ConnectOne Bancorp, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. ConnectOne is a New Jersey bank holding company operating ConnectOne Bank, a community-based commercial bank with 21 banking offices. Unless indicated otherwise, financial amounts below are in millions.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $35.1 | $32.4 | $68.2 | $63.7 |
| Provision for loan losses | $1.5 | $3.8 | $2.6 | $6.8 |
| Noninterest income | $1.4 | $1.6 | $4.4 | $2.8 |
| Noninterest expense | $25.3 | $14.4 | $43.6 | $28.7 |
| Net income | $7.7 | $10.9 | $19.6 | $21.3 |
| Diluted earnings per share | $0.24 | $0.36 | $0.60 | $0.70 |
- Margins: Tax-equivalent net interest margin was 3.45% for Q2 versus 3.40% a year earlier; six-month margin was 3.42% in both periods. Excluding purchase-accounting adjustments, adjusted margin was 3.42% in Q2 and 3.38% for the first half.
- Balance sheet at June 30: Assets were $4.68 billion, loans receivable $3.76 billion gross, deposits $3.43 billion, borrowings $626.2 million, and stockholders’ equity $546.2 million. Loans grew 8.2% from December 31, 2016; deposits grew 2.6%.
- Credit and allowance: Allowance for loan losses was $28.4 million, or 0.76% of loans, versus $25.7 million and 0.74% at year-end. Nonaccrual held-for-investment loans increased to $14.1 million from $5.7 million. Total nonperforming assets were $63.5 million, or 1.36% of assets, versus $69.4 million, or 1.57%.
- Cash flow and liquidity: First-half operating cash flow was $48.0 million; investing used $333.2 million and financing provided $231.3 million. Cash and cash equivalents declined $53.9 million to $146.5 million. Management reported $441.3 million in liquid assets and approximately $757 million in available and unused credit capacity.
- Capital and dividends: Tangible common equity ratio was 8.77%, tangible book value per share $12.42, and the quarterly common dividend $0.075 per share. The Company and Bank met applicable regulatory capital requirements and capital-conservation-buffer requirements.
Material changes and unusual items
- Reported Q2 net income fell 29% year over year; first-half net income fell 8%. Management attributed the decline principally to a valuation allowance on taxi medallion loans held for sale: $9.7 million in Q2 and $12.3 million in the first half. Excluding this charge, operating expenses still rose, which management linked mainly to business and staffing growth.
- The taxi medallion portfolio was carried at $50.9 million at June 30, net of a $12.3 million valuation allowance; the prior year-end carrying value was $65.6 million with no allowance. Fair value depends on Level 3 inputs, including market indications and discounted cash-flow assumptions.
- Net gains on securities sales were $1.6 million in the first half of 2017, versus $0.1 million in the comparable 2016 period; noninterest income excluding securities gains was broadly flat, according to management.
- Gross loans grew $286.1 million from year-end, led by commercial real estate, particularly multifamily, while commercial construction loans declined $55.2 million.
Outlook, commentary and risks
- No formal earnings or revenue guidance is provided. Management said that, excluding changes to the taxi-medallion valuation allowance, it expected the 2017 effective tax rate to remain in the low-30% range.
- Management considered the loan-loss allowance adequate, but noted estimates are judgmental and actual losses could require additional provisions. The filing also identifies risks from loan performance, economic and real-estate conditions, competition, interest-rate changes, regulation, securities markets, and legal or regulatory proceedings.
- Interest-rate modeling at June 30 estimated that a 200-basis-point rate increase would raise one-year net interest income by 1.66%; a 100-basis-point decrease would reduce it by 1.67%. A 200-basis-point increase would reduce modeled economic value of equity by 11.71%.
- The filing reports no legal proceedings expected to have a material adverse impact, no changes to the risk factors in the latest annual report, and effective disclosure controls. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How taxi-medallion loan valuations, collateral assumptions and potential further losses evolve.
- Whether the rise in nonaccrual held-for-investment loans and commercial real estate credit exposures persists.
- Loan and deposit growth, funding costs, net interest margin, and reliance on FHLB borrowings and available liquidity facilities.
- Regulatory capital ratios and the effect of future capital-buffer requirements on dividends or capital deployment.
- Interest-rate sensitivity assumptions and the reported $757 million of available and unused credit capacity.