ConnectOne Bancorp(CNOB) - 2022 Q4 - Annual Report

Part I Item 1. Business ConnectOne Bancorp, Inc. is a $9.6 billion asset bank holding company serving the NY Metro and South Florida markets with a tech-driven, branch-lite model - ConnectOne Bancorp, Inc. is a modern financial services company with over $9.6 billion in assets, operating primarily through its bank subsidiary, ConnectOne Bank[78] - The company's primary business is serving small and mid-sized businesses, local professionals, and individuals in the New York Metropolitan area and the South Florida market through a high-tech, "branch-lite" model[8][79] - Majority of revenue derived from net interest income[27] - 507 full-time and 8 part-time employees as of December 31, 2022[32] - Growth achieved through mergers and acquisitions, including Greater Hudson Bank (2019) and Bancorp of New Jersey, Inc. (2020)[6][23] Products and Services The bank provides a comprehensive range of deposit and loan products, including commercial, real estate, and consumer loans, and participated in the PPP - Offers a full range of deposit products including checking, money market, savings, and time deposits[11][27] - Provides diverse loan products including commercial, consumer, commercial and residential real estate, construction, and home equity loans[80][81] - Participated in the SBA's Paycheck Protection Program (PPP) in 2020 and 2021, with $11.4 million in PPP loans outstanding as of December 31, 2022[30][98] - Legal lending limit to any one borrower is 15% of capital base ($158.1 million) for most loans and 25% ($263.5 million) for loans secured by readily marketable collateral as of year-end 2022[99] Supervision and Regulation The company and its bank are extensively regulated by federal and state authorities, impacting capital, lending, and deposit insurance - Supervised by the Federal Reserve Board (FRB) as a bank holding company, subject to its reporting and examination requirements[49] - The Dodd-Frank Act of 2010 introduced enhanced capital requirements, established the CFPB, and permanently increased the FDIC deposit insurance limit to $250,000[36][37][87] - Required to maintain minimum Basel III capital ratios: 4.5% CET1, 6.0% Tier 1, and 8.0% Total Capital, plus a 2.5% capital conservation buffer[60][64][430] - The EGRRCPA of 2018 provided regulatory relief for institutions under $10 billion in assets, including Volcker Rule exemption and a simplified community bank leverage ratio[39] Item 1A. Risk Factors The company faces risks from economic uncertainty, high commercial real estate loan concentration, intense competition, liquidity, interest rate fluctuations, and regulatory changes - Significant concentration in commercial real estate loans, totaling $6.2 billion (including construction) and representing 76.3% of loans receivable as of December 31, 2022, exposing the company to real estate market risks[468][469] - Highly competitive banking environment with substantial competition from traditional and fintech institutions for loans and deposits[491][507] - Subject to liquidity risk, where the inability to meet obligations could arise from company-specific or industry-wide factors impacting funding access[494][513] - Approaching the $10 billion asset threshold ($9.6 billion as of Dec 31, 2022) will trigger heightened regulatory requirements, including CFPB examination and reduced debit card interchange fees, increasing operating costs[524] - Interest rate changes and Federal Reserve monetary policy to combat inflation may adversely impact net interest income, earnings, and financial condition[526][559] Item 1B. Unresolved Staff Comments No unresolved staff comments from the Securities and Exchange Commission - No unresolved staff comments[103][586] Item 2. Properties Principal office is a leased building in Englewood Cliffs, NJ, with other leased banking offices across NJ, NY, and Florida - The Bank's principal office is located at 301 Sylvan Avenue, Englewood Cliffs, NJ[567] - Operates banking offices across various counties in New Jersey, New York City, Long Island, Hudson Valley, and a financial center in West Palm Beach, Florida[567] Item 3. Legal Proceedings No significant pending legal proceedings are expected to materially affect the company - No significant pending legal proceedings beyond routine operations[106] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[568] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on NASDAQ under "CNOB"; 447,108 shares repurchased in 2022, with 1,827,640 shares remaining for repurchase - Common stock trades on the NASDAQ Global Select Market under the symbol "CNOB"[570] 2022 Share Repurchase Activity | Quarter | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | First quarter 2022 | 144,793 | $32.82 | | Second quarter 2022 | 302,315 | $27.29 | | Third quarter 2022 | - | - | | Fourth quarter 2022 | - | - | | Total 2022 | 447,108 | | - As of December 31, 2022, 1,827,640 shares remained available for repurchase under the authorized program[108][109] Item 6. Selected Financial Data Selected financial data shows consistent growth in assets, loans, and deposits from 2020-2022, with 2022 total assets at $9.6 billion and diluted EPS at $3.01 Selected Financial Data (in thousands, except per share data) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Balance Sheet Data | | | | | Total assets | $9,644,948 | $8,129,480 | $7,547,339 | | Loans receivable | $8,099,689 | $6,828,622 | $6,236,307 | | Deposits | $7,356,622 | $6,332,953 | $5,959,224 | | Total stockholders' equity | $1,178,751 | $1,124,212 | $915,310 | | Income Statement Data | | | | | Net interest income | $302,119 | $262,878 | $237,991 | | Net income | $125,211 | $130,353 | $71,289 | | Net income available to common stockholders | $119,174 | $128,636 | $71,289 | | Per Share Data | | | | | Diluted earnings per share | $3.01 | $3.22 | $1.79 | | Book value per common share | $27.21 | $25.61 | $23.01 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased in 2022 due to higher credit loss provisions and noninterest expenses, despite increased net interest income from strong loan growth, with total assets reaching $9.6 billion - Net income available to common stockholders decreased 7.4% to $119.2 million in 2022 from $128.6 million in 2021, with diluted EPS decreasing 6.5% to $3.01[600] - Net income decrease primarily driven by a $23.2 million increase in provision for credit losses and a $17.4 million increase in noninterest expenses, mainly salaries and benefits[583] - Total assets increased by $1.5 billion (18.5%) to $9.6 billion at year-end 2022, and total loans grew by $1.3 billion (18.6%) to $8.1 billion[126][128] - Allowance for credit losses for loans increased by $11.7 million to $90.5 million as of December 31, 2022, due to organic loan growth and deteriorating economic forecasts[117][581] Loan Portfolio Gross loan portfolio grew 18.6% to $8.1 billion in 2022, with commercial real estate and commercial loans as largest components, concentrated in the NY metropolitan area Loan Portfolio Composition (in thousands) | Loan Type | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | :--- | | Commercial | $1,472,734 | $1,299,428 | $1,521,967 | | Commercial real estate | $5,795,228 | $4,741,590 | $3,783,550 | | Commercial construction | $574,139 | $540,178 | $617,747 | | Residential real estate | $264,748 | $255,269 | $322,564 | | Consumer | $2,312 | $1,886 | $1,853 | | Gross loans | $8,109,161 | $6,838,351 | $6,247,681 | - Commercial real estate loans increased by $1.1 billion, or 22.2%, in 2022, primarily due to multifamily loan growth[145] Asset Quality Asset quality improved in 2022, with nonperforming assets decreasing to $44.7 million and the nonperforming assets to total assets ratio falling to 0.46% Nonperforming Assets (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | :--- | | Nonaccrual loans | $44,454 | $61,700 | $61,696 | | OREO | $264 | $ - | $ - | | Total nonperforming assets | $44,718 | $61,700 | $61,696 | | Nonperforming assets to total assets | 0.46% | 0.76% | 0.82% | - Allowance for credit losses for loans as a percentage of loans receivable was 1.12% as of December 31, 2022, a slight decrease from 1.15% in 2021[152] Liquidity and Capital Resources The company maintained adequate liquidity with $760.0 million in liquid assets, deposits grew to $7.4 billion, and capital ratios remained strong, exceeding regulatory minimums - Liquid assets totaled $760.0 million, representing 7.9% of total assets as of December 31, 2022[160] - Total deposits increased by $1.0 billion to $7.4 billion at year-end 2022, with time deposits growing significantly to $2.4 billion from $1.2 billion in 2021[126][385] Company Capital Ratios | Ratio | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Leverage ratio | 10.68% | 11.65% | | Common equity Tier 1 risk-based ratio | 10.30% | 10.64% | | Risk-based Tier 1 capital ratio | 11.66% | 12.19% | | Risk-based capital ratio | 14.45% | 15.26% | Item 7A. Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate risk, managed via NII and EVE simulations; a 200 basis point rate increase would decrease NII by 2.22% and EVE by 10.51% - The principal objective of asset and liability management is to evaluate and manage interest rate risk[666] Interest Rate Sensitivity Analysis (as of Dec 31, 2022) | Rate Shock (basis points) | Estimated Change in NII (1-Year) | Estimated Change in EVE | | :--- | :--- | :--- | | +300 | -2.81% | -14.67% | | +200 | -2.22% | -10.51% | | +100 | -1.58% | -6.06% | | -100 | -2.01% | -1.13% | Item 8. Financial Statements and Supplementary Data Includes Crowe LLP's unqualified opinion on financial statements and internal controls, with the qualitative component of the allowance for credit losses as a critical audit matter - Independent auditor Crowe LLP issued an unqualified opinion on financial statements and effective internal control over financial reporting as of December 31, 2022[213] - The qualitative component of the Allowance for Credit Losses (ACL) on pooled commercial and commercial real estate loans was identified as a critical audit matter due to subjective judgments[219] - Effective January 1, 2021, the company adopted the CECL methodology for credit losses, replacing the incurred loss model[193][355] Consolidated Financial Statements Consolidated financial statements show total assets of $9.64 billion, liabilities of $8.47 billion, and equity of $1.18 billion as of December 31, 2022 Consolidated Statement of Financial Condition Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total assets | $9,644,948 | $8,129,480 | | Net loans receivable | $8,009,176 | $6,749,849 | | Total deposits | $7,356,622 | $6,332,953 | | Total liabilities | $8,466,197 | $7,005,268 | | Total stockholders' equity | $1,178,751 | $1,124,212 | Consolidated Statement of Income Highlights (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net interest income | $302,119 | $262,878 | $237,991 | | Provision for credit losses | $17,750 | $(5,500) | $41,000 | | Noninterest income | $13,243 | $15,691 | $14,400 | | Noninterest expense | $126,388 | $109,011 | $121,001 | | Net income | $125,211 | $130,353 | $71,289 | Notes to Consolidated Financial Statements Notes provide detailed disclosures on accounting policies, CECL adoption, investment and loan portfolios, asset quality, deposits, borrowings, capital, and fair value measurements - Note 4 details the loan portfolio; nonaccrual loans totaled $44.5 million as of Dec 31, 2022, a decrease from $61.7 million in the prior year[122] - Note 3 details the investment securities portfolio, entirely available-for-sale, with a fair value of $634.9 million and gross unrealized losses of $87.2 million at year-end 2022 due to interest rate changes[136][317] - Note 14 indicates both the Company and the Bank were well-capitalized, with all capital ratios exceeding minimum requirements plus the capital conservation buffer[726][749] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure - None[830] Item 9A. Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes - Management concluded the Company's disclosure controls and procedures were effective as of December 31, 2022[849] - Management determined the Company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[869] Item 9B. Other Information No other information to report for this item - None[871] Part III Items 10, 11, 12, 13, and 14 Information for Items 10-14 is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information for Part III (Items 10-14) is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Stockholders Meeting, expected by April 30, 2023[854][855][873] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists financial statements detailed in Item 8 and all exhibits filed or incorporated by reference, with schedules omitted as inapplicable - This part contains the list of financial statements and exhibits filed as part of the annual report[859][882] - All financial statement schedules are omitted as inapplicable or because required information is included in the Consolidated Financial Statements or notes thereto[862]