CNOB - ConnectOne Bancorp Inc. Reports Third Quarter 2020 Results

ENGLEWOOD CLIFFS, N.J., Oct. 29, 2020 (GLOBE NEWSWIRE) -- ConnectOne Bancorp, Inc. (Nasdaq: CNOB) (the “Company” or “ConnectOne”), parent company of ConnectOne Bank (the “Bank”), today reported net income of $24.8 million for the third quarter of 2020 compared with $14.8 million for the second quarter of 2020 and $21.7 million for the third quarter of 2019.  Diluted earnings per share were $0.62 in the third quarter of 2020 compared with $0.37 in the second quarter of 2020 and $0.61 in the third quarter of 2019.  Included in net income were provisions for loan losses of $5.0 million for the third quarter of 2020, $15.0 million for the second quarter of 2020, and $2.0 million for the third quarter of 2019.  Also included in net income were merger and restructuring expenses of $5.1 million for the second quarter of 2020 and $0.2 million for the third quarter of 2019, while there were no such charges in the third quarter of 2020.  On a pre-tax, pre-provision and pre-merger charges basis, earnings were $37.6 million for the third quarter of 2020, $37.5 million for the second quarter of 2020, and $30.3 million for the third quarter of 2019.

Frank Sorrentino, ConnectOne’s Chairman and Chief Executive Officer, stated, “ConnectOne delivered another solid operating performance this quarter, with earnings of $0.62 per share, which speaks to our strong franchise and the continued outstanding execution on our strategic priorities.  Our pre-tax, pre-provision, and pre-merger charge operating earnings, as a percent of average assets, reached 2% this quarter, reflecting a continued widening of the net interest margin and an efficiency ratio of 40%, while also driving a 4% increase in our tangible book value per share, to $16.87.  We’re operating our Bank efficiently, and effectively, and I’m incredibly proud of the way our team has performed during this unprecedented operating environment.”

“Our provision for loan losses was $5 million for the quarter, down significantly from the $31.0 million in total recorded over the two sequential quarters, as our deferred portfolio continues to decline. We currently project that total deferrals as of year-end will aggregate to $200 million to $250 million, or approximately 3% to 4% of total loans, and that more than 90% of those deferrals are well-collateralized.”

“Operationally, we continue to use our full range of banking expertise to support our clients through ConnectOne’s virtual bank model. We are a technology-forward bank and our recent investments in infrastructure, communication tools and digital channels have played an instrumental role in our success.  We’ve also continued to successfully implement our branch rationalization strategy as we’re moving towards a robust banking hubs model supported by digital tools and resources.” Mr. Sorrentino added, “Looking ahead, while the nation and the banking industry continue to face uncertainty, we feel strongly about the strength and the direction of our Company. We’re focused on long-term sustainable growth and operating ConnectOne in a disciplined manner. We’re also deeply committed to further utilizing technology to remain one of the most efficient banks in the nation.”

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 December 1, 2020, to all shareholders of record on November 16, 2020.

Operating Results

Fully taxable equivalent net interest income for the third quarter of 2020 was $61.0 million, a decrease of $0.2 million, or 0.4%, from the second quarter of 2020.  The decrease from the second quarter of 2020 resulted from a 2.8% decrease in average interest-earning assets, primarily due to lower excess liquidity, and was largely offset by a 5 basis-point widening of the net interest margin to 3.49% from 3.44%.   The widening of the net interest margin resulted from a 5 basis-point improvement in the Bank’s cost of interest-bearing liabilities due primarily to a 17 basis-point decline in interest-bearing deposit costs, which was partially offset by the repayment of Paycheck Protection Program (“PPP”) Liquidity Facility borrowings and the issuance of $75 million in subordinated notes issued at the end of the second quarter of 2020.  Included in interest income in the third quarter of 2020 was PPP fee income of approximately $3.5 million, compared to $3.7 million in the second quarter of 2020. Deferred PPP fees were $7.9 million as of September 30, 2020.

Fully taxable equivalent net interest income for the third quarter of 2020 was $61.0 million, an increase of $12.1 million, or 24.7%, from the third quarter of 2019.  The increase from the third quarter of 2019 resulted primarily from a 23.3% increase in average interest-earning assets, largely due to PPP originations and the Bancorp of New Jersey (“BNJ”) acquisition, and a 5 basis-point widening of the net interest margin to 3.49% from 3.44%.  The widening of the net interest margin resulted from a 59 basis-points reduction in the cost of funding interest-earning assets, partially offset by a 54 basis-point reduction in the rate of average interest-earning assets.

Noninterest income totaled $3.5 million in the third quarter of 2020, $4.6 million in the second quarter of 2020 and $2.1 million in the third quarter of 2019.  The decrease in noninterest income of $1.1 million from the second quarter of 2020 was primarily attributable to a second quarter 2020 non-recurring loan referral fee of $2.3 million generated by BoeFly as a result of its participation in the PPP program. This decrease was partially offset by increases in other deposit and loan fees of $0.4 million, an increase in gains on sale of loans, primarily commercial real estate, of $0.4 million, and a death benefit of $0.5 million related to a BOLI policy. The increase in noninterest income of $1.4 million from the third quarter of 2019 was primarily attributable to the aforementioned BOLI death benefit, an increase in gains on sale of loans and an increase in net securities gains.

Noninterest expenses totaled $26.5 million for the third quarter of 2020, $33.1 million for the second quarter of 2020 and $20.4 million for the third quarter of 2019.  Included in noninterest expenses were merger-related charges totaling $5.1 million and $0.2 million during the second quarter of 2020 and third quarter of 2019, respectively, while there were no such charges in the third quarter of 2020.  Additionally, second quarter of 2020 expenses included an increase in value of acquisition price charge of $2.3 million.  Excluding merger-related charges and the acquisition price adjustment, noninterest expenses increased by $0.9 million from the second quarter of 2020.  The increase was primarily the result of an increase in salaries and employee benefits of $0.6 million due to an increase in certain compensation accruals and an increase in occupancy and equipment of $0.4 million due largely to one-time items. Noninterest expenses increased by $6.3 million, excluding merger-related charges, from the third quarter of 2019.  The increase was primarily the result of the BNJ acquisition which contributed to increases in salaries and employee benefits of $2.7 million, $1.1 million in occupancy and equipment, $0.4 million in professional and consulting, and $0.4 million in data processing.  The increase in FDIC insurance expense was primarily the result of a third quarter 2019 non-recurring FDIC assessment credit of $1.3 million.

Income tax expense was $7.8 million for the third quarter of 2020, $2.5 million for the second quarter of 2020 and $6.4 million for the third quarter of 2019.  The effective tax rates for the third quarter of 2020, second quarter of 2020 and third quarter of 2019 were 23.9%, 14.5% and 22.7%, respectively.  The increase in the effective tax rate when compared to the second quarter of 2020 and the third quarter of 2019 was primarily attributable to an increase in taxable income.

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.

The provision for loan losses was $5.0 million for the third quarter of 2020, $15.0 million for the second quarter of 2020 and $2.0 million for the third quarter of 2019.  The elevated provisions for loan losses for the third and second quarters of 2020 were due to the continued economic uncertainties of the COVID-19 pandemic, including consideration of related payment deferrals requested and/or granted. We 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 $65.5 million as of September 30, 2020, $49.5 million as of December 31, 2019 and $52.2 million as of September 30, 2019. Included in nonperforming assets were taxi medallion loans totaling $23.0 million as of September 30, 2020, $23.4 million as of December 31, 2019 and $25.8 million as of September 30, 2019.  Nonperforming assets (including taxi medallion loans) as a percentage of total assets were 0.88% as of September 30, 2020, 0.80% as of December 31, 2019 and 0.85% as of September 30, 2019.  Excluding the taxi medallion loans, nonaccrual loans were $42.5 million as of September 30, 2020, $26.1 million as of December 31, 2019 and $25.5 million as of September 30, 2019, representing a ratio of nonaccrual loans (excluding taxi medallion loans) to loans receivable of 0.68%, 0.51% and 0.50%, respectively.

The annualized net loan charge-off (recovery) ratio was (0.03%) for the third quarter of 2020, 0.08% for the fourth quarter of 2019 and 0.07% for the third quarter of 2019. During the third quarter of 2020, the Bank received a $0.8 million recovery on a previously charged-off commercial real estate credit.  The allowance for loan losses represented 1.19%, 0.75%, and 0.76% of loans receivable as of September 30, 2020, December 31, 2019 and September 30, 2019, respectively.  Excluding PPP loans, the allowance for loan losses represented 1.29%, 0.75%, and 0.76% of loans receivable as of September 30, 2020, December 31, 2019 and September 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 174.9% as of September 30, 2020, 147.0% as of December 31, 2019 and 151.9% as of September 30, 2019.

Selected Balance Sheet Items

The Company’s total assets were $7.4 billion, an increase of $1.3 billion from December 31, 2019.  Loans receivable were $6.3 billion, an increase of $1.1 billion from December 31, 2019.  The increase in total assets and loans receivable were primarily attributable to the acquisition of BNJ and the origination of PPP loans.  As of September 30, 2020, PPP loans totaled $474.0 million. We expect the level of PPP loans to decline over the course of 2020 and into the first half of 2021 as the loans are forgiven and paid down by the SBA through the guarantee provisions of the CARES Act.

The Company’s stockholders’ equity was $891 million as of September 30, 2020, an increase of $160 million from December 31, 2019. The increase in stockholders’ equity was primarily attributable to the acquisition of BNJ, which increased capital by $118 million and an increase of $38 million retained earnings.  As of September 30, 2020, the Company’s tangible common equity ratio and tangible book value per share were 9.28% and $16.87, 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 $220 million as of September 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.

Third Quarter 2020 Results Conference Call

Management will host a conference call and audio webcast at 10:00 a.m. ET on October 29, 2020 to review the Company’s financial performance and operating results.  The conference call dial-in number is 201-689-8471, access code 13711169 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, October 29, 2020 and ending on Thursday, November 5, 2020 by dialing 412-317-6671, access code 13711169.  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