<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 September 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
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
--------------------------------------------------------------------------------
(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 October 31, 2000
--------------------------------------
Common stock, no par value: 3,721,980 shares
1
<PAGE>
CENTER BANCORP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Condition
at September 30, 2000 (Unaudited) and December 31, 2000 3
Consolidated Statements of Income for the
Three and Nine-months Ended September 30, 2000 and 1999 4
(Unaudited)
Consolidated Statements of Cash Flows for the
Nine-months Ended September 30, 2000 and 1999 5
(Unaudited)
Notes to the Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-22
Item 3. Qualitative and Quantitative Disclosures about
Market Risks 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits 23
Signature 24
Exhibit Index/Data Schedule 25
2
<PAGE>
<TABLE>
<CAPTION>
Center Bancorp, Inc.
Consolidated Statements of Condition September 30, December 31,
(Dollars in thousands) 2000 1999
--------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Assets:
Cash and due from banks $ 16,476 $ 18,675
Federal funds sold 6,500 --
--------------------------------------------------------------------------------------
Total cash and cash equivalents 22,976 18,675
Investment securities held to maturity (approximate
market value of $161,858 in 2000 and $176,542 in 1999) 166,991 183,450
Investment securities available-for-sale 142,742 120,490
--------------------------------------------------------------------------------------
Total investment securities 309,733 303,940
--------------------------------------------------------------------------------------
Loans, net of unearned income 192,948 169,089
Less - Allowance for loan losses 1,594 1,423
--------------------------------------------------------------------------------------
Net loans 191,354 167,666
--------------------------------------------------------------------------------------
Premises and equipment, net 9,432 9,778
Accrued interest receivable 5,234 4,727
Other assets 2,114 2,102
Goodwill 2,494 2,736
--------------------------------------------------------------------------------------
Total assets 543,337 509,624
======================================================================================
Liabilities
Deposits:
Non-interest bearing $ 90,509 $ 94,829
Interest bearing:
Certificates of deposit $100,000 and over 74,581 43,641
Savings and time deposits 265,749 250,785
--------------------------------------------------------------------------------------
Total deposits 430,839 389,255
Federal funds purchased and securities sold under
agreements to repurchase 37,188 30,752
Federal Home Loan Bank advances 35,000 50,000
Accounts payable and accrued liabilities 3,699 3,104
--------------------------------------------------------------------------------------
Total Liabilities 506,726 473,111
--------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, no par value:
Authorized 20,000,000 shares; issued 4,266,378 and
4,253,441 shares in 2000 and 1999, respectively 10,955 10,760
Additional paid in capital 4,049 3,807
Retained earnings 27,532 25,568
Treasury stock at cost (544,491 and 458,864 shares in 2000
and 1999, respectively) (4,474) (1,674)
Restricted stock (56) (71)
Accumulated other comprehensive loss (1,395) (1,877)
--------------------------------------------------------------------------------------
Total stockholders' equity 36,611 36,513
--------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 543,337 $ 509,624
======================================================================================
</TABLE>
See Accompanying Notes To Consolidated Financial Statements.
3
<PAGE>
Center Bancorp, Inc
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30,
------------------------- --------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,750 $ 3,088 $ 10,587 $ 8,975
Interest and dividends on investment securities:
Taxable interest income 5,019 4,771 14,741 13,671
Nontaxable interest income 216 210 671 628
Interest on Federal funds sold and securities
purchased under agreement to resell 100 102 226 365
--------------------------------------------------------------------------------------------------------------
Total interest income 9,085 8,171 26,225 23,639
--------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on certificates of deposit $100,000 or more 972 736 2,553 1,962
Interest on savings and time deposits 2,343 1,857 6,413 5,431
Interest on borrowings 942 690 2,774 1,929
--------------------------------------------------------------------------------------------------------------
Total interest expense 4,257 3,283 11,740 9,322
--------------------------------------------------------------------------------------------------------------
Net interest income 4,828 4,888 14,485 14,317
--------------------------------------------------------------------------------------------------------------
Provision for loan losses 51 36 253 72
--------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,777 4,852 14,232 14,245
--------------------------------------------------------------------------------------------------------------
Other income:
Service charges, commissions and fees 393 236 965 633
Other income 50 52 319 171
Gain (Loss) on securities sold 7 (2) (64) (2)
--------------------------------------------------------------------------------------------------------------
Total other income 450 286 1,220 802
--------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits 1,725 1,749 5,150 5,064
Occupancy expense, net 337 330 1,030 926
Premises and equipment expense 367 303 1,059 966
Stationery and printing expense 89 82 333 356
Marketing and advertising 110 116 348 419
Other expenses 803 767 2,155 2,060
--------------------------------------------------------------------------------------------------------------
Total other expense 3,431 3,347 10,075 9,791
--------------------------------------------------------------------------------------------------------------
Income before income tax expense 1,796 1,791 5,377 5,256
Income tax expense 553 629 1,707 1,793
--------------------------------------------------------------------------------------------------------------
Net income $ 1,243 $ 1,162 $ 3,670 $ 3,463
--------------------------------------------------------------------------------------------------------------
Earnings per share
Basic $ 0.33 $ 0.31 $ 0.97 $ 0.92
Diluted $ 0.33 $ 0.31 $ 0.96 $ 0.91
==============================================================================================================
Average weighted common shares outstanding
Basic 3,747,901 3,787,193 3,791,208 3,773,417
Diluted 3,765,600 3,805,261 3,810,857 3,796,890
==============================================================================================================
See Accompanying Notes To Consolidated Financial Statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Center Bancorp, Inc.
Consolidated Statements of Cash Flows
(Unaudited) Nine Months Ended
September 30,
(Dollars in thousands) 2000 1999
--------------------------------------------------------------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,670 $ 3,463
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,136 1,068
Provision for loan losses 253 72
Loss on sale of investment securities available-for-sale 64 2
Proceeds from sale of other real estate owned 175 0
Increase in accrued interest receivable (507) (1,016)
Gain on sale of other real estate owned (102) 0
Increase in other assets (85) (16)
Increase (Decrease) in other liabilities 595 (1,103)
Amortization of premium and accretion of
discount on investment securities, net 38 18
----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,237 2,488
----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities, calls & paydowns of securities available-for-sale 14,634 22,998
Proceeds from redemption of FHLB stock 4,803 0
Proceeds from maturities of securities held-to-maturity 12,651 42,465
Proceeds from sales of investment securities available-for-sale 20,342 2,997
Purchase securities available-for-sale (36,290) (34,246)
Purchase of securities held-to-maturity (21,553) (64,730)
Net increase in loans (23,941) (14,704)
Property and equipment expenditures, net (548) (1,277)
----------------------------------------------------------------------------------------------------
Net cash used in investing activities (29,902) (46,497)
----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 41,584 10,675
Dividends paid (1,706) (1,645)
Proceeds from issuance of common stock 583 380
Repurchase of Treasury stock (2,931) 0
Net (decrease) increase in borrowings (8,564) 30,990
----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 28,966 40,400
----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,301 (3,609)
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 18,675 15,975
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 22,976 $ 12,366
====================================================================================================
Supplemental disclosures of cash flow information:
Interest paid on deposits and short-term borrowings: $ 11,559 $ 9,422
Income taxes $ 1,636 $ 1,708
Transfer of investment securities held to maturity to investment
securities available-for-sale $ 25,358 $ 0
</TABLE>
See accompanying notes to consolidated financial statements.
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, 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 period ended September 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, No. 137 and No. 138
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.
6
<PAGE>
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.
In June 1999, the FASB issues Statement No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FSAB
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 did not have a
material effect on the financial statements of the Corporation.
SFAS No. 140
In September 2000, 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 are
effective for transactions entered into after March 31, 2001. Companies with
fiscal year ends that hold beneficial interests from previous securitizations
will be required to make additional disclosures in their December 31, 2000
financial statements. The initial adoption of SFAS No. 140 is not expected to
have a material impact on the financial statements of the Corporation.
NOTE 3
A summary of comprehensive income follows.
<TABLE>
<CAPTION>
Three Months Nine Months
------------ -----------
Ended September 30, Ended September 30,
------------------- -------------------
Comprehensive Income 2000 1999 2000 1999
(Dollars in thousands) ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 1,243 $ 1,162 $ 3,670 $ 3,463
Other comprehensive income
Unrealized holding gains (losses) arising
during the period, net of taxes 666 (582) 440 (1,979)
Less reclassification of adjustment for (gains) losses
included in net income (net of tax benefit) (5) 0 42 0
--------------------------------------------------------------------------------------------------
Other total comprehensive income (loss) 661 (582) 482 (1,979)
--------------------------------------------------------------------------------------------------
Total comprehensive income $ 1,904 $ 580 $ 4,152 $ 1,484
==================================================================================================
</TABLE>
7
<PAGE>
NOTE 4
The following is a reconciliation of the calculation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
Three Months Nine-months
------------ -----------
Ended September 30, Ended September 30,
------------------- -------------------
(In thousands, except per share data)
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 1,243 $ 1,162 $ 3,670 $ 3,463
Weighted Average Shares 3,748 3,787 3,791 3,773
Effect of Diluted Stock Options 18 18 20 24
-------------------------------------------------------------------------------------------------
Total Weighted Average Diluted Shares 3,766 3,805 3,811 3,797
-------------------------------------------------------------------------------------------------
Basic Earnings per Share $ 0.33 $ 0.31 $ 0.97 $ 0.92
-------------------------------------------------------------------------------------------------
Diluted Earnings per share $ 0.33 $ 0.31 $ 0.96 $ 0.91
=================================================================================================
</TABLE>
Management's Discussion & Analysis of Financial Condition
and Results of Operations
Net income for the three-months ended September 30, 2000 amounted to $1,243,000
as compared to $1,162,000 earned for the comparable three-month period ended
September 30, 1999. On a per diluted share basis, earnings increased to $.33 per
share as compared with $.31 per share for the three-months ended September 30,
1999. The annualized return on average assets was 0.92 percent compared with
0.91 percent for the comparable three-month period in 1999. The annualized
return on average stockholders' equity was 13.46 percent for the three month
period ended September 30, 2000 as compared to 12.47 percent for the comparable
three-months ended September 30, 1999. Earnings performance for the third
quarter of 2000 primarily reflects increased non-interest income and a reduction
in the effective tax rate, offsetting a reduction in net interest income and
increased non-interest expense.
Net income and earnings per diluted share increased 5.98 and 5.49 percent,
respectively, for the first nine-months of 2000 compared to the first
nine-months of 1999. Net income for the nine-months ended September 30, 2000 was
$3,670,000 as compared to $3,463,000 earned for the comparable nine-month period
of 1999. On a per diluted share basis, earnings were $.96 as compared to $.91
per share for the nine-months ended September 30, 1999. The annualized return on
average assets was 0.93 percent for the nine-months ended September 30, 2000
unchanged from the comparable period in 1999, while the annualized return on
average stockholders' equity was 13.15 percent and 12.41 percent, respectively.
Earnings performance for the nine-months ended September 30, 2000, reflected
increased net interest income and non-interest income and a reduction in the
effective tax rate offset, in part, by increases in the provision for loan
losses and 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 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.
8
<PAGE>
<TABLE>
<CAPTION>
Net Interest Income
(Dollars in thousands) Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
Percent Percent
2000 1999 Change 2000 1999 Change
--------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Investments $ 5,235 $ 4,981 5.10 $ 15,412 $ 14,299 7.78
Loans, including fees 3,750 3,088 21.44 10,587 8,975 17.96
Federal funds sold and securities
sold under agreements to resell 100 102 (1.96) 226 365 (38.08)
--------------------- ---------------------
Total interest income 9,085 8,171 11.19 26,225 23,639 10.94
---------------------------------------------------------- ---------------------
Interest expense:
Certificates $100,000 or more 972 736 32.07 2,553 1,962 30.12
Savings and Time Deposits 2,343 1,857 26.17 6,413 5,431 18.08
FHLB advances and other
borrowings 942 690 36.52 2,774 1,929 43.81
--------------------- ---------------------
Total interest expense 4,257 3,283 29.67 11,740 9,322 25.94
-----------------------------------------------------------------------------------------------------------
Net interest income* 4,828 4,888 (1.23) 14,485 14,317 1.17
-----------------------------------------------------------------------------------------------------------
Tax-equivalent adjustment 111 108 2.78 346 324 6.79
Net interest income on a fully
tax-equivalent basis $ 4,939 $ 4,996 (1.14) $ 14,831 $ 14,641 1.30
===========================================================================================================
</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.
Net interest income on a fully tax-equivalent basis decreased $57,000 or 1.14
percent to approximately $4.9 million for the three-months ended September
30,2000, from approximately $5.0 million for the comparable period in 1999. For
the three-months ended September 30, 2000, the net interest margin decreased to
3.91 percent from 4.18 percent due to an increased cost of funds. For the
three-months ended September 30, 2000, an increase in the average yield on
interest-earning-assets of 35 basis points was offset by an increase in the
average cost of interest-bearing liabilities of 72 basis points, resulting in
the decrease in the net interest margin, and the increase in the cost of
interest.
The decrease in net interest spreads is primarily a result of the increased cost
of interest-bearing liabilities and the Corporation's inability to fund a
greater portion of its earning-assets through increases in core deposits, versus
higher cost time deposits, of $100,000 or more and short term borrowings.
Average interest earning-assets increased by $27.4 million, from the comparable
three-month period in 1999. The net increase in average interest-bearing
liabilities was $27.3 million over the comparable three-month period in 1999.
The 2000 third quarter changes in average interest earning-asset volumes
resulted primarily from increased volumes of loans, funded primarily by
deposits, and increased borrowings.
Net interest income on a fully tax-equivalent basis for the nine-months ended
September 30, 2000 increased $190,000 or 1.30 percent, to approximately $14.8
million from the comparable nine-month period in 1999. The Corporation's net
interest margin for the nine-months in 2000 decreased to 4.02 percent from 4.20
percent due primarily to an increased cost of funds. The average rate paid for
interest bearing liabilities increased 59 basis points and offset the 33 basis
point increase in the average rate earned on invested assets. For the
nine-months ended September 30, 2000 average-interest earning-assets increased
by $27.2 million on average as compared with the nine-months ended September 30,
1999. The increase in the average cost and volume of interest-bearing
liabilities accounted for the decrease in the net interest margin, average
interest-bearing liabilities increased by approximately 7.0 percent.
9
<PAGE>
For the three month period ended September 30, 2000 interest income on a fully
tax-equivalent basis increased by $917,000 or 11.08 percent from the comparable
three-month period in 1999. The primary factor contributing to the increase was
the previously cited increase in average earning-assets. The Corporation's loan
portfolio increased on average $28.8 million to $190.5 million from $161.7
million in the same quarter in 1999, primarily driven by growth in commercial
loans, commercial and residential mortgages and home equity loans. This growth
was funded primarily through an increase in deposits and borrowings. The loan
portfolio (traditionally the Corporations highest yielding earning-asset)
represented, on average, approximately 37.7 percent of the Corporation's
interest earning-assets during the third quarter of 2000 and 33.8 percent in
1999.
Interest income on a fully tax-equivalent basis for the nine-month period ended
September 30, 2000 increased by approximately $2,608,000 or 10.88 percent, as
compared to the comparable period ended September 30, 1999. The Corporation's
average loan portfolio increased $24.8 million to $182.6 million from $157.8
million in the comparable period of 1999. This growth was primarily driven by
growth in commercial loans, commercial and residential mortgages and home equity
loans. This volume increase was funded primarily by an increase in deposits and
borrowings. The loan portfolio represented, on average, approximately 37.1
percent of the Corporation's interest earning-assets for the nine-months ended
September 30, 2000 as compared with 33.9 percent for the comparable period in
1999.
Average investment volume for the three-months ended September 30, 2000
increased $273,000 to approximately $309.2 million compared to $308.9 million
for the three months of 1999. For the nine-months ended September 30, 2000,
average investments increased $7.1 million to $304.8 million.
Interest expense for the three-months ended September 30, 2000, increased
$974,000 or 29.67 percent from the comparable three month period ended September
30, 1999, as a result of an increase in interest rates and higher amounts of
higher cost borrowings. Higher interest rates brought about by the flattening of
the yield curve contributed significantly to the overall increase in interest
expense, as compared with the three-months ended September 30, 1999.
Although interest rates stabilized during the third quarter of 2000, an
inversion and dis-intermediation of rates in the yield curve by The Federal
Reserve's inflation fighting rate increases earlier this year and late last year
have increased the rates on the short term end of the yield. These changes in
rates have increased the Corporation's cost of funds and contributed to a
compression of the net interest margin for both the three and nine-month
periods. The net interest margin decreased 27 and 18 basis points respectively.
For the nine-months ended September 30, 2000, interest expense increased
$2,418,000 or 25.93 percent as compared with the comparable nine-month period in
1999. Interest expense for the nine-months ended September 30, 2000 increased
primarily as a result of a rise in interest rates, coupled with a change in the
mix of interest-bearing liabilities. The amount of the increase attributable to
volume factors was $637,000 while $1.8 million was attributable to increased
rates.
Interest expense for the three- and nine-months ended September 30, 2000 was
adversely affected by the introduction of a premium rate investment savings
account (Super Max) by the Corporation in April of 2000, which carried an above
market initial teaser rate. Through September 30, 2000, Super Max balances have
increased to approximately $32 million. For the three- and nine-month periods
ending September 30, 2000 Super Max balances have averaged approximately $30.6
million and $16.0, respectively.
For the three-months ended September 30, 2000, the Corporation's net interest
spread on a tax-equivalent basis decreased to 3.13 percent from 3.50 percent for
the three-months ended September 30, 1999. This decrease reflected a contraction
of spreads between yields earned on loans and investments and rates paid for
supporting funds. Although there was a favorable change in the mix of supporting
interest earning-assets, primarily increased loan volumes and the yield on
interest-earning-assets rose to 7.27 percent from 6.92 percent; this was offset
by higher rates paid for interest-bearing liabilities coupled with a change in
the mix of interest-bearing liabilities to more costly funding. The cost of
total interest-bearing liabilities increased to 4.14 percent for the
three-months ended September 30, 2000 from 3.42 percent for the three-months
ended September 30, 1999.
10
<PAGE>
For the nine-months ended September 30, 2000, the Corporation's net interest
spread on a tax-equivalent basis decreased to 3.27 percent from 3.53 percent for
the nine-months ended September 30, 1999. This decrease primarily reflected a
contraction of spreads due to higher rates and the change in the mix of
interest-bearing liabilities to more costly funding.
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) widened to approximately 74 basis points from 63 basis
points during the nine-month periods ended September 30, 2000 and 1999,
respectively, and to 77 basis points from 64 basis points for the respective
three month periods ended September 30, 2000 and 1999.
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.
Analysis of Variance in Net Interest Income Due to Volume and Rates
(Tax-Equivalent Basis)
<TABLE>
<CAPTION>
=================================================================================================================
Three Months Ended 9/30/00 Nine Months Ended 9/30/00
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
Volume Rate Change Volume Rate Change
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Investment Securities
Taxable $ 3 $ 245 $ 248 $ 306 $ 764 $ 1,070
Non-taxable 1 8 9 48 17 65
Federal funds sold and securities
purchased under agreement to resell (2) 0 (2) (207) 68 (139)
Loans, net of unearned income 565 97 662 1,434 178 1,612
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 567 350 917 1,581 1,027 2,608
================================================ ========= ========= ========= ========= =========
Interest-bearing liabilities:
Money Market deposits 53 42 95 201 98 299
Savings deposits 147 330 477 191 549 740
Time deposits (124) 268 144 (163) 656 493
Other interest-bearing deposits (7) 13 6 (17) 58 41
Borrowings 92 160 252 425 420 845
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 161 813 974 637 1,781 2,418
========= ========= ========= ========= ========= =========
Change in net interest income $ 406 $ (463) $ (57) $ 944 $ (754) $ 190
-----------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
The following table, "Average Balance Sheet with Interest and Average Rates",
presents for the three-months ended September 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 September 30,
2000 1999
------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average
(tax-equivalent basis, Average Income/ Yield/ Average Income/ Yield/
dollars in thousands) Balance Expense Rate Balance Expense Rate
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Investment securities: (1)
Taxable $ 290,595 $ 5,019 6.91% $ 290,403 $ 4,771 6.57%
Non-taxable 18,568 327 7.04% 18,487 318 6.88%
Federal funds sold and securities
purchased under agreement to resell 6,133 100 6.52% 7,804 102 5.23%
Loans, net of unearned income (2) 190,527 3,750 7.87% 161,694 3,088 7.64%
--------- --------- --------- -----
Total interest-earning assets 505,823 9,196 7.27% 478,388 8,279 6.92%
Non-interest earning assets
Cash and due from banks 17,517 12,944
Other assets 20,588 18,967
Allowance for possible loan losses (1,563) (1,366)
--------- ---------
Total non-interest earning
assets 36,542 30,545
--------- ---------
Total assets $ 542,365 $ 508,933
--------- ---------
Liabilities and stockholders' equity
Interest-bearing liabilities:
Money Market deposits $ 77,407 654 3.38% $ 70,886 559 3.15%
Savings deposits 100,058 845 3.38% 75,414 368 1.95%
Time deposits 116,117 1,607 5.54% 126,284 1,463 4.63%
Other interest-bearing deposits 46,317 209 1.80% 47,870 203 1.70%
Borrowings 71,098 942 5.30% 63,265 690 4.36%
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities 410,997 4,257 4.14% 383,719 3,283 3.42%
--------- ---------
Non-interest-bearing liabilities:
Demand deposits 90,392 84,822
Other noninterest-bearing deposits 434 375
Other liabilities 3,601 2,751
--------- ---------
Total noninterest-bearing
liabilities 94,427 87,948
Stockholders' equity 36,941 37,266
--------- ---------
Total liabilities and
stockholders' equity $ 542,365 $ 508,933
--------- ---------
Net interest income (tax-equivalent basis) $ 4,939 $ 4,996
--------- ---------
Net Interest Spread 3.13% 3.50%
--------- ---------
Net interest income as percent
of earning-assets 3.91% 4.18%
--------- ---------
Tax equivalent adjustment(3) (111) (108)
--------- ---------
Net interest income $ 4,828 $ 4,888
--------- ---------
</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
12
<PAGE>
The following table, "Average Balance Sheet with Interest and Average Rates",
presents for the nine-months ended September 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.
<TABLE>
<CAPTION>
Average Balance Sheet with Interest and Average Rates
Nine Month
Period Ended September 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 $ 285,333 $ 14,741 6.89% $ 279,175 $ 13,671 6.53%
Non-taxable 19,431 1,017 6.98% 18,506 952 6.86%
Federal funds sold and securities
purchased under agreement to resell 4,852 226 6.21% 9,550 365 5.10%
Loans, net of unearned income (2) 182,641 10,587 7.73% 157,842 8,975 7.58%
--------- -------- ----- ---------
Total interest-earning assets 492,257 26,571 7.20% 465,073 23,963 6.87%
Non-interest earning assets
Cash and due from banks 16,329 13,030
Other assets 20,506 18,386
Allowance for possible loan losses (1,478) (1,347)
--------- ---------
Total non-interest earning
assets 35,357 30,069
--------- ---------
Total assets $ 527,614 $ 495,142
--------- ---------
Liabilities and stockholders' equity
Interest-bearing liabilities:
Money Market deposits $ 77,176 1,862 3.22% $ 68,672 1,563 3.03%
Savings deposits 86,930 1,837 2.82% 75,172 1,097 1.95%
Time deposits 117,481 4,664 5.29% 122,117 4,171 4.55%
Other interest bearing deposits 45,471 603 1.77% 46,818 562 1.60%
Borrowings 71,175 2,774 5.20% 59,293 1,929 4.34%
--------- -------- ----- --------- -------- -----
Total interest-bearing
liabilities $ 398,233 11,740 3.93% $ 372,072 9,322 3.34%
--------- ---------
Noninterest-bearing liabilities:
Demand deposits 88,110 82,179
Other noninterest-bearing deposits 461 399
Other liabilities 3,635 3,271
--------- ---------
Total noninterest-bearing
liabilities 92,206 85,849
Stockholders' equity 37,175 37,221
--------- ---------
Total liabilities and
stockholders' equity $ 527,614 $ 495,142
--------- ---------
Net interest income (tax-equivalent basis) 14,831 14,641
-------- --------
Net Interest Spread 3.27% 3.53%
----- -----
Net interest income as percent
of earning-assets 4.02% 4.20%
----- -----
Tax equivalent adjustment(3) (346) (324)
-------- --------
Net interest income $ 14,485 $ 14,317
-------- --------
</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.
13
<PAGE>
Investments
For the three-months ended September 30, 2000, the average volume of investment
securities increased to $309.2 million or an increase of $273,000 from $308.9
million on average for the same three-month period in 1999. The tax-equivalent
yield on the investment portfolio increased to 6.92 percent from 6.59 percent
for the comparable three-month period in 1999. Purchases made to replace
maturing and called investments were made at higher rates.
For the nine-months ended September 30, 2000, the average volume of investment
securities increased by $7.1 million when compared to the same period in 1999.
The tax-equivalent yield on investments increased to 6.89 percent or 34 basis
points from a yield of 6.55 percent for the nine-month period ended September
30, 1999. The increased yield on the investment portfolio during the first
nine-months of 2000 resulted from the Corporation's ability to obtain higher
rates on purchases made to replace lower yielding investments which had matured,
were prepaid, or were called.
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 three-months ended September 30, 2000, the Corporation sold from its
available-for-sale portfolio securities totalling approximately $5.0 million.
Year-to-date through September 30, 2000 the Corporation's sales of securities
from its available-for-sale portfolio amounted to $20.3 million with an average
weighted yield of 6.11 percent. Purchases of securities to replace the sales
amounted to approximately $9.8 million and $ 36.3 million for the three- and
nine-month periods ended September 30, 2000, with weighed average yields of 7.30
percent and 7.60 percent respectively.
For the nine-months ended September 30, 2000, the total investment portfolio
excluding overnight investments, averaged $304.8 million or 61.9 percent of
interest-earning-assets, as compared to $297.7 million or 64.0 percent at
September 30, 1999. The principal components of the investment portfolio are
U.S. Government and Federal Agency callable and non-callable securities,
including agency issued Collateralized Mortgage Obligations.
At September 30, 2000 the net unrealized gain/loss carried as a component of
other comprehensive income and included in shareholders' equity amounted to a
net unrealized loss of $1,395,000 as compared with an unrealized gain of
$1,877,000 at December 31, 1999 resulting from an improvement in the bond market
due to falling interest rates fostered by the Federal Open Market Committee's
pre-emptive strikes against inflation. Bond prices have risen as interest rates
fell in the long end of the yield curve.
Loans
Loan growth during the first nine-months of 2000 occurred in all segments of the
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 increase in the loan portfolio yield for the three and
nine-month periods was the result of a higher rate environment during the latter
part of 1999 and the nine-months of 2000, tempered by 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.
14
<PAGE>
Analyzing the loan portfolio for the three-months ended September 30, 2000,
average loan volume increased $28.8 million or 17.83 percent, while portfolio
yield increased by 23 basis points as compared with the same period in 1999. The
increased total average loan volume was due primarily to increased customer
activity, new lending relationships and new markets. The volume related factors
contributed increased revenue of $565,000 while rate related changes amounted to
$97,000. Total average loan volume increased to $190.5 million with a net
interest yield of 7.87 percent, as compared to $161.7 million with a yield of
7.64 percent for the three-months ended September 30, 1999.
For the nine-months ended September 30, 2000, averages loan volume increased
$24.8 million primarily as a result of aggressive business development efforts
aimed at the business customers and the robust economic environment in the
building sector of New Jersey. This resulted in an increase of commercial real
estate loans in the portfolio. This change in volume was bolstered by a rise in
portfolio yield of 15 basis points as compared with the same period in 1999. The
volume related factors contributed increased revenue of $1.4 million while
$178,000 was due to rate related changes. Total average loan volume increased to
$182.6 million with a yield of 7.73 percent, as compared to $157.8 million with
a yield of 7.58 percent for the nine-months ended September 30, 1999.
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. The level and trend of interest rates and current economic
conditions are also reviewed. 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.
At September 30, 2000, the allowance was $1,594,000 as compared to $1,423,000 on
December 31, 1999, and $1,348,000 at September 30, 1999. The provision for loan
losses during the nine and three-month periods ended September 30, 2000 amounted
to $253,000 and $51,000 respectively. Such provision amounted to $72,000 and
$36,000 for the nine and three-month periods ended September 30, 1999.
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 .83 percent at
September 30, 2000 and .84 percent at December 31, 1999 and September 30, 1999,
respectively.
In management's view, the level of the allowance as of September 30, 2000 is
adequate to cover losses inherent in the loan portfolio.
During the nine-month period ended September 30, 2000, the Corporation did not
experience any substantial problems within its loan portfolio. Net charge-offs
were approximately $82,000. At September 30, 2000, the Corporation had
non-accrual loans amounting to $275,000 versus $292,000 in non-accrual loans at
December 31, 1999 and $315,000 at September 30, 1999. The Corporation continues
to aggressively pursue collections of principal and interest on loans previously
charged-off.
15
<PAGE>
The Corporation defines impaired loans to 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. 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 constitute forward-looking statements under the Private Securities
Litigation Reform 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 inadequate are the same factors that are analyzed by the
Corporation in establishing the amount of the allowance.
Changes in the allowance for loan losses for the nine-months ended September 30,
2000 and 1999, respectively, are set forth below.
Allowance for loan losses
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Average loans outstanding $ 182,641 $ 157,842
--------------------------------------------------------------------------------------
Total loans at end of period 192,948 164,789
--------------------------------------------------------------------------------------
Analysis of the allowance for loan losses
Balance at the beginning of period 1,423 1,326
Charge-offs:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 86 17
--------------------------------------------------------------------------------------
Total charge-offs 86 17
Recoveries:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 4 3
--------------------------------------------------------------------------------------
Total recoveries 4 3
Net Charge-offs: 82 14
Provisions for loan losses 253 72
======================================================================================
Balance at end of period $ 1,594 $ 1,384
======================================================================================
Ratio of net charge-offs during the period to
Average loans outstanding during the period 0.0005% 0.00%
Allowance for loan losses as a percentage of total loans 0.83% 0.84%
</TABLE>
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.
16
<PAGE>
At September 30, 2000, December 31, 1999 and September 30, 1999, the Corporation
had no restructured loans. Non-accrual loans amounted to $275,000 at September
30, 2000, and were primarily comprised of first and second lien mortgages. At
December 31, 1999, non-accrual loans amounted to $292,000, comprised of first
and second lien residential mortgages. At September 30, 1999, non-accrual loans
amounted to $315,000 and were comprised of first and second lien home mortgages.
At September 30, 2000 the Corporation's loans 90 days past due and still
accruing amounted to approximately $23,000. Such loans amounted to $0 at
December 31, 1999 and $2,000 at September 30, 1999.
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 September 30,
2000, December 31, 1999 and September 30, 1999 were as follows:
<TABLE>
<CAPTION>
Non-Performing Loans at September 30, December 31, September 30,
(Dollars in thousands) 2000 1999 1999
======================================================================================
<S> <C> <C> <C>
Loans past due 90 days and still accruing $ 23 $ -- $ 2
Non-accrual loans $ 225 $ 292 $ 315
--------------------------------------------------------------------------------------
Total non-performing loans $ 248 $ 292 $ 317
======================================================================================
Other Real Estate Owned (OREO) $ -- $ 73 $ 73
--------------------------------------------------------------------------------------
Total non-performing assets $ 248 $ 365 $ 390
--------------------------------------------------------------------------------------
</TABLE>
At September 30, 2000, non-performing assets, consisting of loans on non-accrual
status plus other real estate owned (OREO) amounted to $298,000 or .15 percent
of total loans outstanding as compared to $365,000 or .22 percent at December
31, 1999 and $390,000 or .24 percent at September 30, 1999.
At September 30, 1999 and December 31, 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 did not have any OREO at September 30,
2000; however, subsequently on October 10, 2000, the Corporation recorded an
OREO as a result of a foreclosure in the amount of $49,000.
Other Non-Interest Income
The following table presents the principal categories of non-interest income for
the three and nine month periods ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
======================================================================================================
(dollars in thousands) Three months ended Nine months ended
September 30, September 30,
2000 1999 % change 2000 1999 % change
------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Other income:
Service charges, commissions and fees $ 393 $ 236 67.23 $ 965 $ 633 52.45
Other income 50 52 (3.85) 319 171 86.55
Net Gain (Loss) on securities sold 7 (2) N/M (64) (2) N/M
----- ----- ------- -----
Total other income $ 450 $ 286 57.34 $ 1,220 $ 802 52.12
======================================================================================================
N/M Non meaningful
</TABLE>
For the three-months ended September 30, 2000, total other (non-interest)
income, increased $164,000 or 57.34 percent as compared to the three-months
ended September 30, 1999. The increase in other income is primarily due to
increased ATM surcharges and deposit account related revenue. Included in the
service charges, commissions and fees category was non-recurring income of
$75,000.
17
<PAGE>
For the nine-month period ended September 30, 2000, total other (non-interest)
income reflects an increase of $418,000 or 52.12 percent compared with the
comparable nine-month period ended September 30, 1999. This overall increase was
primarily a result of increased service charges, commissions, and fees including
ATM surcharging which amounted to $305,000 for the nine-month period ended
September 30, 2000, as compared to $189,000 in 1999. Service charge fees on
deposits increased primarily as a result of an increase in business activity.
Included in service charges, commissions and fees was non-recurring income of
$75,000. Other noninterest income included non-recurring income of $102,000
resulting from gain on the sale of OREO.
Other Non-Interest Expense
The following table presents the principal categories of non-interest
expense for the three and nine month periods ended September 30, 2000 and
1999.
Dollars in thousands)
<TABLE>
<CAPTION>
============================================================================================
(dollars in thousands) Three months ended Nine months ended
September 30, September 30,
2000 1999 % change 2000 1999 % change
------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Other expense:
Salaries and employee benefits $1,725 $1,749 (1.37) $ 5,150 $5,064 1.70
Occupancy expense, net 337 330 2.12 1,030 926 11.23
Premises and equipment expense 367 303 21.12 1,059 966 9.63
Stationery and printing expense 89 82 8.54 333 356 (6.46)
Marketing and advertising 110 116 (5.17) 348 419 (16.95)
Other expenses 803 767 4.69 2,155 2,060 4.61
------ ------ ------- ------
Total other expense $3,431 $3,347 2.51 $10,075 $9,791 2.90
============================================================================================
</TABLE>
For the three-month period ended September 30, 2000 total other (non-interest)
expenses increased $84,000 or approximately 2.51 percent over the comparable
three-month period ended September 30, 1999. Decreases in salaries and employee
benefits coupled with decreases in marketing and advertising were offset by
increases in occupancy, premises and equipment and other expenses for the
three-month period ended September 30, 2000. Prudent management of other
expenses has been 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 September 30, 2000
was 64.7 percent as compared with 63.4 percent for the comparable period ended
September 30, 1999. For the nine-months ended September 30, 2000, this ratio was
63.2 percent as compared with 66.0 percent for the comparable period ended
September 30, 1999.
For the nine-month period ended September 30, 2000, total other (non-interest)
expenses increased $284,000 or 2.90 percent over the comparable period ended
September 30, 1999. This was due to the full impact in 2000 of expenses
resulting from the expansion of the Bank's branch network coupled with the
expense of ongoing technological and automation programs. Salaries and employee
benefits costs, coupled with occupancy and other expenses (telecommunication and
correspondent bank charges, postage and consulting), comprised the primary
components of the total increase for the period.
Salaries and employee benefits decreased $24,000 or 1.37 percent for the
three-months ended September 30, 2000 and increased $86,000 or 1.70 percent for
the nine-month period over the comparable three and nine-month periods ended
September 30, 1999. The decrease in salaries and employee benefits for the
three-month period ended September 30, 2000 is attributed to lower staffing
levels. The increase in salaries and employee benefits for the nine-month period
ended September 30, 2000 is attributed to normal merit increases, promotional
raises and higher benefits costs. Staffing levels overall decreased to 158
full-time employees at September 30, 2000 compared to 163 full-time equivalent
employees at September 30, 1999.
18
<PAGE>
The increase in occupancy expenses and premises and equipment expense reflects
the associated costs of the Corporation's expanded facilities. For the three and
nine-months ended September 30, 2000, occupancy and premises and equipment
expenses increased $71,000 and $197,000 over the comparable periods in 1999,
primarily related to the Corporation's Summit Banking Center opened in June
1999, the expanded Springfield office and rental increases on other leased
locations.
Marketing and advertising expenditure decreased $6,000 for the three-month
period and decreased $71,000 for the nine-month period ended September 30, 2000,
compared to the comparable periods in 1999. The decrease in this expense
category is primarily attributable to the grand opening expenses associated with
the Corporation's Summit banking center and Springfield branch incurred during
the comparable period in 1999.
Provision for Income Taxes
For the nine-month period ended September 30, 2000, the effective tax rate was
31.7 percent compared to 34.1 percent for the nine-month period ended September
30, 1999. The Corporation's provision for income taxes decreased for both the
three- and three-months from 2000 to 1999 primarily as a result of an increase
in tax exempt income and state tax reduction strategies implemented during the
third quarter of 1999. The benefit of such strategies was reflected in the 1999
numbers only for the third quarter, while such benefit was reflected in all
three-quarters of 2000.
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
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.
19
<PAGE>
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 of less than 1 indicates a
liability sensitive position.
A negative gap and/or a rate sensitivity ratio of 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 September 30, 2000, the Corporation reflected a negative interest sensitivity
gap (or an interest sensitivity ratio) of 0.34:1.0 at the cumulative one year
position. During much of 2000, the Corporation had a negative interest
sensitivity gap. The maintenance of a liability-sensitive position during 2000
had an unfavorable 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 consistent net interest spread during the remainder of
2000. No assurance can be given that the Corporation will be able to satisfy
this objective.
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. Such needs can be satisfied
by scheduled principal loan repayments, maturing investments, short-term liquid
assets and deposit in-flows. 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 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
September 30, 2000, projected to September of 2001, indicates that the Bank's
liquidity should remain strong, with an approximate projection of $91.9 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 nine-month period ended September 30, 2000, core deposits
(comprised of total demand, savings accounts (excluding Super Max accounting)
and money market accounts under $100,000) represented 51.9 percent of total
deposits as compared with 55.1 percent at September 30, 1999. More volatile rate
sensitive deposits, concentrated in time certificates of deposit greater than
$100,000, for the three-month period ended September 30, 2000, decreased on
average to 13.60 percent of total deposits from 14.8 percent during the
three-months ended September 30, 1999. This change has resulted from a $10.1
million decrease in time deposits on average for the three-months ended
September 30, 2000 compared to the prior year period.
20
<PAGE>
Average funding sources during the three-months ended September 30, 2000
increased by approximately $32.8 million compared to the same period in 1999.
The increase was due to an increase 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 increased to 18.7 percent (on
average) as compared to 18.1 percent for the three-month period ended September
30, 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 agreements to
repurchase advances from the Federal Home Loan Bank and Federal funds purchased.
Average short-term borrowings during the first nine-months of 2000 were $71.2
million, an increase of $11.9 million or 20.03 percent from $59.3 million in
average short-term borrowings during the comparable nine-months ended September
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
nine-months ended September 30, 2000, cash and cash equivalents (which increased
overall by $4.3 million) were provided (on a net basis) by financing activities
approximately $29.0 million, primarily due to an increase in deposits of $41.6
million and by operating activities $5.2 million, offsetting a decrease in
borrowings of $8.6 million. $29.9 million was used in net investing activities,
principally a $23.9 million increase in loans and a $5.4 million increase in the
investment portfolio.
Stockholders' Equity
Total stockholders' equity averaged $37.2 million or 7.05 percent of average
assets for the nine-month period ended September 30, 2000, as compared to $37.2
million, or 7.52 percent, during the same period in 1999. The Corporation's
dividend reinvestment and optional stock purchase plan contributed $583,000 in
new capital for the nine-months ended September 30, 2000 as compared with
$380,000 for the comparable period in 1999. Tangible book value per common
share, was $9.17 at September 30, 2000 as compared to $8.90 at December 31,
1999. Tangible book value per common share was $8.98 at September 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. 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.
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Risk-Based Capital/Leverage
Banking regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at September 30, 2000, 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 September 30, 2000, total Tier l capital (defined as tangible stockholders'
equity for common stock and certain perpetual preferred stock) amounted to $35.5
million or 6.54 percent of total assets. Tier I capital excludes the effect of
SFAS No. 115, which amounted to $1,395,000 of net unrealized loss, after tax, on
securities available-for-sale (included as a component of other comprehensive
income) and goodwill of approximately $2.5 million as of September 30, 2000. At
September 30, 2000, the Corporation's estimated Tier I risk-based and total
risk-based capital ratios were 13.26 percent and 13.85 percent, respectively.
These ratios are well above the minimum guidelines of capital to risk-adjusted
assets in effect as of September 30, 2000.
Under prompt corrective action regulations, bank regulators are required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of financial institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage (Tier 1) capital
ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and
a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the bank regulators about capital
components, risk weightings and other factors. As of September 30, 2000,
management believes that the Bank meets all capital adequacy requirements to
which it is subject.
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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 September 30, 2000, the Corporation's
income simulation model indicates an acceptable level of interest rate risk,
with no significant change from December 31, 1999.
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, 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 - September 30, 2000
B) Reports on Form 8-K
There were no reports on Form 8-K filed during the
three months ended September 30, 2000.
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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: November XX, 2000 /s/ Anthony C. Weagley
----------------------
Anthony C. Weagley, Treasurer
(Chief Financial Officer)
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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: November XX, 2000
-----------------------------
Anthony C. Weagley, Treasurer
(Chief Financial Officer)
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