-----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, VhXTfm8Z3c9unGclU/iBLPFnKRdkfg9SIQufJ/ahLiAAlS3KuBOMDGw0iGzUZvPS ZeFZyOL4CEVeF1b1+xvERg== 0001125282-02-003428.txt : 20021114 0001125282-02-003428.hdr.sgml : 20021114 20021114123604 ACCESSION NUMBER: 0001125282-02-003428 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 1934 Act SEC FILE NUMBER: 000-11486 FILM NUMBER: 02823252 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 b321375_10q.txt QUARTERLY REPORT 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, 2002 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________TO___________ Commission file number 2-81353 CENTER BANCORP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New Jersey 52-1273725 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2455 Morris Avenue, Union, New Jersey 07083 - -------------------------------------------------------------------------------- (Address of principal executives offices) (Zip Code) (908) 688-9500 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes|X| No|_| Shares outstanding on October 31, 2002 - -------------------------------------- Common stock - no par value -4,200,186 shares 1 CENTER BANCORP, INC. INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Statements of Condition at September 30, 2002(Unaudited) and December 31, 2001 3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2002 and 2001(Unaudited) 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001(Unaudited) 5 Notes to the Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Qualitative and Quantitative Disclosures about Market Risks 23 Item 4. Controls and Procedures 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 6. Exhibits 24 Signature 24 Certifications 25-28 Exhibit Index 29 Exhibits 30-31 2 Center Bancorp, Inc. Consolidated Statements of Condition
September 30, December 31, (Dollars in thousands) 2002 2001 --------------- --------------- (unaudited) Assets: Cash and due from banks $ 19,351 $ 29,668 Investment securities held to maturity (approximate market value of $227,328 in 2002 and $205,604 in 2001) 220,730 205,237 Investment securities available-for-sale 263,440 212,037 --------------- --------------- Total investment securities 484,170 417,274 --------------- --------------- Loans, net of unearned income 226,656 211,236 Less - Allowance for loan losses 2,381 2,191 --------------- --------------- Net loans 224,275 209,045 --------------- --------------- Premises and equipment, net 12,582 11,685 Accrued interest receivable 5,078 4,542 Bank owned separate account life insurance 13,946 13,382 Other assets 1,974 1,916 Goodwill 2,091 2,091 --------------- --------------- Total assets $ 763,467 $ 689,603 =============== =============== Liabilities Deposits: Non-interest bearing $ 110,437 $ 103,520 Interest bearing: Certificates of deposit $100,000 and over 30,862 23,371 Savings and time deposits 409,246 370,942 --------------- --------------- Total deposits 550,545 497,833 --------------- --------------- Federal funds purchased and securities sold under agreements to repurchase 81,494 72,296 Federal Home Loan Bank advances 65,000 60,000 Corporation - obligated mandatorily redeemable trust preferred securities of subisidary trust holding solely junior subordinated debentures of the Corporation 10,000 10,000 Accounts payable and accrued liabilities 6,392 5,178 --------------- --------------- Total liabilities 713,431 645,307 --------------- --------------- Stockholders' equity Preferred stock, no par value, authorized 5,000,000 shares; none issued 0 0 Common stock, no par value: Authorized 20,000,000 shares; issued 4,745,267 and 4,718,229 shares in 2002 and 2001, respectively 18,893 14,677 Additional paid in capital 4,392 4,180 Retained earnings 28,792 28,569 Treasury stock at cost (540,202 and 573,181 shares in 2002 and 2001, respectively) (4,129) (4,115) Restricted stock (28) (135) Accumulated other comprehensive income 2,116 1,120 --------------- --------------- Total stockholders' equity 50,036 44,296 --------------- --------------- Total liabilities and stockholders' equity $ 763,467 $ 689,603 =============== ===============
All common share and per share amounts have been restated to reflect the 5% common stock dividend distributed on June 1, 2002 to common stockholders of record May 17, 2002. See Accompanying Notes to Consolidated Financial Statements. 3 Center Bancorp, Inc. Consolidated Statements of Income (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, (Dollars in thousands, except per share data) 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Interest income: Interest and fees on loans $ 3,816 $ 3,912 $ 11,245 $ 11,512 Interest and dividends on investment securities: Taxable interest income 6,226 5,380 19,149 16,481 Nontaxable interest income 150 120 451 353 Interest on Federal funds sold and securities purchased under agreement to resell 50 26 59 331 ------------ ------------ ------------ ------------ Total interest income 10,242 9,438 30,904 28,677 ------------ ------------ ------------ ------------ Interest expense: Interest on certificates of deposit $100,000 or more 94 239 383 1,271 Interest on other deposits 2,350 2,228 6,706 7,258 Interest on borrowings 1,340 1,363 3,983 3,903 ------------ ------------ ------------ ------------ Total interest expense 3,784 3,830 11,072 12,432 ------------ ------------ ------------ ------------ Net interest income 6,458 5,608 19,832 16,245 ------------ ------------ ------------ ------------ Provision for loan losses 90 256 270 514 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 6,368 5,352 19,562 15,731 ------------ ------------ ------------ ------------ Other income: Service charges, commissions and fees 409 391 1,183 1,178 Bank Owned Life Insurance 193 143 564 226 Other income 114 67 279 258 Gain on securities sold 203 28 445 180 ------------ ------------ ------------ ------------ Total other income 919 629 2,471 1,842 ------------ ------------ ------------ ------------ Other expense: Salaries and employee benefits 2,373 1,959 6,955 5,665 Occupancy expense, net 395 364 1,233 1,168 Premises and equipment expense 388 390 1,172 1,058 Stationery and printing expense 115 107 419 334 Marketing and advertising 122 92 478 350 Other expenses 792 849 2,600 2,549 ------------ ------------ ------------ ------------ Total other expense 4,185 3,761 12,857 11,124 ------------ ------------ ------------ ------------ Income before income tax expense 3,102 2,220 9,176 6,449 Income tax expense 998 725 2,950 2,199 ------------ ------------ ------------ ------------ Net income $ 2,104 $ 1,495 $ 6,226 $ 4,250 ============ ============ ============ ============ Earnings per share Basic $ 0.50 $ 0.36 $ 1.48 $ 1.03 Diluted $ 0.50 $ 0.36 $ 1.47 $ 1.02 ============ ============ ============ ============ Average weighted common shares outstanding Basic 4,212,865 4,141,860 4,194,624 4,130,797 Diluted 4,244,384 4,179,733 4,227,768 4,165,917 ============ ============ ============ ============
All common share and per share amounts have been restated to reflect the 5% common stock dividend distributed on June 1, 2002 to common stockholders of record May 17, 2002. See Accompanying Notes to Consolidated Financial Statements. 4 Center Bancorp, Inc. Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30 ----------------------------------- (Dollars in thousands) 2002 2001 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,226 $ 4,250 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,256 1,387 Provision for loan losses 270 514 Gain on sale of investment securities available-for-sale (445) (180) Proceeds from sale of other real estate owned 0 45 (Increase) Decrease in accrued interest receivable (536) 718 Loss on sale of other real estate owned 0 4 Increase in other assets (58) (164) Increase in cash surrender value of Bank Owned Life Insurance (564) (226) Increase in other liabilities 1,214 2,775 Amortization of premium and (accretion) of discount on investment securities, net 966 (52) --------------- --------------- Net cash provided by operating activities 8,329 9,071 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available-for-sale 147,379 66,071 Proceeds from redemption of FHLB stock 2,860 460 Proceeds from maturities of securities held-to-maturity 72,018 71,848 Proceeds from sales of securities available-for-sale 38,667 27,659 Purchase of securities available-for-sale (228,957) (125,784) Purchase of securities held-to-maturity (95,427) (56,552) Purchase of FHLB/FRB Stock (2,960) 0 Net increase in loans (15,500) (12,980) Property and equipment expenditures, net (2,153) (1,995) Purchase of bank owned life insurance 0 (10,000) --------------- --------------- Net cash used in investing activities (84,073) (41,273) =============== =============== CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 52,712 4,023 Dividends paid (2,033) (1,744) Proceeds from issuance of common stock 876 493 Repurchase of Treasury stock (326) 0 Net increase in borrowing 14,198 24,669 --------------- --------------- Net cash provided by financing activities 65,427 27,441 --------------- --------------- Net decrease in cash and cash equivalents (10,317) (4,761) --------------- --------------- Cash and cash equivalents at beginning of period $ 29,668 $ 22,274 --------------- --------------- Cash and cash equivalents at end of period $ 19,351 $ 17,513 =============== =============== Supplemental disclosures of cash flow information: Interest paid on deposits and short-term borrowings $ 10,997 $ 12,404 Income taxes $ 3,410 $ 2,199
See Accompanying Notes to Consolidated Financial Statements. 5 Notes to Consolidated Financial Statements Note I 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 subsidiaries, Union Center National Bank (the "Bank") and Center Bancorp Statutory Trust I. 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 condition and results of operations for the interim periods have been made. Such adjustments are of a normal recurring nature. Certain reclassifications have been made for 2001 to conform to the classifications presented in 2002. Results for the period ended September 30, 2002 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, 2001 for information regarding accounting principles. Note 2 Recent Accounting Pronouncements SFAS No. 141 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 September 30, 2001 as well as all purchase method business combinations completed after September 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. Statement 142 requires 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 requires 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. The Corporation had no business combinations subsequent to September 30, 2001, and therefore the implementation of this Statement 141 did not have an impact on the Corporation. 6 SFAS NO. 142 Upon adoption of Statement 142, the Corporation is required to evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination. In addition, the Corporation is 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. To the extent an intangible asset is identified as having an indefinite useful life, the Corporation is required to test the tangible 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 requires the Corporation to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. The Corporation will then have up to nine months from the date of adoption to determine the fair value of goodwill and compare it to the carrying amount. To the extent that the goodwill carrying amount exceeds its fair value, an indication exits that the 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 goodwill, determined by allocating the fair value to all of its 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. As of December 31, 2001, the Corporation had $2.1 million in unamortized goodwill with annual amortization of $323,000, which ceased upon the adoption of SFAS No. 142, "Goodwill and Intangible Assets". The Corporation adopted SFAS No. 142 on January 1, 2002. Accordingly, the September 30, 2002 Financial Statements do not include amortization of goodwill. For the three and nine months ended September 30, 2001, amortization of goodwill totaled $81,000 and $243,000, respectively. If SFAS No. 142 had been adopted on January 1, 2001, net income for the three and nine months ended September 30, 2001 would have increased $81,000 and $243,000, respectively. Accordingly, basic and diluted earnings per share would have increased $.02 and $.06 for the three and nine months ended September 30, 2001, respectively. SFAS NO. 144 On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", it retains many of the fundamental provisions of that Statement. The Statement is effective for fiscal years beginning after December 15, 2001. The initial adoption of SFAS No. 144 did not have a significant impact on the Corporation's consolidated financial statements. SFAS No. 145 In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64 Amendment of FASB Statement No. 13, and Technical Corrections. The Statement was issued to eliminate an inconsistency in the required accounting for sale-leaseback transactions and certain lease modifications that were similar to sale-leaseback transactions and to rescind FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers as well as amending other existing authoritative pronouncements to make various technical corrections. SFAS No. 145 also rescinds SFAS No. 4 Reporting Gains and Losses from Extinguishments of Debt and SFAS No. 64 Extinguishments of Debt Made to Satisfy Sinking Fund Requirements. Under SFAS No. 4, as amended by SFAS No. 64, gains and losses from the extinguishment of debt were required to be classified as an extraordinary item, if material. Under SFAS No. 145, gains or losses from the extinguishment of debt are to be classified as a component of operating income, rather than an extraordinary item. SFAS No. 145 is effective for fiscal years beginning after May 16, 2002, with early adoption of the provisions related to the rescission of SFAS No. 4 encouraged. Upon adoption, companies must reclassify prior period amounts previously classified as an extraordinary item. Management does not anticipate that the initial adoption of SFAS 145 will have a significant impact on the Corporation's consolidated financial statements. 7 SFAS No. 146 In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The standard requires companies to recognize cost associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. SFAS No. 147 In October, 2002, the FASB issued Statement No. 147, Acquisitions of Certain Financial Institutions- an amendment to FASB Statements No. 72 and 144 and FASB Interpretation No. 9. This Statement removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. The provisions of Statement No. 147 that relate to the application of the purchase method of accounting apply to all acquisitions of financial institutions, except transactions between two or more mutual enterprises. Statement No. 147 clarifies that a branch acquisition that meets the definition of a business should be accounted for as a business combination, otherwise the transaction should be accounted for as an acquisition of net assets that does not result in the recognition of goodwill. The provisions of Statement No. 147 are effective October 1, 2002. This Statement will not have any impact on the Corporation's consolidated financial statements. Note 3 A summary of comprehensive income follows.
Comprehensive Income Three Months Nine Months (In thousands) Ended September 30, Ended September 30, --------------------------- --------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net Income $ 2,104 $ 1,495 $ 6,226 $ 4,250 Other comprehensive income Unrealized holding gains arising during the period, net of taxes 104 1,040 1,290 2,128 Less reclassification adjustment for (gains) losses included in net income (net of tax benefit) (134) (18) (294) (119) ------------ ------------ ------------ ------------ Total other comprehensive income (30) 1,022 996 2,009 ------------ ------------ ------------ ------------ Total comprehensive income $ 2,074 $ 2,517 $ 7,222 $ 6,259 ============ ============ ============ ============
Note 4 The following is a reconciliation of the calculation of basic and diluted earnings per share.
Three Months Nine Months (In thousands, except per share data) Ended September 30, Ended September 30, --------------------------- --------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net Income $ 2,104 $ 1,495 $ 6,226 $ 4,250 Weighted Average Shares 4,213 4,142 4,195 4,131 Effect of Dilutive Stock Options 31 38 33 35 ------------ ------------ ------------ ------------ Total Weighted Average Dilutive Shares 4,244 4,180 4,228 4,166 ------------ ------------ ------------ ------------ Basic Earnings per Share $ 0.50 $ 0.36 $ 1.48 $ 1.03 ------------ ------------ ------------ ------------ Diluted Earnings per Share $ 0.50 $ 0.36 $ 1.47 $ 1.02 ============ ============ ============ ============
All common share and per share amounts have been restated to reflect the 5% common stock dividend distributed on June 1, 2002 to common stockholders of record May 17, 2002. 8 Management's Discussion & Analysis of Financial Condition and Results of Operations Net income for the nine months ended September 30, 2002 amounted to $6,226,000 compared to $4,250,000 earned for the comparable nine-month period ended September 30, 2001. On a per diluted share basis, earnings increased to $1.47 per share as compared with $1.02 per share for the nine-months ended September 30, 2001. All common stock per share amounts have been restated to reflect the 5% common stock dividend declared April 16, 2002, and distributed June 1, 2002. The annualized return on average assets increased to 1.13 percent compared with ..96 percent for the comparable nine-month period in 2001. The annualized return on average stockholders' equity was 17.37 percent for the nine month period ended September 30, 2002 as compared to 13.50 percent for the nine-months ended September 30, 2001. Earnings performance for the first nine months of 2002 primarily reflects a higher level of net interest income and increased non-interest income, offsetting increased non-interest expense and income tax expense. Net income for the three months ended September 30, 2002 amounted to $2,104,000 as compared to $1,495,000 earned for the comparable three-month period ended September 30, 2001. On a per diluted share basis, earnings increased to $0.50 per share as compared with $.36 per share for the three months ended September 30, 2001. The annualized return on average assets increased to 1.12 percent compared with .99 percent for the comparable three-month period in 2001. The annualized return on average stockholders' equity was 16.89 percent for the three-month period ended September 30, 2002 as compared to 13.73 percent for the three-months ended September 30, 2001. Earnings performance for the third quarter of 2002 primarily reflects a higher level of net interest income and increased non-interest income, offsetting increased non-interest expense and income tax 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 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 and then in accordance with the Corporation's consolidated financial statements.
Net Interest Income (dollars in thousands) Three Months Ended Nine Months Ended September 30, Percent September 30, Percent 2002 2001 Change 2002 2001 Change ------------ ------------ ------------ ------------ ------------ ------------ Interest income: (Tax-equivalent basis): Investments $ 6,453 $ 5,562 16.0 $ 19,832 $ 17,016 16.5 Loans, including fees 3,816 3,912 (2.5) 11,245 11,512 (2.3) Federal funds sold and securities sold under agreements to repurchase 50 26 92.3 59 331 (82.2) ------------ ------------ ------------ ------------ ------------ ------------ Total interest income 10,319 9,500 8.6 31,136 28,859 7.9 ------------ ------------ ------------ ------------ ------------ ------------ Interest expense: Certificates $100,000 or more 94 239 (60.7) 383 1,271 69.9 Savings and Time Deposits 2,350 2,228 5.5 6,706 7,258 7.6 FHLB advances 849 841 1.0 2,503 2,495 0.3 Short-term borrowings 491 522 (5.9) 1,480 1,408 5.1 ------------ ------------ ------------ ------------ ------------ ------------ Total interest expense 3,784 3,830 (1.2) 11,072 12,432 (10.9) ------------ ------------ ------------ ------------ ------------ ------------ Net interest income *tax-equivalent basis 6,535 5,670 15.3 20,064 16,427 22.1 ============ ============ ============ ============ ============ ============ Tax-equivalent adjustment (77) (62) 24.2 (232) (182) 27.5 Net interest income $ 6,458 $ 5,608 15.2 $ 19,832 $ 16,245 22.1 ============ ============ ============ ============ ============ ============
*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. 9 Net interest income on a fully tax-equivalent basis increased $3,637,000 or 22.1 percent to approximately $20.064 million for the nine months ended September 30, 2002, from $16.427 million for the comparable period in 2001. For the nine months ended September 30, 2002, the net interest margin decreased 6 basis points to 3.92 percent from 3.98 percent due primarily to an increase in the volume of interest earning assets and the lower yield on interest-earning assets offset by the lower cost of funds on interest-bearing liabilities. Net interest income on a fully tax-equivalent basis increased $865,000 or 15.3 percent to $6.535 million for the three months ended September 30, 2002, from $5.670 million for the comparable period in 2001. For the three months ended September 30, 2002, the net interest margin decreased 34 basis points to 3.74 percent from 4.08 percent due primarily to an increase in the volume of interest-earning assets and the lower yield on interest-earning assets offset by the lower cost of funds on interest-bearing liabilities. Interest income on a fully-tax-equivalent basis for the nine-month period ended September 30, 2002 increased by $2.277 million or 7.9 percent, versus the comparable period ended September 30, 2001. The primary increase resulted from the growth of earning assets, primarily investment securities. This was partially offset by a decrease in interest income attributable to loans of $267,000, reflecting reduced yields on loans. The growth in earning assets was funded primarily through increased levels of money market, savings deposits, borrowings and the issuance of mandatorily redeemable trust preferred securities. For the three-month period ended September 30, 2002 interest income on a tax-equivalent basis increased by $819,000 or 8.6 percent over the comparable three-month period in 2001. The primary increase resulted from the growth of earning assets, primarily investment securities. This was partially offset by a decrease in interest income attributable to loans of $96,000, reflecting reduced yields on loans. The growth in earning assets was funded primarily through increased levels of money market, savings deposits, borrowings and the issuance of mandatorily redeemable trust preferred securities. The factors underlying the year-to year changes in net interest income are reflected in the tables appearing on pages 9, 11,12 and 13, each of which has been presented on a tax-equivalent basis (assuming a 34.0 percent tax rates). The table on page 12 (Average Balance Sheet with Interest and Average Rates) shows the Corporation's consolidated average balance of assets, liabilities, and stockholders' equity, the amount of income produced from interest-earning assets and the amount of expense resulting from interest-bearing liabilities and net interest income as a percentage of average interest-earning assets. The table presented on page 11 (Analysis of Variance in Net Interest Income Due to Volume and Rates) quantifies the impact on net interest income resulting from changes in average balances and average rates over the past three months and nine months; any change in interest income or expense attributable to both changes in volume and changes in rate has been allocated in proportion to the relationship of the absolute dollar amount of change in each category. Average Federal funds sold and securities purchased under agreements to resell decreased for the nine month period in 2002, but increased for the three month period in 2002 compared to 2001. For the nine months ended September 30, 2002 the decrease amounted to approximately $4.4 million. For the three months ended September 30, 2002 the increase amounted to approximately $8.5 million. For both the three and nine-month periods the Corporation elected to invest additional monies in overnight institutional money market funds, which are part of the investment portfolio, versus Federal funds or repurchase agreements due to more favorable rates available for liquid overnight funds. Interest expense for the nine months ended September 30, 2002 decreased $1.360 million or 10.9 percent from the comparable nine-month period ended September 30, 2001, as a result of a decline in rates despite higher average volumes of lower cost interest-bearing liabilities and borrowings. A $3.7 million decrease in interest expense attributable to decreased rates brought about by the actions of the Federal Reserve in lowering interest rates was offset in part by $2.4 million increases in interest expense attributable to volume related factors. Interest expense for the three months ended September 30, 2002 decreased $46,000 or 1.2 percent from the comparable three-month period ended September 30, 2001, as a result of a decline in interest rates despite higher average volumes of lower cost interest-bearing liabilities and borrowings. A $935,000 decrease in interest expense attributable to decreased rates brought about by the actions of the Federal Reserve in lowering interest rates was offset in part by an $889,000 increase in interest expense attributable to volume related factors. 10 For both the three and nine month periods ended September 30, 2002, short-term interest rates have decreased compared to 2001, as a result of monetary policy promulgated by the Federal Reserve Open Market Committee. The Fed has lowered the Federal Funds target rate on August 21, September 17, October 2, November 6 and December 11, 2001. Since September 2001 the Federal Funds rate has fallen 175 basis points. For the nine months ended September 30, 2002, 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) increased to 3.50 percent from 3.32 percent for the nine months ended September 30, 2001. The increase reflected a widening of spreads between yields earned on loans and investments and rates paid for supporting funds. Net interest margins expanded due in part to a decline in interest rates, despite the increased volumes of interest-bearing checking, money market and savings deposits in addition to short-term borrowings. The Federal Reserve left the target Federal Funds rate at a 40-year low of 1.75 percent during the nine months ended September 30, 2002, as compared to the same period in 2001, when the Federal Reserve lowered interest rates eight times. Although the yield on interest-earning assets declined to 6.08 percent from 7.00 percent in 2001 (a change of 92 basis points), this change was offset by lower rates paid for interest-bearing liabilities coupled with a change in the mix of interest-bearing liabilities. The total cost of interest-bearing liabilities decreased to 2.58 percent, a change of 110 basis points, for the nine months ended September 30, 2002 from 3.68 percent for the nine months ended September 30, 2001. For the three months ended September 30, 2002, the Corporation's net interest spread on a tax-equivalent basis decreased to 3.31 percent from 3.47 percent for the three months ended September 30, 2001. The decrease reflected a narrowing of spreads between yields earned on loans and investments and rates paid for supporting funds. Net interest margins contracted due in part to the current low interest environment and decline in market interest rates; other related factors contributing to the overall cost of supporting liabilities in the third quarter were increased volumes of interest-bearing checking, money market and savings deposits in addition to short-term borrowings. The Federal Reserve left the target Federal Funds rate at a 40-year low of 1.75 percent during the three-months ended September 30, 2002, as compared to the same period in 2001, when the Federal Reserve lowered interest rates two times. Although the yield on interest-earning assets declined to 5.90 percent from 6.83 percent in 2001 (a change of 93 basis points), this change was substantially offset by lower rates paid for interest-bearing liabilities coupled with a change in the mix of interest-bearing liabilities. The total cost of interest-bearing liabilities decreased to 2.59 percent or 77 basis points, for the three months ended September 30, 2002 from 3.36 percent for the three months ended September 30, 2001. The trend is primarily due to the previously referenced change in the mix and decrease in rates paid on certain interest-bearing liabilities. The decrease in these funding costs continues to change disproportionately to the rates on new loans and investments. 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)
(dollars in thousands) Three Months Ended 9/30/02 Nine Months Ended 9/30/02 2002/2001 Increase/(Decrease) 2002/2001 Increase/(Decrease) Due to Change in: Due to Change in: ------------------------------------------ ------------------------------------------ Average Average Net Average Average Net Interest-earning assets Volume Rate Change Volume Rate Change ------------ ------------ ------------ ------------ ------------ ------------ Investment Securities Taxable $ 1,672 $ (826) $ 846 $ 5,313 $ (2,645) $ 2,668 Non-taxable 44 1 45 149 (1) 148 Federal funds sold and securities purchased under agreement to resell 11 13 24 (117) (155) (272) Loans, net of unearned discount 324 (420) (96) 910 (1,177) (267) ------------ ------------ ------------ ------------ ------------ ------------ Total interest-earning assets $ 2,051 $ (1,232) $ 819 $ 6,255 $ (3,978) $ 2,277 ============ ============ ============ ============ ============ ============ Interest-bearing liabilities: Money Market deposits $ 76 $ (148) $ (72) $ 348 $ (560) $ (212) Savings deposits 213 (481) (268) 804 (1,010) (206) Time deposits 390 (84) 306 319 (1,436) (1,117) Other interest-bearing deposits 36 (25) 11 182 (87) 95 Borrowings 174 (337) (163) 720 (1,060) (340) Trust Preferred 0 140 140 0 420 420 ------------ ------------ ------------ ------------ ------------ ------------ Total interest-bearing liabilities $ 889 $ (935) $ (46) $ 2,373 $ (3,733) $ (1,360) ============ ============ ============ ============ ============ ============ Change in net interest income $ 1,162 $ (297) $ 865 $ 3,882 $ (245) $ 3,637 ============ ============ ============ ============ ============ ============
11 The following table, "Average Balance Sheet with Interest and Average Rates", presents for the three months ended September 30, 2002 and 2001 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, --------------------------------------------------------------------------------------- 2002 2001 ------------------------------------------ ------------------------------------------ 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 $ 446,434 $ 6,226 5.58% $ 331,884 $ 5,380 6.48% Non-taxable 13,020 227 6.97% 10,518 182 6.92% Federal funds sold and securities purchased under agreement to resell 11,583 50 1.73% 3,103 26 3.35% Loans, net of unearned income (2) 228,764 3,816 6.67% 210,472 3,912 7.43% ------------ ------------ ------------ ------------ ------------ ------------ Total interest-earning assets 699,801 10,319 5.90% 555,977 9,500 6.83% ------------ ------------ ------------ ------------ ------------ ------------ Non-interest earning assets Cash and due from banks 18,107 17,264 Bank Owned Life Insurance 13,831 10,132 Other assets 24,889 19,829 Allowance for possible loan losses (2,368) (1,922) ------------ ------------ Total non-interest earning assets 54,459 45,303 ------------ ------------ Total assets $ 754,260 $ 601,280 ============ ============ Liabilities and stockholders' equity Interest-bearing liabilities: Money Market deposits $ 90,362 $ 440 1.95% $ 77,594 $ 512 2.64% Savings deposits 157,546 587 1.49% 120,646 855 2.83% Time deposits 128,624 1,266 3.94% 89,564 960 4.29% Other interest bearing deposits 59,431 151 1.02% 46,192 140 1.21% Borrowings 139,459 1,200 3.44% 122,323 1,363 4.46% Trust Preferred 10,000 140 5.60% 0 0 0.00% ------------ ------------ ------------ ------------ ------------ ------------ Total interest-bearing liabilities 585,422 3,784 2.59% 456,319 3,830 3.36% ------------ ------------ ------------ ------------ ------------ ------------ Noninterest-bearing liabilities: Demand deposits 111,858 95,358 Other noninterest-bearing deposits 684 514 Other liabilities 6,472 5,520 ------------ ------------ Total noninterest-bearing liabilities 119,014 101,392 Stockholders' equity 49,824 43,569 ------------ ------------ Total liabilities and stockholders' equity $ 754,260 $ 601,280 ============ ============ Net interest income (tax-equivalent basis) $ 6,535 $ 5,670 ------------ ------------ Net Interest Spread 3.31% 3.47% ------------ ------------ Net interest income as percent of earning-assets 3.74% 4.08% ------------ ------------ Tax equivalent adjustment (3) (77) (62) ------------ ------------ Net interest income $ 6,458 $ 5,608 ------------ ------------
(1) Average balances for available-for-sale securities are based on amortized cost (2) Average balances for loans include loans on non-accrual status (3) The tax-equivalent adjustment was computed based on a statutory Federal income tax rate of 34 percent. 12 The following table, "Average Balance Sheet with Interest and Average Rates", presents for the nine months ended September 30, 2002 and 2001 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, --------------------------------------------------------------------------------------- 2002 2001 ------------------------------------------ ------------------------------------------ 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 $ 443,427 $ 19,149 5.76% $ 326,139 $ 16,481 6.74% Non-taxable 13,053 683 6.98% 10,197 535 7.00% Federal funds sold and securities purchased under agreement to resell 4,565 59 1.72% 8,995 331 4.91% Loans, net of unearned income (2) 221,614 11,245 6.77% 204,671 11,512 7.50% ------------ ------------ ------------ ------------ ------------ ------------ Total interest-earning assets 682,659 31,136 6.08% 550,002 28,859 7.00% ------------ ------------ ------------ ------------ ------------ ------------ Non-interest earning assets Cash and due from banks 18,293 17,284 Bank Owned Life Insurance 13,641 5,268 Other assets 23,771 20,255 Allowance for possible loan losses (2,296) (1,772) ------------ ------------ Total non-interest earning assets 53,409 41,035 ------------ ------------ Total assets $ 736,068 $ 591,037 ============ ============ Liabilities and stockholders' equity Interest-bearing liabilities: Money Market deposits $ 96,805 1,420 1.96% $ 77,643 1,632 2.80% Savings deposits 156,854 2,513 2.14% 115,718 2,719 3.13% Time deposits 110,677 2,592 3.12% 101,267 3,709 4.88% Other interest bearing deposits 64,480 564 1.17% 44,774 469 1.40% Borrowings 133,518 3,563 3.56% 110,542 3,903 4.71% Trust Preferred 10,000 420 5.60% 0 0 0.00% ------------ ------------ ------------ ------------ ------------ ------------ Total interest-bearing liabilities 572,334 11,072 2.58% 449,944 12,432 3.68% ------------ ------------ ------------ ------------ ------------ ------------ Noninterest-bearing liabilities: Demand deposits 109,331 93,922 Other noninterest-bearing deposits 569 552 Other liabilities 6,035 4,652 ------------ ------------ Total noninterest-bearing liabilities 115,935 99,126 Stockholders' equity 47,799 41,967 ------------ ------------ Total liabilities and stockholders' equity $ 736,068 $ 591,037 ============ ============ Net interest income (tax-equivalent basis) $ 20,064 $ 16,427 ------------ ------------ Net Interest Spread 3.50% 3.32% ------------ ------------ Net interest income as percent of earning-assets 3.92% 3.98% ------------ ------------ Tax equivalent adjustment (3) (232) (182) ------------ ------------ ------------ ------------ Net interest income $ 19,832 $ 16,245 ------------ ------------
(1) Average balances for available-for-sale securities are based on amortized cost (2) Average balances for loans include loans on non-accrual status (3) The tax-equivalent adjustment was computed based on a statutory Federal income tax rate of 34 percent 13 Investments For the nine months ended September 30, 2002, the average volume of investment securities increased to approximately $456.5 million, or 66.9 percent of average earning assets, an increase of $120.1 million on average as compared to the same period in 2001. The tax-equivalent yield on investments decreased by 96 basis points to 5.79 percent from a yield of 6.75 percent during the nine month period ended September 30, 2001. The 96 basis points decline in yield on the portfolio was attributable to lower rates, which unfavorably affected the yield on the additional volume added to the portfolio, as well as, purchases made to replace maturing and called investments. The increased size of the investment portfolio for both the nine and three months ended September 30, 2002 largely reflects the Corporation's leverage strategies, which were implemented in the fourth quarter of 2001. For the three months ended September 30, 2002, the average volume of investment securities increased to approximately $459.5 million, or 65.7 percent of average earning assets, an increase of $117.1 million on average as compared to the same period in 2001. The tax-equivalent yield on investments decreased by 88 basis points to 5.62 percent from a yield of 6.50 percent during the three month period ended September 30, 2002. The increased volume represents both securities added to the portfolio coupled with purchases made to replace maturing and called investments made at lower rates. At September 30, 2002, the principal components of the investment portfolio are U.S. Government Federal Agency callable and non-callable securities, including agency issued collateralized mortgage obligations, corporate securities and municipals. The impact of repricing activity on investment yields was increased to some extent, for both the three and nine month periods ended September 30, 2002, by the change in portfolio mix and shortening of portfolio duration. The Corporation also carried on average $22.9 million and $18.4 million, in short-term institutional money market funds as compared with $23.3 million and $11.5 million for the comparable three and nine month periods in 2001, respectively. These funds carried significantly lower rates than other securities in the portfolio (on average 1.84 percent and 1.92 percent for the three and nine month periods, respectively, compared to 3.49 percent and 4.76 percent earned on these overnight funds for the comparable period in 2001) and contributed to the decline in yield as compared to the comparable periods in 2001. The increased volume of such overnight funds for the nine month periods was for liquidity purposes. Securities available-for-sale is a part of the Corporation's interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. For the three and nine-month period ended September 30, 2002 the Corporation sold from its available-for-sale portfolio securities totaling approximately $4.2 million and $38.7 million, respectively. At September 30, 2002 the net unrealized gain carried as a component of other comprehensive income and included in shareholders' equity net of tax amounted to a net unrealized gain of $2.116 million as compared with an unrealized gain of $1.120 million at December 31, 2001 and an unrealized gain of $2.349 million at September 30, 2001, resulting from a decline in interest rates fostered by the Federal Open Market Committee's actions to lower the Federal Funds target rate as an economic stimulus. Loans Loan growth during the nine months ended September 30, 2002 occurred primarily in the residential 1-4 family and commercial, construction and commercial real estate 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 decrease in the loan portfolio yields for the three and nine month periods was the result of the decline in interest rates as compared with the comparable period in 2001, coupled with a 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. Analyzing the loan portfolio for the nine-months ended September 30, 2002, average loan volume increased $16.9 million or 8.3 percent, while portfolio yield decreased by 73 basis points as compared with the same period in 2001. The volume related factors during the period contributed increased revenue of $910,000 while rate related changes resulted in a decline in interest income of $1,177,000. Total average loan volume increased to $221.614 million with a net interest yield of 6.77 percent, as compared to $204.671 million with a yield of 7.50 percent for the nine months ended September 30, 2001. 14 For the three months ended September 30, 2002, average loan volume increased $18.3 million or 8.7 percent, while portfolio yield decreased by 76 basis points as compared with the same period in 2001. The volume related factors during the period contributed increased revenue of $324,000 while rate related changes resulted in a decline in revenue of $420,000. Total average loan volume increased to $228.764 million with a net interest yield of 6.67 percent, as compared to $210.472 million with a yield of 7.43 percent for the three months ended September 30, 2002. 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. The amount of the loan loss provision and the level of the allowance for loan losses are critical accounting policies of the Corporation. 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, a review of peer group loss experience and an analysis of the levels and trends of loan categories, delinquencies, and problem loans are considered. Such factors as the level and trend of interest rates and current economic conditions are also reviewed. At September 30, 2002, the allowance amounted to $2,381,000 as compared to $2,191,000 at December 31, 2001, and $2,119,000 at September 30, 2001. The Corporation made a provision to the allowance for loan losses during the three and nine month periods ended September 30, 2002 amounting to $90,000 and $270,000, respectively, compared to $256,000 and $514,000 during the three and nine month periods ended September 30, 2001, respectively. The additions to the provision during the three and nine month periods discussed was commensurate with the loan volume recorded during the respective periods and increased focus on the changing composition of the commercial and residential real estate loan portfolios. At September 30, 2002, the allowance for loan losses amounted to 1.05 percent of total loans, as compared with 1.00 percent at September 30, 2001. In management's view, the level of the allowance as of September 30, 2002 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 Statement" under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management's analysis, based principally upon the factors considered by management in establishing the allowance. Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term changes. 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. Future adjustments to the allowance may be necessary due to economic, operating, regulatory, and other conditions beyond the Corporation's control. To the extent actual results differ from forecasts or management's judgment the allowance for loan losses may be greater or less than future charge-offs. During the three and nine-month periods ended September 30, 2002 and 2001, the Corporation did not experience any substantial credit problems within its loan portfolio. For the nine months ended September 30, 2002, net charge-offs were approximately $80,000 and were comprised of a commercial and installment loans. On October 11, 2002, the corporation recovered $48,186.32 representing the full amount of the commercial loan charge-off. The Corporation had total charge-offs of $50,000 for the comparable period in 2001, comprised of installment loans. At September 30, 2002 the Corporation had non-accrual loans amounting to $233,000 as compared with $109,000 at December 31, 2001 and $311,000 at September 30, 2001. The Corporation continues to aggressively pursue collections of principal and interest on loans previously charged-off. The increase in such loans in 2002 was attributable to a $139,900 fixed rate home equity loan. 15 The value of impaired loans is based on the present value of expected future cash flows discounted at the loan's effective interest rate or as a practical expedient, at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependant. Impaired loans consist of non-accrual loans and loans internally classified as substandard or below, in each instance above an established dollar threshold of $200,000. All loans below the established dollar threshold are considered homogenous and are collectively evaluated for impairment. At September 30, 2002, total impaired loans were approximately $2,234,000 compared to $1,859,000 at December 31, 2001 and $1,985,000 at September 30, 2001. Although classified as substandard, impaired loans (other than those in non-accrual status) were current with respect to principal and interest payments. Changes in the allowance for possible loan losses for the nine-month periods ended September 30, 2002 and 2001, respectively, are set forth below. Allowance for loan losses (Dollars in thousands)
Nine Months Ended September 30, 2002 2001 --------------- --------------- Average loans outstanding $ 221,614 $ 204,671 --------------- --------------- Total loans at end of period 226,656 211,879 --------------- --------------- Analysis of the allowance for loan losses Balance at the beginning of year 2,191 1,655 Charge-offs: Commercial 48 0 Real estate-mortgage 0 0 Installment loans 45 53 --------------- --------------- Total charge-offs 93 53 Recoveries: Commercial 0 0 Real estate-mortgage 0 0 Installment loans 13 3 --------------- --------------- Total recoveries 13 3 Net Charge-offs: 80 50 --------------- --------------- Provision for Loan Losses 270 514 =============== =============== Balance at end of period $ 2,381 $ 2,119 =============== =============== Ratio of net charge-offs during the period to average loans outstanding during the period 0.00036% 0.00024% --------------- --------------- Allowance for loan losses as a percentage of total loans 1.05% 1.00% --------------- ---------------
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. Accruing loans past due 90 days or more are generally well secured and in the process of collection. 16 At September 30, 2002, December 31, 2001 and September 30, 2001, the Corporation had no restructured loans. Non-accrual loans amounted to $233,000 at September 30, 2002, and were comprised of three home equity and two auto loans. At December 31, 2001, non-accrual loans amounted to $109,000 and were comprised of first and second lien residential mortgages. At September 30, 2001, non-accrual loans amounted to $311,000 and were comprised of first and second lien residential mortgages. At September 30, 2002 the Corporation did not have any loans 90 days past due and still accruing. Such loans amounted to $8,000 at December 31, 2001 and $107,000 at September 30, 2001. 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, 2002, December 31, 2001 and September 30, 2001, were as follows:
Non-Performing Assets At September 30, December 31, September 30, (Dollars in thousands) 2002 2000 2001 --------------- --------------- --------------- Loans past due 90 days and still accruing $ 0 $ 8 $ 107 Non-accrual loans 233 109 311 --------------- --------------- --------------- Total, non-performing loans $ 233 $ 117 $ 418 =============== =============== =============== Total Non-performing Assets $ 233 $ 117 $ 418 --------------- --------------- ---------------
At September 30, 2002, non-performing assets, consisting of loans on non-accrual status plus other real estate owned (OREO), amounted to $233,000 or .10 percent of total loans outstanding as compared to $109,000 or .05 percent at December 31, 2001 and $311,000 or .15 percent at September 30, 2001. At September 30, 2002, other than the loans set forth above, the Corporation is not aware of any loans which present serious doubts as to the ability of its borrowers to comply with the present loan and repayment terms and which are expected to fall into one of the categories set forth in the table above. At September 30, 2002, December 31, 2001 and September 30, 2001 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 nine month periods ended September 30, 2002 and 2001.
Three Months Ended Nine Months Ended (dollars in thousands) September 30, September 30, 2002 2001 % change 2002 2001 % change ------------ ------------ ------------ ------------ ------------ ------------ Other income: Service charges, commissions and fees $ 409 $ 391 4.6 $ 1,183 $ 1,178 0.4 Bank Owned Life Insurance 193 143 35.0 564 226 141.6 Other income 114 67 70.1 279 258 8.1 Net gains on securities sold 203 28 625.0 445 180 147.2 ------------ ------------ ------------ ------------ ------------ ------------ Total other income $ 919 $ 629 46.1 $ 2,471 $ 1,842 34.1 ============ ============ ============ ============ ============ ============
For the nine-month period ended September 30, 2002, total other (non-interest) income increased $629,000 or 34.1 percent as compared to the comparable nine-month period in September 2001. Other non-interest income, exclusive of gains on securities sold (which increased $265,000 or 147.2 percent), reflects an increase of $364,000 or 21.9 percent compared with the comparable nine-month period ended September 30, 2001. This increased revenue was primarily driven by the increase in the cash surrender value of bank owned life insurance, which amounted to $564,000 for the nine months ended September 30, 2002 as compared to $226,000 for the comparable period in 2001. Other income, excluding BOLI income and gains on securities sold and service charges, commission and fees, reflected an increase of $21,000 or 8.1 percent due primarily to higher letter of credit fees during the nine months ended September 30, 2002 as compared with the comparable period in 2001. 17 For the three month period ended September 30, 2002, total other (non-interest) income increased $290,000 or 46.1 percent as compared to the comparable three-month period in September 2001. Other non-interest income, exclusive of net gains on securities sold (which increased $175,000 or 625.0 percent), reflects an increase of $115,000 or 19.1 percent compared with the comparable three month period ended September 30, 2001. This increased revenue was primarily driven by the increase in the cash surrender value of bank owned life insurance, which amounted to $193,000 for the three months ended September 30, 2002 as compared to $143,000 for the comparable period in 2001. Other income, excluding BOLI income gains on securities sold and service charges, commission and fees, reflected an increase of $47,000 or 70.1 percent due primarily to higher loan servicing, loan fees and gains on sale of originated loans during the three months ended September 30, 2002 as compared with the comparable period in 2001. For the three and nine month periods ended September 30, 2002 the Corporation recorded net gains of $203,000 and $445,000 on securities sold from the available-for-sale investment portfolio compared to gains of $28,000 and $180,000 recorded in the 2001 comparable periods. These 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 nine month periods ended September 30, 2002 and 2001.
(dollars in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 % change 2002 2001 % change ------------ ------------ ------------ ------------ ------------ ------------ Other expense: Salaries and employee benefits $ 2,373 $ 1,959 21.1 $ 6,955 $ 5,665 22.8 Occupancy expense, net 395 364 8.5 1,233 1,168 5.6 Premise & equipment expense 388 390 (0.5) 1,172 1,058 10.8 Stationery and printing expense 115 107 7.5 419 334 25.4 Marketing & Advertising 122 92 32.6 478 350 36.6 Legal and Consulting 86 180 (52.2) 331 486 (31.9) Other expenses 706 669 5.5 2,269 2,063 10.0 ------------ ------------ ------------ ------------ ------------ ------------ Total other expense $ 4,185 $ 3,761 11.3 $ 12,857 $ 11,124 15.6 ============ ============ ============ ============ ============ ============
For the nine month period ended September 30, 2002 total other (non-interest) expenses increased $1.733 million or 15.6 percent over the comparable nine months ended September 30, 2001, with increased salary and benefit expense, Bank premise and equipment, stationary and printing and marketing and advertising accounting for most of the increase. Pursuant to SFAS No. 142 "Goodwill and Intangible Assets", there was no amortization expense in 2002. For the three and nine months ended September 30 2001, other expense included amortization expense of $81,000 and $242,000 respectively. The period-to-period increases in other operating expenses also include the costs of higher data processing and technology costs. For the three months ended September 30, 2002, total other (non-interest) expenses increased $424,000 or 11.3 percent over the comparable three-months ended September 30, 2001, with increased salary and benefit expense, and occupancy expense accounting for most of the increase. The levels of operating expenses during both the three and nine month periods of 2002 were 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 decreased to 2.33 percent in the first nine months of 2002 from 2.51 percent for the first nine months of 2001. The Corporation's efficiency ratio (defined as non-interest expenses divided by tax-equivalent net interest income plus recurring non-interest income) at September 30, 2002 was 58.2 percent compared to 61.5 percent at September 30, 2001. 18 Salaries and employee benefits increased $1.290 million or 22.8 percent in the nine months of 2002 over the comparable nine month period ended September 30, 2001. This increase is primarily attributable to normal merit increases, promotional raises and higher benefit costs and to the opening of the Town Hall banking center. Staffing levels overall increased to 180 full-time equivalent employees at September 30, 2002 compared to 168 full-time equivalent employees at September 30, 2001. For the three months ended September 30, 2002, salaries and benefits increased $414,000 or 21.1 percent. This increase is primarily attributable to higher staffing levels, as well as higher benefit costs. For the nine months ended September 30, 2002 occupancy and premises and equipment expense increased $179,000 or 8.0 percent over the comparable nine-month period in 2001. The increase in occupancy and Bank premise and equipment expenses reflects the expense associated with higher operating costs (utilities, rent, real-estate taxes and general repair and maintenance) of the Corporation's expanded facilities, as well as higher equipment and maintenance cost and depreciation expense of the expanded bank facilities. For the three months ended September 30, 2002, expenses increased $29,000 or 3.8 percent as compared with the comparable three month period in 2001. Stationery and printing expenses increased 25.4 percent or $85,000 for the nine months ended September 30, 2002 as compared with the comparable period in 2001, primarily attributable to the opening of the new Townhall banking Center in Morristown, increased account activity and the destruction of obsolete forms and supplies. Marketing and advertising expenses increased 36.6 percent or $128,000 for the nine months ended September 30, 2002, as compared with the comparable period in 2001, primarily attributable to the opening of the new Townhall Banking Center in Morristown and the promotion of deposit and loan products. For the three months ended September 30, 2002, marketing and advertising expenses increase 32.6 percent or $30,000 as compared to the prior year third quarter, primarily as a result of the advertising of loan products. Legal and consulting expense decreased $155,000 or 31.9 percent and $94,000 or 52.2 percent for the nine and three month periods ended September 30, 2002 compared to 2001 periods. The decrease in the expense category is attributable to a reduction in consulting expenses. Other expenses increased 10.0 percent or $206,000 for the nine months ended September 30, 2002 as compared with the comparable period in 2001, primarily correspondent fees, computer expense and communication expense. For the three months ended September 30, 2002, other expenses increased 5.5 percent or $37,000 as compared to the prior year third quarter. Provision for Income Taxes The Corporation's provision for income taxes increased from 2001 to 2002, primarily as a result of higher levels of taxable income. The effective tax rates for the Corporation for the periods ended September 30, 2002 and 2001 were 32.1 percent, and 34.1 percent, respectively. The effective tax rate continues to be less than the combined statutory Federal tax rate of 34 percent and the New Jersey State tax rate of 9 percent. The difference between the statutory and effective tax rates primarily reflects the tax deductions associated with, income from investments in tax-advantaged assess such as tax exempt securities and Bank Owned Life Insurance and disallowed expense items for tax purposes, such as travel and entertainment expense, as well as amortization of goodwill. Tax deductions associated with tax-advantaged assets increased by $436,000 or 75.3 percent from 2001 to 2002. The New Jersey legislature passed the New Jersey Business Tax Reform Act with new tax law changes to the Corporation Business Tax ("CBT") on July 2, 2002. Management has reviewed the implications of the new tax law, which are retroactively effective to January 1, 2002. The enactment of the new legislation will not have a material impact on the future tax liability and subsequent New Jersey Corporate Business Tax expense. 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. 19 Interest Sensitivity Market Risk "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. The low level of interest rates necessitated a modification of the Corporation's standard rate scenario of a shock down 200 basis points over 12 months to down 100 basis points over a 12 month period. Based on the results of the interest simulation model as of September 30, 2002 and assuming that Management does not take action to alter the outcome, the Corporation would expect a increase of 1.05 percent in net interest income if interest rates decreased 100 basis points from current rates in an immediate and parallel shock over a 12-month period. In a rising rate environment, based on the results of the model as of September 30,2002, the Corporation would expect a decrease of 5.46% in net interest income if interest rates increased 200 basis points from current rates in an immediate and parallel shock over a 12-month period. Short-term interest rate exposure analysis is supplemented with an interest sensitivity gap model. The Corporation utilizes interest sensitivity analysis to measure the responsiveness of net interest income to changes in interest rate levels. 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. 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. 20 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 September 30, 2002, the Corporation reflects a negative interest sensitivity gap (or an interest sensitivity ratio) of 1.07: at the cumulative one-year position. During 2001, the Corporation had a negative interest sensitivity gap. The maintenance of a liability-sensitive position during 2001 and for the nine-months ended September 30, 2002 had a favorable impact on the Corporation's net interest margins; based on management's perception that interest rates will continue to be volatile, emphasis has been, and is expected to continue to be, placed on interest-sensitivity matching with the objective of stabilizing the net interest spread during 2002. However, no assurance can be given that this objective will be met. 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 somewhat reduced. Management also maintains a detailed liquidity contingency plan designed to adequately respond to situations which could lead to liquidity concerns. Anticipated cash-flows at September 30, 2002, projected to October of 2003, indicate that the Bank's liquidity should remain strong, with an approximate projection of $312.9 million in 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 portion of its liquidity from its core deposit base. For the nine-month period ended September 30, 2002, core deposits (comprised of total demand, savings accounts (excluding Super Max) and money market accounts under $100,000 remained relatively stable and represented 49.0 percent of total deposits as compared with 54.1 percent at September 30, 2001. More volatile rate sensitive deposits, concentrated in time certificates of deposit greater than $100,000, for the nine-month period ended September 30, 2002, decreased to 5.6 percent of total deposits from 7.2 percent during the nine-months ended September 30, 2001. This change has resulted from a $121.2 million increase in total deposits for the nine-months ended September 30, 2002 compared to the prior year period. Short-term borrowings can be used to satisfy daily funding needs. Balances in these accounts fluctuate significantly on a day-to-day basis. The Corporation's principal short-term funding sources are securities sold under agreements to repurchase, advances from the Federal Home Loan Bank and Federal funds purchased. Average short-term borrowings during the nine-months ended September 30, 2002 were $133.5 million, an increase of $23.0 million or 20.8 percent from $110.5 million in average short-term borrowings during the comparable nine-months ended September 30, 2001. 21 During the nine-months ended September 30, 2002, average funding sources increased by approximately $137.8 million or 25.3 percent, compared to the same period in 2001. Interest-bearing deposit liabilities increased approximately $89.4 million on average and were comprised primarily of increases in savings deposits, money market and short-term borrowings and an increase in time deposits due to a deposit promotion. Non-interest bearing funding sources as a percentage of the total funding mix decreased to 16.1 percent on average as compared to 17.4 percent for the nine-month period ended September 30, 2001. This is primarily attributable to a more rapid growth in non-deposit funding sources as a percentage of the funding base as compared with overall deposit growth. 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, 2002, cash and cash equivalents (which decreased overall by $10.3 million) were provided (on a net basis) by financing activities (approximately $65.4 million) primarily due to an increase in deposits of $52.7 million coupled with a $14.2 million net increase in borrowings, and by operating activities ($8.3 million). Approximately $84.1 million was used in net investing activities; principally a $15.5 million increase in loans and a $66.4 million increase in the investment portfolio. Stockholders' Equity Total stockholders' equity averaged $47.8 million or 6.49 percent of average assets for the nine month period ended September 30, 2002, as compared to $42.0 million, or 7.11 percent, during the same period in 2001. The Corporation's dividend reinvestment and optional stock purchase plan contributed $876,000 in new capital for the nine-months ended September 30, 2002 as compared with $493,000 for the comparable period in 2001. Book value per common share was $11.90 at September 30, 2002 as compared to $10.66 at September 30, 2001. Tangible book value per common share was $11.40 at September 30, 2002 and $10.14 at September 30, 2001. 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. The Corporation, as of September 30, 2002, had repurchased 16,000 shares at an average cost per share of $20.37 under a previously announced stock buyback program, which authorized the repurchase of up to 120,750 shares. Risk-Based Capital/Leverage Banking regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at September 30, 2002, 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, 2002, total Tier 1 capital (defined as tangible stockholders' equity for common stock and certain perpetual preferred stock) amounted to $55.8 million or 7.31 percent of total assets. Tier I capital excludes the effect of SFAS No. 115, which amounted to $2.1 million of net unrealized gains, after tax, on securities available-for-sale (included as a component of other comprehensive income) and goodwill of approximately $2.1 million as of September 30, 2002. At September 30, 2002, the Corporation's Tier I risk-based and total risk-based capital ratios were 11.56 percent and 12.06 percent, respectively. These ratios are well above the minimum guidelines of capital to risk-adjusted assets in effect as of September 30, 2002. 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%. 22 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, 2002, management believes that the Bank meets all capital adequacy requirements to which it is subject. 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 does not exceed 10 percent of net interest income over a 12-month horizon to a +200 basis point shock in rates the first year and so that the present value of equity at risk does not exceed 15 percent when compared to the forecast. Year 2 will not carry a policy limit, due to the inaccuracies inherent with longer-term projections. Generally, year 2 is calculated and identified for review and presentation purposes only. At September 30, 2002, the Corporation's income simulation model indicates an acceptable level of interest rate risk, with no significant change from June 30, 2002. 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. Item 4 - Controls and Procedures Within the 90 days prior to the date of this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon the evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation's periodic SEC filings. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 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 the legal processes. 23 Item 6 Exhibits and Reports on Form 8-K A) Exhibits: 99.1 Certification by Anthony C. Weagley under Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification by John J. Davis under Section 906 of the Sarbanes-Oxley Act of 2002. B) Reports on Form 8-K There were no reports on Form 8-K filed during the three months ended September 30, 2002 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 14, 2002 /s/ Anthony C. Weagley ---------------------- Anthony C. Weagley, Treasurer (Chief Financial Officer) 24 CERTIFICATION I, John J. Davis, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Center Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 25 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ John J. Davis - ----------------- Name: John J. Davis Title: President and Chief Executive Officer of Center Bancorp, Inc. 26 CERTIFICATION I, Anthony C. Weagley, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Center Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 27 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Anthony C. Weagley - ---------------------- Name: Anthony C. Weagley Title: Treasurer and Chief Financial Officer of Center Bancorp, Inc. 28 EXHIBIT INDEX Exhibit 99.1 Certification of Anthony C. Weagley under Section 906 of the Sarbanes- Oxley Act of 2002. 99.2 Certification of John J. Davis under Section 906 of the Sarbanes-Oxley Act of 2002. 29 EX-99.1 3 b321375_ex99-1.txt CERTIFICATION OF ANTHONY C. WEAGLEY Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Center Bancorp, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2002 filed with the Securities and Exchange Commission (the "Report"), I, Anthony C. Weagley, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented. Dated: November 14, 2002 /s/ Anthony C. Weagley ---------------------- Anthony C. Weagley Chief Financial Officer This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 30 EX-99.2 4 b321375_ex99-2.txt CERTIFICATION OF JOHN J. DAVIS Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Center Bancorp, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2002 filed with the Securities and Exchange Commission (the "Report"), I, John J. Davis, President & CEO of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented. Dated: November 14, 2002 /s/ John J. Davis ----------------- John J. Davis President & CEO This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 31 -----END PRIVACY-ENHANCED MESSAGE-----