ConnectOne Bancorp, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited quarterly results, including fourth quarter 2019. ConnectOne is a New Jersey/New York metropolitan-area commercial bank focused on small and midsize businesses, professionals and individuals.
Financial performance and condition
- Profit: 2019 net income was $73.4 million, up 21.6% from $60.4 million in 2018. Diluted EPS was $2.07 versus $1.86. Return on average assets was 1.22% (1.17% in 2018); return on average common equity was 10.40% (10.29%).
- Fourth quarter: Unaudited net income was $20.8 million and diluted EPS was $0.59, versus $18.7 million and $0.58 in fourth quarter 2018.
- Interest income and margins: Interest income was $271.5 million, compared with $216.1 million; interest expense rose to $85.2 million from $58.9 million. Net interest income was $186.3 million, up from $157.2 million. Net interest margin improved to 3.35% from 3.28%.
- Noninterest items: Noninterest income was $8.0 million versus $5.5 million. Noninterest expense increased to $92.2 million from $70.5 million, including $9.0 million of merger expenses and a $1.0 million loss on debt extinguishment. Income tax expense rose to $20.6 million from $10.8 million; effective tax rates were 21.9% and 15.2%, respectively.
- Assets and lending: Total assets were $6.17 billion, up $712 million year over year. Loans receivable were $5.11 billion versus $4.54 billion. Commercial real estate and construction loans together were approximately $3.67 billion; commercial real estate, including construction, represented 71.6% of loans receivable.
- Credit quality: Allowance for loan losses was $38.3 million, or 0.75% of loans, versus $35.0 million and 0.77%. Net charge-offs were $4.8 million, down from $17.9 million, which included $17.0 million of taxi-medallion charge-offs. Nonaccrual loans were $49.5 million, or 0.97% of loans, versus $51.9 million and 1.14%.
- Deposits, debt and capital: Deposits were $4.77 billion, up $675 million. Borrowings were $500.3 million, down from $600.0 million; subordinated debt was $128.9 million. Company regulatory capital ratios were 9.95% CET1, 10.04% Tier 1 and 12.96% total risk-based capital. The Bank was classified as well capitalized.
- Liquidity and cash flow: Cash and cash equivalents were $201.5 million. Management reported $506 million of liquid assets and approximately $1.1 billion of available, unused borrowing capacity. Operating cash flow was $60.7 million; investing activities used $102.5 million; financing activities provided $70.9 million.
- Shareholder returns: Cash dividends were $0.36 per share for 2019, compared with $0.30 in 2018. The company repurchased 540,018 shares for $12.6 million during the year.
Material changes versus prior year
- Greater Hudson Bank (GHB) was acquired effective January 2, 2019, adding seven New York branches and approximately $0.4 billion in loans and deposits. The acquisition contributed substantially to balance-sheet and net-interest-income growth; related 2019 merger expense was approximately $7.6 million.
- ConnectOne acquired online lending marketplace BoeFly in May 2019; the business operates as a subsidiary and generated fee income and lending opportunities.
- Net interest income rose primarily with higher average earning assets and GHB. Funding costs increased, with average interest-bearing deposit cost rising to 1.72% from 1.28%.
- Loan-loss provision declined to $8.1 million from $21.1 million, principally because 2018 included the taxi-medallion reserve and charge-off event.
- Available-for-sale securities were $404.7 million. The portfolio’s net unrealized position improved to a $2.7 million gain from a $5.8 million loss in 2018; 2019 securities sales generated a net loss of $0.3 million.
Outlook, risks and unusual items
- Outlook: The filing gives no quantified earnings, growth or margin guidance. Management describes a relationship-focused growth strategy, with organic growth expected to remain important and acquisitions pursued opportunistically.
- CECL: The company adopted the expected-credit-loss standard on January 1, 2020. Its preliminary estimate was for total reserves of $50–$60 million versus the $38.3 million year-end 2019 allowance. The estimate was subject to model validation and did not include the BNJ merger; actual adoption impact may differ.
- Acquisition after year-end: The company completed its in-market merger with Bancorp of New Jersey (BNJ) on January 2, 2020. The filing describes approximately $0.8 billion in loans and deposits and nine branches acquired, but says purchase accounting was incomplete. Investors should note that one subsequent-event note appears to state January 2, 2019, inconsistent with the other disclosures identifying January 2, 2020.
- Key risks: Commercial real estate concentration and relatively recent loan originations; exposure to New York City taxi medallion loans ($25.0 million carrying value); sensitivity of margins and economic value to interest rates; deposit competition and reliance in part on brokered and other alternative funding; and the ability to integrate acquisitions. The company also noted that total assets were $6.2 billion at year-end and approximately $7.1 billion after BNJ, approaching the $10 billion threshold for additional regulatory requirements.
- Other contingencies and controls: Management reported no significant pending legal proceedings expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; controls were reported effective. The auditor identified allowance-for-loan-loss estimates and GHB acquired-loan fair values as critical audit matters, not as qualifications to its opinion.
Important facts for investors to verify
- How CECL adoption and the BNJ acquisition affect reserves, capital ratios, earnings and integration costs.
- Whether growth in classified and special-mention loans, including loans acquired with GHB, changes subsequent credit performance or provisions.
- Current commercial real estate concentration, underwriting trends and exposure to taxi-medallion collateral.
- Post-merger deposit mix, brokered funding, borrowing capacity and funding costs, alongside interest-rate sensitivity.
- BNJ purchase-accounting figures and the inconsistent acquisition date in the subsequent-event note.
- Whether merger-related expenses and elevated operating costs moderate as acquisitions are integrated.