CNOB - ConnectOne Bancorp Inc. Reports Second Quarter 2020 Results

ENGLEWOOD CLIFFS, N.J., July 30, 2020 (GLOBE NEWSWIRE) -- ConnectOne Bancorp, Inc. (Nasdaq: CNOB) (the “Company” or “ConnectOne”), parent company of ConnectOne Bank (the “Bank”), today reported net income of $14.8 million for the second quarter of 2020 compared with $6.0 million for the first quarter of 2020 and $19.3 million for the second quarter of 2019.  Diluted earnings per share were $0.37 in the second quarter of 2020 compared with $0.15 in the first quarter of 2020 and $0.54 in the second quarter of 2019. The increase in net income and diluted earnings per share from the first quarter of 2020 was due to an increase in net interest income, an increase in noninterest income, a decrease in noninterest expenses, and a decrease in provision for loan losses.  Included in net income were merger and restructuring expenses of $5.1 million for the second quarter of 2020, $9.5 million for the first quarter of 2020 and $0.3 million for the second quarter of 2019.  On a pre-tax, pre-provision and pre-merger charges basis, earnings were $37.5 million for the second quarter of 2020, $32.6 million for the first quarter of 2020, and $26.2 million for the second quarter of 2019.

Frank Sorrentino, ConnectOne’s Chairman and Chief Executive Officer stated, “We continue to execute on our priorities of using our full range of banking expertise to support our clients, ensuring the safety and well-being of our employees and maintaining a strong financial position. During the quarter, ConnectOne performed well.  We reported earnings of $0.37 per share, despite an additional $14 million of reserves due to the uncertainty regarding the pandemic, matching our reserves from the first quarter of 2020 and bringing our total reserves for the total portfolio to approximately 1.08%. Tangible book value per share increased to $16.28. Additionally, we had strong pre-tax operating revenue which was in excess of 1.95% of total average assets, placing us among the strongest in the industry.” 

“Operationally, our teams continue to offer essential banking services virtually and, as a technology-forward bank, the investments we’ve made in financial technology and in our infrastructure over the past few years is playing a critical role in positioning ConnectOne’s virtual bank model. Further, we’ve continued to be a resource to the communities we serve by actively participating in the SBA’s Paycheck Protection Program (the “PPP”), funding over $470 million of PPP loans. Additionally, our FinTech subsidiary BoeFly – which connects small- to mid-sized businesses to a network of financial lenders – has significantly increased its relationships with borrowers and banking partners and has participated in the PPP programs in a meaningful way.  We’re operating our Bank efficiently and effectively and I’m proud of the continued resiliency of the ConnectOne team.” 

Mr. Sorrentino added, “Looking ahead, while the nation and the banking industry face considerable uncertainty about the length of the pandemic, we have reason to be optimistic.  ConnectOne has always been a commercial real estate lender with low loss history, we have low exposure to hot button industries and our C&I portfolio has focused on lending in low-risk industries. We’re operating ConnectOne in a disciplined manner, our capital levels are solid, our portfolio is underwritten with low LTVs and reasonable cap rates, and we’re confident that together we will all get through this.  When we come out on the other side, we expect to get back to executing prudent growth trends and strong metrics, as we focused on in the past.”

Dividend Declaration

The Company announced that its Board of Directors declared a cash dividend on its common stock of $0.09 per share. The dividend will be paid on September 1, 2020, to all shareholders of record on August 17, 2020.   

Operating Results

Fully taxable equivalent net interest income for the second quarter of 2020 was $61.3 million, an increase of $5.5 million, or 9.8%, from the first quarter of 2020, and an increase of $15.2 million from the second quarter of 2019.  The increase from the first quarter of 2020 resulted primarily from an 8.8% increase in average interest-earning assets, largely due to PPP loan originations, and a 3 basis-point widening of the net interest margin to 3.44% from 3.41%.  Included in net interest income were purchase accounting adjustments of $3.1 million for the second quarter of 2020 and $3.5 million for the first quarter of 2020.  Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.27% for the second quarter of 2020 and 3.20% for the first quarter of 2020.  The widening of the adjusted net interest margin resulted primarily from the favorable impact the Fed’s first quarter interest rate reductions had on our funding costs, which more than offset declines in our interest-earning asset yields.  Included in interest income in the second quarter of 2020 was PPP fee income of approximately $3.7 million. The remaining $11.4 million in unamortized fees are expected to be realized over the next two to three quarters. The benefit to the second quarter 2020 net interest margin attributable to the PPP was offset by additional liquidity on the Bank’s balance sheet.

Noninterest income totaled $4.6 million in the second quarter of 2020, $2.9 million in the first quarter of 2020 and $1.9 million in the second quarter of 2019.  The increase in noninterest income of $1.8 million from the first quarter of 2020 was primarily attributed to increases deposit, loan and other income of $1.9 million, which includes loan referral fee income of $2.3 million generated by BoeFly as a result of its participation in the PPP program, which was partially offset by decreases in other deposit and loan fees of $0.4 million.  Additional decreases were in net gains on sale of loans held-for-sale of $0.2 million and net gains on equity securities of $0.1 million, offset by increases in income on bank owned life insurance of $0.2 million.

Noninterest expenses totaled $33.1 million for the second quarter of 2020, $35.1 million for the first quarter of 2020 and $21.6 million for the second quarter of 2019.  Included in noninterest expenses were merger-related charges totaling $5.1 million, $9.5 million and $0.3 million, during the second quarter of 2020, first quarter of 2020 and second quarter of 2019, respectively.  Excluding merger-related charges, noninterest expenses increased by $2.4 million from the first quarter of 2020, primarily attributable to an additional $2.3 million in expenses related to the BoeFly acquisition.

Income tax expense was $2.5 million for the second quarter of 2020, $1.0 million for the first quarter of 2020 and $5.5 million for the second quarter of 2019.  The effective tax rates for the second quarter of 2020, first quarter of 2020 and second quarter of 2019 were 14.5%, 14.8% and 22.2%, respectively.

Asset Quality

In accordance with the accounting relief provisions of the CARES Act, the Company has postponed the adoption of the current expected credit losses (“CECL”) accounting standards as permitted under regulatory guidance. Management reached this decision due to the complexities of CECL loan loss forecasting exacerbated by the quickly changing economic environment resulting from the COVID-19 pandemic.

The provision for loan losses was $15.0 million for the second quarter of 2020, $16.0 million for the first quarter of 2020 and $1.1 million for the second quarter of 2019.  The elevated provision for loan losses for the first two quarters of 2020 was due to the continued economic uncertainties of the COVID-19 pandemic, including consideration of related payment deferrals requested and/or granted to date. The aggregate payment deferrals are expected to decrease by more than 50% to less than $450 million, as we will commence billing on more than $500 million of loans deferred during the second quarter of 2020.  We will continue to work with our borrowers, where necessary, to provide additional support and guidance during this unprecedented difficult operating environment. ConnectOne has relatively low exposure to perceived at-risk industries, such as energy and hospitality.  And, consistent with our extensive experience and low loss history in real estate lending, a large portion of our loan portfolio is well-secured and was underwritten with prudent loan-to-value ratios and cap rates.  Meanwhile, our well-managed commercial lending program, which has avoided higher risk industries, is virtually all borrower recourse.  Nevertheless, as the pandemic crisis persists, there remains potential for increased levels of impaired loans across all segments of the portfolio. 

Nonperforming assets, which includes nonaccrual loans and other real estate owned, were $64.6 million at June 30, 2020, $49.5 million at December 31, 2019 and $49.9 million at June 30, 2019. Included in nonperforming assets were taxi medallion loans totaling $23.0 million at June 30, 2020, $23.4 million at December 31, 2019 and $26.5 million at June 30, 2019.  Nonperforming assets (including taxi medallion loans) as a percentage of total assets were 0.85% at June 30, 2020, 0.80% at December 31, 2019 and 0.82% at June 30, 2019.  Excluding the taxi medallion loans, nonaccrual loans were $41.6 million at June 30, 2020, $26.1 million at December 31, 2019 and $23.4 million at June 30, 2019, representing a ratio of nonaccrual loans (excluding taxi medallion loans) to loans receivable of 0.66%, 0.51% and 0.46%, respectively.

During the second quarter of 2020, the Bank implemented a series of short-term loan modifications consisting primarily of payment deferrals as requested by borrowers due to the COVID-19 pandemic.  Regulatory agencies previously confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered troubled debt restructurings. As of June 30, 2020, the Bank had 575 deferred loans totaling approximately $937 million.  The majority of these loans were initially deferred for 3-4 months.

The annualized net loan charge-off ratio was 0.03% for the second quarter of 2020, 0.08% for the fourth quarter of 2019 and 0.02% for the second quarter of 2019. The allowance for loan losses represented 1.08%, 0.75%, and 0.74% of loans receivable as of June 30, 2020, December 31, 2019 and June 30, 2019, respectively.  Excluding PPP loans, allowance for loan losses represented 1.17%, 0.75%, and 0.74% of loans receivable as of June 30, 2020, December 31, 2019 and June 30, 2019, respectively.  The allowance for loan losses currently excludes approximately $5 million of purchase accounting credit marks that are expected to be added to the allowance for loan losses once CECL is implemented, resulting in an additional 8 bps to the allowance for loan losses as a percent of loans ratio. The allowance for loan losses as a percentage of nonaccrual loans, excluding taxi medallion loans, was 165.4% as of June 30, 2020, 147.0% as of December 31, 2019 and 161.0% as of June 30, 2019.

Selected Balance Sheet Items

The Company’s total assets were $7.6 billion, an increase of $1.4 billion from December 31, 2019.  Loans receivable were $6.4 billion, an increase of $1.2 billion from December 31, 2019.  The increase in total assets and loans receivable were primarily attributable to the acquisition of Bancorp of NJ (“BNJ”) and the origination of PPP loans.  We originated over $470 million of PPP loans in the second quarter of 2020. We expect the level of PPP loans to decline significantly over the course of 2020 and into the first quarter of 2021 as the loans are forgiven and paid down by the SBA through the guarantee provisions the CARES Act. 

The Company’s stockholders’ equity was $868 million at June 30, 2020, an increase of $137 million from December 31, 2019. The increase in stockholders’ equity was primarily attributable to the acquisition of BNJ, which increased capital by $118 million.  As of June 30, 2020, the Company’s tangible common equity ratio and tangible book value per share were 8.75% and $16.28, respectively.  As of December 31, 2019, the tangible common equity ratio and tangible book value per share were 9.38% and $16.06, respectively. Total goodwill and other intangible assets were approximately $221 million as of June 30, 2020 and $168 million and December 31, 2019.

Use of Non-GAAP Financial Measures

In addition to the results presented in accordance with Generally Accepted Accounting Principles ("GAAP"), ConnectOne routinely supplements its evaluation with an analysis of certain non-GAAP measures. ConnectOne believes these non-GAAP financial measures, in addition to the related GAAP measures, provide meaningful information to investors in understanding our operating performance and trends.  These non-GAAP measures have inherent limitations and are not required to be uniformly applied and are not audited.  They should not be considered in isolation or as a substitute for an analysis of results reported under GAAP.  These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of non-GAAP financial measures disclosed in this earnings release to the comparable GAAP measures are provided in the accompanying tables.

Second Quarter 2020 Results Conference Call

Management will host a conference call and audio webcast at 10:00 a.m. ET on July 30, 2020 to review the Company's financial performance and operating results.  The conference call dial-in number is 412-317-6026, access code 10146235. Please dial in at least five minutes before the start of the call to register. An audio webcast of the conference call will be available to the public, on a listen-only basis, via the "Investor Relations" link on the Company's website https://www.ConnectOneBank.com or at http://ir.connectonebank.com.

A replay of the conference call will be available beginning at approximately 1:00 p.m. ET on Thursday, July 30, 2020 and ending on Thursday, August 6, 2020 by dialing 412-317-6671, access code 10146235. An online archive of the webcast will be available following the completion of the conference call at https://www.ConnectOneBank.com or at http://ir.connectonebank.com.

About ConnectOne Bancorp, Inc.

ConnectOne Bancorp, Inc., through its subsidiary, ConnectOne Bank offers a full suite of both commercial and consumer banking and lending products and services through its banking offices located across New York and New Jersey.   ConnectOne Bancorp, Inc. is traded on the Nasdaq Global Market under the trading symbol "CNOB," and information about ConnectOne may be found at https://www.connectonebank.com.

Forward-Looking Statements

This news release contains certain forward-looking statements which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, those factors set forth in Item 1A – Risk Factors of the Company’s Annual Report on Form 10-K, as filed with the Securities Exchange Commission, as supplemented by the Company’s subsequent filings with the Securities and Exchange Commission, and changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area, changes in accounting principles and guidelines and the impact of the COVID-19 pandemic on the Company, its employees and operations, and its customers. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Investor Contact:

William S. Burns
Executive VP & CFO
201.816.4474; bburns@cnob.com

Media Contact:
Emily Holtzman, MWWPR
631.742.9568; eholtzman@mww.com