ConnectOne: An Undervalued Regional Bank
There is still fallout from the regional bank debacle that occurred earlier this year with the collapse of First Republic Bank, Signature and Silicon Valley Bank. Many regional banks have not returned to 52-week highs and appear to be undervalued. One of these is ConnectOne Bancorp Inc. (NASDAQ:CNOB), the holding company for ConnectOne Bank that operates in the New York and New Jersey metropolitan areas.
The bank provides traditional services, such as personal and business checking, money market, savings accounts and internet and mobile banking. It is also a major lender, providing consumer and commercial business loans, including lines of credit, commercial and residential mortgages, home equity, commercial loans and equipment financing.
It also offers real estate loans, including commercial properties, multi-family properties, refinance properties and residential mortgages.
The company also owns BoeFly, which is a financial technology company it acquired in May 2019. BoeFlys online business lending marketplace helps connect small and medium-sized businesses, primarily franchisors and franchisees, with professional loan brokers and lenders across the United States. BoeFly operates as an independent brand and subsidiary of the bank.
The company, which was formerly known as Center Bancorp, changed its name to ConnectOne in July 2014. It is headquartered in Englewood Cliffs, New Jersey and the current market capitalization is $743 million.
Financial results
On July 27, the company reported second-quarter results that showed a slight decrease in operating results. Net income available to common stockholders was $19.9 million, compared with $23.4 million for the first quarter of 2023 and $30.8 million for the prior-year quarter. Earnings per share were 51 cents, down from 59 cents in the first quarter and 78 cents a year ago.
The decrease in net income and earnings per share from the first quarter was primarily due to a decrease in net interest income of $3.2 million and an increase in provision for credit losses of $2 million.
Total assets were $9.7 billion as of June 30, an increase of $79 million from Dec. 31, 2022. The increase in total assets was primarily due to increased cash balances, which were $264 million, an increase of $57 million over the same period. Loans receivable were $8.1 billion, an increase of $49 million from the end of 2022. Total deposits were $7.5 billion, an increase of $182 million.
Total stockholders equity was $1.2 billion as of the end of the second quarter, an increase of $21 million from Dec. 31. The increase in retained earnings of $31 million was the primary reason for the overall increase in stockholders equity. The companys tangible common equity ratio was 9.19% and the tangible book value per share was $22.34. As of Dec. 31, the tangible common equity ratio and tangible book value per share were 9.04% and $21.71, respectively. Total goodwill and other intangible assets were $214.9 million.
ConnectOnes Chairman and CEO Frank Sorrentino said, ConnectOnes operating performance remains strong and stable during this challenging economic environment, reflecting our core values which include a client-first focus and executing with a sense of urgency. Results include, most importantly, increased client deposits, fortification of liquidity sources and a reduction in brokered deposits and uninsured deposit liabilities. Our loan portfolio remained essentially flat, while our net interest margin, although compressing sequentially by 19 basis points, stabilized during the quarter at the approximate 2.80% level. Similarly, noninterest-bearing demand deposits, although down sequentially, remained relatively stable at their current level over the course of the second quarter. Meanwhile, our tangible common equity ratio increased to 9.19%, which is well above peer averages, and our tangible book value per share increased for the 13th consecutive quarter to $22.34. We also took advantage of market conditions during the quarter and repurchased 270,000 shares at an attractive average price of $15.32."
Valuation
Tangible book value per share was $22.34 as of June 30, which puts the stock selling below tangible book value at 0.85 times. GAAP book value is $27.84. The sector average is approximately 1 times book value.
Consensus analyst earnings per share estimates for 2023 are $2.08 and $2.07 for 2024. The current price-earnings ratio based on 2023 estimates is 9.1 compared to a sector median of approximately 10.
There are three Wall Street analysts that cover the company with an average price target of $24, including a high target of $26 and a low target of $23.
The company pays an annualized dividend of 64 cents, which equates to a 3.62% dividend yield. This is roughly in line with industry averages.
Guru trades
Gurus who have added to their ConnectOne positions include Hotchkis & Wiley and Paul Tudor Jones (Trades, Portfolio). An investor who has reduced or sold out of its position is Jim Simons (Trades, Portfolio)' Renaissance Technologies.
Summary
The company appears to be undervalue relative to peers, yet is well capitalized and posting strong return on equity and return on assets.
Sorrentino summarized it best when he said, Looking ahead, we remain well-positioned for the future. We have strong capital and liquidity levels, our credit performance continues to be strong, and we remain sharply focused on taking advantage of growth opportunities as they arise. By leveraging our results-oriented client-centric culture, continuing to invest in our valuable franchise and maintaining our long-standing financial discipline, we believe that ConnectOne is poised for continued long-term profitability.
This article first appeared on GuruFocus.
