ConnectOne Bancorp, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter results. ConnectOne is a New Jersey/New York metro-area commercial bank focused on small and midsized businesses, professionals, and individuals.
Financial and operating highlights
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets at year-end | $5.11 billion | $4.43 billion |
| Loans receivable, net of allowance | $4.14 billion | $3.45 billion |
| Deposits | $3.80 billion | $3.34 billion |
| Net interest income | $145.1 million | $130.1 million |
| Net income | $43.2 million | $31.1 million |
| Diluted earnings per share | $1.34 | $1.01 |
| Net interest margin | 3.45% | 3.38% |
| Cash and cash equivalents at year-end | $149.6 million | $200.4 million |
Net income increased 39.1%. Net interest income growth reflected higher average earning assets and a modestly wider margin. Noninterest income was $8.2 million, down 17.3%; noninterest expense was $78.8 million, up 34.6%. The 2017 effective tax rate was 36.9%, including an estimated $5.6 million charge to remeasure deferred taxes following the Tax Cuts and Jobs Act; excluding that charge, management reported an effective rate of 28.8%.
Fourth quarter: Net income was $10.6 million and diluted EPS was $0.33, compared with a net loss of $2.0 million and diluted EPS of $(0.07) in fourth-quarter 2016. Fourth-quarter 2017 income tax expense included the tax-reform charge.
Cash flow, debt, liquidity, and capital
- Operating activities generated $131.1 million of cash; investing activities used $817.7 million, largely reflecting loan growth; financing activities provided $635.8 million, including $450.9 million of deposit growth and net FHLB advances.
- Year-end borrowings were $670.1 million, primarily FHLB advances, and subordinated debentures were $54.7 million. Deposits remained the primary funding source; average deposit cost rose to 0.68% from 0.60%.
- Management reported $423.4 million of liquid assets, equal to 8.3% of total assets. Available and unused credit was approximately $812 million; outstanding loan commitments were $678 million.
- At the company level, CET1, Tier 1, and total risk-based capital ratios were 9.15%, 9.26%, and 11.04%, respectively. The Bank was classified as well capitalized. Common dividends remained $0.30 per share for the year.
Changes, credit quality, and unusual items
- Gross loans grew 20.0% to $4.17 billion. Commercial real estate, including construction, represented about 73.7% of loans. Management noted that a substantial share of CRE loans had been originated in the prior three years.
- The provision for loan losses fell to $6.0 million from $38.7 million, largely because 2016 included major taxi-medallion charge-offs. The 2017 allowance was $31.7 million, or 0.76% of loans, versus $25.7 million, or 0.74%, in 2016.
- Nonaccrual loans rose to $65.6 million from $5.7 million, while nonperforming assets declined to $66.2 million from $69.4 million. The change largely reflects the fourth-quarter transfer of the $46.8 million taxi-medallion portfolio from held-for-sale back to held-for-investment; all those loans remained nonaccrual. The company also recorded a $15.6 million valuation allowance related to taxi-medallion loans in noninterest expense.
- Available-for-sale securities totaled $435.3 million. The portfolio’s net unrealized position moved to a loss of approximately $1.2 million, after tax, from a gain of approximately $0.9 million in 2016. Management reported no other-than-temporary impairment charge.
- In January 2018, the company issued $75 million of fixed-to-floating subordinated notes at an initial 5.20% rate. Management said proceeds would support general corporate purposes, including a $65 million contribution to the Bank.
Outlook, risks, and contingencies
The company described organic growth as its primary expected growth engine, while remaining open to complementary acquisitions and adding a Melville, Long Island office in 2018. The filing gives no specific earnings or growth guidance. Management attributed loan growth to business demand, market share gains, refinancing activity, and recruiting experienced commercial lenders.
- Key exposures include CRE concentration, relatively recent loan originations, and dependence on real estate and borrower business cash flows. Regulatory CRE concentration guidance may prompt heightened risk management or capital expectations.
- Taxi-medallion values and borrower economics remain uncertain amid competition from ride-sharing services; further deterioration could lead to additional losses or valuation adjustments.
- Interest-rate, deposit competition, funding, and liquidity risks are material. A modeled 200-basis-point rate increase reduced economic value of equity by 12.83%, although the model projected a 1.31% increase in one-year net interest income.
- The bank’s New Jersey/New York real estate exposure, use of brokered deposits, and deposit maturities warrant monitoring. The filing lists $678.1 million of off-balance-sheet credit commitments.
- Tax-law effects remained subject to estimation at filing. Other cited risks include regulatory changes, cyber and technology disruptions, acquisition execution, and adverse economic conditions. Management stated routine legal proceedings were not expected to materially affect the company.
The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective as of year-end.
Investor verification priorities
- Review the taxi-medallion portfolio’s carrying value, collateral assumptions, nonaccrual status, and potential further loss exposure.
- Track CRE concentration, loan seasoning, classified loans, and whether nonaccrual and criticized-asset trends improve beyond the effects of portfolio reclassification.
- Assess deposit mix and costs, brokered and large time deposits, upcoming maturities, and continued reliance on FHLB funding.
- Confirm the final tax-reform accounting and the company’s post-2017 effective tax rate and capital position after the 2018 subordinated-note issuance.