Business Overview and History: ConnectOne Bancorp, Inc. (CNOB) is a New Jersey-based bank holding company that operates through its wholly-owned subsidiary, ConnectOne Bank. With a history dating back to 2005, ConnectOne has established itself as a leading community bank in the New York metropolitan area, known for its strong client relationships and strategic focus on commercial and industrial (C&I) lending.
ConnectOne was founded in 2005 with the goal of providing personalized banking services to businesses and individuals in New Jersey and the surrounding region. The bank quickly gained traction, expanding its footprint through both organic growth and strategic acquisitions. In its early years, ConnectOne focused on building a strong foundation by expanding its branch network and client base throughout northern New Jersey. The bank successfully weathered the financial crisis of 2008-2009 without major issues, maintaining sound credit quality and profitability during a challenging economic environment.
Over the next several years, ConnectOne executed a strategic growth plan, expanding into new markets like New York City and Southeast Florida through both organic growth and selective acquisitions. This allowed the bank to diversify its geographic footprint and client base while building scale and expertise in key commercial lending verticals. In 2017, ConnectOne acquired Union Center National Bank, further strengthening its presence in New Jersey. That same year, the company reached a major milestone when it converted from a mutual holding company structure to a full stock holding company, raising additional capital to further fuel its growth strategy. This allowed ConnectOne to continue investing in technology, talent, and infrastructure to enhance the client experience and drive efficiency.
Throughout its history, ConnectOne has maintained a strong credit culture and risk management discipline, weathering economic cycles without significant credit issues. The bank has developed a reputation for relationship banking, providing tailored financial solutions to meet the unique needs of its commercial, small business, and retail clients. This client-centric approach has been a key driver of the company's success over the past two decades.
In September 2024, ConnectOne announced a transformative merger with The First of Long Island Corporation (FLIC), the parent company of The First National Bank of Long Island. This all-stock transaction, valued at $284 million, will create a combined entity with approximately $14 billion in total assets, $11 billion in total deposits, and $11 billion in total loans. The merger is expected to close in the first half of 2025 and will significantly enhance ConnectOne's position in the New York metropolitan market, making it one of the top community banks in Long Island.
Financials: As of September 30, 2024, ConnectOne reported total assets of $9.64 billion, total deposits of $7.52 billion, and total loans of $8.11 billion. The company's net income for the nine months ended September 30, 2024, was $53.42 million, with diluted earnings per share of $1.27.
For the fiscal year 2023, ConnectOne reported revenue of $269.11 million, net income of $87.00 million, operating cash flow of $92.89 million, and free cash flow of $85.46 million. In the most recent quarter (Q3 2024), the company reported revenue of $65.62 million, net income of $17.16 million, operating cash flow of -$14.36 million, and free cash flow of -$15.63 million.
Year-over-year growth showed declines across key metrics, with revenue decreasing 3.9%, net income decreasing 19.8%, operating cash flow decreasing 123.1%, and free cash flow decreasing 131.4%. These decreases were primarily attributed to higher noninterest expenses, higher provision for credit losses, and lower net interest income.
For the three months ended September 30, 2024, ConnectOne reported net interest income of $60.89 million and a net interest margin of 2.67%. Noninterest income was $4.74 million, and noninterest expenses were $38.64 million. The bank's efficiency ratio for the quarter was 53.9%.
Liquidity: ConnectOne's capital position remains strong, with a Tier 1 leverage ratio of 11.10% and a total risk-based capital ratio of 14.29% as of September 30, 2024. These ratios comfortably exceed the regulatory requirements for well-capitalized institutions, providing the bank with ample flexibility to support future growth initiatives.
The company's debt-to-equity ratio stood at 0.68 as of September 30, 2024. Cash and cash equivalents amounted to $247.25 million at the end of the third quarter. ConnectOne has substantial available credit, with $1.10 billion in remaining borrowing capacity at the Federal Home Loan Bank and $305 million in borrowing capacity through correspondent banks and other unsecured borrowing lines, totaling $2.90 billion as of September 30, 2024.
The bank's current ratio and quick ratio both stood at 49.49, indicating strong short-term liquidity.
Loan Portfolio and Asset Quality: ConnectOne's loan portfolio is diversified across various sectors, with commercial real estate (70.7%), commercial and industrial (18.7%), and residential real estate (3.0%) being the largest components as of September 30, 2024. The bank has maintained a disciplined approach to credit underwriting, as evidenced by its relatively low level of nonperforming assets, which stood at 0.63% of total loans as of the same date.
During the third quarter of 2024, ConnectOne reported a modest increase in criticized and classified loans, primarily due to the modification of a commercial real estate relationship. However, the bank's overall credit quality remains sound, with the majority of these loans being well-secured and on a path to full restoration.
As of September 30, 2024, the commercial loan portfolio totaled $1.51 billion, commercial real estate loans were $5.74 billion, and commercial construction loans were $616.09 million. The weighted average loan-to-value ratio for the commercial real estate portfolio was 56%. The residential real estate loan portfolio stood at $250.25 million, while consumer loans totaled $835,000.
The allowance for credit losses on loans was $82.49 million, or 1.02% of total loans, as of September 30, 2024.
Deposit Base: As of September 30, 2024, total deposits were $7.52 billion, consisting of $1.26 billion in noninterest-bearing demand deposits, $3.12 billion in interest-bearing demand deposits, $528.51 million in savings deposits, and $2.61 billion in time deposits. The bank utilizes brokered deposits as a supplemental funding source, with $824.90 million in nonreciprocal brokered time deposits as of September 30, 2024.
Merger with The First of Long Island: The announced merger with The First of Long Island is a strategic move that will significantly expand ConnectOne's footprint in the New York metropolitan area. The combined entity will have a stronger presence in Long Island, where First of Long Island has a well-established branch network and customer base. This geographic expansion is expected to provide numerous cross-selling opportunities and synergies, particularly in commercial lending, residential mortgage origination, and SBA lending.
Moreover, the merger will enhance ConnectOne's balance sheet, improving its loan-to-deposit ratio, CRE concentration, and non-interest-bearing deposit composition. The combined company will also benefit from a more diversified loan portfolio and a strengthened allowance for credit losses position.
Outlook and Growth Strategies: Looking ahead, ConnectOne is well-positioned to capitalize on its enhanced presence in the New York metropolitan market. The bank anticipates loan growth to be relatively muted in the near term, but expects a return to mid- to high-single-digit growth in the coming years, driven by both organic and merger-related opportunities.
For the fourth quarter of 2024, ConnectOne projects a net interest margin of around 2.80%, up approximately 10 basis points from the third quarter average. This margin expansion is expected to come from a 20 basis point reduction in the cost of total deposits and a 10 basis point reduction in loan yields due to the 50 basis point Fed rate cut at the end of the third quarter.
The company expects core non-interest income and expenses to increase modestly in the fourth quarter and into early 2025. Beyond the fourth quarter, loan growth may be relatively muted, slightly up or slightly down, for the next two quarters, before the bank expects a return to mid- to high single-digit growth.
ConnectOne's management team has also highlighted the potential for revenue synergies stemming from the First of Long Island acquisition, particularly in areas like residential mortgage lending, SBA lending, and treasury management services. These initiatives, coupled with the bank's continued focus on its client-centric relationship banking model, are expected to drive sustainable growth and profitability in the future.
Conclusion: ConnectOne Bancorp, Inc. has established itself as a premier community bank in the New York metropolitan area, known for its strong client relationships, disciplined credit underwriting, and strategic focus on commercial lending. The transformative merger with The First of Long Island Corporation will significantly enhance the company's market presence, balance sheet, and growth prospects, positioning it for continued success in the years ahead. Despite recent challenges in the economic environment, ConnectOne's strong capital position, diverse loan portfolio, and strategic growth initiatives provide a solid foundation for future performance and shareholder value creation.