ConnectOne Bancorp, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021. ConnectOne operates ConnectOne Bank, a New Jersey community bank with 24 offices. Dollar amounts below are in millions unless noted.
Financial results and key metrics
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Net interest income | $70.4 | $61.2 |
| Net interest margin, tax-equivalent | 3.71% | 3.56% |
| Provision for credit losses | $1.5 expense | $5.8 reversal |
| Noninterest income | $3.1 | $3.4 |
| Noninterest expense | $29.2 | $26.5 |
| Net income | $31.4 | $33.0 |
| Net income available to common shareholders | $29.9 | $33.0 |
| Diluted EPS | $0.75 | $0.82 |
| Total assets | $8,334.3 | $8,129.5 at Dec. 31, 2021 |
| Total deposits | $6,560.4 | $6,333.0 at Dec. 31, 2021 |
| Gross loans | $6,988.0 | $6,838.4 at Dec. 31, 2021 |
| Cash and cash equivalents | $311.5 | $265.5 at Dec. 31, 2021 |
Net cash from operating activities was $45.8; investing activities used $160.2, mainly reflecting loan growth; financing activities provided $160.4, chiefly from deposit growth, partly offset by net FHLB repayments. The allowance for loan losses was $80.1, or 1.15% of loans. Stockholders’ equity was $1,138.5, including $110.9 of preferred stock. Tangible common equity ratio was 9.99% and tangible book value per common share was $20.51.
Borrowings totaled $412.2, primarily FHLB advances, plus $153.0 of subordinated debentures. The company reported $742.8 of liquid assets, equal to 9.1% of assets and 10.9% of deposits and borrowings, and approximately $1.0 billion of available and unused borrowing capacity. Outstanding commitments to extend credit were approximately $1.2 billion. The Bank’s regulatory capital ratios exceeded applicable well-capitalized thresholds.
Material changes versus comparable periods
- Common earnings declined $3.1 and diluted EPS fell $0.07 year over year. A $9.2 increase in tax-equivalent net interest income was more than offset by higher credit-loss provision, operating expense, preferred dividends, and taxes, as well as lower noninterest income.
- Net interest income rose 15.0%, supported by 10.1% growth in average loans and a 15-basis-point increase in net interest margin. The cost of interest-bearing liabilities fell 27 basis points; average earning-asset yield fell 8 basis points.
- Gross loans grew $149.6, or 2.2%, from year-end, primarily through organic originations. Commercial real estate loans increased $177.5; commercial loans fell $21.0, partly reflecting PPP loan balances declining to $54.3 from $93.1.
- Deposits increased $227.5, or 3.6%; demand and savings balances rose while time deposits declined $84.3. FHLB borrowings declined $56.0 from year-end.
- After-tax unrealized losses on available-for-sale securities increased substantially: the net loss in accumulated other comprehensive income was $23.0 at quarter-end versus $0.5 at year-end. Management attributed the decline mainly to market conditions and interest rates, and reported no credit-loss allowance on these securities.
- Nonperforming assets were $59.7, or 0.72% of total assets, versus $61.7 at year-end. Nonaccrual loans were $59.4; performing TDRs were $47.4.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings, revenue, or margin guidance. Management said results for the quarter are not necessarily indicative of full-year results and judged the loan-loss allowance adequate, while noting actual losses may differ from estimates.
- Management cited strong organic loan growth and stabilizing macroeconomic forecasts in explaining the Q1 provision. COVID-19-related customer relief had declined to one deferred loan with a $0.5 balance. PPP loans were $54.3; management expected to recognize most of $2.6 in remaining deferred PPP fees by year-end 2022.
- Interest-rate models estimated that an instantaneous +200-basis-point shock would increase one-year net interest income 3.60%, while a -100-basis-point shock would reduce it 6.28%. Estimated economic value of equity would rise 0.65% under +200 basis points and fall 6.89% under -100 basis points. These are model estimates, not forecasts.
- Unusual or notable items included $0.6 of net losses on equity securities, $0.7 of BoeFly acquisition-price-value expense, and a $0.9 favorable dissolution of a merger lease obligation that reduced occupancy expense. Q1 included $1.5 of preferred dividends; preferred shares had been issued in 2021.
- Key disclosed risks include interest-rate and margin changes, credit losses and loan performance, economic and securities-market conditions, competition, regulation, legal or regulatory proceedings, and continuing effects of COVID-19 and geopolitical events, including the Russia-Ukraine conflict. The filing reported no material change to previously disclosed risk factors and no legal proceedings expected to materially adversely affect results or condition.
- Disclosure controls were assessed as effective; the company reported no material changes in internal control over financial reporting during the quarter. A new accounting standard on troubled debt restructurings and credit-loss disclosures was under evaluation, with adoption required for fiscal years beginning after December 15, 2022.
Important facts for investors to verify
- Whether loan growth, especially commercial real estate exposure, is accompanied by stable credit quality and adequate allowance coverage; review nonaccruals, TDRs, criticized loans, charge-offs, and collateral values.
- How rising rates affect deposit pricing, net interest margin, securities values, and the company’s interest-rate sensitivity relative to model assumptions.
- Whether the $23.0 after-tax unrealized securities loss remains unrealized and whether liquidity needs could require securities sales before recovery.
- Deposit mix, concentration, funding costs, FHLB borrowing capacity, and the ability to fund approximately $1.2 billion of credit commitments.
- Drivers of higher salaries and other operating expenses, BoeFly acquisition-related costs, and progress in converting deferred PPP fees to income.
- Capital and shareholder-return trends, including preferred dividends, common dividends, and Q1 repurchases of 144,793 shares.