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CNBC > SEC Filings for CNBC > Form 10-Q on 15-Nov-2012All Recent SEC Filings

Show all filings for CENTER BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CENTER BANCORP INC


15-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Corporation's results of operations for the periods presented herein and financial condition as of September 30, 2012 and December 31, 2011. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Cautionary Statement Concerning Forward-Looking Statements

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Center Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as "believes," "expects," "anticipates," "plans," "trend," "objective," "continue," "remain," "pattern" or similar expressions or future or conditional verbs such as "will," "would," "should," "could," "might," "can," "may" or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected;
(5) political developments, sovereign debt problems, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which Center Bancorp is engaged, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; (7) changes and trends in the securities markets may adversely impact Center Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by Center Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; (10) Center Bancorp may experience unforeseen difficulties in integrating Saddle River Valley Bank's operations into its own following its August 1, 2012 acquisition of certain assets and assumption of certain liabilities of Saddle River Valley Bank; and (11) the outcome of regulatory and legal investigations and proceedings may not be anticipated. Further information on other factors that could affect the financial results of Center Bancorp is included in Item 1A. of Center Bancorp's Annual Report on Form 10-K and in Center Bancorp's other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission's website at http://www.sec.gov and/or from Center Bancorp, Inc.

Critical Accounting Policies and Estimates

The accounting and reporting policies followed by Center Bancorp, Inc. and its subsidiaries (the "Corporation") conform, in all material respects, to U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the statements of operations. Actual results could differ significantly from those estimates.

The Corporation's accounting policies are fundamental to understanding Management's Discussion and Analysis ("MD&A") of financial condition and results of operations. The Corporation has identified the determination of the allowance for loan losses, the other-than-temporary impairment evaluation of securities, the valuation of the impairment of goodwill and deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies is provided below.


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Allowance for Loan Losses and Related Provision

The allowance for loan losses represents management's estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated statements of condition.

The evaluation of the adequacy of the allowance for loan losses includes, among other factors, an analysis of historical loss rates by loan category applied to current loan totals. However, actual loan losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.

The allowance for loan losses is established through a provision for loan losses charged to expense. Management believes that the current allowance for loan losses will be adequate to absorb loan losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers' ability to pay. The evaluation also details historical losses by loan category and the resulting loan loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the allowance for loan losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 1 of the Notes to Consolidated Financial Statements.

Other-Than-Temporary Impairment of Investment Securities

Investment securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FASB ASC 320-10-65 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management assesses whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert that it has both the intent and the ability to hold a security for a period of time sufficient to allow for anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FASB ASC 320-10-65 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and
(b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Fair Value of Investment Securities

FASB ASC 820-10-35 clarifies the application of the provisions of FASB ASC 820-10-05 in an inactive market and how an entity would determine fair value in an inactive market. The Corporation applied the guidance in FASB ASC 820-10-35 when determining fair value for the Corporation's private label collateralized mortgage obligations, pooled trust preferred securities and single name corporate trust preferred securities. See Note 6 of the Notes to Consolidated Financial Statements for further discussion.


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FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly.

Goodwill

The Corporation adopted the provisions of FASB ASC 350-10, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but rather tested for impairment annually or more frequently if impairment indicators arise. No impairment charge was deemed necessary for the nine months ended September 30, 2012 and 2011.

Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Corporation's consolidated financial statements or tax returns.

Fluctuations in the actual outcome of these future tax consequences could impact the Corporation's consolidated financial condition or results of operations. Note 11 of the Notes to Consolidated Financial Statements includes additional discussion on the accounting for income taxes.

Earnings

Net income available to common stockholders for the three months ended September 30, 2012 amounted to $4,426,000 compared to $3,557,000 for the comparable three-month period ended September 30, 2011. The Corporation recorded earnings per diluted common share of $0.27 for the three months ended September 30, 2012 as compared with earnings of $0.22 per diluted common share for the same three months in 2011. Dividends and accretion relating to the preferred stock issued to the U.S. Treasury, reduced earnings by approximately $0.002 and $0.01 per fully diluted common share for the three month periods. The annualized return on average assets was 1.13 percent for the three months ended September 30, 2012, compared to 1.10 percent for three months ended September 30, 2011. The annualized return on average stockholders' equity was 11.67 percent for the three-month period ended September 30, 2012, compared to 11.12 percent for the three months ended September 30, 2011.

Net income available to common stockholders for the nine months ended September 30, 2012 amounted to $12,785,000 compared to $9,868,000 for the comparable nine-month period ended September 30, 2011. The Corporation recorded earnings per diluted common share of $0.78 for the nine months ended September 30, 2012 as compared with earnings of $0.61 per diluted common share for the same nine months in 2011. Dividends and accretion relating to the preferred stock issued to the U.S. Treasury, reduced earnings by approximately $0.015 and $0.03 per fully diluted common share for the nine months ended September 30, 2012 and 2011, respectively. The annualized return on average assets was 1.15 percent for the nine months ended September 30, 2012, compared to 1.06 percent for the nine months ended September 30, 2011. The annualized return on average stockholders' equity was 11.88 percent for the nine-month period ended September 30, 2012, compared to 10.73 percent for the nine months ended September 30, 2011.

Net Interest Income and Margin

Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets. Net interest income is presented on a fully tax-equivalent basis by adjusting tax-exempt income (primarily interest earned on obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues. Net interest margin is defined as net interest income on a fully tax-equivalent basis as a percentage of total average interest-earning assets.


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The following table presents the components of net interest income on a fully tax-equivalent basis for the periods indicated.

Net Interest Income
(tax-equivalent basis)

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                                                        Three Months Ended                                                                            Nine Months Ended
                                                           September 30,                                                                                September 30,
(dollars in                 2012                   2011            Increase (Decrease)       Percent Change               2012                   2011            Increase (Decrease)       Percent Change
thousands)
Interest income:
Investment          $         3,814        $         3,327        $           487                    14.6 %       $        11,140        $        10,530        $           610                     5.8 %
securities AFS
Investment                      632                    806                   (174 )                 (21.6 )                 2,023                  1,155                    868                    75.2
securities HTM
Loans, including             10,039                  8,956                  1,083                    12.1                  28,838                 27,123                  1,715                     6.3
net costs
Restricted
investment in                   110                    110                      -                       -                     342                    362                    (20 )                  (5.5 )
bank stocks, at
cost
Other interest                    3                      -                      3                       -                       7                      -                      7                       -
bearing deposits
Total interest               14,598                 13,199                  1,399                    10.6                  42,350                 39,170                  3,180                     8.1
income
Interest expense:
Time deposits                   203                    332                   (129 )                 (38.9 )                   637                    945                   (308 )                 (32.6 )
$100 or more
All other                     1,124                  1,059                     65                     6.1                   3,406                  3,133                    273                     8.7
deposits
Borrowings                    1,608                  1,678                    (70 )                  (4.2 )                 4,892                  4,998                   (106 )                  (2.1 )
Total interest                2,935                  3,069                   (134 )                  (4.4 )                 8,935                  9,076                   (141 )                  (1.6 )
expense
Net interest
income on a fully            11,663                 10,130                  1,533                    15.1                  33,415                 30,094                  3,321                    11.0
tax-equivalent
basis
Tax-equivalent                 (480 )                 (280 )                 (200 )                 (71.4 )                (1,341 )                 (506 )                 (835 )                (165.0 )
adjustment(1)
Net interest        $        11,183        $         9,850        $         1,333                    13.5 %       $        32,074        $        29,588        $         2,486                     8.4 %
income

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(1) Computed using a federal income tax rate of 35 percent for 2012 and 34 percent for 2011.

Net interest income on a fully tax-equivalent basis increased $1.5 million or 15.1 percent to $11.7 million for the three months ended September 30, 2012 as compared to the same period in 2011. For the three months ended September 30, 2012, the net interest margin contracted 26 basis points to 3.28 percent from 3.54 percent during the three months ended September 30, 2011. For the three months ended September 30, 2012, a decrease in the average yield on interest-earning assets of 51 basis points was partially offset by a decrease in the average cost of interest-bearing liabilities of 23 basis points, resulting in a decrease in the Corporation's net interest spread of 28 basis points for the period. Net interest margin compression during the third quarter period of 2012, occurred primarily as result of a high liquidity pool carried during the quarter and the timing of a substantial portion of the Corporation's loan growth, which occurred in the latter part of the quarter. This, coupled with a continued high level of prepayment speeds on mortgage-backed securities in the investment portfolio and a high level of loan modifications during the quarter, dampened other actions (including a growth in the Corporation's customer base and enhancement the Corporation's liquidity position, effected while the Company increased its earning assets base) taken to improve the margin.

Net interest income on a fully tax-equivalent basis increased $3.3 million or 11.0 percent to $33.4 million for the nine months ended September 30, 2012 as compared to the same period in 2011. For the nine months ended September 30, 2012, the net interest margin contracted 22 basis points to 3.32 percent from 3.54 percent during the nine months ended September 30, 2011. For the nine months ended September 30, 2012, a


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decrease in the average yield on interest-earning assets of 41 basis points was partially offset by a decrease in the average cost of interest-bearing liabilities of 20 basis points, resulting in a decrease in the Corporation's net interest spread of 21 basis points for the period.

For the three-month period ended September 30, 2012, interest income on a tax-equivalent basis increased by $1,399,000 or 10.6 percent compared to the same three-month period in 2011. This increase in interest income was due primarily to a volume increase in investment securities and loans partially offset by a decline in yields due to the lower interest rate environment. Average investment securities volume increased during the current three-month period by $132.0 million, to $560.0 million, compared to the third quarter of 2011. The loan portfolio increased on average $142.1 million, to $850.1 million, from an average of $707.9 million in the same quarter in 2011, reflecting net increases in commercial loans and commercial real estate related sectors of the loan portfolio. Average loans represented approximately 59.7 percent of average interest-earning assets during the third quarter of 2012 compared to 61.8 percent in the same quarter in 2011.

For the nine-month period ended September 30, 2012, interest income on a tax-equivalent basis increased by $3.2 million or 8.1 percent from the comparable nine-month period in 2011. This increase in interest income was due primarily to higher volume of earning assets of $209.7 million offset in part by lower rates in a lower interest rate environment. Average investment securities volume increased during the current nine-month period by $116.2 million, to $532.7 million, compared to the nine months ended September 30, 2011. The average loan portfolio increased $90.5 million, to $798.9 million, from $708.5 million for the same nine months in 2011, reflecting net increases in commercial loans and commercial real estate. Average loans represented approximately 59.5 percent of average interest-earning assets during the nine months of 2012 compared to 62.5 percent for the same nine months in 2011.

For the three months ended September 30, 2012, interest expense decreased $134,000, or 4.4 percent from the same period in 2011. The average rate of interest-bearing liabilities decreased 23 basis points to 0.95 percent for the three months ended September 30, 2012, from 1.18 percent for the three months ended September 30, 2011. At the same time, the volume of average interest-bearing liabilities increased by $192.9 million. This increase was primarily in money market, savings, and other interest-bearing deposits of $195.9 million, $13.4 million and $70.6 million, respectively, and was partially offset by decreases in borrowings of $35.3 million and time deposits of $51.7 million. Since 2009 steps have been taken to improve the Corporation's net interest margin by allowing the runoff of certain high rate deposits and to position the Corporation for further high-costing cash outflows. The result of these actions, together with the reduction in market interest rates, has been a decline in the Corporation's average cost of funds. For the three months ended September 30, 2012, the Corporation's net interest spread on a tax-equivalent basis decreased to 3.15 percent, from 3.43 percent for the three months ended September 30, 2011.

For the nine months ended September 30, 2012, interest expense declined $141,000, or 1.6 percent from the same period in 2011. The average rate of interest-bearing liabilities decreased 20 basis points to 1.01 percent for the nine months ended September 30, 2012, from 1.21 percent for the nine months ended September 30, 2011. At the same time, the volume of average interest-bearing liabilities increased by $81.6 million. This increase included increases in money market deposits of $179.2 million, savings deposits of $10.2 million and other interest-bearing deposits of $71.0 million, offset by decreases in borrowings of $39.7 million and time deposits of $39.0 million. The result of this was an improvement in the Corporation's average cost of funds for the period. For the nine months ended September 30, 2012, the Corporation's net interest spread on a tax-equivalent basis decreased to 3.19 percent, from 3.40 percent for the nine months ended September 30, 2011.


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The following table quantifies the impact on net interest income on a tax-equivalent basis resulting from changes in average balances and average rates during the three and nine month periods presented. 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.

 Analysis of Variance in Net Interest Income Due to Changes in Volume and Rates

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                                             Three Months Ended                                                    Nine Months Ended
                                        September 30, 2012 and 2011                                           September 30, 2012 and 2011
                                   Increase (Decrease) Due to Change in:                                 Increase (Decrease) Due to Change in:
(tax-equivalent                                                             Net                                                                  Net
basis, in              Average Volume           Average Rate              Change              Average Volume          Average Rate              Change
thousands)
Interest-earning
assets:
Investment
securities:
Available for
sale
Taxable             $           735         $          (743 )      $            (8 )       $           774        $        (1,879 )      $        (1,105 )
Tax-exempt                      577                     (82 )                  495                   1,854                   (139 )                1,715
Held to maturity
Taxable                         (99 )                  (129 )                 (228 )                   434                   (194 )                  240
Tax-exempt                       23                      31                     54                     598                     30                    628
Total investment              1,236                    (923 )                  313                   3,660                 (2,182 )                1,478
securities
Loans                         1,708                    (625 )                1,083                   3,592                 (1,877 )                1,715
Restricted
investment in                    (1 )                     1                      -                       -                    (20 )                  (20 )
bank stocks
Other
interest-bearing                  3                       -                      3                       7                      -                      7
deposits
Total
interest-earning              2,946                  (1,547 )                1,399                   7,259                 (4,079 )                3,180
assets
Interest-bearing
liabilities:
Money market                    211                     (57 )                  154                     606                   (146 )                  460
deposits
Savings deposits                 16                     (79 )                  (63 )                    39                   (234 )                 (195 )
Time deposits                   136                    (262 )                 (126 )                  (296 )                    1                   (295 )
Other
interest-bearing                 86                    (115 )                  (29 )                   263                   (268 )                   (5 )
deposits
Total
interest-bearing                449                    (513 )                  (64 )                   612                   (647 )                  (35 )
deposits
Borrowings and
subordinated                   (325 )                   255                    (70 )                (1,069 )                  963                   (106 )
debentures
. . .
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