ConnectOne Bancorp, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. ConnectOne is a New Jersey-chartered commercial bank operating in the New Jersey/New York metropolitan area. Results include the January 2, 2020 acquisition of Bancorp of New Jersey (BNJ), so year-over-year comparisons reflect a larger company.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $60.8 million | $45.5 million | $116.1 million | $90.5 million |
| Provision for loan losses | $15.0 million | $1.1 million | $31.0 million | $5.6 million |
| Noninterest income | $4.6 million | $1.9 million | $7.5 million | $3.7 million |
| Noninterest expense | $33.1 million | $21.6 million | $68.1 million | $49.7 million |
| Net income | $14.8 million | $19.3 million | $20.9 million | $30.9 million |
| Diluted EPS | $0.37 | $0.54 | $0.52 | $0.87 |
- Q2 net interest margin was 3.44%, up 14 basis points year over year; excluding purchase-accounting adjustments, management reported an adjusted margin of 3.27%, up 10 basis points. Six-month reported margin was 3.42%, up 10 basis points; adjusted margin was 3.23%, up 2 basis points.
- Q2 and six-month total interest income rose to $78.7 million and $155.4 million, respectively. Management attributed higher net interest income chiefly to BNJ-related asset growth and lower funding costs. Q2 included about $3.7 million of PPP fee income; $11.4 million in unamortized PPP fees remained for future recognition.
- At June 30, total assets were $7.62 billion, loans receivable $6.36 billion, deposits $5.83 billion, and stockholders’ equity $867.7 million. Since December 31, 2019, assets grew 23%, loans 24%, deposits 22% on balance-sheet totals, and equity 19%; acquisition effects were significant.
- Cash and cash equivalents were $349.4 million, up $147.9 million from year-end. Six-month operating cash flow was $75.6 million; investing used $389.9 million and financing provided $462.2 million.
- Borrowings were $667.1 million, including $206.6 million under the Federal Reserve’s PPP Lending Facility; subordinated debentures were $202.5 million. Management reported $666.5 million of liquid assets and about $1.2 billion of available and unused credit at quarter-end. Outstanding commitments to extend credit were approximately $1.2 billion.
- The allowance for loan losses was $68.7 million, or 1.08% of loans (1.17% excluding PPP loans), versus $38.3 million and 0.75% at year-end. Nonaccrual loans were $64.6 million, up from $49.5 million at year-end; nonperforming assets were 0.85% of assets. Net charge-offs were $0.4 million for Q2.
- Tangible common equity ratio was 8.75% and tangible book value per share $16.28, compared with 9.38% and $16.06 at year-end. The Company reported a 10.05% CET1 risk-based ratio and a 14.33% total risk-based capital ratio; it said the Company and Bank met applicable capital requirements and conservation-buffer requirements.
Material changes and unusual items
- BNJ added nine Bergen County branches and approximately $774.7 million of acquired loans at fair value. ConnectOne issued $118.4 million of stock and paid $24.0 million cash; the acquisition recorded $45.8 million of goodwill and $8.1 million of core deposit intangibles. BNJ contributed to the increase in assets, loans, deposits, and expenses.
- COVID-19-related provisioning was a major earnings factor: the six-month provision included a $27.0 million unallocated reserve. Q2 merger and restructuring expense was $5.1 million; six-month expense was $14.6 million. The six-month total also included a $2.3 million charge for an increase in acquisition price.
- ConnectOne originated or approved approximately 2,200 PPP loans totaling $473.7 million. It believed most would be forgiven under the program; the loans were excluded from the allowance calculation based on their SBA guarantee. PPP-related lending and fees materially affected reported balances and income.
- The Bank had 575 COVID-related loan deferrals totaling approximately $937.4 million at June 30. Management reported virtually no first-time deferral requests since quarter-end and estimated that more than half of deferred loans would return to original terms in Q3; this is an estimate, not a guarantee.
- The Company issued $75 million of subordinated notes in June at a 5.75% fixed rate through June 2025, then floating-rate terms. CECL adoption was delayed under COVID-related relief, with adoption expected by the earlier of the end of the national emergency or December 31, 2020; the eventual adjustment had not been finalized.
- Management’s interest-rate model estimated that a 100-basis-point decline would reduce one-year net interest income by 3.55%, while a 200-basis-point increase would raise it by 0.91%. These are modeled sensitivities, not forecasts.
Outlook, risks, and contingencies
The filing provides no specific earnings or financial guidance. Management emphasized uncertainty from COVID-19, including potential borrower stress, collateral-value declines, changing credit losses, and effects on liquidity, operations, and the regional economy. It said estimates for the allowance, financial-instrument values, goodwill, and taxes could be materially affected. The Company performed a second-quarter goodwill impairment assessment and reported no impairment. Management also cited risks from BNJ integration, interest-rate changes, competition, regulation, and the potential for acquisition synergies and cost savings to fall short. The filing reported no legal proceedings expected to materially adversely affect financial condition or results.
Important facts for investors to verify
- Whether deferred borrowers resume payments and whether the $937.4 million deferred portfolio migrates to delinquency or nonaccrual status.
- Whether the $68.7 million allowance, including the $27.0 million unallocated COVID-19 reserve, proves adequate as economic and borrower conditions evolve; also monitor CECL adoption and its initial effect.
- PPP loan forgiveness, the timing of remaining fee recognition, and the facility’s repayment as PPP loans are forgiven or mature.
- BNJ integration costs, final purchase-accounting adjustments, realized synergies, and the effect of goodwill and other intangibles on tangible capital.
- Deposit and liquidity trends, use of borrowing facilities, loan commitments, and capital ratios as loans and credit quality change.