ConnectOne Bancorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. ConnectOne is a New Jersey bank holding company whose principal subsidiary operates a community bank. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Q3 earnings: Net income was $32.1 million, up from $24.8 million a year earlier; diluted EPS was $0.80 versus $0.62. Nine-month net income was $97.3 million versus $45.6 million, and diluted EPS was $2.43 versus $1.15.
- Interest income and margins: Q3 net interest income was $68.2 million, up 12.7% on a fully taxable-equivalent basis. Net interest margin was 3.73%, up 24 basis points year over year. For nine months, net interest income was $192.4 million, up 8.8% on a fully taxable-equivalent basis, and margin was 3.63%, up 19 basis points.
- Credit provision: Q3 provision for credit losses was $1.1 million, compared with $5.0 million in Q3 2020. For nine months, the company recorded a $6.3 million reversal, versus a $36.0 million provision in 2020. Management attributed the change principally to an improved economic outlook.
- Other income and expenses: Q3 noninterest income was $4.0 million and noninterest expense was $28.2 million. Nine-month totals were $11.9 million and $80.9 million, respectively. The prior-year nine-month expense included $14.6 million of merger and restructuring costs and $2.3 million related to the BoeFly acquisition; excluding these, expenses increased $3.3 million.
- Balance sheet and funding: Total assets were $7.95 billion, up from $7.55 billion at December 31, 2020. Loans were $6.58 billion, up $340.2 million; commercial real estate loans grew $653.1 million, while commercial loans fell $196.5 million, primarily reflecting PPP forgiveness. Deposits rose $439.1 million to $6.40 billion. Cash and cash equivalents were $413.2 million.
- Liquidity and cash flow: Liquid assets were $800.4 million, or 10.1% of assets and 12.0% of deposits and borrowings. The company reported $1.2 billion of available and unused credit capacity. Nine-month operating cash flow was $154.6 million, investing cash outflow was $352.7 million, and financing cash inflow was $307.5 million.
- Debt and capital: FHLB borrowings were $253.2 million, down from $426.0 million at year-end 2020; subordinated debentures were $152.9 million. In August, the company issued $115 million of 5.25% non-cumulative perpetual preferred stock, receiving $110.9 million net. Stockholders’ equity was $1.10 billion. Tangible common equity ratio was 9.95%, and tangible book value per share was $19.43. The bank’s total risk-based capital ratio was 13.61% and it met well-capitalized requirements.
- Credit quality: The allowance for credit losses was $78.0 million, or 1.19% of loans. Nonaccrual loans were $66.0 million, compared with $61.7 million at year-end 2020; nonperforming assets were 0.83% of total assets. TDRs totaled $79.7 million, including $38.5 million on nonaccrual status.
Material changes versus comparable periods
- Higher earnings reflected increased net interest income and substantially lower credit-loss provisioning; the nine-month comparison also benefited from the absence of prior-year merger and acquisition costs.
- Interest costs fell, supporting wider net interest margins, while yields on average interest-earning assets also declined.
- Loan growth was concentrated in commercial real estate. PPP loans declined to $177.8 million from $397.5 million at December 31, 2020.
- Available-for-sale securities’ net unrealized gains fell to $1.5 million from $7.9 million at year-end, primarily due to market conditions and interest rates; the company recorded no credit-loss allowance on those securities.
Outlook, commentary, and risks
- The filing provides no specific earnings or financial guidance. Management said interim results are not necessarily indicative of full-year results.
- COVID-19 and its variants, economic conditions, interest-rate changes, competition, regulatory or legal developments, and securities-market movements could affect results. Management noted estimates for credit losses, fair values, goodwill impairment, and taxes could be adversely affected.
- At September 30, 10 COVID-related deferred loans totaled approximately $10.3 million; none were delinquent or on nonaccrual. PPP loans totaled $177.8 million and were excluded from the loan allowance calculation based on the company’s assumption of full SBA guarantees. Deferred, unrecognized PPP fees were $6.0 million.
- Interest-rate simulations estimated that a 200-basis-point increase would raise one-year net interest income by 3.23%, while a 100-basis-point decrease would reduce it by 5.80%. These are model estimates, not forecasts.
- The company adopted CECL on January 1, 2021. Adoption increased the loan allowance by $6.6 million and the unfunded-commitment allowance by $2.8 million; the after-tax retained-earnings reduction was $2.9 million. Prior-period credit-loss figures use the previous incurred-loss method and are not directly comparable.
- A $0.7 million gain on branch sales was recorded in the first nine months. The company reported no legal proceedings expected to have a material adverse impact and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether commercial real estate growth, rising TDRs, and the increase in nonaccrual loans indicate worsening borrower or collateral risk.
- Whether the $78.0 million allowance remains adequate under CECL assumptions and changing economic forecasts, especially given the provision reversal.
- How much future earnings depend on low funding costs, PPP fee recognition, and the current net interest margin—and how actual rate changes compare with management’s sensitivity models.
- Whether deposit growth and available borrowing capacity remain sufficient to fund loan commitments and withdrawals without materially increasing funding costs.
- The effects of the preferred-stock issuance, dividends, and share repurchases on common-stockholder returns and tangible capital.