ConnectOne Bancorp, Inc. — Filing Summary
Filing and entity: The supplied filing is Center Bancorp, Inc.’s Form 10-K for the fiscal year ended December 31, 2013, not a 10-K filed under the ConnectOne Bancorp name. Center reported a proposed merger with ConnectOne Bancorp after year-end.
Business context and reporting period
Center Bancorp was a New Jersey bank holding company whose principal subsidiary, Union Center National Bank, provided commercial, consumer, mortgage and related financial services. The filing covers full-year 2013, compares results primarily with 2012, and includes unaudited quarterly data for fourth-quarter 2013.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Total assets, year-end | $1.673 billion | $1.630 billion |
| Total interest and other income | $64.1 million | $62.5 million |
| Net interest income | $46.2 million | $43.5 million |
| Net income | $19.9 million | $17.5 million |
| Net income available to common shareholders | $19.8 million | $17.2 million |
| Diluted EPS | $1.21 | $1.05 |
| Net interest margin, tax-equivalent | 3.30% | 3.32% |
| Efficiency ratio | 46.9% | 47.7% |
| Deposits, year-end | $1.342 billion | $1.307 billion |
| Total loans, year-end | $960.9 million | $889.7 million |
| Stockholders’ equity, year-end | $168.6 million | $160.7 million |
Fourth-quarter 2013 net income was $5.0 million, or $0.30 per diluted share, versus $4.5 million, or $0.27 per diluted share, in fourth-quarter 2012. Fourth-quarter net interest income was $11.9 million versus $11.4 million.
Full-year net interest income on a tax-equivalent basis rose 7.3% to $48.7 million. Average earning assets increased by $108.8 million, while their average yield declined 13 basis points; the cost of funds fell 8 basis points. Net interest margin edged down 2 basis points. Other income declined 5.0% to $6.9 million, while reported other expense was nearly flat at $25.3 million; excluding specified 2012 acquisition and borrowing-termination costs, expenses increased 6.6%.
Operating cash flow was $23.2 million; investing activities used $77.6 million and financing activities provided $31.0 million. Cash and cash equivalents decreased $23.4 million to $82.7 million. Year-end long-term borrowings were $146.0 million, plus $5.2 million in subordinated debentures. The filing reports a projected $212.6 million of Bank net cash flows over the following 12 months; this is a management estimate, not a guarantee.
Regulatory capital remained substantial: the Bank’s Tier 1 risk-based, total risk-based and leverage ratios were 12.10%, 12.91% and 9.69%, respectively. The Bank was classified as well capitalized. The company reported that it believed it could meet the new capital rules on a fully phased-in basis.
Changes versus the prior period
- Net income rose 13.8%, and diluted EPS increased from $1.05 to $1.21. Management attributed earnings growth mainly to higher net interest income and stronger core fee income.
- Loans grew 8.0%; commercial and commercial real estate lending drove growth. Deposits rose 2.7%, with core deposits increasing and certificates of deposit of $100,000 or more declining.
- Asset quality improved by some measures: nonperforming assets fell to $3.4 million, or 0.20% of assets, from $5.0 million, or 0.31%. The allowance for loan losses was $10.3 million, or 1.08% of loans, compared with 1.15% a year earlier.
- Common dividends declared increased to $0.28 per share from $0.195. No common shares were repurchased in 2013.
- Unrealized securities gains and losses shifted materially: accumulated other comprehensive income moved from $5.1 million to a loss of $2.5 million, and 2013 comprehensive income was $12.3 million versus $28.0 million in 2012.
Outlook, risks and unusual items
- Merger: In January 2014, Center and ConnectOne Bancorp entered into a merger agreement. ConnectOne Bancorp shares were to convert into 2.6 shares of Center common stock; Center would be the surviving parent and the bank subsidiaries would combine under ConnectOne Bank. Completion was anticipated in the second or third quarter of 2014, subject to shareholder and regulatory approvals and other conditions. A class-action complaint alleged breaches of fiduciary duty by ConnectOne directors and that Center aided and abetted them; Center said it would defend the claims.
- Credit concentration: Commercial real estate and construction loans totaled $579.3 million, approximately 60.3% of the loan portfolio. The filing also identifies $77.5 million of working-capital loans to real estate developers that were not secured by mortgages on land or buildings under construction.
- Interest-rate and securities risk: Management expected continued rate volatility and aimed to stabilize margins in 2014. Its simulation estimated net interest income declines of 1.33% and 2.30% under gradual +200 and +300 basis-point rate scenarios, and 0.91% under a gradual -100 basis-point scenario. Securities-related impairment charges were $652,000 in 2013. The company transferred $138.3 million of available-for-sale securities to held-to-maturity; related unrealized losses remained in accumulated other comprehensive income.
- Management outlook: Management expected loan demand momentum to continue in 2014 but said it would proceed cautiously given broader economic and credit uncertainty. No specific earnings or revenue guidance was provided.
- Other considerations: New capital requirements, regulatory and compliance costs, competition, deposit and funding availability, New Jersey economic and real-estate conditions, and execution risks from the proposed merger were identified as risks. The allowance for loan losses and securities valuations rely on estimates that may change.
- Audit and controls: The auditor issued unqualified opinions on the 2013 financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Whether the proposed merger received all required approvals, closed on the anticipated terms and schedule, and how its consideration and integration costs affected shareholders.
- Subsequent performance and collateral support of the concentrated commercial real estate, construction and developer-related exposures, including the $77.5 million of identified working-capital loans.
- Whether loan growth, nonperforming assets, troubled debt restructurings and the allowance for loan losses developed in line with management’s estimates.
- How changes in rates and securities valuations affected net interest margin, accumulated other comprehensive income, liquidity and regulatory capital.
- Whether the projected $212.6 million of 12-month net cash flows materialized and whether deposit funding, borrowings and dividend capacity remained adequate.