My Market Wizard

ConnectOne Bancorp, Inc. 10-K Analysis & Summary – 2/21/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

ConnectOne Bancorp, Inc.

Filing date:

02/21/2025

TLDR:

ConnectOne Bancorp’s 10-K filing for 2024 reveals a decrease in net income due to a contracting net interest margin and increased expenses, despite a pending merger with The First of Long Island Corporation (FLIC). Investors should monitor the merger’s progress, asset quality, and interest rate sensitivity.

ELI5:

ConnectOne, a bank, made less money in 2024 because it cost them more to operate and they earned less on loans. They are merging with another bank, which could help or hurt them, so it’s important to watch how that goes.

Accession #:

0001437749-25-004744

Published on

Analyst Summary

  • Net income available to common stockholders decreased by 16.3% from 2023 to 2024.
  • Net interest income decreased by 2.9%, driven by a 10 basis point contraction in net interest margin.
  • Noninterest income increased by 19.5%, primarily due to gains on loan sales and bank-owned life insurance.
  • Noninterest expenses increased by 5.4%, driven by technology investments, salaries, and merger-related expenses.
  • Provision for credit losses increased by $5.6 million.
  • Net Interest Margin: 2.72% (down from 2.82% in 2023)
  • Efficiency Ratio: Approximately 60.7%
  • Return on Average Assets (ROAA): Approximately 0.76%
  • Return on Average Equity (ROAE): Approximately 6.0%
  • Loans to Deposits: Approximately 105.9%
  • Allowance for Loan Losses to Total Loans: 1.00% (up from 0.98% in 2023)
  • Tier 1 Capital Ratio: 12.63% (Bank) and 12.29% (Bancorp)
  • Total Risk-Based Capital Ratio: 13.60% (Bank) and 14.11% (Bancorp)
  • Commercial Real Estate Concentration: Commercial real estate loans represented 435% of the Bank’s Tier 1 capital plus the allowance for credit losses on loans.
  • The net interest margin decreased from 2.82% in 2023 to 2.72% in 2024.
  • The ratio of nonperforming assets to total assets increased from 0.53% in 2023 to 0.58% in 2024.
  • The allowance for credit losses as a percentage of loans receivable increased from 0.98% in 2023 to 1.00% in 2024.

Opportunities and Risks

  • Integration Risk: The successful integration of FLIC is critical to realizing the expected benefits of the merger.
  • Interest Rate Risk: Changes in interest rates could negatively impact the net interest margin and borrowers’ ability to repay their loans.
  • Credit Risk: The company’s concentration in commercial real estate loans and lending to small-to-medium-sized businesses exposes it to credit risk.
  • Regulatory Risk: Increased regulatory requirements associated with exceeding $10 billion in assets could increase operating costs and reduce earnings.
  • Cybersecurity Risk: As a financial institution offering products through multiple digital delivery channels, cybersecurity incidents could have a material effect on the Company, its results of operations and its reputation.
  • Merger Synergies: The merger with FLIC is expected to create cost savings and revenue enhancements.
  • Market Expansion: The merger will expand the company’s presence in the New York Metropolitan area.
  • Technology Investments: The company’s investments in technology could lead to increased efficiency and improved customer service.

Potential Implications

Company Performance

  • Management attributes the decrease in net income to a contraction in the net interest margin and increased noninterest expenses.
  • The MD&A highlights the company’s focus on delivering customized banking services and cross-selling products to clients.
  • The company acknowledges the competitive landscape and the need to attract and retain skilled employees.
  • The MD&A discusses the pending merger with FLIC and the expected benefits and challenges associated with the integration.
  • Management will need to focus on expense control and margin management to improve profitability in the coming year.

Stock Price

  • Monitor Merger Progress: Track the progress of the FLIC merger and the integration of the two companies.
  • Assess Asset Quality: Evaluate the performance of the loan portfolio, particularly commercial real estate loans.
  • Evaluate Interest Rate Sensitivity: Analyze the company’s interest rate sensitivity and its ability to manage interest rate risk.
  • Monitor Regulatory Compliance: Track the company’s compliance with increased regulatory requirements associated with exceeding $10 billion in assets.

ConnectOne Bancorp, Inc. (CNOB) – 10-K Filing Analysis – December 31, 2024

Executive Summary

This report analyzes ConnectOne Bancorp, Inc.’s 10-K filing for the year ended December 31, 2024. Key findings include a decrease in net income, driven by a contraction in net interest margin and increased noninterest expenses, partially offset by increased noninterest income and a decrease in income tax expense. The pending merger with The First of Long Island Corporation (FLIC) introduces both opportunities and risks. Overall, a neutral outlook is warranted, pending the successful integration of FLIC and a stabilization of the net interest margin. Investors should monitor the progress of the merger, asset quality, and interest rate sensitivity.

Company Overview

ConnectOne Bancorp, Inc. is a financial services company operating primarily through its bank subsidiary, ConnectOne Bank. The bank focuses on serving small and mid-sized businesses, local professionals, and individuals in the New York Metropolitan area and South Florida. The company is in the process of merging with The First of Long Island Corporation (FLIC), which is expected to close in the first or second quarter of 2025.

Detailed Analysis

Financial Statement Analysis

Income Statement:

  • Net income available to common stockholders decreased by 16.3% from 2023 to 2024.
  • Net interest income decreased by 2.9%, driven by a 10 basis point contraction in net interest margin.
  • Noninterest income increased by 19.5%, primarily due to gains on loan sales and bank-owned life insurance.
  • Noninterest expenses increased by 5.4%, driven by technology investments, salaries, and merger-related expenses.
  • Provision for credit losses increased by $5.6 million.

Key Ratios (2024):

  • Net Interest Margin: 2.72% (down from 2.82% in 2023)
  • Efficiency Ratio: Calculated from provided data, the efficiency ratio is approximately 60.7% (Noninterest Expense / (Net Interest Income + Noninterest Income)).
  • Return on Average Assets (ROAA): Calculated from provided data, the ROAA is approximately 0.76% (Net Income / Average Assets).
  • Return on Average Equity (ROAE): Calculated from provided data, the ROAE is approximately 6.0% (Net Income / Average Equity).

Balance Sheet:

  • Total assets remained relatively flat, increasing slightly by $24 million.
  • Total loans decreased by $70 million.
  • Deposits increased by $284 million.

Key Ratios (2024):

  • Loans to Deposits: Calculated from provided data, the loans to deposits ratio is approximately 105.9% (Total Loans / Total Deposits).
  • Allowance for Loan Losses to Total Loans: 1.00% (up from 0.98% in 2023)
  • Tier 1 Capital Ratio: 12.63% (Bank) and 12.29% (Bancorp)
  • Total Risk-Based Capital Ratio: 13.60% (Bank) and 14.11% (Bancorp)

Cash Flow Statement:

  • Operating activities provided $60.7 million in net cash.
  • Investing activities provided $55.2 million in net cash, primarily reflecting a decrease in loans.
  • Financing activities used $2.1 million in net cash, primarily reflecting a net increase in deposits of $284.0 million, partially offset by a decrease in net borrowings of $245.5 million and $33.3 million in cash dividends paid.

Management’s Discussion and Analysis (MD&A) Insights

  • Management attributes the decrease in net income to a contraction in the net interest margin and increased noninterest expenses.
  • The MD&A highlights the company’s focus on delivering customized banking services and cross-selling products to clients.
  • The company acknowledges the competitive landscape and the need to attract and retain skilled employees.
  • The MD&A discusses the pending merger with FLIC and the expected benefits and challenges associated with the integration.

Red Flags and Uncommon Metrics

  • Commercial Real Estate Concentration: The company has a significant concentration in commercial real estate loans, which could expose it to higher credit risk. Commercial real estate loans represented 435% of the Bank’s Tier 1 capital plus the allowance for credit losses on loans.
  • Interest Rate Sensitivity: A significant portion of the loan portfolio has interest rates that will reset over the next 24 months, which could impact borrowers’ ability to repay their loans.
  • Qualitative Factor Sensitivity: The allowance for credit losses is sensitive to management’s judgment of qualitative loss factors.
  • Goodwill: The company has a significant amount of goodwill, which could be subject to impairment if future performance does not meet expectations.

Risk and Opportunity Assessment

Risks:

  • Integration Risk: The successful integration of FLIC is critical to realizing the expected benefits of the merger.
  • Interest Rate Risk: Changes in interest rates could negatively impact the net interest margin and borrowers’ ability to repay their loans.
  • Credit Risk: The company’s concentration in commercial real estate loans and lending to small-to-medium-sized businesses exposes it to credit risk.
  • Regulatory Risk: Increased regulatory requirements associated with exceeding $10 billion in assets could increase operating costs and reduce earnings.
  • Cybersecurity Risk: As a financial institution offering products through multiple digital delivery channels, cybersecurity incidents could have a material effect on the Company, its results of operations and its reputation.

Opportunities:

  • Merger Synergies: The merger with FLIC is expected to create cost savings and revenue enhancements.
  • Market Expansion: The merger will expand the company’s presence in the New York Metropolitan area.
  • Technology Investments: The company’s investments in technology could lead to increased efficiency and improved customer service.

Conclusion and Actionable Insights

ConnectOne Bancorp faces challenges related to net interest margin compression and integration of FLIC. However, the merger also presents opportunities for growth and efficiency gains. Investors should:

  • Monitor Merger Progress: Track the progress of the FLIC merger and the integration of the two companies.
  • Assess Asset Quality: Evaluate the performance of the loan portfolio, particularly commercial real estate loans.
  • Evaluate Interest Rate Sensitivity: Analyze the company’s interest rate sensitivity and its ability to manage interest rate risk.
  • Monitor Regulatory Compliance: Track the company’s compliance with increased regulatory requirements associated with exceeding $10 billion in assets.

Overall Assessment: Neutral. The company’s financial performance is currently under pressure, but the merger with FLIC could improve its long-term prospects. A wait-and-see approach is warranted.

ConnectOne Bancorp, Inc. Financial Analysis (Year Ended December 31, 2024)

ConnectOne Bancorp, Inc. experienced a mixed financial performance in 2024. While asset quality remained strong and capital ratios were healthy, profitability metrics declined due to a contraction in the net interest margin and increased noninterest expenses. The planned merger with The First of Long Island Corporation is a key strategic event that could significantly impact future performance. Management will need to focus on expense control and margin management to improve profitability in the coming year.

1. Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin: Not applicable for financial institutions.
  • Operating Profit Margin:

    • Calculation: (Net Interest Income + Noninterest Income – Noninterest Expense) / Total Revenue = ($247,337 + $16,728 – $151,798) / ($247,337 + $16,728) = 42.08%
    • Trend: Previous year operating profit margin = ($255,106 + $14,001 – $143,949) / ($255,106 + $14,001) = 46.54%. Percentage change: (42.08% – 46.54%) / 46.54% = -9.58%
    • Industry: The industry average operating profit margin for banks is around 35-45%. ConnectOne is within this range.
  • Net Profit Margin:

    • Calculation: Net Income / Total Revenue = $73,793 / ($247,337 + $16,728) = 27.94%
    • Trend: Previous year net profit margin = $87,003 / ($255,106 + $14,001) = 32.33%. Percentage change: (27.94% – 32.33%) / 32.33% = -13.58%
    • Industry: The industry average net profit margin for banks is around 20-30%. ConnectOne is within this range.
  • Return on Assets (ROA):

    • Calculation: Net Income / Average Total Assets = $73,793 / (($9,879,600 + $9,855,603)/2) = 0.75%
    • Trend: Previous year ROA = $87,003 / (($9,855,603 + $8,782,741)/2) = 0.93%. Percentage change: (0.75% – 0.93%) / 0.93% = -19.35%
    • Industry: The industry average ROA for banks is around 1%. ConnectOne is below this average.
  • Return on Equity (ROE):

    • Calculation: Net Income / Average Stockholders’ Equity = $73,793 / (($1,241,704 + $1,216,620)/2) = 5.99%
    • Trend: Previous year ROE = $87,003 / (($1,216,620 + $1,178,751)/2) = 7.26%. Percentage change: (5.99% – 7.26%) / 7.26% = -17.50%
    • Industry: The industry average ROE for banks is around 10%. ConnectOne is below this average.
  • Earnings Per Share (EPS) – Basic and Diluted:

    • Calculation: Basic EPS = $67,757 / 38,270 = $1.77; Diluted EPS = $67,570 / 38,481 = $1.76
    • Trend: Previous year Basic EPS = $2.08, Diluted EPS = $2.07. Percentage change: Basic EPS (-14.90%), Diluted EPS (-14.98%)
    • Industry: EPS varies widely based on the size and profitability of the bank.

Liquidity

  • Current Ratio:

    • Calculation: Current Assets / Current Liabilities. To calculate this, we need to identify current assets and current liabilities.
      Current Assets = Cash and cash equivalents + Investment securities + Equity securities + Loans held-for-sale + Accrued interest receivable = $356,488 + $612,847 + $20,092 + $743 + $45,498 = $1,035,668 (in thousands)
      Current Liabilities = Total Deposits + Borrowings + Subordinated debentures, net of debt issuance costs + Operating lease liabilities + Other liabilities = $7,820,114 + $688,064 + $79,944 + $15,498 + $34,276 = $8,637,896 (in thousands)
      Current Ratio = $1,035,668 / $8,637,896 = 0.12
    • Trend: Previous year Current Ratio = ($242,714 + $617,162 + $18,564 + $49,108) / ($7,536,202 + $933,579 + $79,439 + $13,171 + $76,592) = 0.11. Percentage change: (0.12 – 0.11) / 0.11 = 9.09%
    • Industry: A current ratio of 1 or higher is generally considered healthy. ConnectOne’s current ratio is very low, indicating potential liquidity concerns.
  • Quick Ratio (Acid-Test Ratio):

    • Calculation: (Current Assets – Inventory) / Current Liabilities. Since banks don’t typically have inventory, we can exclude loans receivable.
      Quick Ratio = ($356,488 + $612,847 + $20,092 + $743 + $45,498) / $8,637,896 = 0.12
    • Trend: Previous year Quick Ratio = ($242,714 + $617,162 + $18,564 + $49,108) / $8,638,983 = 0.11. Percentage change: (0.12 – 0.11) / 0.11 = 9.09%
    • Industry: A quick ratio of 1 or higher is generally considered healthy. ConnectOne’s quick ratio is very low, indicating potential liquidity concerns.
  • Cash Ratio:

    • Calculation: (Cash and Due from Banks + Interest-Bearing Deposits with Banks) / Current Liabilities = ($57,816 + $298,672) / $8,637,896 = 0.04
    • Trend: Previous year Cash Ratio = ($61,421 + $181,293) / $8,638,983 = 0.03. Percentage change: (0.04 – 0.03) / 0.03 = 33.33%
    • Industry: A cash ratio of 0.1 to 0.2 is generally considered adequate. ConnectOne’s cash ratio is low, indicating limited immediate liquidity.

Solvency/Leverage

  • Debt-to-Equity Ratio:

    • Calculation: Total Liabilities / Total Stockholders’ Equity = $8,637,896 / $1,241,704 = 6.96
    • Trend: Previous year Debt-to-Equity Ratio = $8,638,983 / $1,216,620 = 7.10. Percentage change: (6.96 – 7.10) / 7.10 = -1.97%
    • Industry: The industry average debt-to-equity ratio for banks is around 7. ConnectOne is within this range.
  • Debt-to-Assets Ratio:

    • Calculation: Total Liabilities / Total Assets = $8,637,896 / $9,879,600 = 0.87
    • Trend: Previous year Debt-to-Assets Ratio = $8,638,983 / $9,855,603 = 0.88. Percentage change: (0.87 – 0.88) / 0.88 = -1.14%
    • Industry: The industry average debt-to-assets ratio for banks is around 0.9. ConnectOne is below this average.
  • Interest Coverage Ratio (Times Interest Earned):

    • Calculation: Earnings Before Interest and Taxes (EBIT) / Interest Expense = (Net Income + Income Tax Expense + Interest Expense) / Interest Expense = ($73,793 + $24,674 + $270,552) / $270,552 = 1.36
    • Trend: Previous year Interest Coverage Ratio = ($87,003 + $29,955 + $234,959) / $234,959 = 1.49. Percentage change: (1.36 – 1.49) / 1.49 = -8.72%
    • Industry: A ratio of 1.5 or higher is generally considered healthy. ConnectOne’s interest coverage ratio is low, indicating potential difficulty in meeting interest obligations.

Activity/Efficiency

  • Inventory Turnover: Not applicable for financial institutions.
  • Days Sales Outstanding (DSO): Not directly applicable for financial institutions.
  • Days Payable Outstanding (DPO): Not directly applicable for financial institutions.
  • Asset Turnover:

    • Calculation: Total Revenue / Average Total Assets = ($247,337 + $16,728) / (($9,879,600 + $9,855,603)/2) = 0.027 or 2.7%
    • Trend: Previous year Asset Turnover = ($255,106 + $14,001) / (($9,855,603 + $8,782,741)/2) = 0.029 or 2.9%. Percentage change: (2.7% – 2.9%) / 2.9% = -6.90%
    • Industry: The industry average asset turnover ratio for banks is around 0.03. ConnectOne is below this average.

Valuation

  • Price-to-Earnings Ratio (P/E):

    • Calculation: Stock Price / EPS = $22.99 / $1.77 = 13.0
    • Trend: To determine the trend, we would need the P/E ratio from the previous comparable period, which is not provided in the filing.
    • Industry: The industry average P/E ratio for banks is around 10-15. ConnectOne is within this range.
  • Price-to-Book Ratio (P/B):

    • Calculation: Market Cap / Book Value of Equity = (38,374,263 * $22.99) / $1,241,704,000 = 0.71
    • Trend: To determine the trend, we would need the P/B ratio from the previous comparable period, which is not provided in the filing.
    • Industry: The industry average P/B ratio for banks is around 1. ConnectOne is below this average.
  • Price-to-Sales Ratio (P/S):

    • Calculation: Market Cap / Total Revenue = (38,374,263 * $22.99) / ($247,337,000 + $16,728,000) = 3.33
    • Trend: To determine the trend, we would need the P/S ratio from the previous comparable period, which is not provided in the filing.
    • Industry: The industry average P/S ratio for banks is around 2-4. ConnectOne is within this range.
  • Enterprise Value to EBITDA (EV/EBITDA):

    • Calculation: EV = Market Cap + Total Debt – Cash and Cash Equivalents = (38,374,263 * $22.99) + $688,064,000 + $79,944,000 – $356,488,000 = $1,189,838,000
      EBITDA = Net Income + Interest Expense + Taxes + Depreciation and Amortization = $73,793,000 + $270,552,000 + $24,674,000 + $4,422,000 + $1,235,000 = $374,676,000
      EV/EBITDA = $1,189,838,000 / $374,676,000 = 3.18
    • Trend: To determine the trend, we would need the EV/EBITDA ratio from the previous comparable period, which is not provided in the filing.
    • Industry: The industry average EV/EBITDA ratio for banks is around 6-10. ConnectOne is below this average.

Growth Rates

  • Revenue Growth:

    • Calculation: ($264,065 – $269,107) / $269,107 = -1.87%
    • Trend: N/A
    • Industry: N/A
  • Net Income Growth:

    • Calculation: ($73,793 – $87,003) / $87,003 = -15.18%
    • Trend: N/A
    • Industry: N/A
  • EPS Growth:

    • Calculation: ($1.77 – $2.08) / $2.08 = -14.90%
    • Trend: N/A
    • Industry: N/A

Other Relevant Metrics

  • Uninsured Deposits:

    • Analysis: The company provides information on estimated uninsured deposits. As of December 31, 2024, estimated uninsured deposits were $2,712,798 (in thousands) compared to $2,388,545 (in thousands) as of December 31, 2023. This represents an increase in uninsured deposits, which could increase the bank’s vulnerability to deposit outflows in times of stress.
  • Net Interest Margin (NIM):

    • Analysis: The net interest margin decreased from 2.82% in 2023 to 2.72% in 2024. This contraction in NIM is a significant factor contributing to the decline in profitability.
  • Non-performing Assets to Total Assets:

    • Analysis: The ratio of nonperforming assets to total assets increased from 0.53% in 2023 to 0.58% in 2024. This indicates a slight deterioration in asset quality.
  • Allowance for Credit Losses to Loans Receivable:

    • Analysis: The allowance for credit losses as a percentage of loans receivable increased from 0.98% in 2023 to 1.00% in 2024. This indicates a slight increase in the bank’s reserves for potential loan losses.

2. Commentary

ConnectOne Bancorp’s 2024 performance reflects a challenging environment for banks, with declining profitability despite balance sheet growth. The decrease in net interest margin and increase in noninterest expenses are key areas of concern. While asset quality remains relatively strong, the increase in nonperforming assets warrants close monitoring. The pending merger with The First of Long Island Corporation presents both opportunities and risks, and its successful integration will be crucial for future success. Management’s ability to manage expenses, improve efficiency, and maintain asset quality will be critical for driving shareholder value.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️