ConnectOne Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. ConnectOne is a New Jersey-based community bank operating through ConnectOne Bank and reported as one operating segment. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $123.7 million | $97.0 million | $361.1 million | $261.3 million |
| Interest expense | $61.3 million | $18.8 million | $167.8 million | $37.2 million |
| Net interest income | $62.4 million | $78.2 million | $193.3 million | $224.1 million |
| Net income | $21.4 million | $28.9 million | $67.7 million | $92.7 million |
| Net income available to common shareholders | $19.9 million | $27.4 million | $63.2 million | $88.1 million |
| Diluted earnings per share | $0.51 | $0.70 | $1.61 | $2.23 |
| Noninterest income | $3.6 million | $3.3 million | $9.8 million | $9.7 million |
| Noninterest expense | $35.8 million | $32.1 million | $106.1 million | $93.1 million |
| Provision for credit losses | $1.5 million | $10.0 million | $5.5 million | $14.5 million |
- Margins and funding: Tax-equivalent net interest margin fell to 2.76% in Q3 from 3.68% a year earlier, and to 2.85% for the first nine months from 3.76%. For Q3, the yield on interest-earning assets rose to 5.44% from 4.56%, but the cost of interest-bearing liabilities increased to 3.45% from 1.22%. Deposit expense was the main source of margin pressure.
- Balance sheet at September 30: Total assets were $9.68 billion, including gross loans of $8.18 billion and net loans of $8.09 billion. Total deposits were $7.44 billion; borrowings were $887.6 million and subordinated debentures were $79.3 million. Stockholders’ equity was $1.19 billion.
- Cash flow and liquidity: For the first nine months, operating activities provided $64.6 million; investing activities used $75.7 million; and financing activities used $3.9 million. Cash and cash equivalents declined $15.0 million to $253.3 million. Management reported $515.6 million of liquid assets, equal to 5.3% of total assets, and approximately $3.3 billion of available and unused borrowing capacity. Credit commitments were approximately $1.2 billion.
- Credit and asset quality: The allowance for loan losses was $88.2 million, or 1.08% of loans, versus $90.5 million, or 1.12%, at year-end 2022. Nine-month net charge-offs were $8.0 million, compared with $0.9 million in 2022. Nonaccrual loans rose to $56.1 million from $44.5 million; nonperforming assets were 0.58% of total assets.
- Capital and shareholder returns: The company reported a 9.11% tangible common equity ratio and tangible book value of $22.34 per share. At quarter-end, the Bank’s total risk-based capital ratio was 13.43%, above the 10.00% well-capitalized threshold. The company repurchased 316,789 shares during Q3 and paid a $0.17 per-share common dividend.
Material changes versus comparable periods
- Common earnings fell $7.5 million in Q3 and $24.9 million for the first nine months year over year. Lower net interest income and higher noninterest expense more than offset lower credit-loss provisions and lower income tax expense.
- For Q3, net interest income declined $15.8 million; for the nine-month period it declined $30.8 million. Management attributed the contraction mainly to higher deposit costs, partly offset by higher yields on earning assets.
- Noninterest expenses increased $3.6 million in Q3 and $13.0 million year to date. Key drivers included compensation, FDIC insurance, and technology costs; year-to-date other expense also included derivative cash-collateral costs. The prior-year period included $1.5 million of BoeFly acquisition expense.
- Deposits grew 1.1% from year-end to $7.44 billion, but noninterest-bearing deposits fell $277.5 million. Interest-bearing deposits and time deposits increased, indicating a shift toward more costly funding.
- Available-for-sale securities had $123.0 million of gross unrealized losses at September 30, versus $87.2 million at December 31, 2022. The related after-tax accumulated loss was $87.7 million versus $61.8 million. The filing attributes the change primarily to higher rates and market conditions; no credit-loss allowance was recorded for these securities.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings, growth, or margin guidance. Management said liquidity was adequate and the allowance for credit losses was adequate, while noting that actual credit losses may differ from estimates.
- Interest-rate sensitivity models at September 30 estimated that an immediate 200-basis-point rate increase would reduce one-year net interest income by 8.20% and economic value of equity by 16.49%; a 100-basis-point decrease was estimated to increase one-year net interest income by 4.98%. Management cautioned that model assumptions and actual rate movements may differ materially.
- Management identified inflation, Federal Reserve tightening, potential recession, deposit competition, interest-rate changes, borrower repayment capacity, regulatory changes, and market volatility as risks. The filing also notes industry concerns following bank failures and the possibility of higher FDIC assessments or capital requirements.
- Q3 net charge-offs included a partial charge-off on one commercial loan that had previously been reserved for. Year-to-date charge-offs also reflected resolutions of certain nonaccrual taxi loans and one owner-occupied commercial real estate loan.
- The company redeemed $75 million of subordinated notes in February 2023. One remaining subordinated instrument transitioned from LIBOR to a SOFR-based rate; its stated rate was 8.48% at September 30.
- The company reported no legal proceedings expected to have a material adverse impact and no material changes to internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Deposit pricing, deposit mix, and retention of noninterest-bearing balances, including any further funding-cost pressure.
- Trends in net interest margin and the sensitivity of earnings and economic value to interest-rate changes.
- Commercial real estate exposure, which represented 71.3% of gross loans, and developments in nonaccrual loans, charge-offs, and the allowance.
- Liquidity assumptions and the availability and terms of borrowing facilities, pledged collateral, and the $1.2 billion of outstanding credit commitments.
- The duration and potential recovery of unrealized securities losses, as well as the effects of any securities sales on earnings or capital.
- Reported capital measures, share repurchases, and dividends; tangible common equity is a non-GAAP measure.