ConnectOne Bancorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. ConnectOne is a New Jersey bank holding company operating ConnectOne Bank, a community-based commercial bank.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $37.0 million | $33.0 million | $105.3 million | $96.7 million |
| Provision for loan losses | $1.5 million | $6.8 million | $4.0 million | $13.5 million |
| Noninterest income | $1.8 million | $5.6 million | $6.2 million | $8.3 million |
| Noninterest expense | $18.6 million | $14.6 million | $62.2 million | $43.3 million |
| Net income available to common shareholders | $13.1 million | $11.9 million | $32.6 million | $33.1 million |
| Diluted EPS | $0.41 | $0.39 | $1.01 | $1.09 |
| Tax-equivalent net interest margin | 3.44% | 3.32% | 3.44% | 3.39% |
- Quarterly earnings improved mainly on higher net interest income and lower loan-loss provision, partly offset by higher expenses and the absence of the prior-year quarter’s $4.1 million securities gain.
- Nine-month common earnings declined despite higher net interest income and lower provision. The principal offsets were a $15.3 million taxi-medallion loan valuation allowance and lower securities gains ($1.6 million versus $4.2 million).
- Management reported Q3 adjusted net interest margin of 3.41%, excluding purchase-accounting adjustments, versus 3.22% a year earlier. Higher loan volume and improved asset mix helped; higher deposit funding costs and lower securities yields partly offset the benefit.
Financial position, liquidity and capital
- At September 30, 2017, total assets were $4.845 billion, up from $4.426 billion at December 31, 2016. Gross loans were $3.892 billion, up $413.0 million, or 11.9%; commercial real estate loans grew $380.5 million.
- Deposits were $3.624 billion, up $279.5 million (8.4%) from year-end. Borrowings were $585.1 million, compared with $476.3 million; subordinated debentures were $54.7 million.
- Cash and cash equivalents were $141.3 million, down $59.1 million from year-end. Operating cash flow was $68.3 million; investing activities used $508.7 million and financing activities provided $381.2 million.
- Management reported $399.2 million of liquid assets, equal to 8.2% of assets and 9.5% of deposits and borrowings, versus $428.2 million and 9.7%/11.2% at year-end. Available and unused credit was approximately $796 million; outstanding commitments to extend credit were approximately $635 million.
- Stockholders’ equity was $557.7 million. Tangible common equity ratio was 8.71%, and tangible book value per share was $12.78, versus 8.93% and $11.96 at year-end. The Bank’s total risk-based capital ratio was 11.22%; the Company’s was 11.34%. Both were above applicable well-capitalized requirements.
- Common dividends were $0.075 per share for the quarter and $0.225 per share for the nine-month period.
Credit quality and material developments
- The allowance for loan losses was $29.9 million, or 0.77% of loans, compared with $25.7 million, or 0.74%, at year-end and 1.09% at September 30, 2016. Management considered the allowance adequate, while noting estimates could change.
- Nonaccrual loans held for investment increased to $13.8 million from $5.7 million at year-end. Total nonperforming assets, including taxi-medallion loans held for sale, were $61.2 million, or 1.26% of assets, versus $69.4 million, or 1.57%, at year-end. Performing troubled debt restructurings were $12.7 million.
- Taxi-medallion loans were carried at $47.4 million net of a $15.3 million valuation allowance. On November 2, 2017, the Bank returned these loans to held-for-investment, choosing to work them out through borrower cash flows rather than pursue a sale. Management estimated a further pretax charge of approximately $0.5 million in Q4. It cited reduced institutional investor interest and progress restructuring loans, but warned that collection of balloon payments at maturity remained uncertain.
- The held-for-sale portfolio also included $41.8 million of multifamily commercial real estate loans designated as held for sale during Q3; no valuation allowance was assigned to that segment.
- Gross unrealized losses on available-for-sale securities were $2.8 million. Management did not consider them other-than-temporary, but acknowledged that future impairment charges could result if its judgments or market conditions change.
Outlook, risks and contingencies
- The filing gives no formal earnings or growth guidance. Management expected the 2017 effective tax rate to remain in the low-30% range excluding changes to the taxi-medallion valuation allowance. It cautioned that interim results are not necessarily indicative of full-year results.
- Interest-rate sensitivity modeling estimated that a 200-basis-point rate increase would raise net interest income by 1.65% over one year, while a 100-basis-point decrease would lower it by 1.84%. A 200-basis-point increase was estimated to reduce economic value of equity by 12.49%. These are model estimates, not forecasts.
- Key disclosed risks include competition, interest-rate and margin changes, credit losses and loan-sale activity, economic conditions, regulatory changes, securities-market movements, and legal or regulatory proceedings. The company reported no material legal proceedings and no changes to the risk factors in its latest Form 10-K.
- Management identified loan-loss estimates, securities impairment, goodwill impairment and deferred-tax-asset assessments as critical accounting estimates. Adoption of the expected-credit-loss standard (CECL) is expected to require a one-time allowance adjustment, but its amount could not yet be determined. The filing also notes potential balance-sheet increases from lease accounting changes.
Important facts for investors to verify
- Whether taxi-medallion borrower cash flows support the held-for-investment strategy, and whether balloon principal payments are collectible; monitor the estimated Q4 charge and subsequent allowance needs.
- Whether the rise in held-for-investment nonaccrual loans and commercial real estate delinquencies signals broader portfolio deterioration.
- How continued loan growth is funded and affects deposit costs, liquidity, and net interest margin.
- Whether the $796 million of reported unused credit remains available under applicable collateral and borrowing conditions, particularly alongside $635 million of lending commitments.
- Whether securities valuations, interest-rate exposure and capital ratios remain within management’s and regulatory limits.