SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2002 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.
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(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)
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(Former name, former address and former fiscal year,
if changed since last report)
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|_|
Shares outstanding on April 30, 2002
------------------------------------
Common stock, no par value: 3,994,593 shares
CENTER BANCORP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Condition
at March 31, 2002 (Unaudited) and December 31, 2001 3
Consolidated Statements of Income for the
three-months ended March 31, 2002 and 2001 4
(Unaudited)
Consolidated Statements of Cash Flows for the
three-months ended March 31, 2002 and 2001 5
(Unaudited)
Notes to the Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-21
Item 3. Qualitative and Quantitative Disclosures about 22
Market Risks
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to Vote
of Security Holders 22-23
Item 6. Exhibits 23
Signature 24
2
Consolidated Statements of Condition March 31, December 31,
(Dollars in thousands) 2002 2001
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(unaudited)
Assets:
Cash and due from banks $ 16,899 $ 29,668
Federal funds sold 8,400 0
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Total cash and cash equivalents 25,299 29,668
Investment securities held to maturity (approximate
market value of $231,24 in 2002 and $205,604 in 2001) 231,703 205,237
Investment securities available-for-sale 213,836 212,037
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Total investment securities 445,539 417,274
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Loans, net of unearned income 216,547 211,236
Less - Allowance for loan losses 2,260 2,191
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Net loans 214,287 209,045
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Premises and equipment, net 12,527 11,685
Accrued interest receivable 5,265 4,542
Bank owned separate account life insurance 13,563 13,000
Other assets 2,557 2,298
Goodwill 2,091 2,091
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Total assets 721,128 689,603
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Liabilities
Deposits:
Non-interest bearing $ 110,005 $ 103,520
Interest bearing:
Certificates of deposit $100,000 and over 42,081 23,371
Savings and time deposits 386,454 370,942
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Total deposits 538,540 497,833
Federal funds purchased and securities sold under
agreements to repurchase 61,217 72,296
Federal Home Loan Bank advances 60,000 60,000
Corporation - obligated Mandatorily redeemable trust preferred
securities of subsidiary trust holding solely junior solely junior subordinated
debentures of the Corporation 10,000 10,000
Accounts payable and accrued liabilities 5,745 5,178
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Total Liabilities 675,502 645,307
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Stockholders' equity:
Common stock, no par value:
Authorized 20,000,000 shares; issued 4,736,380 and
4,732,625 shares in 2002 and 2001, respectively 14,743 14,677
Additional paid in capital 4,312 4,180
Retained earnings 30,008 28,569
Treasury stock at cost (542,441 and 569,741 shares in 2002
and 2001, respectively) (3,935) (4,115)
Restricted stock (42) (135)
Accumulated other comprehensive income 540 1,120
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Total stockholders' equity 45,626 44,296
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Total liabilities and stockholders' equity $ 721,128 $ 689,603
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All share and per share amounts have been restated to reflect the 5% stock
dividend declared April 16, 2002, payable June 1, 2002 to stockholders of record
May 17, 2002.
See Accompanying Notes To Consolidated Financial Statements.
3
Center Bancorp, Inc
Consolidated Statements of Income
(unaudited)
Three Months Ended
(Dollars in thousands) March 31,
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2002 2001
Interest income:
Interest and fees on loans $ 3,673 $ 3,802
Interest and dividends on investment securities:
Taxable interest income 6,552 5,553
Nontaxable interest income 151 116
Interest on Federal funds sold and securities
purchased under agreement to resell 2 166
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Total interest income $ 10,378 $ 9,637
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Interest expense:
Interest on certificates of deposit $100,000 or more 174 678
Interest on savings and time deposits 2,191 2,507
Interest on borrowings 1,312 1,203
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Total interest expense 3,677 4,388
Net interest income 6,701 5,249
Provision for loan losses 90 75
Net interest income after provision for loan losses 6,611 5,174
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Other income:
Service charges, commissions and fees 379 387
Other income 70 109
BOLI 180 0
Gain (Loss) on securities sold 186 28
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Total other income $ 815 $ 524
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Other expense:
Salaries and employee benefits 2,300 1,870
Occupancy expense, net 456 434
Premises and equipment expense 389 336
Stationery and printing expense 156 93
Marketing and advertising 193 126
Other expenses 961 793
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Total other expense $ 4,455 $ 3,652
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Income before income tax expense 2,971 2,046
Income tax expense 936 691
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Net income $ 2,035 $ 1,355
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Earnings per share
Basic $ 0.49 $ 0.33
Diluted $ 0.48 $ 0.33
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Average weighted common shares outstanding
Basic 4,173,165 4,116,837
Diluted 4,207,730 4,150,446
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All share and per share amount have been adjusted to reflect the 5% stock
dividend declared April 17, 2002 and payable June 1, 2002 to stockholders of
record May 18, 2002.
See Accompanying Notes To Consolidated Financial Statements
4
Center Bancorp, Inc.
Consolidated Statements of Cash Flows
(Unaudited) Three Months Ended
March 31,
(Dollars in thousands) 2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,035 $ 1,355
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 414 377
Provision for loan losses 90 75
Provision for deferred taxes
(Gain) on sales of investment securities available-for-sale (186) (28)
Proceeds from sale of other real estate owned 0 45
(Increase) decrease in accrued interest receivable (723) 613
Loss on sales of other real estate owned 0 4
Increase in other assets (641) (240)
Increase in cash surrender value of BOLI (181) 0
Increase in other liabilities 567 1,623
Amortization of premium and accretion of
discount on investment securities, net 285 (42)
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Net cash provided by operating activities $ 1,660 $ 3,782
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale $ 48,592 $ 15,615
Proceeds from maturities of securities held-to-maturity 24,519 25,653
Proceeds from sales of investment securities available-for-sale 13,348 8,461
Purchase of securities available-for-sale (61,744) (24,004)
Purchase of securities held-to-maturity (51,979) (14,348)
Purchase of FRB & FHLB stock, net (1,680) 0
Net increase in loans (5,332) (4,218)
Property and equipment expenditures, net 1,256 (189)
- -----------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (33,020) 6,970
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits 40,707 18,886
Dividends paid (596) (560)
Proceeds from issuance of common stock 471 239
Issuance of mandatorily redeemable securities of subsidiary Trust 10,000 0
Net increase in borrowings (1,079) (4,348)
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Net cash provided by financing activities 49,503 14,217
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Net (decrease) increase in cash and cash equivalents (4,369) 24,969
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Cash and cash equivalents at beginning of period 29,668 22,274
Cash and cash equivalents at end of period $ 25,299 $ 47,243
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Supplemental disclosures of cash flow information:
Interest paid on deposits and short-term borrowings: $ 3,671 $ 4,229
Income taxes $ 877 $ 676
See Accompanying Notes to Consolidated Financial Statements
5
Notes to Consolidated Financial Statements
Note I
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-company accounts and transactions have been
eliminated from the accompanying 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.
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.. 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 position and results of operations for the
interim periods have been made. Such adjustments are of a normal recurring
nature. Results for the period ended March 31, 2002 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, 2001 for information regarding accounting principles.
Note 2
Recent Accounting Pronouncements
SFAS No. 140
In September 2001, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (A Replacement
of FASB Statement 125)." SFAS No. 140 supercedes and replaces the guidance in
SFAS No. 125 and, accordingly, provides guidance on the following topics:
securitization transactions involving financial assets; sales of financial
assets such as receivables, loans and securities; factoring transactions: wash
sales; servicing assets and liabilities; collateralized borrowing arrangements;
securities lending transactions; repurchase agreements; loan participations, and
extinguishment of liabilities. While most of the provisions of SFAS No. 140 were
effective for transactions entered into after March 31, 2002, companies that
hold beneficial interests from previous securitizations were required to make
additional disclosures in their December 31, 2001 financial statements. The
initial adoption of SFAS No. 140 did not have a material impact on the financial
statements of the Corporation.
6
SFAS No. 141
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill. Statement 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Corporation
had no business combinations subsequent to June 30, 2001, and therefore the
implementation of this Statement 141 did not have an impact on the Corporation.
SFAS NO. 142
Upon adoption of Statement 142, the Corporation is required to evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination. In addition, the Corporation is required to reassess the
useful lives and residual values of all intangible assets acquired in purchase
business combinations, and make any necessary amortization period adjustments by
the end of the first interim period after adoption. To the extent an intangible
asset is identified as having an indefinite useful life, the Corporation is
required to test the tangible asset for impairment in accordance with the
provisions of Statement 142 within the first interim period. Any impairment loss
will be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation, Statement
142 requires the Corporation to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. The Corporation
will then have up to nine months from the date of adoption to determine the far
value of goodwill and compare it to the carrying amount. To the extent that the
goodwill carrying amount exceeds its fair value, an indication exits that the
goodwill may be impaired and the Corporation must perform the second step of the
transitional impairment test. In the second step, the Corporation must compare
the implied fair value of the goodwill, determined by allocating the fair value
to all of its assets (recognized and unrecognized) and liabilities in a manner
similar to a purchase price allocation in accordance with Statement 141, to its
carrying amount, both of which would be measured as of the date of adoption.
This second step is required to be completed as soon as possible, but no later
than the end of the year of adoption. Any transitional impairment loss will be
recognized as the cumulative effect of a change in accounting principle in the
Corporation's statement of earnings.
As of December 31, 2001, the Corporation has $2.1 million in unamortized
goodwill with annual amortization of $323,000, which will cease upon the
adoption of SFAS No. 142, "Goodwill and Intangible Assets". The Corporation
adopted SFAS No. 142 on January 1, 2002. Accordingly, the March 21, 2002
Financial Statements do not include amortization of goodwill. In the quarter
ended March 31, 2002, amortization of goodwill totaled $81,000.
SFAS NO. 144
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", it retains many of the fundamental
provisions of that Statement. The Statement is effective for fiscal years
beginning after December 15, 2001. The initial adoption of SFAS No. 144 did not
have a significant impact on the Corporation's consolidated financial
statements.
7
NOTE 3
The following table outlines the Corporation's comprehensive income for the
three months ended March 31, 2002 and 2001.
Three Months
Ended March 31
Comprehensive Income 2002 2001
- ----------------------------------------------------------------------------------------
(Dollars in thousands)
Net Income $ 2,035 $ 1,355
Other comprehensive income
Unrealized holding company (losses) gains arising
during the period, net of taxes (457) 922
Less reclassificaton of adjustment for (gains)
losses included in net income (net of tax benefit) (123) (18)
- ----------------------------------------------------------------------------------------
Other total comprehensive income (loss) 580 908
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Total comprehensive income $ 1,455 $ 2,259
========================================================================================
NOTE 4
The following is a reconciliation of the calculation of basic and dilutive
earnings per share.
Three Months
Ended March 31,
(In thousands, except per share data) 2002 2001
- ----------------------------------------------------------------------------------------
(Dollars in thousands)
Net Income $ 2,035 $ 1,355
Weighted Average Shares 4,173 4,117
Effect of Dilutive Stock Options 35 33
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Total Weighted Average Dilutive Shares $ 4,208 $ 4,150
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Basic Earnings per Share $ 0.49 $ 0.33
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Diluted Earnings per share $ 0.48 $ 0.33
========================================================================================
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All share and par share amount have been adjusted to reflect the 5% stock
dividend declared April 16, 2002 and payable June 1, 2002 to stockholders of
record May 17, 2002.
8
Management's Discussion & Analysis of Financial Condition
and Results of Operations
Net income for the three-months ended March 31, 2002 amounted to $2,035,000 as
compared to $1,355,000 earned for the comparable three-month period ended
March 31, 2001. On a per diluted share basis, earnings increased to $.48 per
share as compared with $.33 per share for the three-months ended March 31, 2001.
All per share amounts have been restated to reflect the 5% stock dividend
declared April 16, 2002, payable June 1, 2002. The annualized return on average
assets increased to 1.12 percent compared with 0.94 percent for the comparable
three-month period in 2001. The annualized return on average stockholders'
equity was 17.6 percent for the three-month period ended March 31, 2002 as
compared to 13.4 percent for the three-months ended March 31, 2001. Earnings
performance for the first quarter of 2002 primarily reflects a higher level of
net interest income and increased non-interest income, offsetting increased
non-interest expense and income tax expense.
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 borrowings, which support these assets. Net interest
income is presented below first in accordance with the Corporation's
consolidated financial statements and then 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.
Net Interest Income
- ---------------------------------------------------------------------------------------
(Dollars in thousands) Three Months Ended
March 31, Percent
2002 2001 Change
---------------------------------------------
Interest income:
Investments $ 6,781 $ 5,729 18.36%
Loans, including fees 3,673 3,802 -3.39%
Federal funds sold and securities
sold under agreements to
repurchase 2 166 -98.80%
-------------------------------
Total interest income 10,456 9,697 7.83%
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Interest expense:
Certificates $100,000 or more 174 678 -74.34%
Savings and Time Deposits 2,191 2,507 -12.60%
FHLB advances and other
borrowings 1,312 1,203 9.06%
-------------------------------
Total interest expense 3,677 4,388 -16.20%
- -------------------------------------------------------------------------
Net interest income on a fully
tax-equivalent basis 6,779 5,309 27.69%
Tax-equivalent adjustment (78) (60) 30.00%
-------------------------------
Net interest income* $ 6,701 $ 5,249 27.66%
- ---------------------------------------------------------------------------------------
*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 accrued on securities of state and political.
Net interest income on a fully tax-equivalent basis increased $1,470,000 or 27.7
percent to approximately $6.8 million for the three-months ended March 31, 2002,
from $5.3 million for the comparable period in 2001. For the three- months ended
March 31, 2002, the net interest margin increased to 4.08 percent from 3.99
percent due primarily to an increase in interest earning assets and a lower cost
of funds. For the three-months ended March 31, 2002, a decrease in the average
yield on interest earning assets of 99 basis points was offset by a decrease in
the average cost of interest-bearing liabilities of 143 basis points.
9
The 44 basis point increase in the net interest spread was primarily a result of
the decreased cost of interest-bearing liabilities and the Corporation's ability
to fund a greater portion of its earning-assets through increases in core
deposits, versus higher cost promotional deposits and short term borrowings.
Average interest earning-assets increased by $133.5 million, from the comparable
three-month period in 2001. The net increase in average interest-bearing
liabilities was $129.8 million over the comparable three-month period in 2001.
The 2002 first quarter changes in average interest earning-asset volumes
resulted primarily from increased volumes of taxable investment securities and
loans, funded primarily by deposits and increased short -term borrowings.
For the three-month period ended March 31, 2002 interest income on a fully
tax-equivalent basis increased by $1.47 million or 27.7 percent from the
comparable three-month period in 2001. The primary factor contributing to the
increase was the previously cited increase in average earning-assets. The
Corporation's loan portfolio increased on average $13.7 million to $213.5
million from $199.8 million in the same quarter in 2001, primarily driven by
growth in commercial loans, commercial and residential mortgage loans. This
growth was funded primarily through an increase in deposits and borrowings.
The factors underlying the year-to year changes in net interest income are
reflected in the tables appearing on page 9 and page 12, each of which has been
presented on a tax-equivalent basis (assuming a 34 percent tax rates). The table
on page 12 (Average Statements of Condition 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. The table
presented on page 11 (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 past three years; 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.
The loan portfolio (traditionally the Corporation's highest yielding
earning-asset) represented, on average, approximately 31.5 percent of the
Corporation's interest earning-assets for the three-months ended March 31, 2002
as compared with 37.0 percent for the comparable period in 2001.
Average investment volume for the three-months ended March 31, 2002 increased
$131.6 million to $459.5 million compared to $327.9 million for the three months
of 2001. The growth in investments was in taxable securities, which increased
$128.5 million. Nontaxable securities increased $3.1 million as compared with
the comparable period in 2001.
Interest expense for the three-months ended March 31, 2002, decreased $711,000
or 16.2 percent from the comparable three-month period ended March 31, 2001, as
a result of a decrease in interest rates and higher amounts of lower cost
borrowings and Super Max Savings deposits. The $1.6 million decrease in interest
expense attributable to decreased rates brought about by the actions of the
Federal Reserve in lowering interest rates was offset in part by the $952,000
increases in interest expense attributable to volume factors.
For the three-months ended March 31, 2002, the Corporation's net interest spread
on a tax-equivalent basis increased to 3.67 percent from 3.23 percent for the
three-months ended March 31, 2001. This increase reflected a widening of spreads
between yields earned on loans and investments and rates paid for supporting
funds. Net interest margins expanded due in part to a decline in interest rates,
despite the increased volumes of interest bearing checking, money market and
savings deposits in addition to short-term borrowings. The Federal Reserve left
the Federal Funds at a 40 year low of 1.75% for the first quarter of 2002,as
compared to the first quarter of 2001 when the Federal Reserve lowered interest
rates three-times. Although the yield on interest-earning-assets declined to
6.29 percent from 7.28 percent; this was offset by lower rates paid for
interest-bearing liabilities coupled with a change in the mix of
interest-bearing liabilities to less costly funding. The cost of total
interest-bearing liabilities decreased to 2.62 percent for the three-months
ended March 31, 2002 from 4.05 percent for the three-months ended March 31,
2001.
10
The contribution of non-interest-bearing sources (i.e. the differential between
the average rate paid on all sources of funds and the average rate paid on
interest-bearing sources) narrowed to approximately 44 basis points from 75
basis points during three-month period ended March 31, 2002. The growth in
interest-bearing deposits was not proportionate to the overall deposit growth
experienced for the period and outpaced the growth in non-interest bearing
deposits. This trend reflects the continued change in consumer preferences for
interest-bearing accounts versus non-interest bearing ones.
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 resultant
changes in the rates earned and paid by the Corporation.
2002/2001 Increase/(Decrease)
(Dollars in thousands) Due to Change In:
Average Average Net
Volume Rate Change
-------------- --------------- --------------
Interest-earning assets
Investment Securities
Taxable $ 1,988 $ (989) $ 999
Non-taxable 54 (1) 53
Federal funds sold and securities
purchased under agreement to resell (91) (73) (164)
Loans, net of unearned income 250 (379) (129)
-------------- --------------- --------------
Total interest-earning assets 2,201 (1,442) 759
- -------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Money Market deposits 204 (224) (20)
Savings deposits 330 (323) 7
Time deposits (136) (705) (841)
Other interest-bearing deposits 43 (9) 34
Short-term borrowings 347 (375) (28)
Borrowings 137 0 137
-------------- --------------- --------------
Total interest-bearing liabilities 925 (1,636) (711)
-------------- --------------- --------------
Change in net interest income $ 1,276 $ 194 $ 1,470
- -------------------------------------------------------------------------------------------------------------
11
The following table, "Average Balance Sheet with Interest and Average Rates",
presents for the three-months ended March 31, 2002 and 2001 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 Balance Sheet with Interest and Average Rates
Three Month
Period Ended March 31,
2002 2001
---------------------- -----------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(tax-equivalent basis, dollars in thousands) Balance Expense Rate Balance Expense Rate
- -------------------------------------------- ------- -------- ------- ------- -------- --------
Assets
Interest-earning assets:
Investment securities: (1)
Taxable $446,402 $ 6,552 5.95% $317,895 $ 5,553 7.08%
Non-taxable 13,122 229 6.98% 10,033 176 7.02%
Federal funds sold and securities
purchased under agreement to resell 642 2 1.26% 12,476 166 5.40%
Loans, net of unearned income (2) 213,528 3,673 6.98% 199,827 3,802 7.72%
------------- ------------- ------------- ------------- ------------- ----------
Total interest-earning assets $673,694 10,456 6.29% $540,231 9,697 7.28%
Non-interest earning assets
Cash and due from banks 17,914 17,429
BOLI 13,448 0
Other assets 22,571 20,019
Allowance for possible loan losses (2,224) (1,661)
Total non-interest earning
assets 51,709 35,787
------------- -------------
Total assets $725,403 $576,018
------------- -------------
Liabilities and stockholders' equity
Interest-bearing liabilities:
Money Market deposits $108,315 524 1.96% $ 73,750 544 2.99%
Savings deposits 155,362 873 2.28% 105,759 866 3.32%
Time deposits 100,329 752 3.04% 110,522 1,593 5.85%
Other interest - bearing deposits 66,644 216 1.31% 53,519 182 1.38%
Trust Preferred 10,000 1,175 5.48% 0 0 0.00%
Short-term borrowings 128,777 137 3.65% 96,103 1,203 5.01%
------------- ------------- ------------- ------------- ------------- ----------
Total interest-bearing
liabilities $569,427 3,677 2.62% $439,653 4,388 4.05%
------------- -------------
Non-interest-bearing liabilities:
Demand deposits 103,538 91,155
Other non-interest-bearing deposits 514 870
Other liabilities 5,661 3,922
------------- -------------
Total non-interest-bearing
liabilities 109,713 95,947
Stockholders' equity 46,263 40,418
------------- -------------
Total liabilities and
stockholders' equity $725,403 $576,018
------------- -------------
Net interest income (tax-equivalent basis) $ 6,779 $ 5,309
------------- -------------
Net Interest Spread 3.67% 3.23%
------------- ----------
Net interest income as percent
of earning-assets 4.08% 3.99%
------------- ----------
Tax equivalent adjustment (78) (60)
------------- -------------
Net interest income $ 6,701 $ 5,249
------------- -------------
(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
12
Investments
For the three-months ended March 31, 2002, the average volume of investment
securities increased to $459.5 million, or 68.2 percent of average
earning-assets an increase of $131.6 million from $327.9 million on average for
the same three-month period in 2001. The tax-equivalent yield on the investment
portfolio decreased to 5.98 percent from 7.09 percent for the comparable
three-month period in 2001. The 111 basis points decline in yield on the
portfolio was attributable to both additional volume added to the portfolio
coupled with purchases made to replace maturing and called investments, made at
lower rates. The volume related figures during the first quarter period
contributed an increase in revenue of $2,024,000 while rate related changes
amounted to ($990,000). The increased size of the investment portfolio largely
reflects the Corporation's leverage strategies, which were implemented in the
fourth quarter of 2001. The principal components of the investment portfolio are
U.S. Treasury, U.S. Government Federal Agency callable and non-callable
securities including agency issued collateralized mortgage obligations,
corporate securities, and municipals.
The impact of re-pricing activity on investment yields was increased to some
extent by a change in bond segmentation to shorter duration securities offset in
part by some portfolio extension, where risk is relatively minimal within the
portfolio resulting in wider spreads. The Corporation also carried on average
$18.3 million in short-term overnight money market investments as compared with
$0 for the comparable period in 2001. These funds carried significantly lower
rates than other securities in the portfolio (1.94%) and is a contributing
factor to the decline in yield as compared to the comparable three-moth period
in 2001. The increased volume of such securities was for liquidity purposes.
Securities available-for-sale are 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-months ended March 31, 2002, the Corporation sold from its
available-for-sale portfolio securities totaling approximately $13.3 million.
Purchases of securities to replace the sales amounted to approximately $52.0 for
the three- month period ended March 31, 2002, with weighted average yields of
5.625 percent.
At March 31, 2002 the net unrealized gain carried as a component of other
comprehensive income and included in shareholders' equity amounted to a net
unrealized gain of $540,000 as compared with an unrealized gain of $1,244,000 at
March 31, 2001 resulting from pullback in the bond market due to a decline in
interest rates fostered by the Federal Open Market Committee's recent actions to
lower the Federal funds target rate as an economic stimulus. Bond prices have
fallen as interest rates rose in the long end of the yield curve.
Loans
Loan growth during the first three-months of 2002 occurred primarily in the
residential 1-4 family and commercial loan portfolio. This growth resulted from
the Corporation's business development efforts enhanced by the Corporation's
entry into new markets through expanded branch facilities. The decrease in the
loan portfolio yield for the three-month period was the result of the decline in
interest rates as compared with the comparable period in 2001, coupled with a
competitive rate structure to attract new loans and 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.
Analyzing the loan portfolio for the three-months ended March 31, 2002, average
loan volume increased $13.7 million or 6.9 percent, while portfolio yield
decreased by 74 basis points as compared with the same period in 2001. The
effects of the additions made to the portfolio were lessened by continued
re-financing activity; which was fueled, by historically low interest rates. The
volume related factors contributed increased revenue of $250,000 while rate
related changes amounted to $(379,000). Total average loans increased to $213.5
million with a net interest yield of 6.98 percent, as compared to $199.8 million
with a yield of 7.72 percent for the three-months ended March 31, 2001.
13
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. 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 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, 2002, the allowance was
$2,260,000 as compared to a level of $2,191,000 at December 31, 2001, and
$1,707,000 at March 31, 2001. The Corporation had a provision to the allowance
for loan losses during the three-month periods ended March 31, 2002 and 2001
amounting to $90,000 and $75,000, respectively. The increase in the provision
for loan losses during the periods discussed was commensurate with the loan
volume recorded during the respective periods and increased focus on the
commercial and residential lending.
At March 31, 2002, the allowance for loan losses amounted to 1.04 percent of
total loans. In management's view, the level of the allowance at March 31, 2002
is adequate to cover losses inherent in the loan portfolio. Management's
judgment regarding the adequacy of the allowance constitutes a "Forward Looking
Statement" 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. Furthermore, the majority of the Corporation's loans
are secured by real estate in the State of New Jersey. Accordingly, the
collectability of a substantial portion of the carrying value of the
Corporations loan portfolio or the Central New Jersey area experience an adverse
economic shock. Future adjustments to the allowance may be necessary due to
economic, operating, regulatory and other conditions beyond the Corporation's
control. The allowance for loan losses as a percentage of total loans amounted
to 1.04 percent at March 31, 2002, 1.04 percent at December 31, 2001 and .84
percent at March 31, 2001.
During the three months ended March 31, 2002, and the three months ended
March 31, 2001, the Corporation did not experience any substantial problems
within its loan portfolio. Net charge-offs were $21,000, for the three months
ended March 31, 2002 and $23,000 for the three months ended March 31, 2001. The
charge-off activity for the respective periods was a result of a continued
unfavorable level of charge-offs in the installment loan portfolio, reflecting
the economic slowdown and the resulting higher level of personal bankruptcies.
The Corporation had non-accrual loans amounting to $109,000 at March 31, 2002
and at December 31, 2001. Non-accrual loans at March 31, 2001 amounted to
$231,000. The decrease in such loans in 2002 and at March 31, 2002 was
attributable to a home equity loan, which was charged off, and a residential
mortgage loan, which was 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 dependent. Impaired loans consist of
non-accrual loans and loans internally classified as substandard or worse, 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, 2002, total impaired loans were
approximately $1,973,000 compared to $1,461,000 at December 31, 2001 and
$1,927,000 at March 31, 2001. Although classified as substandard, impaired loans
were current with respect to principal and interest payments.
14
Changes in the allowance for loan losses for the period ended March 31, 2002 and
2001 respectively, are set forth below.
Allowance for loan losses
(Dollars in thousands)
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Average loans outstanding $213,528 $ 199,827
- ---------------------------------------------------------------------------------------------
Total loans at end of period 216,597 203,144
- ---------------------------------------------------------------------------------------------
Analysis of the allowance for loan losses
Balance at the beginning of period 2,191 1,655
Charge-offs:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 24 24
- ---------------------------------------------------------------------------------------------
Total charge-offs 24 24
Recoveries:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 3 1
- ---------------------------------------------------------------------------------------------
Total recoveries 3 1
Net Charge-offs: 21 23
Provisions for loan losses 90 75
- ---------------------------------------------------------------------------------------------
Balance at end of period $ 2,260 $ 1,707
- ---------------------------------------------------------------------------------------------
Ratio of net charge-offs during the period to
Average loans outstanding during the period 0.0001% 0.00001%
Allowance for loan losses as a percentage of total loans 1.04% 0.84%
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, 2002, December 31, 2001 and March 31, 2001, the Corporation had no
restructured loans. Non-accrual loans amounted to $109,000 at March 31, 2002,
and December 31, 2001 and were primarily comprised of a commercial loan and a
second lien residential mortgage. At March 31, 2001, non-accrual loans amounted
to $231,000 and were comprised of first and second lien residential mortgages.
At March 31, 2002 the Corporation's loans 90 days past due and still accruing
amounted to approximately $129,000, and consisted primarily of a first lien
residential mortgage and two consumer loans. Such loans amounted to $8,000 at
December 31, 2001 and $107,000 at March 31, 2001.
15
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, 2002,
December 31, 2001 and March 31, 2001, were as follows:
Non-Performing Loans at March 31, December 31, March 31,
(Dollars in thousands) 2002 2001 2001
=====================================================================================================
Loans past due 90 days and still accruing $ 129 $ 8 $ 107
Non-accrual loans $ 109 $ 109 $ 231
- -----------------------------------------------------------------------------------------------------
Total non-performing loans $ 238 $ 117 $ 338
=====================================================================================================
Other Real Estate Owned (OREO) $ - $ - $ -
- -----------------------------------------------------------------------------------------------------
Total non-performing assets $ 238 $ 117 $ 338
- -----------------------------------------------------------------------------------------------------
At March 31, 2002, non-performing assets, consisting of loans on non-accrual
status plus other real estate owned (OREO) amounted to $238,000 or .11 percent
of total loans outstanding as compared to $117,000 or .06 percent at
December 31, 2001 and $338,000 or .17 percent at March 31, 2001.
At March 31, 2002, 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, 2002, December 31, 2001 and March 31, 2001, the Corporation did not
have any other real estate owned (OREO).
Other Non-Interest Expense
The following table represents the principal categories of non-interest expense
for the three month period ended March 31, 2002 and 2001.
(dollars in thousands) Three months ended
March 31,
Other expense: 2002 2001 % change
-------------- --------------- --------------
Salaries and employee benefits $ 2,300 $ 1,870 22.99%
Occupancy expense, net 456 434 5.07%
Premises & equipment expense 389 336 15.77%
Stationery & printing expense 156 93 67.74%
Marketing & Advertising 193 126 53.17%
Other expense 961 793 21.19%
-------------- --------------- --------------
Total other expense $ 4,455 $ 3,652 21.99%
- --------------------------------------------------------------------------------
16
For the three-months ended March 31, 2002, total other (non-interest) income,
increased $291,000 or 55.5 percent as compared to the three-months ended
March 31, 2001. Other non-interest income, exclusive of gains on securities sold
(which increased $158,000), rose $133,000 or 26.8% for the first quarter
compared with the comparable quarter in 2001. The increased revenue was
primarily driven by the increase in the cash surrender value of bank owned life
insurance, which amounted to $180,000 in 2002 as compared to $0.00 in 2001.
Other income reflected a decline of $39,000 or 35.9 percent due primarily to
lower letter of credit fees in the first quarter of 2002 as compared with the
first quarter of 2001.
Other Non-Interest Income
The following table presents the principal categories of non-interest income for
the three and nine month period ended March 31, 2002 and 2001.
(dollars in thousands) Three months ended
March 31,
2002 2001 % change
-------------------------------
Other income:
Service charges, commissions and fees $ 379 $ 387 -2.07%
Other income 70 109 -35.78%
Bank owned life insurance 180 0 N/M
Net gains on securities sold 186 28 564.29%
-------------- -------------- -------------
Total other income $ 815 $ 524 55.53%
- -------------------------------------------------------------------------------------------
For the three-month period ended March 31, 2002 total other (non-interest)
expenses increased $803,000 or 21.99 percent over the comparable three-month
period ended March 31, 2001 with increased salary and benefit expense, bank
premise and occupancy expense and marketing and advertising accounting for most
of the increase. Effective January 1, 2002, the Corporation adopted SFAS No.
142, "Goodwill and Intangible Assets"; under which annual amortization of
unamortized goodwill will cease. Accordingly there was no amortization expense
in the first quarter of 2002 as compared with an expense of $81,000 included in
other expense in the comparable quarter of 2001.The period to period increases
in other operating expense also include the costs of higher data processing and
technology costs.
Control of other expenses will continue to be a key objective of management in
an effort to improve earnings efficiency. The Corporation's efficiency ratio
(other expenses less non-recurring expenses as a percentage of net interest
income on a tax-equivalent basis plus non-interest income) for the three-months
ended March 31, 2002 was 60.14 percent as compared with 60.10 percent for the
comparable period ended March 31, 2001.
Salaries and employee benefits which accounted for 53.5 percent of the total
increase in other operating expense, increased $430,000 or 22.99 percent for the
three-months ended March 31, 2002. The increase in salaries and employee
benefits for the three-month period ended March 31, 2002 is attributed to higher
staffing levels, coupled with increased expense due to normal merit increases,
promotional raises and higher benefits costs. Although staffing levels overall
increased to 177 full-time employees at March 31, 2002 from 160 at March 31,
2001, the expenses for the quarter ended March 31, 2002 also reflect the expense
for two officers that were hired in the last week of March 2001, severance
payments and higher salaries for officers hired to replace resignations.
The increase in occupancy expenses reflects the expense associated higher
operating costs (utilities, rent, real estate taxes and general repair and
maintenance) of the Corporation's expanded facilities, as well as higher
equipment and maintenance costs of the expanded bank facilities. For the
three-months ended March 31, 2002, occupancy and premises and equipment expenses
increased $75,000 or 9.74 percent over the comparable period in 2001, primarily
related to the Corporation's recent branch expansion with the Townhall Banking
Center in Morristown opening in May 2002, and rental increases on other leased
locations.
17
Stationery and printing expense increased 67.7 percent or $63,000 for the three
months ended March 31, 2002 compared with March 31, 2001 primary attributable to
the cost of the annual report incurred in March 2002 and April 2001.
For the three months ended March 31, 2002, total other operating expenses
increased $168,000 or 21.2 percent over the comparable period in 2001. Increases
were attributable to increased levels of legal and consulting expense.
Provision for Income Taxes
For the three-month period ended March 31, 2002, the effective tax rate was 31.5
percent compared to 33.8 percent for the three-month period ended March 31,
2001. The effective tax rate continues to be less than the combined statutory
Federal tax rate of 34 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, as well as amortization of goodwill. Tax-exempt interest
income on a tax-equivalent basis increased by $53,000 or 30.11 percent for the
three months ended March 31, 2002 as compared to the comparable quarter in 2001.
The amortization of goodwill decreased by $81,000 to $0.00 in the three-month
period in 2002, due to the discontinuation of amortization of goodwill upon the
adoption of SFAS No 142 which was adopted on January 1, 2002.
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.
18
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
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.
Based on the results of the interest simulation model as of March 31, 2002, the
Corporation would expect a decrease of 5.53 percent in net interest income and
an increase of 4.61 percent in net interest income if interest rates increased
or decreased by 200 basis points, respectively, from current rates in an
immediate and parallel shock over a twelve month period.
Short-term interest rate exposure analysis is supplemented with an interest
sensitivity gap model. The Corporation utilizes interest sensitivity analysis to
measure the responsiveness of net interest income to changes in interest rate
levels. Interest rate risk arises when an earning-asset matures or when its
interest rate changes in a time period different from that of a supporting
interest-bearing liability, or when an interest-bearing liability matures or
when its interest rate changes in a time period different from that of an
earning-asset that it supports. While the Corporation matches only a small
portion of specific assets and liabilities, total earning assets and
interest-bearing liabilities are grouped to determine the overall interest rate
risk within a number of specific time frames. The difference between interest
sensitive assets and interest sensitive liabilities is referred to as the
interest sensitivity gap. At any given point in time, the Corporation may be in
an asset-sensitive position, whereby its interest-sensitive assets exceed its
interest-sensitive liabilities, or in a liability-sensitive position, whereby
its interest-sensitive liabilities exceed its interest-sensitive assets,
depending on management's judgment as to projected interest rate trends.
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.
19
At March 31, 2002, the Corporation reflects a negative interest sensitivity gap
(or an interest sensitivity ratio) of .51:1.00: at the cumulative one-year
position. During 2001, the Corporation had a negative interest sensitivity gap.
The maintenance of a liability-sensitive position during 2001 and into the first
quarter of 2002 had a favorable impact on the Corporation's net interest
margins; based on management's perception that interest rates will continue to
be volatile, 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 2002. However, no assurance can be given that this objective will
be met.
Liquidity
The liquidity position of the Corporation is dependent on successful management
of its assets and liabilities so as to meet the needs of both deposit and credit
customers. Liquidity needs arise principally to accommodate possible deposit
outflows and to meet customers' requests for loans. Scheduled principal loan
repayments, maturing investments, short-term liquid assets and deposit in-flows,
can satisfy such needs. The objective of liquidity management is to enable the
Corporation to maintain sufficient liquidity to meet its obligations in a timely
and cost-effective manner.
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, 2002, projected to March of 2003, indicates
that the Bank's liquidity should remain strong, with an approximate projection
of $135.9 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, 2002, core deposits
(comprised of total demand, savings accounts (excluding Super Max) and money
market accounts under $100,000) represented 53.5 percent of total deposits as
compared with 50.7 percent at March 31, 2001. More volatile rate sensitive
deposits, concentrated in time certificates of deposit greater than $100,000,
for the three-month period ended March 31, 2002, decreased on average to 7.81
percent of total deposits from 13.60 percent during the three-months ended
March 31, 2001. This change has resulted from a $14.0 million decrease in time
deposits on average for the three-months ended March 31, 2002 compared to the
prior year period.
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 short-term borrowings during the first three-months of 2002
were $128.8 million, an increase of $32.7 million or 34.0 percent from $96.1
million in average short-term borrowings during the comparable three-months
ended March 31, 2001.
During the three-months ended March 31, 2002, average funding sources increased
by approximately $141.8 million or 26.7 percent, compared to the same period in
2001. Interest-bearing deposits increased $129.8 million and were comprised
primarily of increases in savings deposits, money market, non-interest bearing
demand deposits and short-term borrowings offset in part by a decrease in time
deposits less than $100,000. Non-interest bearing funding sources as a
percentage of the total funding mix decreased to 15.4 percent on average) as
compared to 17.3 percent for the three-month period ended March 31, 2001. This
is primarily attributable to a more rapid growth in non-deposit funding sources
as a percentage of the funding base as compared with overall deposit growth.
20
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, 2002, cash and cash equivalents (which decreased
overall by $4.4 million) were provided (on a net basis) by financing activities
)approximately $49.5 million) primarily due to an increase in deposits of $40.7
million, and by operating activities of $1.7 million. Approximately $33.0
million was used in net investing activities; principally a $5.3 million
increase in loans and $28.9 million increase in the investment portfolio.
Stockholders' Equity
Total stockholders' equity averaged $46.3 million or 6.38 percent of average
assets for the three -month period ended March 31, 2002, as compared to $40.4
million, or 7.05 percent, during the same period in 2001. The Corporation's
dividend reinvestment and optional stock purchase plan contributed $66,000 in
new capital for the three-months ended March 31, 2002 as compared with $57,000
for the comparable period in 2001. Book value per common share was $10.88 at
March 31, 2002 as compared to $9.96 at March 31, 2001. Tangible book value per
common share was $10.38 at March 31, 2002 and $9.39 at March 31, 2001.
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, 2002, 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, 2002, total Tier 1 capital (defined as tangible stockholders'
equity for common stock and certain perpetual preferred stock) amounted to $53.0
million or 7.35 percent of total assets. Tier I capital excludes the effect of
SFAS No. 115, which amounted to $540,000 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, 2002. At
March 31, 2002, the Corporation's estimated Tier I risk-based and total
risk-based capital ratios were 11.86 percent and 11.49 percent, respectively.
These ratios are well above the minimum guidelines of capital to risk-adjusted
assets in effect as of March 31, 2002.
Under prompt corrective action regulations, bank regulators are required to take
certain supervisory actions land 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, 2002, management
believes that the Bank meets all capital adequacy requirements to which it is
subject.
21
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
response 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. Currently, the Corporation's model projects a 200
basis point change in rates during the first year, in even monthly increments,
with rates held constant in the second year. The Corporation's ALCO has
established that interest income sensitivity will be considered acceptable if
net interest income in the above interest rate scenario is within 10 percent of
net interest income in the flat rate scenario in the first year and so that the
present value of equity at risk does not exceed 15 percent when compared to the
forecast. Year 2 will not carry a policy limit, due to the inaccuracies inherent
with longer-term projections. Generally, year 2 is calculated and identified for
review and presentation purposes only. At March 31, 2002, the Corporation's
income simulation model indicates an acceptable level of interest rate risk,
with no significant change from December 31, 2001.
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.
II. OTHER INFORMATION
Item I-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 legal processes.
Item 4 - Submission of Matters to Vote of Security Holders
The Annual Meeting of shareholders was held on Tuesday April 16, 2002.
The following Class 3 Directors, whose three-year terms will expire in 2005,
were re-elected in the following share votes:
Robert L. Bischoff 3,075,962 FOR 82,750 WITHHELD/AGAINST
Paul Lomakin, Jr. 3,074,239 FOR 84,473 WITHHELD/AGAINST
James J. Kennedy 3,075,962 FOR 82,750 WITHHELD/AGAINST
Herbert Schiller 3,075,962 FOR 82,750 WITHHELD/AGAINST
The following class 2 Directors terms continue until the 2003 Annual Meeting
Hugo Barth, III
Alexander A. Bol
William A. Thompson
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The following Class 1 Directors' terms continue until the 2004 Annual Meeting
John J. Davis
Brenda Curtis
Donald G. Kein
Norman F. Schroeder
The shareholders also approved an amendment to the Corporation's certificate of
incorporation. Pursuant to the amendment, the Corporation is now authorized to
issue 5,000,000 shares of preferred stock and 20,000,000 shares of common stock.
Shares were voted at the annual meeting as follows:
2,131,989 FOR
308,850 AGAINST
10,133 ABSTAIN
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits 3.1 Certificate of Incorporation, as amended.
B. Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
March 31, 2002.
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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 15, 2002
/s/ Anthony C. Weagley
----------------------
Anthony C. Weagley, Treasurer
(Chief Financial Officer)
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