SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2001 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 July 31, 2001 Common stock no par value 3,940,056 shares
CENTER BANCORP, INC. INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Statements of Condition at June 30, 2001 (Unaudited) and December 31, 2000 3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 2001 and 2000 4 (Unaudited) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000 5 (Unaudited) Notes to the Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-22 Item 3. Qualitative and Quantitative Disclosures about 23 Market Risks PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 6. Exhibits 24 Signature 25 Center Bancorp Inc. Form 10-Q Page 2
Center Bancorp, Inc. Consolidated Statements of Condition <TABLE> <CAPTION> June 30, December 31, (Dollars in thousands) 2001 2000 ======================================================================================================================= (unaudited) <S> <C> <C> Assets: Cash and due from banks $ 15,887 $ 22,274 Federal Funds Sold and Securities purchased under agreement to resell 13,300 0 - --------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 29,187 22,274 Investment securities held to maturity (approximate market value of $164,652 in 2001 and $173,224 in 2000) 163,195 173,754 Investment securities available-for-sale 166,143 156,513 - --------------------------------------------------------------------------------------------------------------------- Total investment securities 329,338 330,267 ===================================================================================================================== Loans, net of unearned income 205,384 198,949 Less - Allowance for loan losses 1,864 1,655 - --------------------------------------------------------------------------------------------------------------------- Net loans 203,520 197,294 - --------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 10,067 10,045 Accrued interest receivable 5,627 5,839 Other assets 11,567 1,420 Goodwill 2,252 2,414 - --------------------------------------------------------------------------------------------------------------------- Total assets $ 591,558 $ 569,553 ===================================================================================================================== Liabilities Deposits: Non-interest bearing $ 92,159 $ 93,231 Interest bearing: Certificates of deposit $100,000 and over 31,340 58,231 Savings and time deposits 301,301 273,834 - --------------------------------------------------------------------------------------------------------------------- Total deposits 424,800 425,296 - --------------------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 59,569 51,262 Federal Home Loan Bank advances 60,000 50,000 Accounts payable and accrued liabilities 5,043 3,813 - --------------------------------------------------------------------------------------------------------------------- Total liabilities 549,412 530,371 - --------------------------------------------------------------------------------------------------------------------- Stockholders' equity Common stock, no par value: Authorized 20,000,000 shares; issued 4,490,086 and 4,483,521 shares in 2001 and 2000, respectively 14,541 11,015 Additional paid in capital 4,122 4,049 Retained earnings 26,504 28,308 Treasury stock at cost (550,187 and 571,716 shares in 2001 and 2000, respectively) (4,306) (4,474) Restricted stock (42) (56) Accumulated other comprehensive income 1,327 340 - --------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 42,146 39,182 - --------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 591,558 $ 569,553 ===================================================================================================================== </TABLE> All share and per share amounts have been restated to reflect the 5% stock dividend distributed on June 1, 2001 to stockholders of record May 18, 2001. See Accompanying Notes to Consolidated Financial Statements. Center Bancorp Inc. Form 10-Q Page 3
Center Bancorp, Inc. <TABLE> <CAPTION> Consolidated Statements of Income Three Months Ended Six Months Ended (unaudited) June 30, June 30, (Dollars in thousands, except per share data) 2001 2000 2001 2000 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Interest income: Interest and fees on loans $ 3,798 $ 3,536 $ 7,600 $ 6,837 Interest and dividends on investment securities: Taxable interest income 5,548 5,040 11,101 9,722 Nontaxable interest income 117 223 233 455 Interest on Federal funds sold and securities purchased under agreement to resell 139 67 305 126 - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Total interest income 9,602 8,866 19,239 17,140 - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Interest expense: Interest on certificates of deposit $100,000 or more 354 866 1,032 1,581 Interest on other deposits 2,523 2,186 5,030 4,070 Interest on short-term borrowings 1,337 905 2,540 1,832 - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Total interest expense 4,214 3,957 8,602 7,483 - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Net interest income 5,388 4,909 10,637 9,657 - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Provision for loan losses 183 151 258 202 - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 5,205 4,758 10,379 9,455 - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Other income: Service charges, commissions and fees 400 317 787 572 Other income 165 184 274 269 Gain (Loss) on securities sold 124 (16) 152 (71) - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Total other income 689 485 1,213 770 - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Other expense: Salaries and employee benefits 1,836 1,742 3,706 3,425 Occupancy expense, net 370 336 804 693 Premises and equipment expense 332 348 668 692 Stationery and printing expense 134 151 227 244 Marketing and advertising 132 117 258 238 Other expenses 907 725 1,700 1,352 - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Total other expense 3,711 3,419 7,363 6,644 - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Income before income tax expense 2,183 1,824 4,229 3,581 Income tax expense 783 593 1,474 1,154 - ------------------------------------------------------------- ----------- ----------- ----------- ----------- Net income $ 1,400 $ 1,231 $ 2,755 $ 2,427 ============================================================= =========== =========== =========== =========== Earnings per share Basic $ 0.36 $ 0.31 $ 0.70 $ 0.61 Diluted 0.35 0.30 0.70 0.60 ============================================================= =========== =========== =========== =========== Average weighted common shares outstanding Basic 3,936,849 4,015,332 3,928,823 1,002,770 Diluted 3,969,115 4,038,933 3,960,961 4,025,160 ============================================================= =========== =========== =========== =========== </TABLE> All share and per share amounts have been restated to reflect the 5% stock dividend distributed on June 1, 2001 to stockholders of record May 18, 2001. See Accompanying Notes to Consolidated Financial Statements. Center Bancorp Inc. Form 10-Q Page 4
Center Bancorp, Inc. Consolidated Statements of Cash Flows <TABLE> <CAPTION> Six Months Ended June 30 ------------------------ (Dollars in thousands) 2001 2000 ===================================================================================================================== <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,755 $ 2,427 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 752 747 Provision for loan losses 258 202 (Gain) Loss on sale of investment securities available-for-sale (152) 71 Proceeds from sale of other real estate owned 45 175 Decrease (Increase) in accrued interest receivable 212 (395) Loss (Gain) on sale of other real estate owned 4 (102) Increase in other assets (111) (660) Increase in Cash Surrender Value of Bank Owned Life Insurance (84) 0 Increase in other liabilities 1,230 392 Amortization of premium and accretion of discount on investment securities, net (65) 24 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,844 2,881 ===================================================================================================================== CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available-for-sale 38,479 10,363 Proceeds from redemption of FHLB stock 0 4,803 Proceeds from maturities of securities held-to-maturity 36,894 8,592 Proceeds from sales of securities available-for-sale 16,421 15,329 Purchase of securities available-for-sale (63,326) (26,484) Purchase of securities held-to-maturity (26,335) (21,553) Net increase in loans (6,484) (19,079) Property and equipment expenditures, net (613) (357) Purchase of bank owned life insurance (10,000) 0 - --------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (14,964) (28,386) ===================================================================================================================== CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits (496) 37,634 Dividends paid (1,152) (1,145) Proceeds from issuance of common stock 374 432 Net increase (decrease) in short-term borrowing 18,307 (15,038) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 17,033 21,883 - --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 6,913 (3,622) - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period $ 22,274 $ 18,675 - -------------------------------------------------------------------------------------------------------- ----------- Cash and cash equivalents at end of period $ 29,187 $ 15,053 - -------------------------------------------------------------------------------------------------------- ----------- Supplemental disclosures of cash flow information: Interest paid on deposits and short-term borrowings $ 8,529 $ 7,305 Income taxes $ 1,159 $ 1,154 Transfer of investment securities held to maturity to investment securities available-for-sale $ 0 $ 25,358 </TABLE> See Accompanying Notes to Consolidated Financial Statements. Center Bancorp Inc. Form 10-Q Page 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 accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition and revenues and expenses for the applicable period. Actual results could differ significantly from those estimates. In the opinion of Management, all adjustments necessary for a fair presentation of the Corporation's financial position and results of operations for the interim periods have been made. Such adjustments are of a normal recurring nature. Results for the period ended June 30, 2001 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, 2000 for information regarding accounting principles. Center Bancorp Inc. Form 10-Q Page 6
Note 2 Impact of Recently Issued Accounting Standards In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Statement 141 will require upon adoption of Statement 142, that the Corporation evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Corporation will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Corporation will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Corporation to perform an assessment of whether there is an indication that goodwill [and equity-method goodwill] is impaired as of the date of adoption. To accomplish this the Corporation must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Corporation will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Corporation must perform the second step of the transitional impairment test. In the second step, the Corporation must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Corporation's statement of earnings. Center Bancorp Inc. Form 10-Q Page 7
And finally, any unamortized negative goodwill [and negative equity-method goodwill] existing at the date Statement 142 is adopted must be written off as the cumulative effect of a change in accounting principle. The Corporation is analyzing the impact of adopting statement 142. Note 3 A summary of comprehensive income follows. <TABLE> <CAPTION> Comprehensive Income Three Months Six Months (Dollars in thousands) Ended June 30, Ended June 30, - -------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 ------- ------- ------- ------- <S> <C> <C> <C> <C> Net Income $ 1,400 $ 1,231 $ 2,755 $ 2,427 Other comprehensive income Unrealized holding gains (losses) arising during the period, net of taxes 165 (34) 1,087 (225) Less reclassification adjustment for (gains) losses included in net income (net of tax benefit) (82) 10 (100) 46 - -------------------------------------------------------------------------------------------------- Other total comprehensive income (loss) 83 (24) 987 (179) - -------------------------------------------------------------------------------------------------- Total comprehensive income $ 1,483 $ 1,207 $ 3,742 $ 2,248 ================================================================================================== </TABLE> Note 4 The following is a reconciliation of the calculation of basic and diluted earnings per share. <TABLE> <CAPTION> Three Months Six Months (In thousands, except per share data) Ended June 30, Ended June 30, - -------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 ------- ------- ------- ------- <S> <C> <C> <C> <C> Net Income $ 1,400 $ 1,231 $ 2,755 $ 2,427 Weighted Average Shares 3,937 4,015 3,929 4,003 Effect of Dilutive Stock Options 32 24 32 22 - -------------------------------------------------------------------------------------------------- Total Weighted Average Dilutive Shares 3,969 4,039 3,961 4,025 - -------------------------------------------------------------------------------------------------- Basic Earnings per Share $ 0.36 $ 0.31 $ 0.70 $ 0.61 - ----------------------------------------------------------------- ------- ------- ------- Diluted Earnings per Share $ 0.35 $ 0.30 $ 0.70 $ 0.60 ================================================================================================== </TABLE> All share and per share amounts have been restated to reflect the 5% stock dividend distributed on June 1, 2001 to stockholders of record May 18, 2001. Center Bancorp Inc. Form 10-Q Page 8
Management's Discussion & Analysis of Financial Condition and Results of Operations Net income and earnings per share (Basic and Diluted) increased by 13.51 percent, 14.75 percent and 16.67 percent, respectively, for the first six months of 2001 compared to the first six months of 2000. Net income for the six months ended June 30, 2001 was $2,755,000 as compared to $2,427,000 earned for the comparable six-month period of 2000. On a diluted per share basis, earnings were $0.70 as compared to $0.60 per share for the six months ended June 30, 2000. All share and per share information in this section have been updated for the 5% stock dividend distributed June 1, 2001, to stockholders of record May 18, 2001. The annualized return on average assets was 0.94 percent for the six months ended June 30, 2001 as compared with 0.93 percent for the comparable period in 2000, while the annualized return on average stockholders' equity was 13.39 percent and 13.02 percent, respectively. Earnings performance for the six months ended June 30, 2001, reflected increases in net interest income and non-interest income offset in part by an increase in non-interest expense and increased in the provisions for taxes and loan losses. Net income for the three months ended June 30, 2001 amounted to $1,400,000 as compared to $1,231,000 for the comparable three-month period ended June 30, 2000. On a diluted per share basis, earnings were $0.35 as compared to $0.30 per share for the three-month periods ended June 30, 2001 and 2000, respectively. The annualized return on average assets was 0.94 percent for the three months ended June 30, 2001 compared with 0.93 percent for the comparable three-month period in 2000. For the three-month period ended June 30, 2001, the annualized return on average stockholders' equity was 13.37 percent, as compared to 13.07 percent for the comparable three months ended June 30, 2000. Earnings performance for the second quarter of 2001 reflects an increase in net interest income and non-interest income partially offset by increases in the provisions for taxes and loan losses, coupled with an increase in non-interest expense. Net interest income is the difference between the interest earned on the portfolio of earning-assets (principally loans and investments) and the interest paid for deposits and short-term borrowings, which support these assets. Net interest income is presented below first in accordance with the Corporation's consolidated financial statements and then on a fully tax-equivalent basis by adjusting tax-exempt income (primarily interest earned on various obligations of state and political subdivisions) by the amount of income tax, which would have been paid had the assets been invested in taxable issues. Net Interest Income <TABLE> <CAPTION> ============================================================================================================================ (dollars in thousands) Three Months Ended Six Months Ended June 30, Percent June 30, Percent 2001 2000 Change 2001 2000 Change ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Interest income: Investments $ 5,665 $ 5,263 7.64 $ 11,334 $ 10,177 11.37 Loans, including fees 3,798 3,536 7.41 7,600 6,837 11.16 Federal funds sold and securities sold under agreements to repurchase 139 67 107.46 305 126 142.06 ----------- ----------- ----------- ----------- ----------- ----------- Total interest income 9,602 8,866 8.30 19,239 17,140 12.25 - ---------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Interest expense: Certificates $100,000 or more 354 866 (59.12) 1,032 1,581 (34.72) Savings and Time Deposits 2,523 2,186 (15.42) 5,030 4,070 23.59 FHLB advances 832 519 60.31 1,654 1,170 41.37 Short-term borrowings 505 386 80.83 886 662 33.84 Total interest expense 4,214 3,957 6.49 8,602 7,483 14.95 - ---------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Net interest income * 5,388 4,909 9.76 10,637 9,657 10.15 - ---------------------------------------------------- ----------- ----------- ----------- ----------- ----------- Tax-equivalent adjustment 60 115 (47.83) 120 234 (48.72) Net interest income on a fully tax-equivalent basis $ 5,448 $ 5,024 8.44 $ 10,757 $ 9,891 8.76 - ---------------------------------------------------- ----------- ----------- ----------- ----------- ----------- </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. Center Bancorp Inc. Form 10-Q Page 9
Net interest income on a fully tax-equivalent basis for the six months ended June 30, 2001 increased $866,000 or 8.76 percent, from $9.891 million for the comparable six-month period in 2000. The Corporation's net interest margin decreased 15 basis points to 3.93 percent from 4.08 percent, due to a three basis point rise in the average interest rates paid on total interest-bearing liabilities coupled with an eight basis point decrease in yield on earning-assets from 7.16 percent in 2000 to 7.08 percent for the six months in 2001. For the six months ended June 30, 2001 interest earning-assets increased by $61.6 million on average as compared with the six months ended June 30, 2000. The 2001 first half changes in average interest earning asset volumes were primarily due to increased volumes of taxable investments and loans and were funded in part with more costly interest-bearing liabilities. The increased cost in funding liabilities is primarily attributed to the introduction of the Super Max a high yield investment savings account and increased volumes of other borrowings. Net interest income on a fully tax-equivalent basis increased $424,000 or 8.44 percent to $5.4 million for the three months ended June 30, 2001, from $5.0 million for the comparable period in 2000. The Corporation's net interest margin decreased to 3.94 percent from 4.05 percent, due to a 21 basis point decrease in the average interest rates paid on total interest-bearing liabilities, while the yield on earning-assets decreased by 26 basis from 7.24 percent in 2000 to 6.98 percent in 2001. Average interest earning-assets increased by $57.4 million, as compared with the comparable three-month period in 2000. The net increase in average interest-bearing liabilities was $51.2 million over the comparable three-month period in 2000. The 2001-second quarter changes in average earning asset volumes were primarily due to increased volumes of loans and taxable investment securities were funded with more costly interest-bearing liabilities, primarily higher rate Super Max Savings accounts, coupled with increased volumes of other borrowings. Interest income for the six-month period ended June 30, 2001 increased by approximately $2.1 million or 12.25 percent, versus the comparable period ended June 30, 2000. The primary factor contributing to the increase was the growth of earning assets, primarily investment securities and loans. The Corporation's loan portfolio increased on average $23.0 million to $201.7 million from $178.7 million in the same period of 2000. This growth was primarily driven by growth in commercial loans, commercial mortgages, and home equity lines of credit. This growth was funded primarily by increased levels of money market and savings deposits and short-term borrowings. The loan portfolio (traditionally the Corporation's highest yielding earning asset) represented approximately 37 percent of the Corporation's interest earning-assets (on average) for the six months ended June 30, 2001 and 2000. For the three-month period ended June 30, 2001 interest income increased by $736,000 or 8.30 percent over the comparable three-month period in 2000. The primary factor contributing to the increase was a higher level of investment interest income and loan income. The Corporation's loan portfolio increased on average $19.3 million to $203.6 million from $184.3 million in the same quarter in 2000, primarily driven by growth in commercial loans, commercial mortgages and home equity lines of credit. This growth was funded primarily through increased levels of money market and savings deposits, and short-term borrowings. The loan portfolio represented approximately 37 percent of the Corporation's interest earning assets (on average) during the second quarter of 2001 and 37 percent in the same quarter in 2000. Average investment volume increased both for the six and three month periods in 2001 compared to 2000. For the six months ended June 30, 2000 investments increased $30.8 million to approximately $333.3 million. For the three months ended June 30, 2001 the increase amounted to $30.7 million compared to the average investments for the second quarter of 2000. Average Federal funds sold and securities purchased under agreements to resell increased both for the six and three month periods in 2001 compared to 2000. For the six months ended June 30, 2001 the increase amounted to $7.8 million. For the three months ended June 30, 2001 the increase amounted to $7.3 million. Interest expense for the six months ended June 30, 2001 increased as a result of a rise in savings and short-term borrowing volumes despite declining short-term interest rates and the resultant impact on the higher cost short-term Center Bancorp Inc. Form 10-Q Page 10
borrowings. For the six months ended June 30, 2001, interest expense increased $1,119,000 or 14.95 percent as compared with the comparable six-month period in 2000. Interest expense for the three months ended June 30, 2001 increased as a result of a rise in savings and short-term borrowing volumes despite declining short-term interest rates. For the three months ended June 30, 2001, interest expense increased $257,000 or 6.49 percent as compared with the comparable three-month period in 2000. For both the three and six month periods, short-term interest rates have decreased as a result of monetary policy promulgated by the Federal Reserve Open Market Committee. The Fed has lowered the Federal Funds index rate on January 3, January 31, March 20, April 18, May 15 and June 27, 2001. Since June 2000 the Federal Funds rate has fallen 275 basis points. For the six months ended June 30, 2001, the Corporation's net interest spread on a tax-equivalent basis (i.e. interest income on a tax-equivalent basis as a percent of average interest-earning-assets less interest expense as a percent of total interest bearing liabilities) decreased to 3.23 percent from 3.34 percent for the six months ended June 30, 2000. This decrease reflected a narrowing of margins primarily due to the previously discussed change in the mix and increase in rates paid on certain interest bearing liabilities. The increase in these funding costs continues to change disproportionately to the rates on new loans and investments. The yield on interest-earning assets for the six months ended June 30, 2001, decreased to 7.08 percent from 7.16 percent in 2000. The average rate paid on interest-bearing liabilities increased to 3.85 percent during the first six months of 2001 from 3.82 percent in the comparable period in 2000. For the three months ended June 30, 2001, the Corporation's net interest spread on a tax-equivalent basis decreased to 3.26 percent from 3.31 percent for the three months ended June 30, 2000. This decrease reflected a narrowing of spreads between yields earned on loans and investments and rates paid for supporting funds. The yield on interest-earning assets for the three months ended June 30, 2000 decreased to 6.98 percent from 7.24 percent in the comparable period in 2000. The average rates paid on supporting funds decreased to 3.72 percent during the second quarter of 2001 from 3.93 percent in the comparable period in 2000. The contribution of non-interest-bearing sources (i.e. the differential between the average rate paid on all sources of funds and the average rate paid on interest-bearing sources) was approximately 67 and 74 basis points during the six month periods ended June 30, 2001 and 2000, respectively, and 65 and 74 basis points for the respective three month periods ended June 30, 2001 and 2000, respectively. The following table "Analysis of Variance in Net Interest Income Due to Volume and Rates" analyzes net interest income by segregating the volume and rate components of various interest-earning assets and liabilities and the changes in the rates earned and paid by the Corporation. Analysis of Variance in Net Interest Income Due to Volume and Rates (Tax-Equivalent Basis) ================================================================================ <TABLE> <CAPTION> ============================================================================================================================== Three Months Ended 6/30/01 Six Months Ended 6/30/01 2001/2000 Increase/(Decrease) 2001/2000 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 $ 682 $ (174) $ 508 $ 1,393 $ (14) $ 1,379 Non-taxable (165) 4 (161) (346) 10 (336) Federal funds sold and securities purchased under agreement to resell 91 (19) 72 420 (241) 179 Loans, net of unearned discount 363 (101) 262 871 (108) 763 ----------- ----------- ----------- ----------- ----------- ----------- Total interest-earning assets $ 971 $ (290) $ 681 $ 2,338 $ (353) $ 1,985 - --------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- Interest-bearing liabilities: Money Market deposits $ (41) $ (108) $ (149) $ (45) $ (146) $ (191) Savings deposits 256 99 355 481 391 872 Time deposits (209) (111) (320) (190) (15) (205) Other interest-bearing deposits (9) (52) (61) (9) (56) (65) Borrowings 520 (88) 432 815 (107) 708 ----------- ----------- ----------- ----------- ----------- ----------- Total interest-bearing liabilities $ 517 $ (260) $ 257 $ 1,052 $ 67 $ 1,119 - --------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- Change in net interest income $ 454 $ (30) $ 424 $ 1,286 $ (420) $ 866 ============================================================================================================================== </TABLE> Center Bancorp Inc. Form 10-Q Page 11
The following table, "Average Balance Sheet with Interest and Average Rates", presents for the six months ended June 30, 2001 and 2000 the Corporation's average assets, liabilities and stockholders' equity. The Corporation's net interest income, net interest spreads and net interest income as a percentage of interest-earning assets are also reflected. Average Balance Sheet with Interest and Average Rates <TABLE> <CAPTION> Six Month Period Ended June 30, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------ 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 $ 323,218 $ 11,101 6.87% $ 282,673 $ 9,722 6.88% Non-taxable 10,034 353 7.04% 19,868 689 6.94% Federal funds sold and securities purchased under agreement to resell 11,989 305 5.09% 4,204 126 5.99% Loans, net of unearned income (2) 201,722 7,600 7.54% 178,654 6,837 7.65% --------- --------- --------- --------- --------- --------- Total interest-earning assets 546,963 19,359 7.08% 485,399 17,374 7.16% --------- --------- --------- --------- --------- --------- Non-interest earning assets Cash and due from banks 17,295 15,729 Other assets 23,268 20,465 Allowance for possible loan losses (1,696) (1,435) Total non-interest earning assets 38,867 34,759 --------- --------- Total assets $ 585,830 $ 520,158 --------- --------- Liabilities and stockholders' equity Interest-bearing liabilities: Money Market deposits $ 74,114 $ 1,032 2.78% $ 77,059 $ 1,223 3.17% Savings deposits 113,212 1,864 3.29% 80,288 992 2.47% Time deposits 110,770 2,837 5.12% 118,177 3,042 5.15% Other interest bearing deposits 44,053 329 1.49% 45,044 394 1.75% Borrowings 104,555 2,540 4.86% 71,213 1,832 5.15% --------- --------- --------- --------- --------- --------- Total interest-bearing liabilities 446,704 8,602 3.85% 391,781 7,483 3.82% --------- --------- --------- --------- --------- --------- Noninterest-bearing liabilities: Demand deposits 92,745 86,956 Other noninterest-bearing deposits 1,017 475 Other liabilities 4,211 3,653 --------- --------- Total noninterest-bearing liabilities 97,973 91,084 Stockholders' equity 41,153 37,293 --------- Total liabilities and stockholders' equity $ 585,830 $ 520,158 --------- --------- Net interest income (tax-equivalent basis) $ 10,757 $ 9,891 --------- --------- Net Interest Spread 3.23% 3.34% --------- --------- Net interest income as percent of earning-assets 3.93% 4.08% --------- --------- Tax equivalent adjustment (3) (120) (234) --------- --------- Net interest income $ 10,637 $ 9,657 --------- --------- </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 Center Bancorp Inc. Form 10-Q Page 12
The following table, "Average Balance Sheet with Interest and Average Rates", presents for the three months ended June 30, 2001 and 2000 the Corporation's average assets, liabilities and stockholders' equity. The Corporation's net interest income, net interest spreads and net interest income as a percentage of interest-earning assets are also reflected. Average Balance Sheet with Interest and Average Rates <TABLE> <CAPTION> Three Month Period Ended June 30, 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- 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 $328,483 $ 5,548 6.76% $288,377 $ 5,040 6.99% Non-taxable 10,034 177 7.06% 19,383 338 6.98% Federal funds sold and securities purchased under agreement to resell 11,508 139 4.83% 4,230 67 6.34% Loans, net of unearned income (2) 203,596 3,798 7.46% 184,277 3,536 7.68% -------- -------- -------- -------- -------- Total interest-earning assets $553,621 $ 9,662 6.98% 496,267 8,981 7.24% -------- -------- -------- -------- -------- Non-interest earning assets Cash and due from banks 17,161 16,576 Other assets 26,483 20,550 Allowance for possible loan losses (1,730) (1,442) -------- -------- Total non-interest earning assets 41,914 35,684 -------- -------- Total assets $595,535 $531,951 -------- -------- Liabilities and stockholders' equity Interest-bearing liabilities: Money Market deposits $ 74,473 488 2.62% $ 79,845 637 3.19% Savings deposits 120,585 998 3.31% 88,588 643 2.90% Time deposits 102,105 1,244 4.87% 118,827 1,564 5.26% Other interest bearing deposits 43,602 147 1.35% 45,727 208 1.82% Borrowings 112,913 1,337 4.74% 69,519 905 5.21% -------- -------- -------- -------- -------- Total interest-bearing liabilities 453,678 4,214 3.72% 402,506 3,957 3.93% -------- -------- -------- -------- -------- -------- Noninterest-bearing liabilities: Demand deposits 94,320 87,517 Other noninterest-bearing deposits 1,161 377 Other liabilities 4,495 3,886 -------- -------- Total noninterest-bearing liabilities 99,976 91,780 Stockholders' equity 41,881 37,665 -------- -------- Total liabilities and stockholders' equity $595,535 $531,951 -------- -------- Net interest income (tax-equivalent basis) $ 5,448 $ 5,024 -------- -------- Net Interest Spread 3.26% 3.31% -------- ------- Net interest income as percent of earning-assets 3.94% 4.05% -------- ------- Tax equivalent adjustment (3) (60) (115) -------- -------- Net interest income $ 5,388 $ 4,909 -------- -------- </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 Center Bancorp Inc. Form 10-Q Page 13
Investment For the six months ended June 30, 2001, the average volume of investment securities increased by $30.7 million as compared to the same period in 2000. The tax-equivalent yield on investments decreased to 6.87 percent or one basis point from a yield of 6.88 percent during the six-month period ended June 30, 2000. The yield on the investment portfolio during the first six months of 2001 was maintained through the purchase of higher coupon callable securities to replace, in certain cases, high yielding investments, which had matured, were prepaid, or were called and the purchase of $19 million trust preferred securities. For the three months ended June 30, 2001, the average volume of investment securities increased by $30.8 million to $338.5 million from approximately $307.8 million on average for the same three-month period in 2000. The tax-equivalent yield on the investments was 6.76 percent and 6.99 percent in 2001 and 2000, respectively. The decrease in portfolio yield is due to the lower interest rate environment as well as a high liquidity position maintained during the quarter. The impact of repricing activity on investment yields was enhanced by a change in portfolio mix, and to a lesser extent some maturity extension where risk is relatively minimal within the portfolio, resulting in wider spreads. Securities available-for-sale are a part of the Corporation's interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. For the six months ended June 30, 2001, the total investment portfolio excluding overnight investments, averaged $333.3 million, or 60.9 percent of earning-assets, as compared to $302.5 million or 62.3 percent for the six months ended June 30, 2000. The principal components of the investment portfolio are U.S. Government Federal Agency callable and non-callable securities, including agency issued collateralized mortgage obligations. Loans Loan growth during the first three-months of 2001 occurred in all categories 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 slight decrease in the loan portfolio yields for the three and six-month period was the result of decline in interest rates as compared with the converse in 2000. Another contributing factor to the decline in portfolio yield was the competitive rate pricing structure maintained by the Corporation 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. Further analyzing the loan portfolio for the six-months ended June 30, 2001, average loan volume increased $23.0 million or 12.87 percent, while portfolio yield decreased by 11 basis points as compared with the same period in 2000. The increased total average loan volume was due primarily to increased customer activity, new lending relationships and new markets. The volume related factors during the period contributed increased revenue of $363,000 while rate related changes amounted to $(101,000). Total average loan volume increased to $203.6 million with a net interest yield of 7.46 percent, as compared to $184.3 million with a yield of 7.68 percent for the three-months ended June 30, 2000. Center Bancorp Inc. Form 10-Q Page 14
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. At June 30, 2001, the allowance amounted to $1,864,000 as compared to $1,655,000 at December 31, 2000, and $1,543,000 at June 30, 2000. The provision for loan losses during the six and three-month periods ended June 30, 2001 amounted to $257,500 and $182,500, respectively, compared to $202,000 and $151,000 during the six and three month periods ended June 30, 2000, respectively. The increase in the provision during the second quarter was due to increased loan portfolio growth and changing composition of in the portfolio. 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 .91 percent at June 30, 2001 and .82 percent at June 30, 2000. In management's view, the level of the allowance as of June 30, 2001 is adequate to cover losses inherent in the loan portfolio. 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. During the six month period ended June 30, 2001, the Corporation did not experience any substantial credit problems within its loan portfolio. Net charge-offs were approximately $49,000 and were comprised of installment loans. At June 30, 2001 the Corporation had non-accrual loans amounting to $209,000 as compared with $246,000 at December 31, 2000 and $270,000 of non-accrual loans at June 30, 2000. The Corporation continues to aggressively pursue collections of principal and interest on loans previously charged-off. The Corporation defines impaired loans to consist of non-accrual loans and loans internally classified as substandard or worse, in each instance above an established dollar threshold of $200,000. All loans below the established dollar threshold are considered homogenous and are collectively evaluated for impairment. At June 30, 2001, total impaired loans were approximately $1,998,887 compared to $1,461,000 at December 31, 2000 and $0.00 at June 30, 2000. Although classified as substandard, impaired loans were current with respect to principal and interest payments. Center Bancorp Inc. Form 10-Q Page 15
Changes in the allowance for possible loan losses for the six-month periods ended June 30, 2001 and 2000, respectively, are set forth below. Allowance for loan losses (Dollars in thousands) ================================================================================ Six Months Ended June 30, 2001 2000 Average loans outstanding $ 201,722 $ 178,654 - -------------------------------------------------------------------------------- Total loans at end of period 205,384 188,086 - -------------------------------------------------------------------------------- Analysis of the allowance for loan losses Balance at the beginning of year 1,655 1,423 Charge-offs: Commercial 0 0 Real estate-mortgage 0 0 Installment loans 51 85 - -------------------------------------------------------------------------------- Total charge-offs 51 85 Recoveries: Commercial 0 0 Real estate-mortgage 0 0 Installment loans 2 3 - -------------------------------------------------------------------------------- Total recoveries 2 3 Net Charge-offs: 49 82 - -------------------------------------------------------------------------------- Provision for Loan Losses 258 202 - -------------------------------------------------------------------------------- Balance at end of period $ 1,864 $ 1,543 - -------------------------------------------------------------------------------- Ratio of net charge-offs during the period to average loans outstanding during the period 0.00% 0.05% - -------------------------------------------------------------------------------- Allowance for loan losses as a percentage of total loans 0.91% 0.82% - -------------------------------------------------------------------------------- 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. Center Bancorp Inc. Form 10-Q Page 16
At June 30, 2001, December 31, 2000 and June 30, 2000, the Corporation had no restructured loans. Non-accrual loans amounted to $209,000 at June 30, 2001, and were primarily comprised of first and second lien residential mortgages. At December 31, 2000, non-accrual loans amounted to $246,000 and were comprised of first and second lien residential mortgages. At June 30, 2000, non-accrual loans amounted to $270,000 and were comprised of first and second lien residential mortgages. At June 30, 2001 the Corporation's loans 90 days past due and still accruing amounted to approximately $242,000. Such loans amounted to $2,000 at December 31, 2000 and none at June 30, 2000. 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 June 30, 2001, December 31, 2000 and June 30, 2000, were as follows: Non-Performing Loans At <TABLE> <CAPTION> June 30, December 31, June 30, (Dollars in thousands) 2001 2000 2000 ============================================================================================== <S> <C> <C> <C> Loans past due 90 days and still accruing $ 242 $ 2 $ 0 Non-accrual loans 209 246 270 - ------------------------------------------------ ------------- ------------ ------------ Total non-performing loans 451 248 270 ============================================================================================== Other Real Estate Owned (OREO) 0 49 0 - ---------------------------------------------------------------------------------------------- Total non-performing assets $ 451 $ 297 $ 270 - ---------------------------------------------------------------------------------------------- </TABLE> At June 30, 2001, non-performing assets, consisting of loans on non-accrual status plus other real estate owned (OREO), amounted to $209,000 or .10 percent of total loans outstanding as compared to $295,000 or .15 percent at December 31, 2000 and $270,000 or .14 percent at June 30, 2000. At June 30, 2001, the Corporation did not have any other real estate owned (OREO). The Corporation's OREO at December 31, 2000 amounted to $49,000 and consisted of a residential property acquired through foreclosure and subsequently sold on March 20, 2001 at a loss of $3,970. At June 30, 2000 the Corporation did not have any other real estate owned. Other Non-Interest Income The following table presents the principal categories of non-interest income for the three and six month periods ended June 30, 2001 and 2000. <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended (dollars in thousands) June 30, June 30, 2001 2000 % change 2001 2000 % change -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Other income: Service charges, commissions and fees $ 400 $ 317 26.18 $ 787 $ 572 37.59 Other income 165 184 (10.33) 274 269 1.86 Net Gain (Loss) on securities sold 124 (16) N/M 152 (71) N/M -------- -------- ------ -------- -------- ----- Total other income $ 689 $ 485 42.06 $ 1,213 $ 770 57.53 - ----------------------------------------------------------------------------------------------------------------- </TABLE> Center Bancorp Inc. Form 10-Q Page 17
For the three-month period ended June 30, 2001, total other (non-interest) income excluding net gain (loss) on securities sold, reflects an increase of $204,000 or 12.99 percent compared with the comparable three-month period ended June 30, 2000. This increase was primarily a result of higher service charges, commissions, and fees on deposit accounts including an increase in ATM surcharge income. Excluding the $102,000 gain on the sale of the closed branch facility carried as other real estate owned in the 2000 three month period, the Corporation recorded a rise in other income due to higher letter of credit income as well as the recorded change in the net asset value of Bank owned life insurance which is included in other income. For the six months ended June 30, 2001, total other (non-interest) income excluding net gain (loss) on securities sold, increased $453,000 or 26.16 percent as compared to the six months ended June 30, 2000. The increase in other income is primarily due to the increase in service charges, commissions and fees, which primarily increased as a result of an increase in business activity. The 2000 six-month period included the $102,000 gain on the sale of the closed branch facility carried as other real estate owned. For the three and six month periods ended June 30, 2001 the Corporation recorded net gains of $124,000 and $152,000 on securities sold from the available-for-sale investment portfolio compared to losses of $16,000 and $71,000 recorded in the 2000 comparable periods. The sales were made in the normal course of business and proceeds were reinvested in securities. Other Non-Interest Expense The following table presents the principal categories of non-interest expense for the three and six month periods ended June 30, 2001 and 2000. <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, 2001 2000 % change 2001 2000 % change -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Other expense: Salaries and employee benefits $ 1,836 $ 1,742 5.40 $ 3,706 $ 3,425 8.20 Occupancy expense, net 370 336 10.12 804 693 16.02 Premise & equipment expense 332 348 (4.60) 668 692 (3.47) Stationery and printing expense 134 151 (11.26) 227 244 (6.97) Marketing & Advertising 132 117 12.82 258 238 8.40 Legal and Consulting 191 125 52.80 306 205 49.27 Other expenses 716 600 19.33 1,394 1,147 21.53 -------- -------- -------- -------- Total other expense $ 3,711 $ 3,419 8.54 $ 7,363 $ 6,644 10.82 - --------------------------------------------------------------------------------------------------------------------- </TABLE> The level of operating expenses during the first six months of 2001 was unfavorably impacted by an increase in several expense categories. The year to year increase in expenses are primarily attributable to the continued investment in technology and the need to attract, develop, and retain high caliber employees. The Corporation's ratio of other expenses (annualized) to average assets increased to 2.58 percent in the first six months of 2001 from 2.55 percent for the first six months of 2000. The Corporation's efficiency ratio (defined as non-interest expenses divided by tax-equivalent net interest income plus recurring non-interest income) at June 30, 2001 was 60.7 percent compared to 64.3 percent at June 30, 2000. Salaries and employee benefits increased $281,000 or 8.20 percent in the six months of 2001 over the comparable six-month period ended June 30, 2000. This increase is primarily attributable to normal merit increases, promotional raises and higher benefit costs. Staffing levels overall decreased to 158 full-time equivalent employees at June 30, 2001 compared to 161 full-time equivalent employees at June 30, 2000. Center Bancorp Inc. Form 10-Q Page 18
Occupancy and Bank premise and equipment expenses for the six months ended June 30, 2001 increased $87,000 or 6.28 percent over the comparable six-month period in 2000. This increase in Bank premise and equipment expense in 2001 is primarily attributable to higher operating costs (utilities, rent, real estate taxes and general repair and maintenance) of the Corporation's expanded facilities, coupled with higher equipment maintenance and repair and depreciation expenses. Stationery and printing expenses for the six months decreased $17,000 or 6.97 percent compared to 2001 and reflect lower costs associated with the branch network despite higher business activity. Stationery and printing expense in 2000 included "startup" costs associated with the Summit and Springfield banking centers. Marketing and advertising expenses for the six months increased $20,000 or 8.40 percent in 2001 compared to 2000, which included the expenses associated with the reopening of the Springfield branch and the grand opening of the Summit branch. Legal and consulting expense for the six months of 2001 increased $101,000 or 49.27 percent compared to 2000 and reflect increased costs associated with the formation of a Real Estate Investment Trust and expenses associated with Project 2000, a revenue enhancing initiative. Associated with general corporate matters , as well as costs associated with a sales training program and expanded EDP audit function. For the three-month period ended June 30, 2001 total other (non-interest) expenses increased $292,000 or 8.54 percent over the comparable six months ended June 30, 2000. Increases were recorded in several expense categories except. The reasons for the increases and decreases in the level of expenses for the three month period ended June 30, 2001 compared to June 30, 2000 are similar to the reasons discussed above for the six month comparison. Provision for Income Taxes The Corporation's provision for income taxes increased from 2000 to 2001, primarily as a result of higher levels of taxable income. The effective tax rates for the Corporation for the periods ended June 30, 2001 and 2000 were 34.9 percent, 32.2 percent, respectively. The difference between the statutory and effective tax rates primarily reflects the tax-exempt status of interest income on obligations of states and political subdivisions and disallowed expense items for tax purposes, such as travel and entertainment expense, as well as amortization of goodwill. Tax-exempt interest income on a tax-equivalent basis decreased by $336,000 or 48.77 percent from 2000 to 2001. Asset Liability Management The composition of the Corporation's statement of condition is planned and monitored by the Asset and Liability Committee (ALCO). Asset and Liability management encompasses the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. In general, management's objective is to optimize net interest income and minimize interest rate risk by monitoring these components of the statement of condition. Center Bancorp Inc. Form 10-Q Page 19
Interest Sensitivity The management of interest rate risk is also important to the profitability of the Corporation. Interest rate risk arises when an earning asset matures or when its interest rate changes in a time period different from that of a supporting interest bearing liability, or when an interest bearing liability matures or when its interest rate changes in a time period different from that of an earning asset that it supports. While the Corporation matches only a small portion of specific assets and liabilities, total earning-assets and interest bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames. Interest sensitivity analysis attempts to measure the responsiveness of net interest income to changes in interest rate levels. The difference between interest sensitive assets and interest sensitive liabilities is referred to as the interest sensitivity gap. At any given point in time, the Corporation may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities, or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending on management's judgment as to projected interest rate trends. The Corporation's rate sensitivity position in each time frame may be expressed as assets less liabilities, as liabilities less assets, or as the ratio between rate sensitive assets (RSA) and rate sensitive liabilities (RSL). For example, a short funded position (liabilities repricing before assets) would be expressed as a net negative position, when period gaps are computed by subtracting repricing liabilities from repricing assets. When using the ratio method, a RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1 indicates an asset sensitive position, and a ratio less than 1 indicates a liability sensitive position. A negative gap and/or a rate sensitivity ratio less than 1 tends to expand net interest margins in a falling rate environment and to reduce net interest margins in a rising rate environment. Conversely, when a positive gap occurs, generally margins expand in a rising rate environment and contract in a falling rate environment. From time to time, the Corporation may elect to deliberately mismatch liabilities and assets in a strategic gap position. At June 30, 2001, the Corporation reflects a negative interest sensitivity gap (or an interest sensitivity ratio) of 0.56:1.0 at the cumulative one-year position. The maintenance of a liability-sensitive position during the first six months of 2001 has had a positive impact on the Corporation's net interest margins; however, based on management's perception that interest rates will continue to be volatile, emphasis has been placed on interest-sensitivity matching with the objective of achieving a stable net interest spread during the balance of 2001. Liquidity The liquidity position of the Corporation is dependent on successful management of its assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise principally to accommodate possible deposit outflows and to meet customers' requests for loans. Scheduled principal loan repayments, maturing investments, short-term liquid assets and deposit in-flows, can satisfy such needs. The objective of liquidity management is to enable the Corporation to maintain sufficient liquidity to meet its obligations in a timely and cost-effective manner. Management monitors current and projected cash flows, and adjusts positions as necessary to maintain adequate levels of liquidity. By using a variety of potential funding sources and staggering maturities, the risk of potential funding pressure is significantly reduced. Management also maintains a detailed liquidity contingency plan designed to adequately respond to situations which could lead to liquidity concerns. Anticipated cash-flows at June 30, 2001, projected to June of 2002, indicates that the Bank's liquidity should remain strong, with an approximate projection of $84.1 million in Center Bancorp Inc. Form 10-Q Page 20
anticipated cash flows over the next twelve months. This projection represents a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from this projection depending upon a number of factors, including the liquidity needs of the Bank's customers, the availability of sources of liquidity and general economic conditions. The Corporation derives a significant proportion of its liquidity from its core deposit base. For the six-month period ended June 30, 2001, core deposits (comprised of total demand, savings accounts, and money market accounts under $100,000) represented 52.8 percent of total deposits as compared with 58.7 percent in the comparable period in 2000. Certain volatile rate sensitive deposits, concentrated in time certificates of deposit of $100,000 or more, for the six month period ended June 30, 2001 decreased by $26.5 million or 45.7 percent to 7.40 percent of total deposits from 13.57 percent during the six months ended June 30, 2000. Average funding sources during the six months ended June 30, 2001 increased by approximately $61.3 million compared to 2000. The increase was due to an increase in money market, savings, non-interest demand deposits and borrowings, primarily FHLB advances and securities sold under agreements to repurchase. Non-interest bearing funding sources as a percentage of the funding mix amounted to 17.3 percent and 18.2 percent on average for the six-month period ended June 30, 2001 and 2000. Short-term borrowings can be used to satisfy daily funding needs. Balances in these accounts fluctuate significantly on a day-to-day basis. The Corporation's principal short-term funding sources are securities sold under agreement to repurchase and advance from the Federal Home Loan Bank (FHLB). Average short-term borrowings during the first six months of 2001 were $104.6 million, an increase of $33.4 million or 46.9 percent from $71.2 million in average short-term borrowings during the comparable six months ended June 30, 2000. Cash Flow The consolidated statements of cash flows present the changes in cash and cash equivalents from operating, investing and financing activities. During the six months ended June 30, 2001, cash and cash equivalents (which increased overall by $6.9 million) were provided (on a net basis) by approximately $4.8 million in net cash flows from operating activities and by $17.0 million in net cash flows provided by financing activities. A total of $15.0 million was used in net investing activities; of that amount $6.5 million was used to increase loans, on a net basis 2.0 million was provided by investment securities primarily from the available-for-sale portfolio and $10.0 million was used to purchase Bank Owned Life Insurance. Stockholders' Equity Stockholders' equity averaged $41.2 million for the six-month period ended June 30, 2001, an increase of $3.8 million or 10.19 percent from $37.3 million, for the same period in 2000. The Corporation's dividend reinvestment and optional stock purchase plan contributed $119,000 in new capital for the six months ended June 30, 2001 as compared with $127,000 for the comparable period in 2000. Tangible book value per common share was $10.13 at June 30, 2001 as compared to $9.40 at December 31, 2000 and $8.83 at June 30, 2000. On June 1, 2001 the Corporation issued 187,311 shares of its common stock in payment of a 5% stock dividend declared on April 17, 2001 to stockholders of record May 18, 2001. Center Bancorp Inc. Form 10-Q Page 21
Capital The maintenance of a solid capital foundation continues to be a primary goal for the Corporation. Accordingly, capital plans and dividend policies are monitored on an ongoing basis. The most important objective of the capital planning process is to balance effectively the retention of capital to support future growth and the goal of providing stockholders with an attractive long-term return on their investment. Risk-Based Capital/Leverage FDIC regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at June 30, 2001, the Bank was required to maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets of 4.0%, and (ii) minimum ratios of Tier 1 and total capital to risk-weighted assets of 4.0% and 8.0%, respectively. At June 30, 2001, total Tier l capital (defined as tangible stockholders' equity for common stock and certain perpetual preferred stock) amounted to $38.97 million or 6.65 percent of total average assets. The Tier I and Tier II leverage capital ratio was 6.90 percent of total assets. Tier I capital excludes the effect of SFAS No. 115, which amounted to $1.3 million of net unrealized gains, after tax, on securities available-for-sale (included as a component of other comprehensive income) and goodwill of approximately $2.3 million as of June 30, 2001. At June 30, 2001, the Corporation's estimated Tier I risk based and total risk-based capital ratios were 11.47 percent and 12.03 percent, respectively. These ratios are well above the minimum guidelines of capital to risk-adjusted assets in effect as of June 30, 2001. Under its prompt corrective action regulations, bank regulators are required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution's financial statements. The regulations establish a framework for the classification of financial institutions into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Generally, an institution is considered well capitalized if it has a leverage (Tier 1) capital ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.5%. The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the bank regulators about capital components, risk weightings and other factors. As of June 30, 2001, management believes that the Bank and the Corporation meet all capital adequacy requirements to which they are subject. Center Bancorp Inc. Form 10-Q Page 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. "Market risk" represents the risk of loss from adverse changes in market prices and rates. The Corporation's market rate risk arises primarily from interest rate risk inherent in its investing, lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Corporation's profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely affect the Corporation's earnings to the extent that the interest rates borne by assets and liabilities do not similarly adjust. The Corporation's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Corporation's net interest income and capital, while structuring the Corporation's asset-liability structure to obtain the maximum yield-cost spread on that structure. The Corporation relies primarily on its asset-liability structure to control interest rate risk. The Corporation continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. The management of the Corporation believes that hedging instruments currently available are not cost-effective, and therefore, has focused its efforts on increasing the Corporation's yield-cost spread through wholesale and retail growth opportunities. The Corporation monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Corporation's exposure to differential changes in interest rates between assets and liabilities is the Corporation's analysis of its interest rate sensitivity. This test measures the impact on net interest income and on net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities and off-balance sheet contracts. The primary tool used by management to measure and manage interest rate exposure is a simulation model. Use of the model to perform simulations reflecting changes in interest rates over one and two-year time horizons has enabled management to develop and initiate strategies for managing exposure to interest rate risk. In its simulations, management estimates the impact on net interest income of various changes in interest rates. Projected net interest income sensitivity to movements in interest rates is modeled based on both an immediate rise and fall in interest rates ("rate shock"), as well as gradual changes in interest rates over a 12 month time period. The model is based on the actual maturity and repricing characteristics of interest-rate sensitive assets and liabilities. The model incorporates assumptions regarding earning-asset and deposit growth, prepayments, interest rates and other factors. Management believes that both individually and taken together, these assumptions are reasonable, but the complexity of the simulation modeling process results in a sophisticated estimate, not an absolutely precise calculation of exposure. For example, estimates of future cash flows must be made for instruments without contractual maturity or payment schedules. Based on the results of the interest simulation model as of June 30, 2001, the Corporation would expect a decrease of 6.22 percent in net interest income and an increase of 1.69 percent in net interest income if interest rates increase or decrease by 200 basis points, respectively, from current rates in an immediate and parallel shock over a twelve month period. 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. Center Bancorp Inc. Form 10-Q Page 23
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. B) Reports on Form 8-K There were no reports on Form 8-K filed during the three months ended June 30, 2001 Center Bancorp Inc. Form 10-Q Page 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: 8/14/01 /s/ Anthony C. Weagley ----------------------------- Anthony C. Weagley, Treasurer (Chief Financial Officer)