ConnectOne Bancorp(CNOB) - 2023 Q4 - Annual Report

PART I Item 1. Business ConnectOne Bancorp, Inc. operates as a bank holding company through ConnectOne Bank, serving the New York metro area and South Florida - ConnectOne Bancorp, Inc. is a one-bank holding company operating primarily through its subsidiary, ConnectOne Bank, with over $9.856 billion in assets[146][210] - The company has grown through strategic mergers, including with Legacy ConnectOne in 2014, Greater Hudson Bank in 2019, and Bancorp of New Jersey in 2020[147][148][41] - The bank operates a "branch-lite" model, leveraging technology to serve clients efficiently across the New York metro area and a new office in West Palm Beach, Florida[236][238] - BoeFly, a wholly-owned subsidiary, is a fintech marketplace connecting franchise borrowers with a network of partner banks[237][46] Products and Services The company's primary revenue is net interest income from diverse loan and deposit products for consumer and business clients - The company's primary revenue source is net interest income, derived from a comprehensive suite of deposit and loan products for consumer and business clients[213] - Loan offerings include commercial and industrial loans, commercial real estate, construction loans, residential mortgages, and home equity loans The bank is not involved in the sub-prime lending market[241][242][215] - Deposit products include various checking, savings, money market, and time deposit accounts The bank also participates in the IntraFi Network (CDARS/ICS) to provide clients with extended FDIC insurance coverage on large deposits[240] - As of December 31, 2023, the Bank's legal lending limit to a single borrower is $168.2 million for most loans, with its largest committed relationship being $173.6 million[244] Human Capital The company employs 487 full-time and 12 part-time staff, fostering development through ConnectOne University and DEI initiatives - As of December 31, 2023, the company employed 487 full-time and 12 part-time/temporary employees, none of whom are represented by a collective bargaining unit[221] - The company fosters employee development through its ConnectOne University program, which includes training, leadership development, continuing education, and mentorship In 2023, 289 employees participated in these programs[222][249] - In 2022, the company appointed its first Chief Diversity, Equity & Inclusion Officer and established its first Employee Resource Group, WomenConnect, in January 2023[248] - The company focuses on internal promotion, with 58 employees promoted into new roles in 2023[225] Supervision and Regulation The company is a bank holding company supervised by the FRB, subject to Dodd-Frank, Basel III capital rules, and FDIC assessments - The company is a bank holding company supervised by the Federal Reserve Board (FRB) and is subject to the Bank Holding Company Act of 1956[278][254] - The Dodd-Frank Act has a significant impact on the company, mandating changes in capital requirements, deposit insurance assessments (now based on average assets less tangible equity), and consumer protection regulations via the Consumer Financial Protection Bureau (CFPB)[281][258][282] - The company and the Bank are subject to Basel III capital rules, requiring a minimum Common Equity Tier 1 (CET1) ratio of 4.5%, Tier 1 Capital ratio of 6.0%, and Total Capital ratio of 8.0%, plus a 2.5% capital conservation buffer[267][292][268] - The FDIC implemented a special assessment to recover losses from the 2023 bank failures The company accrued $2.1 million as of December 31, 2023, related to this assessment[298][322] Item 1A. Risk Factors The company faces key risks from commercial real estate loan concentration, competition, liquidity, interest rates, and regulatory changes - The company has a significant concentration in commercial real estate loans, totaling $6.5 billion (78.1% of loans receivable) as of December 31, 2023 This represents 463% of the Bank's Tier 1 capital plus the allowance for credit losses, exceeding regulatory guidance levels and requiring heightened risk management[336][337][368] - The company faces substantial competition in both lending and deposit-gathering from larger banks, non-bank entities, and fintech companies, which could compress margins and reduce market share[345][376][348] - As the company's total assets of $9.856 billion approach the $10 billion threshold, it will be subject to heightened regulatory requirements, including increased FDIC premiums, reduced debit card interchange fees, and direct examination by the Consumer Financial Protection Bureau (CFPB)[359][418] - Recent failures of other banks and the Federal Reserve's quantitative tightening have increased market volatility, competition for deposits, and the risk of an economic recession, which could adversely impact the company's stock price and operating results[360][391] - Changes in interest rates and Federal Reserve monetary policy, including quantitative tightening, pose a significant risk to the company's net interest income and financial condition[421][395] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[402] Item 1C. Cybersecurity The company manages cybersecurity as a material risk through its IT Committee, reporting to the ERMC and Board Audit and Risk Committee - Cybersecurity risk is managed by the management IT Committee (ITC), which includes the Chief Compliance Officer, Chief Technology Officer, and Chief Risk Officer, among others[403][453][404] - The ITC reports to the Enterprise Risk Management Committee (ERMC), which provides quarterly updates to the Board Audit and Risk Committee, integrating cybersecurity into the company's overall risk management framework[407] - The company's risk mitigation program utilizes internal teams for monthly vulnerability scanning and annual risk assessments, and engages third-party vendors for penetration testing and internal audits of the cybersecurity program[456][434] Item 2. Properties The company's principal office is leased in Englewood Cliffs, NJ, with other leased banking offices across NJ, NY, and FL - The Bank's principal office is located at 301 Sylvan Avenue, Englewood Cliffs, NJ, in a leased building[458] Leased Operating Locations | Banking Office Location | Term | | :--- | :--- | | 301 Sylvan Avenue, Englewood Cliffs, NJ | Term expires November 2028 | | 1 Union Ave, Cresskill, NJ | Term expires January 2038 | | 142 John Street, Hackensack, NJ | Term expires December 2026 | | 551 Madison Avenue, Suite 201, NY, NY | Term expires May 2032 | | 625 N Flagler Dr Ste 1002, West Palm Beach, FL | Term expires June 2027 | Item 3. Legal Proceedings The company is not involved in any significant pending legal proceedings outside of routine operations, with no material adverse effects expected - There are no significant pending legal proceedings involving the Company other than those arising out of routine operations[437] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "CNOB"; in 2023, it repurchased shares, with remaining authorization - The company's common stock is traded on the NASDAQ Global Select Market under the symbol "CNOB"[460] - In September 2021, the Board authorized a share repurchase program for up to 2,000,000 shares During the year ended December 31, 2023, the Company repurchased 904,152 shares[440] - As of December 31, 2023, 933,488 shares remained available for repurchase under the existing program[440] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased in 2023 due to lower net interest income and higher noninterest expenses, partially offset by reduced credit loss provisions 2023 vs. 2022 Performance Summary | Metric | 2023 | 2022 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Income to Common Stockholders | $81.0M | $119.2M | ($38.2M) | (32.1%) | | Diluted EPS | $2.07 | $3.01 | ($0.94) | (31.2%) | | Net Interest Income | $255.1M | $302.1M | ($47.0M) | (15.6%) | | Provision for Credit Losses | $8.2M | $17.8M | ($9.6M) | (54.1%) | | Noninterest Expense | $143.9M | $126.4M | $17.5M | 13.8% | - The allowance for credit losses (ACL) for loans decreased by $8.5 million to $82.0 million at year-end 2023, primarily due to $17.0 million in net charge-offs, partially offset by an $8.4 million provision for credit losses[446] - Total assets increased by $0.2 billion to $9.856 billion as of December 31, 2023 Total loans grew by $0.2 billion to $8.3 billion, and deposits increased by $0.2 billion to $7.5 billion[493] Net Interest Income Fully taxable equivalent net interest income decreased in 2023 due to net interest margin contraction, despite increased average interest-earning assets - Fully taxable equivalent net interest income for 2023 was $258.3 million, a 15.2% decrease from 2022 This was caused by an 87 basis-point contraction in the net interest margin to 2.82%, which was partially offset by an 11.0% increase in average interest-earning assets[482] - The net interest margin contraction was driven by a 199-basis point increase in the average cost of deposits to 2.74%, while the loan portfolio yield increased by only 77 basis points to 5.57%[482] Provision for Credit Losses The provision for credit losses decreased in 2023 due to macroeconomic forecast changes, partially offset by organic loan growth - The provision for credit losses was $8.2 million in 2023, a decrease of $9.6 million from $17.8 million in 2022 The decrease reflected changes in forecasted macroeconomic conditions, partially offset by organic loan growth[488] - In 2022, the provision was $17.8 million, a significant increase from a reversal of ($5.5) million in 2021, reflecting strong loan growth and changes in macroeconomic forecasts at that time[203] Noninterest Income and Expense Noninterest income increased slightly in 2023, while noninterest expense rose significantly due to salaries, FDIC insurance, and technology costs - Noninterest income increased by $0.7 million (5.7%) to $14.0 million in 2023, mainly due to a $1.4 million decrease in net losses on equity securities and a $0.7 million increase in income on bank-owned life insurance[489] - Noninterest expense rose by $17.6 million in 2023, driven by a $7.0 million increase in salaries and benefits, a $5.5 million increase in FDIC insurance (including a $2.1 million special assessment), and a $3.2 million increase in technology costs[490] Loan Portfolio Commercial real estate loans remain the largest portfolio component, while nonperforming assets and the allowance for credit losses saw changes Loan Portfolio Composition (in thousands) | Loan Type | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Commercial | $1,578,730 | $1,472,734 | | Commercial real estate | $5,895,545 | $5,795,228 | | Commercial construction | $620,496 | $574,139 | | Residential real estate | $256,041 | $264,748 | | Consumer | $1,029 | $2,312 | | Gross loans | $8,351,841 | $8,109,161 | - Commercial real estate loans are the largest portfolio component, increasing by $100 million (1.7%) in 2023 to $5.9 billion[523] - Nonperforming assets (nonaccrual loans and OREO) were $52.5 million, or 0.53% of total assets, as of December 31, 2023, compared to $44.7 million, or 0.46% of total assets, a year prior[536][563] - The allowance for credit losses for loans as a percentage of loans receivable was 0.98% as of December 31, 2023, down from 1.12% as of December 31, 2022[566] Liquidity and Capital Resources Deposits increased in 2023, driven by interest-bearing accounts, with significant use of reciprocal deposits and substantial available credit lines - Deposits, the primary source of funds, increased by $180 million to $7.5 billion in 2023 The growth was driven by interest-bearing demand, time, and savings deposits, which offset a $242 million decrease in noninterest-bearing deposits[584][589] - The company significantly increased its use of reciprocal deposits through the IntraFi Network, with ICS deposits growing to $1.1 billion and CDARS to $96 million by year-end 2023, driven by client demand for expanded FDIC insurance[618][192] - As of December 31, 2023, the company had aggregate available and unused credit of approximately $3.3 billion from sources including the FHLB and Federal Reserve[582] Company Capital Ratios (Dec 31, 2023) | Ratio | Actual | Minimum Requirement | | :--- | :--- | :--- | | CET 1 | 10.62% | 4.50% | | Tier 1 | 11.95% | 6.00% | | Total Risk-Based | 13.77% | 8.00% | | Leverage (Tier 1) | 10.86% | 4.00% | Item 8. Financial Statements and Supplementary Data This section presents the consolidated financial statements, including the independent auditor's report, covering financial condition, operations, and cash flows - The independent auditor, Crowe LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023[629][651] - The auditor identified the qualitative component of the Allowance for Credit Losses (ACL) on commercial and commercial real estate loans as a critical audit matter due to the subjective judgments involved[634][657] Notes to Consolidated Financial Statements The notes detail the company's accounting policies, including ACL, investment securities, derivatives, and goodwill, along with balance sheet and income statement accounts Note 1 – Summary of Significant Accounting Policies The company adopted the CECL methodology for allowance for credit losses, and goodwill is tested for impairment annually - The company adopted the CECL (Current Expected Credit Loss) methodology for its allowance for credit losses on January 1, 2021 The allowance is an estimate of lifetime expected credit losses based on historical experience, current conditions, and reasonable forecasts[679][316] - The allowance methodology involves both a collective (pooled) component for loans with similar risk characteristics and an individual component for loans that do not share common risks, such as nonaccrual loans over $250,000 and all PCD loans[732][710] - Goodwill is not amortized but is tested for impairment annually as of December 31, or more frequently if impairment indicators exist No impairment charge was recorded for 2023, 2022, or 2021[12] - The company adopted ASU 2022-02 on January 1, 2023, which eliminated the accounting guidance for troubled debt restructurings (TDRs) and enhanced disclosures for loan modifications to borrowers in financial difficulty[725][69] Note 2 – Earnings per Common Share This note provides detailed calculations for basic and diluted earnings per common share for the reported periods Earnings Per Common Share | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net income available to common stockholders | $80,967 | $119,174 | $128,636 | | Weighted average common shares outstanding | 38,809 | 39,260 | 39,626 | | Weighted average common and equivalent shares outstanding | 38,962 | 39,476 | 39,886 | | Basic EPS | $2.08 | $3.03 | $3.24 | | Diluted EPS | $2.07 | $3.01 | $3.22 | Note 3 – Investment Securities This note details the composition and fair value of the company's investment securities, primarily available-for-sale Investment Securities Available-for-Sale (in thousands) | Category | Amortized Cost (2023) | Fair Value (2023) | Fair Value (2022) | | :--- | :--- | :--- | :--- | | Federal agency obligations | $55,898 | $45,326 | $44,450 | | Residential mortgage pass-through | $462,004 | $411,191 | $417,578 | | Obligations of U.S. states | $148,795 | $132,705 | $142,896 | | Other | $31,665 | $27,940 | $29,960 | | Total | $698,362 | $617,162 | $634,884 | - As of December 31, 2023, the investment portfolio had gross unrealized losses of $82.4 million and gross unrealized gains of $1.2 million[728] - No allowance for credit losses for available-for-sale securities was recorded as of December 31, 2023 The company determined that unrealized losses were primarily due to changes in interest rates and not credit-related issues[52][53] Note 4 – Loans and the Allowance for Credit Losses This note details the loan portfolio composition, nonaccrual loans, and activity in the allowance for credit losses Allowance for Credit Losses Activity (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Balance, Beginning of Period | $90,513 | $78,773 | $85,783 | | Charge-offs | (17,049) | (5,443) | (2,397) | | Recoveries | 86 | 117 | 405 | | Provision for credit losses | 8,424 | 17,066 | (5,018) | | Balance, End of Period | $81,974 | $90,513 | $78,773 | - Nonaccrual loans increased to $52.5 million as of December 31, 2023, from $44.5 million as of December 31, 2022[762] - As of December 31, 2023, the company had modified $17.8 million in loans to borrowers experiencing financial difficulty, primarily through payment deferrals and term extensions[101] Note 6 – Goodwill and Other Intangible Assets This note details the company's goodwill and other intangible assets, including impairment testing and amortization expense - Goodwill remained unchanged at $208.4 million for 2023 and 2022 The company performed a quantitative impairment analysis as of December 31, 2023, and concluded that goodwill was not impaired[78][77] - Aggregate amortization expense for other intangible assets (primarily core deposit intangibles) was $1.4 million in 2023, $1.7 million in 2022, and $2.0 million in 2021[110] Note 9 – Subordinated Debentures This note details the company's outstanding subordinated debentures and capital securities, including redemption and interest rates - In February 2023, the company redeemed in full its $75 million aggregate principal amount of fixed-to-floating rate subordinated notes issued in 2018 (the "2018 Notes")[625][848] - The company has $75 million in fixed-to-floating rate subordinated notes issued in 2020 (the "2020 Notes") outstanding, which bear a fixed interest rate of 5.75% until June 2025[115] - The company's $5.0 million of MMCapS capital securities, issued in 2003, converted from a LIBOR-based index to a SOFR-based index effective June 30, 2023 The rate as of December 31, 2023 was 8.50%[83][645] Note 14 – Stockholders' Equity and Regulatory Requirements This note details the company's stockholders' equity and regulatory capital ratios, confirming its well-capitalized status - As of December 31, 2023, both the Company and the Bank were categorized as well-capitalized and satisfied all capital adequacy requirements, including the capital conservation buffer[92][125] The Bank - Regulatory Capital Ratios (Dec 31, 2023) | Ratio | Actual | Minimum for Adequacy | Minimum to be Well Capitalized | | :--- | :--- | :--- | :--- | | CET 1 | 12.31% | 4.50% | 6.50% | | Tier 1 | 12.31% | 6.00% | 8.00% | | Total | 13.28% | 8.00% | 10.00% | | Leverage (Tier 1) | 11.20% | 4.00% | 5.00% | Note 16 – Pension and Other Benefits This note details the company's defined benefit pension plan, 401(k) plan, and supplemental executive retirement plans - The company maintains a frozen, noncontributory defined benefit pension plan As of December 31, 2023, the plan was overfunded, with a fair value of plan assets of $14.6 million and a projected benefit obligation of $9.3 million[127][156] - The company also maintains a 401(k) plan with a 100% match on employee contributions up to 5% Employer contributions to the 401(k) plan amounted to $2.6 million in 2023, $2.2 million in 2022, and $1.6 million in 2021[135] - Supplemental executive retirement plans (SERPs) are in place for several executive officers, with compensation expense of $0.4 million in 2023, $1.4 million in 2022, and $1.0 million in 2021[165] Note 19 – Derivatives This note details the company's use of interest rate swaps and caps as cash flow hedges, including their fair values and impact on income - The company uses interest rate swaps and caps as cash flow hedges As of December 31, 2023, the fair value of these derivative assets was $43.8 million[141][174] - The company has eleven pay-fixed interest rate swaps with a total notional amount of $500 million to hedge FHLB advances, and two interest rate cap spread transactions with a total notional amount of $225 million to hedge brokered certificates of deposits[903][142] Gains (Losses) on Cash Flow Hedges (in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Amount of gain (loss) recognized in OCI | $9,431 | $46,282 | | Amount of (gain) loss reclassified from OCI to interest expense | ($20,230) | ($3,343) | Note 20 – Fair Value Measurements This note details the company's fair value measurements, categorized by a three-level hierarchy, for various assets and liabilities - The company uses a three-level hierarchy for fair value measurements: Level 1 (quoted prices for identical assets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[197][176][907] - As of December 31, 2023, of the $679.5 million in assets measured at fair value on a recurring basis, $10.0 million were Level 1, $662.4 million were Level 2, and $7.1 million were Level 3[930] - The fair value of the net loan portfolio was estimated at $8.00 billion, compared to a carrying amount of $8.26 billion as of December 31, 2023 This is a Level 3 estimate based on a discounted cash flow analysis[939][942] Item 9A. Controls and Procedures Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective - Management concluded that the Company's disclosure controls and procedures were effective as of December 31, 2023[1014] - Based on an assessment using the COSO framework, management determined that the Company's internal control over financial reporting was effective as of December 31, 2023[996][973] - There were no changes in internal controls over financial reporting during the fourth fiscal quarter that materially affected, or are reasonably likely to materially affect, these controls[997] PART III Items 10-14 Information for Items 10-14, covering governance, compensation, and related matters, is incorporated by reference from the 2024 Proxy Statement - Information for Items 10 through 14 is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting, expected to be filed by April 29, 2024[976][977][978] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits filed with the annual report; all financial statement schedules are omitted - This section lists the financial statements and exhibits filed with the annual report All financial statement schedules have been omitted because the required information is included elsewhere in the report[981][984]