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CNBC > SEC Filings for CNBC > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for CENTER BANCORP INC

Form 10-Q for CENTER BANCORP INC


12-May-2014

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 March 31, 2014 and December 31, 2013. 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; and (10) 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 (collectively, 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 consolidated 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 evaluation of the impairment of goodwill and the evaluation of 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.

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, individual credit situation 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.

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. 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 applies 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 8 of the Notes to Consolidated Financial Statements for further discussion.

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 three months ended March 31, 2014 and 2013.

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 2013 form 10-K 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 March 31, 2014 amounted to $4,370,000 compared to $4,868,000 for the comparable three-month period ended March 31, 2013. The Corporation recorded earnings per diluted common share of $0.27 for the three months ended March 31, 2014 as compared with earnings of $0.30 per diluted common share for the same three months in 2013. Dividends relating to the preferred stock issued to the U.S. Treasury reduced earnings per share by approximately $0.002 and $0.003 per fully diluted common share for the three month periods ended March 31, 2014 and 2013, respectively. The annualized return on average assets was 1.05 percent for the three months ended March 31, 2014, compared to 1.23 percent for the three months ended March 31, 2013. The annualized return on average stockholders' equity was 10.16 percent for the three-month period ended March 31, 2014, compared to 12.09 percent for the three months ended March 31, 2013.

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 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 tax-equivalent basis as a percentage of total average interest-earning assets.

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

Net Interest Income

(tax-equivalent basis)



                                                           Three Months Ended
                                                                March 31,
                                                                        Increase        Percent
(dollars in thousands)                     2014           2013         (Decrease)        Change
Interest income:
Investment securities (available for
sale)                                   $    2,669     $    3,889     $     (1,220 )       (31.37 )%
Investment securities (held to
maturity)                                    2,013            762            1,251         164.17
Loans, including net costs                  10,214          9,923              291           2.93
Restricted investment in bank stocks,
at cost                                        113            108                5           4.63
Other interest-bearing deposits                  -              2               (2 )     ((100.00 )
Total interest income                       15,009         14,684              325           2.21
Interest expense:
Time deposits $100 or more                     207            239              (32 )       (13.39 )%
All other deposits                           1,109          1,045               64           6.12
Borrowings                                   1,411          1,450              (39 )        (2.69 )
Total interest expense                       2,727          2,734               (7 )        (0.26 )
Net interest income on a
tax-equivalent basis                        12,282         11,950              332           2.78
Tax-equivalent adjustment (1)                 (672 )         (580 )            (92 )        15.86
Net interest income                     $   11,610     $   11,370     $        240           2.11

(1) Computed using a federal income tax rate of 35 percent for 2014 and 2013.

Net interest income on a tax-equivalent basis increased $332,000 or 2.78 percent to $12.3 million for the three months ended March 31, 2014 as compared to the same period in 2013. For the three months ended March 31, 2014, the net interest margin contracted by 3 basis points to 3.28 percent from 3.31 percent during the three months ended March 31, 2013. For the three months ended March 31, 2014, a decrease in the average yield on interest-earning assets of 6 basis points was partially offset by a decrease in the average cost of interest-bearing liabilities of 4 basis points, resulting in a stabilization of the Corporation's net interest spread for the periods. Net interest margin contracting during the first quarter period of 2014 occurred primarily as result of a higher liquidity pool carried during the quarter.

For the three-month period ended March 31, 2014, interest income on a tax-equivalent basis increased by $325,000 or 2.21 percent compared to the same three-month period in 2013. This increase in interest income was due primarily to a volume increase in loans of $89.2 million partially offset by $33.1 million decrease in investment securities and a decline in yields on loans due to the lower interest rate environment. Average investment securities volume decreased during the current three-month period by $33.1 million, to $526.5 million, compared to the first quarter of 2013. The loan portfolio increased on average $89.2 million, to $963.1 million, from an average of $873.9 million in the same quarter in 2013, reflecting net increases in commercial loans and commercial real estate related sectors of the loan portfolio. Average loans represented approximately 64.3 percent of average interest-earning assets during the first quarter of 2014 compared to 60.5 percent in the same quarter in 2013.

For the three months ended March 31, 2014, interest expense decreased $7,000, or 0.26 percent from the same period in 2013. The average rate of interest-bearing liabilities decreased 4 basis points to 0.86 percent for the three months ended March 31, 2014, from 0.90 percent for the three months ended March 31, 2013. At the same time, the volume of average interest-bearing liabilities increased by $52.1 million. This increase was primarily in money market, and other interest-bearing deposits of $46.9 million and $46.7 million, respectively, and was partially offset by decreases in savings deposits of $34.2 million and time deposits of $7.5 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 March 31, 2014 and 2013, the Corporation's net interest spread on a tax-equivalent basis was 3.15 percent and 3.17 percent, respectively.

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 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



                                                       Three Months Ended
                                                     March 31, 2014 and 2013
                                              Increase (Decrease) Due to Change in:
                                           Average           Average             Net
(tax-equivalent basis, in thousands)       Volume             Rate             Change

Interest-earning assets:
Investment securities:
Available-for-sale
Taxable                                  $      (872 )     $       369       $      (503 )
Tax-exempt                                      (922 )             205              (717 )
Held-to-maturity
Taxable                                          601               (36 )             565
Tax-exempt                                       766               (80 )             686
Total investment securities                     (427 )             458                31
Loans                                            972              (681 )             291
Restricted investment in bank stocks               -                 5                 5
Other interest bearing deposits                   (2 )               -                (2 )
Total interest-earning assets                    543              (218 )             325

Interest-bearing liabilities:
Money market deposits                             52                69               121
Savings deposits                                 (27 )              (9 )             (36 )
Time deposits                                     18               (80 )             (62 )
Other interest-bearing deposits                   42               (33 )               9
Total interest-bearing deposits                   85               (53 )              32
Borrowings and subordinated debentures             2               (41 )             (39 )
Total interest-bearing liabilities                87               (94 )              (7 )
Change in net interest income            $       456       $      (124 )     $       332

The following tables, "Average Statements of Condition with Interest and Average Rates", present for the three months ended March 31, 2014 and 2013, the Corporation's average assets, liabilities and stockholders' equity. The Corporation's net interest income, net interest spread and net interest margin are also reflected.

        Average Statements of Condition with Interest and Average Rates



                                                               Three Months Ended March 31,
                                                     2014                                        2013
                                                    Interest                                    Interest
                                      Average        Income/       Average        Average        Income/       Average
(tax-equivalent basis)                Balance        Expense        Rate          Balance        Expense        Rate
                                                                  (dollars in thousands)
Assets
Interest-earning assets:
Investment securities (1) :
Available-for-sale
Taxable                             $   286,902     $   2,324          3.24 %   $   399,356     $   2,827          2.83 %
Tax-exempt                               24,945           345          5.53          94,903         1,062          4.48
Held-to-maturity
Taxable                                 100,782           733          2.91          18,871           168          3.56
Tax-exempt                              113,897         1,280          4.50          46,507           594          5.11
Total investment securities             526,526         4,682          3.56         559,637         4,651          3.32
Loans (2)                               963,098        10,214          4.24         873,916         9,923          4.54
Restricted investment in bank
stocks                                    8,986           113          5.03           8,964           108          4.82
Other interest-bearing deposits               -             -             -           1,425             2          0.56
Total interest-earning assets         1,498,610        15,009          4.01       1,443,942        14,684          4.07
Non interest-earning assets:
Cash and due from banks                 103,628                                      88,263
Bank-owned life insurance                35,839                                      34,896
Intangible assets                        16,825                                      16,855
Other assets                             32,392                                      30,264
Allowance for loan losses               (10,358 )                                   (10,229 )
Total non interest-earning assets       178,326                                     160,049
Total assets                        $ 1,676,936                                 $ 1,603,991
Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
Money market deposits               $   430,086     $     519          0.48 %   $   383,176     $     398          0.42 %
Savings deposits                        162,621           127          0.31         196,803           163          0.33
Time deposits                           171,145           368          0.86         178,650           430          0.96
Other interest-bearing deposits         349,361           302          0.35         302,632           293          0.39
Total interest-bearing deposits       1,113,213         1,316          0.47       1,061,261         1,284          0.48
Short-term and long-term
borrowings                              146,500         1,372          3.75         146,333         1,411          3.86
Subordinated debentures                   5,155            39          3.03           5,155            39          3.03
Total interest-bearing
liabilities                           1,264,868         2,727          0.86       1,212,749         2,734          0.90
Non interest-bearing liabilities:
Demand deposits                         225,407                                     212,860
Other liabilities                        13,477                                      15,529
Total non interest-bearing
liabilities                             238,884                                     228,389
Stockholders' equity                    173,184                                     162,853
Total liabilities and
stockholders' equity                $ 1,676,936                                 $ 1,603,991
Net interest income
(tax-equivalent basis)                                 12,282                                      11,950
Net interest spread                                                    3.15 %                                      3.17 %
Net interest margin (3)                                                3.28 %                                      3.31 %
Tax-equivalent adjustment (4)                            (672 )                                      (580 )
Net interest income                                 $  11,610                                   $  11,370

(1) Average balances are based on amortized cost.
(2) Average balances include loans on non-accrual status.
(3) Represents net interest income as a percentage of total average interest-earning assets.
(4) Computed using a federal income tax rate of 35 percent for 2014 and 2013.

Investment Portfolio

At March 31, 2014, the principal components of the investment securities portfolio were corporate bonds and notes, U.S. Treasury and agency obligations, federal agency obligations, mortgage-backed securities, obligations of U.S. states and political subdivisions, trust preferred securities, asset backed securities and equity securities.

During the three months ended March 31, 2014, approximately $42.1 million in investment securities were sold from the available-for-sale portfolio. The cash flow from the sale of investment securities was primarily used to purchase new securities. The Corporation's sales from its available-for-sale investment portfolio reflect continued volatility present in the market. Given the historic low interest rates prevalent in the market, it is necessary for the Corporation to protect itself from interest rate exposure. Securities that once appeared to be sound investments can, after changes in the market, become securities that the Corporation must sell in order to avoid losses and mismatches of interest-earning assets and interest-bearing liabilities.

For the three months ended March 31, 2014, average investment securities decreased $33.1 million to approximately $526.5 million, or 35.1 percent of average interest-earning assets, from $559.6 million on average, or 38.8 percent of average interest-earning assets, for the comparable period in 2013.

During the three month period ended March 31, 2014, the volume-related factors applicable to the investment portfolio decreased interest income by approximately $427,000 while rate-related changes resulted in an increase in interest income of approximately $458,000 from the same period in 2013. The tax-equivalent yield on investments increased by 24 basis points to 3.56 percent from a yield of 3.32 percent during the comparable period in 2013. A decrease in the volume of taxable securities of $30.5 million and tax exempt municipal securities during the period of $2.6 million was offset by an increase of 28 basis points in the yield on the taxable portfolio while the yield on the tax exempt portfolio remained consisted at 4.68 percent.

At March 31, 2014, net unrealized gains on investment securities available-for-sale, which are carried as a component of accumulated other comprehensive income and included in stockholders' equity, net of tax, amounted to $3.7 million as compared with net unrealized gains of $2.4 million at December 31, 2013. At March 31, 2014, the net unrealized gains on investment securities held-to-maturity that were transferred from securities available-for-sale, are carried, net of tax, as a component of accumulated other comprehensive income and included in stockholders' equity. The gross unrealized losses associated with agency securities and federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other-than-temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.

Loan Portfolio

Lending is one of the Corporation's primary business activities. The Corporation's loan portfolio consists of commercial, residential and retail loans, serving the diverse customer base in its market area. The composition of the Corporation's portfolio continues to change due to the local economy. Factors such as the economic climate, interest rates, real estate values and employment all contribute to these changes. Growth is generated through business . . .

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