Item 1A. Risk Factors
An investment in our securities involves risks.
Stockholders should carefully consider the risks described below, together with all other information contained in this Annual Report
on Form 10-K, before making any purchase or sale decisions regarding our securities. If any of the following risks actually occur, our
business, financial condition or operating results may be harmed. In that case, the trading price of our securities may decline, and stockholders
may lose part or all of their investment in our securities.
Risks Applicable to Our Business:
The ongoing COVID-19 pandemic and measures intended to prevent its
spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will
depend on future developments, which are highly uncertain and are difficult to predict.
Global health concerns relating to the COVID-19
outbreak and its variants and related government actions taken to reduce the spread of the virus, including the initial closure of non-essential
business and stay at home orders, and continuing restrictions on certain businesses, such as bars restaurants and gyms, have been weighing
on the macroeconomic environment in our New Jersey/New York metropolitan market trade area, and the outbreak has significantly increased
economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to
contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations
and shutdowns. Such measures, even as certain of them have been eased, have significantly contributed to rising unemployment and negatively
impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated
economic effects of the virus, including the passage of the CARES Act and the Economic Aid Act, but there can be no assurance that such
steps will be effective or achieve their desired results in a timely fashion.
The outbreak has adversely impacted and is likely
to further adversely impact our workforce and operations and the operations of our borrowers, clients and business partners. In particular,
we may experience financial losses due to a number of operational factors impacting us or our borrowers, clients or business partners,
including but not limited:
o declines in collateral values;
These factors may remain prevalent for a significant
period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19
outbreak has subsided.
The extent to which the coronavirus outbreak impacts
our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult
to predict, including, but not limited to, the duration and spread of the outbreak, its severity, new variants of the virus, the actions
to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even
after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the
virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has
occurred or may occur in the future.
There are no comparable recent events that provide
guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak
is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global
economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks
described in this “Risk Factors” section.
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Our growth-oriented business strategy could be adversely affected
if we are not able to attract and retain skilled employees or if we lose the services of our senior management team.
We may not be able to successfully manage our business
as a result of the strain on our management and operations that may result from growth. Our ability to manage growth will depend upon
our ability to continue to attract, hire and retain skilled employees. The loss of members of our senior management team, including those
officers named in the summary compensation table of our proxy statement, could have a material adverse effect on our results or operations
and ability to execute our strategic goals. Our success will also depend on the ability of our officers and key employees to continue
to implement and improve our operational and other systems, to manage multiple, concurrent client relationships and to hire, train and
manage our employees.
We may need to raise additional capital to execute our growth-oriented
business strategy.
In order to continue our growth, we will be required
to maintain our regulatory capital ratios at levels higher than the minimum ratios set by our regulators. We can offer you no assurances
that we will be able to raise capital in the future, or that the terms of any such capital will be beneficial to our existing security
holders. In the event we are unable to raise capital in the future, we may not be able to continue our growth strategy.
We have a significant concentration in commercial real estate loans.
Our loan portfolio is made up largely of commercial
real estate loans. These types of loans generally expose a lender to a higher degree of credit risk of non-payment and loss than do residential
mortgage loans because of several factors, including dependence on the successful operation of a business or a project for repayment,
and loan terms with a balloon payment rather than full amortization over the loan term. In addition, commercial real estate loans typically
involve larger loan balances to single borrowers or groups of related borrowers compared to one-to four-family residential mortgage loans.
Underwriting and portfolio management activities cannot completely eliminate all risks related to these loans. Any significant failure
to pay on time by our clients or a significant default by our clients would materially and adversely affect us.
As of December 31, 2021, we had $5.3 billion of
commercial real estate loans (nonowner-occupied, owner-occupied and multifamily), including commercial construction loans, which represented
77.3% of loans receivable. Concentrations in commercial real estate are also monitored by regulatory agencies and subject to scrutiny.
Guidance from these regulatory agencies includes all commercial real estate loans, including commercial construction loans, in calculating
our commercial real estate concentration, but excludes owner-occupied commercial real estate loans. Based on this regulatory definition,
our commercial real estate loans represented 468% of the Bank’s Tier 1 capital plus the allowance for credit losses on loans.
Loans secured by owner-occupied real estate are
reliant on the operating businesses to provide cash flow to meet debt service obligations, and as a result may be more susceptible to
the general impact on the economic environment affecting those operating companies as well as the real estate.
The impact of the COVID-19 pandemic on the metropolitan
New York area commercial real estate market is uncertain, causing volatility in rents in certain core urban markets. Many other factors,
including the exchange rate for the U.S. dollar, potential international trade tariffs, and changes in federal tax laws affecting the
deductibility of state and local taxes and mortgage interest could negatively impact our local economy and real estate market. Accordingly,
it may be more difficult for commercial real estate borrowers to repay their loans in a timely manner, as commercial real estate borrowers’
ability to repay their loans frequently depends on the successful development of their properties. The deterioration of one or a few of
our commercial real estate loans could cause a material increase in our level of nonperforming loans, which would result in a loss of
revenue from these loans and could result in an increase in the provision for credit losses and/or an increase in charge-offs, all of
which could have a material adverse impact on our net income. We also may incur losses on commercial real estate loans due to declines
in occupancy rates and rental rates, which may decrease property values and may decrease the likelihood that a borrower may find permanent
financing alternatives. Any weakening of the commercial real estate market may increase the likelihood of default of these loans, which
could negatively impact our loan portfolio’s performance and asset quality. If we are required to liquidate the collateral securing
a loan to satisfy the debt during a period of reduced real estate values, we could incur material losses. Any of these events could increase
our costs, require management time and attention, and materially and adversely affect us.
Federal banking agencies have issued guidance regarding
high concentrations of commercial real estate loans within bank loan portfolios. The guidance requires financial institutions that exceed
certain levels of commercial real estate lending compared with their total capital to maintain heightened risk management practices that
address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting
standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed
to support the level of commercial real estate lending. If there is any deterioration in our commercial real estate portfolio or if our
regulators conclude that we have not implemented appropriate risk management practices, it could adversely affect our business, and could
result in the requirement to maintain increased capital levels. Such capital may not be available at that time and may result in our regulators
requiring us to reduce our concentration in commercial real estate loans.
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If we are limited in our ability to originate loans secured by commercial
real estate, we may face greater risk in our loan portfolio.
If, because of our concentration of commercial
real estate loans, or for any other reasons, we are limited in our ability to originate loans secured by commercial real estate, we may
incur greater risk in our loan portfolio. For example, we are and may continue to seek to further increase our growth rate in commercial
and industrial loans, including both secured and unsecured commercial and industrial loans. Unsecured loans generally involve a higher
degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’
businesses and personal guarantees. Secured commercial and industrial loans are generally collateralized by accounts receivable, inventory,
equipment or other assets owned by the borrower and typically include a personal guaranty of the business owner. Compared to real estate,
that type of collateral is more difficult to monitor, its value is harder to ascertain, it may depreciate more rapidly, and it may not
be as readily saleable if repossessed. Therefore, we may be exposed to greater risk of loss on these credits.
The nature and growth rate of our commercial loan portfolio may
expose us to increased lending risks.
Given the significant growth in our loan portfolio,
many of our commercial real estate loans are unseasoned, meaning that they were originated relatively recently. As of December 31, 2021,
we had $4.7 billion in commercial real estate loans outstanding. Approximately 58.5% of the loans, or $2.8 billion, had been originated
in the past three years. As a result, it may be difficult to predict the future performance of our loan portfolio. These loans may have
delinquency or charge-off levels above our expectations, which could negatively affect our performance.
Our portfolio of loans secured by New York City taxi medallions
could expose us to credit losses.
We maintain a credit exposure ($26.2 million carrying
value as of December 31, 2021) of loans secured by New York City taxi medallions. The taxi industry in New York City is facing significant
competition and pressure from technology-based ride share companies such as Uber and Lyft, as well as from the impact of the COVID-19
pandemic and the trend toward working from home as a mitigant to the pandemic. This has resulted in volatility in the pricing of medallions,
and has impacted the earnings of many medallion holders, including our borrowers. Any further deterioration in the value of New York City
taxi medallions, or in the medallion taxi industry in New York City, could expose us to additional losses through additional write downs
on these loans.
The small-to medium-sized businesses that the Bank lends to may
have fewer resources to weather a downturn in the economy, which may impair a borrower’s ability to repay a loan to the Bank that
could materially harm our operating results.
The Bank targets its business development and marketing
strategy primarily to serve the banking and financial services needs of small-to medium-sized businesses. These small-to medium-sized
businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need substantial
additional capital to expand or compete and may experience significant volatility in operating results. Any one or more of these factors
may impair the borrower’s ability to repay a loan. In addition, the success of a small-to medium-sized business often depends on
the management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one
or more of these persons could have a material adverse impact on the business and its ability to repay a loan. Economic downturns and
other events that negatively impact our market areas could cause the Bank to incur substantial credit losses that could negatively affect
our results of operations and financial condition.
Our ability to maintain our reputation is critical to the success
of our business and the failure to do so may materially adversely affect our performance.
Our reputation is one of the most valuable components
of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting,
hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service
to our clients and caring about our clients and associates. If our reputation is negatively affected, by the actions of our employees
or otherwise, our business and, therefore, our operating results may be materially adversely affected.
Anti-takeover provisions in our corporate documents and in New Jersey
corporate law may make it difficult and expensive to remove current management.
Anti-takeover provisions in our corporate documents
and in New Jersey law may render the removal of our existing board of directors and management more difficult. Consequently, it may be
difficult and expensive for our stockholders to remove current management, even if current management is not performing adequately.
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Competition in originating loans and attracting deposits may adversely
affect our profitability.
We face substantial competition in originating
loans. This competition currently comes principally from other banks, savings institutions, mortgage banking companies, credit unions
and other lenders, including online “fintech” companies. Many of our competitors enjoy advantages, including greater financial
resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider
array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce
our net income by decreasing the number and size of loans that we originate and the interest rates we may charge on these loans.
In attracting deposits, we face substantial competition
from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured
investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources,
more aggressive marketing campaigns, better brand recognition and more branch locations.
These competitors may offer higher interest rates
than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract
new deposits.
We have also been active in competing for New York
and New Jersey governmental and municipal deposits. As of December 31, 2021, governmental and municipal deposits accounted for approximately
$691.9 million in deposits. The governor of New Jersey has proposed that the state form and own a bank in which governmental and municipal
entities would deposit their excess funds, with the state-owned bank then financing small businesses and municipal projects in New Jersey.
Although this proposal is in the very early stages, should this proposal be adopted and a state-owned bank formed, it could impede our
ability to attract and retain governmental and municipal deposits.
Increased deposit competition could adversely affect
our ability to generate the funds necessary for lending operations, which may increase our cost of funds.
We also compete with non-bank providers of financial
services, such as brokerage firms, consumer finance companies, insurance companies and governmental organizations, which may offer more
favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our operations. As a result,
such non-bank competitors may have advantages over us in providing certain products and services. This competition may reduce or limit
our margins on banking services, reduce our market share and adversely affect our earnings and financial condition.
In addition, the banking industry in general faces
competition for deposit, credit and money management products from non-bank technology firms, or fintech companies, which may offer products
independently or through relationships with insured depository institutions.
External factors, many of which we cannot control, may result in
liquidity concerns for us.
Liquidity risk is the potential that the Bank may
be unable to meet its obligations as they come due, capitalize on growth opportunities as they arise, or pay regular dividends because
of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances.
Liquidity is required to fund various obligations,
including credit commitments to borrowers, mortgage and other loan originations, withdrawals by depositors, repayment of borrowings, operating
expenses, capital expenditures and dividend payments to shareholders.
Liquidity is derived primarily from deposit growth
and retention; principal and interest payments on loans; prepayment and maturities of loans; principal and interest payments on investment
securities; sale, maturity and prepayment of investment securities; net cash provided from operations, and access to other funding sources.
In addition, in recent periods we have substantially increased our use of alternate deposit origination channels, such as brokered deposits,
including reciprocal deposit services, and internet listing services.
Our access to funding sources in amounts adequate
to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors
that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to market
factors or an adverse regulatory action against us. In addition, our ability to use alternate deposit origination channels could be substantially
impaired if we fail to remain “well capitalized”. Our ability to borrow could also be impaired by factors that are not specific
to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services
industry as a whole. Furthermore, regional and community banks generally have less access to the capital markets than do the national
and super-regional banks because of their smaller size and limited analyst coverage. Any decline in available funding could adversely
impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as meeting deposit withdrawal
demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.
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Declines in the value of our investment securities portfolio may
adversely impact our results.
As of December 31, 2021, we had approximately $534.5 million
in investment securities, available-for-sale. We may be required to record impairment charges on our investment securities if they suffer
a decline in value below their amortized cost basis that is considered credit related. Numerous factors, including lack of liquidity for
re-sales of certain investment securities, absence of reliable pricing information on investment securities, adverse changes in business
climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment
portfolio in future periods. If an impairment charge is significant enough, it could affect the ability of the Bank to upstream dividends
to the Company, which could have a material adverse effect on our liquidity and our ability to pay dividends to shareholders and could
also negatively impact our regulatory capital ratios.
The Bank’s ability to pay dividends is subject to regulatory
limitations, which, to the extent that the Company requires such dividends in the future, may affect the Company’s ability to honor
its obligations and pay dividends.
As a bank holding company, the Company is a separate
legal entity from the Bank and its subsidiaries and does not have significant operations. We currently depend on the Bank’s cash
and liquidity to pay our operating expenses and to fund dividends to shareholders. We cannot assure you that in the future the Bank will
have the capacity to pay the necessary dividends and that we will not require dividends from the Bank to satisfy our obligations. Various
statutes and regulations limit the availability of dividends from the Bank. It is possible, depending upon our and the Bank’s financial
condition and other factors, that bank regulators could assert that payment of dividends or other payments by the Bank are an unsafe or
unsound practice. In the event that the Bank is unable to pay dividends, we may not be able to service our obligations, as they become
due, or pay dividends on our capital stock. Consequently, the inability to receive dividends from the Bank could adversely affect our
financial condition, results of operations, cash flows and prospects.
In addition, as described under “Capital
Adequacy Guidelines,” banks and bank holding companies are be required to maintain a capital conservation buffer on top of minimum
risk-weighted asset ratios. The capital conservation buffer is 2.5%. Banking institutions which do not maintain capital in excess of the
capital conservation buffer will face constraints on the payment of dividends, equity repurchases, and compensation based on the amount
of the shortfall. Accordingly, if the Bank fails to maintain the applicable minimum capital ratios and the capital conservation buffer,
distributions to the Company may be prohibited or limited.
We may not be able to pay dividends on our common stock if we have
not made required dividend payments on our outstanding, noncumulative preferred stock.
We have outstanding a series of perpetual preferred
stock, our 5.25% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series A. The rights of the preferred stockholders to receive
dividends are senior to the rights of our common holders, although the preferred dividend rights are non-cumulative. Therefore, unless
all dividends due on our outstanding preferred stock have been declared and paid for the most recent dividend period provided for under
the terms of the preferred stock, we may not pay a dividend on our common stock or repurchase shares of our common stock.
We may incur impairment to goodwill.
We review our goodwill at least annually. Significant
negative industry or economic trends, reduced estimates of future cash flows or disruptions to our business, could indicate that goodwill
might be impaired. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical
experience and to rely on projections of future operating performance. We operate in a competitive environment and projections of future
operating results and cash flows may vary significantly from actual results. Additionally, if our analysis results in an impairment to
our goodwill, we would be required to record a non-cash charge to earnings in our financial statements during the period in which such
impairment is determined to exist. Any such charge could have a material adverse effect on our results of operations.
We have grown and may continue to grow through acquisitions.
Since January 1, 2019, we have acquired GHB, BoeFly
and BNJ. To be successful as a larger institution, we must successfully integrate the operations and retain the clients of acquired institutions,
attract and retain the management required to successfully manage larger operations, and control costs.
Future results of operations will depend in large
part on our ability to successfully integrate the operations of the acquired institutions and retain the clients of those institutions.
If we are unable to successfully manage the integration of the separate cultures, client bases and operating systems of the acquired institutions,
and any other institutions that may be acquired in the future, our results of operations may be adversely affected.
In addition, to successfully manage substantial
growth, we may need to increase noninterest expenses through additional personnel, leasehold and data processing costs, among others.
In order to successfully manage growth, we may need to adopt and effectively implement policies, procedures and controls to maintain credit
quality, control costs and oversee our operations. No assurance can be given that we will be successful in this strategy.
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We may be challenged to successfully manage our
business as a result of the strain on management and operations that may result from growth. The ability to manage growth will depend
on our ability to continue to attract, hire and retain skilled employees. Success will also depend on the ability of officers and key
employees to continue to implement and improve operational and other systems, to manage multiple, concurrent client relationships and
to hire, train and manage employees.
Finally, substantial growth may stress regulatory
capital levels, and may require us to raise additional capital. No assurance can be given that we will be able to raise any required
capital, or that it will be able to raise capital on terms that are beneficial to stockholders.
Attractive acquisition opportunities may not be available to us
in the future.
We expect that other banking and financial service
companies, many of which have significantly greater resources than us, will compete with us in acquiring other target companies if we
pursue such acquisitions. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions
are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate
an acquisition that we believe is in our best interests. Among other things, our regulators will consider our capital, liquidity, profitability,
regulatory compliance and levels of goodwill when considering acquisition and expansion proposals. Any acquisition could be dilutive to
our earnings and shareholders’ equity per share of our common stock.
Hurricanes or other adverse weather or health related events could
negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.
Hurricanes and other weather events can disrupt
our operations, result in damage to our properties and negatively affect the local economies in which we operate. In addition, these weather
events may result in a decline in value or destruction of properties securing our loans and an increase in delinquencies, foreclosures
and credit losses. Finally, health related events, such as a viral pandemic, could adversely affect the business of our clients and our
local economies, thereby adversely affecting our results of operations.
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The Company will be subject to heightened
regulatory requirements if total assets exceed $10 billion.
The Company’s total
assets were $8.1 billion as of December 31, 2021. Banks with assets in excess of $10 billion are subject to requirements
imposed by the Dodd-Frank Act and its implementing regulations, including: the examination authority of the Consumer Financial Protection
Bureau to assess compliance with Federal consumer financial laws, imposition of higher FDIC premiums, and reduced debit card interchange
fees all of which increase operating costs and reduce earnings.
As the Company approaches
$10 billion in total consolidated assets, additional costs have been incurred to prepare for the implementation of these imposed requirements.
The Company may be required to invest more significant management attention and resources to evaluate and continue to make any changes
necessary to comply with the new statutory and regulatory requirements under the Dodd-Frank Act. Further, Federal financial regulators
may require accelerated actions and investments to prepare for compliance before $10 billion in total consolidated assets is exceeded,
and may suspend or delay certain regulatory actions, such as approving a proposed merger, if preparations are deemed inadequate. Upon
reaching this threshold, the Company faces the risk of failing to meet these requirements, which may negatively impact results of operations
and financial condition.
Reforms to and uncertainty regarding LIBOR
may adversely affect the business.
In 2017, a committee of
private-market derivative participants and their regulators convened by the Federal Reserve, the Alternative Reference Rates Committee,
or “ARRC”, was created to identify an alternative reference interest rate to replace LIBOR. The ARRC announced Secured Overnight
Financing Rate, or “SOFR”, a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities,
as its preferred alternative to LIBOR. The U.S. bank regulatory agencies have directed U.S. insured depository institutions to cease using
LIBOR in new loan or other financial agreements effective December 31, 2021. Certain LIBOR maturity rates will no longer be published
after December 31, 2021, with publication of the remaining maturity rates ending in 2023.The Federal Reserve Bank commenced publication
of SOFR rates on April 2, 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future
of LIBOR at this time is uncertain. The uncertainty as to the nature and effect of such reforms and actions and the political discontinuance
of LIBOR may adversely affect the value of and return on the Company’s financial assets and liabilities that are based on or are
linked to LIBOR, the Company’s results of operations or financial condition. In addition, these reforms may also require extensive
changes to the contracts that govern these LIBOR based products, as well as the Company’s systems and processes.
Risks Applicable to the Banking Industry Generally:
Our allowance for credit losses may not be adequate to cover actual
losses.
Like all financial institutions,
we maintain an allowance for credit losses and to provide for loan defaults and nonperformance. The process for determining the amount
of the allowance is critical to our financial results and condition. It requires difficult, subjective and complex judgments about the
future, including the impact of national and regional economic conditions on the ability of our borrowers to repay their loans. If our
judgment proves to be incorrect, our allowance may not be sufficient to cover losses in our loan portfolio. Further, state and federal
regulatory agencies, as an integral part of their examination process, review our loans and allowance and may require an increase in our
allowance for credit losses. Further increases to the allowance could adversely affect our earnings.
Changes in interest rates may adversely affect our earnings and
financial condition.
Our net income depends
primarily upon our net interest income. Net interest income is the difference between interest income earned on loans, investments and
other interest-earning assets and the interest expense incurred on deposits and borrowed funds. The level of net interest income is primarily
a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread
between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning
assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the local economy, competition for
loans and deposits, the monetary policy of the Federal Open Market Committee of the Federal Reserve Board of Governors (the “FOMC”),
and market interest rates.
A sustained increase in
market interest rates could adversely affect our earnings if our cost of funds increases more rapidly than our yield on our earning assets
and compresses our net interest margin. In addition, the economic value of portfolio equity would decline if interest rates increase.
For example, we estimate that as of December 31, 2021, a 200-basis point increase in interest rates would have resulted in our economic
value of portfolio equity increasing by approximately $2.9 million or 0.24%. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Interest Rate Sensitivity Analysis.”
Different types of assets
and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically
experience gaps in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will
be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. When interest-bearing liabilities
mature or re-price more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income.
Likewise, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could
reduce our net interest income. We are unable to predict changes in market interest rates, which are affected by many factors beyond our
control, including inflation, deflation, recession, unemployment, money supply, domestic and international events and changes in the United
States and other financial markets.
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We also attempt to manage
risk from changes in market interest rates, in part, by controlling the mix of interest rate sensitive assets and interest rate sensitive
liabilities. However, interest rate risk management techniques are not exact. A rapid increase or decrease in interest rates could adversely
affect our results of operations and financial performance.
The banking business is subject to significant government regulations.
We are subject to extensive
governmental supervision, regulation and control. These laws and regulations are subject to change and may require substantial modifications
to our operations or may cause us to incur substantial additional compliance costs. In addition, future legislation and government policy
could adversely affect the commercial banking industry and our operations. Such governing laws can be anticipated to continue to be the
subject of future modification. Our management cannot predict what effect any such future modifications will have on our operations. In
addition, the primary focus of Federal and state banking regulation is the protection of depositors and not the shareholders of the regulated
institutions.
For example, the Dodd-Frank
Act may result in substantial new compliance costs. The Dodd-Frank Act was signed into law on July 21, 2010. Generally, the
Dodd-Frank Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the law,
many of which will not become effective until various Federal regulatory agencies have promulgated rules implementing the statutory provisions.
Ultimately, final implementation the Dodd-Frank Act could have a material adverse impact either on the financial services industry as
a whole, or on our business, results of operations and financial condition.
The following aspects
of the financial reform and consumer protection act are related to the operations of the Bank:
· Deposit insurance is permanently increased to $250,000.
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In addition, in order
to implement Basel III and certain additional capital changes required by the Dodd-Frank Act, on July 9, 2013, the Federal banking agencies,
including the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency, approved, as an interim final rule, the regulatory
capital requirements for U.S. insured depository institutions and their holding companies. This regulation requires financial institutions
to maintain higher capital levels and more equity capital.
These provisions, as well
as any other aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, may impact
the profitability of our business activities and may change certain of our business practices, including the ability to offer new products,
obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including
increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary
changes to operations in order to comply and could therefore also materially and adversely affect our business, financial condition and
results of operations.
Our management is actively
reviewing the provisions of the Dodd-Frank Act, many of which are to be phased-in over the next several months and years and assessing
the probable impact on our operations. However, the ultimate effect of certain of these changes on the financial services industry in
general, and us in particular, is uncertain at this time.
The laws that regulate our operations are designed for the protection
of depositors and the public, not our shareholders.
The federal and state
laws and regulations applicable to our operations give regulatory authorities extensive discretion in connection with their supervisory
and enforcement responsibilities, and generally have been promulgated to protect depositors and the Deposit Insurance Fund and not for
the purpose of protecting shareholders. These laws and regulations can materially affect our future business. Laws and regulations now
affecting us may be changed at any time, and the interpretation of such laws and regulations by bank regulatory authorities is also subject
to change.
We can give no assurance
that future changes in laws and regulations or changes in their interpretation will not adversely affect our business. Legislative and
regulatory changes may increase our cost of doing business or otherwise adversely affect us and create competitive advantages for non-bank
competitors.
The potential impact of changes in monetary policy and interest
rates may negatively affect our operations.
Our operating results
may be significantly affected (favorably or unfavorably) by market rates of interest that, in turn, are affected by prevailing economic
conditions, by the fiscal and monetary policies of the United States government and by the policies of various regulatory agencies. Our
earnings will depend significantly upon our interest rate spread (i.e., the difference between the interest rate earned on our loans and
investments and the interest raid paid on our deposits and borrowings). Like many financial institutions, we may be subject to the risk
of fluctuations in interest rates, which, if significant, may have a material adverse effect on our operations.
We cannot predict how changes in technology will impact our business;
increased use of technology may expose us to service interruptions or breaches in security.
The financial services market, including banking
services, is increasingly affected by advances in technology, including developments in:
· Telecommunications;
· Data processing;
· Automation;
· Debit cards and so-called “smart cards”;
· Remote deposit capture;
· Cryptocurrency; and
· Use of Blockchain.
Our ability to compete successfully in the future
will depend, to a certain extent, on whether we can anticipate and respond to technological changes. We offer electronic banking services
for our consumer and business clients via our website, www.cnob.com, including Internet banking and electronic bill payment, as well as
mobile banking by phone. We also offer check cards, ATM cards, credit cards, and automatic and ACH transfers. The successful operation
and further development of these and other new technologies will likely require additional capital investments in the future. In addition,
increased use of electronic banking creates opportunities for interruptions in service or security breaches, which could expose us to
claims by clients or other third parties and damage our reputation. We cannot assure you that we will have sufficient resources or access
to the necessary proprietary technology to remain competitive in the future, or that we will be able to maintain a secure electronic environment.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
The Bank operates eight banking offices in Bergen
County, NJ, in Fort Lee, Englewood Cliffs, Englewood, Hackensack, Cresskill, Haworth, Ridgewood and Saddle River; five banking offices
in Union County, NJ, consisting of two offices in Union Township, and one office each in Springfield Township, Berkeley Heights, and Summit;
one banking office in Morristown in Morris County, NJ; one office in Newark in Essex County, NJ; one office in West New York in Hudson
County, NJ; one office in Holmdel in Monmouth County, one banking office in the borough of Manhattan in New York City, one office in Melville,
Nassau County on Long Island, one in Astoria, Queens and five branches in the Hudson Valley, including in White Plains and Tarrytown,
in Westchester County, New York, Bardonia and Blauvelt, in Rockland County, New York and in Middletown, in Orange County, New York, and
one financial center in West Palm Beach in Palm Beach County, FL. The Bank’s principal office is located at 301 Sylvan Avenue, Englewood
Cliffs, NJ. The principal office is a three-story leased building constructed in 2008.
The following table sets forth certain information
regarding the Bank’s leased operating locations.
Banking Office Location Term
301 Sylvan Avenue, Englewood Cliffs, NJ Term expires November 2028
12 East Palisade Avenue, Englewood, NJ Term expires July 2022
156 Piermont Rd, Cresskill, NJ Term expires July 2022
899 Palisade Avenue, Fort Lee, NJ Term expires August 2022
142 John Street, Hackensack, NJ Term expires December 2026
171 East Ridgewood Avenue, Ridgewood, NJ Term expires April 2024
71 East Allendale Road, Saddle River, NJ Term expires May 2032
356 Chestnut Street, Union, NJ Term expires May 2027
545 Morris Avenue, Summit, NJ Term expires February 2024
217 Chestnut Street, Newark, NJ Term expires December 2024
5914 Park Avenue, West New York, NJ Term expires September 2023
963 Holmdel Road, Holmdel, NJ Term expires September 2026
551 Madison Avenue, Suite 202, NY, NY Term expires October 2028
48 South Service Rd, 2nd Fl, Melville, NY Term Expires July 2025
36-19 Broadway, Astoria, NY Term Expires August 2028
485 Schutt Rd, Middletown, NY Term Expires October 2025
715 Route 304, Bardonia NY Term Expires August 2028
567 North Broadway, White Plains NY Term Expires December 2028
155 White Plains Rd., Tarrytown NY Term Expires December 2026
170 East Erie St, Blauvelt NY Term Expires February 2028
Item 3. Legal Proceedings
There are no significant pending legal proceedings
involving the Company other than those arising out of routine operations. None of these matters would have a material adverse effect on
the Company or its results of operations if decided adversely to the Company.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for the Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Security Market Information
The common stock of the Company is traded on the
NASDAQ Global Select Market under the symbol “CNOB”. As of December 31, 2021, the Company had 686 stockholders of record,
excluding beneficial owners for whom Cede & Company or others act as nominees.
Share Repurchase Program
Historically, repurchases have been made from time
to time as, in the opinion of management, market conditions warranted, in the open market or in privately negotiated transactions.
In March 2019, the Board of Directors of the Company
approved a share repurchase program for up to 1,200,000 shares. In September 2021, the Board of Directors had authorized the repurchase
of up to an additional 2,000,000 shares. The Company may repurchase shares from time to time in the open market, in privately negotiated
share purchases or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission
and applicable federal securities laws. The share repurchase plan does not obligate the Company to acquire any particular amount of common
stock, and it may be modified or suspended at any time at the Company's discretion. During the year ended December 31, 2021, the Company
repurchased a total of 330,541 shares. As of December 31, 2021, shares remaining for repurchase under the program were 2,274,748.
The following table details
share repurchases for the year 2021:
Dividends
Federal laws and regulations contain restrictions
on the ability of the Parent Corporation and the Bank to pay dividends. For information regarding restrictions on dividends, see Part
I, Item 1, “Business” and Part II, Item 8, “Financial Statements and Supplementary Data”, Note 18 and Note 21
of the Notes to Consolidated Financial Statements.”
Stockholders Return Comparison
Set forth on the following page is a line graph
presentation comparing the cumulative stockholder return on the Parent Corporation’s common stock, on a dividend reinvested basis,
against the cumulative total returns of the NASDAQ Composite and the KBW Bank Index for the period from December 31, 2016 through December
31, 2021.
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COMPARE 5-YEAR CUMULATIVE
TOTAL RETURN
AMONG CONNECTONE BANCORP INC.
NASDAQ AND KBW BANK INDEX
Assumes $100 Invested on December 31, 2016,
with Dividends Reinvested
Year Ended December 31, 2021
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE
OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
Fiscal Year Ending
Item 6. Selected Financial Data
The following tables set forth selected consolidated
financial data as of the dates and for the periods presented. The selected consolidated statement of financial condition data as of December
31, 2021 and 2020 and the selected consolidated summary of income data for the years ended December 31, 2021, 2020 and 2019 have been
derived from our audited consolidated financial statements and related notes that we have included elsewhere in this Annual Report. The
selected consolidated statement of financial condition data as of December 31, 2019 and the selected consolidated summary of income data
have been derived from audited consolidated financial statements that are not presented in this Annual Report.
The selected historical consolidated financial
data as of any date and for any period are not necessarily indicative of the results that may be achieved as of any future date or for
any future period. You should read the following selected statistical and financial data in conjunction with the more detailed information
contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated
financial statements and the related notes that we have presented elsewhere in this Annual Report.
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SUMMARY OF SELECTED STATISTICAL INFORMATION
AND FINANCIAL DATA
As of and for the years ended December 31,
Selected Statement of Financial Condition Data
Common Dividends
Cash dividends per common share $ 0.48 $ 0.27 $ 0.36
Selected Statement of Income Data
Reversal of (Provision for) credit losses 5,500 (41,000 ) (8,100 )
Preferred stock dividends 1,717 - -
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As of and for the years ended December 31,
Per Common Share Data
Selected Performance Ratios
Return on average common stockholders’ equity 13.32 8.09 10.40
Selected Asset Quality Ratios
As a % of Loans Receivable:
Nonaccrual loans (excluding loans held-for-sale) 0.90 % 0.99 % 0.97 %
Loans 90 days or greater past due and still accruing 0.20 0.21 0.06
Allowance for credit losses - loans 1.15 1.27 0.75
Nonperforming assets(2) to total assets 0.76 % 0.82 % 0.80 %
Allowance for credit losses for loans to nonaccrual loans 127.7 128.4 77.4
Net loan charge-offs to average loans 0.03 0.00 0.09
Company Capital Ratios
Tangible common equity to tangible assets(1) 10.06 9.50 9.38
__________________________
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Non-GAAP Reconciliation Table ($ in thousands, except per share
amounts)
As of December 31,
Tangible common equity and tangible common equity/tangible assets
Less: Preferred stock 110,927 - -
Tangible book value per common share
Less: goodwill and other intangible assets 5.49 5.52 4.79
Return on average tangible common equity
Less: average preferred stock 41,028 - -
Return on average common stockholders’ equity 13.32 % 8.09 % 10.40 %
Return on average tangible common stockholders’ equity 17.21 % 10.80 % 13.61 %
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Item 7. Management’s Discussion and
Analysis (“MD&A”) of Financial Condition and Results of Operations
The purpose of this analysis is to provide the reader
with information relevant to understanding and assessing the Company’s results of operations for each of the past three years and
financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the
consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented
in this document.
Cautionary Statement Concerning Forward-Looking Statements
See Item 1 of this Annual Report on Form 10-K for
information regarding forward-looking statements.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial
Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. Accounting policies considered critical to our financial results
include the allowance for credit losses and related provision and income taxes. For information on our significant accounting policies,
see Note 1a in the Notes to Consolidated Financial Statements.
Allowance for Credit Losses and Related
Provision
The allowance for credit losses is an estimate of
current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual
term of the financial assets necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The
methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high