ConnectOne Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021. ConnectOne operates a community-focused commercial bank, primarily in New Jersey, New York and South Florida. Financial statement amounts below are in millions unless otherwise noted.
Financial performance
- Q3 earnings: Net income was $28.9 million, down 9.9% from $32.1 million; net income available to common shareholders was $27.4 million versus $32.1 million. Diluted EPS was $0.70 versus $0.80.
- First nine months: Net income was $92.7 million versus $97.3 million; common earnings were $88.1 million versus $97.3 million. Diluted EPS was $2.23 versus $2.43.
- Net interest income: Q3 was $78.2 million, up 14.5% year over year; fully taxable-equivalent net interest income rose 14.7% to $78.9 million. Nine-month GAAP net interest income was $224.1 million, up 16.5%; fully taxable-equivalent net interest income increased 16.6% to $225.8 million.
- Net interest margin: Fully taxable-equivalent margin was 3.68% in Q3, down 5 basis points year over year. For nine months it was 3.76%, up 13 basis points.
- Other income and expenses: Q3 noninterest income was $3.3 million versus $4.0 million; noninterest expense was $32.1 million versus $28.2 million. Nine-month totals were $9.7 million and $93.1 million, respectively, compared with $11.9 million and $80.9 million.
- Credit costs: Q3 provision for credit losses was $10.0 million versus $1.1 million. Nine-month provision was $14.5 million, compared with a $6.3 million reversal in 2021. Nine-month net charge-offs were $0.9 million versus $1.8 million.
Financial position, cash flow and capital
- Growth: Total assets were $9.48 billion, up 16.6% from year-end. Gross loans rose 15.7% to $7.91 billion, led by commercial real estate loans, which reached $5.67 billion. CRE was 71.6% of gross loans.
- Funding and debt: Deposits rose 15.4% to $7.31 billion. Borrowings increased to $830.0 million from $468.2 million; subordinated debentures were $153.2 million. The filing identifies $802.3 million of FHLB advances maturing in under one year, at a 2.99% weighted rate.
- Liquidity: Cash and cash equivalents were $333.8 million. Management reported $796.9 million of liquid assets, equal to 8.4% of assets and 9.8% of deposits and borrowings. Available and unused credit was approximately $0.9 billion; outstanding commitments to extend credit were approximately $1.2 billion.
- Cash flow, first nine months: Operating activities provided $94.9 million, investing activities used $1.33 billion (primarily loan and securities growth), and financing activities provided $1.30 billion. Cash increased $68.3 million.
- Credit quality: The allowance for loan losses was $91.7 million, or 1.16% of loans, versus $78.8 million and 1.15% at year-end. Nonaccrual loans were $57.4 million, or 0.73% of loans, down from $61.7 million and 0.90%. Nonperforming assets were $57.7 million, or 0.61% of assets.
- Capital and securities: Stockholders’ equity was $1.15 billion. Tangible common equity ratio was 8.87%, down from 10.06%; tangible book value per share was $20.93 versus $20.12. Bank regulatory capital ratios exceeded well-capitalized thresholds. Available-for-sale securities had $95.1 million of pretax unrealized losses and $67.7 million of after-tax accumulated losses, primarily attributed to interest rates and market conditions; no securities credit-loss allowance was recorded.
Changes and management commentary
Higher loan balances and asset yields lifted net interest income, while deposit and borrowing costs rose. Management attributed lower earnings chiefly to higher credit provisions, higher operating expenses and preferred dividends introduced after the 2021 preferred-stock issuance. Q3 salaries and benefits increased by $4.2 million year over year, reflecting additional staff, salary increases and incentive accruals. Nine-month expenses included a $1.5 million increase in the estimated BoeFly acquisition price.
Management said the allowance was adequate, while noting that estimates depend on portfolio composition and economic forecasts. The filing gives no formal earnings or financial guidance. Interest-rate sensitivity modeling estimated that a 200-basis-point rate increase would raise one-year net interest income by 0.28%, but reduce economic value of equity by 5.54%; a 100-basis-point decline would reduce one-year net interest income by 1.51%.
Risks, contingencies and unusual items
- Management cited inflation, Federal Reserve tightening and possible recession as risks to borrowers’ repayment capacity and bank results. Other cited uncertainties include COVID-19 effects, competition, regulation, geopolitical developments and the LIBOR transition.
- Rising rates drove a substantial decline in securities fair value recorded in other comprehensive loss, rather than earnings. Management stated issuers continued timely payments and the company did not intend, and was not expected to be required, to sell before recovery.
- The loan portfolio is concentrated in commercial real estate. Investors should consider this exposure alongside economic and property-market conditions.
- The filing reports no material legal proceeding and no material change to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Track deposit mix, funding costs, borrowing levels and upcoming FHLB maturities as rates and competition change.
- Review CRE concentrations, criticized and nonaccrual loans, collateral values, and the assumptions supporting the allowance.
- Monitor unrealized securities losses, their effect on tangible capital, and whether losses are realized through sales.
- Compare actual net interest margin and rate sensitivity with the filing’s modeled outcomes.
- Assess the effect of preferred dividends, staffing-related expense growth and BoeFly-related costs on future common earnings.