ConnectOne Bancorp, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are against December 31, 2020. ConnectOne operates ConnectOne Bank, a New Jersey community commercial bank with 26 offices. Figures below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / December 31, 2020 |
|---|---|---|
| Net interest income | $61.2 million | $55.3 million, Q1 2020 |
| Net interest margin, tax-equivalent | 3.56% | 3.41%, Q1 2020 |
| Provision for credit losses | $(5.8) million reversal | $16.0 million provision, Q1 2020 |
| Net income / diluted EPS | $33.0 million / $0.82 | $6.0 million / $0.15, Q1 2020 |
| Noninterest income / expense | $3.4 million / $26.5 million | $2.9 million / $35.1 million, Q1 2020 |
| Net cash from operating activities | $80.1 million | $46.5 million, Q1 2020 |
| Cash and cash equivalents | $260.1 million | $303.8 million |
| Total assets / net loans | $7,449.6 million / $6,196.6 million | $7,547.3 million / $6,157.1 million |
| Deposits / borrowings | $5,951.3 million / $359.7 million | $5,959.2 million / $426.0 million |
| Stockholders’ equity | $935.6 million | $915.3 million |
Q1 operating cash flow was $80.1 million; investing activities provided $5.6 million and financing activities used $129.4 million. Financing outflows included repayment of $66.2 million of FHLB borrowings and redemption of $50.0 million of subordinated debt. The company reported a 9.91% tangible common equity ratio and $18.02 tangible book value per share, both non-GAAP measures.
Material changes and drivers
- Net income rose substantially year over year, primarily reflecting a $5.8 million credit-loss reserve reversal in Q1 2021 versus a $16.0 million provision in Q1 2020. The company attributed the reversal to an improved macroeconomic outlook. CECL adoption also makes allowance comparisons with prior periods less directly comparable.
- Tax-equivalent net interest income increased 10.4% year over year. Average interest-earning assets grew 6.4%, largely due to PPP lending, while net interest margin widened 15 basis points. Lower funding costs more than offset lower yields on average interest-earning assets.
- Noninterest expense declined $8.6 million, mainly because Q1 2020 included $9.5 million in merger expenses related to the Bancorp of New Jersey acquisition. Excluding merger costs, expenses increased $0.9 million.
- Q1 2021 noninterest income included a $0.7 million gain on sale of two branches. Gross loans increased $47.8 million from year-end, with PPP balances rising to $522.3 million from $397.5 million.
- Deposits were nearly flat overall; time deposits decreased $107.5 million, partly offset by growth in demand, savings, and other balances. Total assets declined $97.7 million from year-end.
- The allowance for credit losses on loans was $80.6 million, or 1.28% of loans, versus $79.2 million and 1.27% at year-end. The company reported $0.1 million in net recoveries for the quarter. Nonaccrual loans were $60.9 million, approximately 0.97% of loans, versus $61.7 million at year-end.
Outlook, risks and notable items
- The filing provides no specific earnings, revenue, or margin guidance. Management said Q1 results are not necessarily indicative of full-year performance.
- COVID-19’s effects on borrowers, operations, the economy, and financial markets remain uncertain. At March 31, 102 loans totaling $204.2 million were deferred; none were delinquent or on nonaccrual status, and $44.1 million were rated special mention or worse. Management noted these loans may be reassessed after deferral periods.
- PPP loans totaled $522.3 million and were excluded from the loan allowance calculation because management considered them fully SBA-guaranteed. Changes in that assessment could require additional provision expense.
- Management identified credit-loss estimates, goodwill impairment, and deferred taxes among significant judgment areas. It warned that actual credit losses and other outcomes could differ from estimates. The filing also cites interest-rate, economic, competitive, regulatory, and legal risks.
- Liquidity included $601.1 million of liquid assets, equal to 8.1% of assets, and approximately $1.1 billion of available and unused credit. Outstanding commitments to extend credit were approximately $970 million. Regulatory capital ratios exceeded applicable minimums; the Bank’s total risk-based capital ratio was 14.55%.
- Interest-rate modeling estimated that a 100-basis-point rate decline would reduce one-year net interest income by 5.91%, while a 200-basis-point increase would raise it by 1.89%. These are model estimates, not forecasts.
- The company adopted CECL on January 1, 2021, increasing the loan allowance by $6.6 million and recording a $2.9 million net-of-tax reduction to retained earnings. The 2015 subordinated notes were redeemed in full on January 1, 2021.
- The company reported effective disclosure controls, no material change in internal control over financial reporting, no material legal proceedings, and no material changes to previously disclosed risk factors.
Investor verification priorities
- Review the CECL allowance assumptions and the sensitivity of the $5.8 million quarterly reversal to economic forecasts and loan performance.
- Track the $204.2 million deferred-loan portfolio, including the $44.1 million rated special mention or worse, and monitor TDRs and nonaccrual trends.
- Verify PPP forgiveness, SBA guarantee coverage, and the effect of PPP balances and fee recognition on loan growth and reported margins.
- Assess liquidity and funding trends, including available borrowing capacity, the $970 million of lending commitments, and the reduction in cash and liquid assets.
- Monitor securities valuation and interest-rate exposure: unrealized losses on available-for-sale securities increased, and modeled rate declines reduce net interest income.
- Distinguish underlying expense trends from merger-related comparisons and the one-time branch-sale gain when evaluating earnings quality.