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UNITED STATES OF AMERICA SECURITIES &
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
Or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From __________to___________
COMMISSION FILE NUMBER 2-81353
CENTER BANCORP, INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 52-1273725
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
2455 MORRIS AVENUE, UNION, NEW JERSEY 07083
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(Address of principal executives offices) (Zip Code)
(908) 688-9500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-12 of the Exchange Act).
Yes |X| No |_|
COMMON STOCK, NO PAR VALUE: 8,956,979
- --------------------------------------------------------------------------------
(Title of Class) (Outstanding at April 30, 2004)
RESTATED TO REFLECT THE 5%
COMMON STOCK DIVIDEND PAYABLE
JUNE 1, 2004
Center Bancorp, Inc. 10-Q 1
CENTER BANCORP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition
at March 31, 2004 (Unaudited)
and December 31, 2003 (audited) 4
Consolidated Statements of Income for the
three months ended March 31, 2004 and 2003 5
(Unaudited)
Consolidated Statements of Cash Flows for the
Three months ended March 31, 2004 and 2003
(Unaudited) 6
Notes to Consolidated Financial Statements 7-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-24
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT 25
MARKET RISKS
ITEM 4. CONTROLS AND PROCEDURES 25
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 26
ITEM 2. Changes In Securities 26
ITEM 3. Defaults Upon Senior Securities 27
ITEM 4. Submission of Matters to Vote of
Security Holders 26
ITEM 5. Other Information 26
ITEM 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Center Bancorp, Inc. 10-Q 2
PART I- FINANCIAL INFORMATION
The following unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America of America for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America of America for complete financial
statements. However, in the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 2004
are not necessarily indicative of the results that may be expected for the full
year ending December 31, 2004. The Center Bancorp Inc. 2003 annual report on
form 10-K should be read in conjunction with these statements.
Center Bancorp, Inc. 10-Q 3
PART 1 - FINANCIAL STATEMENT
CONSOLIDATED STATEMENTS OF CONDITION
MARCH 31, DECEMBER 31,
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(DOLLARS IN THOUSANDS) 2004 2003
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(UNAUDITED)
ASSETS
Cash and due from banks $ 20,865 $ 16,509
Investment securities held to maturity (approximate market
value of $150,199 in 2004 and $159,989 in 2003) 143,280 155,149
Investment securities available-for-sale 354,323 364,085
--------------------------------------------------------------------------------------------------
Total investment securities 497,603 519,234
Loans, net of unearned income 354,132 349,525
Less--Allowance for loan losses 3,236 3,002
--------------------------------------------------------------------------------------------------
Net loans 350,896 346,523
Premises and equipment, net 15,487 15,610
Accrued interest receivable 4,754 4,485
Bank owned separate account life insurance 17,281 14,614
Other assets 4,253 2,758
Goodwill 2,091 2,091
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Total assets $ 913,230 $ 921,824
==================================================================================================
LIABILITIES
Deposits:
Non-interest bearing $ 131,825 $ 120,526
Interest bearing:
Certificates of deposit $100,000 and over 46,514 58,245
Savings and time deposits 420,375 454,150
--------------------------------------------------------------------------------------------------
Total deposits 598,714 632,921
Federal funds purchased and securities sold under agreements to
repurchase 93,413 99,724
Federal Home Loan Bank advances 140,000 115,000
Subordinated debentures 15,000 15,000
Accounts payable and accrued liabilities 8,287 4,999
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Total liabilities 855,414 867,644
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Commitments and contingencies
STOCKHOLDERS' EQUITY
PREFERRED STOCK, NO PAR VALUE, Authorized 5,000,000 shares; None Issued 0 0
COMMON STOCK, NO PAR VALUE: Authorized 20,000,000 shares; issued
10,011,955 and 10,003,580 shares in 2004 and 2003 respectively 19,547 19405
Additional paid in capital 4,682 4,677
Retained earnings 34,220 33,268
Treasury stock at cost (1,055,514 and 1,059,138 shares in 2004 and
2003 respectively) (3,965) (3,978)
Restricted stock (14) (14)
Accumulated other comprehensive income 3,346 822
--------------------------------------------------------------------------------------------------
Total stockholders' equity 57,816 54,180
--------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 913,230 $ 921,824
==================================================================================================
All per common share amounts have been adjusted retroactively for common stock splits and common
stock dividends impacting the periods presented.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Center Bancorp, Inc. 10-Q 4
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) MARCH 31,
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(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003
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INTEREST INCOME:
Interest and fees on loans $ 4,376 $ 3,586
Interest and dividends on investment securities:
Taxable interest income 3,980 5,370
Non-taxable interest income 880 307
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Dividends 334 175
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Total interest income 9,570 9,438
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INTEREST EXPENSE:
Interest on certificates of deposit $100,000 and over 101 152
Interest on other deposits 1,641 1,797
Interest on borrowings 1,445 1,286
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Total interest expense 3,187 3,235
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Net interest income 6,383 6,203
Provision for loan losses 205 80
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Net interest income after provision for loan losses 6,178 6,123
--------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges, commissions and fees 481 417
Other income 102 111
Annuity & Insurance 8 0
Bank Owned Life Insurance 166 180
Gain on securities sold 126 231
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Total other income 883 939
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OTHER EXPENSE:
Salaries and employee benefits 2,637 2,651
Occupancy, net 563 528
Premises and equipment 445 447
Stationery and printing 152 174
Marketing and advertising 149 177
Other 1,045 756
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Total other expense 4,991 4,733
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Income before income tax expense 2,070 2,329
Income tax expense 346 643
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Net income $ 1,724 $ 1,686
==================================================================================================
EARNINGS PER SHARE: (Note 4)
Basic $ .19 $ .19
Diluted $ .19 $ .19
Weighted average common shares outstanding:
Basic 8,950,362 8,862,653
Diluted 9,030,062 8,956,275
==================================================================================================
All per common share amounts have been adjusted retroactively for common
stock splits and common stock dividends impacting the periods presented.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Center Bancorp, Inc. Form 10-Q 5
CONSOLIDTATED STATEMENTS OF CASH FLOW
(UNAUDITED)
--------------------------------------------------------------------------------------------------
MARCH 31,
--------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2004 2003
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,724 $ 1,686
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 378 442
Provision for loan losses 205 80
Gains on sale of investment securities available-for-sale (126) (231)
(Increase) in accrued interest receivable (269) (474)
(Increase) in other assets (1,495) (262)
Increase in other liabilities 3,288 505
Increase in Cash Surrender value of BOLI (167) (180)
Amortization of premium and accretion of discount on investment
securities, net 299 1,386
--------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,837 2,952
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities available for - sale 18,852 75,704
Proceeds from maturities of investment securities held to maturity 11,692 53,330
(Purchase) of FHLB and FRB Stock net, (1,250) (3,685)
Proceeds from sales of investment securities available-for-sale 26,333 52,667
Purchase of securities available-for-sale (31,650) (148,894)
Purchase of securities held to maturity 0 (63,824)
Net increase in loans (4,578) (14,476)
Property and equipment expenditures, net (255) (656)
Purchase of bank owned life insurance (2,500) 0
--------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 16,644 (49,834)
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (34,207) (36,255)
Net (decrease) increase in borrowings (6,311) 16,863
Increase in FHLB advances 25,000 70,000
Dividends paid (767) (716)
Proceeds from issuance of common stock 160 495
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Net cash (used in) provided by financing activities (16,125) 50,387
--------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4,356 3,505
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Cash and cash equivalents at beginning of year 16,509 23,220
--------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 20,865 $ 26,725
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
--------------------------------------------------------------------------------------------------
Interest paid on deposits and short term borrowings $ 3,008 $ 3,017
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Income taxes $ 13 $ (3)
==================================================================================================
Center Bancorp, Inc. Form 10-Q 6
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Center Bancorp, Inc. (the Corporation)
are prepared on the accrual basis and include the accounts of the Corporation
and its wholly owned subsidiary, Union Center National Bank (the Bank). All
significant inter-Corporation accounts and transactions have been eliminated
from the Corporation's consolidated financial statements.
BUSINESS
The Bank provides a full range of banking services to individual and corporate
customers through branch locations in Union and Morris Counties, New Jersey. The
Bank is subject to competition from other financial institutions, is subject to
the regulations of certain federal agencies and undergoes periodic examinations
by those regulatory authorities.
ESTIMATES
Center Bancorp's accounting policies conform to accounting principles generally
accepted in the United States of America and prevailing practices within the
financial industry, Management must make certain estimates and judgments when
determining the amounts presented in its Consolidated Financial Statements and
related notes. If these same estimates prove inaccurate, actual results could
differ from those reported.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America of
America. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities, as of the date of the statement of condition, and
revenues and expenses for the applicable period. Actual results could differ
significantly from those estimates.
In the opinion of Management, all adjustments necessary for a fair presentation
of the Corporation's financial condition and results of operations for the
interim periods have been made. Such adjustments are of a normal recurring
nature. Certain reclassifications have been made for 2003 to conform to the
classifications presented in 2004. Results for the period ended March 31, 2004
are not necessarily indicative of results for any other interim period or for
the entire fiscal year. Reference is made to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2003 for information regarding
accounting principles.
STOCK BASED COMPENSATION
The following table illustrates the effect on net income and earnings per share
if the Corporation had applied the fair value recognition provisions of FASB
Statement No. 123, accounting for Stock-Based Compensation, to our stock option
plans.
THREE MONTHS ENDED MARCH 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 2003
- ----------------------------------------------------------------------------------
Net income, as reported $ 1,724 $ 1,686
- ----------------------------------------------------------------------------------
Add: compensation expense recognized for restricted stock
award, net of related tax effect $ 0 $ 0
Deduct: Total Stock-based employee compensation
expense determined under fair value based method
all awards, net of related tax effects 22 16
- ----------------------------------------------------------------------------------
Pro forma net income $ 1,702 $ 1,670
- ----------------------------------------------------------------------------------
Earnings per share:
Basic - as reported $ .19 $ .19
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Basic - pro forma $ .19 $ .19
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Diluted - as reported $ .19 $ .19
- ----------------------------------------------------------------------------------
Diluted - pro forma $ .19 $ .19
==================================================================================
All common stock and per share amounts have been restated to reflect the 5%
common stock dividend declared April 20, 2004, to common stockholders of record
May 18, 2004 to be distributed on June 1, 2004.
Center Bancorp, Inc. Form 10-Q 7
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
SFAS NO. 149
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities," was issued on April 30, 2003.
The Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. This statement is effective for
contracts entered into or modified after June 30, 2003. The adoption of this
Statement did not have a significant effect on the Corporation's consolidated
financial statements.
SFAS NO. 150
The Financial Accounting Standards Board (FASB) has issued Statement No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". The Statement improves the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new Statement requires that those instruments be classified as
liabilities in statements of financial position.
Statement 150 affects the issuer's accounting for three types of freestanding
financial instruments. One type is mandatorily redeemable shares, which the
issuing Corporation is obligated to buy back in exchange for cash or other
assets. A second type, which includes put options and forward purchase
contracts, involves instruments that do or may require the issuer to buy back
some of its shares in exchange for cash or other assets. The third type of
instruments that are liabilities under this Statement is obligations that can be
settled with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as a market index, or varies inversely with the
value of the issuers' shares. Statement 150 does not apply to features embedded
in a financial instrument that is not a derivative in its entirety.
In addition to its requirements for the classification and measurement of
financial instruments in its scope, Statement 150 also requires disclosures
about alternative ways of settling the instruments and the capital structure of
entities, all of whose shares are mandatorily redeemable. Statement 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The initial adoption of Statement 150 did not
have an impact on the Corporation's consolidated financial statements.
CONSOLIDATION OF VARIABLE INTEREST- ENTITIES
FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN
46") was issued in January 2003 and was reissued as FASB Interpretation No. 46
(revised December 2003) (FIN 46R). For public entities, FIN 46 or FIN 46R is
applicable to all special-purpose entities (SPEs) in which the entity holds a
variable interest no later than the end of the first reporting period ending
after December 15, 2003. FIN 46 and FIN 46R may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated. FIN
46 and FIN 46R provide guidance on the identification of entities controlled
through means other than voting rights. FIN 46 and FIN 46R specify how a
business enterprise should evaluate its interest in a variable interest entity
to determine whether to consolidate that entity. A variable interest entity must
be consolidated by its primary beneficiary if the entity does not effectively
disperse risks among the parties involved.
The Corporation adopted FIN 46R as of December 31, 2003 and elected to
retroactively restate all periods presented. FIN 46R required the Corporation to
deconsolidate its investment in the subsidiary trusts formed in connection with
the issuance of trust preferred securities. In July 2003, the Board of Governors
of the Federal Reserve System instructed bank holding companies to continue to
include the trust preferred securities in their Tier 1 capital for regulatory
capital purposes until notice is given to the contrary. There can be no
assurance that the Federal Reserve will continue to allow institutions to
include trust preferred securities in Tier 1 capital for regulatory capital
purposes. As of December 31, 2003, assuming the Corporation was not allowed to
include the $15.0 million in trust preferred securities issued by the subsidiary
trusts in Tier 1 capital, the Corporation would remain "well capitalized."
The deconsolidation of the subsidiary trusts results in the Corporation
reporting on its statements of condition the subordinated debentures that have
been issued from Center Bancorp to the subsidiary trusts. The adoption of FIN 46
did not have a significant effect on the Corporation's consolidated financial
statements.
Center Bancorp, Inc. Form 10-Q 8
As of March 31, 2004, assuming the Corporation was not allowed to include the
$15 million in subordinated debentures issued by Center Bancorp Statutory Trust
I and Center Bancorp Statutory Trust II in Tier 1 capital the Corporation would
remain "Well Capitalized". With a tier 1 capital ratio of 5.75% and total risk
based capital ratio of 11.18%.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OR OTHERS.
In 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). The disclosure requirements of FIN 45 were
effective for the year ended December 31, 2003 and require disclosure of the
nature of the guarantee, the maximum potential amount of future payments that
the guarantor could be required to make under the guarantee, and the current
amount of the liability, if any, for the guarantor's obligations under the
guarantee. Significant guarantees that have been entered into by the Corporation
include standby letters of credits with a total of $12.8 million as of March 31,
2004. The adoption of FIN 45 did not have a material impact on the consolidated
financial statements.
NOTE 3 - COMPREHENSIVE INCOME
Total comprehensive income includes all changes in equity during a period from
transactions and other events and circumstances from non-owner sources. The
Bank's other comprehensive income is comprised of unrealized holding gains and
losses on securities available-for-sale.
The following table outlines the Corporation's disclosure of comprehensive
income for the three months ended March 31, 2004 and 2003.
THREE MONTHS ENDED MARCH 31,
- ----------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2004 2003
- ----------------------------------------------------------------------------------
Net Income $1,724 $ 1,686
OTHER COMPREHENSIVE INCOME
Unrealized holding gains (losses) arising
during the period, net of taxes 2,607 (254)
Less reclassification adjustments for gains
included in net income (net of taxes) 83 152
- ----------------------------------------------------------------------------------
Other total comprehensive (loss) income 2,524 (102)
Total comprehensive income $4,248 $1,584
==================================================================================
NOTE 4 - EARNINGS PER SHARE RECONCILEMENT
All common share and per common share amounts have been restated to reflect the
5% common stock dividend declared April 20, 2004, to common stockholders of
record May 18, 2004 to be distributed on June 1, 2004.
Basic Earnings per Share (EPS) is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding.
Diluted EPS includes any additional common shares as if all potentially dilutive
common shares were issued (e.g. stock options). The Corporation's weighted
average common shares outstanding for diluted EPS include the effect of stock
options outstanding using the Treasury Stock Method, which are not included in
the calculation of basic EPS.
Earnings per common share have been computed based on the following:
THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 2003
- ----------------------------------------------------------------------------------
Net income $1,724 $1,686
- ----------------------------------------------------------------------------------
Average number of common shares outstanding 8,950 8,863
Effect of dilutive options 77 90
Effect of restricted stock awards 3 3
- ----------------------------------------------------------------------------------
Average number of common shares outstanding used to
calculate diluted earnings per common share 9,030 8,956
- ----------------------------------------------------------------------------------
Net income per share
Basic $ .19 $ .19
Diluted $ .19 $ .19
==================================================================================
All common stock and per share amounts have been restated to reflect the 5%
common stock dividend declared April 20, 2004, to common stockholders of record
May 18, 2004 to be distributed on June 1, 2004.
Center Bancorp, Inc. Form 10-Q 9
NOTE 5 - COMPONENTS OF NET PERIOD BENEFIT COST
THREE MONTHS ENDED MARCH 31.
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
- ------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------
Service Cost $ 165 $ 150 $ 11 $ 19
Interest Cost 124 $ 106 16 20
Expected return on plan assets (111) (96) 0 0
Amortization of prior service cost 1 1 3 3
Amortization of the net (gain) loss 11 6 10 29
Net Periodic benefit cost $ 190 $ 167 $ 40 $ 71
- ------------------------------------------------------------------------------------------------
CONTRIBUTIONS
The company previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute $760,000 to its pension plans
in 2004. As of March 31, 2004, $203,336 of contributions has been made. The
Company presently does not anticipate increasing its total contributions for the
year to fund its pension plan obligations in 2004.
Center Bancorp, Inc. Form 10-Q 10
ITEM 2-MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Sections
27A of the Securities Act of 1933, as amended, and 21E of the Securities
Exchange Act of 1934, as amended, with respect to the financial condition,
results of operations, plans, objectives, future performance and business of
Center Bancorp, including statements preceded by, followed by or that include
the words or phrases such as "believes," "expects," "anticipates," "plans,"
"trend," "objective," "continue," "remain," "pattern" or similar expressions or
future or conditional verbs such as "will," "would," "should," "could," "might,"
"can," "may" or similar expressions. Such forward-looking statements involve
inherent risks and uncertainties. There are a number of important factors that
could cause actual results to differ materially from historical performance and
from these forward-looking statements. Factors that might cause such a
difference include, but are not limited to: (1) competitive pressures among
depository institutions may increase significantly; (2) changes in the interest
rate environment; (3) prepayment speeds, loan origination and sale volumes,
charge-offs and loan loss provisions may reduce interest margins; (4) general
economic conditions may be less favorable than expected; (5) political
developments, wars or other hostilities may disrupt or increase volatility in
securities markets or other economic conditions; (6) legislative or regulatory
changes or actions adversely affect the businesses in which Center Bancorp is
engaged; (7) changes and trends in the securities markets may affect the common
stock; (8) a delayed or incomplete resolution of regulatory issues may
negatively impact the services provided by the Bank; (9) the developments
discussed above may have a material adverse effect on the Corporation's business
generation and retention, funding and liquidity; and (10) the outcome of
regulatory and legal investigations and proceedings cannot always be predicted
accurately. Further information on other factors that could affect the financial
results of Center Bancorp are included in Center Bancorp's filings with the
Securities and Exchange Commission. These documents are available free of charge
at the Commission's website at http://www.sec.gov and/or from Center Bancorp The
Corporation assumes no obligation for updating any such forward-looking
statement at any time
CRITICAL ACCOUNTING POLICIES
The Corporation's business is dynamic and complex. Consequently, management must
exercise judgment in choosing and applying accounting policies and
methodologies. These choices are important; not only are they necessary to
comply with accounting principles generally accepted in the United States of
America, they also reflect the exercise of management's judgment in determining
the most appropriate manner in which to record and report the Corporation's
overall financial performance. All accounting policies are important, and all
policies contained in Note 1 ("Summary of Significant Accounting Policies") of
the Corporation's 2003 Annual Report on Form 10-K, should be reviewed for
greater understanding of how the Corporation's financial performance is recorded
and reported.
In management's opinion, some areas of accounting are likely to have a more
significant effect than others on the Corporation's financial results and expose
those results to potentially greater volatility. This is because they apply to
areas of relatively greater business importance and/or require management to
exercise judgment in making assumptions and estimates that affect amounts
reported in the financial statements. Because these assumptions and estimates
are based on current circumstances, they may change over time or prove to be
inaccurate based on actual experience. For the Corporation, the area that relies
most heavily on the use of assumptions and estimates includes but is not limited
to accounting for the allowance for loan losses. The Corporation's accounting
policies related to this area are discussed in Note 1 of the Corporation's 2003
Annual Report on Form 10-K, and further described on page 16 of this Quarterly
Report on Form 10-Q under "Allowance for Loan Losses and Related Provision." See
also "Estimates of Fair Value" set forth on page 20 of this quarterly report on
Form 10-Q.
EARNINGS ANALYSIS
Net income for three months ended March 31, 2004 amounted to $1,724,000 compared
to $1,686,000 earned for the comparable three-month period ended March 31, 2003.
On a per diluted share basis, earnings remained flat at $0.19 per share for the
three months ended March 31, 2004 and the three-months ended March 31, 2003. All
common stock per share amounts have been restated to reflect the 5% common stock
dividend declared April 20, 2004, to common stockholders of record May 18, 2004
and to be distributed June 1, 2004. The annualized return on average assets
decreased to 0.75 percent compared with 81 percent for the comparable
three-month period in 2003. The annualized return on average stockholders'
equity was 12.43 percent for the three-month period ended March 31, 2004 as
compared to 13.10 percent for the three-months ended March 31, 2003. Earnings
performance for the first three months of 2004 primarily reflects a higher level
of net interest income and a reduction in the effective tax rate offset by
increased non-interest expense and an increase in the provision for loan losses.
Center Bancorp, Inc. Form 10-Q 11
NET INTEREST INCOME/ MARGIN
Net interest income is the difference between the interest earned on the
portfolio of earning-assets (principally loans and investments) and the interest
paid for deposits and short-term borrowings, which support these assets. Net
interest income is presented below first on a fully tax-equivalent basis by
adjusting tax-exempt income (primarily interest earned on various obligations of
state and political subdivisions) by the amount of income tax which would have
been paid had the assets been invested in taxable issues and then in accordance
with the Corporation's consolidated financial statements.
Financial institutions typically analyze earnings performance on a tax
equivalent basis as a result of certain disclosure obligations, which require
the presentation of tax equivalent data and in order to assist financial
statement readers in comparing data from period to period.
NET INTEREST INCOME
- ---------------------------------------------------------------------------------------------------------
AMOUNT
2004 2003 INCREASE PERCENT
(DOLLARS IN THOUSANDS) AMOUNT AMOUNT (DECREASE) CHANGE
- ---------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Investments $ 5,647 $ 6,010 $ (363) (6.04)
Loans, including fees 4,376 3,586 790 22.03
Federal Funds Sold and securities sold under agreement to
resell 0 0 0 0
- ---------------------------------------------------------------------------------------------------------
Total interest income 10,023 9,596 427 4.45
- ---------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Certificates of $100,00 or more 101 152 (51) (33.55)
Deposits 1,641 1,797 (156) (8.68)
Borrowings 1,445 1,286 159 12.36
- ---------------------------------------------------------------------------------------------------------
Total interest expense 3,187 3,235 (48) (1.48)
- ---------------------------------------------------------------------------------------------------------
Net interest income on a fully tax-equivalent basis 6,836 6,361 475 7.47
- ---------------------------------------------------------------------------------------------------------
Tax-equivalent adjustment (453) (158) (295) 186.7
- ---------------------------------------------------------------------------------------------------------
Net interest income * $ 6,383 $ 6,203 $ 180 2.90
=========================================================================================================
* BEFORE THE PROVISION FOR LOAN LOSSES
NOTE: THE TAX-EQUIVALENT ADJUSTMENT WAS COMPUTED BASED ON AN ASSUMED STATUTORY
FEDERAL INCOME TAX RATE OF 34 PERCENT. ADJUSTMENTS WERE MADE FOR INTEREST EARNED
ON SECURITIES OF STATE AND POLITICAL SUBDIVISIONS.
Net interest income on a fully tax-equivalent basis increased $475,000 or 7.47
percent to approximately $6.836 million for the three months ended March 31,
2004, from $6.361 million for the comparable period in 2003. For THE three
months ended March 31, 2004, the net interest margin decreased 15 basis points
to 3.20 percent from 3.35 percent due primarily to lower rates earned on
interest earning assets. For the three months ended March 31, 2004, a decrease
in the average yield on interest earning assets of 37 basis points was only
partially offset by a decrease in the average cost of interest-bearing
liabilities of 24 basis points, which was not sufficient to sustain the
Corporation's net interest margins.
For the three-month period ended March 31, 2004 interest income on a
tax-equivalent basis increased by $427,000 or 4.45 percent over the comparable
three-month period in 2003. This increase reflects an increase in average
earning assets. The Corporation's loan portfolio increased on average $112.3
million to $347.8 million from $235.5 million in the same quarter in 2003,
primarily driven by growth in commercial loans and commercial and residential
mortgages. The loan portfolio represented approximately 40.7 percent of the
Corporation's interest earning assets (on average) during the first quarter of
2004 and 30.6 percent in the same quarter in 2003. Average investment volume
decreased during the period by $25.9 million on average compared to 2003. The
growth in earning assets was funded primarily through increased levels of money
market and savings deposits, and borrowings.
The factors underlying the year-to year changes in net interest income are
reflected in the tables appearing on pages 12, 13, and 14, each of which has
been presented on a tax-equivalent basis (assuming a 34 percent tax rates). The
table on page 14 (Average Statements of Condition Sheet with Interest and
Average Rates) shows the Corporation's consolidated average balance of assets,
liabilities, and stockholders' equity, the amount of income produced from
interest-earning assets and the amount of expense resulting from
interest-bearing liabilities and the interest income as a percentage of average
interest-earning assets, for the three month periods ended March 31, 2004 and
2003. The table presented on page 13 (Analysis of Variance in Net Interest
Income Due to Volume and Rates) quantifies the impact on net interest income
resulting from changes in average balances and average rates over the periods
presented; any change in interest income or expense attributable to both changes
in volume and changes in rate has been allocated in proportion to the
relationship of the absolute dollar amount of change in each category.
Center Bancorp, Inc. Form 10-Q 12
For the three months ended March 31, 2004, the Corporation's net interest spread
on a tax-equivalent basis decreased to 2.94 percent from 3.07 percent for the
three months ended March 31, 2003. The decrease reflected a narrowing of spreads
between yields earned on loans and investments and rates paid for supporting
funds. Net interest margins compressed due primarily to a continued decline in
interest rates. The protracted lower interest rate environment has had a
negative effect on interest margins.
The Federal Reserve Open Market Committee lowered interest rates for a
thirteenth time on June 25, 2003, 25 basis points to a 45-year low of 1.00
percent. Although the yield on interest-earning assets declined to 4.69 percent
from 5.06 percent in 2003 (a change of 37 basis points), this change was
partially offset by lower rates paid for interest-bearing liabilities coupled
with a change in the mix of interest-bearing liabilities. The total cost of
interest-bearing liabilities decreased to 1.75 percent, a change of 24 basis
points, for the three months ended March 31, 2004 from 1.99 percent for the
three months ended March 31, 2003.
The trend is primarily due to the decrease in rates paid on certain
interest-bearing liabilities. The decrease in these funding costs continues to
change disproportionately to the rates on new loans and investments.
The following table "Analysis of Variance in Net Interest Income due to Volume
and Rates" analyzes net interest income by segregating the volume and rate
components of various interest-earning assets and liabilities and the changes in
the rates earned and paid by the Corporation.
ANALYSIS OF VARIANCE IN NET INTEREST INCOME DUE TO VOLUME AND RATES
2004/2003
INCREASE
(DECREASE)
DUE TO CHANGE
IN:
- ----------------------------------------------------------------------------------------
AVERAGE AVERAGE NET
(DOLLARS IN THOUSANDS) VOLUME RATE CHANGE
- ----------------------------------------------------------------------------------------
Interest-earning assets:
Investment securities:
Taxable $ (947) $ (284) $ (1,231)
Non-Taxable 933 (65) 868
Federal funds sold and securities
purchased under agreement to resell 0 0 0
Loans, net of unearned discounts 1,493 (703) 790
- ----------------------------------------------------------------------------------------
Total interest-earning assets 1,479 (1,052) 427
- ----------------------------------------------------------------------------------------
Interest-bearing liabilities:
Money market deposits 21 (64) (43)
Savings deposits (28) (139) (167)
Time deposits 22 19 41
Other interest-bearing deposits 1 (39) (38)
Borrowings 434 (275) 159
- ----------------------------------------------------------------------------------------
Total interest-bearing liabilities 450 (498) (48)
- ----------------------------------------------------------------------------------------
Change in net
interest income $ 1,029 $ (554) $ 475
========================================================================================
Center Bancorp, Inc. Form 10-Q 13
The following table, "Average Balance Sheet with Interest and Average Rates",
presents for the three months ended March 31, 2004 and 2003 the Corporation's
average assets, liabilities and stockholders' equity. The Corporation's net
interest income, net interest spreads and net interest income as a percentage of
interest-earning assets are also reflected
AVERAGE STATEMENTS OF CONDITION WITH INTEREST AND AVERAGE RATES
THREE MONTH PERIOD ENDED MARCH 31,
- ---------------------------------------------------------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
(TAX-EQUIVALENT BASIS, AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Investment securities: (1)
Assets
Interest-earning assets:
Investment securities: (1)
Taxable $415,447 $4,314 4.15% $505,498 $5,545 4.45%
Non-taxable 92,313 1,333 5.78% 28,185 465 6.60%
Federal funds sold and securities
purchased under agreement to resell 0 0 0.00% 0 0 0.00%
Loans, net of unearned income (2) 347,806 4,376 5.03% 235,474 3,586 6.18%
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 855,566 10,023 4.69% $769,157 9,596 5.06%
- ---------------------------------------------------------------------------------------------------------------------------
Non-interest earning assets
Cash and due from banks 20,938 22,895
BOLI 15,503 14,205
Other assets 24,830 26,168
Allowance for possible loan losses -3,094 -2,533
Total non-interest earning assets 58,177 60,735
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $913,743 $829,892
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Interest-bearing liabilities:
Money market deposits $107,559 263 0.98% $100,427 306 1.24%
Savings deposits 146,542 353 0.96% 155,472 520 1.36%
Time deposits 157,468 1,036 2.63% 154,084 995 2.62%
Other interest - bearing deposits 72,640 90 0.50% 72,235 128 0.72%
Short-term Borrowings 228,704 1,272 2.22% 166,595 1,161 2.79%
Subordinated Debentures 15,000 173 4.61% 10,000 125 5.00%
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 727,913 3,187 1.75% 658,813 3,235 1.99%
- ---------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities:
- ---------------------------------------------------------------------------------------------------------------------------
Demand deposits 123,314 113,996
Other non-interest-bearing deposits 1,808 483
Other liabilities 5,263 5,132
Total non-interest-bearing liabilities 130,385 119,611
Stockholders' equity 55,445 51,468
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $913,743 $829,892
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (tax-equivalent basis) $6,836 $6,361
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 2.94% 3.07%
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income as percent
of earning-assets (net interest margin) 3.20% 3.35%
- ---------------------------------------------------------------------------------------------------------------------------
Tax equivalent adjustment -453 -158
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $6,383 $6,203
- ---------------------------------------------------------------------------------------------------------------------------
(1) Average balances for available-for-sale securities are based on amortized
cost
(2) Average balances for loans include loans on non-accrual status
(3) The tax-equivalent adjustment was computed based on a statutory Federal
income tax rate of 34 percent
Center Bancorp, Inc. Form 10-Q 14
INVESTMENTS
For the three months ended March 31, 2004, the average volume of investment
securities decreased to approximately $507.8 million, or 59.3 percent of average
earning assets, a decrease of $25.9 million on average as compared to the same
period in 2003. The tax-equivalent yield on investments decreased by 5 basis
points to 4.45 percent from a yield of 4.50 percent during the three month
period ended March 31, 2003. The 5 basis points decline in yield on the
portfolio was attributable primarily to the lower interest rate environment
which increased the volume of securities which were called from the portfolio
coupled with extraordinary prepayment levels negatively affecting the returns on
mortgage related securities. Heightened prepayment levels during 2003 have led
to accelerated prepayments on these securities and the increased volume of
additional cash flow was reinvested at lower rates than in comparable periods.
The volume related figures during the three-month period ended March 31, 2004
contributed a decrease in revenue of $14,000, while rate related changes
amounted to a decline of $349,000. At March 31, 2004, the principal components
of the investment portfolio are U.S. Government Federal Agency callable and
non-callable securities, including agency issued collateralized mortgage
obligations, corporate securities and municipals.
The impact of repricing activity on investment yields was increased to some
extent, for the three month period ended March 31, 2004, by the change in
portfolio mix and shortening of portfolio duration. In addition, there was some
portfolio extension where risk is relatively minimal within the portfolio,
resulting in wider spreads. The Corporation also carried on average $19.7
million in short-term money market funds as compared with $21.1 million for the
comparable three month periods in 2003. These funds carried significantly lower
rates than other securities in the portfolio (on average 1.00 percent for the
three month period, compared to 1.33 percent on these overnight funds for the
comparable period in 2003) and contributed to the decline in yield as compared
to the comparable period in 2003. The volume of such funds for the three month
period ended March 31, 2004 was for liquidity purposes.
Securities available-for-sale is a part of the Corporation's interest rate risk
management strategy and may be sold in response to changes in interest rates,
changes in prepayment risk, liquidity management and other factors. For the
three-month period ended March 31, 2004 the Corporation sold from its
available-for-sale portfolio securities totaling approximately $26.4 million.
At March 31, 2004 the net unrealized gain carried as a component of other
comprehensive income and included in stockholders' equity net of tax amounted to
a net unrealized gain of $3.332 million as compared with an unrealized gain of
$2.082 million at March 31, 2003. The increase resulted from a decline in
interest rates fostered by the Federal Open Market Committee's actions to
continue to lower the Federal Funds target rate.
LOANS
Loan growth during the three months ended March 31, 2004 occurred primarily in
the residential 1-4 family home equity loans and commercial loan portfolio. This
growth resulted from the Corporation's business development efforts, aggressive
marketing campaigns on its home equity and 10-year residential mortgage loan
products. These have been enhanced in recent years by the Corporation's expanded
branch network. The decrease in the loan portfolio yields for the three month
period was the result of the decline in interest rates as compared with the
comparable period in 2003, coupled with a competitive rate pricing structure
maintained by the Corporation to attract new loans and further by the heightened
competition for lending relationships that exists in the Corporation's market.
The Corporation's desire to grow this segment of the earning-asset mix is
reflected in its current business development plan and marketing plans, as well
as its short-term strategic plan.
For the three months ended March 31, 2004, average loan volume increased $112.3
million or 47.70 percent, while portfolio yield decreased by 115 basis points as
compared with the same period in 2003. The volume related factors during the
period-contributed increased revenue of $1.493 million while rate related
changes amounted to a decline in revenue of $703,000. Total average loan volume
increased to $347.8 million with a net interest yield of 5.03 percent, as
compared to $235.5 million with a yield of 6.18 percent for the three months
ended March 31, 2003.
The decline in portfolio yield was a result of prepayments and rate
modifications of higher yielding loans coupled with lower yields on new volume
added to the portfolio in 2004 compared with 2003.
Center Bancorp, Inc. Form 10-Q 15
ALLOWANCE FOR LOAN LOSSES
The purpose of the allowance for loan losses is to absorb the impact of losses
inherent in the loan portfolio. Additions to the allowance are made through
provisions charged against current operations and through recoveries made on
loans previously charged-off. The allowance for loan losses is maintained at an
amount considered adequate by management to provide for potential credit losses
inherent in the loan portfolio based upon a periodic evaluation of the risk
characteristics of the loan portfolio. The amount of the loan loss provision and
the level of the allowance for loan losses are critical accounting policies of
the Corporation. In establishing an appropriate allowance, an assessment of the
individual borrowers, a determination of the value of the underlying collateral,
a review of historical loss experience, a review of peer group loss experience
and an analysis of the levels and trends of loan categories, delinquencies, and
problem loans are considered. Such factors as the level and trend of interest
rates and current economic conditions are also reviewed. At March 31, 2004, the
allowance amounted to $3,236,000 as compared to $3,002,000 at December 31, 2003,
and $2,581,000 at March 31, 2003. The Corporation had a provision to the
allowance for loan losses during the three month period ended March 31, 2004
amounting to $205,000 compared to $80,000 during the three month period March
31, 2003. The additions to the allowance during the respective three month
periods of 2004 and 2003 are reflective of the loan volume recorded during the
periods and the Corporation's focus on the changing composition of the
commercial and residential real estate loan portfolios.
At March 31, 2004, the allowance for loan losses amounted to .91 percent of
total loans, as compared with 1.06 percent at March 31, 2003. In management's
view, the level of the allowance as of March 31, 2004 is adequate to cover the
risk of loss inherent in the loan portfolio. The Corporation's statements herein
regarding the adequacy of the allowance for loan losses constitute
"Forward-Looking Statement's" under the Private Securities Litigation Reform Act
of 1995. Actual results could differ materially from management's analysis,
based principally upon factors considered by management in establishing the
allowance.
Although management uses the best information available, the level of the
allowance for loan losses remains an estimate, which is subject to significant
judgment and short-term changes. Various regulatory agencies, as an integral
part of their examination process, periodically review the Corporation's
allowance for loan losses. Such agencies may require the Corporation to increase
the allowance based on their analysis of information available to them at the
time of their examinations. Future adjustments to the allowance may be necessary
due to economic, operating, regulatory, and other conditions beyond the
Corporation's control. To the extent actual results differ from forecasts or
management's judgment, the allowance for loan losses may be greater or less than
future charge-offs.
During the three-month periods ended March 31, 2004 and 2003, the Corporation
did not experience any substantial credit problems within its loan portfolio.
Net recoveries were approximately $29,000 and were comprised of installment
loans as compared with net recoveries of $3,000 for the comparable three-month
period in 2003, which were comprised of installment loans.
At March 31, 2004 the Corporation had non-accrual loans amounting to $26,000 as
compared with $229,000 at December 31, 2003 and $109,000 of non-accrual loans at
March 31, 2003. The Corporation continues to aggressively pursue collections of
principal and interest on loans previously charged-off. The decrease in such
loans in 2004 compared to March 31, 2003 was attributable to three home equity
loans, which were re-paid in full by the borrower.
The value of impaired loans is based on the present value of expected future
cash flows discounted at the loan's effective interest rate or as a practical
expedient, at the loan's observable market price or at the fair value of the
collateral if the loan is collateral dependant. Impaired loans consist of
non-accrual loans and loans internally classified as substandard or below, in
each instance above an established dollar threshold of $200,000. All loans below
the established dollar threshold are considered homogenous and are collectively
evaluated for impairment. At March 31, 2004, total impaired loans were
approximately $307,000 compared to $358,000 at December 31, 2003 and $12,000 at
March 31, 2003. The reserves allocated to such loans at March 31, 2004, December
31, 2003 and March 31, 2003, were $5,700, $6,000 and $0, respectively. Although
classified as substandard, impaired loans (other than those in non-accrual
status) were current with respect to principal and interest payments.
Center Bancorp, Inc. Form 10-Q 16
Changes in the allowance for possible loan losses for the three-month periods
ended March 31, 2004 and 2003, respectively, are set forth below.
ALLOWANCE FOR LOAN LOSSES
THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2004 2003
- -------------------------------------------------------------------------------
Average loans outstanding $ 347,803 $ 235,474
- -------------------------------------------------------------------------------
Total loans at end of period $ 354,087 $ 243,530
- -------------------------------------------------------------------------------
Analysis of the Allowance for Loan Losses
Balance at the beginning of year $ 3,002 $ 2,498
Charge-offs:
Commercial 0 0
Installment loans 1 2
- -------------------------------------------------------------------------------
Total charge-offs 1 2
- -------------------------------------------------------------------------------
Recoveries:
Commercial 0 0
Installment loans 30 5
- -------------------------------------------------------------------------------
Total recoveries 30 5
Net charge-offs: (29) (3)
Provision for loan losses 205 80
Balance at end of year $ 3,236 $ 2,581
- -------------------------------------------------------------------------------
Ratio of net charge-offs during the year to
average loans outstanding during the year N/M N/M
- -------------------------------------------------------------------------------
Allowance for loan losses as a percentage
of total loans at end of year 0.91% 1.06%
===============================================================================
ASSET QUALITY
The Corporation manages asset quality and credit risk by maintaining
diversification in its loan portfolio and through review processes that include
analysis of credit requests and ongoing examination of outstanding loans and
delinquencies, with particular attention to portfolio dynamics and mix. The
Corporation strives to identify loans experiencing difficulty early enough to
correct the problems, to record charge-offs promptly based on realistic
assessments of current collateral values, and to maintain an adequate allowance
for loan losses at all times. These practices have protected the Corporation
during economic downturns and periods of uncertainty.
It is generally the Corporation's policy to discontinue interest accruals once a
loan is past due as to interest or principal payments for a period of ninety
days. When a loan is placed on non-accrual status, interest accruals cease and
uncollected accrued interest is reversed and charged against current income.
Payments received on non-accrual loans are applied against principal. A loan may
only be restored to an accruing basis when it again becomes well secured and in
the process of collection or all past due amounts have been collected. Loan
origination fees and certain direct loan origination costs are deferred and
recognized over the life of the loan as an adjustment to the loan's yield.
Accruing loans past due 90 days or more are generally well secured and in the
process of collection.
At March 31, 2004, December 31, 2003 and March 31, 2003, the Corporation had no
restructured loans. Non-accrual loans amounted to $26,000 at March 31, 2004, and
was comprised one fixed rate home equity loans. At December 31, 2003,
non-accrual loans amounted to $229,000 and were comprised of a consumer loan, a
fixed rate hone equity loan and a commercial loan. At March 31, 2003,
non-accrual loans amounted to $117,000 and were comprised of three home equity
and two auto loans. At March 31, 2004 and December 31, 2003, the Corporation did
not have any loans 90 days past due and still accruing, while at March 31, 2003
such loans amounted to $8,000.
The outstanding balances of accruing loans, which are 90 days or more past due
as to principal or interest payments, and non-accrual loans at March 31, 2004,
December 31, 2003 and March 31, 2003, were as follows:
NON-PERFORMING LOANS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2004 2003 2003
- -------------------------------------------------------------------------------
Non-accrual loans $ 26 $ 229 $ 109
Accruing loans past due 90 days or more 0 0 8
Other real estate owned 0 0 0
- -------------------------------------------------------------------------------
Total non-performing assets $ 26 $ 229 $ 117
===============================================================================
Center Bancorp, Inc. Form 10-Q 17
At March 31, 2004, non-performing assets, consisting of loans on non-accrual
status plus other real estate owned (OREO), amounted to $26,000 or .007 percent
of total loans outstanding as compared to $26,000 or .007 percent at December
31, 2003 and $216,000 or .09 percent at March 31, 2003.
At March 31, 2004, other than the loans set forth above, the Corporation is not
aware of any loans which present serious doubts as to the ability of its
borrowers to comply with the present loan and repayment terms and which are
expected to fall into one of the categories set forth in the table above. At
March 31, 2004, December 31, 2003 and March 31, 2003 the Corporation did not
have any other real estate owned or restructured loans.
OTHER NON-INTEREST INCOME
The following table presents the principal categories of non-interest income
during the three months ended March 31, 2004 and 2003.
THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2004 2003 % CHANGE
- -------------------------------------------------------------------------------
Service charges, commissions and fees $ 481 $ 417 15.35
Other income 110 111 (.90)
Bank Owned Life Insurance 166 180 (7.78)
Gain on securities sold 126 231 (45.45)
- -------------------------------------------------------------------------------
Total other non-interest income $ 883 $ 939 (5.96)
===============================================================================
For the three-month period ended March 31, 2004, total other (non-interest)
income decreased $56,000 or 5.96 percent as compared to the comparable
three-month period in 2003. Other non-interest income, exclusive of gains on
securities sold (which decreased $105,000 or 54.1 percent), reflects an increase
of $49,000 or 6.92 percent compared with the comparable three-month period ended
March 31, 2003. This increased revenue was primarily driven by the increase in
services charges, commission and fees which increased $64,000 or 15.3% as
compared to the comparable quarter in 2003. This increase was attributable to
the introduction of the check safe program which was introduced during the
fourth quarter of 2003. This was offset in part by a decrease in the
non-interest income attributable to the cash surrender value of bank owned life
insurance, which amounted to $166,000 or a decrease of $14,000 for the first
quarter in comparison to $180,000 for the comparable quarter in 2003. The
decrease in other income is primarily a result of a decrease in fees from
secondary market activity on mortgage loans originated for sale during the three
months ended March 31, 2004 as compared with the comparable period in 2003.
For the three month period ended March 31, 2004, the Corporation recorded a net
gain of $126,000 on securities sold from the available-for-sale investment
portfolio compared to gains of $231,000 for the three-month period ended March
31, 2003. These sales were made in the normal course of business and proceeds
were reinvested in securities.
OTHER NON-INTEREST EXPENSE
The following table presents the principal categories of non-interest expense
during the three-months ended March 31, 2004 and 2003.
THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2004 2003 % CHANGE
- -------------------------------------------------------------------------------
Salaries and employee benefits $2,637 $2,651 (0.53)
Occupancy expense, net 563 528 6.63
Premises & equipment expense 445 447 (0.45)
Stationery & printing expense 152 174 (12.64)
Marketing & advertising expense 149 177 (15.82)
Other expense 1,045 756 38.23
- -------------------------------------------------------------------------------
Total other non-interest expense $ 4,991 $4,733 5.45
===============================================================================
For the three months ended March 31, 2004, total other (non-interest) expenses
increased $258,000 or 5.45 percent over the comparable three-months ended March
31, 2003, with occupancy expense and other expenses accounting for most of the
increase. The Corporation's ratio of other expenses (annualized) to average
assets decreased to 2.18 percent in the first three months of 2004 from 2.28
percent for the first three months of 2003.
Salaries and employee benefits decreased $14,000 or .53 percent for the three
months ended March 31, 2004 as compared to the comparable three-month period
ended March 31, 2003. This decrease is primarily attributable to the
Corporation's efforts to control employee benefit costs, such as employee health
insurance costs, which decreased $33,000 or 20.54% for the three-month period as
compared to the comparable period in 2003. Staffing levels remained relatively
steady at 185 full-time equivalent employees at March 31, 2004 compared to 186
full-time equivalent employees at March 31, 2003.
Center Bancorp, Inc. Form 10-Q 18
For the three months ended March 31, 2004, occupancy expenses increased $35,000
or 6.62 percent over the comparable three-month period in 2003. The increase in
occupancy expenses reflects higher operating costs (utilities, rent, real-estate
taxes and general repair and maintenance) of the Corporation's expanded
facilities, as well as depreciation expense of the expanded bank facilities,
which includes a 20,000 square foot operations center acquired during the fourth
quarter of 2003.
Other expense for the three month period ended March 31, 2004 increased $289,000
or 38.0% as compared to the comparable quarter in 2003 and was attributable to
increased audit, legal and consulting fees, coupled with a nonrecurring expense
reduction of $136,000 recorded in 2003.
PROVISION FOR INCOME TAXES
For the three month period ended March 31, 2004, the effective tax (benefit)
rate was 16.71 percent as compared to 27.61 percent for the three month period
ended March 31, 2003. The effective tax rate continues to be less than the
combined statutory Federal tax rate of 34.0 percent and the New Jersey State tax
rate of 9 percent. The difference between the statutory and effective tax rates
primarily reflects the tax-exempt status of interest income on obligations of
states and political subdivisions, an increase in the cash surrender value of
bank owned life insurance and disallowed expense items for tax purposes, such as
travel and entertainment expense. Tax-exempt interest income increased by
$868,000 or 187.67 percent for the three month period ended March 31, 2004, , as
compared to the comparable periods in 2003.
ASSET LIABILITY MANAGEMENT
The composition and mix of the Corporation's assets and liabilities is planned
and monitored by the Asset and Liability Committee (ALCO). Asset and Liability
management encompasses the control of interest rate risk (interest sensitivity
management) and the ongoing maintenance and planning of liquidity and capital.
In general, management's objective is to optimize net interest income and
minimize interest rate risk by monitoring these components of the statement of
condition.
INTEREST SENSITIVITY
MARKET RISK
"Market risk" represents the risk of loss from adverse changes in market prices
and rates. The Corporation's market rate risk arises primarily from interest
rate risk inherent in its investing, lending and deposit taking activities. To
that end, management actively monitors and manages its interest rate risk
exposure.
The Corporation's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase or decrease in interest rates may adversely
affect the Corporation's earnings to the extent that the interest rates borne by
assets and liabilities do not similarly adjust. The Corporation's primary
objective in managing interest rate risk is to minimize the adverse impact of
changes in interest rates on the Corporation's net interest income and capital,
while structuring the Corporation's asset-liability structure to obtain the
maximum yield-cost spread on that structure. The Corporation relies primarily on
its asset-liability structure to control interest rate risk. The Corporation
continually evaluates interest rate risk management opportunities, including the
use of derivative financial instruments. The management of the Corporation
believes that hedging instruments currently available are not cost-effective,
and, therefore, has focused its efforts on increasing the Corporation's
yield-cost spread through wholesale and retail growth opportunities.
The Corporation monitors the impact of changes in interest rates on its net
interest income using several tools. One measure of the Corporation's exposure
to differential changes in interest rates between assets and liabilities is the
Corporation's analysis of its interest rate sensitivity. This test measures the
impact on net interest income and on net portfolio value of an immediate change
in interest rates in 100 basis point increments. Net portfolio value is defined
as the net present value of assets, liabilities and off-balance sheet contracts.
The primary tool used by management to measure and manage interest rate exposure
is a simulation model. Use of the model to perform simulations reflecting
changes in interest rates over one and two-year time horizons has enabled
management to develop and initiate strategies for managing exposure to interest
rate risk. In its simulations, management estimates the impact on net interest
income of various changes in interest rates. Projected net interest income
sensitivity to movements in interest rates is modeled based on both an immediate
rise and fall in interest rates ("rate shock"), as well as gradual changes in
Center Bancorp, Inc. Form 10-Q 19
interest rates over a 12 month time period. The model is based on the actual
maturity and repricing characteristics of interest-rate sensitive assets and
liabilities. The model incorporates assumptions regarding earning-asset and
deposit growth, prepayments, interest rates and other factors. Management
believes that both individually and taken together, these assumptions are
reasonable, but the complexity of the simulation modeling process results in a
sophisticated estimate, not an absolutely precise calculation, of exposure. For
example, estimates of future cash flows must be made for instruments without
contractual maturity or payment schedules.
The Corporation's rate sensitivity position in each time frame may be expressed
as assets less liabilities, as liabilities less assets, or as the ratio between
rate sensitive assets (RSA) and rate sensitive liabilities (RSL). For example, a
short funded position (liabilities repricing before assets) would be expressed
as a net negative position, when period gaps are computed by subtracting
repricing liabilities from repricing assets. When using the ratio method, a
RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1
indicates an asset sensitive position and a ratio less than 1 indicates a
liability sensitive position.
A negative gap and/or a rate sensitivity ratio less than 1, tends to expand net
interest margins in a falling rate environment and to reduce net interest
margins in a rising rate environment. Conversely, when a positive gap occurs,
generally margins expand in a rising rate environment and contract in a falling
rate environment. From time to time, the Corporation may elect to deliberately
mismatch liabilities and assets in a strategic gap position.
At March 31, 2004, the Corporation reflects a positive interest sensitivity gap
(or an interest sensitivity ratio) of 1.02:1.00 at the cumulative one-year
position. During most of 2003 and at the Corporation had a negative interest
sensitivity gap. Management's perception is that interest rates will continue to
be volatile, therefore emphasis has been, and is expected to continue to be,
placed on interest-sensitivity matching with the objective of stabilizing the
net interest spread during 2004. However, no assurance can be given that this
objective will be met.
ESTIMATES OF FAIR VALUE
The estimation of fair value is significant to a number of the Corporation's
assets, including trading account assets, loans held for sale, available for
sale investment securities, mortgage servicing rights ("MSR's"), other real
estate owned and other repossessed assets. These are all recorded at either fair
value or lower of cost or fair value. Fair values are volatile and may be
influenced by a number of factors. Circumstances that could cause estimates of
the fair value of certain assets and liabilities to change include a change in
prepayment speeds, discount rates, or market interest rates. Fair values for
trading account assets, most available for sale investment securities and most
derivative financial instruments are based on quoted market prices. If quoted
market prices are not available, fair values are based on judgments regarding
future expected loss experience, current economic condition, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature, involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto, presented elsewhere herein, have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the operations, since unlike most industrial companies,
nearly all of the Corporation's assets and liabilities are monetary. As a
result, interest rates have a greater impact on performance than do the effects
of general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
LIQUIDITY MANAGEMENT
Liquidity risk is the risk of being unable to timely meet obligations as they
come due at reasonable cost. The Corporation manages this risk by maintaining
borrowing resources to fund increases in assets and replace maturing obligations
or deposit withdrawals, both in the normal course of business and in times of
unusual events. ALCO sets the policies and reviews adherence to these policies.
The Corporation's sources of funds include a large, stable deposit base, secured
advances from the Federal Home Loan Bank of New York, and access to capital
markets. Increases in rates, economic activity and confidence in the financial
markets, may lead to disintermediation of deposits which may need to be replaced
with higher cost borrowings.
Center Bancorp, Inc. Form 10-Q 20
The Corporation manages reliance on short-term unsecured borrowings as well as
total wholesale funding though policy limits reviewed at ALCO. The Corporation
maintains access to a diversified base of wholesale funding sources. These
sources include Federal Funds purchased; securities sold under agreements to
repurchase, jumbo certificates of deposit and Federal Home Loan bank advances.
Liquidity is also available through unpledged securities in the investment
portfolio and capacity to offer securities and loans, including single family
mortgage loans.
The low rate environment has created heavy refinance activity and to some degree
by the amount of mortgage loans originated by the Corporation. The Corporation
sells a portion of these loans into the secondary market and such loans are
included in loans held for sale. At March 31, 2004 there were no loans available
for sale. For the three months ended March 31, 2004 the Corporation originated
$1.5 million in loans held for sale compared with $4.8 million for the three
months ended March 31, 2003.
Management believes that the Corporation has the funding capacity to meet the
liquidity needs arising from potential events. In addition to pledgeable
securities, the Corporation also maintains borrowing capacity through the
Federal Discount Window and the Federal Home Loan Bank of New York secured with
loans and marketable securities.
Liquidity is measured and monitored for the Bank. The Corporation reviews the
parent holding Corporation's net short-term mismatch. This measures the ability
of the holding Corporation to meet obligations should access to bank dividends
be constrained. At March 31, 2004, the parent Corporation had $2.082 million in
cash compared to $6.207 million at December 31, 2003. The decrease in cash at
the parent Corporation level was due to increased capitalization of the
subsidiary bank. Expenses at the parent Corporation are minimal and management
believes that the parent Corporation has adequate liquidity to fund its
obligations.
Certain provisions of long-term debt agreements prevent the Corporation from
creating liens on, disposing of or issuing voting stock of subsidiaries. As of
March 31, 2004 the Corporation was in compliance with all covenants and
provisions of these agreements.
Management monitors current and projected cash flows, and adjusts positions as
necessary to maintain adequate levels of liquidity. By using a variety of
potential funding sources and staggering maturities, the risk of potential
funding pressure is somewhat reduced. Management also maintains a detailed
liquidity contingency plan designed to adequately respond to situations which
could lead to liquidity concerns.
Anticipated cash-flows at March 31, 2004, projected to April 2005, indicates
that the Bank's liquidity should remain strong, with an approximate projection
of $190.0 million in anticipated cash flows over the next twelve months. This
projection represents a forward-looking statement under the Private Securities
Litigation Reform Act of 1995. Actual results could differ materially from this
projection depending upon a number of factors, including the liquidity needs of
the Bank's customers, the availability of sources of liquidity and general
economic conditions.
The Corporation derives a significant proportion of its liquidity from its core
deposit base. For the three-month period ended March 31, 2004, core deposits
(comprised of total demand, savings accounts (excluding Super Max and money
market accounts under $100,000) remained relatively stable and represented 49.3
percent of total deposits as compared with 50.3 percent at March 31, 2003.
The following table depicts the Corporation's core deposit mix at March 31, 2004
and 2003:
CORE DEPOSIT MIX
MARCH 31, NET CHANGE IN
2004 2003 VOLUME 2004
--------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT PERCENTAGE AMOUNT PERCENTAGE VS. 2003
- -------------------------------------------------------------------------------------------------------------------
Demand Deposits $131,825 44.7 $119,920 41.1 $ 11,905
Interest-Bearing Demand 72,275 24.5 67,820 23.2 4,455
Regular Savings 60,870 20.6 78,660 27.0 (17,790)
Money Market Deposits under $100 30,094 10.2 25,280 8.7 4,814
Total core deposits $295,064 100.0 $291,680 100.0 $ 3,384
- -------------------------------------------------------------------------------------------------------------------
Total deposits $598,714 $580,096 $ 18,618
- -------------------------------------------------------------------------------------------------------------------
Core deposits to total deposits 49.3% 50.3%
===================================================================================================================
More volatile rate sensitive deposits, concentrated in time certificates of
deposit greater than $100,000, for the three-month period ended March 31, 2004,
decreased to 7.77 percent of total deposits from 7.95 percent during the
three-months ended March 31, 2003.
Center Bancorp, Inc. Form 10-Q 21
Short-term borrowings can be used to satisfy daily funding needs. Balances in
these accounts fluctuate significantly on a day-to-day basis. The Corporation's
principal short-term funding sources are securities sold under agreements to
repurchase, advances from the Federal Home Loan Bank and Federal funds
purchased. Average borrowings during the three-months ended March 31, 2004 were
$228.7 million, an increase of $62.1 million or 37.28 percent from $166.6
million in average borrowings during the comparable three-months ended March 31,
2003.
During the three-months ended March 31, 2004, average funding sources increased
by approximately $80.1 million or 10.29 percent, compared to the same period in
2003. Interest-bearing deposit liabilities increased approximately $1.99 million
on average and were comprised primarily of increases in money market, time
deposits, and other interest bearing deposits, offset by a decline in savings
deposits. Borrowings and subordinated debentures increased by $62.1 million and
$5.0 million, respectively. Non-interest bearing funding sources as a percentage
of the total funding mix decreased to 15.2 percent on average as compared to
15.4 percent for the three-month period ended March 31, 2003. This reflects a
more rapid growth in non-deposit funding sources as a percentage of the funding
base as compared with overall deposit growth.
CASH FLOW
The consolidated statements of cash flows present the changes in cash and cash
equivalents from operating, investing and financing activities. During the three
months ended March 31, 2004, cash and cash equivalents (which increased overall
by $4.356 million) were provided (on a net basis) by investing activities in the
amount of approximately $16.6 million primarily due to net increase in cash flow
from maturing investment securities offset in part with a n net increase if $4.6
million in loans and $3.71 million was provided from operating activities.
Approximately $16.1 million was used in financing activities, principally a
decrease of $40.5 million in deposits and borrowings offset in part with a $25.0
million increase in advances from the Federal Home Loan Bank.
STOCKHOLDERS' EQUITY
Total stockholders' equity averaged $55.4 million or 6.07 percent of average
assets for the three month period ended March 31, 2004, as compared to $51.5
million, or 6.20 percent, during the same period in 2003. The Corporation's
dividend reinvestment and optional stock purchase plan contributed $160,000 in
new capital for the three-months ended March 31, 2004 as compared with $105,000
for the comparable period in 2003. Book value per common share was $6.45 at
March 31, 2004 as compared to $5.91 at March 31, 2003. Tangible book value
(i.e., book value less goodwill) per common share was $6.22 at March 31, 2004
and $5.67 at March 31, 2003.
As of March 31, 2004 the Corporation has purchased 54,600 common shares at an
average cost per share of $9.85 under the stock buyback program announced on
January 24, 2002 for the repurchase of up to 253,575 shares of the Corporation's
outstanding common stock. The repurchased shares were recorded as Treasury
Stock, which resulted in a decrease in stockholder's equity. For the three month
period ended March 31, 2004 there were no repurchases made.
CAPITAL
The maintenance of a solid capital foundation continues to be a primary goal for
the Corporation. Accordingly, capital plans and dividend policies are monitored
on an ongoing basis. The most important objective of the capital planning
process is to balance effectively the retention of capital to support future
growth and the goal of providing stockholders with an attractive long-term
return on their investment.
RISK-BASED CAPITAL/LEVERAGE
Banking regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at March 31, 2004, the Bank was
required to maintain (i) a minimum leverage ratio of Tier 1 capital to total
adjusted assets of 4.00%, and (ii) minimum ratios of Tier 1 and total capital to
risk-weighted assets of 4.00% and 8.00%, respectively.
At March 31, 2004, total Tier 1 capital (defined as tangible stockholders'
equity for common stock and certain perpetual preferred stock) amounted to $67.4
million or 7.38 percent of total assets. Tier I capital excludes the effect of
SFAS No. 115, $3,332 million of net unrealized gains, after tax, on securities
available-for-sale (included as a component of other comprehensive income) and
goodwill of approximately $2.1 million as of March 31, 2004. At March 31, 2004,
the Corporation's estimated Tier I risk-based and total risk-based capital
ratios were 13.55 percent and 14.20 percent, respectively. These ratios are well
above the minimum guidelines of capital to risk-adjusted assets in effect as of
March 31, 2004.
Center Bancorp, Inc. Form 10-Q 22
Under prompt corrective action regulations, bank regulators are required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of financial institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage (Tier 1) capital
ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and
a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the bank regulators about capital
components, risk weightings and other factors. As of March 31, 2004, management
believes that each of the Bank and the Corporation meet all capital adequacy
requirements to which it is subject.
SUBORNDINATED DEBENTURES
On December 19, 2003 Center Bancorp Statutory Trust II, a statutory business
trust and wholly-owned subsidiary of Center Bancorp, Inc., issued $5.0 million
of MMCapS capital securities to investors due on January 23, 2034. The capital
securities have preference over the common securities with respect to
liquidation and other disturbances and qualify as Tier 1 capital. The trust
loaned the proceeds of this offering to the Corporation and received in exchange
$5.0 million of the Corporation's subordinated debentures. The subordinate
debentures are redeemable in whole or part, prior to maturity but after January
23, 2009. The floating interest rate on the subordinate debentures is
three-month LIBOR plus 2.85% and reprices quarterly. The rate at March 31, 2004
was 4.02 %.
On December 18, 2001 Center Bancorp Statutory Trust I, a statutory business
trust and wholly-owned subsidiary of Center Bancorp, Inc issued $10.0 million of
floating rate capital trust pass through securities to investors due on December
18, 2031. The capital securities have preference over the common securities with
respect to liquidation and other disturbances and qualify as Tier 1 capital. The
subordinated debentures are redeemable in whole or part, prior to maturity but
after December 18, 2006. The floating interest rate on the subordinated
debentures is three-month LIBOR plus 3.60% and reprices quarterly. The rate at
March 31, 2004 was 4.77 %.
The additional capital raised with respect to the issuance of the above
mentioned securities was used to bolster the Corporation's capital and for
general corporate purposes, including capital contributions to Union Center
National Bank.
For information regarding certain developments which could impact the treatment
of the Corporation's subordinated debentures for regulatory capital purposes,
see "Recent Accounting Pronouncements - Consolidation of variable - interest
entities."
LOOKING FORWARD
One of the Corporation's primary objectives is to achieve balanced asset and
revenue growth, and at the same time expand market presence and diversify its
financial products. However, it is recognized that objectives, no matter how
focused, are subject to factors beyond the control of the Corporation, which can
impede its ability to achieve these goals. The following factors should be
considered when evaluating the Corporation's ability to achieve its objectives:
The financial market place is rapidly changing. Banks are no longer the only
place to obtain loans, nor the only place to keep financial assets. The banking
industry has lost market share to other financial service providers. The future
is predicated on the Corporation's ability to adapt its products, provide
superior customer service and compete in an ever-changing marketplace.
Net interest income, the primary source of earnings, is impacted favorably or
unfavorably by changes in interest rates. Although the impact of interest rate
fluctuations is mitigated by ALCO strategies, significant changes in interest
rates can have an adverse impact on profitability.
The ability of customers to repay their obligations is often impacted by changes
in the regional and local economy. Although the Corporation sets aside loan loss
provisions toward the allowance for loan losses, significant unfavorable changes
in the economy could impact the assumptions used in the determination of the
adequacy of the allowance.
Technological changes will have a material impact on how financial service
companies compete for and deliver services. It is recognized that these changes
will have a direct impact on how the marketplace is approached and ultimately on
profitability. The Corporation has already taken steps to improve its
traditional delivery channels. However, continued success will likely be
measured by the ability to react to future technological changes.
Center Bancorp, Inc. Form 10-Q 23
This "Looking Forward" description constitutes a forward-looking statement under
the Private Securities Litigation Reform Act of 1995. Actual results could
differ materially from those projected in the Corporation's forward-looking
statements due to numerous known and unknown risks and uncertainties, including
the factors referred to above and in other sections of this quarterly report and
the Corporation's Annual report on FROM 10K for the year ended December 31,
2003.
Center Bancorp, Inc. Form 10-Q 24
ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
The primary market risk faced by the Corporation is interest rate risk.
The Corporation's Asset/Liability Committee ("ALCO") monitors the changes in the
movement of funds and rate and volume trends to enable appropriate management
responses to changing market and rate conditions.
The Corporation's income simulation model analyzes interest rate
sensitivity by projecting net interest income over the next 24 months in a flat
rate scenario versus net interest in alternative interest rate scenarios.
Management reviews and refines its interest rate risk management process in
response to the changing economic climate. The low level of interest rates
necessitated a modification of the Corporation's standard rate scenario of a
shock down 200 basis points over 12 months to down 100 basis points over a
12-month period.
Based on the results of the interest simulation model as of March 31,
2004, and assuming that management does not take action to alter the outcome,
the Corporation would expect an increase of .13 percent in net interest income
if interest rates decreased 100 basis points from the current rates in an
immediate and parallel shock over a 12-month period. In a rising rate
environment, based on the results of the model as of March 31, 2004, the
Corporation would expect a decrease of 3.6% percent in net interest income if
interest rates increased by 200 basis points from current rates in an immediate
shock over a twelve month period.
The statements in this Quarterly Report regarding the effects of
hypothetical interest rate changes represent forward- looking statements under
the Private Securities Litigation Reform Act of 1995. Actual results could
differ materially from these statements. Computation of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, loan prepayments and duration of
deposits, and should not be relied upon as indicative of actual results.
Further, the computations do not contemplate any actions that ALCO could
undertake in response to changes in interest rates.
ITEM 4 - CONTROLS AND PROCEDURES
(A) Disclosure controls and procedures. As of the end of the Corporation's
most recently completed fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) covered by this report, the
Corporation carried out an evaluation, with the participation of the
Corporation's management, including the Corporation's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
Corporation's disclosure controls and procedures pursuant to Securities
Exchange Act Rule 13a-15. Based upon that evaluation, the Corporation's
Chief Executive Officer and Chief Financial Officer concluded that the
Corporation's disclosure controls and procedures are effective in ensuring
that information required to be disclosed by the Corporation in the
reports that it files or submits under the Securities Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms.
(B) Changes in internal controls over financial reporting. There have been no
changes in the Corporation's internal controls over financial reporting
that occurred during the Corporation's last fiscal quarter to which this
report relates that have materially affected, or are reasonably likely to
materially affect, the Corporation's internal control over financial
reporting.
Center Bancorp, Inc. Form 10-Q 25
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Corporation is subject to claims and lawsuits, which arise primarily in the
ordinary course of business. Based upon the information currently available, it
is the opinion of management that the disposition or ultimate determination of
such claims will not have a material adverse impact on the consolidated
financial position, results of operations, or liquidity of the Corporation. This
statement represents a forward-looking statement under the Private Securities
Litigation Reform Act of 1995. Actual results could differ materially from this
statement, primarily due to the uncertainties involved in proving facts within
the context of the legal processes.
ITEM 2-CHANGES IN SECURITIES
None
ITEM 3-DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Annual Meeting of shareholders was held on Tuesday April 20, 2004.
The following Class 1 Directors, whose three-year terms will expire in
2007, were re-elected with the following share votes:
FOR % WITHHOLD %
----------------------------------------------------
John J. Davis 7,143,364 96.9 226,230 3.1
Brenda Curtis 7,158,986 97.1 210,608 2.9
Donald G. Kein 7,134,154 96.8 235,440 3.2
Norman F. Schroeder 7,134,846 96.8 234,748 3.2
The following class 3 Directors terms continues until the 2005 Annual Meeting
Robert L. Bischoff
Paul Lomakin, Jr.
James J. Kennedy
Herbert Schiller
The following Class 2 Directors terms continue until the 2006 Annual Meeting
Hugo Barth III
Alexander A. Bol
Eugene Malinowski
William A. Thompson
Approval of Non-employee Director Stock Option plan
FOR % AGAINST % ABSTAIN % NON-VOTE %
- -------------------------------------------------------------------------------
4,285,805 58.2 1,395,080 18.9 179,544 2.4 1,509,165 20.5
ITEM 5 - OTHER INFORMATION
None
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS:
31.1 Certification of the Chief Executive Officer under section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer under section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer under section 906 of
the Sarbanes-Oxley act of 2002.
32.2 Certification of the Chief Financial Officer under section 906 of
the Sarbanes-Oxley act of 2002.
Center Bancorp, Inc. Form 10-Q 26
B) REPORTS ON FORM 8-K
Current Report dated January 22, 2004, submitted to the SEC, disclosing
(under Items 7 and 12) a press release regarding fourth quarter earnings.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf, by the
undersigned, thereunto duly authorized.
CENTER BANCORP, INC.
DATE: May 10, 2004 /s/: Anthony C. Weagley
-----------------------
Anthony C. Weagley, Treasurer
(Chief Financial Officer)
Center Bancorp, Inc. Form 10-Q 27