-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GOBJjLm0sd7Qf4OM4VFznvgTZyRSIre69bDOfhu8c0G7kCGy98NUVQ7o7YpPtZXc bcEBArt51FmtOxv37iToHg== 0000950116-99-002094.txt : 19991117 0000950116-99-002094.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950116-99-002094 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTER BANCORP INC CENTRAL INDEX KEY: 0000712771 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 521273725 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11486 FILM NUMBER: 99755114 BUSINESS ADDRESS: STREET 1: 2455 MORRIS AVE CITY: UNION STATE: NJ ZIP: 07083 BUSINESS PHONE: 9086889500 MAIL ADDRESS: STREET 1: 2455 MORRIS AVE CITY: UNION STATE: NJ ZIP: 07083 10-Q 1 10-Q 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, 1999 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 September 30, 1999 - ---------------------------------------- Common stock, no par value: 3,788,856 shares CENTER BANCORP, INC. INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Statements of Condition at September 30, 1999 (Unaudited) and December 31, 1998 3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1999 and 1998 (Unaudited) 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 (Unaudited) 5 Notes to the Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-21 Item 3. Qualitative and Quantitative Disclosures about Market Risks 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Changes in Securities 23 Item 6. Exhibits 23 Signature 24 Exhibit Index/Data Schedule 25 30-September-99 Center Bancorp, Inc. Form 10Q 2 Center Bancorp, Inc. Consolidated Statements of Condition
September 30, December 31, (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ (unaudited) Assets: Cash and due from banks $ 12,366 $ 15,975 Investment securities held to maturity (approximate market value of $189,759 in 1999 and $174,184 in 1998) 193,671 172,014 Investment securities available-for-sale 122,813 115,952 - ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities 316,484 287,966 Loans, net of unearned income 164,789 150,099 Less - Allowance for loan losses (1,348) (1,326) - ------------------------------------------------------------------------------------------------------------------------------------ Net loans 163,405 148,773 - ------------------------------------------------------------------------------------------------------------------------------------ Premises and equipment, net 9,877 9,426 Accrued interest receivable 5,136 4,120 Other assets 829 815 Goodwill 2,817 3,059 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 510,914 $ 470,134 ==================================================================================================================================== Liabilities Deposits: Non-interest bearing $ 88,425 $ 82,072 Interest bearing: Certificates of deposit $100,000 and over 52,882 53,056 Savings and time deposits 246,535 242,039 - ------------------------------------------------------------------------------------------------------------------------------------ Total deposits 387,842 377,167 Federal funds purchased and securities sold under agreements to repurchase 28,592 12,602 Federal Home Loan Bank advances 55,000 40,000 Accounts payable and accrued liabilities 2,631 3,734 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 474,065 433,503 Stockholders' equity: Common stock, no par value: Authorized 20,000,000 shares; issued 4,248,318 and 4,222,559 shares in 1999 and 1998 respectively 7,866 7,616 Additional paid in capital 3,748 3,660 Retained earnings 27,795 25,978 Less - Treasury stock at cost (459,462 shares in 1999 and 485,642 shares in 1998 respectively) (1,694) (1,736) Accumulated other comprehensive (loss) income (866) 1,113 - ------------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 36,849 36,631 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 510,914 $ 470,134 ====================================================================================================================================
All share amounts have been restated to reflect the 5% stock dividend distributed June 1, 1999 to stockholders of record May 18, 1999 and the 3-for-2 stock split distributed on May 29, 1998. See Accompanying Notes To Consolidated Financial Statements 30-September-99 Center Bancorp, Inc. Form 10Q 3 Center Bancorp, Inc Consolidated Statements of Income (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- -------------------------- (Dollars in thousands) 1999 1998 1999 1998 - ---------------------------------------------------- ------------ ------------ ------------ ----------- Interest income: Interest and fees on loans $ 3,088 $ 2,738 $ 8,975 $ 8,108 Interest and dividends on investment securities: Taxable interest income 4,771 4,700 13,671 13,929 Nontaxable interest income 210 166 628 533 Interest on Federal funds sold and securities purchased under agreement to resell 102 154 365 440 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 8,171 7,758 23,639 23,010 - ------------------------------------------------------------------------------------------------------------------------------------ Interest expense: Interest on certificates of deposit $100,000 or more 736 995 1,962 3,622 Interest on savings and time deposits 1,857 2,040 5,431 5,979 Interest on borrowings 690 371 1,929 847 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 3,283 3,406 9,322 10,448 Net interest income 4,888 4,352 14,317 12,562 - ------------------------------------------------------------------------------------------------------------------------------------ Provision for loan losses 36 30 72 90 Net interest income after provision for loan losses 4,852 4,322 14,245 12,472 - ------------------------------------------------------------------------------------------------------------------------------------ Other income: Service charges, commissions and fees 235 188 632 536 Other income 51 74 170 155 - ------------------------------------------------------------------------------------------------------------------------------------ Total other income 286 262 802 691 - ------------------------------------------------------------------------------------------------------------------------------------ Other expense: Salaries and employee benefits 1,749 1,534 5,064 4,300 Occupancy expense, net 330 285 926 805 Premises and equipment expense 303 317 966 871 Stationery and printing expense 82 130 356 317 Marketing and advertising 116 161 419 363 Other expenses 767 674 2,060 1,865 - ------------------------------------------------------------------------------------------------------------------------------------ Total other expense 3,347 3,101 9,791 8,521 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income tax expense 1,791 1,483 5,256 4,642 Income tax expense 629 504 1,793 1,574 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 1,162 $ 979 $ 3,463 $ 3,068 ==================================================================================================================================== Earnings per share Basic $ 0.31 $ 0.26 $ 0.92 $ 0.82 Diluted 0.31 0.26 0.91 0.81 - ------------------------------------------------------------------------------------------------------------------------------------ Average weighted common shares outstanding Basic 3,787,193 3,748,815 3,773,417 3,737,265 Diluted 3,805,261 3,777,723 3,796,890 3,774,136 ====================================================================================================================================
All share and per share amount s have been restated to reflect the 5% dividend distributed June 1, 1999 to stockholders of record May 18, 1999 and the 3-for-2 stock split distributed on May 29, 1998. See Accompanying Notes To Consolidated Financial Statements 30-September-99 Center Bancorp, Inc. Form 10Q 4 Center Bancorp, Inc. Consolidated Statements of Cash Flows (Unaudited)
\ Nine Months Ended September 30, (Dollars in thousands) 1999 1998 - ------------------------------------------------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,463 $ 3,068 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization 1,068 1,029 Provision for loan losses 72 90 (Increase) decrease in accrued interest receivable (1,016) 150 Increase in other assets (14) (310) (Decrease) increase in other liabilities (1,103) 1,013 Amortization of premium and accretion of discount on investment securities, net 18 167 - --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 2,488 5,207 - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available-for-sale 22,998 56,230 Proceeds from maturities of securities held-to-maturity 42,465 47,875 Proceeds from sales of investment securities available-for-sale 2,997 0 Purchase of securities available-for-sale (34,246) (50,923) Purchase of securities held-to-maturity (64,730) (48,814) Net increase in loans (14,704) (10,463) Property and equipment expenditures, net (1,277) (903) - --------------------------------------------------------------------------------------------------------- Net cash used in investing activities (46,497) (6,998) - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits 10,675 (58,763) Dividends paid (1,645) (1,485) Proceeds from issuance of common stock 380 459 Net increase in borrowings 30,990 47,961 - --------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 40,400 (11,828) - --------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (3,609) (13,619) - --------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 15,975 26,110 - --------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 12,366 $ 12,491 ========================================================================================================= Supplemental disclosures of cash flow information: Interest paid on deposits and short-term borrowings: $ 9,422 $ 10,470 Income taxes $ 1,708 $ 1,452
30-September-99 Center Bancorp, Inc. Form 10Q 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 and is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. Basis of Financial Statement Presentation The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition and revenues and expenses for the applicable period. Actual results could differ significantly from those estimates. In the opinion of Management, all adjustments necessary for a fair presentation of the Corporation's financial position and results of operations for the interim periods have been made. Such adjustments are of a normal recurring nature. All share and per share amounts have been restated to reflect the 5% stock dividend distributed June 1, 1999 to stockholders of record May 18, 1999. Also reflected and restated for all prior periods is the 3-for-2 stock split distributed on May 29, 1998. Results for the period ended September 30, 1999 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, 1998 for information regarding accounting principles. Note 2 Recent Accounting Pronouncements SFAS No. 133 and No. 137 In June 1998, the 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. 30-September-99 Center Bancorp, Inc. Form 10Q 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. The adoption of this Statement by the Corporation is not expected to have a material effect on the financial statements of the Corporation. In June of 1999 FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", which amended SFAS No. 133 to be effective for all fiscal years beginning after June 15, 2000. NOTE 3 The following table outlines the Corporation's comprehensive income for the three and nine months ended September 30, 1999 and 1998.
Three Months Nine Months Ended September 30, Ended September 30, ------------------------- ------------------------- Comprehensive Income 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Net Income $ 1,162 $ 979 $ 3,463 $ 3,068 Other comprehensive income Unrealized holding (losses)gains arising during the period, net of taxes (582) 373 (1,979) 1,169 - ------------------------------------------------------------------------------------------------------------------------ Other total comprehensive income (loss) $ (582) $ 373 $ (1,979) $ 1,169 - ------------------------------------------------------------------------------------------------------------------------ Total comprehensive income $ 580 $ 1,352 $ 1,489 $ 4,237 ========================================================================================================================
Management's Discussion & Analysis of Financial Condition and Results of Operations Net income for the three months ended September 30, 1999 amounted to $1,162,000 as compared to $979,000 earned for the comparable three month period ended September 30, 1998. On a per diluted share basis, earnings increased to $.31 per share as compared with $.26 per share for the three months ended September 30, 1998. The annualized return on average assets was .91 percent compared with .82 percent for the comparable three month period in 1998. The annualized return on average stockholders' equity was 12.47 percent for the three month period ended September 30, 1999 as compared to 10.91 percent for the comparable three months ended September 30, 1998. Earnings performance for the third quarter of 1999 primarily reflects an increase in net interest income offset by higher operating and income tax expenses. Net income and earnings per diluted share increased 12.87 and 12.35 percent, respectively, for the first nine months of 1999 compared to the first nine months of 1998. Net income for the nine months ended September 30, 1999 was $3,463,000 as compared to $3,068,000 earned for the comparable nine month period of 1998. On a per diluted share basis, earnings were $.91 as compared to $.81 per share for the nine months ended September 30, 1998. The annualized return on average assets was .93 percent for the nine months ended September 30, 1999 as compared with .86 percent for the comparable period in 1998, while the annualized return on average stockholders' equity was 12.41 percent and 11.70 percent, respectively. Earnings performance for the nine months ended September 30, 1999, reflected increased net interest income and other income offset by increases in non-interest expense and income tax expense. All share and per share amounts have been restated to reflect the 5% stock dividend distributed on June 1, 1999 and the 3 for 2 stock split distributed in May of 1998. 30-September-99 Center Bancorp, Inc. Form 10Q 7 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
- --------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Three Months Ended Nine Months Ended September 30, September 30, Percent Percent 1999 1998 Change 1999 1998 Change --------------------- ---------------------- Interest income: Investments $ 4,981 $ 4,866 2.36 $ 14,299 $ 14,462 (1.13) Loans, including fees 3,088 2,738 12.78 8,975 8,108 10.69 Federal funds sold and securities sold under agreements to repurchase 102 154 (33.77) 365 440 (17.05) ---------- ----------- ---------- ---------- Total interest income 8,171 7,758 5.32 23,639 23,010 2.74 - -------------------------------------------------- ----------- ---------- ---------- Interest expense: Certificates $100,000 or more 736 995 (26.03) 1,962 3,622 (45.83) Savings and Time Deposits 1,857 2,040 (8.97) 5,431 5,979 (9.17) FHLB advances and other borrowings 690 371 85.98 1,929 847 127.74 ---------- ----------- ---------- ---------- Total interest expense 3,283 3,406 (3.61) 9,322 10,448 (10.78) - -------------------------------------------------- ----------- ---------- ---------- Net interest income* 4,888 4,352 12.32 14,317 12,562 13.97 - -------------------------------------------------- ----------- ---------- ---------- Tax-equivalent adjustment 108 86 25.58 324 275 17.82 Net interest income on a fully tax-equivalent basis $ 4,996 $ 4,438 12.57 $ 14,641 $ 12,837 14.05 ================================================== =========== ========== ========== *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 increased $558,000 or 12.6 percent to approximately $5.0 million for the three months ended September 30, 1999, from $4.4 million for the comparable period in 1998. For the three months ended September 30, 1999, the net interest margin increased to 4.18 percent from 3.97 percent due to a more favorable mix of interest-bearing liabilities and a decreased cost of funds. For the three months ended September 30, 1999, a decrease in the average yield on interest-earning assets of ten basis points was offset by a decrease in the average cost of interest-bearing liabilities of 33 basis points, resulting in the increase in the net interest margin. The increase in net interest spreads is primarily a result of the decreased cost of interest-bearing liabilities and the Corporation's ability to fund a greater portion of its earning assets through increases in short-term borrowings, non-interest-bearing sources and core deposits, versus higher cost time deposits, of $100,000 or more. Average interest- earning assets increased by $31.1 million, from the comparable three month period in 1998. The net increase in average interest-bearing liabilities was $20.1 million over the comparable three month period in 1998. The 1999 third quarter changes in average interest earning asset volumes were primarily due to increased volumes of loans and taxable and non-taxable investment securities, funded primarily by core deposits, cash flows from the investment portfolio and increased borrowings. 30-September-99 Center Bancorp, Inc. Form 10Q 8 Net interest income on a fully tax-equivalent basis for the nine months ended September 30, 1999 increased $1,804,000 or 14.1 percent, to approximately $14.6 million from the comparable nine month period in 1998. The Corporation's net interest margin for the nine months in 1999 increased to 4.20 percent from 3.84 percent due primarily to a decreased cost of funds. The average rate paid for interest bearing liabilities declined 49 basis points and offset the nine basis point decline in the average rate earned on assets. For the nine months ended September 30, 1999 average- interest earning assets increased by $19 million on average as compared with the nine months ended September 30, 1998. The decrease in the average cost of interest-bearing liabilities accounted for the increase in the net interest margin. For the three month period ended September 30, 1999 interest income on a fully tax-equivalent basis increased by $435,000 or 5.5 percent from the comparable three month period in 1998. The primary factor contributing to the increase was the previously cited increase in average earning assets. The Corporation's loan portfolio increased on average $21.3 million to $161.7 million from $140.4 million in the same quarter in 1998, 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 approximately 33.8 percent of the Corporation's interest-earning assets (on average) during the third quarter of 1999 and 31.4 percent in 1998. Interest income on a fully tax-equivalent basis for the nine month period ended September 30, 1999 increased by approximately $678,000 or 2.9 percent, as compared to the comparable period ended September 30, 1998. The Corporation's average loan portfolio increased $20.5 million to $157.8 million from $137.3 million in the comparable period of 1998. 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 approximately 33.9 percent of the Corporation's interest-earning assets (on average) for the nine months ended September 30, 1999 as compared with 30.7 percent for the comparable period in 1998. Average investment volume for the three months ended September 30, 1999 increased $12.9 million to approximately $308.9 million compared to $296.0 million for the three months of 1998. For the nine months ended September 30, 1999 average investments decreased $752,000 to $297.7 million. Interest expense for the three months ended September 30, 1999, decreased $123,000 or 3.6 percent from the comparable three month period ended September 30, 1998, as a result of a decrease in interest rates and changes in deposit mix and higher amounts of lower cost short-term borrowings. Lower interest rates brought about by the flattening of the yield curve contributed significantly to the overall decrease in interest expense, as compared with the three months ended September 30, 1998. For the nine months ended September 30, 1999, interest expense decreased $1,126,000 or 10.8 percent as compared with the comparable nine month period in 1998. Interest expense for the nine months ended September 30, 1999 decreased primarily as a result of a decline in interest rates. The amount of the decrease attributable to volume factors was $27,000 while $1.1 million was due to rate. For the three months ended September 30, 1999, the Corporation's net interest spread on a tax-equivalent basis increased to 3.50 percent from 3.27 percent for the three months ended September 30, 1998. This increase reflected a widening of spreads between yields earned on loans and investments and rates paid for supporting funds. There was a favorable change in the mix of supporting interest-earning assets, primarily increased loan volumes, but the yield on interest-earning assets declined to 6.92 percent from 7.02 percent. This was offset by a change in a mix of interest-bearing liabilities to less costly funding. The yield on total interest-bearing liabilities decreased to 3.42 percent for the three months ended September 30, 1999 from 3.75 percent for the three months ended September 30, 1998. For the nine months ended September 30, 1999, the Corporation's net interest spread on a tax-equivalent basis increased to 3.53 percent from 3.13 percent for the nine months ended September 30, 1998. This increase primarily reflected a widening of spreads due to the change in the mix of interest-bearing liabilities to less costly funding. 30-September-99 Center Bancorp, Inc. Form 10Q 9 The contribution of non-interest-bearing sources (i.e. the differential between the average rate paid on all sources of funds and the average rate paid on interest-bearing sources) narrowed to approximately 67 basis points from 71 basis points during the nine month periods ended September 30, 1998 and 1999, respectively, and to 68 basis points from 70 basis points for the respective three month periods ended September 30, 1998 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)
- -------------------------------------------------------------------------------------------------------------------------------- Three Months Ended 9/30/99 Nine Months Ended 9/30/99 1999/1998 Increase/(Decrease) 1999/1998 Increase/(Decrease) (Dollars in thousands) Due to Change in: Due to Change in: - -------------------------------------------------------------------------------------------------------------------------------- Average Average Net Average Average Net Volume Rate Change Volume Rate Change --------- -------- -------- --------- --------- -------- Interest-earning assets Investment Securities Taxable $ 141 $ (70) $ 71 $ (197) $ (61) $ (258) Non-taxable 75 (9) 66 168 (24) 144 Federal funds sold and securities purchased under agreement to resell 5 (57) (52) (34) (41) (75) Loans, net of unearned income 407 (57) 350 1,180 (313) 867 --------- -------- -------- --------- ------- ------- Total interest-earning assets $ 627 $ (192) $ 435 $ 1,117 $ (439) $ 678 ========= ======== ======== ========= ======= ======= Interest-bearing liabilities: Money Market deposits $ 64 $ 16 $ 80 $ 209 $ 42 $ 251 Savings deposits 4 (21) (17) (14) (194) (208) Time deposits (216) (216) (432) (1,429) (793) (2,222) Other interest-bearing deposits 15 (19) (4) 49 (78) (29) Borrowings 278 (28) 250 1,158 (76) 1,082 --------- -------- -------- --------- ------- ------- Total interest-bearing liabilities 143 (266) (123) (27) (1,099) (1,126) --------- -------- -------- --------- ------- ------- Change in net interest income $ 484 $ 74 $ 558 $ 1,145 $ 659 $ 1,804 ====================================================================================================================================
30-September-99 Center Bancorp, Inc. Form 10Q 10 The following table, "Average Balance Sheet with Interest and Average Rates", presents for the three months ended September 30, 1999 and 1998 the Corporation's average assets, liabilities and stockholders' equity. The Corporation's net interest income, net interest spreads and net interest income as a percentage of interest-earning assets are also reflected. Average Balance Sheet with Interest and Average Rates
Three Month Period Ended September 30, 1999 1998 ------------------------------------- ----------------------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (tax-equivalent basis, dollars in thousands) Balance Expense Rate Balance Expense Rate - ------------------------------------------------------------------------------------------------------------------------------------ Assets Interest-earning assets: Investment securities: (1) Taxable $ 290,403 $ 4,771 6.57% $ 281,883 $ 4,700 6.67% Non-taxable 18,487 318 6.88% 14,150 252 7.12% Federal funds sold and securities purchased under agreement to resell 7,804 102 5.23% 10,796 154 5.71% Loans, net of unearned income (2) 161,694 3,088 7.64% 140,427 2,738 7.80% ------------------------ --------------------------------------- ------- Total interest-earning assets 478,388 8,279 6.92% 447,256 7,844 7.02% ---------- -------- Non-interest earning assets Cash and due from banks 12,944 11,838 Other assets 18,967 17,682 Allowance for possible loan losses (1,366) (1,339) ---------- ----------- Total non-interest earning assets 30,545 28,181 ---------- ----------- Total assets $ 508,933 $ 475,437 ---------- ----------- Liabilities and stockholders' equity Interest-bearing liabilities: Money Market deposits $ 70,886 559 3.15% $ 62,747 479 3.05% Savings deposits 75,414 368 1.95% 74,709 385 2.06% Time deposits 126,284 1,463 4.63% 143,766 1,895 5.27% Other interest - bearing deposits 47,870 203 1.70% 44,418 207 1.86% Borrowings 63,265 690 4.36% 37,937 440 4.64% ---------- ---------- ------- ----------- -------- ------- Total interest-bearing liabilities 383,719 3,283 3.42% $ 363,577 3,406 3.75% ---------- ----------- Non-interest-bearing liabilities: Demand deposits 84,822 72,011 Other noninterest-bearing deposits 375 476 Other liabilities 2,751 3,483 ---------- ----------- Total noninterest-bearing liabilities 87,948 75,970 Stockholders' equity 37,266 35,890 ---------- ----------- Total liabilities and stockholders' equity $ 508,933 $ 475,437 ---------- ----------- Net interest income (tax-equivalent basis) $ 4,996 $ 4,438 ---------- -------- Net Interest Spread 3.50% 3.27% ------- ------- Net interest income as percent of earning-assets 4.18% 3.97% ------- ------- Tax equivalent adjustment (108) (86) ---------- -------- Net interest income $ 4,888 $ 4,352 ---------- --------
(1) Average balances for available-for-sale securities are based on amortized cost (2) Average balances for loans include loans on non-accrual status 30-September-99 Center Bancorp, Inc. Form 10Q 11 The following table, "Average Balance Sheet with Interest and Average Rates", presents for the nine months ended September 30, 1999 and 1998 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
Nine Month Period Ended September 30, 1999 1998 ------------------------------------- ----------------------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (tax-equivalent basis, dollars in thousands) Balance Expense Rate Balance Expense Rate - ------------------------------------------------------------------------------------------------------------------------------------ Assets Interest-earning assets: Investment securities (1) Taxable $ 279,175 $ 13,671 6.53% $ 283,185 $ 13,929 6.56% Non-taxable 18,506 952 6.86% 15,248 808 7.07% Federal funds sold and securities purchased under agreement to resell 9,550 365 5.10% 10,385 440 5.65% Loans, net of unearned income (2) 157,842 8,975 7.58% 137,258 8,108 7.88% ------------------------ ---------------------------------------- ------- Total interest-earning assets 465,073 23,963 6.87% 446,076 23,285 6.96% ---------- -------- Non-interest earning assets Cash and due from banks 13,030 12,145 Other assets 18,386 17,597 Allowance for possible loan losses (1,347) (1,309) ---------- ----------- Total non-interest earning assets 30,069 28,433 --------- ----------- Total assets $ 495,142 $ 474,509 ---------- ----------- Liabilities and stockholders' equity Interest-bearing liabilities: Money Market deposits $ 68,672 1,563 3.03% $ 59,454 1,312 2.94% Savings deposits 75,172 1,097 1.95% 76,015 1,305 2.29% Time deposits 122,117 4,171 4.55% 161,744 6,393 5.27% Other interest bearing deposits 46,818 562 1.60% 43,036 591 1.83% Borrowings 59,293 1,929 4.34% 23,862 847 4.73% --------- ---------- ------- ----------- -------- ------- Total interest-bearing liabilities 372,072 9,322 3.34% $ 364,111 10,448 3.83% ---------- ----------- Noninterest-bearing liabilities: Demand deposits 82,179 71,746 Other noninterest-bearing deposits 399 438 Other liabilities 3,271 3,223 --------- ----------- Total noninterest-bearing liabilities 85,849 75,407 Stockholders' equity 37,221 34,991 ---------- ----------- Total liabilities and stockholders' equity $ 495,142 $ 474,509 ---------- ----------- Net interest income (tax-equivalent basis) $ 14,641 $ 12,837 ---------- -------- Net Interest Spread 3.53% 3.13% ------- ------ Net interest income as percent of earning-assets 4.20% 3.84% ------- ------ Tax equivalent adjustment (324) (275) ---------- -------- Net interest income $ 14,317 $ 12,562 ---------- --------
(1) Average balances for available-for-sale securities are based on amortized cost (2) Average balances for loans include loans on non-accrual status 30-September-99 Center Bancorp, Inc. Form 10Q 12 Investments For the three months ended September 30, 1999, the average volume of investment securities increased to $308.9 million or an increase of $12.9 million from $296.0 million on average for the same three month period in 1998. The tax-equivalent yield on the investment portfolio declined to 6.59 percent from 6.69 percent for the comparable three month period in 1998. Purchases made to replace maturing and called investments were not made at comparable rates and in some cases the monies were not re-invested in the Investment Portfolio. For the nine months ended September 30, 1999, the average volume of investment securities decreased by $752,000 when compared to the same period in 1998. The tax-equivalent yield on investments decreased to 6.55 percent or 2 basis points from a yield of 6.57 percent for the nine month period ended September 30, 1998. The decreased yield on the investment portfolio during the first nine months of 1999 resulted from the Corporation's inability to obtain comparable or higher rates on purchases made to replace, in some cases, higher yielding investments which had matured, were prepaid, or were called. The impact of repricing activity on yields was lessened by a change in bond segmentation most notably in the volume of callable Federal Agency Securities and some extension, where risk is minimal within the portfolio of investment maturities. This resulted in narrowed spreads and was compounded by the current uncertainty respecting rates. 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 nine months ended September 30, 1999, the total investment portfolio excluding overnight investments, averaged $297.7 or 64.0 percent of earning assets, as compared to $298.4 million or 64.0 percent at September 30, 1998. The principal components of the investment portfolio are U.S. Government Treasury and Federal Agency callable and noncallable securities, including agency issued Collateralized Mortgage Obligations. At September 30, 1999 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 $866,000 as compared with an unrealized gain of $1,113,000 at December 31, 1998 resulting from a deterioration in the bond market due to rising interest rates fostered by the Federal Open Market Committee's pre-emptive strikes against inflation. Bond prices have fallen as interest rates rose. Loans Loan growth during the first nine months of 1999 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 branching. The decline of the loan portfolio yield for the three and nine month periods was the result of a lower prime rate environment during the first nine months of 1999 coupled with a competitive rate structure to attract new loans and by the heightened competition for lending relationships that exists in the Corporation's market. The Corporation's desire to grow this segment of the earning-asset mix is reflected in its current business development plan and marketing plans, as well as its short-term strategic plan. Analyzing the loan portfolio for the nine months ended September 30, 1999, average loan volume increased $20.6 million or 15.0 percent, while portfolio yield declined by 30 basis points as compared with the same period in 1998. The increased total average loan volume was due primarily to increased customer activity, new lending relationships, and new markets. For the three months ended September 30, 1999, average loan volume increased $21.3 million primarily as a result of aggressive business development efforts aimed at the business customers. The robust economic environment in building sector of New Jersey. This resulted in an increase of commercial real estate loans in the portfolio. This change in volume was somewhat affected by a decline in portfolio yield of 16 basis points as compared with the same period in 1998. The volume related factors contributed increased earnings of $407,000 offset by a decline of $57,000 due to rate related changes. Total average loan volume increased to $161.7 million with a net interest yield of 7.64 percent, as compared to $140.4 million with a yield of 7.80% for the three months ended September 30, 1998. 30-September-99 Center Bancorp, Inc. Form 10Q 13 Allowance for Loan Losses The purpose of the allowance for loan losses is to absorb the impact of losses inherent in the loan portfolio. Additions to the allowance are made through provisions charged against current operations and through recoveries made on loans previously charged-off. The allowance for loan losses is maintained at an amount considered adequate by Management to provide for potential credit losses inherent in the loan portfolio based upon a periodic evaluation of the risk characteristics of the loan portfolio. In establishing an appropriate allowance, an assessment of the individual borrowers, a determination of the value of the underlying collateral, a review of historical loss experience and an analysis of the levels and trends of loan categories, delinquencies, and problem loans are considered. The level and trend of interest rates and current economic conditions are also reviewed. At September 30, 1999 the allowance was $1,384,000 as compared to $1,326,000 on December 31, 1998. The provision for loan losses during the nine and three month periods ended September 30, 1999 amounted to $72,000 and $36,000 respectively. Such provision amounted to $90,000 and $30,000 for the nine and three month periods ended September 30, 1998. 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 .84 percent and .95 percent at September 30, 1999, and 1998, respectively. In management's view the level of the allowance at September 30, 1999 is adequate to cover potential losses inherent in the loan portfolio. During the nine month period ended September 30, 1999, the Corporation did not experience any substantial problems within its loan portfolio. Net charge-offs were approximately $14,000. At September 30, 1999 the Corporation had non-accrual loans amounting to $315,000 versus $41,000 in non-accrual loans at December 31, 1998. The Corporation continues to aggressively pursue collections of principal and interest on loans previously charged-off. The Corporation defines impaired loans to consist of non-accrual loans and loans internally classified as substandard or below, in each instance above an established dollar threshold of $250,000. 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 1999 or 1998. The Corporation's statements herein regarding the adequacy of the allowance for loan losses may 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. 30-September-99 Center Bancorp, Inc. Form 10Q 14 Changes in the allowance for loan losses for the periods ended September 30, 1999 and 1998, respectively, are set forth below. Allowance for loan losses (Dollars in thousands)
- ------------------------------------------------------------------------------------------------------ Nine Months Ended September 30, ------------------------------ 1999 1998 --------- ---------- Average loans outstanding $ 157,842 $ 137,258 - ------------------------------------------------------------------------------------------------------ Total loans at end of period 164,789 142,885 - ------------------------------------------------------------------------------------------------------ Analysis of the allowance for loan losses Balance at the beginning of period 1,326 1,269 Charge-offs: Commercial 0 0 Real estate-mortgage 0 0 Installment loans 17 9 - ------------------------------------------------------------------------------------------------------ Total charge-offs 17 9 Recoveries: Commercial 0 0 Real estate-mortgage 0 0 Installment loans 3 7 - ------------------------------------------------------------------------------------------------------ Total recoveries 3 7 Net Charge-offs: 14 2 Provisions for loan losses 72 90 ====================================================================================================== Balance at end of period $ 1,384 $ 1,357 ====================================================================================================== Ratio of net charge-offs during the period to Average loans outstanding during the period 0.00% 0.00% - ------------------------------------------------------------------------------------------------------ Allowance for loan losses as a percentage of total loans 0.84% 0.95% - ------------------------------------------------------------------------------------------------------
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. 30-September-99 Center Bancorp, Inc. Form 10Q 15 At September 30, 1999, December 31, 1998 and September 30, 1998, the Corporation had no restructured loans. Non-accrual loans amounted to $315,000 at September 30, 1999, and were primarily comprised of first and second lien mortgages. At December 31, 1998 non-accrual loans amounted to $41,000 comprised of two home equity loans. At September 30, 1998, non-accrual loans amounted to $149,000 and were comprised of first and second lien home mortgages. At September 30, 1999 the Corporation's loans 90 days past due and still accruing amounted to approximately $2,400. Such loans amounted to $24,000 at December 31, 1998 and $86,000 at September 30, 1998. 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, 1999 and September 30, 1998 were as follows: ------------------------------------------------------------------------ Non-Performing Loans at September 30, December 31, ----------------------- (Dollars in thousands) 1999 1998 ======================================================================== Loans past due 90 days and still accruing $ 2 $ 41 Non-accrual loans 315 24 ------------------------------------------------------------------------ Total non-performing loans $ 317 $ 65 ======================================================================== At September 30, 1999, non-performing assets, consisting of loans on non-accrual status plus other real estate owned (OREO) amounted to $388,000 or .24 percent of total loans outstanding as compared to $114,000 or .08 percent at December 31, 1998 and $149,000 or .10 percent at September 30, 1998. At September 30, 1999 and December 31, 1998 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, 1998. 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, 1999 and 1998.
======================================================================================================================= (dollars in thousands) Three months ended Nine months ended September 30, September 30, 1999 1998 % change 1999 1998 % change ------- ------- ------- ------ Other income: Service charges, commissions and fees $ 235 $ 188 25.00 $ 632 $ 536 17.91 Other income 51 74 (31.08) 170 155 9.68 ------ ------ ------ ------ Total other income $ 286 $ 262 9.16 $ 802 $ 691 16.06 ====================================================== ====== ====== ====== ====== =====
For the three months ended September 30, 1999, total other (non-interest) income, increased $24,000 or 9.2 percent as compared to the three months ended September 30, 1998. The increase in other income is primarily due to increased ATM surcharges and deposit account related charges. For the nine month period ended September 30, 1999, total other (non-interest) income, reflects an increase of $111,000 or 16.1 percent compared with the comparable nine month period ended September 30, 1998. This overall increase was primarily a result of increased service charges, commissions, and fees including ATM surcharging which amounted to $189,000 for the nine month period ended September 30, 1999, as compared to $155,000 in 1998. Service charge fees on deposits increased primarily as an result of an increase in business activity. 30-September-99 Center Bancorp, Inc. Form 10Q 16 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, 1999 and 1998.
- --------------------------------------------------------------------------------------------------------------- (dollars in thousands) Three months ended Nine months ended September 30, September 30, Other expense: 1999 1998 % change 1999 1998 % change --------- --------- --------- --------- Salaries and employee benefits $ 1,749 $ 1,534 14.02 $ 5,064 $ 4,300 17.77 Occupancy expense, net 330 285 15.79 926 805 15.03 Premises & equipment expense 303 317 (4.42) 966 871 10.91 Stationery and printing expense 82 130 (36.92) 356 317 12.30 Marketing & Advertising 116 161 (27.95) 419 363 15.43 Other expenses 767 674 13.80 2,060 1,865 10.46 -------- ------- ------- ------- ------- ------- Total other expense $ 3,347 $ 3,101 7.93 $ 9,791 $ 8,521 14.90 ==================================== ======== ======= ======= ======= ======= =======
For the three month period ended September 30, 1999 total other (non-interest) expenses increased $246,000 or approximately 7.9 percent over the comparable three month period ended September 30, 1998. Increases in salaries and employee benefits coupled with increases in occupancy and other expenses comprised the primary components of the total increase for the three month period ended September 30, 1999. 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 nine months ended September 30, 1999 was 63.4 percent as compared with 63.0 percent for the comparable period ended September 30, 1998. For the three months ended September 30, 1999 this ratio was 66.0 percent as compared with 66.0 percent for the comparable period ended September 30, 1998. For the nine month period ended September 30, 1999, total other (non-interest) expenses increased $1,270,000 or 14.9 percent over the comparable period ended September 30, 1998. This was due to continued expansion of the Bank's branch network coupled with the expense of ongoing technological and automation programs. Salaries, loan portfolio operating expense, telecommunication and network expenses and employee benefits costs coupled with occupancy, stationery and printing, marketing, and advertising, and other expenses (computer related and correspondent bank charges, director's fees and check charge-offs) comprised the primary components of the total increase for the period. Salaries and employee benefits increased $215,000 or 14.0 percent for the three months ended September 30, 1999 and $764,000 or 17.8 percent for the nine month period over the comparable three and nine month periods ended September 30, 1998. These increases are primarily attributable to higher staffing levels, normal merit increases, promotional raises and higher benefits costs. Staffing levels overall increased to 163 full-time employees at September 30, 1999 compared to 152 full-time equivalent employees at September 30, 1998. The increase in occupancy expenses reflect the associated costs of the Corporation's expanded facilities. For the three and nine months ended September 30, 1999, occupancy expenses increased $45,000 and $121,000 over the comparable periods in 1998 primarily related to the Corporation's Morristown banking center opened in August 1998, Summit Banking Center opened in June 1999, and the expanded Springfield office and rental increases on other leased locations. Marketing and advertising expenditure decreased $45,000 for the three month period but increased $56,000 for the nine month period ended September 30, 1999, compared to the comparable periods in 1998. The increase in this expense category is primarily attributable to the grand opening expenses associated with the Corporation's Summit banking center and Springfield branch. 30-September-99 Center Bancorp, Inc. Form 10Q 17 Provision for Income Taxes For the nine month period ended September 30, 1999, the effective tax rate was 34.1 percent compared to 33.9 percent for the nine month period ended September 30, 1998. The Corporation's provision for income taxes increased for both the three and nine months from 1999 to 1998 primarily as a result of an increase in taxable income. 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. 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, 1999, the Corporation reflected a negative interest sensitivity gap (or an interest sensitivity ratio) of 0.47:1.0 at the cumulative one year position. During much of 1999 the Corporation had a negative interest sensitivity gap. The maintenance of a liability-sensitive position during 1999 had a favorable 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 wider net interest spread during the remainder of 1999. No assurance can be given that the company will be able to satisfy this objective. 30-September-99 Center Bancorp, Inc. Form 10Q 18 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 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 September 30, 1999, projected to September of 2000, indicates that the Bank's liquidity should remain strong, with an approximate projection of $110.5 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, 1999, average core deposits (comprised of total demand, savings accounts and money market accounts under $100,000) represented 55.1 percent of total deposits as compared with 50.3 percent at September 30, 1998. More volatile rate sensitive deposits, concentrated in time certificates of deposit greater than $100,000 for the nine month period ended September 30, 1999, decreased on average to 14.77 percent of total deposits from 39.2 percent during the nine months ended September 30, 1998. This change has resulted from a $33.9 million decrease in time deposits on average for the nine months ended September 30, 1999 compared to the prior year period. Average funding sources during the nine months ended September 30, 1999 increased by approximately $18.3 million compared to the same period in 1998. The increase was due to an increase in non-interest bearing demand deposits and short term borrowings, primarily advances from the Federal Home Loan Bank. Non-interest bearing funding sources as a percentage of the total funding mix increased to 18.1 percent (on average) as compared to 16.5 percent for the nine month period ended September 30, 1998. 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, advances from the Federal Home Loan Bank and Federal funds purchased. Average short-term borrowings during the first nine months of 1999 were $59.3 million, an increase of $35.4 million or 148.5 percent from $23.4 million in average short-term borrowings during the comparable nine months ended September 30, 1998. This change was due to a strategic shift from jumbo certificates of deposit to more cost effective funding from the Federal Home Loan Bank. 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, 1999, cash and cash equivalents (which decreased overall by $3.6 million) were provided (on a net basis) by financing activities($40.4 million), primarily due to a increase in borrowings of $31.0 million and deposits $10.7 million and by operating activities ($2.5 million). A total of $46.5 million was used in net investing activities, principally a $30.5 million increase in the investment portfolio and a $14.7 million increase in loans. 30-September-99 Center Bancorp, Inc. Form 10Q 19 Stockholders' Equity Total stockholders' equity averaged $37.2 million or 7.52 percent of average assets for the nine month period ended September 30, 1999, as compared to $35.0 million, or 7.37 percent, during the same period in 1998. The Corporation's dividend reinvestment and optional stock purchase plan contributed $380,000 in new capital for the nine months ended September 30, 1999 as compared with $459,000 for the comparable period in 1998. Tangible book value per common share, after the 5% stock dividend paid June 1, 1999 and the 3-for-2 stock split paid May 1998, was $9.73 at September 30, 1999 as compared to $8.94 at December 31, 1998. Tangible book value per common share was $9.76 at September 30, 1998, as adjusted for the above noted stock split and 5% stock dividend. Capital The maintenance of a solid capital foundation continues to be a primary goal for the Corporation. Accordingly, capital plans and dividend policies are monitored on an ongoing basis. The most important objective of the capital planning process is to balance effectively the retention of capital to support future growth and the goal of providing stockholders with an attractive long-term return on their investment. Risk-Based Capital/Leverage Banking regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at September 30, 1999, 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, 1999, total Tier l capital (defined as tangible stockholders' equity for common stock and certain perpetual preferred stock) amounted to $34.9 million or 6.83 percent of total assets. Tier I capital excludes the effect of SFAS No. 115, which amounted to $866,000 of net unrealized loss, after tax, on securities available-for-sale (included as a component of other comprehensive income) and goodwill of approximately $2.8 million as of September 30, 1999. At September 30, 1999, the Corporation's estimated Tier I risk-based and total risk-based capital ratios were 15.3 percent and 15.9 percent, respectively. These ratios are well above the minimum guidelines of capital to risk-adjusted assets in effect as of September 30, 1999. 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, 1999, management believes that the Bank meets all capital adequacy requirements to which it is subject. 30-September-99 Center Bancorp, Inc. Form 10Q 20 Year 2000 Century Date Change In May 1998, the Federal Financial Institutions Examination Council (FFIEC) issued a joint statement updating its prior statement, issued in June of 1996, addressing the assessment and preparedness for the Year 2000 Century date change. Regulators have defined a formal year 2000 management process to assist the financial industry in dealing with this issue on a timely basis. The year 2000 century date change poses a significant challenge for financial institutions, as well as all businesses, because many computer programs and applications will cease to function normally as a result of the way that date fields have been programmed historically. This date problem exists because the two-digit representation of the year will be interpreted in many applications to mean the year 1900, not 2000, unless the date or program logic is changed. The result could be a number of errors, including incorrect mathematical calculations and lost system files. The Corporation has implemented a strategic plan designed to ensure that all information technology, including software and hardware, used in connection with the Corporation's business will handle date related data in a manner which will provide accurate results. The project objectives include assessment of the full effect of the Year 2000 issue, system development for testing and implementing solutions, determining how the Corporation will coordinate processing capabilities with its customer, vendor, and payment partners, and determining internal control requirements. As of September 30, 1999, management has completed all phases of the plan, including identification, modification, and testing. Management believes that the Corporation is currently compliant with regulatory milestone dates. At present, total costs to the Corporation of achieving Year 2000 compliance are estimated at $470,000 of which the Corporation has incurred $422,000 as of September 30, 1999. Approximately 75 to 80 percent has been invested in new technology while the remainder approximates the amount of direct expense. However, management believes that such costs may rise if and when additional issues arise that may require additional expenditures to make the Corporation Year 2000 compliant. In addition management completed the evaluation process necessary to formulate a comprehensive contingency plan. As part of the contingency planning, the Corporation implemented a due diligence process that identified significant customers, and third parties posing material Year 2000 risks, evaluated their Year 2000 preparedness, assessed their Year 2000 risk and considered appropriate risk controls. The contingency planning process was completed during the fourth quarter of 1998 and implementation of the various components of the contingency plan was achieved during the second quarter of 1999. Management's goal to be compliant with regulatory guidelines by June 1999 was achieved, although no assurances can be given that the Corporation's information technology systems or those of a third party on which the Corporation relies will be Year 2000 compliant by the year 2000 or that the Corporation's contingency plans will mitigate the effects of any noncompliance. An interruption of the Corporation's ability to conduct its business due to a Year 2000 readiness problem, including a failure by suppliers, distributors and other third parties to successfully address Year 2000 issues, could have a material adverse affect on the Corporation's business, operations, liquidity, or financial condition. Any projections herein regarding Year 2000 compliance constitute a forward-looking statement, under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from the Corporation's forward-looking statements as a result of a variety of factors, including potential unavailability of technological resources, increased expenses associated with obtaining such resources and unanticipated technological difficulties. 30-September-99 Center Bancorp, Inc. Form 10Q 21 Item 3 Qualitative and Quantitative Disclosures about Market Risks The primary market risk faced by the Corporation is interest rate risk. The Corporation's Asset/Liability Committee ("ALCO") monitors the changes in the movement of funds and rate and volume trends to enable appropriate management response to changing market and rate conditions. The Corporation's income simulation model analyzes interest rate sensitivity by projecting net interest income over the next 24 months in a flat rate scenario versus net interest in alternative interest rate scenarios. Management reviews and refines its interest rate risk management process in response to the changing economic climate. Currently, the Corporation's model projects a 200 basis point change in rates during the first year, in even monthly increments, with rates held constant in the second year. The Corporation's ALCO has established that interest income sensitivity will be considered acceptable if net interest income in the above interest rate scenario is within 10% of net interest income in the flat rate scenario in the first year and within 20% over the two year time frame. At September 30, 1999, the Corporation's income simulation model indicates an acceptable level of interest rate risk, with no significant change from December 31, 1998. Management also monitors interest rate risk by utilizing a market value of equity model. The model computes estimated changes in net portfolio value ("NPV") of its cash flows from the Corporation's assets and liabilities in the event of a change in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities. This analysis assesses the risk of gain or loss in market risk sensitive instruments in the event of an immediate and sustained 200 basis point increase or decrease in market interest rates. The Corporation's ALCO policy indicates that the level of interest rate risk is acceptable if the immediate 200 basis point change in interest rates would not result in the loss of more than 25% from the base market value of equity. At September 30, 1999, the market value of equity indicates an acceptable level of interest rate risk, with no significant change since December 31, 1998. 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. 30-September-99 Center Bancorp, Inc. Form 10Q 22 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 2 Changes in Securities On April 13, 1999, the Board of Directors of the registrant declared a 5% stock dividend on the common stock of the Corporation, payable on June 1, 1999 to stockholders of record on May 18, 1999. All share data has been retroactively adjusted for the common stock dividend. Item 6 Exhibits and Reports on Form 8-K A) Exhibits: Exhibit (27-1) - Center Bancorp, Inc. Financial Data Schedule - September 30, 1999 B) Reports on Form 8-K There were no reports on Form 8-K filed during the three months ended September 30, 1999. 30-September-99 Center Bancorp, Inc. Form 10Q 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 12, 1999 /s/ Anthony C. Weagley --------------------------------------- Anthony C. Weagley, Treasurer (Chief Financial Officer) EX-27.1 2 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1999 SEP-30-1999 12,366 0 0 0 122,813 193,671 189,759 164,789 (1,384) 510,914 387,842 83,592 2,631 0 0 0 7,866 28,983 510,914 8,975 14,299 365 23,639 7,393 9,322 14,317 72 0 9,791 5,256 3,463 0 0 3,463 .92 .91 6.87 315 2 0 0 1,326 17 3 0 1,333 0 51
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