CONNECTONE BANCORP, INC. The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company's results of operations for the periods presented herein and financial condition as ofMarch 31, 2023 andDecember 31, 2022 . In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.
Cautionary Statement Concerning Forward-Looking Statements
This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business ofConnectOne Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as "believes," "expects," "anticipates," "plans," "trend," "objective," "continue," "remain," "pattern" or similar expressions or future or conditional verbs such as "will," "would," "should," "could," "might," "can," "may" or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and credit loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities such as the ongoing conflict betweenUkraine andRussia , may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in whichConnectOne Bancorp is engaged; (7) changes and trends in the securities markets may adversely impactConnectOne Bancorp ; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning byConnectOne Bancorp ; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; (10) the outcome of regulatory and legal investigations and proceedings may not be anticipated, and (11) the impact of the COVID-19 pandemic on our employees and operations, and those of our customers. Further information on other factors that could affect the financial results ofConnectOne Bancorp is included in Item 1a. ofConnectOne Bancorp's Annual Report on Form 10-K as amended and updated inConnectOne Bancorp's other filings with theSecurities and Exchange Commission . These documents are available free of charge at the Commission's website at http://www.sec.gov and/or fromConnectOne Bancorp, Inc.
Critical Accounting Policies and Estimates
Our accounting policies are integral to understanding the results reported. We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. As ofMarch 31, 2023 , there have been no material changes to our critical accounting policies as compared to the critical accounting policies disclosed in our most recent Annual Report on Form 10-K. Reference is made to Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 . 40
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Table of Contents Operating Results Overview Net income available to common stockholders for the three months endedMarch 31, 2023 was$23.4 million compared to$29.9 million for the comparable three-month period endedMarch 31, 2022 . The Company's diluted earnings per share were$0.59 for the three months endedMarch 31, 2023 as compared with diluted earnings per share of$0.75 for the comparable three-month period endedMarch 31, 2022 . The$6.5 million decrease in net income available to common stockholders and$0.16 decrease in diluted earnings per share versus the three months endedMarch 31, 2022 were primarily due to a$3.3 million decrease in net interest income, a$0.3 million decrease in noninterest income and a$5.6 million increase in noninterest expenses, partially offset by a decrease in provision for credit losses of$0.5 million and a$2.3 million decrease in income tax expenses.
Net Interest Income and Margin
Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid on deposits and borrowings, which support these assets. Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (including interest earned on tax-free loans and on obligations of state and local political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable assets. Net interest margin is defined as net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets. Fully taxable equivalent net interest income for the three months endedMarch 31, 2023 decreased by$3.0 million , or 4.3%, from the comparable three-month period endedMarch 31, 2022 . The decrease from the three months endedMarch 31, 2022 resulted primarily from a 71 basis-point decrease of the net interest margin from 3.71% to 3.00%, partially offset by an increase in interest-earning assets of$1.4 billion . The contraction of the net interest margin for the three months endedMarch 31, 2023 when compared to the three months endedMarch 31, 2022 was primarily attributable to a 222 basis-point increase in the cost of interest-bearing liabilities, partially offset by 102 basis-point increase in the yield on average interest-earning assets. 41
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The following tables, "Average Statements of Condition with Interest and Average Rates", present for the three months endedMarch 31, 2023 and 2022, the Company's average assets, liabilities and stockholders' equity. The Company's net interest income, net interest spread and net interest margin are also reflected. Average Statements of Condition with Interest and Average Rates Three Months Ended March 31, 2023 2022 Interest Interest Average Income/ Average Average Income/ Average Balance Expense Rate (7) Balance Expense Rate (7) (dollars in thousands) Interest-earning assets: Securities (1) (2)$ 732,929 $ 5,620 3.11 %$ 545,203 $ 2,771 2.06 % Total loans (2) (3) (4) 8,131,035 107,348 5.35 6,871,477 76,320 4.50 Federal funds sold and interest-bearing with banks 260,297 2,975 4.64 312,224 120 0.16 Restricted investment in bank stocks 49,906 898 7.29 24,977 214 3.47 Total interest-earning assets 9,174,167 116,841 5.17 7,753,881 79,425 4.15 Noninterest-earning assets: Allowance for credit losses (90,182 ) (79,763 ) Other noninterest-earning assets 616,545 589,264 Total assets$ 9,700,530 $ 8,263,382 Interest-bearing liabilities: Interest-bearing deposits: Time deposits$ 2,357,332 17,267 2.97$ 1,124,614 2,154 0.78 Other interest-bearing deposits 3,565,904 22,820 2.60 3,851,558 2,856 0.30 Total interest-bearing deposits 5,923,236 40,087 2.74 4,976,172 5,010 0.41 Borrowings 941,266 7,322 3.15 404,907 1,377 1.38 Subordinated debentures 103,638 1,579 6.18 152,977 2,168 5.75 Finance lease 1,714 25 5.92 1,917 28 5.92 Total interest-bearing
liabilities 6,969,854 49,013 2.85 5,535,973 8,583 0.63 Demand deposits 1,451,654 1,547,055 Other liabilities 87,807 48,386 Total
noninterest-bearing
liabilities 1,539,461
1,595,441
Stockholders' equity 1,191,215
1,131,968
Total liabilities and stockholders' equity$ 9,700,530 $ 8,263,382 Net interest income (tax-equivalent basis) 67,828 70,842 Net interest spread (5) 2.32 % 3.53 % Net interest margin (6) 3.00 % 3.71 % Tax-equivalent adjustment (744 ) (484 ) Net interest income$ 67,084 $ 70,358
(1) Average balances are based on amortized cost and include equity securities. (2) Interest income is presented on a tax-equivalent basis using a 21% assumed
tax rate.
(3) Includes loan fee income and accretion of purchase accounting adjustments.
(4) Total loans include loans held-for-sale and nonaccrual loans.
(5) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities and is presented
on a tax- equivalent basis. (6) Represents net interest income on a tax-equivalent basis divided by average
total interest-earning assets.
(7) Rates are annualized.
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Table of Contents Noninterest Income Noninterest income totaled$2.8 million for the three months endedMarch 31, 2023 , compared with$3.1 million for the comparable three-month period endedMarch 31, 2022 . Included in noninterest income for the three months endedMarch 31, 2023 andMarch 31, 2022 were net losses on equity securities of$0.2 million and$0.6 million , respectively. Excluding net losses on equity securities, adjusted noninterest income was$3.0 million and$3.7 million for the three months endedMarch 31, 2023 andMarch 31, 2022 , respectively. The$0.7 million decrease in adjusted noninterest income for the three months endedMarch 31, 2023 versus the three months endedMarch 31, 2022 was primarily due to decreases in net gains on sale of loans held-for-sale of$0.7 million and deposit, loan and other income of$0.3 million , partially offset by an increase in bank owned life insurance ("BOLI") income of$0.3 million . Noninterest Expenses Noninterest expenses totaled$34.9 million for the three months endedMarch 31, 2023 , compared with$29.2 million for the three months endedMarch 31 , 2022.The increase in noninterest expenses of$5.6 million from the three months endedMarch 31, 2022 was primarily attributable to increases in salaries and employee benefits of$3.5 million , other expenses of$0.8 million , occupancy and equipment of$0.8 million , professional and consulting of$0.4 million ,FDIC insurance of$0.3 million , information technology and communications of$0.2 million , marketing and advertising of$0.2 million and amortizations of core deposit intangible of$0.1 million partially offset by a decrease in acquisition expenses related to BoeFly of$0.7 million . The increase in salaries and employee benefits was attributable to increased staff in both the revenue and back-office of the Bank and seasonal increases in payroll taxes. Income Taxes Income tax expense was$9.1 million for the three months endedMarch 31, 2023 , compared to$11.4 million for the three months endedMarch 31, 2022 . The decrease in income tax expense was the result of lower income before taxes. The effective tax rate for the three months endedMarch 31, 2023 andMarch 31, 2022 was 26.7% and 26.6%, respectively. 43
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Financial Condition
Loan Portfolio
The following table sets forth the composition of our loan portfolio, excluding
loans held-for-sale and unearned net origination fees and costs, by loan segment
at the periods indicated.
Amount
March 31, 2023 December 31, 2022 Increase/
Amount % Amount % (Decrease)
(dollars in thousands)
Commercial $ 1,414,226 17.3 % $ 1,472,734 18.2 % $ (58,508 )
Commercial real estate 5,835,880 71.7 5,795,228 71.4 40,652
Commercial construction 630,469 7.7 574,139 7.1 56,330
Residential real estate 259,166 3.2 264,748 3.2 (5,582 )
Consumer 1,435 0.1 2,312 0.1 (877 )
Gross loans $ 8,141,176 100.0 % $ 8,109,161 100.0 % $ 32,015 As of
Allowance for Credit Losses and Related Provision
As ofMarch 31, 2023 , the Company's allowance for credit losses for loans was$87.0 million , a decrease of$3.5 million from$90.5 million as ofDecember 31, 2022 . The decrease was primarily attributable to$4.5 million in net charge-offs, offset by a$1.0 million provision for credit losses.
The provision for credit losses was
There were$4.5 million net charge-offs for the three months endedMarch 31, 2023 , compared with$0.2 million in net charge-offs for the three months endedMarch 31, 2022 . The net charge-offs for the three months endedMarch 31, 2023 reflect the resolution of certain nonaccrual taxi loans and one owner-occupied commercial real estate loan that were previously reserved for and, therefore, required no additional loan loss provisioning. The ACL as a percentage of loans receivable amounted to 1.07% as ofMarch 31, 2023 and 1.12% as ofDecember 31, 2022 . The level of the allowance for the respective periods of 2023 and 2022 reflects the credit quality within the loan portfolio, loan growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management's view, the level of the ACL as ofMarch 31, 2023 is adequate to cover credit losses inherent in the loan portfolio. Management's judgment regarding the adequacy of the allowance constitutes a "Forward-Looking Statement" under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management's analysis, based principally upon the factors considered by management in establishing the allowance. 44
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Changes in the ACL on loans are presented in the following table for the periods
indicated.
Three Months Ended
March 31,
2023 2022
(dollars in thousands)
Average loans receivable $ 8,117,572 $ 6,871,095
Analysis of the ACL:
Balance - beginning of quarter $ 90,513 $ 78,773
Charge-offs:
Commercial (2,767 ) (274 )
Commercial real estate (1,716 ) -
Total charge-offs (4,483 ) (274 )
Recoveries:
Commercial - 1
Consumer 1 31
Total recoveries 1 32
Net charge-offs (4,482 ) (242 )
Provision for credit losses - loans 1,000 1,539
Balance - end of period$ 87,031
Ratio of annualized net charge-offs during the period to average loans receivable during the period
0.22 % 0.01 %
Loans receivable $ 8,132,119 $ 6,979,595
ACL as a percentage of loans receivable 1.07 % 1.15 %
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Table of Contents Asset Quality The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through a review processes that includes analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix. The Company strives to identify loans experiencing difficulty early on, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for credit losses at all times. It is generally the Company's policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of ninety days. When a loan is placed on nonaccrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on nonaccrual loans are generally applied against principal. A loan may be restored to an accruing basis when all past due amounts have been collected. Loans past due 90 days or more which are both well-secured and in the process of collection may remain on an accrual basis.
Nonperforming assets include nonaccrual loans and other real estate owned. Nonaccrual loans represent loans of which interest accruals have been suspended. In general, it is the policy of management to consider the charge-off of uncollectible amounts of loans at the point they become past due 90 days.
The following table sets forth, as of the dates indicated, the amount of the Company's nonperforming assets:
March 31, 2023 December 31, 2022
(dollars in thousands)
Nonaccrual loans $ 47,667 $ 44,454
OREO - 264
Total nonperforming assets (1) $ 47,667 $ 44,718
(1) Nonperforming assets are defined as nonaccrual loans and OREO.
Nonaccrual loans to total loans receivable 0.59 % 0.55 % Nonperforming assets to total assets
0.48 % 0.46 %
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Table of ContentsInvestment Securities As ofMarch 31, 2023 , the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations ofU.S. states and political subdivisions, corporate bonds and notes, asset-backed securities and equity securities. For the three-months endedMarch 31, 2023 , average securities decreased$11.0 million to approximately$732.9 million , or 8.0% of average total interest-earning assets, from approximately$743.9 million , or 8.3% of average interest-earning assets, atDecember 31, 2022 . As ofMarch 31, 2023 , net unrealized losses on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included in stockholders' equity, net of tax, amounted to$57.3 million as compared with net unrealized losses of$61.8 million as ofDecember 31, 2022 . The decrease in unrealized losses is predominately attributable to changes in market conditions and interest rates. Unrealized losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. The Company did not record an allowance for credit losses for available-for-sale as ofMarch 31, 2023 .
Interest Rate Sensitivity Analysis
The principal objective of our asset and liability management function is to
evaluate the interest-rate risk included in certain balance sheet accounts;
determine the level of risk appropriate given our business focus, operating
environment, and capital and liquidity requirements; establish prudent asset
concentration guidelines; and manage the risk consistent with Board approved
guidelines. We seek to reduce the vulnerability of our operations to changes in
interest rates, and actions in this regard are taken under the guidance of the
Bank's Asset Liability Committee (the "ALCO"). The ALCO generally reviews our
liquidity, cash flow needs, maturities of investments, deposits and borrowings,
and current market conditions and interest rates.
The Company utilizes a number of strategies to manage interest rate risk
including, but not limited to: (i) balancing the types and structures of
interest-earning assets and interest-bearing liabilities by diversifying mix,
coupons, maturities and/or repricing characteristics (ii) reducing the overall
interest rate sensitivity of liabilities by emphasizing core and/or longer-term
deposits; utilizing FHLB advances and wholesale deposits for our interest rate
risk profile, (iii) managing the investment portfolio for liquidity and interest
rate risk profile, and (iv) entering into interest rate swap and cap agreements.
We currently utilize net interest income simulation and economic value of equity
("EVE") models to measure the potential impact to the Bank of future changes in
interest rates. As of March 31, 2023 and December 31, 2022 , the results of the
models were within guidelines prescribed by our Board of Directors. If model
results were to fall outside prescribed ranges, action, including additional
monitoring and reporting to the Board, would be required by the ALCO and the
Bank's management.
The net interest income simulation model attempts to measure the change in net
interest income over the next one-year period, and over the next three-year
period on a cumulative basis, assuming certain changes in the general level of
interest rates.
Based on our model, which was run as of March 31, 2023 , we estimated that over
the next one-year period a 200 basis-point instantaneous increase in the general
level of interest rates would decrease our net interest income by 0.63%, while a
100 basis-point instantaneous decrease in interest rates would decrease net
interest income by 2.79%. As of December 31, 2022 , we estimated that over the
next one-year period a 200 basis-point instantaneous increase in the general
level of interest rates would decrease our net interest income by 2.22%, while a
100 basis-point instantaneous decrease in interest rates would decrease net
interest income by 2.01%.
Based on our model, which was run as of March 31, 2023 , we estimated that over
the next three years, on a cumulative basis, a 200 basis-point instantaneous
increase in the general level of interest rates would decrease our net interest
income by 3.11%, while a 100 basis-point instantaneous decrease in interest
rates would decrease net interest income by 3.01%. As of December 31, 2022 , we
estimated that over the next three years, on a cumulative basis, a 200
basis-point instantaneous increase in the general level of interest rates would
decrease our net interest income by 2.66%, while a 100 basis-point instantaneous
decrease in interest rates would decrease net interest income by 3.99%.
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An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as ofMarch 31, 2023 , would decrease by 12.16% with an instantaneous rate shock of up 200 basis points, and decline by 0.49% with an instantaneous rate shock of down 100 basis points. Our EVE as ofDecember 31, 2022 , would decrease by 10.51% with an instantaneous rate shock of up 200 basis points, and decrease by 1.13% with an instantaneous rate shock of down 100 basis points. The change in interest rate sensitivity was impacted by an increases in our cash on hand position and in short and intermediate-term fixed rate funding, partially offset by the deposit mix shift into certificates of deposit, from both noninterest-bearing and interest-bearing nonmaturity deposits.
The following table illustrates the most recent results for EVE and one-year NII
sensitivity as of
Interest Rates Estimated Estimated Change in EVE Interest Rates Estimated Estimated Change in NII (basis points) EVE Amount % (basis points) NII Amount % +300$ 1,012,527 (212,442 ) (17.34 ) +300$ 268,853 $ (605 ) (0.22 ) +200 1,076,038 (148,931 ) (12.16 ) +200 267,757 (1,701 ) (0.63 ) +100 1,142,074 (82,895 ) (6.77 ) +100 266,795 (2,663 ) (0.99 ) 0 1,224,969 - - 0 269,458 - - -100 1,218,995 (5,974 ) (0.49 ) -100 261,947 (7,511 ) (2.79 ) -200 1,199,347 (25,622 ) (2.09 ) -200 252,496 (16,962 ) (6.29 ) -300 1,170,922 (54,047 ) (4.41 ) -300 244,526 (24,932 ) (9.25 ) Certain model limitations are inherent in the methodology used in the EVE and net interest income measurements. The models require the making of certain assumptions which may tend to oversimplify the way actual yields and costs respond to changes in market interest rates. The models assume that the composition of the Company's interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured, thus they do not consider the Company's strategic plans, or any other steps it may take to respond to changes in rates over the forecasted period of time. Additionally, the models assume immediate changes in interest rates, based on yield curves as of a point-in-time, which are reflected in a parallel, instantaneous and uniform manner across all yield curves, when in reality changes may rarely be of this nature. The models also utilize data derived from historical performance and as interest rates change the actual performance of loan prepayments, rate sensitivities, and average life assumptions may deviate from assumptions utilized in the models and can impact the results. Accordingly, although the above measurements provide an indication of the Company's interest rate risk exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates. Given the unique nature of the post-pandemic interest rate environment and the speed with which interest rates have been changing, the projections noted above on the Company's EVE and net interest income and can be expected to differ from actual results. Estimates of Fair Value The estimation of fair value is significant to a number of the Company's assets, including loans held-for-sale and securities available-for-sale. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available-for-sale securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented elsewhere
herein have been prepared in accordance with GAAP, which requires the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased cost of operations; unlike most industrial companies, nearly all of
the Company's assets and liabilities are monetary. As a result, interest rates
have a greater impact on performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
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Table of Contents Liquidity Liquidity is a measure of a bank's ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. As ofMarch 31, 2023 , the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors' withdrawal requirements, and other operational and client credit needs could be satisfied. As ofMarch 31, 2023 , liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were$827.7 million , which represented 8.1% of total assets and 9.6% of total deposits and borrowings, compared to$760.0 million as ofDecember 31, 2022 , which represented 7.9% of total assets and 9.3% of total deposits and borrowings. The Bank is a member of theFederal Home Loan Bank of New York and, based on available qualified collateral as ofMarch 31, 2023 , had the ability to borrow$2.1 billion . The Bank also has a credit facility established with theFederal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral of$73.7 million . In addition, as ofMarch 31, 2023 , the Bank had in place borrowing capacity of$410 million through correspondent banks and other unsecured borrowing lines. As ofMarch 31, 2023 , the Bank had aggregate available and unused credit of approximately$1.2 billion , which represents the aforementioned facilities totaling$2.6 billion net of$1.4 billion in outstanding borrowings and letters of credit. As ofMarch 31, 2023 , outstanding commitments for the Bank to extend credit were approximately$1.2 billion . DuringApril 2023 the Bank increased its availability at both theFederal Reserve Bank of New York and theFederal Home Loan Bank of New York , by a total of approximately$2.0 billion , primarily through the additional pledging of previously unencumbered and unpledged loans. The Bank's access to theFederal Reserve Bank of New York , for both discount window and BTF access, was increased to$1.2 billion , from$0.1 billion as ofMarch 31, 2023 , primarily reflecting loans now pledged with unpaid principal balances of approximately$1.4 billion . The Bank's access to theFederal Home Loan Bank was increased to$2.9 billion , from$2.1 billion as ofMarch 31, 2023 , primarily reflecting increased loans pledged with unpaid principal balances of approximately$1.2 billion . Cash and cash equivalents totaled$562.4 million as ofMarch 31, 2023 , increasing by$294.1 million from$268.3 million as ofDecember 31, 2022 . Operating activities provided$16.4 million in net cash. Investing activities used$26.6 million in net cash, primarily reflecting an increase in loans and investment securities. Financing activities provided$304.3 million in net cash, primarily reflecting an increase in deposits of$396.7 million and partially offset by repayment of subordinated debt of$75.0 million . 49
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Table of Contents Deposits Total deposits increased by$396.6 million , or 5.4%, to$7.8 billion as ofMarch 31, 2023 fromDecember 31, 2022 . The increase was primarily due to increases in time deposits and interest-bearing and NOW deposits partially offset by a decrease in demand, noninterest-bearing deposits and savings deposits. The following table sets forth the composition of our deposit base by the periods indicated. Amount March 31, 2023 December 31, 2022 Increase/ Amount % Amount % (Decrease) (dollars in thousands) Demand, noninterest-bearing$ 1,345,265 17.4 %$ 1,501,614 20.4 %$ (156,349 ) Demand, interest-bearing and NOW 3,328,582 42.9 3,085,613 41.9 242,969 Savings 372,667 4.8 375,205 5.1 (2,538 ) Time 2,706,662 34.9 2,394,190 32.6 312,472 Total deposits$ 7,753,176 100.0 %$ 7,356,622 100.0 %$ 396,554 Subordinated Debentures DuringDecember 2003 , Center Bancorp Statutory Trust II, a statutory business trust and wholly owned subsidiary of theParent Corporation issued$5.0 million of MMCapS capital securities to investors due onJanuary 23, 2034 . The trust loaned the proceeds of this offering to the Company and received in exchange$5.2 million of theParent Corporation's subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85% and re-prices quarterly. The rate as ofMarch 31, 2023 was 7.65%. DuringJune 2020 , theParent Corporation issued$75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the "2020 Notes"). The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding,September 15, 2025 or the date of earlier redemption, payable semi-annually in arrears onSeptember 15 andDecember 15 of each year, commencingDecember 15, 2020 . From and includingSeptember 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears onMarch 15 ,June 15 ,September 15 andDecember 15 of each year, commencing onSeptember 15, 2025 . Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero. DuringJanuary 2018 , theParent Corporation issued$75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the "Notes") to certain accredited investors. The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included theParent Corporation contributing$65 million of the net proceeds to the Bank in the form of debt and common equity. The Notes were non-callable for five years, had a stated maturity ofFebruary 1, 2028 and bore interest at a rate that reset quarterly to then current three-month LIBOR rate plus 284 basis points. The 2018 Notes were redeemed in full onFebruary 1, 2023 . 50
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Table of Contents Stockholders' Equity The Company's stockholders' equity was$1.2 billion as ofMarch 31, 2023 , an increase of$12.2 million fromDecember 31, 2022 . The increase in stockholders' equity was primarily attributable to retained earnings, in addition to an increase in additional paid-in capital, partially offset by a decrease in accumulated other comprehensive income, reflecting the after-tax decline in the fair value of investment securities net of unrealized hedge gains recorded in other assets, and an increase in treasury stock. As ofMarch 31, 2023 , the Company's tangible common equity ratio and tangible book value per share were 8.87% and$22.07 , respectively. As ofDecember 31, 2022 , the tangible common equity ratio and tangible book value per share were 9.04% and$21.71 , respectively. Total goodwill and other intangible assets were approximately$215.3 million and$215.7 million , as ofMarch 31, 2023 andDecember 31, 2022 , respectively.
The following table shows the reconciliation of common equity to tangible common equity and the tangible common equity ratio.
December 31,
March 31, 2023 2022
(dollars in thousands, except for
share and per share data)
Common equity $ 1,080,043 $ 1,067,824
Less: intangible assets (215,312 ) (215,684 )
Tangible common stockholders' equity $ 864,731 $ 852,140
Total assets $ 9,960,467 $ 9,644,948
Less: intangible assets (215,312 ) (215,684 )
Tangible assets $ 9,745,155 $ 9,429,264
Common stock outstanding at period end 39,179,051 39,568,090
Tangible common equity ratio (1) 8.87 % 9.04 % Book value per common share $ 27.57 $ 27.21 Less: intangible assets 5.50 5.50 Tangible book value per common share $ 22.07 $ 21.71
(1) Tangible common equity ratio is a non-GAAP measure.
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The maintenance of a solid capital foundation is a primary goal for the Company. Accordingly, capital plans, stock repurchases and dividend policies are monitored on an ongoing basis. The Company's objective with respect to the capital planning process is to effectively balance the retention of capital to support future growth with the goal of providing stockholders with an attractive long-term return on their investment.
The Company and the Bank are subject to regulatory guidelines establishing minimum capital standards that involve quantitative measures of assets, and certain off-balance sheet items, as risk-adjusted assets under regulatory accounting practices.
The following is a summary of regulatory capital amounts and ratios as ofMarch 31, 2023 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution (for the Bank). To Be Well-Capitalized For Capital Adequacy Under Prompt Corrective ConnectOne Bancorp, Inc. Purposes Action Provisions The Company Amount Ratio Amount Ratio Amount Ratio As of March 31, 2023 (dollars in thousands) Tier 1 leverage capital$ 1,014,519 10.60 %$ 382,730 4.00 % NA NA CET I risk-based ratio 898,437 10.55 383,258 4.50 NA NA Tier 1 risk-based capital 1,014,519 11.91 511,011 6.00 NA NA Total risk-based capital 1,178,852 13.84 681,348 8.00 NA NA N/A - not applicable For Capital Adequacy To Be Well-Capitalized Under Prompt ConnectOne Bank Purposes Corrective Action Provisions The Bank Amount Ratio Amount Ratio Amount Ratio As of March 31, 2023 (dollars in thousands) Tier 1 leverage capital$ 1,015,381 10.62 %$ 382,549 4.00 % 478,186 5.00 %
CET I risk-based ratio 1,015,381 11.92 383,251
4.50 553,585 6.50
Tier 1 risk-based capital 1,015,381 11.92 511,002
6.00 681,355 8.00
Total risk-based capital 1,130,514 13.27 681,335
8.00 851,669 10.00
As of March 31, 2023 , both the Company and Bank satisfy the capital conservation
buffer requirements applicable to them. The lowest ratio at the Company is the
Total Risk Based Capital Ratio which was 3.34% above the minimum buffer ratio
and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which
was 2.77% above the minimum buffer ratio.
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