ConnectOne Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. ConnectOne is a New Jersey-based bank holding company operating ConnectOne Bank, a community commercial bank with 26 banking offices. Unless noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $63.0 | $60.8 | $124.2 | $116.1 |
| Net interest margin, tax-equivalent | 3.60% | 3.44% | 3.58% | 3.42% |
| Noninterest income | $4.5 | $4.6 | $7.9 | $7.5 |
| Noninterest expense | $26.3 | $33.1 | $52.7 | $68.1 |
| Credit-loss provision (reversal) | $(1.6) | $15.0 | $(7.4) | $31.0 |
| Net income | $32.2 | $14.8 | $65.2 | $20.9 |
| Diluted EPS | $0.81 | $0.37 | $1.63 | $0.52 |
- Interest income declined year over year, but lower deposit and borrowing costs lifted net interest income. Q2 tax-equivalent net interest income increased 3.5%; the margin widened 16 basis points.
- As of June 30, total assets were $7,710.1, up from $7,547.3 at year-end 2020. Loans receivable were $6,407.9, up 2.8%; commercial real estate loans grew $355.0, partly offset by lower commercial loans, including PPP forgiveness.
- Deposits were $6,192.5, up $233.3 from year-end. Noninterest-bearing deposits rose to $1,486.0; time deposits declined to $1,301.8. Cash and cash equivalents were $349.4.
- Six-month operating cash flow was $119.5; investing activities used $174.3 and financing activities provided $100.5. Cash increased $45.7 from year-end.
- At June 30, borrowings were $353.5 and subordinated debentures were $152.8, compared with $426.0 and $202.6, respectively, at year-end. The company reported $965.0 of stockholders’ equity; tangible common equity ratio was 9.97% and tangible book value per share was $18.76.
- Management reported liquid assets of $724.1, equal to 9.4% of assets and 11.1% of deposits and borrowings. Available and unused credit was approximately $1.2 billion; outstanding commitments to extend credit were approximately $1.1 billion.
- At June 30, the Bank’s regulatory capital ratios included 12.42% CET1 and 14.07% total risk-based capital; the company reported 11.09% CET1 and 14.58% total risk-based capital. Both satisfied applicable capital conservation buffer requirements.
Material changes versus comparable periods
- Net income more than doubled year over year in both Q2 and the first half, largely reflecting credit-loss reversals versus substantial provisions in 2020, lower reported noninterest expense, and higher net interest income. Income tax expense increased as pretax income rose; the effective tax rate was 24.8% in 2021 versus 14.5% in Q2 2020 and 14.6% in first-half 2020.
- Lower noninterest expenses partly reflect the absence of 2020 merger/restructuring costs ($5.1 in Q2 and $14.6 for the first half) and $2.3 of BoeFly acquisition costs in 2020. Excluding those items, expenses increased $0.7 in Q2 and $1.6 for the first half, mainly from salaries and professional fees.
- The loan allowance was $78.7, compared with $79.2 at year-end. The company adopted CECL on January 1, 2021, recording a $6.6 increase to the loan allowance and a $2.9 after-tax reduction to retained earnings. The new methodology makes some prior-period credit measures not directly comparable.
- Nonaccrual loans declined to $56.2 from $61.7 at year-end; nonperforming assets were 0.73% of assets versus 0.82%. The allowance was 1.23% of loans, or 1.29% excluding PPP loans.
- Available-for-sale securities declined to $458.9 from $488.0. Net unrealized gains, net of tax, fell to $3.9 from $7.9, attributed mainly to market and interest-rate changes; no credit-loss allowance was recorded for these securities.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or financial guidance. Management said economic activity had accelerated in 2021, but the duration and financial effects of COVID-19 and variants remained uncertain. Management cautioned that credit-loss estimates, fair values, goodwill impairment, and taxes could be materially affected.
- COVID-19 relief deferrals fell to 79 loans totaling approximately $100.0 from 113 loans totaling $207.0 at year-end. None were delinquent or on nonaccrual at June 30, but $62.0 were rated special mention or worse. PPP loans totaled $326.8 and were excluded from the allowance calculation because they were understood to be government-guaranteed.
- Q2 and first-half credit-loss reversals reflected an improved macroeconomic outlook under CECL. Management considered the allowance adequate, while noting actual credit losses could differ and additional provisions could adversely affect future earnings. TDRs totaled $62.4, including $29.4 on nonaccrual status.
- Interest-rate modeling estimated that an immediate +200-basis-point shock would raise one-year net interest income 2.94%, while a −100-basis-point shock would reduce it 6.04%. The corresponding estimated EVE changes were −1.79% and −1.13%. Management said model results were within Board guidelines.
- Other notable items: a $0.7 gain on branch sales in the first half, $0.2 of securities sale/redemption gains, and redemption of $50.0 of 2015 subordinated notes on January 1, 2021. The filing disclosed no legal proceedings expected to materially affect results and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether the credit-loss reversals and improving loan performance are sustainable, especially given the $100.0 of deferred loans and $62.0 rated special mention or worse.
- How PPP forgiveness and commercial real estate growth affect future loan balances, yields, and portfolio concentration.
- Whether deposit pricing, interest rates, and the filing’s rate-sensitivity assumptions support continued margin performance.
- Whether the $1.2 billion of reported unused credit capacity and other liquidity resources remain available under changing collateral and funding conditions.
- How CECL estimates, securities valuation changes, and COVID-19 developments affect future provisions, earnings, and capital.