ConnectOne Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; financial statements are unaudited. ConnectOne operates ConnectOne Bank, a community bank headquartered in New Jersey, with 25 banking offices. Amounts below are in U.S. dollars; “$ millions” means millions unless otherwise stated.
Key financial results
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net interest income | $63.8m | $75.6m | $130.9m | $145.9m |
| Net interest margin, tax-equivalent | 2.81% | 3.91% | 2.89% | 3.81% |
| Net income | $21.4m | $32.4m | $46.3m | $63.7m |
| Net income available to common stockholders | $19.9m | $30.8m | $43.3m | $60.7m |
| Diluted earnings per share | $0.51 | $0.78 | $1.10 | $1.53 |
| Provision for credit losses | $3.0m | $3.0m | $4.0m | $4.5m |
| Noninterest income | $3.4m | $3.4m | $6.2m | $6.4m |
| Noninterest expense | $35.5m | $31.7m | $70.3m | $60.9m |
Financial condition, cash flow and credit
- Balance sheet at June 30: Total assets were $9.72bn; loans net of allowance were $8.06bn; deposits were $7.54bn; borrowings were $827.6m; subordinated debentures, net, were $79.2m; and stockholders’ equity was $1.20bn.
- Loans and deposits: Gross loans rose $47.1m, or 0.6%, from year-end 2022 to $8.16bn. Commercial real estate represented 71.5% of gross loans. Deposits increased $181.7m, or 2.5%; noninterest-bearing deposits declined $145.3m while time deposits increased $227.0m.
- Liquidity: Cash and cash equivalents were $319.9m, up $51.6m from year-end. Management reported $591.8m of liquid assets, or 6.1% of total assets, versus $760.0m at year-end. Available and unused credit was approximately $3.3bn, against approximately $1.2bn of commitments to extend credit.
- Cash flow, first half: Operating activities provided $37.6m; investing activities used $36.3m; financing activities provided $50.3m. Financing included $181.9m of net deposit growth, $1.377bn of FHLB advances, $1.407bn of borrowing repayments, and repayment of $75m of subordinated debt.
- Credit quality: The allowance for loan losses was $89.2m, or 1.09% of loans, compared with $90.5m and 1.12% at year-end. Nonaccrual loans rose to $51.5m from $44.5m; nonperforming assets were 0.53% of total assets versus 0.46%. First-half net charge-offs were $5.5m, compared with $0.5m in the prior-year period; the filing attributes the increase mainly to resolution of previously reserved taxi loans and an owner-occupied commercial real estate loan.
- Capital: Company regulatory ratios were 10.62% Tier 1 leverage, 10.55% CET1, 11.90% Tier 1 risk-based and 13.83% total risk-based. The Bank’s total risk-based capital ratio was 13.33%, above the 10.00% well-capitalized threshold. Tangible common equity ratio was 9.19%, versus 9.04% at year-end.
Material changes and management commentary
- Common earnings declined: Q2 net income available to common shareholders fell $10.9m year over year; first-half earnings fell $17.4m. Management cited lower net interest income and higher operating costs, partly offset by lower income taxes.
- Management attributed the margin contraction primarily to sharply higher deposit costs. Q2 interest expense on deposits was $50.7m versus $5.7m a year earlier; first-half expense was $90.8m versus $10.7m. The tax-equivalent margin narrowed 110 basis points in Q2 and 92 basis points for the first half.
- First-half noninterest expense increased $9.4m, including higher salaries and benefits ($5.6m), FDIC insurance ($1.3m), and technology and communications ($1.0m). The company also reported $0.4m of net losses on equity securities for the first half, down from $1.0m a year earlier.
- Available-for-sale securities had $90.9m of gross unrealized losses and $64.6m of after-tax unrealized losses in accumulated other comprehensive loss at June 30. Management attributed the decline mainly to market interest rates, reported no credit-loss allowance on these securities, and stated it did not intend, and was not likely to be required, to sell them before recovery.
- The company redeemed its $75m 2018 subordinated notes in February 2023. It also repurchased 270,000 shares during Q2; 1,342,477 shares remained authorized for repurchase at quarter-end. Common dividends were $0.17 per share for Q2.
Outlook, risks and contingencies
- The filing provides no specific earnings, margin, loan-growth or expense guidance. Management said liquidity was adequate and the allowance was adequate for inherent portfolio losses; these are management assessments, not guarantees.
- Management highlighted inflation, Federal Reserve tightening, possible recession, higher deposit competition and funding costs, and potential effects on borrowers’ repayment ability. The filing also identifies interest-rate, securities-market, regulatory, legal, competitive and geopolitical risks.
- Interest-rate models estimated that an immediate 200-basis-point increase would reduce one-year net interest income by 1.87% and economic value of equity by 12.72%; a 100-basis-point decrease would reduce one-year net interest income by 1.75%. Management cautioned that model assumptions and actual outcomes may differ.
- The filing added industry risks arising from recent bank failures, including deposit competition, market volatility, possible additional FDIC assessments, and potential regulatory changes or higher capital requirements. The company reported no legal proceedings expected to materially affect its results or financial condition, and no material changes to other previously disclosed risk factors.
Important facts for investors to verify
- Whether deposit pricing and deposit mix stabilize enough to arrest further net interest margin compression.
- Deposit concentration, uninsured deposit exposure, pledged collateral, and the practical availability and terms of reported borrowing capacity.
- Trends in commercial real estate exposure, nonaccrual loans, charge-offs and reserve adequacy, particularly if economic conditions weaken.
- The potential timing and realization of the securities portfolio’s unrealized losses, including effects of interest rates and liquidity needs.
- The filing’s tangible book value per share contains an internal discrepancy: the narrative states $22.34 at June 30, while the reconciliation table reports $22.43; verify the correct figure.
- Assumptions and sensitivity of interest-rate models, and the effect of the 2018 debt redemption and ongoing share repurchases on funding and capital.