ConnectOne Bancorp, Inc. — Q2 2022 Form 10-Q
Business context and period. ConnectOne Bancorp is a New Jersey bank holding company operating ConnectOne Bank, a community-focused commercial bank with 24 banking offices in addition to its headquarters. This unaudited filing covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are with December 31, 2021. Amounts below are in millions of dollars unless otherwise stated.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $75.6 | $63.0 | $145.9 | $124.2 |
| Net interest margin, tax-equivalent | 3.91% | 3.60% | 3.81% | 3.58% |
| Noninterest income | $3.4 | $4.5 | $6.4 | $7.9 |
| Noninterest expenses | $31.7 | $26.3 | $60.9 | $52.7 |
| Provision for credit losses | $3.0 | $(1.6) | $4.5 | $(7.4) |
| Net income | $32.4 | $32.2 | $63.7 | $65.2 |
| Net income available to common shareholders | $30.8 | $32.2 | $60.7 | $65.2 |
| Diluted earnings per common share | $0.78 | $0.81 | $1.53 | $1.63 |
Balance sheet and credit. Total assets were $8,841.5 million, up from $8,129.5 million at year-end. Gross loans grew 6.5% to $7,282.4 million, primarily through organic originations; commercial real estate accounted for 70.1% of gross loans. Deposits rose 4.5% to $6,617.6 million. The allowance for loan losses was $82.7 million, or 1.14% of loans, versus $78.8 million and 1.15% at year-end. Nonaccrual loans were $60.8 million (0.84% of loans), and nonperforming assets were $61.1 million (0.69% of assets). Net charge-offs were $0.3 million for the quarter.
Cash flow, liquidity, and funding. For the first half, operating activities provided $71.0 million, investing activities used $699.7 million, and financing activities provided $662.5 million. Cash and cash equivalents ended at $299.3 million, up $33.8 million from year-end. Management reported $796.9 million of liquid assets, equal to 9.1% of assets and 10.9% of deposits and borrowings. The Bank reported approximately $880 million of aggregate available and unused credit facilities; outstanding commitments to extend credit were approximately $1.2 billion.
Borrowings were $875.0 million at June 30, compared with $468.2 million at year-end; subordinated debentures were $153.1 million. FHLB advances were primarily short-term and carried a 1.84% weighted-average rate, compared with 0.73% at year-end. The filing also reports approximately $0.6 billion of remaining FHLB borrowing capacity. Total stockholders’ equity was $1,143.1 million. The tangible common equity ratio was 9.46%, down from 10.06%; tangible book value per share was $20.79, up from $20.12. The Bank’s regulatory capital ratios exceeded “well-capitalized” thresholds.
Material changes versus comparable periods
- Quarterly net interest income increased $12.6 million; management attributed the increase mainly to 12.1% growth in average loans and a 31-basis-point improvement in tax-equivalent net interest margin.
- Quarterly common net income fell $1.4 million despite higher net interest income. Higher credit-loss provision, operating expenses, preferred dividends, and taxes more than offset that increase. For the first half, common net income declined $4.5 million.
- Noninterest expenses rose, including salaries and benefits, which increased $4.3 million in Q2 and $7.5 million in the first half. The company also recorded $0.8 million in Q2 and $1.5 million year-to-date of increased acquisition price related to BoeFly.
- Available-for-sale securities increased to $675.9 million from $534.5 million at year-end. Net unrealized losses on those securities, recorded in accumulated other comprehensive loss rather than earnings, rose to $39.3 million after tax from $0.5 million. Total accumulated other comprehensive loss was $19.1 million.
- Preferred dividends of $1.5 million in Q2 and $3.0 million in the first half reduced income available to common shareholders; the preferred stock was issued in August 2021.
Outlook, commentary, and risks
The filing provides no specific earnings or financial guidance. Management said loan growth and forecast macroeconomic conditions contributed to the 2022 credit-loss provision and considered the allowance adequate, while noting actual losses may differ and additional provisions could affect future earnings. One $0.5 million loan remained under payment deferral at June 30. PPP loans totaled $18.0 million; management expected to recognize most of the remaining $0.3 million in deferred PPP fees by year-end 2022.
Interest-rate exposure remains a key market risk. The company’s model estimated that a 200-basis-point rate increase would raise one-year net interest income 2.30%, while a 100-basis-point decrease would reduce it 5.65%. A 200-basis-point increase would reduce modeled economic value of equity 1.41%; a 100-basis-point decrease would reduce it 6.86%. The company uses $400 million of interest-rate swaps as cash-flow hedges of FHLB advances.
Risks discussed include changing interest rates and margins, economic weakness, credit losses, competition, market volatility, regulation and legal matters, COVID-19 effects, and the transition from LIBOR. The Bank had ceased originating loans indexed to LIBOR, but said the effect on existing LIBOR-linked assets and liabilities remained uncertain. Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reports no material legal proceedings and no material change to the risk factors in the 2021 Form 10-K.
Important facts for investors to verify
- Whether loan growth, deposit growth, and the higher reliance on borrowings can be sustained as funding costs change.
- How rising or falling rates affect actual net interest margin and results compared with the company’s interest-rate sensitivity models.
- Whether credit quality and the $82.7 million allowance remain adequate, particularly given the concentration in commercial real estate and construction lending.
- Whether securities unrealized losses recover without requiring sales, and the resulting effects on equity and tangible capital.
- Whether staffing and BoeFly-related costs, and other operating expenses, moderate or continue to pressure earnings.
- The pace of LIBOR contract transition and any effects on existing loans, liabilities, and hedges.
- Capital and liquidity headroom after loan growth, dividends, and share repurchases; the company repurchased 302,315 shares during Q2.