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Salaries and employee benefits decreased $191,000 or 2.06 percent for the nine months ended September 30, 2007 as compared to the comparable nine-month period ended September 30, 2006. This decrease is primarily attributable to costs associated with a decline in staffing levels, offset in part by certain merit and promotional pay increases and increased hospitalization expense premiums. Salary and benefit expense for the nine months ended September 30, 2007 includes compensation expense of $105,083 for share-based payments pursuant to FASB 123R as well as $5,517 associated with the settlement of a pension curtailment resulting from the reduction in workforceand $1.161 million benefit from the pension curtailment as a result of freezing its defined benefit pension plan. This was offset by one-time charges for salary and benefit expense amounting to $1.6 million related to severance payments.
For the nine months ended September 30, 2007, occupancy and premises expenses increased $318,000 or 10.37 percent over the comparable nine-month period in 2006. The increase in occupancy and equipment expenses reflects higher operating costs (utilities, rent, real-estate taxes and general repair and maintenance) of the Corporation’s expanded facilities, as well as depreciation expense associated with the expanded bank facilities.
Professional and consulting fees for the nine months ended September 30, 2007 increased $673,000 or 86.73 percent over the comparable period in 2006 due to an increase in expenses attributable to the annual meeting and contested proxy, advisory service and consulting fees associated with conversions of bank applications.
Stationery and printing expense for the nine months ended September 30, 2007 decreased $187,000 or 34.1 percent over the comparable period in 2006 due to a decline in expense related to marketing and advertising printing materials. Marketing and advertising expense decreased by $41,000 or 8.82 percent compared to the nine-month period ended September 30, 2006 due to a decrease in media and advertising.
Computer expense for the nine-month period ended September 30, 2007 decreased $81,000 or 14.86 percent compared to the comparable nine-month period of 2006 due to a decrease in fees for ADP payroll and other computer services.
Other expense for the first nine months of 2007 totaled $3.4 million, an increase of $371,000 or 12.25 percent over the comparable period in 2006. The increase is such expense was primarily attributable to higher other general and administrative expense reflecting increases in director fees, telephone, insurance and customer related expenses.
Provision for Income Taxes
For the three-month ended September 30, 2007, the Corporation recorded an income tax benefit of $786,000, as compared with a benefit of $78,000 for the quarter ended September 30, 2006. For the nine months ended September 30, 2007, the Corporation recorded a benefit of $2.3 million for income taxes compared to a benefit of $1.6 million for the comparable nine months of 2006. In the 2006 period, the Corporation recognized a pre-tax net loss on securities sales of $3.6 million. In the 2007 period, the tax benefit resulted in part from change in the Corporation’s business entity structure, which led to the recognition of a $2.3 million tax benefit. 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 Corporation adjusts its expected annual tax rate on a quarterly basis based on the current projections of non-deductible expenses, tax- exempt interest income, increase in the cash surrender value of bank owned life insurance and pre-tax net earnings.
Tax-exempt interest income on a fully tax equivalent basis decreased by $505,000, or 27.84 percent, from the third quarter of 2007 to the comparable period in 2006. The Corporation recorded income related to the cash surrender value of bank owned life insurance as a component of other income during the third quarter of 2007 in the amount of $223,000 and $213,000 during the third quarter of 2006. During the nine months ended September 30, 2007 tax -exempt income on a fully tax equivalent basis decreased by $784,000, or 15.55 percent from the comparable nine-month period of 2006. The Corporation recorded income related to the cash surrender value of bank owned life insurance as a component of other income during the period in the amount of $676,000 for the nine months ended September 30, 2007 and $597,000 for the comparable period of 2006.
The Corporation has adopted the provisions of FASB Interpretation No.48 “Accounting for Uncertainty in Income taxes” on January 1, 2007. As a result of the implementation of Interpretation 48, the Corporation
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did not recognize an increase in the liability for unrecognized tax benefits to the provision for income taxes. Included in the balance at September 30, 2007 are $2.0 million of tax positions, an increase from $1.1 million at December 31, 2006, for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.
The total unrecognized benefits, that, if recognized would affect the effective tax rate was $2.0 million. Because of the impact of deferred tax accounting, to amounts other than interest and penalties, the disallowance of the shorter deductibility periods would not only affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
Recent Accounting Pronouncements
Note 4 of the Consolidated Financial Statements discusses new accounting policies adopted by the Corporation during 2007 and the expected impact of accounting policies recently issued or proposed but not yet required to be adopted. To the extent the adoption of new accounting standards materially affects financial condition results of operations or liquidity, the impacts are discussed in the applicable sections of this financial review and notes to the consolidated financial statements.
Asset and Liability Management
Asset and Liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. The composition of the Corporation’s statement of condition is planned and monitored by the Asset and Liability Committee (“ALCO”). In general, management’s objective is to optimize net interest income and minimize market risk and interest rate risk by monitoring these components of the statement of condition.
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 than 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 than 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 in part on management’s judgment as to projected interest rate trends.
The Corporation’s rate sensitivity position in each time frame may be expressed as assets less liabilities, as liabilities less assets, or as the ratio between rate sensitive assets (“RSA”) and rate sensitive liabilities (“RSL”). For example, a short funded position (liabilities repricing before assets) would be expressed as a net negative position, when period gaps are computed by subtracting repricing liabilities from repricing assets. When using the ratio method, a RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1 indicates an asset sensitive position and a ratio less than 1 indicates a liability sensitive position.
A negative gap and/or a rate sensitivity ratio less than 1, tends to expand net interest margins in a falling rate environment and to reduce net interest margins in a rising rate environment. Conversely, when a positive gap occurs, generally margins expand in a rising rate environment and contract in a falling rate environment. From time to time, the Corporation may elect to deliberately mismatch liabilities and assets in a strategic gap position.
At September 30, 2007, the Corporation reflects a negative interest sensitivity gap (or an interest sensitivity ratio of .43:1.00) at the cumulative one-year position. For the nine months ended September 30, 2007 and for all of 2006 and 2005, the Corporation had a negative interest sensitivity gap. The rising rates and a flattening of the yield curve during 2006 affected net interest margins. Based on management’s perception that interest rates will continue to be volatile, projected increased levels of prepayments on the earning-asset portfolio and the current level of interest rates, emphasis has been, and is expected to continue to be, placed
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on interest-sensitivity matching with the objective of stabilizing the net interest spread during 2007. However, no assurance can be given that this objective will be met.
Estimates of Fair Value
The estimation of fair value is significant to a number of the Corporation’s assets, including loans held for sale, other real estate owned and available for sale investment securities. These are all recorded at either fair value or lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available for sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the operations; unlike most industrial companies, nearly all of the Corporation’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
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 reduced. Management also maintains a detailed liquidity contingency plan designed to respond adequately to situations which could lead to liquidity concerns.
Management believes that the Corporation has the funding capacity to meet the liquidity needs arising from potential events. In addition to pledgeable securities, the Corporation also maintains borrowing capacity through the Federal Discount Window and the Federal Home Loan Bank of New York secured with loans and marketable securities.
Liquidity is measured and monitored for the Corporation’s bank subsidiary, Union Center National Bank (the “Bank”). The Corporation reviews its net short-term mismatch. This measures the ability of the Corporation to meet obligations should access to Bank dividends be constrained. At September 30, 2007, the Parent Corporation had $954,000 in cash and short-term investments compared to $4.9 million at September 30, 2006. The change in cash at the Parent Corporation level was due in part to the use of funds for the Corporation’s common stock buyback program and the redemption of $10.3 million of subordinated debt. Expenses at the Parent Corporation are moderate and management believes that the Parent Corporation has adequate liquidity to fund its obligations.
Certain provisions of long-term debt agreements, primarily subordinated debt, prevent the Corporation from creating liens on, disposing of or issuing voting stock of subsidiaries. As of September 30, 2007 the Corporation was in compliance with all covenants and provisions of these agreements.
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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, 2007, projected to October 1, 2008, indicates that the Bank’s liquidity should remain strong, with an approximate projection of $110.2 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.
Deposits
Total deposits decreased to $651.0 million on September 30, 2007 from $726.8 million at December 31, 2006 and $731.7 million at September 30, 2006. The $80.7 million decrease or 11.03 percent from September 2006 was attributable to the decrease in time deposits and non-interest bearing deposits.
Total non-interest-bearing deposits decreased from $136.5 million at December 31, 2006 to $121.9 million at September 30, 2007, a decrease of $14.6 million or 10.68 percent. The decline is attributable to fluctuations in business activity. Interest bearing demand, savings and time deposits decreased $44.9 million at September 30, 2007 as compared to September 30, 2006. During the nine months ended September 30, 2007 as compared to the comparable period in 2006, the Corporation experienced a shift in its deposit mix to more costly interest-bearing deposits, driven by the changes that occurred in interest rates. Time deposits $100,000 and over decreased $22.5 million to $68.1 million for the nine-month period ended September 30, 2007.
The Corporation derives a significant proportion of its liquidity from its core deposit base. For the nine-month period ended September 30, 2007, core deposits, comprised of total demand deposits, savings and money market accounts, decreased by $21.6 million or 4.21 percent from September 30, 2006 to $492.3 million at September 30, 2007. At September 30, 2007, core deposits were 75.6 percent of total deposits, compared to 72.6 percent at year-end 2006. Alternatively, the Corporation uses a more stringent calculation for the management of its liquidity positions internally, which consists of total demand and savings accounts (excluding money market accounts greater than $100,000) and excludes time deposits as part of core deposits as a percentage of total deposits. This number represented 50.1 percent of total deposits at September 30, 2007 as compared with 44.3 percent at September 30, 2006.
More volatile rate sensitive deposits, concentrated in certificates of deposit $100,000 and greater, decreased to 10.5 percent of total deposits at September 30, 2007 from 12.4 percent at September 30, 2006. This change was due primarily to increased rates and enhanced market competition for certificates of deposit $100,000 and greater in 2007 compared to 2006. As such, the Corporation elected to continue to reduce its reliance on this segment of deposits in the current rate environment.
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Core Deposit Mix
The following table depicts the Corporation’s core deposit mix at September 30, 2007 and 2006.
 | |  | |  | |  | |  | |  |
| | September 30, | | Net Change Volume 2007 vs. 2006 |
| | 2007 | | 2006 |
| | Amount | | Percentage | | Amount | | Percentage |
| | (Dollars in Thousands) |
Demand Deposits | | $ | 121,451 | | | | 37.2 | | | $ | 134,774 | | | | 41.6 | | | $ | (13.323 ) | |
Interest-Bearing Demand | | | 110,177 | | | | 33.8 | | | | 74,316 | | | | 22.9 | | | | 35,861 | |
Regular Savings | | | 49,700 | | | | 15.2 | | | | 60,016 | | | | 18.5 | | | | (10.316 ) | |
Money Market Deposits under $100 | | | 44,783 | | | | 13.8 | | | | 54,991 | | | | 17.0 | | | | (10,208 | ) |
Total core deposits | | $ | 326,111 | | | | 100.0 | | | $ | 324,097 | | | | 100.0 | | | $ | 2,014 | |
Total deposits | | $ | 650,999 | | | | | | | $ | 731,727 | | | | | | | | (80,728 ) | |
Core deposits to total deposits | | | 50.1 % | | | | | | | | 44.3 % | | | | | | | | | |
Short-Term Borrowings
Short-term borrowings can be used to satisfy daily funding needs. Balances in those accounts fluctuate on a day-to-day basis. The Corporation’s principal short-term funding sources are Federal funds purchased and securities sold under agreement to repurchase. Average short-term borrowings, including federal funds purchased during the first nine months of 2007, amounted to approximately $99.9 million, a decrease of $23.8 million or 19.24 percent from the first nine months of 2006.
The following table is a summary of securities sold under repurchase agreements for the nine-month periods ended.
 | |  | |  |
| | September 30, |
| | 2007 | | 2006 |
| | (Dollars in Thousands) |
Securities sold under repurchase agreements:
| | | | | | | | |
Average interest rate:
| | | | | | | | |
At period end | | | 4.57 % | | | | 4.00 % | |
For the period | | | 4.32 % | | | | 3.84 % | |
Average amount outstanding during the period: | | $ | 99,907 | | | $ | 123,718 | |
Maximum amount outstanding at any month end: | | $ | 140,406 | | | $ | 195,103 | |
Amount outstanding at period end: | | $ | 140,406 | | | $ | 92,901 | |
Operating, Investing and Financing 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, 2007, cash and cash equivalents (which decreased overall by $29.1 million) were provided (on a net basis) by investing activities in the amount of approximately $28.2 million, primarily from net securities cash flow, offset by cash used in financing activities in the amount of approximately $56.2 million, primarily due to a decline in deposits offset in part with a net increase in borrowings of $37.0 million. Net cash used in operating activities amounted to $1.1 million. At September 30, 2007, the Corporation had no commitments to settle sales or purchase of securities under trade date accounting.
In comparison, the consolidated statements of cash flows for the nine months ended September 30, 2006, cash and cash equivalents (which increased overall by $7.0 million) were provided (on a net basis) by operating activities in the amount of approximately $1.4 million and investing activities in the amount of approximately $92.3 million, primarily due to $129.2 million in proceeds from the sale of investment securities available for sale and another $189.6 million in proceeds from maturing investment securities available for sale and held-to-maturity offset by purchases of $191.4 million of securities available for sale and held-to-maturity and a $31.6 million increase in loans. Financing activities primarily consisted of a decrease in
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borrowings of $32.5 million and payments on Federal Home Loan Bank advances of $79.0 million offset by cash provided by increases in deposits of $31.1 million.
Stockholders’ Equity
Total stockholders’ equity amounted to $93.7 million or 9.49 percent of total assets at September 30, 2007, compared to $97.6 million or 9.28 percent of total assets at December 31, 2006. The change in stockholders’ equity at September 30, 2007 included, among other things, the impact of the recording of a pension curtailment associated with the reduction in workforce under which the Corporation recorded a $813,000 net of tax benefit to the other comprehensive income component of stockholders’ equity. Book value per common share was $6.85 at September 30, 2007, compared to $6.96 at September 30, 2006. Tangible book value (i.e., total stockholders’ equity less goodwill and other intangible assets) per common share was $5.59 at September 30, 2007, and $5.76 at December 31, 2006, and $5.71 at September 30, 2006. Tangible book value is a non-GAAP financial measure and represents total stockholders’ equity less goodwill and other intangible assets, calculated on a per common share basis. The Corporation has provided reconciliation by also reporting its total book value per share. The Corporation believes that a disclosure of tangible book value per share may be helpful for those investors who seek to evaluate the Corporation’s book value per share without giving effect to goodwill and other intangible assets.
The Corporation had 292,174 common shares repurchased during the first nine months of 2007 at an average cost per share of $12.20. In the comparable nine months of 2006, the Corporation repurchased 343,253 shares at an average cost per share of $11.38 per share under its buy back program. The Corporation repurchased a total of 343,253 common shares during the twelve-months ended December 31, 2006 at an average cost per share of $11.38 per share. On September 28, 2007 the Board approved an increase in its current share buyback program to an additional 5% of outstanding shares, enhancing its current authorization by 684,627 shares. Any purchases by the Corporation may be made, from time to time, in the open market, in privately negotiated transactions or otherwise. At September 30, 2007, there were 754,592 shares available for repurchase under the Corporation’s stock buyback program.
Capital
The maintenance of a solid capital foundation continues to be a primary goal for the Corporation. Accordingly, capital plans and dividend policies are monitored on an ongoing basis. The most important objective of the capital planning process is to balance effectively the retention of capital to support future growth and the goal of providing stockholders with an attractive long-term return on their investment.
Risk-Based Capital/Leverage
The Tier I leverage capital at September 30, 2007 (defined as tangible stockholders’ equity for common stock and Trust Preferred Capital Securities) amounted to $85.8 million or 8.68 percent of total assets. At September 30, 2007, the Corporation’s Tier I leverage risk-based capital amounted to $85.8 million or 8.85 percent of average total assets.
Tier I capital excludes the effect of SFAS No. 115, which amounted to $4.0 million of net unrealized losses, after tax, on securities available-for-sale (reported as a component of accumulated other comprehensive income which is included in stockholders’ equity), $100,000 of net unrealized losses related to the adoption of FASB No. 158, and goodwill and intangible assets of $17.2 million as of September 30, 2007. For information on goodwill and intangible assets, see Note 1 to the Consolidated Financial Statements.
United States bank regulators have issued guidelines establishing minimum capital standards related to the level of assets and off balance-sheet exposures adjusted for credit risk. Specifically, these guidelines categorize assets and off balance-sheet items into four risk-weightings and require banking institutions to maintain a minimum ratio of capital to risk-weighted assets.
At December 31, 2006, the Corporation’s Tier 1 and total risk-based capital ratios were 13.50 percent and 14.26 percent, respectively. These ratios are well above the minimum guidelines of capital to risk-adjusted assets in effect as of September 30, 2007.
The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-statement of condition items as calculated under regulatory accounting practices. Capital amounts
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and classifications are also subject to qualitative judgments by the bank regulators regarding capital components, risk weightings and other factors. As of September 30, 2007, management believes that each of the Bank and the Parent Corporation meet all capital adequacy requirements to which it is subject.
Subordinated Debentures
On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of Center Bancorp, Inc., issued $5.0 million of, MMCapS capital securities to investors due on January 23, 2034.
The capital securities presently qualify as Tier I capital. The trust loaned the proceeds of this offering to the Corporation and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part, prior to maturity but after January 23, 2009. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85 percent and reprices quarterly. The rate at September 30, 2007 was 8.21 percent.
On December 18, 2001, Center Bancorp Statutory Trust I, a statutory business trust and wholly-owned subsidiary of Center Bancorp, Inc., issued $10.0 million of floating rate capital trust pass through securities to investors due on December 18, 2031. The trust loaned the proceeds of this offering to the Corporation and received in exchange $10.3 million of the Parent Corporation’s subordinated debentures. The subordinated debentures were redeemed in whole on December 18, 2006. Prior to redemption on December 18, 2006, the floating interest rate on the subordinated debentures was three-month LIBOR plus 3.85 percent and repriced quarterly.
The additional capital raised with respect to the issuance of the floating rate capital pass through securities was used to bolster the Corporation’s capital and for general corporate purposes, including capital contributions to Union Center National Bank.
Looking Forward
One of the Corporation’s primary objectives is to achieve balanced asset and revenue growth, and at the same time expand market presence and diversify its financial products. However, it is recognized that objectives, no matter how focused, are subject to factors beyond the control of the Corporation, which can impede its ability to achieve these goals. The following factors should be considered when evaluating the Corporation’s ability to achieve its objectives:
The financial market place is rapidly changing. Banks are no longer the only place to obtain loans, nor the only place to keep financial assets. The banking industry has lost market share to other financial service providers. The future is predicated on the Corporation’s ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace.
Net interest income, the primary source of earnings, is impacted favorably or unfavorably by changes in interest rates. Although the impact of interest rate fluctuations is mitigated by ALCO strategies, significant changes in interest rates can have a material adverse impact on profitability.
The ability of customers to repay their obligations is often impacted by changes in the regional and local economy. Although the Corporation sets aside loan loss provisions toward the allowance for loan losses when the Board determines such action to be appropriate, significant unfavorable changes in the economy could impact the assumptions used in the determination of the adequacy of the allowance.
Technological changes will have a material impact on how financial service companies compete for and deliver services. It is recognized that these changes will have a direct impact on how the marketplace is approached and ultimately on profitability. The Corporation has taken steps to improve its traditional delivery channels. However, continued success will likely be measured by the ability to anticipate and react to future technological changes.
This “Looking Forward” description constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the Corporation’s forward-looking statements due to numerous known and unknown risks and uncertainties, including the factors referred to in this quarterly report and in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006.
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Item 3. Qualitative and Quantitative Disclosures about Market Risks
Market Risk
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-statement of condition 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 a ramped rise and fall in interest rates based on a parallel yield curve shift over a 12 month time horizon an then maintained at those levels over the remainder of the model time horizon, which provides a rate shock to the two year period and beyond. 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.
In prior years, the low level of interest rates had necessitated a modification of the Corporation’s standard rate scenario of a movement down 200 basis points over 12 months to down 100 basis points over a 12-month period. However given the recent rise in rates for the year ended December 31, 2006 the Corporation has returned to a -200 basis point change down over a 12-month period.
Based on the results of the interest simulation model as of September 30, 2007, and assuming that management does not take action to alter the outcome, the Corporation would expect an increase of 7.03 percent in net interest income if interest rates decreased 200 basis points from the current rates in a change as noted above over a 12-month period. In a rising rate environment, based on the results of the model as of September 30, 2007, the Corporation would expect a decrease of 8.18 percent in net interest income if interest rates increased by 200 basis points from current rates in a gradual change over a twelve month period.
The rising rates and a flattening of the yield curve during 2007 affected net interest margins. Based on management’s perception that interest rates will continue to be volatile, projected increased levels of prepayments on the earning-asset portfolio and the current level of interest rates, 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 2007. However, no assurance can be given that this objective will be met.
Equity Price Risk
The Corporation is exposed to equity price risk inherent in its portfolio of publicly traded equity securities, which had an estimated fair value of $2.2 million at September 30, 2007 and $2.5 million at
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September 30, 2006. The Corporation monitors its equity investments for impairment on a periodic basis. In the event that the carrying value of the equity investment exceeds its fair value, and the Corporation determines the decline in value to be other than temporary, the Corporation will reduce the carrying value to its current fair value.
Item 4. Controls and Procedures
a)Disclosure controls and procedures. As of the end of the Corporation’s most recently completed fiscal quarter covered by this report, the Corporation carried out an evaluation, with the participation of the Corporation’s management, including the Corporation’s chief executive officer and chief financial officer, of the effectiveness of the Corporation’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Corporation’s chief executive officer and chief financial officer concluded that the Corporation’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
b)Changes in internal controls over financial reporting: There have been no changes in the Corporation’s internal controls over financial reporting that occurred during the Corporation`s last fiscal quarter to which this report relates that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.
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PART 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 proving facts within the context of the legal processes.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
As of September 30, 2007, the Corporation has purchased 635,427 common shares at an average cost per share of $11.76 under the stock buyback program amended on March 27, 2006 for the repurchase of up to 705,392 shares of the Corporation’s outstanding common stock. The repurchased shares were recorded as Treasury Stock, which resulted in a decrease in stockholder’s equity. On September 28, 2007 the Board approved an increase in its current share buyback program to an additional 5% of outstanding shares, enhancing its current authorization by 684,627 shares. Any purchases by the Corporation may be made, from time to time, in the open market, in privately negotiated transactions or otherwise. At September 30, 2007, there were 754,592 shares available for repurchase under the Corporation’s stock buyback program.
During the three-months ended September 30, 2007 there were 292,174 shares purchased at a cost of $12.20 per share.
Information concerning the third quarter 2007 stock repurchases is set forth below.
 | |  | |  | |  | |  |
Period | | (a) Total Number of Shares (or Units) Purchased | | (b) Average Price Paid per Share (or Unit) | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
July 1 through July 31, 2007 | | | 0 | | | $ | 0 | | | | 343,253 | | | | 362,139 | |
August 1, through August 31, 2007 | | | 146,300 | | | $ | 11.99 | | | | 489,553 | | | | 215,839 | |
September 1 through September 30, 2007 | | | 145,874 | | | $ | 12.40 | | | | 635,427 | | | | 754,592 | |
Total | | | 292,174 | | | $ | 12.20 | | | | 635,427 | | | | 754,592 | |
Item 5. Other Information
None
Item 6. Exhibits
 | |  |
Exhibit 31.1 | | Certification of the Acting President and Chief Financial Officer of the Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
Exhibit 32.1 | | Certification of the Acting President and Chief Financial Officer of the Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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TABLE OF CONTENTS
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.
| By: | /s/ Anthony C. Weagley
 Anthony C. Weagley, Acting President & Chief Financial Officer |
Date: November 9, 2007
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