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
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
<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
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
<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
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
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
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
<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
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
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
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
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
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
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
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
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
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
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
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
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. 21
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. 22
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. 23
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) 24
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) 25