ConnectOne Bancorp, Inc. — 2023 Form 10-K Summary
Business context and reporting period
ConnectOne Bancorp is a New Jersey bank holding company operating primarily through ConnectOne Bank, a commercial bank serving businesses, professionals and individuals in the New York metropolitan area and South Florida. The company also operates BoeFly, a nationwide digital lending marketplace. This filing reports the fiscal year ended December 31, 2023; it was filed February 23, 2024.
Financial and operating performance
| Metric | 2023 | 2022 |
|---|---|---|
| Total assets, year-end | $9.856 billion | $9.645 billion |
| Net interest income | $255.1 million | $302.1 million |
| Net interest margin | 2.82% | 3.69% |
| Net income | $87.0 million | $125.2 million |
| Net income available to common shareholders | $81.0 million | $119.2 million |
| Diluted earnings per share | $2.07 | $3.01 |
| Provision for credit losses | $8.2 million | $17.8 million |
| Noninterest expense | $143.9 million | $126.4 million |
| Deposits, year-end | $7.536 billion | $7.357 billion |
| Net loans, year-end | $8.263 billion | $8.009 billion |
Average interest-earning assets grew 11.0%, but higher funding costs outweighed asset growth: average deposit cost rose to 2.74% from 0.75%, while the loan portfolio yield rose to 5.57% from 4.80%. Noninterest income was $14.0 million, up from $13.2 million. The effective tax rate was 25.6%, compared with 26.9%.
Operating cash flow was $92.9 million, down from $176.8 million. Investing activities used $248.0 million, principally reflecting loan growth; financing activities provided $129.5 million. Cash and cash equivalents declined $25.6 million to $242.7 million. Management reported liquid assets of $516.3 million, 5.2% of assets, versus $760.0 million and 7.9% a year earlier. Available and unused borrowing capacity was approximately $3.3 billion, net of outstanding borrowings and letters of credit.
Year-end borrowings were $933.6 million and subordinated debentures were $79.4 million, compared with $857.6 million and $153.3 million, respectively, in 2022. The company’s regulatory capital ratios were 10.62% CET1, 11.95% Tier 1 and 13.77% total risk-based capital; both the company and bank reported meeting applicable capital conservation buffer requirements.
Material changes versus the prior year
- Common net income fell 32.1% and diluted EPS declined 31.2%, mainly reflecting a $47.0 million reduction in net interest income as the net interest margin contracted by 87 basis points.
- Interest expense rose substantially as deposits repriced and the mix shifted toward time deposits. Average time deposits increased about $1.1 billion, while average noninterest-bearing demand deposits declined $279 million.
- Noninterest expense increased $17.6 million, including higher salary and benefit costs, technology spending and FDIC insurance. The 2023 FDIC expense included a $2.1 million special assessment related to losses associated with the 2023 bank failures.
- Year-end loans grew 3.0% and deposits 2.4%. Noninterest-bearing deposits declined $242 million; interest-bearing demand and NOW deposits increased $241 million.
- Net charge-offs rose to $17.0 million from $5.3 million, and the annualized net charge-off ratio increased to 0.23% from 0.07%. The allowance for loan losses fell to $82.0 million from $90.5 million, or 0.98% of loans versus 1.12%.
- Nonaccrual loans increased to $52.5 million from $44.5 million; nonperforming assets were 0.53% of total assets, compared with 0.46%.
Outlook, commentary, risks and unusual items
The filing provides no specific earnings, growth or margin guidance. Management describes a relationship-focused, technology-enabled community banking strategy and identifies net interest income, funding costs, loan growth, credit quality and noninterest expenses as key performance drivers. Management considers year-end liquidity adequate, while noting reliance on deposits and alternate funding sources.
- Commercial real estate concentration: Commercial real estate loans, including construction, were approximately $6.5 billion and 78.1% of loans receivable. Under the regulatory concentration measure cited by the company, CRE loans were 463% of Tier 1 capital plus the allowance. Much of the CRE book is relatively recent: about 64.5% of the cited $5.9 billion CRE balance originated in the preceding three years.
- Credit reserve uncertainty: The allowance depends on forecasts and management judgments. A hypothetical adverse Moody’s forecast, considered alone, would increase the modeled allowance for collectively evaluated loans by approximately $39.4 million; management cautions this is not a forecast of the actual reserve.
- Interest-rate exposure: The company’s model estimated that a 200-basis-point rate increase would reduce one-year net interest income by 9.25% and economic value of equity by 15.09%; a 100-basis-point decrease was estimated to increase one-year net interest income by 5.34%. Management cautions that model assumptions may differ from actual results.
- Funding and liquidity: Estimated uninsured deposits at the bank were $2.389 billion at year-end, down from $3.148 billion. Nonreciprocal brokered time deposits were approximately $917 million, and the bank reported $1.1 billion of ICS reciprocal deposits. Higher deposit competition or deposit outflows could increase funding costs or constrain lending.
- Investment securities: The available-for-sale portfolio had a fair value of $617.2 million against amortized cost of $698.4 million; net unrealized losses, after tax, were $57.8 million. The company said it did not intend, and was not expected, to need, to sell the securities before recovery. No investment-security credit-loss allowance was recorded.
- Regulatory threshold: Assets were $9.856 billion, close to the $10 billion threshold that can trigger additional requirements and costs, including CFPB examination authority and higher FDIC premiums. Management said it was preparing for the transition.
- Other items: The company accrued $2.1 million for the FDIC special assessment, with collection expected to begin in 2024 and subject to adjustment. It repurchased 904,152 shares during 2023. Goodwill was not impaired. The auditor issued unqualified opinions on the financial statements and internal controls; the critical audit matter concerned qualitative credit-loss factors for commercial and CRE loans. The company reported no cybersecurity incident with a material effect and no significant pending legal proceedings.
Most important facts for investors to verify
- Whether deposit pricing and mix stabilize enough to limit further net interest margin compression, and how much funding relies on brokered or reciprocal deposits.
- CRE portfolio performance, especially office and other nonowner-occupied exposures, loan maturities, collateral values, and the seasoning of recently originated loans.
- Whether the rise in net charge-offs and nonaccrual loans persists, and whether the $82.0 million allowance remains adequate under changing economic forecasts.
- Actual liquidity and borrowing availability, including collateral encumbrance, the maturity and cost of borrowings, and the effects of uninsured-deposit movements.
- Progress and related expense impacts as consolidated assets approach or exceed $10 billion, including the FDIC special assessment.
- Actual sensitivity of earnings and capital to interest-rate changes compared with the company’s model estimates, which rely on assumptions and are not precise forecasts.