ConnectOne Bancorp, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. ConnectOne Bancorp is a New Jersey bank holding company operating ConnectOne Bank, a community bank with 25 banking offices. This unaudited filing covers the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022 unless noted.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable / prior period |
|---|---|---|
| Total interest income | $116.1 million | $78.9 million in Q1 2022 |
| Net interest income | $67.1 million | $70.4 million in Q1 2022 |
| Net interest margin, tax-equivalent | 3.00% | 3.71% in Q1 2022 |
| Net income | $24.9 million | $31.4 million in Q1 2022 |
| Net income available to common stockholders | $23.4 million | $29.9 million in Q1 2022 |
| Diluted earnings per common share | $0.59 | $0.75 in Q1 2022 |
| Noninterest income / expenses | $2.8 million / $34.9 million | $3.1 million / $29.2 million in Q1 2022 |
| Cash and cash equivalents | $562.4 million | $268.3 million at December 31, 2022 |
| Total assets | $9.96 billion | $9.64 billion at December 31, 2022 |
| Total deposits | $7.75 billion | $7.36 billion at December 31, 2022 |
| Gross loans | $8.14 billion | $8.11 billion at December 31, 2022 |
| Stockholders’ equity | $1.19 billion | $1.18 billion at December 31, 2022 |
- Profitability and margins: Common earnings declined $6.5 million year over year. Management attributed the decrease mainly to a $3.3 million reduction in net interest income and a $5.6 million increase in noninterest expenses, partly offset by lower credit-loss provision and income taxes. Interest expense rose to $49.0 million from $8.6 million in Q1 2022. The reported effective tax rate was 26.7%.
- Cash flow and liquidity: Operating activities provided $16.4 million; investing activities used $26.6 million; financing activities provided $304.3 million. Financing cash flow chiefly reflected $396.7 million of deposit growth, partly offset by repayment of $75.0 million of subordinated debt. Management reported $827.7 million of liquid assets, equal to 8.1% of total assets and 9.6% of deposits and borrowings. At quarter-end, available and unused credit was approximately $1.2 billion. In April, the Bank increased borrowing availability at the Federal Reserve and FHLB by approximately $2.0 billion.
- Debt and capital: Borrowings were $852.6 million and subordinated debentures were $79.1 million at quarter-end. The company redeemed its $75 million 2018 subordinated notes in February. Company total risk-based capital was 13.84%; the Bank’s was 13.27%, and the Bank met well-capitalized thresholds. Tangible common equity ratio was 8.87%, versus 9.04% at year-end.
- Credit: The loan allowance was $87.0 million, or 1.07% of loans, down from $90.5 million and 1.12% at year-end. Q1 net charge-offs were approximately $4.5 million, versus $0.2 million in Q1 2022; management said they reflected resolutions of previously reserved taxi loans and one owner-occupied commercial real estate loan. Nonaccrual loans were $47.7 million, or 0.59% of loans, compared with $44.5 million, or 0.55%, at year-end.
Material changes versus comparable periods
- Tax-equivalent net interest income declined 4.3% year over year, despite a $1.4 billion increase in average interest-earning assets. Management attributed margin compression primarily to a 222-basis-point rise in the cost of interest-bearing liabilities, partly offset by a 102-basis-point increase in asset yields.
- Deposit costs rose substantially as interest-bearing deposit expense increased to $40.1 million from $5.0 million in Q1 2022. Sequentially, deposits increased $396.6 million, while noninterest-bearing deposits fell $156.3 million and time deposits rose $312.5 million.
- Noninterest expenses increased $5.6 million year over year, mainly from salaries and benefits, occupancy, and other expenses. Salaries and benefits rose $3.5 million, which management attributed to staffing and seasonal payroll taxes.
- Available-for-sale securities had $57.3 million of net unrealized losses, net of tax, at March 31, versus $61.8 million at year-end. The filing says losses were primarily related to interest rates and market conditions; no credit-loss allowance was recorded for these securities.
- Commercial real estate represented 71.7% of gross loans. Total gross loans grew only 0.4% from year-end, with commercial real estate and construction growth partly offset by lower commercial loans.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings, revenue, margin, or loan-growth guidance. Management said liquidity was adequate and the allowance for credit losses was adequate, while cautioning that actual credit outcomes could differ from estimates.
- Management warned that inflation, Federal Reserve rate increases and quantitative tightening could weaken the economy, pressure borrowers, intensify deposit competition, and increase funding costs. The filing also identifies interest-rate changes, competition, regulation, market volatility, and legal or regulatory proceedings as risks.
- Recent bank failures and financial-sector volatility were added as a risk factor. The company warned of possible deposit competition, higher FDIC assessments, regulatory restrictions or capital requirements, and market-price volatility in its shares.
- Interest-rate models estimated that a 200-basis-point immediate increase would reduce one-year net interest income by 0.63% and economic value of equity by 12.16%; a 100-basis-point decrease would reduce one-year net interest income by 2.79%. Management cautioned that the models rely on assumptions and are not precise forecasts.
- The company uses interest-rate swaps and caps as hedges. It reported $950 million notional in cash-flow hedge contracts with a $47.6 million fair value. Q1 hedge-related net interest income was approximately $4.3 million, compared with $0.5 million of expense in Q1 2022.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The company said it had no legal proceedings expected to materially adversely affect results or financial condition.
Important facts for investors to verify
- Deposit trends and funding costs, especially the shift from noninterest-bearing deposits toward time deposits, and the sustainability of reported liquidity and expanded borrowing capacity.
- Whether net interest margin stabilizes as deposit pricing changes and how rate movements affect earnings and economic value of equity.
- Credit performance in the concentrated commercial real estate portfolio, including nonaccrual balances, charge-offs, and allowance adequacy.
- How unrealized securities losses, capital levels, and any need or decision to sell securities could affect tangible equity and liquidity.
- The effect of the February subordinated-note redemption, share repurchases, and dividends on capital and future funding flexibility.