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ConnectOne Bancorp, Inc. Reports Third Quarter 2020 Results

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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


CONNECTONE BANCORP, INC. AND SUBSIDIARIES          
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION        
(in thousands)          
           
  September 30,   December 31,   September 30,
  2020   2019   2019
  (unaudited)       (unaudited)
ASSETS          
Cash and due from banks $ 59,422     $ 65,717     $ 54,792  
Interest-bearing deposits with banks   196,697       135,766       139,217  
Cash and cash equivalents   256,119       201,483       194,009  
           
Securities available-for-sale   453,015       404,701       425,849  
Equity securities   13,400       11,185       11,231  
           
Loans held-for-sale   8,508       33,250       33,245  
           
Loans receivable   6,251,051       5,113,527       5,110,471  
Less: Allowance for loan losses   74,267       38,293       38,771  
Net loans receivable   6,176,784       5,075,234       5,071,700  
           
Investment in restricted stock, at cost   28,713       27,397       27,946  
Bank premises and equipment, net   29,922       19,236       19,754  
Accrued interest receivable   34,326       20,949       21,024  
Bank owned life insurance   165,676       137,961       137,048  
Right of use operating lease assets   22,830       15,137       15,789  
Other real estate owned   -       -       907  
Goodwill   208,372       162,574       162,574  
Core deposit intangibles   11,605       5,460       5,800  
Other assets   40,289       59,465       34,393  
Total assets $ 7,449,559     $ 6,174,032     $ 6,161,269  
           
LIABILITIES          
Deposits:          
Noninterest-bearing $ 1,270,021     $ 861,728     $ 828,190  
Interest-bearing   4,528,735       3,905,814       3,923,044  
Total deposits   5,798,756       4,767,542       4,751,234  
Borrowings   506,225       500,293       512,456  
Operating lease liabilities   26,726       16,449       17,148  
Subordinated debentures, net of debt issuance costs   202,552       128,885       128,802  
Other liabilities   24,564       29,673       31,469  
Total liabilities   6,558,823       5,442,842       5,441,109  
           
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS' EQUITY          
Common stock   586,946       468,571       468,571  
Additional paid-in capital   22,867       21,344       20,450  
Retained earnings   309,893       271,782       254,159  
Treasury stock   (30,271 )     (29,360 )     (21,892 )
Accumulated other comprehensive income (loss)   1,301       (1,147 )     (1,128 )
   Total stockholders' equity   890,736       731,190       720,160  
   Total liabilities and stockholders' equity $ 7,449,559     $ 6,174,032     $ 6,161,269  
           



CONNECTONE BANCORP, INC. AND SUBSIDIARIES            
CONSOLIDATED STATEMENTS OF INCOME              
(dollars in thousands, except for per share data)              
               
  Three Months Ended   Nine Months Ended
  09/30/20   09/30/19   09/30/20   09/30/19
Interest income              
Interest and fees on loans $ 74,755     $ 66,796     $ 223,488   $ 190,646  
Interest and dividends on investment securities:              
Taxable   1,305       1,916       5,083     7,431  
Tax-exempt   688       897       2,148     3,105  
Dividends   426       502       1,268     1,369  
Interest on federal funds sold and other short-term investments   47       278       625     925  
Total interest income   77,221       70,389       232,612     203,476  
Interest expense              
Deposits   11,947       17,351       42,756     49,298  
Borrowings   4,725       4,632       13,236     15,290  
Total interest expense   16,672       21,983       55,992     64,588  
               
Net interest income   60,549       48,406       176,620     138,888  
Provision for loan losses   5,000       2,000       36,000     7,600  
Net interest income after provision for loan losses   55,549       46,406       140,620     131,288  
               
Noninterest income              
Income on bank owned life insurance   1,598       915       3,693     2,570  
Net gains on sale of loans held-for-sale   614       278       1,244     343  
Deposit, loan and other income   1,278       1,116       5,777     2,816  
Net (losses) gains on equity securities   (7 )     79       215     340  
Net (losses) gains on sale of securities available-for-sale   -       (279 )     29     (280 )
Total noninterest income   3,483       2,109       10,958     5,789  
               
Noninterest expenses              
Salaries and employee benefits   15,114       12,449       44,177     36,254  
Occupancy and equipment   3,566       2,480       10,193     7,332  
FDIC insurance   1,105       (364 )     3,054     1,216  
Professional and consulting   1,926       1,499       5,173     4,078  
Marketing and advertising   214       473       944     1,080  
Data processing   1,470       1,058       4,529     3,352  
Merger and restructuring expenses   -       191       14,640     8,084  
Loss on extinguishment of debt   -       -       -     1,047  
Amortization of core deposit intangibles   627       340       1,931     1,068  
Increase in value of acquisition price   -       -       2,333     -  
Other expenses   2,456       2,253       7,625     6,520  
Total noninterest expenses   26,478       20,379       94,599     70,031  
               
Income before income tax expense   32,554       28,136       56,979     67,046  
Income tax expense   7,768       6,440       11,331     14,434  
Net income $ 24,786     $ 21,696     $ 45,648   $ 52,612  
               
Earnings per common share:              
Basic $ 0.62     $ 0.61     $ 1.15   $ 1.49  
Diluted   0.62       0.61       1.15     1.48  
               


ConnectOne's management believes that the supplemental financial information, including non-GAAP measures provided below, is useful to investors. The non-GAAP measures should not be viewed as a substitute for financial results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP financial measures presented by other companies.
                   
CONNECTONE BANCORP, INC.                  
SUPPLEMENTAL GAAP AND NON-GAAP FINANCIAL MEASURES                
                   
  As of
  Sept. 30,   June 30,   Mar. 31,   Dec. 31,   Sept. 30,
  2020   2020   2020   2019   2019
   
Selected Financial Data (dollars in thousands)
Total assets $ 7,449,559     $ 7,617,184     $ 7,279,327     $ 6,174,032     $ 6,161,269  
Loans receivable:                  
Commercial $ 1,599,295     $ 1,625,024     $ 1,203,818     $ 1,096,224     $ 1,079,071  
Commercial real estate   2,001,311       1,987,695       1,981,149       1,559,354       1,551,182  
Multifamily   1,703,290       1,723,273       1,762,651       1,518,400       1,513,216  
Commercial construction   614,112       673,893       676,836       620,969       647,261  
Residential   343,376       366,315       387,400       320,019       322,307  
Consumer   1,876       2,001       1,965       3,328       2,436  
Gross loans   6,263,260       6,378,201       6,013,819       5,118,294       5,115,473  
Unearned net origination fees   (12,209 )     (14,934 )     (4,509 )     (4,767 )     (5,002 )
Loans receivable   6,251,051       6,363,267       6,009,310       5,113,527       5,110,471  
Loans held-for-sale   8,508       11,212       32,425       33,250       33,245  
Total loans $ 6,259,559     $ 6,374,479     $ 6,041,735     $ 5,146,777     $ 5,143,716  
                   
Investment securities $ 466,415     $ 431,833     $ 460,101     $ 415,886     $ 437,080  
Goodwill and other intangible assets   219,977       220,605       221,263       168,034       168,374  
Deposits:                  
Noninterest-bearing demand $ 1,270,021     $ 1,276,070     $ 979,778     $ 861,728     $ 828,190  
Time deposits   1,619,609       1,807,864       1,974,400       1,553,721       1,573,736  
Other interest-bearing deposits   2,909,126       2,742,927       2,555,014       2,352,093       2,349,308  
Total deposits $ 5,798,756     $ 5,826,861     $ 5,509,192     $ 4,767,542     $ 4,751,234  
                   
Borrowings $ 506,225     $ 667,062     $ 726,856     $ 500,293     $ 512,456  
Subordinated debentures (net of debt issuance costs)   202,552       202,476       128,967       128,885       128,802  
Total stockholders' equity   890,736       867,741       853,710       731,190       720,160  
                   
Quarterly Average Balances                  
Total assets $ 7,474,002     $ 7,684,403     $ 7,106,027     $ 6,084,607     $ 6,059,413  
Loans receivable:                  
Commercial $ 1,610,423     $ 1,539,749     $ 1,146,773     $ 1,085,640     $ 1,040,355  
Commercial real estate (including multifamily)   3,679,297       3,722,966       3,723,991       3,074,889       3,144,978  
Commercial construction   646,281       675,698       663,036       642,476       617,106  
Residential   352,426       374,283       390,655       318,413       325,188  
Consumer   2,536       1,898       3,007       4,165       3,525  
Gross loans   6,290,963       6,314,594       5,927,462       5,125,583       5,131,152  
Unearned net origination fees   (13,292 )     (13,420 )     (4,648 )     (5,031 )     (4,778 )
Loans receivable   6,277,671       6,301,174       5,922,814       5,120,552       5,126,374  
Loans held-for-sale   10,772       31,329       33,655       33,163       991  
Total loans $ 6,288,443     $ 6,332,503     $ 5,956,469     $ 5,153,715     $ 5,127,365  
                   
Investment securities $ 429,947     $ 452,224     $ 458,642     $ 427,973     $ 448,618  
Goodwill and other intangible assets   220,391       221,039       221,075       168,257       168,598  
Deposits:                  
Noninterest-bearing demand $ 1,253,235     $ 1,277,428     $ 955,358     $ 844,332     $ 810,247  
Time deposits   1,728,129       1,905,165       1,962,714       1,533,425       1,598,378  
Other interest-bearing deposits   2,881,592       2,639,052       2,660,755       2,348,752       2,300,886  
Total deposits $ 5,862,956     $ 5,821,645     $ 5,578,827     $ 4,726,509     $ 4,709,511  
                   
Borrowings $ 467,399     $ 798,648     $ 477,121     $ 452,837     $ 467,230  
Subordinated debentures (net of debt issuance costs)   202,502       141,904       128,913       128,830       128,747  
Total stockholders' equity   883,364       868,796       864,241       732,173       714,002  
                   
  Three Months Ended
  Sept. 30,   June 30,   Mar. 31,   Dec. 31,   Sept. 30,
  2020   2020   2020   2019   2019
   
  (dollars in thousands, except for per share data)
Net interest income $ 60,549     $ 60,790     $ 55,281     $ 47,431     $ 48,406  
Provision for loan losses   5,000       15,000       16,000       500       2,000  
Net interest income after provision for loan losses   55,549       45,790       39,281       46,931       46,406  
Noninterest income                  
Income on bank owned life insurance   1,598       1,128       967       914       915  
Net gains on sale of loans held-for-sale   614       237       393       169       278  
Deposit, loan and other income   1,278       3,212       1,287       1,209       1,116  
Net (losses) gains on equity securities   (7 )     44       178       (46 )     79  
Net gains (losses) on sale of investment securities   -       -       29       -       (279 )
Total noninterest income   3,483       4,621       2,854       2,246       2,109  
Noninterest expenses                  
Salaries and employee benefits   15,114       14,500       14,563       12,881       12,449  
Occupancy and equipment   3,566       3,156       3,471       2,380       2,480  
FDIC insurance   1,105       1,093       856       795       (364 )
Professional and consulting   1,926       1,673       1,574       1,428       1,499  
Marketing and advertising   214       426       304       273       473  
Data processing   1,470       1,586       1,473       1,151       1,058  
Merger expenses   -       5,146       9,494       871       191  
Amortization of core deposit intangible   627       652       652       340       340  
Increase in value of acquisition price   -       2,333       -       -       -  
Other expenses   2,456       2,498       2,671       2,078       2,253  
Total noninterest expenses   26,478       33,063       35,058       22,197       20,379  
                   
Income before income tax expense   32,554       17,348       7,077       26,980       28,136  
Income tax expense   7,768       2,516       1,047       6,197       6,440  
Net income $ 24,786     $ 14,832     $ 6,030     $ 20,783     $ 21,696  
                   
Weighted average diluted shares outstanding   39,653,832       39,611,712       39,510,810       35,245,285       35,262,565  
Diluted EPS $ 0.62     $ 0.37     $ 0.15     $ 0.59     $ 0.61  
                   
Reconciliation of GAAP Earnings to Pre-tax, Pre-provision and Pre-merger charges Earnings                  
Net income $ 24,786     $ 14,832     $ 6,030     $ 20,783     $ 21,696  
Income tax expense   7,768       2,516       1,047       6,197       6,440  
Merger charges   -       5,146       9,494       871       191  
Provision for loan losses   5,000       15,000       16,000       500       2,000  
Pre-tax, pre-provision and pre-merger charges earnings $ 37,554     $ 37,494     $ 32,571     $ 28,351     $ 30,327  
                   
Return on Assets Measures                  
Average assets $ 7,474,002     $ 7,684,403     $ 7,106,027     $ 6,084,607     $ 6,059,413  
Return on avg. assets   1.32 %     0.78 %     0.34 %     1.36 %     1.42 %
Return on avg. assets (pre tax, pre-provision and pre-merger charges)   2.00       1.96       1.84       1.85       1.99  
                   
  Three Months Ended
  Sept. 30,   June 30,   Mar. 31,   Dec. 31,   Sept. 30,
  2020   2020   2020   2019   2019
   
Return on Equity Measures (dollars in thousands)
Average common equity $ 883,364     $ 868,796     $ 864,241     $ 732,173     $ 714,002  
Less: average intangible assets   (220,391 )     (221,039 )     (221,075 )     (168,257 )     (168,598 )
Average tangible common equity $ 662,973     $ 647,757     $ 643,166     $ 563,916     $ 545,404  
                   
Return on avg. common equity (GAAP)   11.16 %     6.87 %     2.81 %     11.26 %     12.06 %
Return on avg. tangible common equity (non-GAAP) (1)   15.14       9.50       4.06       14.79       15.96  
                   
Efficiency Measures                  
Total noninterest expenses $ 26,478     $ 33,063     $ 35,058     $ 22,197     $ 20,379  
Amortization of core deposit intangibles   (627 )     (652 )     (652 )     (340 )     (340 )
Merger expenses   -       (5,146 )     (9,494 )     (871 )     (191 )
FDIC small bank assessment credit   -       -       -       -       1,310  
Foreclosed property expense   -       (5 )     10       8       (90 )
Operating noninterest expense $ 25,851     $ 27,260     $ 24,922     $ 20,994     $ 21,068  
                   
Net interest income (tax equivalent basis) $ 61,005     $ 61,253     $ 55,781     $ 47,929     $ 48,918  
Noninterest income   3,483       4,621       2,854       2,246       2,109  
Net losses (gains) on equity securities   7       (44 )     (178 )     46       (79 )
Net (gains) losses on sales of securities   -       -       (29 )     -       279  
Operating revenue $ 64,495     $ 65,830     $ 58,428     $ 50,221     $ 51,227  
                   
Operating efficiency ratio (non-GAAP) (2)   40.1 %     41.4 %     42.7 %     41.8 %     41.1 %
                   
Net Interest Margin                  
Average interest-earning assets $ 6,962,499     $ 7,164,545     $ 6,584,508     $ 5,663,538     $ 5,649,058  
                   
Net interest income (tax equivalent basis) $ 61,005     $ 61,253     $ 55,781     $ 47,929     $ 48,918  
Impact of purchase accounting fair value marks   (2,403 )     (3,073 )     (3,457 )     (1,455 )     (1,566 )
Adjusted net interest income (tax equivalent basis) $ 58,602     $ 58,180     $ 52,324     $ 46,474     $ 47,352  
                   
Net interest margin (GAAP)   3.49 %     3.44 %     3.41 %     3.36 %     3.44 %
Adjusted net interest margin (non-GAAP) (3)   3.35       3.27       3.20       3.26       3.33  
____________                  
(1) Earnings available to common stockholders excluding amortization of intangible assets divided by average tangible common equity.  
(2) Operating noninterest expense divided by operating revenue.                  
(3) Adjusted net interest margin excludes impact of purchase accounting fair value marks.            
                   
  As of
  Sept. 30,   June 30,   Mar. 31,   Dec. 31,   Sept. 30,
  2020   2020   2020   2019   2019
   
Capital Ratios and Book Value per Share (dollars in thousands, except for per share data)
Common equity $ 890,736     $ 867,741     $ 853,710     $ 731,190     $ 720,160  
Less: intangible assets   (219,977 )     (220,605 )     (221,263 )     (168,034 )     (168,374 )
Tangible common equity $ 670,759     $ 647,136     $ 632,447     $ 563,156     $ 551,786  
                   
Total assets $ 7,449,559     $ 7,617,184     $ 7,279,327     $ 6,174,032     $ 6,161,269  
Less: intangible assets   (219,977 )     (220,605 )     (221,263 )     (168,034 )     (168,374 )
Tangible assets $ 7,229,582     $ 7,396,579     $ 7,058,064     $ 6,005,998     $ 5,992,895  
                   
Common shares outstanding   39,754,051       39,753,033       39,704,921       35,072,066       35,364,845  
                   
Common equity ratio (GAAP)   11.96 %     11.39 %     11.73 %     11.84 %     11.69 %
Tangible common equity ratio (non-GAAP) (4)   9.28       8.75       8.96       9.38       9.21  
                   
Regulatory capital ratios (Bancorp):                  
Leverage ratio   9.30 %     8.99 %     9.20 %     9.54 %     9.39 %
Common equity Tier 1 risk-based ratio   10.63       10.04       9.63       9.95       9.78  
Risk-based Tier 1 capital ratio   10.72       10.12       9.71       10.04       9.87  
Risk-based total capital ratio   14.94       14.32       12.46       12.95       12.80  
                   
Regulatory capital ratios (Bank):                  
Leverage ratio   10.41 %     10.12 %     10.36 %     10.81 %     10.68 %
Common equity Tier 1 risk-based ratio   12.00       11.38       10.93       11.37       11.23  
Risk-based Tier 1 capital ratio   12.00       11.38       10.93       11.37       11.23  
Risk-based total capital ratio   13.70       12.96       12.25       12.63       12.50  
                   
Book value per share (GAAP) $ 22.41     $ 21.83     $ 21.50     $ 20.85     $ 20.36  
Tangible book value per share (non-GAAP) (5)   16.87       16.28       15.93       16.06       15.60  
                   
Net Loan (Recoveries) Charge-Off Detail                  
Net loan charge-offs (recoveries) :                  
Charge-offs $ 257     $ 449     $ 127     $ 1,029     $ 964  
Recoveries   (800 )     (4 )     (3 )     (22 )     (37 )
Net loan (recoveries) charge-offs $ (543 )   $ 445     $ 124     $ 1,007     $ 927  
Net loan (recoveries) charge-offs as a % of average loans receivable (annualized)   (0.03 )%     0.03 %     0.01 %     0.08 %     0.07 %
                   
Asset Quality                  
Nonaccrual taxi medallion loans $ 23,024     $ 23,024     $ 23,024     $ 23,431     $ 25,802  
Nonaccrual loans (excluding taxi medallion loans)   42,470       41,556       39,349       26,050       25,519  
Other real estate owned   -       -       -       -       907  
Total nonperforming assets $ 65,494     $ 64,580     $ 62,373     $ 49,481     $ 52,228  
                   
Performing troubled debt restructurings $ 18,241     $ 20,418     $ 21,293     $ 21,410     $ 19,681  
                   
Allowance for loan losses ("ALLL") $ 74,267     $ 68,724     $ 54,169     $ 38,293     $ 38,771  
                   
Loans receivable $ 6,251,051     $ 6,363,267     $ 6,009,310     $ 5,113,527     $ 5,110,471  
Less: taxi medallion loans   24,634       24,603       24,575       24,977       27,353  
Loans receivable (excluding taxi medallion loans) $ 6,226,417     $ 6,338,664     $ 5,984,735     $ 5,088,550     $ 5,083,118  
                   
Loans receivable $ 6,251,051     $ 6,363,267     $ 6,009,310     $ 5,113,527     $ 5,110,471  
Less: PPP loans   474,022       473,999       -       -       -  
Loans receivable (excluding PPP loans) $ 5,777,029     $ 5,889,268     $ 6,009,310     $ 5,113,527     $ 5,110,471  
                   
Nonaccrual loans (excluding taxi medallion loans) as a % of loans receivable (excluding taxi medallion loans)   0.68 %     0.66 %     0.66 %     0.51 %     0.50 %
Nonaccrual loans as a % of loans receivable   1.05       1.01       1.04       0.97       1.00  
Nonperforming assets as a % of total assets   0.88       0.85       0.86       0.80       0.85  
ALLL as a % of loans receivable   1.19       1.08       0.90       0.75       0.76  
ALLL as a % of loans receivable (excluding PPP loans)   1.29       1.17       0.90       0.75       0.76  
ALLL as a % of nonaccrual loans (excluding taxi medallion loans)   174.9       165.4       137.7       147.0       151.9  
ALLL as a % of nonaccrual loans   113.4       106.4       86.8       77.4       75.5  
____________                  
(4) Tangible common equity divided by tangible assets.                  
(5) Tangible common equity divided by common shares outstanding at period-end.                


CONNECTONE BANCORP, INC. AND SUBSIDIARIES                          
NET INTEREST MARGIN ANALYSIS                            
(dollars in thousands)                            
  For the Three Months Ended  
  September 30, 2020 June 30, 2020 September 30, 2019  
  Average
          Average
          Average
       
Interest-earning assets: Balance
  Interest Rate (7)   Balance
  Interest Rate (7)   Balance
  Interest Rate (7)
Investment securities (1) (2) $ 420,362     $ 2,176   2.06 %   $ 443,282     $ 2,531   2.30 %   $ 445,492     $ 3,053   2.72 %
Loans receivable and loans held-for-sale (2) (3) (4)   6,288,443       75,028   4.75       6,332,503       76,088   4.83       5,127,365       67,068   5.19  
Federal funds sold and interest-                            
bearing deposits with banks   227,617       47   0.08       357,758       79   0.09       50,289       278   2.19  
Restricted investment in bank stock   26,077       426   6.50       31,002       442   5.73       25,912       502   7.69  
     Total interest-earning assets   6,962,499       77,677   4.44       7,164,545       79,140   4.44       5,649,058       70,901   4.98  
Allowance for loan losses   (69,381 )             (53,502 )             (37,704 )        
Noninterest-earning assets   580,884               573,360               448,059          
     Total assets $ 7,474,002             $ 7,684,403             $ 6,059,413          
                                               
Interest-bearing liabilities:                            
Time deposits $ 1,728,129     $ 8,174   1.88     $ 1,905,165     $ 9,586   2.02     $ 1,598,378     $ 9,934   2.47  
Other interest-bearing deposits   2,881,592       3,773   0.52       2,639,052       4,011   0.61       2,300,886       7,416   1.28  
     Total interest-bearing deposits   4,609,721       11,947   1.03       4,544,217       13,597   1.20       3,899,264       17,350   1.77  
                             
Borrowings   467,399       1,992   1.70       798,648       2,235   1.13       467,230       2,754   2.34  
Subordinated debentures, net of debt issuance costs   202,502       2,700   5.30       141,904       2,021   5.73       128,747       1,843   5.68  
Capital lease obligation   2,211       33   5.94       2,257       34   6.06       2,393       36   5.97  
     Total interest-bearing liabilities   5,281,833       16,672   1.26       5,487,026       17,887   1.31       4,497,634       21,983   1.94  
                             
Noninterest-bearing demand deposits   1,253,235               1,277,428               810,247          
Other liabilities   55,570               51,153               37,530          
     Total noninterest-bearing liabilities   1,308,805               1,328,581               847,777          
Stockholders' equity   883,364               868,796               714,002          
     Total liabilities and stockholders' equity $ 7,474,002             $ 7,684,403             $ 6,059,413          
                                               
Net interest income (tax equivalent basis)     61,005             61,253             48,918      
Net interest spread (5)     3.18 %       3.13 %       3.04 %
                             
Net interest margin (6)     3.49 %       3.44 %       3.44 %
                             
Tax equivalent adjustment     (456 )           (463 )           (512 )    
Net interest income   $ 60,549           $ 60,790           $ 48,406      
                             
(1) Average balances are calculated on amortized cost.
(2) Interest income is presented on a tax equivalent basis using 21% federal tax rate.
(3) Includes loan fee income.
(4) Loans include nonaccrual loans.
(5) Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing
liabilities and is presented on a tax equivalent basis.             
(6) Represents net interest income on a tax equivalent basis divided by average total interest-earning assets.        
(7) Rates are annualized.              

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