ConnectOne Bancorp, Inc. (NASDAQ:CNOB) Q2 2020 Earnings Conference Call - Final Transcript

Jul 30, 2020 • 10:00 am ET


ConnectOne Bancorp, Inc. (NASDAQ:CNOB) Q2 2020 Earnings Conference Call - Final Transcript


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William S. Burns

already been working that down. And removing that drag will improve margin immediately and we still have some room for lower deposit rates, especially as CDs continue to run off. Over the next six months, 40% of the CD portfolio will mature. It carries a weighted average rate right now of 220 basis points [Phonetic]. And so we'll have a choice when those mature, whether we want to be competitive or let some of those CDs run off.

Now offsetting those positive margin items is the recent sub-debt offering. That's going to compress NIM by about five basis points in the third quarter, although that will come down to just two-basis point compression, once we pay off $50 million of sub-debt that's outstanding. We'll do that either later this year or early next year. And finally, I want to add, there may be a bias towards lower loan origination rates versus the average yield on the portfolio which would compress the margin. But all in all, I see a relatively stable, if not slightly improving margin for the rest of 2020.

Want to make a couple of comments about BoeFly because there were a couple of items that impacted noninterest income and expense. First, we recorded $2.3 million in PPP referral fees. These were on loans referred by BoeFly to and originated by other banks. And offsetting that income in the quarter, we are accruing an advertisement to the valuation of the BoeFly acquisition due to all the PPP volume ConnectOne had. And that resulted in recognizing a similar $2.3 million expense offsetting the fees.

Let's turn now to credit and reserves. Our provision for loan losses was elevated and that was due to qualitative factors namely an increase in the projected duration of the pandemic. We believe the $15 million total provision for the quarter is conservative, especially when we consider the positive trends in deferred loans. And I want to add, when it comes to reserves, we'd much rather be ahead of the curve versus playing catch-up.

Want to elaborate a little bit more on what Frank said about deferments that more than 50% are coming off deferral. That's based on loans that have been reviewed so far. So, that number is likely to get even better as all the deferment terms run their course. Our reserves as a percentage of loans has increased to 1.08 on a GAAP basis if you will. If you were to exclude the PPP loans which have a 0% risk weighting and add back the purchase accounting discount that ratio increases to approximately 1.25%. The reserve ratio was only 0.75 at year-end 2019. So we've had growth in both reserves and capital during the quarter, improving our fortress even further to go along with ongoing strong net operating revenue to withstand any prolonged crisis. Our bank leverage ratio stands at a healthy 10.1%.

Just a couple of comments on expense growth and efficiency. Expense growth, I expect, will continue to be moderate,