Business context and reporting period
ConnectOne Bancorp, Inc. is a New Jersey bank holding company operating ConnectOne Bank, a community-focused commercial bank serving the New York metropolitan area. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are to the corresponding 2018 periods or December 31, 2018, as applicable.
Results and balance-sheet growth reflect the January 2, 2019 acquisition of Greater Hudson Bank (GHB). The company also acquired certain BoeFly, LLC assets in May 2019.
Financial results and condition
Amounts below are in millions, except per-share data and ratios.
| Metric | Q3 / Sept. 30, 2019 | Comparable period / prior date |
|---|---|---|
| Net interest income | $48.4 | $40.0 in Q3 2018 |
| Net income | $21.7; diluted EPS $0.61 | $19.9; diluted EPS $0.61 in Q3 2018 |
| Net interest margin, tax-equivalent | 3.44% | 3.30% in Q3 2018 |
| Total assets | $6,161 | $5,462 at Dec. 31, 2018 |
| Loans receivable, net of allowance | $5,072 | $4,506 at Dec. 31, 2018 |
| Total deposits | $4,751 | $4,092 at Dec. 31, 2018 |
| Borrowings | $512 | $600 at Dec. 31, 2018 |
| Stockholders’ equity | $720 | $614 at Dec. 31, 2018 |
For the first nine months, net interest income was $138.9 million versus $117.1 million, tax-equivalent net interest margin was 3.36% versus 3.29%, net income was $52.6 million versus $41.7 million, and diluted EPS was $1.48 versus $1.29. Nine-month total interest income was $203.5 million (up from $158.9 million); interest expense rose to $64.6 million from $41.9 million.
GHB-related loan growth was a major contributor to higher interest income. Reported deposits increased $659 million, or 16.1%, from year-end, primarily due to GHB. Average loan yields rose, while deposit costs also increased. The company reported a 9.21% tangible common equity ratio and $15.60 tangible book value per share, versus 8.77% and $14.42 at year-end.
Cash and cash equivalents were $194.0 million at quarter-end. For the nine months, operating activities provided $63.4 million, investing activities used $118.8 million, and financing activities provided $77.1 million; cash and cash equivalents increased $21.6 million. Management reported $509.5 million of liquid assets and approximately $1.1 billion of available and unused credit capacity. Outstanding commitments to extend credit were approximately $1.1 billion.
The allowance for loan losses was $38.8 million, or 0.76% of loans, versus $35.0 million and 0.77% at year-end. Nonaccrual loans were $51.3 million; nonperforming assets were $52.2 million, or 0.85% of assets. Troubled debt restructurings totaled $51.5 million, including $31.8 million on nonaccrual status, compared with $34.5 million total at year-end. The Bank’s total risk-based capital ratio was 12.50%; management said the Bank and holding company met applicable capital and capital conservation buffer requirements.
Material changes and unusual items
- Quarterly net income rose from the prior year, but diluted EPS was unchanged at $0.61. The increase in income reflected higher net interest income and noninterest income, partly offset by higher provision, operating expenses, and taxes.
- Nine-month provision for loan losses fell to $7.6 million from $20.0 million in 2018. The prior-year period included a $17.0 million provision related to taxi medallion loans. The 2019 period included a $3.0 million provision and $2.1 million partial charge-off on a commercial office-building loan; nine-month net charge-offs were $3.8 million versus $17.0 million.
- Nine-month noninterest expense was $70.0 million versus $52.1 million. It included $8.1 million of merger expenses, a $1.0 million loss on extinguishment of debt, and a $1.3 million FDIC assessment credit. Q3 expense included the same $1.3 million credit; Q3 also included a $0.3 million net loss on securities sales.
- The Q3 effective tax rate was 22.7%, compared with 9.6% in Q3 2018; the prior-year quarter included $1.4 million of federal and New Jersey deferred-tax benefits. The nine-month effective rate was 21.4% versus 14.6%.
- The company repurchased 240,018 shares in the first nine months under a 1.2 million-share authorization; no repurchases occurred in Q3.
Outlook, commentary, and risks
Management projected a combined federal and state effective tax rate of approximately 22% for 2019. No earnings or revenue guidance was provided. Management stated that the allowance was adequate based on its assessment, while cautioning that actual losses may differ from estimates. Adoption of the expected-credit-loss standard (CECL) was scheduled for 2020; the company had not determined the amount of the initial allowance adjustment or the overall financial-statement impact.
ConnectOne had agreed to acquire Bancorp of New Jersey, Inc. (BKJ), with closing expected in the first quarter of 2020, subject to shareholder, regulatory, listing, and other customary conditions. The filing identifies risks including integration challenges, possible failure to realize expected synergies or savings, disruption to customers or employees, competition, interest-rate changes, economic conditions, credit losses, regulation, and market volatility. Management reported no material change to previously disclosed business risk factors and no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether loan growth, deposit growth, and net interest margin can be sustained as acquisition effects and funding costs evolve.
- Credit quality trends, including the commercial office-building exposure, nonaccrual loans, TDRs, charge-offs, and allowance adequacy.
- The recurring expense base after GHB integration and the effects of merger costs, debt extinguishment, and the FDIC assessment credit.
- The eventual CECL transition adjustment and the final terms, approvals, timing, and integration risks of the proposed BKJ merger.
- Liquidity and capital capacity relative to loan commitments, funding needs, and planned shareholder distributions or repurchases.