ConnectOne Bancorp, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; balance-sheet amounts are as of June 30, 2015. ConnectOne is a New Jersey community bank. The July 1, 2014 merger with Legacy ConnectOne materially expanded the company; 2014 income comparisons largely reflect the pre-merger company and are not directly comparable with 2015.
Financial performance and condition
| Metric | Q2 2015 / June 30, 2015 | Comparison |
|---|---|---|
| Net interest income | $28.7 million for Q2; $57.0 million for the first half | Q2 2014: $11.7 million; first half 2014: $23.3 million |
| Net interest margin, tax-equivalent | 3.60% for Q2; 3.63% for the first half | Q2 2014: 3.29%; first half 2014: 3.28% |
| Net income | $10.5 million for Q2; $20.9 million for the first half | Q2 2014: $4.4 million; first half 2014: $8.8 million |
| Diluted EPS | $0.35 for Q2; $0.69 for the first half | Q2 2014: $0.26; first half 2014: $0.53 |
| Total assets | $3.66 billion | $3.45 billion at December 31, 2014 |
| Loans / allowance | $2.77 billion gross loans; $17.5 million allowance, or 0.63% of loans | Gross loans: $2.54 billion; allowance: $14.2 million, or 0.56%, at year-end |
| Deposits / borrowings | $2.57 billion deposits; $548.8 million borrowings; $55.2 million subordinated debentures | Deposits: $2.48 billion; borrowings: $495.6 million; subordinated debentures: $5.2 million at year-end |
| Cash flows, first half | $22.3 million provided by operations; $217.3 million used in investing; $193.7 million provided by financing | Cash and cash equivalents ended at $125.5 million, down $1.4 million from year-end |
First-half net interest income benefited from purchase-accounting accretion and amortization of $3.3 million. The company reported $3.4 million of Q2 noninterest income, including a $2.2 million insurance recovery related to a $2.4 million wire-fraud loss recorded in Q4 2014. Q2 noninterest expense was $15.0 million, including a $2.4 million loss on extinguishing debt. The company declared common dividends of $0.075 per share for Q2.
Material changes and capital
- Loans increased 9.0% from year-end, led by multifamily, commercial and industrial, and construction lending. Commercial real estate represented 63.3% of gross loans.
- Deposits increased $93.6 million. Noninterest-bearing deposits rose $65.9 million, while time deposits rose $109.2 million; money-market deposits declined $55.8 million.
- In June, the company issued $50 million of fixed-to-floating subordinated notes, initially bearing 5.75% interest, and contributed $35 million of the proceeds to the Bank as common equity. Proceeds were also intended to fund redemption of $11.3 million of Treasury-issued preferred stock by January 1, 2016, and for general corporate purposes.
- The company repurchased $16 million of puttable repurchase-agreement borrowings, incurring a $2.4 million prepayment penalty. It reported $695 million of available and unused credit at quarter-end.
- At June 30, the Bank’s capital ratios included a 10.48% Tier 1 leverage ratio, 11.19% CET1 ratio, and 11.74% total risk-based capital ratio. Management said the company and Bank met applicable capital requirements.
Outlook, risks, and contingencies
The filing provides no quantified earnings or revenue guidance. Management said it expected fee income to increase modestly and described an intent to keep multifamily concentration in the 25%–30% range while growing commercial and industrial and construction lending. Management considered liquidity adequate; liquid assets were $429.5 million, or 11.7% of assets. Interest-rate sensitivity modeling estimated that a 200-basis-point rate increase would raise one-year net interest income by 1.91%, while a 100-basis-point decrease would reduce it by 3.44%. These are model estimates, not forecasts.
- Credit quality warrants attention: nonaccrual loans were $12.1 million, total nonperforming assets were $13.7 million, and special-mention loans rose to $44.1 million from $19.3 million at year-end. The filing attributed downgrades to weakened financial condition of a guarantor on certain taxi-medallion loans and declining operating cash flows at some commercial real estate borrowers.
- The allowance increased to $17.5 million, and first-half provision expense rose to $3.4 million from $0.9 million. Management considered the allowance adequate but warned actual losses and future provision needs may differ from estimates.
- Interest-rate, competition, economic, regulatory, securities-market, and legal or regulatory proceeding risks could affect results. Most loans are secured by New Jersey real estate, exposing credit performance to local economic and property conditions.
- The company disclosed no legal proceedings expected to materially adversely affect results or financial condition and no pending mortgage-loan repurchase requests at June 30, 2015. It noted that future repurchase obligations under mortgage representations and warranties remain possible.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate merger-related scale effects from organic growth when comparing 2015 results with 2014.
- Assess whether higher loan growth and the increase in special-mention credits lead to greater nonaccruals, charge-offs, or allowance requirements.
- Track funding mix and costs, including the new subordinated notes, time-deposit growth, and the planned preferred-stock redemption.
- Distinguish recurring earnings from the insurance recovery and debt-extinguishment charge; verify their treatment in reported results.
- Review the assumptions behind interest-rate sensitivity, liquidity capacity, and management’s multifamily concentration target.