ConnectOne Bancorp, Inc. — Q1 2024 Form 10-Q
Business and period. ConnectOne Bancorp is a bank holding company operating ConnectOne Bank, a community bank headquartered in New Jersey. The unaudited results cover the three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. The company reports as one community-banking segment.
Key financial results
| Metric | Q1 2024 | Q1 2023 or prior period |
|---|---|---|
| Total interest income | $129.6 million | $116.1 million |
| Net interest income | $60.3 million | $67.1 million |
| Tax-equivalent net interest margin | 2.64% | 3.00% |
| Provision for credit losses | $4.0 million | $1.0 million |
| Noninterest income | $3.8 million | $2.8 million |
| Noninterest expense | $37.1 million | $34.9 million |
| Net income | $17.2 million | $24.9 million |
| Net income available to common shareholders | $15.7 million | $23.4 million |
| Diluted EPS | $0.41 | $0.59 |
| Operating cash flow | $20.5 million | $16.4 million |
Balance sheet, funding and capital
- Total assets were $9.85 billion, essentially unchanged from year-end 2023. Gross loans were $8.30 billion, down $47.7 million (0.6%); commercial real estate represented 70.2% of gross loans.
- Deposits increased $52.5 million to $7.59 billion. Borrowings declined $56.0 million to $877.6 million; subordinated debentures were $79.6 million.
- Cash and cash equivalents were $277.6 million. Management reported $706.2 million of liquid assets (7.2% of assets) and approximately $3.2 billion of available, unused credit capacity. The Bank had about $1.1 billion of outstanding commitments to extend credit.
- Stockholders’ equity was $1.22 billion. Tangible common equity ratio was 9.25%; tangible book value per share was $23.26. The Bank’s total risk-based capital ratio was 13.41%, above its 10.00% well-capitalized threshold.
- Cash increased $34.9 million during the quarter: operating activities provided $20.5 million, investing activities provided $33.1 million, and financing activities used $18.7 million.
Material changes and management commentary
- Common earnings fell $7.7 million year over year. Management attributed the decline principally to a $6.8 million decrease in net interest income, a $3.0 million increase in credit-loss provision, and a $2.2 million increase in noninterest expense, partly offset by lower tax expense and higher noninterest income.
- Tax-equivalent margin contracted 36 basis points. The average cost of deposits rose 114 basis points year over year, partly offset by a 47-basis-point increase in loan yield. Average interest-earning assets grew 1.6%.
- Noninterest expense growth included higher technology and communications costs ($1.3 million) and FDIC insurance expense ($0.9 million). Management linked the latter to balance-sheet growth and a higher initial assessment rate.
- Average deposits increased 1.9% year over year, with time deposits up $210 million and average noninterest-bearing demand deposits down $198 million. Management cited migration to interest-bearing products amid higher rates and continued use of brokered deposits as a funding alternative.
- The allowance for loan losses rose to $82.9 million, or 1.00% of loans, from $82.0 million and 0.98% at year-end. Net charge-offs were $3.2 million, versus $4.5 million a year earlier. Management said the allowance was adequate; the provision increase reflected macroeconomic forecasts, qualitative adjustments and specific reserves.
Outlook, risks and unusual items
- The filing provides no numerical earnings or margin guidance. Management said liquidity was adequate and interest-rate-risk model results were within Board guidelines.
- Rate simulations estimated that a 200-basis-point immediate increase would reduce one-year net interest income by 6.38% and economic value of equity by 12.46%; a 100-basis-point decrease would increase them by 2.66% and 4.44%, respectively. Management cautions that model assumptions and actual rate, deposit and loan behavior may differ.
- Available-for-sale securities had $92.2 million of gross unrealized losses at quarter-end; the net-of-tax unrealized loss reflected in accumulated other comprehensive loss was $66.7 million. Management attributed the decline primarily to interest rates and market conditions, stated it did not intend to sell and expected not to be required to sell before recovery, and recorded no credit-loss allowance on these securities. The BTFP expired March 11, 2024.
- Nonaccrual loans were $47.4 million, down from $52.5 million at year-end. One $23.6 million loan was over 90 days past due but still accruing; the company said it was well-secured at approximately 60% loan-to-value and in collection. The CRE concentration and regional and property-market exposures merit monitoring.
- Estimated uninsured deposits were $2.30 billion on a consolidated basis, excluding affiliate and subsidiary accounts. Nonreciprocal brokered time deposits totaled $920.1 million. These funding sources, deposit pricing and customer behavior are liquidity and margin sensitivities.
- Forward-looking risks include competition, interest-rate changes, credit losses, economic conditions, regulation, market volatility, and legal or regulatory proceedings. The company reported no legal proceedings expected to have a material adverse impact and no material change in previously disclosed risk factors. Management assessed disclosure controls as effective.
Important facts for investors to verify
- Track deposit mix, renewal pricing, brokered-deposit reliance, uninsured balances and available borrowing capacity, particularly following expiration of the BTFP.
- Review subsequent credit performance and collateral values for CRE loans, the $23.6 million past-due accruing loan, nonaccrual balances and allowance assumptions.
- Assess whether deposit costs continue to outpace asset-yield gains and whether the reported margin and interest-rate sensitivity models change.
- Monitor AFS unrealized losses, capital and tangible common equity, and the effect of any securities sales or funding needs.
- Reconcile deposit figures before relying on year-end comparisons: the balance sheet reports December 31, 2023 deposits of $7.536 billion, while one MD&A passage gives $7.356 billion; other filing tables show $7.536 billion.