Business Overview and History
ConnectOne Bancorp, Inc. is a New Jersey-based bank holding company that operates through its wholly-owned subsidiary, ConnectOne Bank. The bank was founded in 2005 and has since grown to become a prominent community-based financial institution in the Northeast region, particularly in New Jersey and New York.
ConnectOne Bancorp traces its origins back to 2005 when it was founded as a community-based, full-service New Jersey-chartered commercial bank. The bank's mission was to provide banking services to businesses, professionals, and individuals in the northern New Jersey market. In its early years, ConnectOne focused on building a strong foundation by attracting talented bankers, developing competitive products and services, and fostering deep relationships with clients.
The company grew organically through the opening of additional branch locations, allowing it to expand its reach and customer base. In 2017, ConnectOne's shareholders approved the company's 2017 Equity Compensation Plan, which has been the basis for the company's stock-based compensation awards since then.
Over the years, ConnectOne has faced various challenges common to community banks, such as increased competition, changes in the regulatory environment, and economic downturns. However, the company has demonstrated resilience and an ability to adapt. For example, during the 2008 financial crisis, ConnectOne maintained strong credit quality and continued to support its customers.
In 2020, the company navigated the challenges posed by the COVID-19 pandemic, implementing measures to protect the health and safety of its employees and customers while continuing to serve the community. Despite the difficulties, ConnectOne remained focused on its core mission and relationship-driven business model, which has been a key driver of its success over the past 15+ years.
Today, ConnectOne Bancorp operates a network of 23 banking offices, primarily located in New Jersey and New York. The bank's client-centric approach and focus on building long-term relationships have been key drivers of its success. As of September 30, 2024, ConnectOne Bancorp had total assets of $9.64 billion, total loans of $8.12 billion, and total deposits of $7.52 billion.
Financial Snapshot and Performance
ConnectOne Bancorp's financial performance has been solid, with the bank consistently delivering strong results over the past several years. In the latest reported quarter (Q3 2024), the bank reported net income of $17.16 million, or $0.41 per diluted share, compared to $21.41 million, or $0.51 per diluted share, in the same quarter of the previous year. The bank's revenue for Q3 2024 was $65.62 million, representing a 0.5% decrease compared to the same quarter in the previous year.
The bank's net interest margin (NIM) remained relatively stable, declining slightly from 2.76% in Q3 2023 to 2.67% in Q3 2024. However, management expects the NIM to expand in the fourth quarter of 2024, projecting a spot NIM of around 2.80% as of the latest update. This improvement is expected to be driven by a combination of factors, including lower deposit costs, higher-yielding loan originations, and the repricing of adjustable-rate commercial loans.
ConnectOne Bancorp's credit quality remains strong, with nonperforming assets at 0.53% of total assets as of September 30, 2024. The bank's allowance for credit losses stood at 1.02% of total loans, a level management considers adequate to cover potential credit losses.
Financials
ConnectOne Bancorp's financial performance has remained strong, as evidenced by its consistent delivery of solid results. The bank's total assets of $9.64 billion, total loans of $8.12 billion, and total deposits of $7.52 billion as of September 30, 2024, demonstrate its significant presence in the market. The bank's net income of $17.16 million in Q3 2024, although lower than the previous year, still indicates profitability in a challenging economic environment.
For the most recent quarter, ConnectOne Bancorp reported operating cash flow (OCF) of -$13.85 million and free cash flow (FCF) of -$13.59 million. The negative cash flows in the quarter may be attributed to various factors, including changes in working capital or increased investments in growth initiatives.
The bank's net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and borrowings, was $60.89 million for the three months ended September 30, 2024, and $182.63 million for the nine months ended September 30, 2024. Noninterest income, which includes deposit, loan and other income, income on bank-owned life insurance, and net gains on sale of loans and securities, was $4.74 million for the three months ended September 30, 2024, and $12.98 million for the nine months ended September 30, 2024.
Noninterest expenses, which include salaries and employee benefits, occupancy and equipment, FDIC insurance, professional and consulting fees, marketing and advertising, information technology and communications, and other expenses, were $38.64 million for the three months ended September 30, 2024, and $113.30 million for the nine months ended September 30, 2024.
Liquidity
The bank's liquidity position appears to be stable, with a healthy loan-to-deposit ratio. The strong credit quality, as indicated by the low level of nonperforming assets (0.53% of total assets) and adequate allowance for credit losses (1.02% of total loans), suggests that ConnectOne Bancorp maintains sufficient liquidity to meet its obligations and potential credit losses.
ConnectOne Bancorp's financial stability is further evidenced by its debt-to-equity ratio of 0.66, indicating a balanced capital structure. The bank held $247.25 million in cash as of the latest reporting period. Additionally, the bank has access to $1.1 billion in available borrowing capacity from the Federal Home Loan Bank and the Federal Reserve Bank of New York, providing further liquidity support if needed.
The bank's current ratio of 1.14 and quick ratio of 0.98 suggest that it has sufficient short-term assets to cover its short-term liabilities, indicating a healthy liquidity position.
Product Segments and Loan Portfolio
ConnectOne Bancorp operates through three main product segments:
1. Commercial Lending: This segment includes commercial and industrial (C&I) loans, commercial real estate (CRE) loans, and commercial construction loans. As of September 30, 2024, commercial loans accounted for $1.51 billion or 18.7% of total gross loans, commercial real estate loans represented $5.74 billion or 70.7% of total gross loans, and commercial construction loans amounted to $616.09 million or 7.6% of total gross loans.
2. Residential Lending: This segment includes loans secured by 1-4 family residential properties. As of September 30, 2024, residential real estate loans accounted for $250.25 million or 3.0% of total gross loans.
3. Consumer Lending: This segment includes loans to individuals for personal, family, or household purposes, such as automobile loans and personal lines of credit. As of September 30, 2024, consumer loans represented $835 thousand or less than 1% of total gross loans.
The bank's focus on commercial lending, particularly in the commercial real estate sector, is evident from the composition of its loan portfolio. This concentration allows ConnectOne to leverage its expertise in these areas but also exposes the bank to potential risks associated with the commercial real estate market.
Guidance and Outlook
For the remainder of 2024 and into 2025, ConnectOne Bancorp expects loan growth to be relatively muted, with the potential for slight increases or decreases in the coming quarters. However, the bank remains optimistic about its long-term growth prospects, targeting a return to mid- to high-single-digit loan growth beyond the next few quarters.
The company's recently announced merger with The First of Long Island Corporation is expected to significantly enhance ConnectOne's market presence and financial profile. The combined entity will have approximately $14 billion in total assets, $11 billion in total loans and deposits, and a pro forma market capitalization of $1.3 billion. The transaction is expected to close in the first half of 2025 and is anticipated to be accretive to ConnectOne's earnings per share and tangible book value per share.
Management has provided guidance on several key aspects of the bank's performance:
1. Net Interest Margin: The bank expects its net interest margin to continue widening, with the projected Q4 2024 margin at around 2.80%, up approximately 10 basis points compared to Q3 2024. This expansion is driven by several factors, including: - A 40 basis point reduction in rates on nearly $3.7 billion of non-maturity interest-bearing deposits - Downward pricing of 19% of the loan book (approximately $1.5 billion) by 50 basis points late in Q3 2024 - Continued growth in core deposits, with non-interest-bearing demand growing since the end of Q3 2024 - CD renewals at lower rates, with $200 million maturing each month and averaging 4.75% previously - $1.5 billion of adjustable-rate commercial loans expected to reset upward over the next couple of years - Newly originated loans being booked at rates over 7%, around 100 basis points higher than loans coming off
2. Credit Quality: The bank expects credit quality to remain sound, with non-accrual loans and charge-offs fluctuating but remaining within management's expectations.
3. Deposit Growth: ConnectOne anticipates continued growth in core deposits, which should support the bank's funding needs and contribute to margin expansion.
While the bank has provided near-term guidance, it has refrained from offering specific 2025 guidance due to uncertainties surrounding the timing of future Federal Reserve rate cuts and competitive pressures that could impact deposit betas.
Risk Factors and Challenges
Like any financial institution, ConnectOne Bancorp faces a variety of risks and challenges that could impact its future performance. These include interest rate risk, credit risk, regulatory changes, and competitive pressures in its markets.
The bank's reliance on commercial real estate lending, which accounted for approximately 70% of its loan portfolio as of September 30, 2024, exposes it to potential downturns in the commercial real estate market. Additionally, the bank's geographic concentration in the Northeast region makes it vulnerable to economic conditions in that particular market.
Regulatory changes, such as those related to capital requirements or lending standards, could also pose challenges for ConnectOne Bancorp, potentially impacting its operations and profitability. The bank's ability to navigate these regulatory changes effectively will be crucial to its long-term success.
Furthermore, the bank's performance may be affected by macroeconomic factors such as interest rate movements, inflation, and overall economic growth. The uncertainty surrounding future Federal Reserve actions and their potential impact on deposit costs and loan demand presents an ongoing challenge for ConnectOne and other banks in the industry.
Conclusion
ConnectOne Bancorp has established itself as a prominent community bank in the Northeast, driven by its client-centric approach and focus on building long-term relationships. The bank's solid financial performance, strong credit quality, and strategic initiatives, such as the pending merger with The First of Long Island Corporation, position it well for future growth and continued success.
The bank's focus on commercial lending, particularly in the commercial real estate sector, has been a key driver of its growth but also represents a potential risk factor. Management's guidance suggests a positive outlook for net interest margin expansion and continued stable credit quality, which should support the bank's profitability in the near term.
However, ConnectOne must remain vigilant in managing the various risks and challenges that come with operating in a competitive and highly regulated industry. The bank's ability to adapt to changing market conditions, maintain its strong credit quality, and successfully integrate its upcoming merger will be critical factors in determining its long-term success and value creation for shareholders.