ConnectOne Bancorp, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This annual filing also provides unaudited fourth-quarter results. ConnectOne is a New Jersey-based bank holding company operating ConnectOne Bank, focused on commercial banking in the New York/New Jersey metropolitan area, and BoeFly, a digital lending marketplace.
Financial performance and condition
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Total assets | $7.55 billion | $6.17 billion | Up $1.37 billion, largely reflecting the BNJ acquisition |
| Loans receivable | $6.24 billion | $5.11 billion | Up 22.0%; gross loans were up 23.8% |
| Deposits | $5.96 billion | $4.77 billion | Up $1.19 billion |
| Net interest income | $238.0 million | $186.3 million | Up 27.7% |
| Net interest margin | 3.46% | 3.35% | Up 11 basis points |
| Provision for loan losses | $41.0 million | $8.1 million | Higher amid pandemic-related uncertainty and specific commercial reserves |
| Net income | $71.3 million | $73.4 million | Down 2.9% |
| Diluted EPS | $1.79 | $2.07 | Down 13.5% |
Interest income was $308.2 million and interest expense was $70.2 million. Noninterest income rose to $14.4 million from $8.0 million, including BoeFly PPP-related referral fees, gains on loan sales and higher bank-owned life insurance income. Noninterest expense increased to $121.0 million from $92.2 million, reflecting acquisition-related costs and higher compensation, occupancy, FDIC and professional expenses. The effective tax rate was 21.1%, versus 21.9% in 2019.
Fourth-quarter 2020 net income was $25.6 million, or $0.64 per diluted share; net interest income was $61.4 million and provision expense was $5.0 million.
Cash and cash equivalents were $303.8 million at year-end, up from $201.5 million. Operating activities provided $81.1 million; investing activities used $323.4 million, mainly due to loan growth; financing activities provided $344.5 million. Management reported $697.4 million of liquid assets and approximately $1.1 billion of available, unused credit capacity, after outstanding borrowings and letters of credit. Outstanding commitments to extend credit were approximately $0.9 billion.
Year-end borrowings were $426.0 million and subordinated debentures were $202.6 million. The company issued $75 million of subordinated notes in June 2020 at a fixed 5.75% rate through June 2025; its $50 million 2015 notes were redeemed on January 1, 2021. Regulatory capital ratios remained above minimums: company CET1 was 10.79% and total risk-based capital was 15.08%. The Bank was classified as well capitalized. Total stockholders’ equity was $915.3 million; tangible common equity was $696.0 million, a non-GAAP measure.
Material changes and notable items
- The January 2, 2020 acquisition of Bancorp of New Jersey added approximately $0.8 billion of loans and deposits and nine branches. The company issued shares and recorded $45.8 million of goodwill; 2020 merger expenses totaled $14.6 million.
- Commercial real estate, including construction loans, represented approximately $4.4 billion, or 70.6% of loans receivable. Under the regulatory concentration definition, commercial real estate loans were 442% of Bank risk-based capital.
- PPP loans outstanding were $397.5 million at year-end and are federally guaranteed. The company said it would participate in the program’s extension through March 31, 2021.
- The allowance for loan losses rose to $79.2 million from $38.3 million; the allowance-to-loans ratio increased to 1.27% from 0.75% (1.36% excluding PPP loans). Net charge-offs were $0.1 million, compared with $4.8 million in 2019.
- Nonaccrual loans increased to $61.7 million from $49.5 million. The company had $207.1 million of COVID-related loan deferrals; none were delinquent or on nonaccrual at year-end, though $40.3 million were rated special mention or worse.
- Management performed a quantitative goodwill impairment evaluation after a second-quarter triggering event; no impairment was recorded. The auditor identified the allowance for loan losses, acquired-loan valuation and goodwill impairment as critical audit matters. The audit opinion was unqualified, and the auditor and management reported effective internal control over financial reporting.
Outlook, risks and contingencies
The filing gives no numerical earnings or growth guidance. Management emphasized continuing uncertainty from COVID-19 and its effects on borrowers, collateral values and the regional economy. Key exposures include the large commercial real estate concentration, small and midsize business credit risk, competition for deposits and loans, interest-rate sensitivity, acquisition integration, funding access and regulatory requirements as assets approach $10 billion.
The company planned to adopt CECL on January 1, 2021 and expected a one-time increase in reserves, but did not provide a clear quantified impact. Future provision expense may be more volatile. Its rate-sensitivity model estimated that a 200-basis-point rate increase would raise one-year net interest income by 0.70%, while a 100-basis-point decrease would reduce it by 5.18%; estimated economic value of equity would fall 7.76% under a 200-basis-point increase. The company also disclosed LIBOR transition uncertainty. No significant pending legal proceedings were reported. The share repurchase program, suspended during the first quarter of 2020, was reinstated by the Board on January 26, 2021.
Important facts for investors to verify
- Whether deferred borrowers, particularly commercial real estate borrowers, resume and sustain normal payments, and how the $207.1 million deferral portfolio performs.
- The eventual CECL adoption adjustment and its effect on reserves, earnings and regulatory capital.
- How much 2020 loan and deposit growth reflects the BNJ acquisition versus organic growth, and whether acquisition-related costs and synergies develop as expected.
- The quality and valuation of the commercial real estate portfolio, including the 442% regulatory concentration measure and pandemic-sensitive property exposures.
- Actual liquidity, funding costs and capital distributions, including the effect of deposit mix, borrowing availability and dividend restrictions.