ConnectOne Bancorp, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter filing. ConnectOne is a bank holding company operating primarily through ConnectOne Bank, serving businesses and individuals mainly in the New York metropolitan area, with a West Palm Beach office opened in August 2022.
Financial highlights
| Metric | 2022 | 2021 |
|---|---|---|
| Total assets at year-end | $9.645 billion | $8.129 billion |
| Loans receivable at year-end | $8.100 billion | $6.829 billion |
| Deposits at year-end | $7.357 billion | $6.333 billion |
| Net interest income (GAAP) | $302.1 million | $262.9 million |
| Net interest margin | 3.69% | 3.66% |
| Provision for credit losses | $17.8 million expense | $5.5 million reversal |
| Net income | $125.2 million | $130.4 million |
| Net income available to common stockholders | $119.2 million | $128.6 million |
| Diluted earnings per share | $3.01 | $3.22 |
| Return on average assets | 1.36% | 1.69% |
Results, funding and capital
- Tax-equivalent net interest income rose 15.1% to $304.6 million, supported by 14.3% growth in average interest-earning assets and a 3-basis-point increase in net interest margin. Higher loan and securities yields and lower average cash balances were partly offset by rising funding costs.
- Common earnings fell 7.4%. The $23.3 million year-over-year swing in credit-loss provision and $17.4 million increase in noninterest expense—principally higher salaries and benefits—more than offset stronger net interest income. Noninterest income declined $2.4 million to $13.2 million.
- Loans grew 18.6% year over year. Commercial real estate loans, including construction, were about $6.2 billion and represented 76.3% of loans receivable. Deposits grew approximately $1.0 billion; time deposits rose to $2.4 billion from $1.2 billion, including $934.9 million of nonreciprocal brokered time deposits.
- Cash and cash equivalents were $268.3 million. Management reported $760.0 million in liquid assets, equal to 7.9% of assets and 9.3% of deposits and borrowings. The Bank reported approximately $949 million of available and unused borrowing capacity after outstanding borrowings and letters of credit; outstanding commitments to extend credit were $1.2 billion.
- Cash flow from operations was $176.8 million; investing activities used $1.543 billion, primarily from loan growth; financing activities provided $1.369 billion, primarily from deposit growth and net borrowings. Year-end borrowings were $857.6 million and subordinated debt was $153.3 million.
- Company regulatory capital ratios were 10.30% CET1, 11.66% Tier 1 risk-based, 14.45% total risk-based and 10.68% leverage. The Bank was categorized as well capitalized. Tangible common equity to tangible assets was 9.04%, down from 10.06%.
Material changes and unusual items
- Net charge-offs increased to $5.3 million from $2.0 million; the allowance for credit losses on loans increased to $90.5 million from $78.8 million. Nonaccrual loans declined to $44.5 million from $61.7 million, while nonperforming assets fell to 0.46% of total assets from 0.76%.
- Available-for-sale securities had $87.2 million of gross unrealized losses at year-end; the after-tax unrealized loss in accumulated other comprehensive income was $61.8 million, versus $0.5 million at year-end 2021. Management attributed the decline mainly to interest rates and market conditions, reported no impairment charge, and stated it did not intend, and was not likely to be required, to sell before recovery.
- The company repurchased 447,108 shares in 2022 for approximately $13.1 million and paid $23.4 million in common dividends. Common dividends per share were $0.595, compared with $0.48 in 2021.
- In the fourth quarter, net income available to common stockholders was $31.0 million and diluted EPS was $0.79. Net interest income was $78.0 million and provision expense was $3.3 million. The filing provides quarterly figures but no clear fourth-quarter year-over-year comparison in the presented summary.
Outlook, commentary and risks
- No quantified earnings or growth guidance is provided. Management expected the effective tax rate to increase in 2023, citing revenue growth in existing and new markets.
- Management identified the approaching $10 billion asset threshold as a significant regulatory consideration. Assets were $9.645 billion at year-end; crossing the threshold could bring added consumer compliance oversight, higher FDIC premiums and reduced debit-card interchange fees, increasing costs.
- Interest-rate risk is material. The year-end model estimated that an instantaneous 200-basis-point rate increase would reduce one-year net interest income by 2.22% and economic value of equity by 10.51%. Management also cited deposit competition, quantitative tightening, inflation and possible recession risks.
- Key credit risks include the substantial commercial real estate concentration, unseasoned loan growth and exposure to small and midsized businesses. Management’s hypothetical adverse-forecast sensitivity indicated the quantitative allowance estimate for collectively evaluated loans could increase by approximately $40 million; this was a sensitivity, not a forecast.
- There were no loans on pandemic-related deferral at year-end. The filing reports no significant pending legal proceedings beyond routine matters and no material adverse effect expected from their disposition. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; the ACL’s qualitative factors for commercial and CRE loans were identified as a critical audit matter.
Most important facts for investors to verify
- Whether deposit growth can be sustained without materially higher deposit costs, and how brokered and uninsured deposits evolve.
- CRE portfolio performance, especially multifamily and recently originated loans; collateral values, refinancing conditions and borrower delinquencies.
- Allowance adequacy against loan growth and changing economic forecasts, including the assumptions behind qualitative reserves and the disclosed adverse sensitivity.
- Realized versus unrealized effects of securities losses, available liquidity and borrowing capacity, and any impact on capital or dividends.
- Costs and operational readiness for the $10 billion regulatory threshold, together with sensitivity to interest rates and funding competition.