ConnectOne Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Financial statements are unaudited. ConnectOne is a New Jersey community bank. Results include Bancorp of New Jersey (BNJ) from its January 2, 2020 acquisition date.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Prior comparable / year-end |
|---|---|---|
| Net interest income | $55.3 million | $45.0 million in Q1 2019 |
| Net interest margin | 3.41% tax-equivalent; 3.20% excluding purchase-accounting adjustments | 3.34%; adjusted 3.25% in Q1 2019 |
| Provision for loan losses | $16.0 million | $4.5 million in Q1 2019 |
| Noninterest income / expense | $2.9 million / $35.1 million | $1.7 million / $28.1 million in Q1 2019 |
| Net income / diluted EPS | $6.0 million / $0.15 | $11.6 million / $0.33 in Q1 2019 |
| Total assets | $7.279 billion | $6.174 billion |
| Loans receivable / allowance | $6.009 billion / $54.2 million; allowance 0.90% of loans | $5.114 billion / $38.3 million; 0.75% |
| Deposits / borrowings | $5.509 billion / $726.9 million | $4.768 billion / $500.3 million |
| Cash and cash equivalents | $282.8 million | $201.5 million |
| Stockholders’ equity | $853.7 million | $731.2 million |
Operating cash flow was $46.5 million; investing activities used $95.4 million and financing activities provided $130.2 million. Liquid assets were $620.3 million, or 8.5% of assets. Management reported approximately $973.6 million in available and unused credit facilities. The Bank had $2.2 billion of FHLB borrowing capacity based on qualified collateral; reported FHLB advances were $726.7 million.
At quarter-end, the Company’s regulatory ratios included a 9.20% Tier 1 leverage ratio, 9.63% CET1 ratio and 12.46% total risk-based capital ratio. Tangible common equity was 8.96% and tangible book value per share was $15.93, compared with 9.38% and $16.06 at year-end.
Material changes and notable items
- BNJ acquisition added nine Bergen County branches. ConnectOne issued approximately 4.60 million shares and paid $24.0 million cash; it recognized $45.8 million of goodwill and an $8.1 million core deposit intangible. The acquired assets and liabilities remain subject to measurement-period adjustments through January 2021.
- Gross loans rose $895.5 million from year-end, mainly due to BNJ. Deposits and borrowings also increased, with reported balance-sheet deposits rising $741.7 million.
- Net interest income increased 22.5% on a tax-equivalent basis, supported by growth in average earning assets. The reported margin expanded, but the adjusted margin contracted five basis points, which management attributed partly to higher cash balances and BNJ.
- Net income fell 48% year over year, chiefly reflecting higher credit-loss provision and noninterest expense. Merger expenses were $9.5 million, versus $7.6 million in Q1 2019; management attributed expense growth largely to franchise expansion and BNJ.
- Net charge-offs were $124,000. Nonaccrual loans rose to $62.4 million from $49.5 million at year-end; loans 30–59 days past due increased to $90.9 million, of which $81.5 million were exactly 30 days past due.
- Unrealized gains on available-for-sale securities contributed to accumulated other comprehensive income, while cash-flow hedge losses partly offset them. The filing states management did not consider securities’ unrealized losses other-than-temporary.
Outlook, risks and contingencies
- COVID-19’s duration and financial effects were uncertain. The Company recorded $13.5 million of additional provision related to pandemic-driven economic uncertainty and warned that estimates, including the allowance, goodwill and fair values, could be materially affected.
- As of May 8, 2020, the Company had completed 81 loan-payment deferrals totaling $46.7 million and had about 630 additional requests totaling $1.0 billion in process. These temporary relief measures generally covered 30–90 days.
- As of May 8, the Company had closed or received SBA approval for approximately 2,000 PPP loans totaling $470 million. Management intended to fund all or most through the Federal Reserve’s PPP Lending Facility; forgiveness and government-guarantee treatment remain relevant exposures.
- The Company elected under CARES Act relief to delay CECL adoption until the earlier of the end of the national emergency or December 31, 2020; adoption is to be retroactive to January 1, 2020. Management expected a one-time cumulative adjustment but had not finalized its amount.
- Management provided no specific earnings or financial guidance. It cited risks from COVID-19, credit deterioration and collateral values, interest rates, funding and liquidity, and execution of BNJ integration and expected synergies.
- Interest-rate sensitivity estimates showed a 200-basis-point rate increase would raise one-year net interest income 0.64%, while a 100-basis-point decline would reduce it 1.15%. The modeled economic value of equity declined 8.01% under a 200-basis-point increase.
Important facts for investors to verify
- Reconcile deposit reporting: the balance sheet shows $5.509 billion at March 31 and $4.768 billion at December 31, while MD&A describes deposits as $6.4 billion and gives a different year-end deposit figure. The filing text does not provide a clear reconciliation.
- Track loan deferrals and PPP balances, borrower performance, delinquencies and nonaccrual loans, and whether additional credit provisions are needed as pandemic effects develop.
- Review the final BNJ purchase-accounting allocations, integration costs and realized synergies, as well as the effects of acquired-loan marks on future income.
- Assess the eventual CECL transition adjustment and changes in the allowance methodology after the elected delay ends.
- Monitor liquidity, borrowing needs, interest-rate exposure and capital ratios; reported commitments to extend credit were approximately $974 million.