ConnectOne Bancorp, Inc. — Q2 2014 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2014, compared with the same 2013 periods. The statements reflect the pre-merger business. On July 1, 2014, the company completed its merger with Legacy ConnectOne; the registrant changed its name from Center Bancorp, Inc. to ConnectOne Bancorp, Inc., and the bank merger made ConnectOne Bank the surviving bank. Initial purchase accounting was incomplete at filing.
Financial performance and position
| Metric | Q2 2014 / June 30, 2014 | Comparison |
|---|---|---|
| Net interest income | $11.7 million | Up 3.9% from Q2 2013 |
| Net income | $4.4 million; diluted EPS $0.26 | Down from $4.9 million and $0.30 |
| Net income available to common | $4.35 million | Six months: $8.72 million, versus $9.76 million in 2013 |
| Tax-equivalent net interest margin | 3.29% | 3.28% in Q2 2013; first-half 2014 was 3.28% versus 3.29% |
| Return on average assets / equity | 1.06% / 9.92% | Q2 2013: 1.22% / 11.84% |
| Total assets / total equity | $1.666 billion / $178.3 million | At December 31, 2013: $1.673 billion / $168.6 million |
| Loans / allowance for loan losses | $1.006 billion / $10.8 million | Loans up $45.3 million from year-end; allowance ratio 1.08% |
| Deposits / borrowings | $1.275 billion / $196 million; subordinated debentures $5.2 million | Deposits down $67.4 million and borrowings up $50 million from year-end |
For the first half, total interest income was $28.7 million, total other income $4.2 million, and net income $8.8 million. Cash and cash equivalents were $92.6 million at June 30, up $9.9 million from year-end. Six-month operating cash flow was $10.4 million; investing activities provided $18.7 million and financing activities used $19.2 million. The company reported regulatory capital ratios of 10.08% Tier 1 leverage and 13.43% total risk-based capital; the bank reported 9.99% and 13.32%, respectively.
Changes versus comparable periods
- Q2 net income available to common fell about 11% year over year. First-half net income available to common declined about 11%.
- Net interest income grew, aided by loan growth and a shift in earning assets toward loans; lower yields on assets and a larger liquidity pool constrained margin.
- First-half provision for loan losses was $909,000 versus none in 2013; net charge-offs were $417,000 versus $35,000.
- Q2 noninterest expense rose to $6.7 million, including $729,000 of merger costs. First-half expense was $14.2 million, including $1.8 million of merger costs. Excluding merger costs, management said expense was slightly lower year over year.
- First-half net securities gains rose to $2.0 million from $943,000, while bank-owned life insurance income declined by $328,000.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management expects securities to represent a declining share of earning assets and said merger synergies were ahead of schedule; it planned to focus on realizing synergies while investing in infrastructure and pursuing prudent growth.
- Management considered the allowance adequate, but noted that actual credit losses could differ and that New Jersey real estate and economic conditions affect borrowers and collateral. Nonperforming assets were $4.4 million, or 0.26% of assets, versus $3.4 million at year-end. Potential problem loans totaled $30.4 million, down from $35.1 million.
- Management’s interest-rate simulation indicated a 0.17% decline in net interest income under a gradual 200-basis-point rate increase over 12 months, assuming no management action. The company also cited competitive, regulatory, economic, market, technology and liquidity risks.
- Deposits fell while borrowings increased. Core deposits under the company’s stricter internal definition declined $36.8 million to $713.4 million; management said it had borrowing capacity through the Federal Reserve and FHLB.
- Available-for-sale securities had $5.3 million in net unrealized gains at June 30. The company recorded $2.0 million in net securities-sale gains in the first half; results may therefore be affected by portfolio sales and market conditions. No other-than-temporary impairment charge was recorded in 2014.
- Merger-related shareholder lawsuits were dismissed on April 25, 2014. The company reported no pending mortgage-loan repurchase requests at June 30, but identified possible future repurchase exposure from representation, warranty or documentation issues.
Important facts for investors to verify
- Post-merger purchase accounting, integration progress, realized synergies and any additional merger costs.
- Whether loan growth is sustained and whether nonperforming loans, delinquencies, charge-offs and the allowance remain manageable.
- Deposit trends, funding mix and borrowing levels following the decline in deposits.
- How much earnings depend on securities gains, and how securities valuations respond to interest rates and credit spreads.
- The effect of the merger and changing tax-exempt income mix on future effective tax rates and reported profitability.