ConnectOne Bancorp, Inc. — 2021 Form 10-K Summary
Business context and reporting period. ConnectOne Bancorp is a New Jersey bank holding company operating ConnectOne Bank and fintech subsidiary BoeFly. The bank focuses on commercial and real-estate lending and deposits in the New York metropolitan area, with a South Florida presence. This annual report covers the year ended December 31, 2021; it also reports fourth-quarter results. Unless noted otherwise, amounts are in U.S. dollars.
Key financial metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Total assets at year-end | $8.13 billion | $7.55 billion |
| Loans receivable at year-end | $6.83 billion | $6.24 billion |
| Deposits at year-end | $6.33 billion | $5.96 billion |
| Net interest income | $262.9 million | $238.0 million |
| Net income available to common stockholders | $128.6 million | $71.3 million |
| Diluted earnings per share | $3.22 | $1.79 |
| Net interest margin | 3.66% | 3.46% |
| Return on average assets | 1.69% | 0.96% |
| Allowance for credit losses on loans at year-end | $78.8 million | $79.2 million |
| Cash and cash equivalents at year-end | $265.5 million | $303.8 million |
Net income available to common stockholders increased 80.4%. Net interest income rose 10.3% on a fully taxable-equivalent basis, reflecting 4.2% growth in average interest-earning assets and a 20-basis-point increase in net interest margin. Lower deposit and borrowing costs more than offset lower yields on loans and securities and higher average cash balances.
The company reported a $5.5 million reversal of provision for credit losses in 2021, compared with a $41.0 million provision in 2020. Noninterest income increased to $15.7 million from $14.4 million, while noninterest expense declined to $109.0 million from $121.0 million, mainly because merger expenses fell by $14.6 million. Income tax expense rose to $44.7 million from $19.1 million; the effective tax rate increased to 25.5% from 21.1%.
Operating activities provided $202.3 million of cash; investing activities used $689.9 million, primarily as loans increased; and financing activities provided $449.4 million, including deposit growth and preferred-stock proceeds. Cash and cash equivalents decreased by $38.2 million. Management reported $742.1 million in liquid assets and approximately $894.0 million of available, unused credit capacity, against $1.2 billion of outstanding commitments to extend credit.
At year-end, borrowings were $468.2 million and subordinated debentures were $153.0 million. Total stockholders’ equity was $1.12 billion. The company’s regulatory capital ratios included a 10.64% CET1 ratio and a 15.26% total risk-based capital ratio; the bank was classified as well capitalized. In August 2021, the company issued $115 million of Series A preferred stock at a 5.25% dividend rate, receiving $110.9 million net of costs.
Material changes and fourth-quarter results
- Loan growth was 9.5% year over year. Commercial real-estate loans reached $4.74 billion, up $958.0 million; commercial loans declined $222.5 million, in large part as PPP loans outstanding fell from $397.5 million to $93.1 million.
- Deposits increased $373.7 million from year-end 2020. Noninterest-bearing deposits rose to $1.62 billion, or 25.5% of deposits, from $1.34 billion, or 22.5%.
- The allowance for credit losses reflects adoption of CECL on January 1, 2021. The adoption increased the loan allowance by $6.6 million and reduced retained earnings by $2.9 million, net of tax. The auditor identified the allowance estimate and CECL implementation as a critical audit matter, while issuing an unqualified opinion on the financial statements.
- Fourth-quarter 2021 net income was $33.0 million, versus $25.6 million in fourth-quarter 2020. Net income available to common stockholders was $31.3 million after $1.7 million of preferred dividends; diluted EPS was $0.79, versus $0.64.
Outlook, risks, and unusual items
- Management said it expects the effective tax rate to increase in 2022, citing revenue growth in existing and new markets. The filing provides no specific earnings, revenue, or margin guidance.
- Management described liquidity as adequate. Its year-end interest-rate model estimated that an immediate 200-basis-point increase would raise one-year net interest income by 3.35%, while a 100-basis-point decline would reduce it by 5.64%; these are model estimates, not forecasts.
- Commercial real estate is a major concentration: the filing reports $5.3 billion of CRE loans, including construction, equal to 77.3% of loans receivable, and 468% of bank Tier 1 capital plus the loan allowance under the cited regulatory concentration measure. The filing also notes that much of the portfolio is recently originated.
- Asset-quality indicators were mixed: nonaccrual loans were $61.7 million, near the prior year’s $61.7 million, but substandard loans increased to $157.4 million from $119.7 million. Performing troubled debt restructurings rose to $43.6 million from $23.7 million. One loan totaling $0.5 million remained on deferral at year-end.
- Other disclosed risks include continuing COVID-19 effects, possible deterioration in regional real-estate conditions, deposit competition and reliance on alternative deposit channels, interest-rate and LIBOR transition risk, and potential higher regulatory costs as assets approach the $10 billion threshold. Taxi-medallion exposure had a $26.2 million carrying value.
- Unrealized gains on available-for-sale securities declined, with the portfolio’s net unrealized position moving from a $7.9 million gain in 2020 to a $0.5 million loss in 2021, primarily reflecting market and interest-rate changes. The company reported no significant pending legal proceedings and said ordinary-course claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Track CRE concentration, recently originated loans, substandard credits, and the assumptions underlying the CECL allowance.
- Assess whether loan growth and deposit funding remain sustainable, including the effect of deposit competition and commitments to lend.
- Review the sensitivity of net interest income and securities values to changing rates, along with LIBOR-to-SOFR transition provisions in relevant contracts.
- Confirm the impact of preferred dividends, debt maturities and costs, and capital requirements on common-stockholder returns and distributions.
- Monitor progress toward the $10 billion asset threshold and associated compliance, FDIC, and operating costs.