What changed in this filing

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Item 1A. Risk Factors

2025-02-21 compared with 2024-02-23 · 91 added, 28 removed, 209 unchanged (36% of the section changed)

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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 and changes in customer, employer and employee behavior have weighed on and may continue to effect the macroeconomic environment in our New Jersey/New York metropolitan market trade area and have caused economic uncertainty and reduced economic activity.

Given the ongoing and dynamic nature of the pandemic, it is difficult to predict the full impact of the COVID-19 pandemic on our business and that of our clients, employees and third-party service providers.

The extent of such an impact will depend on future developments, which are highly uncertain.

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.

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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 and the development of remote work or hybrid work models on the metropolitan New York area commercial real estate market is uncertain, causing volatility in rents in certain core urban markets.

The impact of the development of remote work or hybrid work models 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.

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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 originated relatively recently.

As of December 31, 2023, we had $5.9 billion in commercial real estate loans outstanding.

Approximately 64.5% of the loans, or $3.8 billion, were 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 New York State multifamily loan portfolio could be adversely impacted by changes in legislation or regulation which, in turn, could have a material adverse effect on our financial condition and results of operations.

We have a significant portfolio of loans secured by multi family properties located in New York.

On June 14, 2019, the New York State legislature passed the New York Housing Stability and Tenant Protection Act of 2019.

This legislation represents the most extensive reform of New York State’s rent laws in several decades and generally limits a landlord’s ability to increase rents on rent regulated apartments and makes it more difficult to convert rent regulated apartments to market rate apartments.

As a result, the value of the collateral located in New York State securing the Company’s multi family loans or the future net operating income of such properties could potentially become impaired which, in turn, could have a material adverse effect on our financial condition and results of operations.

A significant portion of our loan portfolio has interest rates that will reset over the next 24 months.

In addition, a significant portion of our portfolio will mature over the next 24 months.

Applicable increases in interest rates could harm our borrowers ’ abilities to repay their loans.

As of December 31, 2024, a significant portion of our loan portfolio bears interest at rates that will reset during 2025 and 2026.

Generally, these loans currently bear interest at rates that are lower than current market rates, as these loans were predominately originated in 2020 and 2021, and so these borrowers will experience an increase in the interest rates applicable to their loans, which in some cases will be significant.

In addition, a significant portion of our loan portfolio matures in 2025 and 2026.

For loans that are maturing, borrowers will either need to refinance these loans, with the Bank or with another financial institution, or pay these loans off using other sources of funds.

Borrowers refinancing loans will likely experience an increase in the interest rates applicable to their loans, which in some cases will be significant.

An increase in interest rates applicable to their loans may negatively impact our borrowers, increasing their costs and potentially making it more difficult for them to continue to perform under their loan agreements.

Any increase in late payments or defaults by our borrowers due to increases in the interest rates applicable to their loans could adversely affect our asset quality and results of operations.

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.

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We have also been active in competing for New York and New Jersey governmental and municipal deposits.

As of December 31, 2023, governmental and municipal deposits accounted for approximately $745.0 million in deposits.

As of December 31, 2024, governmental and municipal deposits accounted for approximately $1.1 billion 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.

Although this proposal has not advanced, 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.

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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.

In addition, in recent periods we have substantially increased our use of alternative 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.

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As of December 31, 2024, we had approximately $612.8 million in fair value of investment securities, all of which are classified as available-for-sale.

We may be required to record an allowance for credit on our investment securities if they suffer a decline in value below their amortized cost basis that is considered credit related.

We may be required to record an allowance for credit losses 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.

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We have grown and may continue to grow through acquisitions.

Since January 1, 2019, we have acquired GHB, BoeFly and BNJ.

Since January 1, 2019, we have acquired GHB, BoeFly and BNJ and entered into an agreement to acquire FLIC (First of Long Island Corp.), the consummation of which is pending regulatory approval.

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.

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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.

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The Company’s total assets were $9.880 billion as of December 31, 2024.

Upon consummation of the FLIC merger, our assets will be substantially in excess of $10 billion.

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.

As the Company has approached $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.

Any failure of the Company to meet these requirements may negatively impact results of operations and financial condition.

Risks Applicable to our Proposed Merger with FLIC

Shareholders of ConnectOne will have less influence as shareholders of the combined company than as a shareholder of ConnectOne prior to the completion of the merger.

The shareholders of ConnectOne will experience a decline in their influence over the resulting entity in the merger.

Presently, ConnectOne shareholders have the right to control ConnectOne through their ability to elect the board of directors of ConnectOne and to vote on other matters affecting ConnectOne.

As a result of the merger, the existing shareholders of ConnectOne will own approximately 76% of the combined company’s outstanding common stock.

Consequently, while the existing shareholders of ConnectOne will continue to own a majority of the outstanding shares of the combined company and thus will continue to have the ability to control the vote on most matters submitted to the shareholders of the combined company, the extent of the existing ConnectOne shareholders’ influence over the management and policies of the combined company will be less than their current influence over the management and policies of ConnectOne.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the Merger.

Before the merger and the bank merger may be completed, ConnectOne and FLIC must obtain approvals from, or provide notice to, the Federal Reserve Board, the FDIC and the New Jersey Department of Banking and Insurance.

Other approvals, waivers or consents from regulators may also be required.

In determining whether to grant these approvals the regulators consider a variety of factors.

An adverse development in either party’s regulatory standing or these factors could result in an inability to obtain approvals or delay their receipt.

These regulators may impose conditions on the completion of the holding company merger or the bank merger or require changes to the terms of the merger or the bank merger.

Such conditions or changes could have the effect of delaying or preventing completion of the merger or the bank merger or imposing additional costs on or limiting the revenues of the combined company following the merger and the bank merger, any of which might have an adverse effect on the combined company following the merger.

ConnectOne may need to raise additional capital in connection with the merger.

In order to further support the capital ratios of the combined entity, ConnectOne expects that it will raise additional capital as part of the transaction.

Under the terms of the merger agreement, ConnectOne has agreed that it would raise up to $200 million in new capital if required to obtain any necessary regulatory approval.

The actual amount of capital to be raised, the timing, and the type of securities to be issued by ConnectOne to raise such capital, have not yet been determined.

We can offer you no assurances that ConnectOne will be able to raise additional capital in connection with the merger.

If ConnectOne is unable to raise additional capital, it may negatively impact ConnectOne’s ability to obtain necessary regulatory approvals for the merger.

Failure to complete the merger could severely disadvantage ConnectOne.

Completion of the merger is subject to the satisfaction or waiver of a number of conditions.

ConnectOne or FLIC cannot guarantee when or if these conditions will be satisfied or that the merger will be successfully completed.

The consummation of the merger may be delayed, the merger may be consummated on terms different than those contemplated by the merger agreement, or the merger may not be consummated at all.

If the merger is not completed, the ongoing business of ConnectOne may be adversely affected, and ConnectOne will be subject to several risks, including the following:

ConnectOne could incur substantial costs relating to the proposed merger, such as legal, accounting, financial advisor, filing, printing and mailing fees;

ConnectOne’s management’s and employees’ attention may be diverted from their day-to-day business and operational matters as a result of efforts relating to the attempt to consummate the merger.

In addition, if the merger is not completed, ConnectOne may experience negative reactions from the financial markets and from its customers and employees.

ConnectOne also could be subject to litigation related to any failure to complete the merger or to enforcement proceedings commenced against ConnectOne to perform its obligations under the merger agreement.

If the merger is not completed, ConnectOne cannot assure shareholders that the risks described above will not materialize and will not materially affect the stock price and business and financial results of ConnectOne.

The expected benefits of the merger may not be realized if the combined company does not achieve cost savings and other benefits.

The expectation by the management teams of ConnectOne and FLIC that cost savings and revenue enhancements are achievable is a forward-looking statement that is inherently uncertain.

The combined company’s actual cost savings and revenue enhancements, if any, cannot be quantified at this time.

Any actual cost savings or revenue enhancements will depend on future expense levels and operating results, the timing of certain events and general industry, regulatory and business conditions.

Many of these events will be beyond the control of the combined company.

ConnectOne will be subject to business uncertainties and contractual restrictions, while the merger is pending.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on ConnectOne.

These uncertainties may impair ConnectOne’s ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with ConnectOne to seek to change existing business relationships with ConnectOne.

Retention of certain employees by ConnectOne may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with ConnectOne.

If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with ConnectOne, ConnectOne’s business could be harmed.

In addition, subject to certain exceptions, ConnectOne has agreed to operate its business in the ordinary course, consistent with past practices, prior to closing.

This could prohibit ConnectOne from taking advantage of a new business opportunity prior to consummation of the merger.

Shareholder litigation could prevent or delay the completion of the merger or otherwise negatively impact the business and operations of ConnectOne.

ConnectOne shareholders and/or FLIC shareholders may file lawsuits against ConnectOne, FLIC and/or the directors and officers of either company in connection with the merger.

If any plaintiff were successful in obtaining an injunction prohibiting ConnectOne or FLIC from completing the merger or any of the other transactions contemplated by the merger agreement, then such injunction may delay or prevent the effectiveness of the merger and could result in significant costs to ConnectOne, including any cost associated with the indemnification of directors and officers or the defense or settlement of any shareholder lawsuits filed in connection with the merger.

Such litigation could have an adverse effect on the consolidated financial condition and consolidated results of operations of ConnectOne and could prevent or delay the completion of the merger.

The combined company may be unable to retain ConnectOne and/or FLIC personnel successfully after the merger is completed.

The success of the merger will depend in part on the combined company’s ability to retain the talents and dedication of key employees currently employed by ConnectOne and FLIC.

It is possible that these employees may decide not to remain with ConnectOne or FLIC, as applicable, while the merger is pending or with the combined company after the merger is consummated.

If ConnectOne is unable to retain key employees, including management, who are critical to the successful integration and future operations of the companies, ConnectOne could face disruptions in their operations, loss of existing customers, loss of key information, expertise or know-how and unanticipated additional recruitment costs.

In addition, following the merger, if key employees terminate their employment, the combined company’s business activities may be adversely affected, and management’s attention may be diverted from successfully hiring suitable replacements, all of which may cause the combined company’s business to suffer.

ConnectOne also may not be able to locate or retain suitable replacements for any key employees who leave the company.

Unanticipated costs relating to the merger could reduce ConnectOne ’ s future earnings per share.

ConnectOne has incurred substantial legal, accounting, financial advisory and other merger-related costs, and ConnectOne’s management has devoted considerable time and effort in connection with the merger.

If the merger is not completed, ConnectOne will bear certain fees and expenses associated with the merger without realizing the benefits of the merger.

If the merger is completed, ConnectOne expects to incur substantial expenses in connection with integrating the business, operations, network, systems, technologies, policies and procedures of the two companies.

The fees and expenses may be significant and could have an adverse impact on ConnectOne’s results of operations.

ConnectOne believes that it has reasonably estimated the likely costs of integrating the operations of ConnectOne and FLIC, and the incremental costs of operating as a combined company.

However, it is possible that unexpected transaction costs such as taxes, fees or professional expenses or unexpected future operating expenses such as increased personnel costs or increased taxes, as well as other types of unanticipated adverse developments, could have a material adverse effect on the results of operations and financial condition of the combined company.

If unexpected costs are incurred, the merger could have a dilutive effect on ConnectOne’s earnings per share.

In other words, if the merger is completed, the earnings per share of ConnectOne common stock could be less than anticipated or even less than if the merger had not been completed.

Issuance of shares of ConnectOne common stock in connection with the merger may adversely affect the market price of ConnectOne common stock.

In connection with the payment of the merger consideration, ConnectOne expects to issue approximately 12 million shares of ConnectOne common stock to FLIC shareholders.

The issuance of these new shares of ConnectOne common stock may result in fluctuations in the market price of ConnectOne's common stock, including a stock price decrease.

Risks Applicable to the Banking Industry Generally:

Recent events impacting the financial services industry.

Recent events impacting the financial services industry, including the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, have resulted in increased volatility and reduced valuations of equity and other securities of banks in the capital markets.

In addition, the Federal Reserve, in order to combat inflation, has employed quantitative tightening in order to reduce the size of its balance sheet, resulting in increased competition and costs for bank deposits and an increased risk of an economic recession.

These recent events have, and could continue to, increase competition for deposits and adversely impact the market price and volatility of the Company’s common stock.

These recent events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business.

We may be impacted by concerns regarding the soundness or creditworthiness of other financial institutions, which can cause substantial disruption within the financial markets and increased expenses.

The cost of resolving the recent bank failures has caused the FDIC to issue additional special assessments and could cause the FDIC to increase premiums or issue additional special assessments in the future.

Our allowance for credit losses may not be adequate to cover actual losses.

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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, such as has been in effect since the first half of 2023, 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.

A period of sustained high 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 as interest rates increase.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors