ConnectOne Bancorp(CNOB) - 2021 Q3 - Quarterly Report

Part I – Financial Information Financial Statements The unaudited consolidated financial statements detail the company's financial position, operations, and cash flows, highlighting total asset growth to $7.95 billion and a significant increase in nine-month net income to $97.3 million, influenced by CECL adoption Consolidated Statement of Condition Highlights | (in thousands) | September 30, 2021 (unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $7,949,514 | $7,547,339 | | Net Loans Receivable | $6,498,453 | $6,157,081 | | Total Liabilities | $6,851,081 | $6,632,029 | | Total Deposits | $6,398,338 | $5,959,224 | | Total Stockholders' Equity | $1,098,433 | $915,310 | Consolidated Income Statement Highlights | (in thousands, except per share data) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net Interest Income | $192,417 | $176,620 | | Provision for (reversal of) credit losses | $(6,315) | $36,000 | | Net Income | $97,315 | $45,648 | | Diluted EPS | $2.43 | $1.15 | Consolidated Statement of Cash Flows Highlights | (in thousands) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $154,644 | $99,756 | | Net cash used in investing activities | $(352,696) | $(312,151) | | Net cash provided by financing activities | $307,509 | $267,231 | | Net change in cash and cash equivalents | $109,439 | $54,636 | - Effective January 1, 2021, the Company adopted the CECL standard, resulting in a total pre-tax increase to the Allowance for Credit Losses (ACL) of $9.4 million and a net decrease to retained earnings of $2.9 million after tax effects[37] Notes to Consolidated Financial Statements The notes detail the basis of financial statement preparation, including CECL adoption, the $462.9 million investment securities portfolio, the $6.6 billion loan portfolio with its $78.0 million allowance for credit losses, and the issuance of $115 million in new perpetual preferred stock - The company operates as a community-based, full-service commercial bank headquartered in Englewood Cliffs, New Jersey, with its business primarily consisting of its wholly-owned subsidiary, ConnectOne Bank[32] - The COVID-19 pandemic continues to pose risks to the company's financial condition, with potential material adverse impacts on estimates for the allowance for credit losses, fair value of financial instruments, and goodwill[35] Loan Portfolio Composition (Sep 30, 2021) | Loan Type | Amount (in thousands) | | :--- | :--- | | Commercial | $1,325,488 | | Commercial real estate | $4,436,626 | | Commercial construction | $552,896 | | Residential real estate | $270,793 | | Consumer | $2,093 | | Total Gross Loans | $6,587,896 | Allowance for Credit Losses (ACL) Roll-Forward (Nine Months Ended Sep 30, 2021) | (in thousands) | Amount | | :--- | :--- | | Balance at Dec 31, 2020 | $79,226 | | Day 1 effect of CECL | $6,557 | | Adjusted Balance at Jan 1, 2021 | $85,783 | | Net Charge-offs | $(1,751) | | (Reversal of) provision for credit losses - loans | $(6,046) | | Balance at Sep 30, 2021 | $77,986 | - In August 2021, the company issued 115,000 shares of 5.25% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A, for net proceeds of $110.9 million[177] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q3 2021 performance to higher net interest income and decreased credit loss provisions, with net income reaching $32.1 million and net interest margin widening to 3.73%, while total loans grew by $340.2 million and asset quality remained stable Q3 2021 vs Q3 2020 Performance | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net Income | $32.1 million | $24.8 million | | Diluted EPS | $0.80 | $0.62 | | Net Interest Income | $68.2 million | $60.5 million | | Provision for Credit Losses | $1.1 million | $5.0 million | - The increase in net income for the first nine months of 2021 was primarily due to a $15.8 million increase in net interest income and a $42.3 million decrease in the provision for credit losses compared to the same period in 2020[196] - The fully taxable equivalent net interest margin widened to 3.73% in Q3 2021 from 3.49% in Q3 2020, driven by a 60 basis-point reduction in the cost of interest-bearing liabilities[198] - As of September 30, 2021, the company held $177.8 million in PPP loans, down from $397.5 million at year-end 2020, with remaining deferred fees of $6.0 million expected to be recognized by the end of 2022[193][75] Asset Quality Metrics | Metric | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Nonperforming assets to total assets | 0.83% | 0.82% | | Nonaccrual loans to total loans | 1.00% | 0.99% | | ACL to total loans | 1.19% | 1.27% | | ACL to total loans (ex-PPP) | 1.22% | 1.36% | - Stockholders' equity increased by $183.1 million since year-end 2020 to $1.1 billion, largely due to $110.9 million net proceeds from a preferred stock issuance and $82.0 million in retained earnings growth[254] Qualitative and Quantitative Disclosures about Market Risks The company manages primary interest rate risk through ALCO using NII simulation and EVE models, with sensitivity analysis showing a +200 bps rate increase would boost one-year NII by 3.23% and a -100 bps decrease would lower it by 5.80%, while EVE would decline by 0.61% and 1.30% respectively, all within guidelines One-Year Net Interest Income (NII) Sensitivity (as of Sep 30, 2021) | Interest Rate Shock (bps) | Estimated Change in NII (%) | | :--- | :--- | | +200 | +3.23% | | +100 | +1.57% | | -100 | -5.80% | Economic Value of Equity (EVE) Sensitivity (as of Sep 30, 2021) | Interest Rate Shock (bps) | Estimated Change in EVE (%) | | :--- | :--- | | +200 | -0.61% | | +100 | -0.07% | | -100 | -1.30% | Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures are effective in ensuring timely and accurate reporting as required by the SEC[265] - No material changes to the company's internal controls over financial reporting occurred during the last fiscal quarter[266] Part II – Other Information Legal Proceedings The company is not subject to any legal proceedings that could materially adversely impact its operations or financial condition - The Company is not currently subject to any material legal proceedings[268] Risk Factors No material changes have occurred in the company's risk factors since the Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes have occurred in the risk factors since the last Annual Report on Form 10-K for the year ended December 31, 2020[269] Exhibits This section lists exhibits filed with the Form 10-Q, including documents related to the Series A Preferred Stock and CEO/CFO certifications under the Sarbanes-Oxley Act of 2002 - Exhibits filed include documents related to the new Series A Preferred Stock (Certificate of Amendment, Specimen Certificate, Deposit Agreement)[271] - Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits[271]