Business context and reporting period
The filing is a Form 10-Q for the quarter and nine months ended September 30, 2011. The registrant named in the filing is Center Bancorp, Inc., the parent of Union Center National Bank—not ConnectOne Bancorp, Inc. Investors should verify that this is the intended filing before relying on the figures. Amounts below are in U.S. dollars; financial-statement amounts are generally reported in thousands.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Interest income | $12.9 million | $12.0 million | $38.7 million | $37.2 million |
| Net interest income | $9.9 million | $8.4 million | $29.6 million | $25.5 million |
| Provision for loan losses | $1.0 million | $1.3 million | $2.1 million | $3.0 million |
| Net income | $3.7 million | $2.1 million | $10.3 million | $4.4 million |
| Net income available to common shareholders | $3.6 million | $2.0 million | $9.9 million | $4.0 million |
| Diluted EPS | $0.22 | $0.14 | $0.61 | $0.27 |
- Net interest margin, on a fully tax-equivalent basis, was 3.54% in Q3, up from 3.30%; for the nine months it was 3.54%, up from 3.34%. The filing attributes improvement chiefly to lower funding costs, which more than offset lower yields on earning assets.
- Other income was $2.3 million in Q3 and $5.6 million for the nine months. Nine-month results included $2.8 million in net securities gains, versus a $1.7 million net securities loss in the prior-year period; 2010 included substantially higher securities impairment charges.
- Total assets were $1.377 billion at September 30, 2011, versus $1.207 billion at December 31, 2010. Loans were $721.6 million, up 1.9% from year-end; deposits were $1.060 billion, up $199.7 million.
- Cash and cash equivalents were $113.1 million, compared with $37.5 million at year-end. Nine-month operating cash flow was $15.1 million; investing activities used $86.7 million and financing activities provided $147.2 million.
- Borrowings included $161.0 million of long-term borrowings and no short-term borrowings at quarter-end; subordinated debentures were $5.2 million. Total stockholders’ equity was $133.8 million, or 9.72% of assets, versus $121.0 million, or 10.02%, at year-end.
- Regulatory capital ratios at September 30 included a 9.54% Tier 1 leverage ratio and 13.45% total risk-based capital ratio at the holding company. The Bank reported 9.38% and 13.22%, respectively; management said the Bank met applicable capital requirements, including higher OCC requirements.
Material changes versus comparable periods
- Common earnings rose year over year in both the quarter and nine-month period. Nine-month net income more than doubled, helped by improved net interest income, lower loan-loss provision, lower operating expenses, and the swing in securities results.
- Net interest income increased 17.5% in Q3 and 15.8% for the nine months. The filing cites higher investment-securities balances and reduced deposit and borrowing costs; average loan balances were lower year over year.
- Nonperforming assets increased to $14.9 million from $11.9 million at December 31, 2010. Nonaccrual loans rose to $14.1 million from $11.2 million. The allowance for loan losses increased to $9.5 million from $8.9 million, while nine-month net charge-offs declined to $1.5 million from $3.0 million.
- Potential problem loans rated special mention or substandard increased to $51.2 million from $38.4 million at year-end. Management nevertheless described overall portfolio credit quality as relatively strong and the allowance as adequate.
- In September, the company issued $11.25 million of Series B preferred stock through the Treasury’s Small Business Lending Fund and redeemed $10 million of Series A TARP preferred stock. The company said the transaction added approximately $1.25 million of Tier 1 capital.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or revenue guidance. Management said it aimed to improve net interest spread and margin during 2011, while acknowledging that results depend on market conditions and other factors. The filing cautions that interim and nine-month results are not necessarily indicative of full-year results.
- Interest-rate risk is material. The company’s model estimated that a gradual, parallel 200-basis-point rate increase over 12 months would raise net interest income by 1.11%, assuming no management action. Management also noted that low rates could pressure asset yields; model results depend on assumptions.
- Credit risks include New Jersey economic and real-estate conditions, loan concentrations secured by real estate, rising nonperforming assets, and the judgment involved in setting the allowance. A $3.5 million participation loan went on nonaccrual September 30; after quarter-end, the bank group received a deed in lieu of foreclosure. The company recorded its share in other real estate owned at an estimated $3.4 million, net of a $100,000 charge-off, and said a sale was expected but not assured.
- The securities portfolio carries market, credit, and liquidity risks. At quarter-end, available-for-sale securities had $8.8 million of gross unrealized losses; three securities were classified Level 3. The company recorded $303,000 of nine-month impairment and principal losses and said further losses on a private-label mortgage security were possible. Future credit deterioration could lead to additional impairment charges.
- A lawsuit against Highlands State Bank concerning a participation agreement remained in discovery, with a counterclaim filed. Management said other routine claims were not expected to have a material adverse effect, based on currently available information.
- Management identified competition, economic conditions, interest rates, regulatory and legislative changes, market volatility, and execution of technology and customer-service initiatives as risks. It reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for Center Bancorp, Inc., despite the request metadata naming ConnectOne Bancorp, Inc.
- Assess whether earnings growth is sustainable apart from securities gains and the unusually large prior-year impairment charges.
- Track nonperforming and potential problem loans, subsequent performance of restructured loans, charge-offs, and allowance adequacy.
- Review the valuation and credit performance of impaired or below-investment-grade securities, including possible future losses.
- Verify the outcome and carrying value of the post-quarter-end deed-in-lieu property and the Highlands litigation.
- Monitor deposit growth and mix, funding costs, capital ratios, and sensitivity to changes in interest rates.