ConnectOne Bancorp, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. ConnectOne is a New Jersey-based bank holding company operating ConnectOne Bank, a community-focused commercial bank with 21 banking offices. Figures are unaudited; dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2017 | Q1 2016 / prior date | Change |
|---|---|---|---|
| Net interest income | $33.1 | $31.3 | Up 5.8% |
| Net interest margin, tax-equivalent | 3.40% | 3.45% | Down 5 basis points |
| Adjusted net interest margin, excluding purchase-accounting adjustments | 3.33% | 3.31% | Up 2 basis points |
| Provision for loan losses | $1.1 | $3.0 | Down $1.9 |
| Noninterest income | $3.0 | $1.2 | Includes $1.6 securities gain |
| Noninterest expense | $18.2 | $14.4 | Up $3.9; includes $2.6 medallion-loan valuation allowance |
| Net income | $11.9 | $10.4 | Up 14.3% |
| Diluted earnings per share | $0.37 | $0.34 | Up $0.03 |
| Common dividend per share | $0.075 | $0.075 | Unchanged |
Management attributed higher earnings principally to increased net interest income, securities-sale gains, and a lower loan-loss provision, partly offset by higher expenses. Interest-earning assets grew 8.7% year over year; reported net interest margin contracted, while the adjusted margin modestly improved.
Financial position, cash flow and credit
- Assets and lending: Total assets were $4.46 billion, up from $4.43 billion at year-end. Gross loans were $3.57 billion, up $95.4 million, or 2.7%, from year-end. Growth was concentrated in commercial real estate, including multifamily; construction and commercial loans declined.
- Funding and liquidity: Deposits were $3.36 billion, up $11.2 million. Cash and cash equivalents fell to $161.9 million from $200.4 million. Management reported liquid assets of $384.5 million, or 8.6% of assets and 10.0% of deposits and borrowings, and approximately $785 million of available and unused credit capacity. Outstanding commitments to extend credit were approximately $616 million.
- Cash flows: Operating activities provided $26.5 million; investing activities used $88.7 million, primarily due to loan growth; financing activities provided $23.6 million. Net cash decreased $38.5 million during the quarter.
- Debt: Borrowings were $491.2 million, including $476.2 million of FHLB advances; subordinated debentures were $54.6 million. FHLB advances carried a 1.55% weighted-average rate, with approximately $748 million of remaining FHLB borrowing capacity reported in the note.
- Credit quality: Allowance for loan losses was $26.9 million, or 0.75% of loans, versus 0.74% at year-end and 0.89% a year earlier. The quarter had $57,000 of net recoveries. Held-for-investment nonaccrual loans rose to $12.8 million from $5.7 million, principally reflecting an increase in nonaccrual commercial real estate loans. Total nonperforming assets were $72.4 million, including $59.1 million of nonaccrual loans held-for-sale, primarily taxi medallion loans.
- Capital: Stockholders’ equity was $540.3 million. Tangible common equity ratio was 9.08%, and tangible book value per share was $12.23, compared with 8.93% and $11.96 at year-end. The Company and Bank exceeded applicable well-capitalized regulatory thresholds.
Material changes and unusual items
- The Company recorded a $2.6 million valuation allowance on taxi medallion loans held-for-sale. The medallion portfolio had a $61.3 million carrying value at quarter-end, net of the allowance, compared with $65.6 million at year-end. Valuation uses significant unobservable inputs and management judgment.
- The Company sold available-for-sale securities for $29.5 million, recognizing a $1.6 million pretax gain. Securities available-for-sale totaled $352.5 million at quarter-end.
- Nonaccrual loans held-for-investment increased notably during the quarter; total nonperforming assets also rose from $69.4 million at year-end to $72.4 million.
- Q1 2017 income tax expense included a $133,000 benefit related to adoption of the share-based compensation accounting standard. The reported effective tax rate was 29.3%; management said it expected a low-30% rate excluding changes to the medallion valuation allowance.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. Management stated that the allowance for loan losses was adequate based on its assessment, but emphasized that estimates may change and future provisions could materially affect earnings. Management’s interest-rate model estimated that an immediate 200-basis-point increase would raise one-year net interest income 4.66%, while a 100-basis-point decrease would lower it 2.87%. Under the same shocks, modeled economic value of equity would decline 9.13% and rise 3.32%, respectively. These are model estimates, not forecasts.
Principal disclosed risks include competition for deposits and loans; interest-rate changes and potential margin pressure; changes in credit losses, loan volumes and prepayments; economic and real-estate conditions, particularly in New Jersey; regulatory or legal developments; securities valuation and impairment judgments; and liquidity, funding and reputation risks. The filing reported no legal proceedings expected to materially adversely affect results or financial condition, and no material changes to the risk factors in the prior Form 10-K. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track taxi medallion loan valuations, realized recovery or sale prices, and any further allowance needs.
- Investigate the increase in nonaccrual commercial real estate loans and monitor total nonperforming assets, TDRs and delinquencies.
- Assess whether loan growth, deposit mix and funding costs sustain net interest income and margin, particularly under changing rates.
- Review liquidity and borrowing capacity alongside the decline in cash and the growth in lending and credit commitments.
- Confirm capital ratios and the effect of future credit losses, securities valuation changes and regulatory requirements.
- Verify the common shares outstanding: the cover reports 32,005,471 shares as of April 28, 2017, while the statement of condition reports 32,004,471 at March 31, 2017.