Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CNOB > SEC Filings for CNOB > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for CONNECTONE BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CONNECTONE BANCORP, INC.


8-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Some of the statements in this document discuss future expectations, contain projections or results of operations or financial conditions or state other "forward-looking" information. Those statements are subject to known and unknown risk, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. We based the forward-looking statements on various factors and using numerous assumptions. Important factors that may cause actual results to differ from those contemplated by forward-looking statements include those disclosed under Item 1A
- Risk Factors included in the Company's Annual Report Form 10K filed for the year ended December 31, 2012 and the following:

the success or failure of our efforts to implement our business strategy;

the effect of changing economic conditions and, in particular, changes in interest rates;

changes in government regulations, tax rates and similar matters;

our ability to attract and retain quality employees; and

other risks which may be described in our future filings with the SEC

We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements.

Critical Accounting Policies and Estimates

"Management's Discussion and Analysis of Financial Condition and Results of Operations," is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to our audited consolidated financial statements included in our Annual Report on Form 10-K contains a summary of our significant accounting policies. Management believes our policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and our Board of Directors.

The allowance for loan losses is based upon management's evaluation of the adequacy of the allowance, including an assessment of known and probable incurred losses included in the portfolio, including giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of our loans are secured by real estate in the State of New Jersey. Accordingly, the collectability of a substantial portion of the carrying value of our loan portfolio is susceptible to changes in local market conditions and may be adversely affected by declines in real estate values, or if the Central or Northern areas of New Jersey experience an adverse economic shock. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond our control.

- 24 -

Operating Results Overview

Net income for the third quarter of 2013 was $2.6 million, an increase of $0.4 million, or 17.8%, compared to net income of $2.2 million in the third quarter of 2012. Diluted earnings per share were $0.50 for the third quarter of 2013, a decline from $0.68 for the third quarter of 2012. Net income for the first nine months of 2013 was $7.4 million, an increase of $1.3 million, or 21.3%, compared to net income of $6.1 million in the first nine months of 2012. Net income available to common shareholders for the first nine months of 2013 was $7.4 million, an increase of $1.7 million, or 28.8%, compared to net income available to common shareholders of $5.8 million in the first nine months of 2012. Diluted earnings per share were $1.54 for the first nine months of 2013, a decline from $1.92 for the first nine months of 2012.

Net income available to common shareholders and diluted earnings per share in 2012 were impacted by three series of convertible preferred stock issued at various times between 2009 and 2012. During 2012, all three series of preferred stock were converted into common shares and, as of December 31, 2012, stockholders' equity was comprised solely of common equity. In addition, earnings per share in 2013 were impacted by the issuance of 1.8 million shares in the first quarter of 2013 as part of our initial public offering.

The increases in net income and net income available to common shareholders were primarily attributable to significant increases in net interest income due to the Company's rapid growth in loans and deposits, and in its customer base. Partially offsetting the revenue increases were higher noninterest expenses, largely staff-related, commensurate with the Company's growing infrastructure. Credit costs have kept pace with both loan growth and a changing mix in the loan portfolio, while benefitting from an improving economy and overall sound credit quality.

Net Interest Income

Fully taxable equivalent ("FTE") net interest income for the third quarter of 2013 totaled $10.6 million, an increase of $1.9 million, or 21.7%, from the year ago quarter. The increase in net interest income was primarily due to an increase in average interest-earning assets, which grew by 24.2% to $1.1 billion, and was partially offset by an 8 basis points contraction in the net interest margin, from 4.01% in the third quarter of 2012 to 3.93% in the third quarter of 2013. Average total loans increased by 29.7% to $1.0 billion in the third quarter of 2013 from the prior year period. FTE net interest income for the first nine months of 2013 totaled $29.8 million, an increase of $4.5 million, or 18.0%, from the year ago period. The increase in net interest income was primarily due to an increase in average interest-earning assets, which grew by 27.3% to $1.0 billion, and was partially offset by a 31 basis points contraction in the net interest margin, from 4.25% in the first nine months of 2012 to 3.94% in the first nine months of 2013. Average total loans increased by 29.6% to $931.1 million in the first nine months of 2013 from the prior year period. The net interest margin in the current quarter widened slightly, by 4 basis points, from the sequential second quarter of 2013, as prepayment fees increased and the level of low earning cash balances decreased. Management expects net interest income to increase as the loan portfolio grows, although any such increases will likely be moderated by net interest margin compression resulting from the maturity, prepayment or contractual re-pricing of loans and securities in this extended period of low interest rates.

- 25 -

Average Balance Sheets

The following tables sets forth certain information relating to our average assets and liabilities for the three months and nine months ended September 30, 2013 and 2012, and reflect the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.

                                                                                     For the Three Months Ended
                                                              September 30, 2013                                    September 30, 2012
                                                   Average                           Average            Average                           Average
                                                   Balance         Interest         Rate (7)            Balance         Interest         Rate (7)
Interest-earning assets:
Investment securities (1) (2)                    $    28,589      $       218             3.03 %       $   28,982      $       311             4.27 %
Loans receivable (3) (4)                             994,722           11,923             4.76 %          767,164            9,955             5.16 %
Interest-bearing deposits with banks                  42,812               25             0.23 %           62,394               23             0.15 %
 Total interest-earning assets                     1,066,123           12,166             4.53 %          858,540           10,289             4.77 %
Allowance for loan losses                            (14,393 )                                            (11,655 )
Non-interest earning assets                           28,008                                               21,826
 Total assets                                    $ 1,079,738                                           $  868,711

Interest-bearing liabilities:
Savings, NOW, Money Market, Interest Checking    $   336,980              242             0.28 %       $  306,516              311             0.40 %
Time deposits                                        342,719              973             1.13 %          213,744              903             1.68 %
 Total interest-bearing deposits                     679,699            1,215             0.71 %          520,260            1,214             0.93 %

Borrowings                                            81,218              346             1.69 %           77,871              349             1.78 %
Capital lease obligation                               3,141               47             5.94 %            3,233               48             5.91 %
 Total interest-bearing liabilities                  764,058            1,608             0.83 %          601,364            1,611             1.07 %
Noninterest-bearing deposits                         183,381                                              125,723
Other liabilities                                      5,626                                                3,230
Stockholders' equity                                 126,673                                               66,645
 Total liabilities and stockholders' equity      $ 1,079,738                                           $  796,962

Net interest income/interest rate spread (5)                      $    10,558             3.69 %                       $     8,678             3.70 %
Tax equivalent affect                                                      (8 )                                                  -
Net interest income, as reported                                  $    10,550                                          $     8,678

Net interest margin (6)                                                                   3.93 %                                               4.01 %

(1) Average balances are calculated on amortized cost.
(2) Interest income is presented on a tax equivalent basis using a 35 percent federal tax rate.
(3) Includes loan fee income.
(4) Loans receivable include non-accrual loans.
(5) Represents difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(6) Represents net interest income divided by average total interest-earning assets.
(7) Rates are annualized.

- 26 -

                                                                                     For the Nine Months Ended
                                                              September 30, 2013                                    September 30, 2012
                                                   Average                           Average            Average                           Average
                                                   Balance         Interest         Rate (7)            Balance         Interest         Rate (5)
Interest-earning assets:
Investment securities (1) (2)                    $    26,747      $       592             2.96 %       $   32,589      $       833             3.41 %
Loans receivable (3) (4)                             931,145           33,758             4.85 %          718,270           29,076             5.41 %
Interest-bearing deposits with banks                  52,403               80             0.20 %           42,869               53             0.17 %
 Total interest-earning assets                     1,010,295           34,430             4.56 %          793,728           29,962             5.04 %
Allowance for loan losses                            (13,955 )                                            (10,721 )
Non-interest earning assets                           21,953                                               23,019
 Total assets                                    $ 1,018,293                                           $  806,026

Interest-bearing liabilities:
Savings, NOW, Money Market, Interest Checking    $   332,451              758             0.30 %       $  307,671            1,101             0.48 %
Time deposits                                        308,581            2,752             1.19 %          218,112            2,478             1.52 %
 Total interest-bearing deposits                     641,032            3,510             0.73 %          525,783            3,579             0.91 %

Borrowings                                            78,079            1,010             1.73 %           76,728            1,001             1.74 %
Capital lease obligation                               3,160              142             6.01 %            3,233              145             5.99 %
 Total interest-bearing liabilities                  722,271            4,662             0.86 %          605,744            4,725             1.04 %
Noninterest-bearing deposits                         181,641                                              130,617
Other liabilities                                      4,725                                                4,139
Stockholders' equity                                 109,656                                               65,526
 Total liabilities and stockholders' equity      $ 1,018,293                                           $  806,026

Net interest income/interest rate spread (5)                      $    29,768             3.69 %                       $    25,237             4.00 %
Tax equivalent affect                                                      (8 )                                                  -
Net interest income, as reported                                  $    29,760                                          $    25,237

Net interest margin (6)                                                                   3.94 %                                               4.25 %

(1) Average balances are calculated on amortized cost.
(2) Interest income is presented on a tax equivalent basis using a 35 percent federal tax rate.
(3) Includes loan fee income.
(4) Loans receivable include non-accrual loans.
(5) Represents difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(6) Represents net interest income divided by average total interest-earning assets.
(7) Rates are annualized.

Provision for Loan Losses

In determining the provision for loan losses, management considers national and local economic trends and conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; effects of changes in lending policies, trends in volume and terms of loans; levels and trends in delinquencies, impaired loans and net charge-offs and the results of independent third party loan and lease review.

The provision for loan losses for the third quarter and first nine months of 2013 was $1.3 million and $3.2 million, respectively, compared to the provision for loan losses of $1.0 million and $2.8 million in the comparable 2012 periods. The provision for loan losses for all periods presented was largely related to loan growth and, to a lesser degree, specific reserves for impaired credits. In addition, the 2013 provision for loan losses benefited from improving economic factors.

- 27 -

Non-Interest Income

Non-interest income represents a relatively small portion of the Bank's total revenue as management has historically made a strategic decision to de-emphasize fee income, focusing instead on customer growth and retention. During the third quarter of 2013, Management made a decision to invest in bank owned life insurance ("BOLI") in order to help offset the rising cost of employee benefits. Life insurance policies, with cash surrender values totaling $15.0 million at September 30, 2013, were purchased at the end of August 2013, and contributing $44,000 of BOLI income to 2013 operating results. Non-interest income totaled $293,000 and $853,000 for the third quarter and first nine months of 2013, respectively, versus $294,000 and $815,000 for the third quarter and first nine months of 2012, respectively. Growth in service and card-related fees, and the aforementioned BOLI income, were essentially offset by declines in gains on sale of residential mortgage loans.

Non-Interest Expense

Non-interest expenses for the third quarter 2013 increased by $0.9 million, or 20.4%, to $5.2 million from $4.3 million in the prior year third quarter. Non-interest expenses for the first nine months of 2013 increased by $2.0 million, or 15.0%, to $14.9 million from $12.9 million in the prior year period. The largest factor contributing to the increases in total non-interest expenses was salaries and employee benefits expense, which increased by $0.6 million to $2.6 million in the third quarter 2013 from $2.0 million in the third quarter 2012, and which increased by $1.3 million to $7.5 million in the first nine months of 2013 from $6.3 million in the first nine months of 2012. The increases were primarily due an increase in the number of full-time equivalent employees and higher incentive-based compensation. Also contributing to higher non-interest expenses were increased costs associated with being a publicly-traded entity, higher legal fees, and a general increase in other operating expenses related to a significantly increased volume of business. Management continues to focus on expense control, balancing its investment in infrastructure with prudent and sustainable growth.

Management continues to focus efforts on supporting growth primarily by adding to staff, investing in technology, and by enhancing risk controls. At the same time, management seeks to contain costs whenever prudent. Our success in this regard is evident in the recent improvements in our efficiency ratio, a widely-followed metric in the banking industry which measures operating expenses as a percentage of net revenue. The ratio is computed by dividing total noninterest expense by the sum of net interest income and noninterest income less securities gains/(losses). The Company's efficiency ratio improved to 48.1% in the third quarter of 2013 from 48.3% in the third quarter of 2012.

Income Taxes

Income tax expense was $1.7 million for the third quarter 2013 and $5.1 million for the first nine months of 2013 versus $1.5 million for the third quarter 2012 and $4.2 million for the first nine months of 2013. The effective tax rate, which is derived from both federal and New Jersey statutory income tax rates, was approximately 40.9% for 2013, an increase from 40.4% for 2012, as the Company's growth and increase in earnings has placed it into the 35% federal bracket. The increase in statutory rates was offset by an increase in non-taxable revenue in the third quarter of 2013. The Company's effective tax rate is projected to decline in future periods by approximately 5 percentage points, resulting from a combination of an increase in revenue from non-taxable sources and a reorganized operating structure.

Financial Condition Overview

At September 30, 2013, total assets were $1.1 billion, a $200.0 million increase from December 31, 2012. The increase in total assets was due primarily to a $182.2 million increase, to $1,031.1 million, in loans receivable, a $15 million investment into Bank owned life insurance and a $3.4 million increase, to $24.7 million, in securities. The growth in assets was funded by a $128.4 million increase in deposits and $47.8 million in net proceeds from our first quarter 2013 initial public equity offering.

- 28 -

Stockholders' Equity

Stockholders' equity totaled $127.2 million as of September 30, 2013, an increase of $54.9 million from $72.4 million as of year-end 2012, due primarily to the Company's first quarter IPO. As of September 30, 2013, the tangible common equity ratio and tangible book value per share were 11.24% and $24.95, respectively. As of December 31, 2012, the Company's tangible common equity ratio and tangible book value per share were 7.76.% and $22.77, respectively. The tangible common equity ratio is calculated by dividing common equity, less goodwill by total assets less goodwill. Tangible book value per share is calculated by dividing common equity, less goodwill, by common shares outstanding.

Capital



The following table summarizes the risk-based and leverage capital ratios for
the Company and the Bank as well as the required minimum regulatory capital
ratios for the following periods:



                                        September 30, 2013                               December 31, 2012
                                                              Well                                             Well
                            Actual         Minimum         Capitalized       Actual         Minimum         Capitalized
                            Ratio        Requirement       Requirement       Ratio        Requirement       Requirement
The Company:
Leverage ratio                11.76 %            4.00 %             n/a         7.84 %            4.00 %             n/a
Tier 1 Risk-based
capitalization                12.85 %            4.00 %             n/a         9.26 %            4.00 %             n/a
Total Risk-based
capitalization                14.28 %            8.00 %             n/a        10.52 %            8.00 %             n/a
The Bank:
Leverage ratio                11.74 %            4.00 %            5.00 %       7.84 %            4.00 %            5.00 %
Tier 1 Risk-based
capitalization                12.83 %            4.00 %            6.00 %       9.26 %            4.00 %            6.00 %
Total Risk-based
capitalization                14.26 %            8.00 %           10.00 %      10.51 %            8.00 %           10.00 %

On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the Federal Reserve. The final rules implement the "Basel III" regulatory capital reforms, as well as certain changes required by the Dodd-Frank Act.

The final rules include new risk-based capital and leverage ratios that will be phased in from 2015 to 2019. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and Tier 2 risk-based capital requirements. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The required minimum ratio of total capital to risk-weighted assets will remain 8.0%. The new risk-based capital requirements (except for the capital conservation buffer) will become effective for the Company on January 1, 2015. The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.

The following chart compares the risk-based capital ratios required under existing Federal Reserve rules to those prescribed under the new final rules under the phase-in period described above:

                                               Current
                                                Rules       Final Rules
                Common Equity Tier 1               n/a             4.5 %
                Additional Tier 1                  n/a             1.5 %
                Tier 1                             4.0 %           n/a
                Tier 2                             4.0 %           2.0 %
                Common Equity Tier 1
                Capital Conservation Buffer        n/a             2.5 %

- 29 -

The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses and instruments that will no longer qualify as Tier 1 capital. The final rules provide that depository holding companies with less than $15 billion in total assets as of December 31, 2009, such as the Company, may permanently include trust preferred securities and certain other non-qualifying instruments issued and included in Tier 1 or Tier 2 capital before May 19, 2010 in additional Tier 1 (subject to a maximum of 25% of Tier 1 capital) or Tier 2 capital until maturity or redemption.

The final rules also set forth certain changes for the calculation of risk-weighted assets that the Company will be required to implement beginning January 1, 2015. Management is currently evaluating the provisions of the final rules and their expected impact on the Company. Based on the Company's current capital composition and levels, management does not presently anticipate that the final rules present a material risk to the Company's financial condition or results of operations.

Except as set forth above, management is not aware of any other events or uncertainties that are reasonably likely to have a material effect on the Company's liquidity, capital resources or operations.

Loan Portfolio

The Bank's lending activities are generally oriented to small-to-medium sized businesses, high net worth individuals, professional practices and consumer and retail customers living and working in the Bank's market area of Hudson, Bergen and Monmouth Counties, New Jersey. The Bank has not made loans to borrowers outside of the United States. The Bank believes that its strategy of high-quality customer service, competitive rate structures and selective marketing have enabled it to gain market entry.

Commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, taxi medallions, inventory and equipment and liens on commercial and residential real estate. Commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include loans secured by first liens on . . .

  Add CNOB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CNOB - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.