<PAGE>
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 June 30, 2000 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
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CENTER BANCORP, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 52-1273725
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2455 Morris Avenue, Union, New Jersey 07083
------------------------------------------------------------------
(Address of principal executives offices) (Zip Code)
(908) 688-9500
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(Registrant's telephone number, including area code)
------------------------------------------------------------------
(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 June 30, 2000
------------------------------------
Common stock no par value 3,827,757 shares
<PAGE>
CENTER BANCORP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Condition
at June 30, 2000 (Unaudited) and December 31, 1999 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2000 and 1999 4
(Unaudited)
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 5
(Unaudited)
Notes to the Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-20
Item 3. Qualitative and Quantitative Disclosures about 21
Market Risks
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits 21
Signature 22
Exhibit Index/Data Schedule 23
30-June-00 Center Bancorp, Inc. Form 10-Q Page 2
<PAGE>
Center Bancorp, Inc.
Consolidated Statements of Condition
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in thousands) 2000 1999
--------- ------------
(unaudited)
<S> <C> <C>
Assets:
Cash and due from banks $ 15,053 $ 18,675
--------- ---------
Investment securities held to maturity (approximate
market value of $163,918 in 2000 and $176,542 in 1999) 171,076 183,450
Investment securities available-for-sale 141,540 120,490
--------- ---------
Total investment securities 312,616 303,940
--------- ---------
Loans, net of unearned income 188,086 169,089
Less - Allowance for loan losses 1,543 1,423
--------- ---------
Net loans 186,543 167,666
--------- ---------
Premises and equipment, net 9,549 9,778
Accrued interest receivable 5,122 4,727
Other assets 2,689 2,102
Goodwill 2,575 2,736
--------- ---------
Total assets $ 534,147 $ 509,624
--------- ---------
Liabilities
Deposits:
Non-interest bearing $ 90,023 $ 94,829
Interest bearing:
Certificates of deposit $100,000 and over 57,920 43,641
Savings and time deposits 278,946 250,785
--------- ---------
Total deposits 426,889 389,255
Federal funds purchased and securities sold under
agreements to repurchase 45,714 30,752
Federal Home Loan Bank advances 20,000 50,000
Accounts payable and accrued liabilities 3,496 3,104
--------- ---------
Total liabilities 496,099 473,111
--------- ---------
Stockholders' equity
Common stock, no par value:
Authorized 20,000,000 shares; issued 4,262,002 and 4,253,441
shares in 2000 and 1999, respectively 10,887 10,760
Additional paid in capital 4,002 3,807
Retained earnings 26,850 25,568
Treasury stock at cost (434,245 and 458,864 shares in 2000 and
1999, respectively) (1,579) (1,674)
Restricted stock (56) (71)
Accumulated other comprehensive loss (2,056) (1,877)
--------- ---------
Total stockholders' equity 38,048 36,513
--------- ---------
Total liabilities and stockholders' equity $ 534,147 $ 509,624
========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
30-June-00 Center Bancorp, Inc. Form 10-Q Page 3
<PAGE>
Center Bancorp, Inc.
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
(Dollars in thousands, except per share data) 2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,536 $ 3,008 $ 6,837 $ 5,887
Interest and dividends on investment securities:
Taxable interest income 5,040 4,589 9,722 8,900
Nontaxable interest income 223 211 455 418
Interest on Federal funds sold and securities
purchased under agreement to resell 67 120 126 263
----------- ----------- ----------- -----------
Total interest income 8,866 7,928 17,140 15,468
----------- ----------- ----------- -----------
Interest expense:
Interest on certificates of deposit $100,000 or more 866 649 1,518 1,226
Interest on other deposits 2,186 1,794 4,070 3,574
Interest on short-term borrowings 905 647 1,832 1,239
----------- ----------- ----------- -----------
Total interest expense 3,957 3,090 7,483 6,039
----------- ----------- ----------- -----------
Net interest income 4,909 4,838 9,657 9,429
----------- ----------- ----------- -----------
Provision for loan losses 151 18 202 36
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 4,758 4,820 9,455 9,393
----------- ----------- ----------- -----------
Other income:
Service charges, commissions and fees 317 221 572 397
Other income 184 49 269 119
(Loss) gain on securities sold (16) 0 (71) 0
----------- ----------- ----------- -----------
Total other income 485 270 770 516
----------- ----------- ----------- -----------
Other expense:
Salaries and employee benefits 1,742 1,647 3,425 3,315
Occupancy expense, net 336 299 693 596
Premises and equipment expense 348 343 692 663
Stationery and printing expense 151 183 244 274
Marketing and advertising 117 138 238 303
Other expenses 725 702 1,352 1,293
----------- ----------- ----------- -----------
Total other expense 3,419 3,312 6,644 6,444
----------- ----------- ----------- -----------
Income before income tax expense 1,824 1,778 3,581 3,465
Income tax expense 593 608 1,154 1,164
----------- ----------- ----------- -----------
Net income $ 1,231 $ 1,170 $ 2,427 $ 2,301
=========== =========== =========== ===========
Earnings per share
Basic $ 0.32 $ 0.31 $ 0.64 $ 0.61
Diluted 0.32 0.31 0.63 0.61
=========== =========== =========== ===========
Average weighted common shares outstanding
Basic 3,824,126 3,774,570 3,812,162 3,767,709
Diluted 3,846,603 3,798,112 3,833,486 3,792,705
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
30-June-00 Center Bancorp, Inc. Form 10-Q Page 4
<PAGE>
Center Bancorp, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30
---------------------
(Dollars in thousands) 2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,427 $ 2,301
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 747 700
Provision for loan losses 202 36
Loss on sale of investment securities available-for-sale 71 0
Proceeds from sale of other real estate owned 175 0
Increase in accrued interest receivable (395) (393)
Gain on sale of other real estate owned (102) 0
Increase in other assets (660) (133)
Increase (decrease) in other liabilities 392 (859)
Amortization of premium and accretion of
discount on investment securities, net 24 24
-------- --------
Net cash provided by operating activities 2,881 1,676
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 10,363 16,495
Proceeds from redemption of FHLB stock 4,803 0
Proceeds from maturities of securities held-to-maturity 8,592 32,021
Proceeds from sales of securities available-for-sale 15,329 0
Purchase of securities available-for-sale (26,484) (20,552)
Purchase of securities held-to-maturity (21,553) (47,680)
Net increase in loans (19,079) (10,928)
Property and equipment expenditures, net (357) (1,093)
-------- --------
Net cash used in investing activities (28,386) (31,737)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 37,634 15,866
Dividends paid (1,145) (1,077)
Proceeds from issuance of common stock 432 308
Net (decrease) increase in short-term borrowing (15,038) 11,306
-------- --------
Net cash provided by financing activities 21,883 26,403
-------- --------
Net decrease in cash and cash equivalents (3,622) (3,658)
-------- --------
Cash and cash equivalents at beginning of period $ 18,675 $ 15,975
-------- --------
Cash and cash equivalents at end of period $ 15,053 $ 12,317
======== ========
Supplemental disclosures of cash flow information:
Interest paid on deposits and short-term borrowings $ 7,305 $ 6,144
Income taxes $ 1,154 $ 1,246
Transfer of investment securities held to maturity to investment
securities available-for-sale $ 25,358 $ 0
</TABLE>
30-June-00 Center Bancorp, Inc. Form 10-Q Page 5
<PAGE>
Notes to Consolidated 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-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 and 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
generally accepted accounting principles. 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 three and six month periods ended June 30, 2000 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, 1999 for information regarding accounting
principles.
Note 2
Recent Accounting Pronouncements
SFAS No. 133 and No. 137
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivatives and Similar Financial Instruments and for
Hedging Activities." This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial condition and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, or
(b) a hedge of the exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
This Statement was originally effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of this Statement should be
as of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the provisions
of this Statement. Earlier application of all of the provisions of this
Statement is encouraged, but is permitted only as of the beginning of any fiscal
quarter that begins after issuance of this Statement. This Statement should not
be applied retroactively to financial statements of prior periods.
30-June-00 Center Bancorp, Inc. Form 10-Q Page 6
<PAGE>
In June 1998, the FASB issued Statement No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" which amended SFAS No. 133 to be effective for all fiscal
years beginning after June 15, 2000.
On January 1, 2000 the Corporation adopted SFAS 133 and SFAS 137. The transition
provisions contained in SFAS 133 provide that at the date of the initial
application, an entity may transfer any debt security classified as "held to
maturity ("HTM") to "available-for sale ("AFS") or "trading." On the initial
adoption date of SFAS 133 as amended by SFAS 137, the Bank transferred
$25,357,952 (amortized cost) of its securities previously classified as HTM to
the AFS classification. The related unrealized net gain as of transfer date was
$5,109, which has been recognized in the comprehensive income component of
stockholders' equity, as the cumulative effect of adopting the new accounting
principles.
In June 2000, the FASB issued Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133 and 137," effective for companies that have adopted the
provisions of FASB Statement No. 133 and 137 for fiscal quarters beginning after
June 15, 2000. The adoption of this statement by the Corporation has not had a
material effect on the financial statements of the Corporation.
Note 3
A summary of comprehensive income follows.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
Comprehensive Income ----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 1,231 $ 1,170 $ 2,427 $ 2,301
Other comprehensive income
Unrealized holding (losses) gains arising
during the period, net of taxes (34) (882) (225) (1,397)
Less reclassification adjustment for losses
included in net income (net of tax benefit) 10 0 46 0
------- ------- ------- -------
Other total comprehensive income (loss) (24) (882) (179) (1,397)
------- ------- ------- -------
Total comprehensive income $ 1,207 $ 288 $ 2,248 $ 904
======= ======= ======= =======
</TABLE>
Note 4
The following is a reconciliation of the calculation of basic and dilutive
earnings per share.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
(In thousands, except per share data)
(Dollars in thousands) 2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $1,231 $1,170 $2,427 $2,301
------ ------ ------ ------
Weighted Average Shares 3,824 3,775 3,812 3,768
Effect of Dilutive Stock Options 23 23 21 25
------ ------ ------ ------
Total Weighted Average Dilutive Shares 3,847 3,798 3,833 3,793
------ ------ ------ ------
Basic Earnings per Share $ 0.32 $ 0.31 $ 0.64 $ 0.61
------ ------ ------ ------
Diluted Earnings per Share $ 0.32 $ 0.31 $ 0.63 $ 0.61
====== ====== ====== ======
</TABLE>
Note 5
SUBSEQUENT EVENT
On July 24, 2000, the Corporation purchased an aggregate of 117,246 shares of
its common stock, in a negotiated private transaction, at a total purchase price
of $2,931,150. After giving effect to this purchase, the total number of shares
of the Corporation's common stock outstanding at June 30, 2000 would have been
3,710,511. The repurchased shares were recorded as Treasury Stock which resulted
in a decrease to stockholders' equity.
30-June-00 Center Bancorp, Inc. Form 10-Q Page 7
<PAGE>
Management's Discussion & Analysis of
Financial Condition and Results of Operations
Net income and earnings per share (Basic and Diluted) increased by 5.5 percent
and 3.3 percent, respectively, for the first six months of 2000 compared to the
first six months of 1999. Net income for the six months ended June 30, 2000 was
$2,427,000 as compared to $2,301,000 earned for the comparable six-month period
of 1999. On a diluted per share basis, earnings were $0.63 as compared to $0.61
per share for the six months ended June 30, 1999. The annualized return on
average assets was 0.93 percent for the six months ended June 30, 2000 as
compared with 0.94 percent for the comparable period in 1999, while the
annualized return on average stockholders' equity was 13.02 percent and 12.37
percent, respectively. Earnings performance for the six months ended June 30,
2000, reflected increases in net interest income and noninterest income offset
in part by an increase in non-interest expense and an increase in the provision
for loan losses.
Net income for the three months ended June 30, 2000 amounted to $1,231,000 as
compared to $1,170,000 for the comparable three-month period ended June 30,
1999. On a diluted per share basis, earnings were $0.32 as compared to $0.31 per
share for the three month periods ended June 30, 2000 and 1999, respectively.
The annualized return on average assets was 0.93 percent for the three months
ended June 30, 2000 compared with 0.94 percent for the comparable three month
period in 1999. For the three-month period ended June 30, 2000, the annualized
return on average stockholders' equity was 13.07, as compared to 12.55 percent
for the comparable three months ended June 30, 1999. Earnings performance for
the second quarter of 2000 reflects an increase in net interest income and
non-interest income partially offset by an increase in the provision for loan
losses, coupled with an increase in non-interest 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 short-term 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
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(dollars in thousands) June 30, June 30,
------------------ ------------------
Percent Percent
2000 1999 Change 2000 1999 Change
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Investments $ 5,263 $ 4,800 9.65 $10,177 $ 9,318 9.22
Loans, including fees 3,356 3,008 17.55 6,837 5,887 16.14
Federal funds sold and securities sold
under agreements to repurchase 67 120 (44.17) 126 263 (52.09)
------- ------- ------- -------
Total interest income 8,866 7,928 11.83 17,140 15,468 10.81
------- ------- ------- -------
Interest expense:
Certificates $100,000 or more 866 649 33.44 1,581 1,226 28.96
Savings and Time Deposits 2,186 1,794 21.85 4,070 3,574 13.88
FHLB advances 519 485 7.01 1,170 965 21.24
Short-term borrowings 386 162 138.27 662 274 141.61
------- ------- ------- -------
Total interest expense 3,957 3,090 28.06 7,483 6,039 23.91
------- ------- ------- -------
Net interest income * 4,909 4,838 1.47 9,657 9,429 2.42
------- ------- ------- -------
Tax-equivalent adjustment 115 109 5.50 234 215 8.84
Net interest income on a fully
tax-equivalent basis $ 5,024 $ 4,947 1.56 $ 9,891 $ 9,644 2.56
======= ======= ======= =======
</TABLE>
-------------------
* 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 subdivisions.
30-June-00 Center Bancorp, Inc. Form 10-Q Page 8
<PAGE>
Net interest income on a fully tax-equivalent basis for the six months ended
June 30, 2000 increased $247,000 million or 2.56 percent, from $9.6 million for
the comparable six-month period in 1999. The Corporation's net interest margin
decreased 13 basis points to 4.08 percent from 4.21 percent in, due to a 52
basis point rise in the average interest rates paid on total interest-bearing
liabilities while the average yield on earning-assets increased by only a 32
basis point increase in yield from 6.84 percent in 1999 to 7.16 percent for the
six months in 2000. For the six months ended June 30, 2000 interest
earning-assets increased by $27.1 million on average as compared with the six
months ended June 30, 1999. The 2000 first half changes in average interest
earning asset volumes were primarily due to increased volumes of loans and
taxable investments funded with more costly interest-bearing liabilities.
Net interest income on a fully tax-equivalent basis increased $77,000 or 1.56
percent to $5.0 million for the three months ended June 30, 2000, from $4.9
million for the comparable period in 1999. The Corporation's net interest margin
decreased to 4.05 percent from 4.22 percent, due to a 64 basis point increase in
the average interest rates paid on total interest-bearing liabilities, while the
yield on earning-assets increased by only a 39 basis point rise in yield from
6.85 percent in 1999 to 7.24 percent in 2000. Average interest earning-assets
increased by $27.1 million, as compared with the comparable three-month period
in 1999. The net increase in average interest-bearing liabilities was $27.1
million over the comparable three month period in 1999. The 2000 second quarter
changes in average earning asset volumes were primarily due to increased volumes
of loans and taxable investment securities funded with more costly
interest-bearing liabilities.
Interest income for the six-month period ended June 30, 2000 increased by
approximately $1.7 million or 10.81 percent, versus the comparable period ended
June 30, 1999. The primary factor contributing to the increase was the growth of
earning assets, primarily loans. The Corporation's loan portfolio increased on
average $22.8 million to $178.7 million from $155.9 million in the same period
of 1999. This growth was primarily driven by growth in commercial loans,
commercial mortgages, and home equity lines of credit. This growth was funded
primarily by a decrease in federal funds sold and increased levels of money
market and savings deposits and short-term borrowings. The loan portfolio
(traditionally the Corporation's highest yielding earning asset) represented
approximately 37 percent of the Corporation's interest earning-assets (on
average) for the six months ended June 30, 2000 as compared with 36 percent for
the comparable period in 1999.
For the three month period ended June 30, 2000 interest income increased by
$938,000 or 11.83 percent over the comparable three-month period in 1999. The
primary factor contributing to the increase was a higher level of loan income
and investment interest income. The Corporation's loan portfolio increased on
average $24.9 million to $188.3 million from $159.4 million in the same quarter
in 1999, primarily driven by growth in commercial loans, commercial mortgages
and home equity lines of credit. This growth was funded primarily through a
decrease in Federal Funds sold and increased levels of money market and savings
deposits, and short-term borrowings. The loan portfolio represented
approximately 37 percent of the Corporation's interest earning assets (on
average) during the second quarter of 2000 and 34 percent in the same quarter in
1999.
Average investment volume increased both for the six and three month periods in
2000 compared to 1999. For the six months ended June 30, 2000 investments
increased $10.6 million to approximately $302.5 million. For the three months
ended June 30, 2000 the increase amounted to $7.4 million compared to the
average investments for the second quarter of 1999.
Interest expense for the six months ended June 30, 2000 increased as a result of
a rise in short-term interest rates and the resultant impact on the higher cost
short-term borrowings. For the six months ended June 30, 2000, interest expense
increased $1.4 million or 23.91 percent as compared with the comparable
six-month period in 1999.
Interest expense for the three months ended June 30, 2000 increased as a result
of a rise in short-term interest rates. For the three months ended June 30,
2000, interest expense increased $867,000 or 28.06 percent as compared with the
comparable three-month period in 1999.
30-June-00 Center Bancorp, Inc. Form 10-Q Page 9
<PAGE>
For both the three and six month periods, short-term interest rates have
increased as a result of monetary policy promulgated by the Federal Reserve Open
Market Committee. The Fed has raised the Federal Funds index rate on February 2,
March 21, and May 16, 2000. Since June 1999 the Federal Funds rate has risen 175
basis points.
For the six months ended June 30, 2000, the Corporation's net interest spread on
a tax-equivalent basis (i.e. interest income on a tax-equivalent basis as a
percent of average interest-earning-assets less interest expense as a percent of
total interest bearing liabilities) decreased to 3.34 percent from 3.54 percent
for the six months ended June 30, 1999. This decrease reflected a narrowing of
margins primarily due to the previously discussed change in the mix and increase
in rates paid on interest bearing liabilities. The increase in these funding
costs continues to change disproportionately to the rates on new loans and
investments. The yield on interest-earning assets for the six months ended June
30, 2000, increased to 7.16 percent from 6.84 percent in 1999. The average rate
paid on interest-bearing liabilities increased to 3.82 percent during the first
six months of 2000 from 3.30 percent in the comparable period in 1999.
For the three months ended June 30, 2000, the Corporation's net interest spread
on a tax-equivalent basis decreased to 3.31 percent from 3.56 percent for the
three months ended June 30, 1999. This decrease reflected a narrowing of spreads
between yields earned on loans and investments and rates paid for supporting
funds. The yield on interest-earning assets for the three months ended June 30,
2000 increased to 7.24 percent from 6.85 percent in the comparable period in
1999. The average rates paid on supporting funds increased to 3.93 percent
during the second quarter of 2000 from 3.29 percent in the comparable period in
1999.
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) was approximately 74 and 67 basis points during the
six month periods ended June 30, 2000 and 1999, respectively, and 74 and 66
basis points for the respective three month periods ended June 30, 2000 and
1999, respectively.
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
(Tax-Equivalent Basis)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended 6/30/00 Six Months Ended 6/30/00
2000/1999 Increase/(Decrease) 2000/1999 Increase/(Decrease)
Due to Change in: Due to Change in:
------------------------------- -------------------------------
(dollars in thousands) Average Average Net Average Average Net
Interest-earning assets Volume Rate Change Volume Rate Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
Taxable $ 111 $ 340 $ 451 $ 306 $ 516 $ 822
Non-taxable 13 5 18 47 9 56
Federal funds sold and securities
purchased under agreement to resell (78) 25 (53) (351) 488 (137)
Loans, net of unearned discount 477 51 528 870 80 950
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 523 $ 421 $ 944 $ 1,574 $ 117 1,691
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Money Market deposits 71 37 108 148 71 219
Savings deposits 72 204 276 54 209 263
Time deposits (32) 235 203 (42) 377 335
Other interest-bearing deposits (7) 31 24 (10) 46 36
Borrowings 108 148 256 334 257 591
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 212 655 867 484 960 1,444
------- ------- ------- ------- ------- -------
Change in net interest income $ 311 $ (234) $ 77 $ 1,090 $ (843) $ 247
======= ======= ======= ======= ======= =======
</TABLE>
30-June-00 Center Bancorp, Inc. Form 10-Q Page 10
<PAGE>
The following table, "Average Balance Sheet with Interest and Average Rates",
presents for the six months ended June 30, 2000 and 1999 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
<TABLE>
<CAPTION>
Six Month
Period Ended June 30,
2000 1999
------------------------------- --------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(tax equivalent basis, dollars in thousands) Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Investment securities: (1)
Taxable $ 282,673 9,722 6.88% $ 273,467 $8,900 6.51%
Non-taxable 19,868 689 6.94% 18,516 633 6.84%
Federal funds sold and securities
purchased under agreement to resell 4,204 126 5.99% 10,438 263 5.04%
Loans, net of unearned income (2) 178,654 6,837 7.65% 155,885 5,887 7.55%
--------- ------ -------- --------- ------ ------
Total interest-earning assets 485,399 17,374 7.16% 458,306 15,683 6.84%
------ ------
Non-interest earning assets
Cash and due from banks 15,729 13,072
Other assets 20,465 18,091
Allowance for possible loan losses (1,435) (1,337)
--------- --------
Total non-interest earning assets 34,759 29,826
--------- --------
Total assets $ 520,158 $488,132
========= ========
Liabilities and stockholders' equity
Interest-bearing liabilities:
Money Market deposits $ 77,059 1,223 3.17% $ 67,546 1,004 2.97%
Savings deposits 80,288 992 2.47% 75,049 729 1.94%
Time deposits 118,177 3,042 5.15% 120,000 2,707 4.51%
Other interest bearing deposits 45,044 394 1.75% 46,284 358 1.55%
Borrowings 71,213 1,832 5.15% 57,274 1,241 4.33%
--------- ------ ------ --------- ------ ------
Total interest-bearing liabilities 391,781 7,483 3.82% $ 366,153 6,039 3.30%
--------- ---------
Noninterest-bearing liabilities:
Demand deposits 86,956 80,835
Other noninterest-bearing 475 411
Other liabilities 3,653 3,534
--------- --------
Total noninterest-bearing liabilities 91,084 84,780
Stockholders' equity 37,293 37,199
--------- --------
Total liabilities and
stockholders' equity $ 520,158 $488,132
========= ========
Net interest income
(tax-equivalent basis) $ 9,891 $ 9,644
------- -------
Net Interest Spread 3.34% 3.54%
------ ------
Net interest income as percent
of earning-assets 4.08% 4.21%
====== ======
Tax equivalent adjustment (3) (234) (215)
------- -------
Net interest income $ 9,657 $ 9,429
======= =======
</TABLE>
-------------------
(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
30-June-00 Center Bancorp, Inc. Form 10-Q Page 11
<PAGE>
The following table, "Average Balance Sheet with Interest and Average Rates",
presents for the three months ended June 30, 2000 and 1999 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
<TABLE>
<CAPTION>
Three Month
Period Ended June 30,
2000 1999
-------------------------------- --------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(tax equivalent basis, dollars inthousands) Balance Expense Rate Balance Expense Rate
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Investment securities:(1)
Taxable $ 288,377 5,040 6.99% $281,678 $4,589 6.52%
Non-taxable 19,383 338 6.98% 18,659 320 6.86%
Federal funds sold and securities
purchased under agreement to resell 4,230 67 6.34% 9,455 120 5.08%
Loans, net of unearned income (2) 184,277 3,536 7.68% 159,396 3,008 7.55%
--------- ------ ------ ------- ------ ----
Total interest-earning assets 496,267 8,981 7.24% 469,188 8,037 6.85%
------ ------
Non-interest earning assets
Cash and due from banks 16,576 13,017
Other assets 20,550 18,299
Allowance for possible loan losses (1,442) (1,345)
--------- --------
Total non-interest earning assets 35,684 29,971
--------- --------
Total assets $ 531,951 $499,159
========= ========
Liabilities and stockholders' equity
Interest-bearing liabilities:
Money Market deposits $ 79,845 637 3.19% $ 70,736 529 2.99%
Savings deposits 88,588 643 2.90% 75,424 367 1.95%
Time deposits 118,827 1,564 5.26% 121,590 1,361 4.48%
Other interest bearing deposits 45,727 208 1.82% 47,368 184 1.55%
Borrowings 69,519 905 5.21% 60,289 649 4.31%
--------- ------ ---- -------- ------ ----
Total interest-bearing liabilities $ 402,506 3,957 3.93% $375,407 3,090 3.29%
--------- --------
Noninterest-bearing liabilities:
Demand deposits 87,517 82,695
Other noninterest-bearing 377 386
Other liabilities 3,886 3,372
--------- --------
Total noninterest-bearing liabilities 91,780 86,453
Stockholders' equity 37,665 37,299
--------- --------
Total liabilities and
stockholders' equity $ 531,951 $499,159
========= ========
Net interest income
(tax-equivalent basis) $5,024 $4,947
------ ------
Net Interest Spread 3.31% 3.56%
----- -----
Net interest income as percent
of earning-assets 4.05% 4.22%
===== =====
Tax equivalent adjustment (3) (115) (109)
------ ------
Net interest income $4,909 $4,838
====== ======
</TABLE>
-------------------
(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
30-June-00 Center Bancorp, Inc. Form 10-Q Page 12
<PAGE>
Investments
For the six months ended June 30, 2000, the average volume of investment
securities increased by $10.6 million as compared to the same period in 1999.
The tax-equivalent yield on investments increased to 6.88 percent or 35 basis
points from a yield of 6.53 percent during the six-month period ended June 30,
2000. The yield on the investment portfolio during the first six months of 2000
was increased through the purchase of higher coupon callable securities to
replace, in certain cases, high yielding investments which had matured, were
prepaid, or were called.
For the three months ended June 30, 2000, the average volume of investment
securities increased by $7.5 million to $307.8 million from approximately $300.3
million on average for the same three-month period in 1999. The tax-equivalent
yield on the investments was 6.99 percent and 6.54 percent in 2000 and 1999,
respectively.
For the three and six month periods ended June 30, 2000 the Corporation recorded
as investment income a one time transitional dividend paid by the Federal Home
Loan Bank of New York. The effect on the investment yield for the three and six
month periods was 14 and 7 basis points, respectively.
The impact of repricing activity on investment yields was enhanced by a change
in bond segmentation and some extension where risk is relatively minimal within
the portfolio, resulting in wider spreads. 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 six months ended June 30, 2000, the total investment portfolio excluding
overnight investments, averaged $302.5 million, or 62.3 percent of
earning-assets, as compared to $292.0 million or 63.7 percent for the six months
ended June 30, 1999. The principal components of the investment portfolio are
U.S. Government Treasury and Federal Agency callable and noncallable securities,
including agency issued collateralized mortgage obligations.
Loans
Loan growth during the first six months of 2000 occurred in all major segments
of the loan portfolio. This growth resulted from the Corporation's business
development efforts enhanced by the Corporation's broadened marketplace through
an increased branch network. The increased volume coupled with a higher rate
environment primarily drove the increased yield of the portfolio. The prime rate
increased 6 times from 7.75 percent at June 30, 1999. The increase in rate was
offset by a more competitive rate structure used to attract new loans, in light
of heightened competition for lending relationships that exists in the market
area, reducing the full impact of the increase in the prime rate index.
Analyzing the loan portfolio for the six months ended June 30, 2000, average
loan volume increased $22.8 million or 14.61 percent, while portfolio yield
increased 10 basis points to 7.65 percent, compared with the same period in
1999. The volume related factors contributed increased earnings of $870,000,
while rate related changes contributed an increase of $80,000. The increased
total average loan volume was due primarily to increased customer activity and a
broader market area.
For the three months ended June 30, 2000, average loan volume increased $24.9
million, while the portfolio yield increased 13 basis points as compared with
the same period in 1999. The volume related factors contributed increased
earnings of $477,000 coupled with an increase of $51,000 due to rate related
changes. Total average loan volume increased to $184.3 million with a net
interest yield of 7.68 percent, as compared to $159.4 million with a yield of
7.55 percent for the three months ended June 30, 1999.
30-June-00 Center Bancorp, Inc. Form 10-Q Page 13
<PAGE>
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
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 June 30, 2000 the level of the Corporation's allowance was
$1,543,000 as compared to a level of $1,423,000 at December 31, 19999 and
$1,357,000 at June 30, 1999. The provision for loan losses during the six and
three month periods ended June 30, 2000 amounted to $202,000 and $152,000,
respectively, compared to $36,000 and $18,000 during the six and three month
periods ended June 30, 1999, respectively. The increase in the provision during
the second quarter, included an additional provision of approximately $100,000
which was made to maintain adequate loan loss reserves in relationship with
increased loan portfolio growth.
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. The allowance
for loan losses as a percentage of total loans amounted to 0.82 percent and 0.84
percent at June 30, 2000, and 1999, respectively. The allowance is maintained at
a level determined adequate to provide for potential losses on loans. In
Management's view, the level of the allowance as of June 30, 2000 is adequate to
cover losses inherent in the loan portfolio.
During the six month period ended June 30, 2000, the Corporation did not
experience any substantial credit problems within its loan portfolio. Net
charge-offs were approximately $85,000, and were comprised of consumer loans. At
June 30, 2000 the Corporation had non-accrual loans amounting to $270,000 as
compared with $292,000 at December 31, 1999 and $265,000 of non-accrual loans at
June 30, 1999. The Corporation continues to aggressively pursue collections of
principal and interest on loans previously charged-off.
The Corporation defines impaired loans to 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. The Corporation did not have any impaired loans in either 2000 or
1999.
The Corporation's statements herein regarding the adequacy of the allowance for
loan losses may constitute forward looking statements under the Private
Securities Reform Litigation Act of 1995. Actual results may indicate that the
amount of the Corporation's allowance was inadequate. Factors that could cause
the allowance to be inaccurate are the same factors that are analyzed by the
Corporation in establishing the amount of the allowance.
30-June-00 Center Bancorp, Inc. Form 10-Q Page 14
<PAGE>
Changes in the allowance for possible loan losses for the six month periods
ended June 30, 2000 and 1999, respectively, are set forth below.
Allowance for loan losses
(Dollars in thousands)
--------------------------------------------------------------------------------
Six Months
Ended June 30,
-------------------
2000 1999
-------- --------
Average loans outstanding $178,654 $155,885
-------- --------
Total loans at end of period 188,086 161,022
-------- --------
Analysis of the allowance for loan losses
Balance at the beginning of year 1,423 1,326
Charge-offs:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 85 8
-------- --------
Total charge-offs 85 8
Recoveries:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 3 3
-------- --------
Total recoveries 3 3
Net Charge-offs: 82 5
-------- --------
Provision for Loan Losses 202 36
-------- --------
Balance at end of period $ 1,543 $ 1,357
======== ========
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.05% 0.00%
-------- --------
Allowance for loan losses as a percentage of
total loans 0.82% 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, 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.
At June 30, 2000, December 31, 1999 and June 30, 1999, the Corporation had no
restructured loans. Non-accrual loans amounted to $270,000 at June 30, 2000, and
were comprised of one residential mortgage loan, and two home equity loans. At
December 31, 1999 non-accrual loans amounted to $292,000 comprised of a
residential mortgage loan and two home equity loans. At June 30, 1999,
non-accrual loans amounted to $265,000 and were comprised of one residential
mortgage and three home equity loans, a student loan and two installment loans.
At June 30, 2000, December 31, 1999 and June 30, 1999 the Corporation did not
have any loans 90 days past due and still accruing.
Non-Performing Loans At
June 30 December 31 June 30
(Dollars in thousands) 2000 1999 1999
----------------------- ---- ---- ----
Loans past due 90 days and still accruing $ 0 $ 0 $ 0
Non-accrual loans 270 292 265
---- ---- ----
Total non-performing loans $270 $292 $265
==== ==== ====
30-June-00 Center Bancorp, Inc. Form 10-Q Page 15
<PAGE>
At December 31, 1999 and June 30, 1999, the Corporation's other real estate
owned (OREO) consisted of a closed branch facility with a carrying value of
approximately $73,000. The Corporation sold the closed branch facility in April
2000 and recorded a net gain on the sale of approximately $102,000.
Other Non-Interest Income
The following table presents the principal categories of non-interest income for
the three and six month periods ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in thousands) 2000 1999 % change 2000 1999 % change
----- ---- -------- ----- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Other income:
Service charges, commissions and fees $ 317 $221 43.44 $ 572 $397 44.08
Other income 184 49 275.51 269 119 126.05
Net Loss on securities sold (16) 0 100.0 (71) 0 100.00
----- ---- ------ ----- ---- ------
Total other income $ 485 $270 79.63 $ 770 $516 49.22
===== ==== ====== ===== ==== ======
</TABLE>
For the six month period ended June 30, 2000, total other (non-interest) income,
reflects an increase of $254 or 49.2 percent compared with the comparable six
month period ended June 30, 1999. This increase was primarily a result of higher
service charges, commissions, and fees on deposit accounts including an increase
in ATM surcharge income. The increase in other income is attributable to higher
letter of credit income and the $102,000 gain on the sale of the closed branch
facility carried as other real estate owned.
For the three months ended June 30, 2000, total other (non-interest) income,
increased $215,000 or 79.63 percent as compared to the three months ended June
30, 1999. The increase in other income is primarily due to the increase in
service charges, commissions and fees which primarily increased as a result of
an increase in business activity and the $102,000 gain on the sale of the closed
branch facility carried as other real estate owned. For the three and six month
periods ended June 30, 2000 the Corporation recorded net losses of $16,000 and
$71,000 on securities sold from the available-for-sale investment portfolio. The
sales were made in the normal course of business and proceeds were utilized to
pay down short-term borrowings.
Other Non-Interest Expense
The following table presents the principal categories of non-interest expense
for the three and six month periods ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in thousands) 2000 1999 % change 2000 1999 % change
------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Other expense:
Salaries and employee benefits $1,742 $1,647 5.77 $3,425 $3,315 3.32
Occupancy expense, net 336 299 12.37 693 596 16.28
Premise & equipment expense 348 343 1.46 692 663 4.37
Stationery and printing expense 151 183 (17.49) 244 274 (10.95)
Marketing & Advertising 117 138 (15.22) 238 303 (21.45)
Legal and Consulting 125 93 34.41 205 138 48.55
Other expenses 600 609 (1.48) 1,147 1,155 (0.69)
------ ------ ------ ------
Total other expense $3,419 $3,312 3.23 $6,644 $6,444 3.10
====== ====== ====== ======
</TABLE>
The level of operating expenses during the first six months of 2000 was
unfavorably impacted by an increase in several expense categories except for
stationery and printing, marketing and advertising and other expenses. While
management continues to emphasize expense control, the year to year increase in
expenses are attributable to the continued investment in technology and the need
to attract, develop, and retain high caliber employees. The Corporation's ratio
of other expenses (annualized) to average assets decreased to 2.55 percent in
30-June-00 Center Bancorp, Inc. Form 10-Q Page 16
<PAGE>
the first six months of 2000 from 2.64 percent for the first six months of 1999.
The Corporation's efficiency ratio (defined as non-interest expenses divided by
tax-equivalent net interest income plus recurring non-interest income) at June
30, 2000 was 63.1 percent compared to 63.4 percent at June 30, 1999.
Salaries and employee benefits increased $110,000 or 3.32 percent in the six
months of 2000 over the comparable six-month period ended June 30, 1999. This
increase is primarily attributable to higher staffing levels, normal merit
increases, promotional raises and higher benefit costs. Staffing levels overall
increased to 161 full-time equivalent employees at June 30, 2000 compared to 156
full-time equivalent employees at June 30, 1999.
Occupancy and Bank premise and equipment expenses for the six months ended June
30, 2000 increased $126,000 or 10.01 percent over the comparable six-month
period in 1999. This increase in Bank premise and equipment expense in 2000 is
primarily attributable to higher operating costs (utilities, rent, real estate
taxes and general repair and maintenance) of the Corporation's expanded
facilities, coupled with higher equipment maintenance and repair and
depreciation expenses.
Stationery and printing expenses for the six months decreased $30,000 or 10.95
percent compared to 1999 and reflect lower costs associated with the branch
network despite higher business activity. Stationery and printing expense in
1999 included "startup" costs associated with the Summit and Springfield banking
centers.
Marketing and advertising expenses for the six months decreased $65,000 or 21.45
percent in 2000 compared to 1999, which included the expenses associated with
the reopening of the Springfield branch and the grand opening of the Summit
branch.
Legal and consulting expense for the six months of 2000 increased $67,000 or
48.55 percent compared to 1999 and reflect costs associated with the formation
of a Real Estate Investment Trust and expenses associated with Project 2000, a
revenue enhancing initiative.
For the three month period ended June 30, 2000 total other (non-interest)
expenses increased $107,000 or 3.23 percent over the comparable three months
ended June 30, 1999. Increases were recorded in several expense categories
except for stationery and printing, marketing and advertising and other
expenses. The reasons for the increases and decreases in the level of expenses
for the three month period ended June 30, 2000 compared to June 30, 1999 are
similar to the reasons discussed above for the six month comparison.
The corporation's efficiency ratio for the three months ended June 30, 200 was
64.3 percent compared with 63.5 percent for the comparable period ended June 30,
1999.
30-June-00 Center Bancorp, Inc. Form 10-Q Page 17
<PAGE>
Provision for Income Taxes
The effective tax rate for the six month period ended June 30, 2000 was 32.2
percent as compared to 33.6 percent for the six months ended June 30, 1999. The
decrease in the effective tax rates reflects the increased tax-exempt interest
income on obligations of states and political subdivisions and the benefit
derived from the formation of a Real Estate Investment Trust.
Asset Liability Management
The composition of the Corporation's statement of condition 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
The management of interest rate risk is also important to the profitability of
the Corporation. 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.
Interest sensitivity analysis attempts to measure the responsiveness of net
interest income to changes in interest rate levels. 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.
At June 30, 2000, the Corporation reflects a negative interest sensitivity gap
(or an interest sensitivity ratio) of 0.47:1.0 at the cumulative one year
position. The maintenance of a liability-sensitive position during the first six
months of 2000 had an adverse impact on the Corporation's net interest margins;
however, based on management's perception that interest rates will continue to
be volatile, emphasis has been placed on interest-sensitivity matching with the
objective of achieving a stable net interest spread during the balance of 2000.
30-June-00 Center Bancorp, Inc. Form 10-Q Page 18
<PAGE>
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 cashflows,
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 significantly 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
June 30, 2000, projected to June of 2001, indicates that the Bank's liquidity
should remain strong, with an approximate projection of $97.3 million in
anticipated cashflows 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 six-month period ended June 30, 2000, core deposits
(comprised of total demand, savings accounts, and money market accounts under
$100,000) represented 59.4 percent of total deposits as compared with 58.7
percent in the comparable period in 1999. More volatile rate sensitive deposits,
concentrated in time certificates of deposit of $100,000 or more, for the six
month period ended June 30, 2000 increased by $1.3 million or 2.24 percent to
13.57 percent of total deposits from 14.49 percent during the six months ended
June 30, 1999.
Average funding sources during the six months ended June 30, 2000 increased by
approximately $31.8 million compared to 1999. The increase was due to an
increase in money market, savings, non-interest demand deposits and short-term
borrowings, primarily securities sold under agreements to repurchase.
Non-interest bearing funding sources as a percentage of the funding mix remained
at 18.2 percent on average for the six-month period ended June 30, 2000 and
1999.
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 agreement to
repurchase and advance from the Federal Home Loan Bank (FHLB). Average
short-term borrowings during the first six months of 2000 were $71.2 million, an
increase of $13.9 million or 24.34 percent from $57.3 million in average
short-term borrowings during the comparable six months ended June 30, 1999.
Cash Flow
The consolidated statements of cash flows present the changes in cash and cash
equivalents from operating, investing and financing activities. During the six
months ended June 30, 2000, cash and cash equivalents (which decreased overall
by $3.6 million) were provided (on a net basis) by approximately $2.9 million in
net cash flows from operating activities and by $21.9 million in net cash flows
provided by financing activities. A total of $28.4 million was used in net
investing activities; of that amount $19.1 million was used to increase loans,
on a net basis $8.9 million was used to purchase investment securities primarily
for the available-for-sale portfolio.
30-June-00 Center Bancorp, Inc. Form 10-Q Page 19
<PAGE>
Stockholders' Equity
Stockholders' equity averaged $37.3 million for the six-month period ended June
30, 2000, an increase of $94,000, or 0.25 percent from $37.2 million, for the
same period in 1999. The Corporation's dividend reinvestment and optional stock
purchase plan contributed $127,000 in new capital for the six months ended June
30, 2000 as compared with $177,000 for the comparable period in 1999. Tangible
book value per common share was $9.27at June 30, 2000 as compared to $8.90 at
December 31, 1999 and $8.96 at June 30, 1999.
On July 24, 2000, the Corporation purchased an aggregate of 117,246 shares of
its common stock, in a negotiated private transaction, at a total purchase price
of $2,931,150. After giving effect to this purchase, the total number of shares
of the Corporation's common stock outstanding at June 30, 2000 would have been
3,710,511. The repurchased shares were recorded as Treasury Stock which resulted
in a decrease to stockholders' equity.
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
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at June 30, 2000, the Bank was required to
maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets
of 4.0%, and (ii) minimum ratios of Tier 1 and total capital to risk-weighted
assets of 4.0% and 8.0%, respectively.
At June 30, 2000, total Tier l capital (defined as tangible stockholders' equity
for common stock and certain perpetual preferred stock) amounted to $37.5
million or 7.09 percent of total average assets. The Tier I and Tier II leverage
capital ratio was 7.31 percent of total assets. Tier I capital excludes the
effect of SFAS No. 115, which amounted to $2.1 million of net unrealized losses,
after tax, on securities available-for-sale (included as a component of other
comprehensive income) and goodwill of approximately $2.6 million as of June 30,
2000.
At June 30, 2000, the Corporation's estimated Tier I risk based and total
risk-based capital ratios were 14.34 percent and 14.93 percent, respectively.
These ratios are well above the minimum guidelines of capital to risk-adjusted
assets in effect as of June 30, 2000.
Under its 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
10.5%.
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 June 30, 2000, management believes that the Bank and the Corporation meet
all capital adequacy requirements to which they are subject.
30-June-00 Center Bancorp, Inc. Form 10-Q Page 20
<PAGE>
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% of net
interest income in the flat rate scenario in the first year and within 20% over
the two year time frame. At June 30, 2000, the Corporation's income simulation
model indicates an acceptable level of interest rate risk, with no significant
change from December 31, 1999.
Management also monitors interest rate risk by utilizing a market value of
equity model. The model computes estimated changes in net portfolio value
("NPV") of its cash flows from the Corporation's assets and liabilities in the
event of a change in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities. This analysis assesses the risk of gain or loss in market
risk sensitive instruments in the event of an immediate and sustained 200 basis
point increase or decrease in market interest rates. The Corporation's ALCO
policy indicates that the level of interest rate risk is generally acceptable if
an immediate 200 basis point change in interest rates would not result in the
loss of more than 25% from the book value of equity. At June 30, 2000, the
market value of equity indicates an acceptable level of interest rate risk.
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 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 or 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 6 Exhibits and Reports on Form 8-K
A) Exhibits: Exhibit (27-1) - Center Bancorp, Inc.
Financial Data - Schedule - June 30, 2000
B) Reports on Form 8-K
There were no reports on Form 8-K filed during the
three months ended June 30, 2000.
30-June-00 Center Bancorp, Inc. Form 10-Q Page 21
<PAGE>
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: 8/14/00 /s/ Anthony C. Weagley
----------------------
Anthony C. Weagley, Treasurer
(Chief Financial Officer)
30-June-00 Center Bancorp, Inc. Form 10-Q Page 22
