UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(Mark One) | ||
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the Fiscal Year Ended December 31, 2017
OR
For the Fiscal Year Ended December 31, 2021 | ||
OR | ||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
For the Transition Period from to |
For the Transition Period from to
Commission File Number: 000-11486
ConnectOne Bancorp, Inc.
(Exact name of registrant as specified in its charter)
New Jersey | 52-1273725 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer
|
Identification Number)
301 Sylvan Avenue
Englewood Cliffs, New Jersey 07632
(Address of Principal Executive Offices) (Zip Code)
201-816-8900
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, no par value | CNOB | NASDAQ |
Depositary Shares (each representing a 1/40th interest in a share of 5.25% Series A Non-Cumulative, perpetual preferred stock) | CNOBP | NASDAQ |
Securities registered pursuant to Section 12(g) of the Exchange Act:None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o☒ No x
☐
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o☐ No x☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Regulation S-T (232,405(232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant has required to submit and post such files.) Yes x☒ No ¨☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K.x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting company or emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large Accelerated Filer | Accelerated Filer | Non-Accelerated | Small Reporting Company |
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared its audit report. Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ or☐ No x
☒
The aggregate market value of the voting and nonvoting common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold or the average bid and ask price of such common equity, as of the last business day of the registrant’sregistrant's most recently completed second fiscal quarter - $557.7$968.8 million.
Shares Outstanding on February 25, 2022 | |
Common Stock, no par value: 39,605,913 shares | |
DOCUMENTS INCORPORATED BY REFERENCE | |
Definitive proxy statement in connection with the 2022 Annual Stockholders Meeting to be filed with the Commission pursuant to Regulation 14A will be incorporated by reference in Part III |
Shares Outstanding on March 6, 2018Common Stock, no par value: 32,119,241 sharesCONNECTONE BANCORP, INC.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive proxy statement in connection with the 2018 Annual Stockholders Meeting to be filed with the Commission pursuant to Regulation 14A will be incorporated by reference in Part III
CONNECTONE BANCORP, INC.
Financial Statements and Supplementary Data: | ||
Information included in or incorporated by reference in this Annual Report on Form 10-K, other filings with the Securities and Exchange Commission, the Company’s press releases or other public statements, contain or may contain forward looking statements. Please refer to a discussion of the Company’s forward lookingforward-looking statements and associated risks in “Item 1 - Business – Forward Looking Statements” and “Item 1A - Risk Factors” in this Annual Report on Form 10-K.
CONNECTONE BANCORP, INC.
FORM 10-K
Item 1. Business
Forward Looking Statements
This report, in Item 1, Item 7 and elsewhere, includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. These forward-looking statements concern the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp, Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) the impact of the COVID-19 pandemic and the government’s response to the pandemic on our operations as well as those of our clients and on the economy generally and in our market area specifically, (2) competitive pressures among depository institutions may increase significantly; (2)(3) changes in the interest rate environment may reduce interest margins; (3)(4) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (4)(5) general economic conditions may be less favorable than expected; (5)(6) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6)(7) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp, Inc. is engaged; (7)(8) changes and trends in the securities markets may adversely impact ConnectOne Bancorp, Inc.; (8)(9) a delayed or incomplete resolution of regulatory issues could adversely impact our planning; (9)(10) difficulties in integrating any businesses that we may acquire, which may increase our expenses and delay the achievement of any benefits that we may expect from such acquisitions; (10)(11) the impact of reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; and (11)(12) the outcome of any future regulatory and legal investigations and proceedings may not be anticipated. Further information on other factors that could affect the financial results of ConnectOne Bancorp, Inc. are included in Item 1A of this Annual Report on Form 10-K and in ConnectOne Bancorp’s other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission’s website athttp://www.sec.gov and/or from ConnectOne Bancorp, Inc. ConnectOne Bancorp, Inc. assumes no obligation to update forward-looking statements at any time.
Historical Development of Business
ConnectOne Bancorp, Inc., (the “Company” and with ConnectOne Bank, “we” or “us”) a one-bank holding company, was incorporated in the State of New Jersey on November 12, 1982 as Center Bancorp, Inc. and commenced operations on May 1, 1983 upon the acquisition of all outstanding shares of capital stock of Union Center National Bank, its then principal subsidiary.
On January 20, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ConnectOne Bancorp, Inc., a New Jersey corporation (“Legacy ConnectOne”). Effective July 1, 2014, the Company completed the merger contemplated by the Merger Agreement (the “Merger”) with Legacy ConnectOne merging with and into the Company, with the Company as the surviving corporation. Also, at closing, the Company changed its name to “ConnectOne Bancorp, Inc.” and changed its NASDAQ trading symbol to “CNOB”. Immediately following the consummation of the Merger, Union Center National Bank merged with and into ConnectOne Bank, a New Jersey-chartered commercial bank (“ConnectOne Bank” or the “Bank”) and a wholly-owned subsidiary of Legacy ConnectOne, with ConnectOne Bank continuing as the surviving bank. Subject
On July 11, 2018, the Company entered into an Agreement and Plan of Merger with Greater Hudson Bank (“GHB”), under which GHB merged with and into ConnectOne Bank, with ConnectOne Bank as the surviving bank. This transaction was consummated effective January 2, 2019. As part of this merger, the Company acquired approximately $0.4 billion in loans, assumed approximately $0.4 billion in deposits and acquired seven branch offices located in Rockland, Orange and Westchester, Counties, New York.
On May 31, 2019, the Company, through the Bank, completed its purchase of New York/Boston-based BoeFly, LLC (“BoeFly”). BoeFly’s online business lending marketplace helps connect small- to medium-size businesses, primarily franchisors and franchisees, with professional loan brokers and lenders across the termsUnited States. BoeFly operates as an independent brand and conditionssubsidiary of the Merger Agreement, each shareBank.
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Table of common stock, no par value per share,Contents
On January 2, 2020, the Company completed its in-market merger with Bergen County, New Jersey based Bancorp of Legacy ConnectOne was convertedNew Jersey, Inc. (“BNJ”), pursuant to which BNJ merged with and into 2.6 sharesthe Company, and BNJ’s bank subsidiary, Bank of New Jersey, merged with and into the Company’s common stock.Bank. All of BNJ’s offices were located in Bergen County, New Jersey. As part of this merger, the Company acquired approximately $0.8 billion in loans and assumed approximately $0.8 billion in deposits.
The Company’s primary activity, at this time, is to act as a holding company for the Bank and its other subsidiaries. As used herein, the term “Parent Corporation” shall refer to the Company on an unconsolidated basis.
The Company owns 100% of the voting shares of Center Bancorp, Inc. Statutory Trust II, through which it issued trust preferred securities. The trust exists for the exclusive purpose of (i) issuing trust securities representing undivided beneficial interests in the assets of the trust; (ii) investing the gross proceeds of the trust securities in $5.2 million of junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with Financial Accounting Standards Board (“FASB”) ASC 810-10 “Consolidation of Variable Interest Entities.” Distributions on the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income. See Note 119 of the Notes to Consolidated Financial Statements.
Except as described above, the Company’s wholly-owned subsidiaries are all included in the Company’s consolidated financial statements. These subsidiaries include BoeFly, an advertising subsidiary;subsidiary, an insurance subsidiary, and various investment subsidiaries which hold, maintain and manage investment assets for the Company. The Company’s subsidiaries also include a real estate investmentReal Estate Investment trust (the “REIT”) which holds a portion of the Company’s real estate loan portfolio. All subsidiaries mentioned above are directly or indirectly wholly owned by the Company, except that the Company owns less than 100% of the preferred stock of the REIT. A real estate investmentREIT trust must have 100 or more shareholders. The REIT has issued less than 20% of its outstanding non-voting preferred stock to individuals, primarily Bank personnel and directors.
SEC Reports and Corporate Governance
The Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto available on its website atwww.ConnectOneBank.comhttps://www.connectonebank.com without charge as soon as reasonably practicable after filing or furnishing them to the SEC. Also available on the website are the Company’s corporate code of conduct that applies to all of the Company’s employees, including principal officers and directors, and charters for the Audit/Risk Committee, Nominating and Corporate Governance Committee and Compensation Committee.Committee and the Company’s Corporate Governance Guidelines..
Additionally, the Company will provide without charge, a copy of its Annual Report on Form 10-K to any shareholder by mail. Requests should be sent to ConnectOne Bancorp, Inc., Attention: ShareholderInvestor Relations, 301 Sylvan Avenue, Englewood Cliffs, New Jersey 07632.
Narrative Description of the Business
We areConnectOne Bancorp, Inc. is a New Jersey/New York metro areamodern financial services company with over $8.1 billion in assets. It operates through its bank subsidiary, ConnectOne Bank and the Bank’s fintech subsidiary Boefly.
ConnectOne Bank is a high-performing commercial bank offering a full suite of deposit and loan products and services to the general public and, in particular,primarily, to small and mid-sized businesses, local professionals and individuals residing, working and conducting business in the Northern New Jersey the New York Metropolitan area and the South Florida market served by our trade area. Our mission isWest Palm Beach Office. The bank's continuous investments in technology coupled with top talent allow ConnectOne to prove that putting people firstoperate a "branch-lite" model, making for a highly efficient operating environment.
BoeFly, a wholly owned subsidiary of Connectone Bank, is a better way to do business.fintech marketplace that connects borrowers in the franchise space with funding solutions through a network of partner banks.
Our talented, diverse team of financial expertsMarket Area
ConnectOne Bank's offices are located primarily in the New York metro market and relationship specialists know thatspan New Jersey, New York City, Long Island, and the demands of a successful businessHudson Valley, including Rockland, Orange, and Westchester counties. Through high tech tools and service, ConnectOne Bank is able to extend far beyond '9-5.' A big partits reach supporting clients as they move into new markets, such as South Florida where we recently opened an office in West Palm Beach. Our market area includes some of the trust we've earned from entrepreneurs and business owners stems from our firsthand knowledge ofmost affluent markets in the businesses and communities we serve. That trust extends to the families we help thrive, from helping them refinance their homes to being able to easily access accounts wherever and whenever they're needed.
While we expect to take an opportunistic approach to acquisitions, considering opportunities to purchase or merge with whole institutions, banking offices or lines of business that complement our existing strategy, the bulk of our future growth may be organic. OurUnited States. The Bank's goal is to open new offices in the counties contained incontinue to expand and do business to support our broader trade area discussed below. However, we do not believe that we need to establish a physical location in each market that we serve. We believe that advancesclients as they grow. Advances in technology have created new delivery channels whichthat allow us to service clients and maintain business relationships with a reduced-branch model, establishing regional offices that serve as business hubs. We believeThe Bank's experience has shown that the key to client acquisition and retention is attracting quality business relationship officers who will frequently go to the client, rather than having the client come to us.
Our Market Area
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Our bankingBoeFly operates out of its main offices are located in Bergen, Union, Morris, Essex, Hudson, MercerBoston, Massachusetts and Monmouth Counties in New Jersey and in the borough of Manhattan, in New York, City, and we expect to open our newest banking office in Melville, Suffolk County New York in the first quarter of 2018. Our market area includes some of the most affluent markets in the United States. We also attracthas a nationwide presence through its digital business and clients from broader regions, including the other boroughs of New York City as well as Westchester County and Long Island in New York State.marketplace.
Products and Services
We derive a majority of our revenue from net interest income (i.e., the difference between the interest we receive on our loans and securities and the interest we pay on deposits and other borrowings). We offer a broad range of deposit and loan products. In addition, to attract the business of consumer and business clients, we also provide a broad array of other banking services. Products and services provided include personal and business checking accounts, retirement accounts, money market accounts, time and savings accounts, credit cards, wire transfers, access to automated teller services, internet banking, Treasury Direct, ACHAutomated Clearing House (“ACH”) origination, lockbox services and mobile banking by phone. In addition, we offer safe deposit boxes. The Bank also offers remote deposit capture banking for both retail and business clients, providing the ability to electronically scan and transmit checks for deposit, reducing time and cost.
Noninterest
Non-interest demand deposit products include “Totally Free Checking” and “Simply Better Checking” for retailConsumer clients and “Small Business Checking” and “Analysis Checking” for commercial clients. Interest-bearing checking accounts require minimum balances for both retailConsumer and commercial clients and include “Consumer Interest Checking” and “Business Interest Checking”. Money market accounts consist of products that provide a market rate of interest to depositors but offer a limited number of preauthorized withdrawals.depositors. Our savings accounts consist of statement type accounts. Time deposits consist of certificates of deposit, including those held in IRA accounts, generally with initial maturities ranging from 731 days to 60 months and brokered certificates of deposit, which we use for asset liability management purposes and to supplement other sources of funding. CDARS/ICS Reciprocal deposits are offered based on the Bank’s participation in the IntraFi Network LLC network, formerly known as Promontory Interfinancial Network, LLC network.Network. Clients, who are FDICFederal Deposit Insurance Corporation (“FDIC”) insurance sensitive, are able to place large dollar deposits with the Company and the Company usesutilizes CDARS to place those funds into certificates of deposit issued by other banks in the Network. This occurs in increments of less than the FDIC insurance limits so that both the principal and interest are eligible for FDIC insurance coverage in amounts larger than the standardinsured dollar amount. TheUnless certain conditions are satisfied, the FDIC currently considers these funds as brokered deposits.
Deposits serve as the primary source of funding for our interest-earning assets, but also generate noninterest revenue through insufficient funds fees, stop payment fees, wire transfer fees, safe deposit rental fees, debit card income, including foreign ATM fees and credit and debit card interchange, and other miscellaneous fees. In addition, the Bank generates additional noninterest revenue associated with residential, commercial and Small Business Administration (“SBA”) loan originations and sales, loan servicing, late fees and merchant services.
We offer personalconsumer and commercial business loans on a secured and unsecured basis, revolving lines of credit, commercial mortgage loans, and residential mortgages on both primary and secondary residences, home equity loans, bridge loans and other personal purpose loans. However, we are not and have not historically been a participant in the sub-prime lending market.
Commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, inventory and equipment, and liensmortgages filed on commercial and residential real estate.Included in commercial loans are loans secured by New York City taxi medallions. As of December 31, 2017, the carrying value of our taxi medallion portfolio totaled $46.8 million, all of which was re-designated as held-for-investment. All of our taxi medallion loans are secured by New York City taxi medallions.
Commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include loans secured by first liens on completed commercial properties, including multi-family properties, to purchase or refinance such properties. Residential mortgages include loans secured by first liens on 1-4 family residential real estate and are generally made to existing clients of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences. Consumer loans are made to individuals who qualify for auto loans, cash reserve, credit cards and installment loans.
During 2020 and 2021, we participated in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) created under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP provided funds to guarantee forgivable loans originated by depository institutions to eligible small businesses through the SBA’s 7(a) loan guaranty program. These loans are 100% federally guaranteed (principal and interest) and currently not subject to any allocation of allowance for credit losses. An eligible business could apply under the PPP during the applicable covered period and receive a loan up to 2.5 times its average monthly “payroll costs” limited to a loan amount of $10.0 million. The proceeds of the loan could be used for payroll (excluding individual employee compensation over $100,000 per year), mortgage, interest, rent, insurance, utilities and other qualifying expenses. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term (or five-year loan term for loans made after June 5, 2020) to maturity; and (c) principal and interest payments deferred until the date on which the SBA remits the loan forgiveness amount to the borrower’s lender or, alternatively, notifies the lender no loan forgiveness is allowed. If the borrower did not submit a loan forgiveness application to the lender within 10 months following the end of the 24-week loan forgiveness covered period (or the 8-week loan forgiveness covered period with respect to loans made prior to June 5, 2020 if such covered period is elected by the borrower), the borrower would begin paying principal and interest on the PPP loan immediately after the 10-month period.
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On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law. Among other things, the Economic Aid Act extended the PPP through March 31, 2021 and allocated additional funds for new PPP loans, to be guaranteed by the SBA. The extension included an authorization to make new PPP loans to existing PPP loan borrowers, and to make loans to parties that did not previously obtain a PPP loan. The Company participated in the extended PPP. Loans originated under the extended PPP have substantially the same terms as under the original PPP. As of December 31, 2021, the Company had $93.1 million in total PPP loans outstanding and not yet forgiven.
The Board of Directors has approved a loancredit policy granting designated lending authorities to specific officers of the Bank. Those officers are comprised of the Chief Executive Officer, Chief Lending Officer,President, Chief Credit Officer, Senior Lending Officer, Team Leaders and the Consumer Loan Officers. All loan approvals require the signatures of a minimum of two officers. The Senior Lending Group (Chief Executive Officer, President, Chief LendingCredit Officer and Chief CreditSenior Lending Officer) can approve loans up to $25$35 million in aggregate loan exposure with no policy exceptions and which do not exceed 65% ofup to $30 million with policy exceptions. Furthermore, the LegalSenior Lending Limit of the Bank (currently $75.1Group has authority to approve unsecured loan amounts without policy exceptions up to $10 million as of December 31, 2017 for most loans), provided that (i) the credit does not involveand up to $5 million with an exception to policy and a principal balance greater than $7.5 million or $20 million in all credit outstanding to the borrower in the aggregate, (ii) the credit does not exceed certain dollar amount thresholds set forth in our policy, which varies by loan type, and (iii) the credit is not extended to an insider of the Bank. The Board Loan Committee (which includes the Chief Executive Officer and four other Board members) approves credits that are both exceptions to policy and are above prescribed amounts related to loan type and collateral.exception. Loans to insiders must be approved by the entire Board.
The Bank’s lending policies generally provide for lending within our primary trade area. However, the Bank will make loans to persons outside of our primary trade area when we deem it prudent to do so. In an effort toTo promote a high degree of asset quality, the Bank focuses primarily upon offering secured loans. However, the Bank does make short-term unsecured loans to borrowers with highhigher net worth and income profiles. The Bank generally requires loan clients to maintain deposit accounts with the Bank. In addition, the Bank generally provides for a minimum required rate of interest in its variable rate loans. The Bank’s legal lending limit to any one borrower is 15% of the Bank’s capital base (defined as tangible equity plus the allowance for loancredit losses) for most loans ($75.1145.9 million) and 25% of the capital base for loans secured by readily marketable collateral ($125.2243.2 million). AtAs of December 31, 2017,2021, the Bank’s largest committed relationship (to several affiliated borrowers) totaled $69.6 million. The Bank’swas $103.2 million and single largest single loan outstanding at December 31, 2017 was $35.0$70.5 million.
Our business model includes using industry best practices for community banks, including personalized service, state-of-the-art technology and extended hours. We believe that this will generate deposit accounts with somewhat larger average balances than are found at many other financial institutions. We also use pricing techniques in our efforts to attract banking relationships having larger than average balances.
Competition
The banking business is highly competitive. We face substantial immediate competition and potential future competition both in attracting deposits and in originating loans. We compete with numerous commercial banks, savings banks and savings and loan associations, many of which have assets, capital and lending limits larger than those that we have. Other competitors include money market mutual funds, mortgage bankers, insurance companies, stock brokerage firms, regulated small loan companies, credit unions and issuers of commercial paper and other securities. 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.
Our larger competitors have greater financial resources to finance wide-ranging advertising campaigns. Additionally, we endeavor to compete for business by providing high quality, personal service to clients, client access to our decision-makers and competitive interest rates and fees. We seek to hire and retain quality employees who desire greater responsibility than may be available working for a larger employer.
Employees and Human Capital Resources
Our employees are one of our greatest assets and we believe they provide us with an advantage over our competitors. We believe we have a talented, diverse team of financial experts and relationship specialists who understand the demands of a successful business and are prepared to meet them.
As of December 31, 2021, we had 434 full-time employees, and 4 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.
We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development are advanced through ongoing performance and development conversations with employees, internally developed training programs, customized corporate training engagements and educational reimbursement programs. We leverage a combination of customized content and external resources to address required banking compliance, skills training for new roles, and development of people management skills. We continuously assess any skill gaps and are gearing learning for the banking positions of the future.
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The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through our technology and teamwork, we were able to transition, over a short period of time, substantially all of our non-branch employees to a remote working environment while still servicing the needs of our clients. Branch locations have operated in a variety of ways: closed to lobby traffic, in person banking by appointment only, curbside banking and always with COVID safety protocols at the forefront. When we were able to resume substantial in office employee participation, we took a number of steps to protect the health and safety of our employees, including adhering to CDC and state guidelines for in office work (limiting occupancy in the buildings, social distancing, mask requirements, limiting in person meetings) We also developed COVID-19 protocols as a resources for all employees in the event someone was exposed. Currently, the Company is operating under a Company-wide “return-to-work” policy, and remains in compliance with any and all government requirements related to the pandemic.
Employee retention helps us operate efficiently and is key to our ability to compete against larger competitors. We focus on promoting employees from within and leveraging their knowledge of the organization as we continue to grow our Bank. In 2021, 66 employees were promoted into new roles.
SUPERVISION AND REGULATION
The banking industry is highly regulated. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to deploy assets and maximize income. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the Company or the Bank. It is intended only to briefly summarize some material provisions.
Bank Holding Company Regulation
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “Holding Company Act”). As a bank holding company, the Company is supervised by the Board of Governors of the Federal Reserve System (“FRB”) and is required to file reports with the FRB and provide such additional information as the FRB may require. The Company and its subsidiaries are subject to examination by the FRB.
The Holding Company Act prohibits the Company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks, except that it may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking “as to be a proper incident thereto.” The Holding Company Act requires prior approval by the FRB of the acquisition by the Company of more than 5% of the voting stock of any other bank. Satisfactory capital ratios and Community Reinvestment Act ratings and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The policy of the FRB, embodied in FRB regulations, provides that a bank holding company is expected to act as a source of financial and managerial strength to its subsidiary bankbank(s) and to commit resources to support the subsidiary bankbank(s) in circumstances in which it might not do so absent that policy.
As a New Jersey-charted commercial bank and an FDIC-insured institution, acquisitions by the Bank require approval of the New Jersey Department of Banking and Insurance (the “Banking Department”) and the FDIC, an agency of the federal government. The Holding Company Act does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. The Gramm-Leach-Bliley Act, discussed below, allows the Company to expand into insurance, securities, merchant banking activities, and other activities that are financial in nature, in certain circumstances.
Regulation of Bank Subsidiary
The operations of the Bank are subject to requirements and restrictions under federal law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted, and limitations on the types of investments that may be made and the types of services which may be offered. Various consumer laws and regulations also affect the operations of the Bank. There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, which govern the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding company’s non-bank subsidiaries and affiliates. Under federal law, a bank subsidiary may only make loans or extensions of credit to, or invest in the securities of, its parent or the non-bank subsidiaries of its parent (other than direct subsidiaries of such bank which are not financial subsidiaries) or to any affiliate, or take their securities as collateral for loans to any borrower, upon satisfaction of various regulatory criteria, including specific collateral loan to value requirements.
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The Dodd-Frank Act
The Dodd-Frank Act, adopted in 2010, will continue to have a broad impact on the financial services industry, as a result of the significant regulatory and compliance changes made by the Dodd-Frank Act, including, among other things, (i) enhanced resolution authority over troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal
regulatory agencies, including the Financial Stability Oversight Council, the FRB, the Office of the Comptroller of the Currency and the FDIC. A summary of certain provisions of the Dodd-Frank Act is set forth below:
• | Minimum Capital Requirements. The Dodd-Frank Act | |
• | The Consumer Financial Protection Bureau (“Bureau”). The Dodd-Frank Act created the Bureau. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against state-chartered institutions. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Institutions with $10 billion or less in assets, such as the Bank, will continue to be examined for compliance with the consumer laws by their primary bank regulators. | |
• | Deposit Insurance. The Dodd-Frank Act | |
• | Shareholder Votes. The Dodd-Frank Act requires publicly traded companies like the Company to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments in certain circumstances. The Dodd-Frank Act also authorizes the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy materials. The SEC has not yet adopted such rules. |
Although a significant number of the rules and regulations mandated by the Dodd-Frank Act have been finalized, many of the new requirements called for have yet to be fully implemented and will likely be subject to implementing regulations over the course of several years. In addition, some of the requirements of the Dodd-Frank Act that were implemented have already been revised. See “Economic Growth, Regulatory Relief and Consumer Protection Act” below. Given the uncertainty associated with the manner in whichway the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements (which, in turn, could require the Company and the Bank to seek additional capital) or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
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Economic Growth, Regulatory Relief and Consumer Protection Act.
The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), adopted in May of 2018, was intended to provide regulatory relief to midsized and regional banks. While many of its provisions are aimed at larger institutions, such as raising the threshold to be considered a systemically important financial institution to $250 billion in assets from $50 billion in assets, many of its provisions will provide regulatory relief to those institutions with $10 billion or more in assets, as well as to those institutions with less than $10 billion in assets. Among other things, the EGRRCPA increased the asset threshold for depository institutions and holding companies to perform stress tests required under Dodd Frank from $10 billion to $250 billion, exempted institutions with less than $10 billion in consolidated assets from the Volcker Rule, raised the threshold for the requirement that publicly traded holding companies have a risk committee from $10 billion in consolidated assets to $50 billion in consolidated assets, directed the federal banking agencies to adopt a “community bank leverage ratio”, applicable to institutions and holding companies with less than $10 billion in assets, and to provide that compliance with the new ratio would be deemed compliance with all capital requirements applicable to the institution or holding company (See “-Capital Adequacy Guidelines”), and provided that residential mortgage loans meeting certain criteria and originated by institutions with less than $10 billion in total assets will be deemed to meet the “ability to repay rule” under the Truth in Lending Act. In addition, the EGRRCPA limited the definition of loans that would be subject to the higher risk weighting applicable to High Volatility Commercial Real Estate.
Certain of the regulations needed to implement the EGRRCPA have yet to be promulgated by the federal banking agencies, and others have not been fully implemented or enforced and so it is still uncertain how full implementation of the EGRRCPA will affect the Company and the Bank.
Regulation W
Regulation W codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions. Affiliates of a bank include, among other entities, the bank’s holding company and companies that are under common control with the bank. The Company is considered to be an affiliate of the Bank. In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates:
• | to an amount equal to 10% of the bank’s capital and surplus, in the case of covered transactions with any one affiliate; and | |
• | to an amount equal to 20% of the bank’s capital and surplus, in the case of covered transactions with all |
In addition, a bank and its subsidiaries may engage in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the bank or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A “covered transaction” includes:
• | a loan or extension of credit to an affiliate; | |
• | a purchase of, or an investment in, securities issued by an affiliate; | |
• | a purchase of assets from an affiliate, with some exceptions; | |
• | the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; and | |
• | the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. |
Further, under Regulation W:
• | a bank and its subsidiaries may not purchase a low-quality asset from an affiliate; | |
• | covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and | |
• | with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by certain types of collateral with a market value ranging from 100% to 130% |
Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the FRB decides to treat these subsidiaries as affiliates.
FDICIA
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), each federal banking agency has promulgated regulations, specifying the levels at which an insured depository institution such as the Bank would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution. To qualify to engage in financial activities under the Gramm-Leach-Bliley Act, all depository institutions must be “well capitalized.”
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The FDIC’s regulations implementing these provisions of FDICIA provide that an institution will be classified as “well capitalized” if it (i) has a total risk-based capital ratio of at least 10.0%, (ii) has a Tier 1 risk-based capital ratio of at least 8.0%, (iii) has a Tier 1 leverage ratio of at least 5.0%, (iv) has a common equity Tier 1 capital ratio of at least 6.5%, and (v) meets certain other requirements. An institution will be classified as “adequately capitalized” if it (i) has a total risk-based capital ratio of at least 8.0%, (ii) has a Tier 1 risk-based capital ratio of at least 6.0%, (iii) has a Tier 1 leverage ratio of at least 4.0%, has a common equity Tier 1 capital ratio of at least 4.5%, and (v) does not meet the definition of “well capitalized.” An institution will be classified as “undercapitalized” if it (i) has a total risk-based capital ratio of less than 8.0%, (ii) has a Tier 1 risk-based capital ratio of less than 6.0%, (iii) has a Tier 1 leverage ratio of less than 4.0%, or (iv) has a common equity Tier 1 capital ratio of less than 4.5%. An institution will be classified as “significantly undercapitalized” if it (i) has a total risk-based capital ratio of less than 6.0%, (ii) has a Tier 1 risk-based capital ratio of less than 4.0%, (iii) has a Tier 1 leverage ratio of less than 3.0%, or (iv) has a common equity Tier 1 capital ratio of less 3.0%. An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets ratio that is equal to or less than 2.0%. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination rating.
In addition, significant provisions of FDICIA required federal banking regulators to impose standards in a number of other important areas to assure bank safety and soundness, including internal controls, information systems and internal audit systems, credit underwriting, asset growth, compensation, loan documentation and interest rate exposure.
Capital Adequacy Guidelines
In December 2010 and January 2011, the Basel Committee on Banking Supervision (the “Basel Committee”) published the final texts of reforms on capital and liquidity generally referred to as “Basel III.” In July 2013, the FRB, the FDIC and the Comptroller of the Currency adopted final rules (the “New Rules”), which implement certain provisions of Basel III and the Dodd-Frank Act. The New Rules replaced the existing general risk-based capital rules of the various banking agencies with a single, integrated regulatory capital framework. The New Rules require higher capital cushions and more stringent criteria for what qualifies as regulatory capital. The New Rules were effective for the Bank and the Company on January 1, 2015.
Under the New Rules, the Company and the Bank are required to maintain the following minimum capital ratios, expressed as a percentage of risk-weighted assets:
· | Common Equity Tier 1 Capital Ratio of 4.5% | |
· | Tier 1 Capital Ratio (CET1 capital plus “Additional Tier 1 capital”) of 6.0%; and | |
· | Total Capital Ratio (Tier 1 capital plus Tier 2 capital) of 8.0%. |
In addition, the Company and the Bank will be subject to a leverage ratio of 4% (calculated as Tier 1 capital to average consolidated assets as reported on the consolidated financial statements).
The New Rules also require a “capital conservation buffer.” When fully phased in on January 1 2019,Under this provision, the Company and the Bank will beare required to maintain a 2.5% capital conservation buffer, which is composed entirely of CET1, on top of the minimum risk-weighted asset ratios described above, resulting in the following minimum capital ratios:
· | CET1 of 7%; | |
· | Tier 1 Capital Ratio of 8.5%; and | |
· | Total Capital Ratio of 10.5%. |
The purpose of the capital conservation buffer is to absorb losses during periods of economic stress. Banking institutions with a CET1, Tier 1 Capital Ratio and Total Capital Ratio above the minimum set forth above but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall.
The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level, and it increasesincreased by 0.625% on each subsequent January 1 until it reacheswas fully phased in at 2.5% on January 1, 2019.
The New Rules provide for several deductions from and adjustments to CET1, which are being phased in between January 1, 2015 and January 1, 2018.CET1. For example, mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in common equity issued by nonconsolidated financial entities must be deducted from CET1 to the extent that any one of those categories exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
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Under the New Rules, banking organizations such as the Company and the Bank may make a one-time permanent election regarding the treatment of accumulated other comprehensive income items in determining regulatory capital ratios. Effective as of January 1, 2015, the Company and the Bank elected to exclude accumulated other comprehensive income items for purposes of determining regulatory capital.
While the New Rules generally require the phase-out of non-qualifying capital instruments such as trust preferred securities and cumulative perpetual preferred stock, holding companies with less than $15 billion in total consolidated assets as of December 31, 2009, such as the Company, may permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in Additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.
The New Rules prescribe a standardized approach for calculating risk-weighted assets. Depending on the nature of the assets, the risk categories generally range from 0% for U.S. Government and agency securities, to 600% for certain equity exposures, and result in higher risk weights for a variety of asset categories. In addition, the New Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.
Consistent with the Dodd-Frank Act, the New Rules adopt alternatives to credit ratings for calculating the risk-weighting for certain assets.
In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”). Under the CARES Act, the effective date for the implementation of ASU No. 2016-13 was delayed until the earlier of the end of the health crises caused by the COVID-19 Pandemic or December 31, 2020. The Economic Aid Act then further delayed implementation until the earlier of the end of the health crises caused by the COVID-19 Pandemic or January 1, 2022. The final rule also provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. The Company adopted the CECL standard effective January 1, 2021.
On September 17, 2019, the federal banking agencies issued a final rule providing simplified capital requirements for certain community banking organizations (banks and holding companies) with less than $10 billion in total consolidated assets, implementing provisions of EGRRCPA discussed above. Under the rule, a qualifying community banking organization would be eligible to elect the community bank leverage ratio framework or continue to measure capital under the existing Basel III requirements set forth in the New Rules. The new rule took effect January 1, 2020, and qualifying community banking organizations could elect to opt into the new community bank leverage ratio (“CBLR”) in their call report for the first quarter of 2020.
A qualifying community banking organization (“QCBO”) is defined as a bank, a savings association, a bank holding company or a savings and loan holding company with:
· | a leverage capital ratio of greater than 9.0%; |
· | total consolidated assets of less than $10.0 billion; |
· | total off-balance sheet exposures (excluding derivatives other than credit derivatives and unconditionally cancelable commitments) of 25% or less of total consolidated assets; and |
· | total trading assets and trading liabilities of 5% or less of total consolidated assets. |
A QCBO opting into the CBLR must maintain a CBLR of 9.0%, subject to a two-quarter grace period to come back into compliance, provided that the QCBO maintains a leverage ratio of more than 8.0% during the grace period. A QCBO failing to satisfy these requirements must comply with the Basel III requirements as implemented by the New Rules. The numerator of the CBLR is Tier 1 capital, as calculated under present rules. The denominator of the CBLR is the QCBO’s average assets, calculated in accordance with the QCBO’s Call Report instructions and less assets deducted from Tier 1 capital.
The Company and the Bank have elected not to opt into the CBLR.
Federal Deposit Insurance and Premiums
Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF.
The assessment base for deposit insurance premiums is an institution’s average consolidated total assets minus average tangible equity. In connection with adopting this assessment base calculation, the FDIC lowered total base assessment rates to between 2.5 and 9 basis points for banks in the lowest risk category, and 30 to 45 basis points for banks in the highest risk category. The Company paid $3.1$2.9 million and $4.0 million in total FDIC assessments in 2017, as compared to $2.4 million in 2016.2021 and 2020, respectively.
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Pursuant to the Dodd-Frank Act, the
The FDIC has established 2.0% as thea designated reserve ratio (DRR), that is, the ratio of the DIF to insured deposits. The FDIC has adopted a plan under which it will meet the statutory minimum DRRdeposits, of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act.. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. The FDIC has not yet announced how it will implement this offset.
In addition to deposit insurance assessments, the FDIC is required to continue to collect from institutions payments for the servicing of obligations of the Financing Corporation (“FICO”) that were issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding. The Bank paid a FICO premium of $210 thousand in 2017, as compared to $209 thousand in 2016.
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “Modernization Act”):
· | allows bank holding companies meeting management, capital, and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than previously was permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies, if the bank holding company elects to become a financial holding company. Thereafter it may engage in certain financial activities without further approvals; | |
· | allows insurers and other financial services companies to acquire banks; | |
· | removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and | |
· | establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. |
The Modernization Act also modified other financial laws, including laws related to financial privacy and community reinvestment. The Company has elected not to become a financial holding company.
Community Reinvestment Act
Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, an insured depository institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including lowlow- and moderate incomemoderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examination of every bank, to assess the bank’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such bank.
USA PATRIOT Act
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) gives the federal government powers to address terrorist threats through domestic security measures, surveillance powers, information sharing, and anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, the USA PATRIOT Act encourages information-sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of the USA PATRIOT Act impose affirmative obligations on a broad range of financial institutions, including banks, thrift institutions, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.
Among other requirements, the USA PATRIOT Act imposes the following requirements with respect to financial institutions:
· | All financial institutions must establish anti-money laundering programs that include, at a minimum: (i) internal policies, procedures, and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; and (iv) an independent audit function to test the anti-money laundering program. | |
· | The Secretary of the Department of Treasury, in conjunction with other bank regulators, is authorized to issue regulations that provide for minimum standards with respect to | |
· | Financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) are required to establish appropriate, specific and, |
where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. |
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· | ||
Financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain record keeping obligations with respect to correspondent accounts of foreign banks. | ||
· | Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications. |
The United States Treasury Department has issued a number of implementing regulations which address various requirements of the USA PATRIOT Act and are applicable to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers.clients.
Loans to Related Parties
The Company’s authority to extend credit to its directors and executive officers, as well as to entities controlled by such persons, is currently governed by the requirements of the Sarbanes-Oxley Act of 2002 and Regulation O promulgated by the FRB. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. In addition, the Bank’s Board of Directors must approve all extensions of credit to insiders.
Dividend Restrictions
The Parent Corporation is a legal entity separate and distinct from the Bank. Virtually all of the revenue of the Parent Corporation available for payment of dividends on its capital stock will result from amounts paid to the Parent Corporation by the Bank. All such dividends are subject to the laws of the State of New Jersey, the Banking Act, the Federal Deposit Insurance Act (“FDIA”) and the regulation of the New JerseyBanking Department of Banking and Insurance and of the FDIC.
Under the New Jersey Corporation Act, the Parent Corporation is permitted to pay cash dividends provided that the payment does not leave us insolvent. As a bank holding company under the BHCA, we would be prohibited from paying cash dividends if we are not in compliance with any capital requirements applicable to us.us, including our required capital conservation buffer. However, as a practical matter, for so long as our major operations consist of ownership of the Bank, the Bank will remain our source of dividend payments, and our ability to pay dividends will be subject to any restrictions applicable to the Bank.
The Parent Corporation has 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, we may not pay a dividend on our common stock or repurchase shares of our common stock.
Under the New Jersey Banking Act of 1948, as amended, dividends may be paid by the Bank only if, after the payment of the dividend, the capital stock of the Bank will be unimpaired and either the Bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the Bank’s surplus. The payment of dividends is also dependent upon the Bank’s ability to maintain adequate capital ratios pursuant to applicable regulatory requirements.
The FRB has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the FRB’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. FRB regulations also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized, and under regulations implementing the Basel III accord, a bank holding company’s ability to pay cash dividends may be impaired if it fails to satisfy certain capital buffer requirements. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.
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Item 1A. Risk Factors
An investment in our common stocksecurities 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 common stock.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 common stocksecurities may decline, and stockholders may lose part or all of their investment in our common stock.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 | to credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy and retail industries, but across other industries as well. As of December 31, 2021, the Bank had 1 loan on deferral for $0.5 million. Although nearly all of the loans receiving deferrals during 2021 have returned to normal repayment cycles, we can give you no assurance that these borrowers will be able to sustain repayment of their credits, or that other borrowers will not need/seek payment deferrals; |
o | declines in collateral values; |
o | third party disruptions, including outages at network providers and other suppliers; |
o | increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and |
o | operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions. |
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 customerclient relationships and to hire, train and manage our employees.
We may need to raise additional capital to execute our growth orientedgrowth-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. In addition, the implementation of the Basel III regulatory capital requirements may require us to increase our regulatory capital ratios and raise additional capital. 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 customersclients or a significant default by our customersclients would materially and adversely affect us.
AtAs of December 31, 2017,2021, we had $3.1$5.3 billion of commercial real estate loans (nonowner-occupied, owner-occupied and multifamily), including commercial construction loans, which represented 73.7%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 568%468% of total risk-based capital.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 they aremay be more susceptible to the general impact on the economic environment affecting those operating companies as well as the real estate.
AlthoughThe impact of the economy in our marketCOVID-19 pandemic on the metropolitan New York area generally, and thecommercial real estate market is uncertain, causing volatility in particular, is growing, we can give you no assurance that it will continue to grow or that the rate of growth will accelerate.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 effectingaffecting the deductibility of state and local taxes and mortgage interest could reduce or halt growth innegatively 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 loancredit 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 portfolioportfolio.
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, 2017,2021, we had $2.6$4.7 billion in commercial real estate loans outstanding. Approximately 67%58.5% of the loans, or $1.7$2.8 billion, had been originated in the past three years. Our limited experience with these loans does not provide us with a significant payment history pattern with which to judge future collectability. 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 significant credit exposure ($46.826.2 million carrying value as of December 31, 2017)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 basedtechnology-based ride share companies such as Uber and Lyft.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. The entire taxi medallion portfolio was designated as nonaccrual, and the entire portfolio has been re-designated as loans held-for-investment, reflecting reduced interest by purchasers in smaller portfolios of loans secured by taxi medallions, such as ours. 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 tosmall-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 tosmall-to medium-sized businesses. These small tosmall-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 tosmall-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 customersclients and caring about our customersclients 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 from other financial institutions 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.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. AtAs of December 31, 2017,2021, governmental and municipal deposits accounted for approximately $358.8$691.9 million in deposits. The newly elected 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 ownedstate-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 ownedstate-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 inon 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 originationsorigination 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. The liquidity issues have been particularly acute for regional and community banks, as many of the larger financial institutions have significantly curtailed their lending to regional and community banks to reduce their exposure to the risks of other banks. In addition, many of the larger correspondent lenders have reduced or even eliminated federal funds lines for their correspondent customers. 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, 2017,2021, we had approximately $435.3$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 other-than-temporary.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,” beginning in 2016, banks and bank holding companies are be required to maintain a capital conservation buffer on top of minimum risk-weighted asset ratios. When fully phased in on January 1, 2019, theThe capital conservation buffer will beis 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.
If we pursue acquisitions, weWe have grown and may heighten the riskscontinue to our operations and financial condition.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 extentoperations 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 undertake acquisitions, wewill be successful in this strategy.
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We may experiencebe challenged to successfully manage our business as a result of the effects of higher operating expenses relativestrain on management and operations that may result from growth. The ability to operating income from the new operations, which may have a material adverse effectmanage 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, of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management’s time and attention and general disruptionrequire us to our business. To the extent that we grow through acquisitions, we cannot assure youraise additional capital. No assurance can be given that we will be able to adequately and profitably manage this growth. Acquiring other banks and businesses involve similar risksraise any required capital, or that it will be able to those commonly associated with branching, but may also involve additional risks, including: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 financial institutionstarget 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 loancredit 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.
We may be adversely affected by recent changes in U.S. tax laws.
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Changes in tax laws contained in the Tax Cuts and Jobs Act, enacted in December 2017, include a numberTable of provisions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. Changes include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility of property taxes and state and local income taxes.Contents
The recentCompany 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 tax lawsCompany 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 an adversedirected 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 market for,Company’s financial assets and valuationliabilities that are based on or are linked to LIBOR, the Company’s results of residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments.operations or financial condition. In addition, these recent changesreforms may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes, suchrequire extensive changes to the contracts that govern these LIBOR based products, as New Jersey. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in the loan portfolio may be adversely impactedwell as a result of the changing economics of home ownership, which could require an increase in the provision for loan losses, which would reduce profitability and could have a material adverse effect on the Company’s business, financial conditionsystems and results of operations.processes.
Risks Applicable to the Banking Industry Generally:
Our allowance for loancredit losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loancredit 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 for loan losses may not be sufficient to cover losses inherent in our loan portfolio. Further, state and federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses and may require an increase in our allowance for loancredit losses.
Although we believe that our allowance for loan losses is adequate Further increases to cover known and probable incurred losses included in the portfolio, we cannot assure you that we will not further increase the allowance for loan losses or that our regulators will not require us to increase this allowance. Either of these occurrences 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, 2017,2021, a 200 basis200-basis point increase in interest rates would have resulted in our economic value of portfolio equity decliningincreasing by approximately $72.4$2.9 million or 12.83%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. Uncertainty remains as to the ultimate impact ofUltimately, final implementation the Dodd-Frank Act which 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:
· | A new independent consumer financial protection bureau was established within the Federal Reserve, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. However, |
· | The act also imposes new obligations on originators of residential mortgage loans, such as the Bank. Among other things, originators must make a reasonable and good faith determination based on documented information that a borrower has a reasonable ability to repay a particular mortgage loan over the long term. If the originator cannot meet this standard, the loan may be unenforceable in foreclosure proceedings. The act contains an exception from this ability to repay rule for “qualified mortgages”, which are deemed to satisfy the rule, but does not define the term, and left authority to the Consumer Financial Protection Bureau (“CFPB”) to adopt a definition. A rule issued by the CFPB |
· | Tier 1 capital treatment for “hybrid” capital items like trust preferred securities is eliminated subject to various grandfathering and transition rules. |
· | The prohibition on payment of interest on demand deposits was repealed, effective July 21, 2011. |
· | Deposit insurance is permanently increased to $250,000. |
· | The deposit insurance assessment base calculation now equals the depository institution’s total assets minus the sum of its average tangible equity during the assessment period. |
· | The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35% of estimated annual insured deposits or assessment base; however, the FDIC is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion. |
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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; |
· | ||
Internet-based banking, including personal computers, mobile phones and tablets; |
· | ||
Debit cards and so-called “smart cards”; |
· | Remote deposit capture; |
· | Cryptocurrency; and |
· | ||
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 customersclients 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 customersclients or other third parties.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 seveneight banking offices in Bergen County, NJ, consisting of one office each in Fort Lee, Englewood Cliffs, Englewood, Hackensack, Cresskill, Fort Lee, Hackensack,Haworth, Ridgewood and Saddle River; ninefive banking offices in Union County, NJ, consisting of fourtwo offices in Union Township, and one office each in Springfield Township, Berkeley Heights, and Summit; threeone banking officesoffice in Morristown in Morris County, NJ, consisting of one office each in Boonton, Madison and Morristown;NJ; one office in Newark in Essex County, NJ; one office in West New York in Hudson County, NJ; one office in Princeton in Mercer County, NJ; one office in Holmdel in Monmouth County, and one banking office in the borough of Manhattan in New York City. The Bank is also opening a bankingCity, 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, on Long Island.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 | |
12 East Palisade Avenue, Englewood, NJ | Term expires July | |
Term expires | ||
899 Palisade Avenue, Fort Lee, NJ | Term expires August | |
142 John Street, Hackensack, NJ | Term expires December | |
171 East Ridgewood Avenue, Ridgewood, NJ | Term expires April | |
71 East Allendale Road, Saddle River, NJ | Term expires | |
356 Chestnut Street, Union, NJ | Term expires May 2027 | |
545 Morris Avenue, Summit, NJ | Term expires | |
217 Chestnut Street, Newark, NJ | Term expires | |
5914 Park Avenue, West New York, NJ | Term expires September | |
963 Holmdel Road, Holmdel, NJ | Term expires | |
551 Madison Avenue, Suite 202, NY, NY | Term expires | |
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 |
The Bank operates a Drive In/Walk Up located at 2022 Stowe Street, Union, NJ.
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, Stock, 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, 2017,2021, the Company had 475686 stockholders of record, excluding beneficial owners for whom CEDECede & Company or others act as nominees. On December 31, 2017, the closing sale price was $25.75.
The following table sets forth the high and low closing sales price, and the dividends declared, on a share of the Company’s common stock for the years ended December 31, 2017 and 2016.
Common Stock Price | ||||||||||||||||||||||||
2017 | 2016 | Common Dividends Declared | ||||||||||||||||||||||
High | Low | High | Low | 2017 | 2016 | |||||||||||||||||||
Fourth Quarter | $ | 27.80 | $ | 24.70 | $ | 26.50 | $ | 17.78 | $ | 0.075 | $ | 0.075 | ||||||||||||
Third Quarter | 24.60 | 21.25 | 18.86 | 15.22 | 0.075 | 0.075 | ||||||||||||||||||
Second Quarter | 24.40 | 21.50 | 17.30 | 15.12 | 0.075 | 0.075 | ||||||||||||||||||
First Quarter | 26.00 | 22.45 | 18.63 | 15.17 | 0.075 | 0.075 | ||||||||||||||||||
Total | $ | 0.300 | $ | 0.300 |
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. Shares repurchased were used for stock dividends and other issuances. No repurchases were made
In March 2019, the Board of Directors of the Company’sCompany 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, during 2017and it may be modified or 2016.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:
Shares Authorized | Total Number of Shares Purchased | Average Price Paid per Share | Cumulative Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||
605,289 | ||||||||||||||||||||
First quarter 2021 | - | 93,629 | $ | 25.72 | 688,340 | 511,660 | ||||||||||||||
Second quarter 2021 | - | - | - | 688,340 | 511,660 | |||||||||||||||
Third quarter 2021 | 2,000,000 | 196,069 | 28.71 | 884,409 | 2,315,591 | |||||||||||||||
Fourth quarter 2021 | - | 40,843 | 33.22 | 925,252 | 2,274,748 |
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 2018 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, 20122016 through December 31, 2017.2021.
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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, 2012,2016, with Dividends Reinvested
Year Ended December 31, 20172021
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
Fiscal Year Ending | ||||||||||||||||||||||||
Company/Index/Market | 12/31/12 | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | ||||||||||||||||||
ConnectOne Bancorp, Inc. | 100.00 | 164.25 | 168.98 | 168.89 | 237.20 | 238.12 | ||||||||||||||||||
NASDAQ | 100.00 | 139.89 | 160.47 | 171.83 | 187.03 | 242.34 | ||||||||||||||||||
KBW Bank Index | 100.00 | 137.40 | 150.09 | 150.82 | 197.72 | 228.08 |
Fiscal Year Ending | ||||||||||||||||||||||||
Company/Index/Market | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | 12/31/21 | ||||||||||||||||||
ConnectOne Bancorp, Inc. | 100.00 | 100.47 | 72.91 | 103.18 | 81.09 | 136.12 | ||||||||||||||||||
NASDAQ | 100.00 | 129.73 | 126.08 | 172.41 | 250.08 | 305.63 | ||||||||||||||||||
KBW Bank Index | 100.00 | 128.51 | 152.41 | 125.42 | 170.72 | 171.55 |
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, 20172021 and 20162020 and the selected consolidated summary of income data for the years ended December 31, 2017, 20162021, 2020 and 20152019 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, 2015, 2014, 20132019 and the selected consolidated summary of income data for the years ended December 31, 2014 and 2013 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 or For the Years Ended December 31, | As of and for the years ended December 31, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||
(dollars in thousands, except share data) | ||||||||||||||||||||||||||||||||
($ in thousands except per share amounts) | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||
Selected Statement of Financial Condition Data | ||||||||||||||||||||||||||||||||
Total assets | $ | 5,108,442 | $ | 4,426,348 | $ | 4,015,909 | $ | 3,448,572 | $ | 1,673,082 | $ | 8,129,480 | $ | 7,547,339 | $ | 6,174,032 | ||||||||||||||||
Loans receivable | 4,171,456 | 3,475,832 | 3,099,007 | 2,538,641 | 960,943 | 6,828,622 | 6,236,307 | 5,113,527 | ||||||||||||||||||||||||
Allowance for loan losses | 31,748 | 25,744 | 26,572 | 14,160 | 10,333 | |||||||||||||||||||||||||||
Securities – available-for-sale | 435,284 | 353,290 | 195,770 | 289,532 | 323,070 | |||||||||||||||||||||||||||
Securities – held-to-maturity | - | - | 224,056 | 224,682 | 215,286 | |||||||||||||||||||||||||||
Allowance for credit losses - loans | 78,773 | 79,226 | 38,293 | |||||||||||||||||||||||||||||
Investment securities | 534,507 | 487,955 | 404,701 | |||||||||||||||||||||||||||||
Goodwill and other intangible assets | 148,273 | 148,997 | 149,817 | 150,734 | 16,828 | 217,369 | 219,349 | 168,034 | ||||||||||||||||||||||||
Borrowings | 670,077 | 476,280 | 671,587 | 495,553 | 146,000 | 468,193 | 425,954 | 500,293 | ||||||||||||||||||||||||
Subordinated debt (net of issuance costs) | 54,699 | 54,534 | 54,343 | 5,155 | 5,155 | 152,951 | 202,648 | 128,885 | ||||||||||||||||||||||||
Deposits | 3,795,128 | 3,344,271 | 2,790,966 | 2,475,607 | 1,342,005 | 6,332,953 | 5,959,224 | 4,767,542 | ||||||||||||||||||||||||
Tangible common stockholders’ equity(1) | 417,164 | 325,127 | 316,277 | 284,235 | 168,584 | 795,916 | 695,961 | 563,156 | ||||||||||||||||||||||||
Total stockholders’ equity | 565,437 | 531,032 | 477,344 | 446,219 | 168,584 | 1,124,212 | 915,310 | 731,190 | ||||||||||||||||||||||||
Average total assets | 4,629,380 | 4,236,758 | 3,661,306 | 2,520,524 | 1,633,270 | 7,735,228 | 7,453,474 | 6,014,535 | ||||||||||||||||||||||||
Average common stockholders’ equity | 553,390 | 491,110 | 456,036 | 301,004 | 153,775 | 965,995 | 880,720 | 705,496 | ||||||||||||||||||||||||
Dividends | ||||||||||||||||||||||||||||||||
Common Dividends | ||||||||||||||||||||||||||||||||
Cash dividends paid on common stock | $ | 9,612 | $ | 9,067 | $ | 8,996 | $ | 6,940 | $ | 4,254 | $ | 17,493 | $ | 14,317 | $ | 12,160 | ||||||||||||||||
Dividend payout ratio | �� | 22.24 | % | 29.19 | % | 21.84 | % | 37.60 | % | 21.50 | % | |||||||||||||||||||||
Cash dividends per share | ||||||||||||||||||||||||||||||||
Cash dividends | $ | 0.300 | $ | 0.300 | $ | 0.300 | $ | 0.300 | $ | 0.280 | ||||||||||||||||||||||
Common dividend payout ratio | 13.60 | % | 20.08 | % | 16.57 | % | ||||||||||||||||||||||||||
Cash dividends per common share | $ | 0.48 | $ | 0.27 | $ | 0.36 | ||||||||||||||||||||||||||
Selected Statement of Income Data | ||||||||||||||||||||||||||||||||
Interest income | $ | 181,324 | $ | 161,241 | $ | 140,967 | $ | 94,207 | $ | 57,268 | $ | 301,738 | $ | 308,200 | $ | 271,484 | ||||||||||||||||
Interest expense | (36,255) | (31,096) | (23,814) | (14,808) | (11,082) | (38,860 | ) | (70,209 | ) | (85,165 | ) | |||||||||||||||||||||
Net interest income | 145,069 | 130,145 | 117,153 | 79,399 | 46,186 | 262,878 | 237,991 | 186,319 | ||||||||||||||||||||||||
Provision for loan losses | (6,000) | (38,700) | (12,605) | (4,683) | (350) | |||||||||||||||||||||||||||
Net interest income after provision for loan losses | 139,069 | 91,445 | 104,548 | 74,716 | 45,836 | |||||||||||||||||||||||||||
Reversal of (Provision for) credit losses | 5,500 | (41,000 | ) | (8,100 | ) | |||||||||||||||||||||||||||
Net interest income after provision for credit losses | 268,378 | 196,991 | 178,219 | |||||||||||||||||||||||||||||
Noninterest income | 8,204 | 9,920 | 11,173 | 7,498 | 6,851 | 15,691 | 14,400 | 8,035 | ||||||||||||||||||||||||
Noninterest expense | (78,759) | (58,507) | (54,484) | (54,804) | (25,278) | (109,011 | ) | (121,001 | ) | (92,228 | ) | |||||||||||||||||||||
Income before income tax expense | 68,514 | 42,858 | 61,237 | 27,410 | 27,409 | 175,058 | 90,390 | 94,026 | ||||||||||||||||||||||||
Income tax expense | (25,294) | (11,776) | (19,926) | (8,845) | (7,484) | (44,705 | ) | (19,101 | ) | (20,631 | ) | |||||||||||||||||||||
Net income | 43,220 | 31,082 | 41,311 | 18,565 | 19,925 | 130,353 | 71,289 | 73,395 | ||||||||||||||||||||||||
Preferred stock dividends | - | (22) | (112) | (112) | (141) | 1,717 | - | - | ||||||||||||||||||||||||
Net income available to common stockholders | $ | 43,220 | $ | 31,060 | $ | 41,199 | $ | 18,453 | $ | 19,784 | $ | 128,636 | $ | 71,289 | $ | 73,395 |
(1) | measure. |
As of or For the Years Ended December 31, | |||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||
Per Common Share Data | (dollars in thousands, except share data) | ||||||||||||||||||||
Basic | $ | 1.35 | $ | 1.02 | $ | 1.37 | $ | 0.80 | $ | 1.21 | |||||||||||
Diluted | 1.34 | 1.01 | 1.36 | 0.79 | 1.21 | ||||||||||||||||
Book value per common share | 17.63 | 16.62 | 15.49 | 14.65 | 9.61 | ||||||||||||||||
Tangible book value per common share(1) | 13.01 | 11.96 | 10.51 | 9.57 | 8.58 | ||||||||||||||||
Selected Performance Ratios | |||||||||||||||||||||
Return on average assets | 0.93 | % | 0.73 | % | 1.13 | % | 0.74 | % | 1.22 | % | |||||||||||
Return on average common stockholders’ equity | 7.81 | 6.30 | 9.03 | 6.13 | 12.87 | ||||||||||||||||
Net interest margin | 3.45 | 3.38 | 3.55 | 3.57 | 3.30 | ||||||||||||||||
Selected Asset Quality Ratios as a % of loans receivable: | |||||||||||||||||||||
Nonaccrual loans (excluding loans held-for sale) | 1.57 | % | 0.16 | % | 0.67 | % | 0.46 | % | 0.33 | % | |||||||||||
Loans 90 days or greater past due and still accruing (non-PCI) | - | - | - | 0.05 | - | ||||||||||||||||
Loans 90 days or greater past due and still accruing (PCI) | 0.04 | 0.15 | - | - | - | ||||||||||||||||
Performing TDRs | 0.36 | 0.38 | 2.77 | 0.07 | 0.60 | ||||||||||||||||
Allowance for loan losses | 0.76 | 0.74 | 0.86 | 0.56 | 1.08 | ||||||||||||||||
Nonperforming assets(2) to total assets | 1.29 | % | 1.57 | % | 0.58 | % | 0.37 | % | 0.20 | % | |||||||||||
Allowance for loan losses to nonaccrual loans (excluding loans held-for-sale | 168.4 | 449.0 | 128.1 | 122.0 | 329.4 | ||||||||||||||||
Net loan charge-offs (recoveries) to average loans(3) | 0.01 | 1.18 | 0.01 | 0.05 | 0.03 | ||||||||||||||||
Capital Ratios | |||||||||||||||||||||
Leverage ratio | 8.92 | % | 9.29 | % | 9.07 | % | 9.37 | % | 9.69 | % | |||||||||||
Common equity Tier 1 risk-based ratio | 9.15 | 9.74 | 9.14 | n/a | n/a | ||||||||||||||||
Risk-based Tier 1 capital ratio | 9.26 | 9.87 | 9.61 | 10.44 | 12.10 | ||||||||||||||||
Risk-based capital ratio | 11.04 | 11.78 | 11.77 | 10.94 | 12.90 | ||||||||||||||||
Tangible common equity to tangible assets(1) | 8.41 | 8.93 | 8.18 | 8.62 | 8.48 |
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As of and for the years ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Per Common Share Data | ||||||||||||
Basic earnings per share | $ | 3.24 | $ | 1.80 | $ | 2.08 | ||||||
Diluted earnings per share | 3.22 | 1.79 | 2.07 | |||||||||
Book value per common share | 25.61 | 23.01 | 20.85 | |||||||||
Tangible book value per common share(1) | 20.12 | 17.49 | 16.06 | |||||||||
Selected Performance Ratios | ||||||||||||
Return on average assets | 1.69 | % | 0.96 | % | 1.22 | % | ||||||
Return on average common stockholders’ equity | 13.32 | 8.09 | 10.40 | |||||||||
Return on average tangible common equity(1) | 17.21 | 10.80 | 13.61 | |||||||||
Net interest margin | 3.66 | 3.46 | 3.35 | |||||||||
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 | |||||||||
Performing TDRs | 0.64 | 0.38 | 0.42 | |||||||||
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 | ||||||||||||
Leverage ratio | 11.65 | % | 9.51 | % | 9.54 | % | ||||||
Common equity Tier 1 risk-based ratio | 10.64 | 10.79 | 9.95 | |||||||||
Risk-based Tier 1 capital ratio | 12.19 | 10.87 | 10.04 | |||||||||
Risk-based capital ratio | 15.26 | 15.08 | 12.96 | |||||||||
Tangible common equity to tangible assets(1) | 10.06 | 9.50 | 9.38 |
__________________________
(1) | These measures are not measures recognized under generally accepted accounting principles in the United States (“GAAP”) |
(2) | Nonperforming assets are defined as nonaccrual loans |
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Non-GAAP Reconciliation Table ($ in thousands, except per share amounts)
As of December 31 | ||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | As of December 31, | |||||||||||||||||||||||||||
(dollars in thousands, except per share data) | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||
Tangible common equity and tangible common equity/tangible assets | ||||||||||||||||||||||||||||||||
Common stockholders’ equity | $ | 565,437 | $ | 531,032 | $ | 466,094 | $ | 434,969 | $ | 157,334 | ||||||||||||||||||||||
Less: goodwill and other intangible assets | 148,273 | 148,997 | 149,817 | 150,734 | 16,828 | |||||||||||||||||||||||||||
Stockholders equity | $ | 1,124,212 | $ | 915,310 | $ | 731,190 | ||||||||||||||||||||||||||
Less: Preferred stock | 110,927 | - | - | |||||||||||||||||||||||||||||
Common stockholders equity | $ | 1,013,285 | $ | 915,310 | $ | 731,190 | ||||||||||||||||||||||||||
Less: Goodwill and other intangible assets | 217,369 | 219,349 | 168,034 | |||||||||||||||||||||||||||||
Tangible common stockholders’ equity | $ | 417,164 | $ | 382,035 | $ | 316,277 | $ | 284,235 | $ | 140,506 | $ | 795,916 | $ | 695,961 | $ | 563,156 | ||||||||||||||||
Total assets | $ | 5,108,442 | $ | 4,426,348 | $ | 4,015,909 | $ | 3,448,572 | $ | 1,673,082 | $ | 8,129,480 | $ | 7,547,339 | $ | 6,174,032 | ||||||||||||||||
Less: goodwill and other intangible assets | 148,273 | 148,997 | 149,817 | 150,734 | 16,828 | 217,369 | 219,349 | 168,034 | ||||||||||||||||||||||||
Tangible assets | $ | 4,960,169 | $ | 4,277,351 | $ | 3,866,092 | $ | 3,297,838 | $ | 1,656,254 | $ | 7,912,111 | $ | 7,327,990 | $ | 6,005,998 | ||||||||||||||||
Tangible common equity ratio | 8.41 | % | 8.93 | % | 8.18 | % | 8.62 | % | 8.48 | % | 10.06 | % | 9.50 | % | 9.38 | % | ||||||||||||||||
Tangible book value per common share | ||||||||||||||||||||||||||||||||
Book value per common share | $ | 17.63 | $ | 16.62 | $ | 15.49 | $ | 14.65 | $ | 9.61 | $ | 25.61 | $ | 23.01 | $ | 20.85 | ||||||||||||||||
Less: goodwill and other intangible assets | 4.62 | 4.66 | 4.98 | 5.08 | 1.03 | 5.49 | 5.52 | 4.79 | ||||||||||||||||||||||||
Tangible book value per common share | $ | 13.01 | $ | 11.96 | $ | 10.51 | $ | 9.57 | $ | 8.58 | $ | 20.12 | $ | 17.49 | $ | 16.06 | ||||||||||||||||
Return on average tangible common equity | ||||||||||||||||||||||||||||||||
Net income available to common stockholders | $ | 128,636 | $ | 71,289 | $ | 73,395 | ||||||||||||||||||||||||||
Average stockholders’ equity | $ | 1,007,023 | $ | 880,720 | $ | 705,496 | ||||||||||||||||||||||||||
Less: average preferred stock | 41,028 | - | - | |||||||||||||||||||||||||||||
Average common stockholders’ equity | 965,995 | 880,720 | 705,496 | |||||||||||||||||||||||||||||
Less: goodwill and other intangible assets | 218,417 | 220,570 | 166,116 | |||||||||||||||||||||||||||||
Average tangible common stockholders’ equity | $ | 747,578 | $ | 660,150 | $ | 539,380 | ||||||||||||||||||||||||||
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. Note 1Accounting policies considered critical to our audited consolidated financial statements contains a summary ofresults include the allowance for credit losses and related provision and income taxes. For information on our significant accounting policies. Management believes our policy with respectpolicies, see Note 1a in the Notes to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and our Board of Directors.Consolidated Financial Statements.
Allowance for LoanCredit Losses and Related Provision
The allowance for loancredit losses represents management’sis an estimate of probable incurred loancurrent 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 loan portfolio. Determining the amount ofbalance sheet date. The methodology for determining the allowance for loancredit losses is considered a critical accounting estimatepolicy by management because it requires significantof the high degree of judgment involved, the subjectivity of the assumptions used, and the use of estimates relatedpotential for changes in the forecasted economic environment that could result in changes to the amount and timing of expected future cash flows on impaired loans, estimated probable incurred losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.the recorded allowance for credit losses. The loan portfolio also represents the largest asset type on the Company’s Consolidated Statements of Condition.
Expected credit losses of financial assets are measured on a collective (pool) basis when similar risk characteristic(s) exist. If the Company determines that a financial asset does not share risk characteristics with other financial assets, the Company shall evaluate the financial asset for expected credit losses on an individual basis. Financial assets are assessed once, either through collective assessments or individual assessments. Standard expected losses are evaluated on a collective, or pool, basis when financial assets share similar risk characteristics. For pooled loan segments, utilizing a quantitative analysis, the Company calculates estimated credit losses using a probability of default and loss given default methodology, the results of which are applied to the aggregated discounted cash flow of each individual loan within the segment. The evaluationpoint in time probability of default and loss given default are then conditioned by macroeconomic scenarios to incorporate reasonable and supportable forecasts that affect the collectability of the adequacyreported amount.
Financial assets may be segmented based on one characteristic, or a combination of characteristics. Examples of risk characteristics relevant to the Company’s evaluation included, but were not limited to: (1) internal or external credit scores or credit ratings, (2) risk ratings or classifications, (3) financial asset type, (4) collateral type, (5) size, (6) effective interest rate, (7) term, (8) geographical location, (9) industry of the allowance for loan losses includes, among other factors, an analysis of historical loss rates by loan category applied to current loan totals. However, actual loan losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.
The allowance for loan losses is established through a provision for loan losses charged to expense. Management believes that the current allowance for loan losses will be adequate to absorb probable incurred loan losses on existing loans that may become uncollectible based on the evaluation of knownborrower and inherent risks in the originated loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect our borrowers’ ability to pay. The evaluation also details historical losses by loan category and the resulting loan loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed.(10) vintage. Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loancredit losses. Such agencies may require us to make additional provisions for loancredit losses based upon information available to them at the time of their examination. All of the factors considered in the analysis of the adequacy of the allowance for loancredit losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loancredit losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 11a of the Notes to Consolidated Financial Statements.
Income Taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns.
Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of operations. NotesNote 1 (under the caption “Use of Estimates”) and 12Note 10 of the Notes to Consolidated Financial Statements include additional discussion on the accounting for income taxes.
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Goodwill
The Company has adopted the provisions of FASB ASC 350-10-05, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but tested for impairment annually or more frequently if indicators arise for impairment. No impairment charge was deemed necessary for the years ended December 31, 2017, 2016 and 2015.
Overview and Strategy
We serve as a holding company for the Bank, which is our primary asset and only operating subsidiary. We follow a business plan that emphasizes the delivery of customized banking services in our market area to customersclients who desire a high level of personalized service and responsiveness. The Bank conducts a traditional banking business, making commercial loans, consumer loans and residential and commercial real estate loans. In addition, the Bank offers various non-deposit products through non-proprietary relationships with third party vendors. The Bank relies upon deposits as the primary funding source for its assets. The Bank offers traditional deposit products.
Many of our customerclients relationships start with referrals from existing customers.clients. We then seek to cross sell our products to customersclients to grow the customerclient relationship. For example, we will frequently offer an interest rate concession on credit products for customersclients that maintain a noninterest-bearing deposit account at the Bank. This strategy has helped maintain our funding costs and the growth of our interest expense even as we have substantially increased our total deposits. It has also helped fuel our significant loan growth. We believe that the Bank’s significant growth and increasing profitability demonstrate the need for and success of our brand of banking.
Our results of operations depend primarily on our net interest income, which is the difference between the interest earned on our interest-earning assets and the interest paid on funds borrowed to support those assets, primarily deposits. Net interest margin is the difference between the weighted average rate received on interest-earning assets and the weighted average rate paid to fund those interest-earning assets, which is also affected by the average level of interest-earning assets as compared with that of interest-bearing liabilities. Net income is also affected by the amount of noninterest income and noninterest expenses.
General
The following discussion and analysis presentspresent the more significant factors affecting the Company’s financial condition as of December 31, 20172021 and 20162020 and results of operations for each of the years in the three-year period ended December 31, 2017.2021. The MD&A should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and other information contained in this report.
Operating Results Overview
Net income available to common stockholders for the year ended December 31, 20172021 was $43.2$128.6 million, an increase of $12.1$57.3 million, or 39.1%80.4%, compared to net income of $31.1$71.3 million for 2016. Net income available to common shareholders for the year ended December 31, 2017 was $43.2 million, an increase of $12.2 million, or 39.2%, compared to net income available to common shareholders of $31.1 million for 2016.2020. Diluted earnings per share were $1.34$3.22 for 2017,2021, a 32.7%79.9% increase from $1.01$1.79 for 2016.2020.
The change in net income from 20162020 to 20172021 was attributable to the following:
· |
· | Increase in net interest income of |
· | Increase in noninterest income of $1.3 million, primarily due to |
· | ||
· |
Net income for the year ended December 31, 20162020 was $31.1$71.3 million, a decrease of $10.2$2.1 million, or 24.8%2.9%, compared to net income of $41.3$73.4 million for 2015. Net income available to common shareholders for the year ended December 31, 2016 was $31.1 million, a decrease of $10.1 million, or 24.6%, compared to net income available to common shareholders of $41.2 million for 2015.2019. Diluted earnings per share were $1.01$1.79 for 2016,2020, a 25.7%13.5% decrease from $1.36$2.07 for 2015.2019.
The change in net income from 20152019 to 20162020 was attributable to the following:
· | Increased |
· | ||
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· | Increased net interest income of $51.7 million primarily due to the acquisition of BNJ and an 11-basis point widening of the net interest margin. |
· | Increase in noninterest income of $6.4 million primarily resulting from an increase in deposit, loan, and other |
· |
Net Interest Income
Fully taxable equivalent net interest income for 20172021 totaled $148.5$264.7 million, an increase of $15.5$24.8 million, or 11.7%10.3%, from 2016.2020. The increase in net interest income was due to an increase in average interest-earning assets, which grew by 9.4%4.2% to $4.3$7.2 billion and a widening of 20 basis-points in the net interest margin. The widening of the net interest margin by 7 basis-points. The increase in the net interest margin was attributedmainly attributable to an improved asset mix, including lower levelscost of cash held at the Federal Reserve Bank, partiallyfunds, offset by increases in deposit funding costs, as well ashigher average cash balances and lower yields on loans and securities. Average total loans, which includes loans held-for-sale, increased by 13.6%3.6% to $3.8$6.4 billion in 20172021 from $3.4$6.2 billion in 2016.2020. The increase in average total loans is primarily attributable to higher, non PPP, loan originations.
Fully taxable equivalent net interest income for 20162020 totaled $133.0$239.9 million, an increase of $13.3$51.9 million, or 11.1%27.6%, from 2015.2019. The increase in net interest income was due to an increase in average interest-earning assets, which grew by 16.7%23.6% to $3.9 billion. Partially offsetting the increase in interest-earning assets was$6.9 billion and a 17 basis-point contractionwidening of 11 basis-points in the net interest margin. The decrease inwidening of the net interest margin was attributedmainly attributable to lower cost of funds, offset by higher levels ofaverage cash held at the Federal Reserve Bank,balances and lower accretion of purchase accounting adjustments related to the Merger, long-term subordinated debt issued in June 2016,yields on loans and an increase in rates paid on deposits.securities. Average total loans, which includes loans held-for-sale, increased by 20.1%22.8% to $3.4$6.2 billion in 20162020 from $2.8$5.0 billion in 2015.2019. The increase in average total loans is primarily attributable to the acquisition of BNJ.
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Average Balance Sheets
The following table sets forth certain information relating to our average assets and liabilities for the years ended December 31, 2017, 20162021, 2020 and 20152019 and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.
Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Tax-Equivalent Basis) | Average Balance | Income/ Expense | Yield/ Rate | Average Balance | Income/ Expense | Yield/ Rate | Average Balance | Income/ Expense | Yield/ Rate | Average Balance | Income/ Expense | Yield/ Rate | Average Balance | Income/ Expense | Yield/ Rate | Average Balance | Income/ Expense | Yield/ Rate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment securities(1) (2) | $ | 393,144 | $ | 12,290 | 3.13 | % | $ | 396,622 | $ | 13,153 | 3.32 | % | $ | 482,703 | $ | 16,128 | 3.34 | % | $ | 464,342 | $ | 7,455 | 1.61 | % | $ | 444,070 | $ | 9,996 | 2.25 | % | $ | 478,478 | $ | 13,885 | 2.90 | % | ||||||||||||||||||||||||||||||||||||
Loans(2) (3) (4) | 3,811,922 | 170,314 | 4.47 | % | 3,355,452 | 148,755 | 4.43 | % | 2,793,952 | 126,133 | 4.51 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and interest-earnings deposits with banks | 70,527 | 711 | 1.01 | % | 152,397 | 756 | 0.50 | % | 65,513 | 178 | 0.27 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans receivable and loans held-for-sale (2) (3) (4) | 6,419,610 | 294,686 | 4.59 | % | 6,198,753 | 297,756 | 4.80 | % | 5,049,458 | 256,299 | 5.08 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and interest-earning deposits with banks | 322,692 | 405 | 0.13 | % | 267,824 | 694 | 0.22 | % | 55,819 | 1,167 | 2.09 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted investment in bank stocks | 27,093 | 1,421 | 5.24 | % | 28,439 | 1,410 | 4.96 | % | 27,335 | 1,081 | 3.95 | % | 20,797 | 971 | 4.67 | % | 27,185 | 1,642 | 6.04 | % | 27,389 | 1,778 | 6.49 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Total interest-earning assets | 4,302,686 | 184,736 | 4.29 | % | 3,932,910 | 164,074 | 4.17 | % | 3,369,503 | 143,520 | 4.26 | % | 7,227,441 | 303,517 | 4.20 | % | 6,937,832 | 310,088 | 4.47 | % | 5,611,144 | 273,129 | 4.87 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses | (28,276) | (32,554) | (17,905) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for credit losses | (79,863 | ) | (59,271 | ) | (37,433 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-earning assets | 354,970 | 336,402 | 309,708 | 587,650 | 574,913 | 440,824 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 4,629,380 | $ | 4,236,758 | $ | 3,661,306 | $ | 7,735,228 | $ | 7,453,474 | $ | 6,014,535 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Savings, NOW, money market, interest checking | $ | 1,773,454 | 9,502 | 0.54 | % | $ | 1,544,838 | 6,754 | 0.44 | % | $ | 1,279,663 | 4,972 | 0.39 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Time deposits | 1,015,552 | 14,168 | 1.40 | % | 923,114 | 11,913 | 1.29 | % | 752,380 | 8,784 | 1.17 | % | $ | 1,300,270 | 14,813 | 1.14 | % | $ | 1,792,568 | 34,813 | 1.94 | % | $ | 1,549,700 | 37,177 | 2.40 | % | |||||||||||||||||||||||||||||||||||||||||||||
Other interest-bearing deposits | 3,451,765 | 9,955 | 0.29 | % | 2,819,908 | 17,573 | 0.62 | % | 2,267,812 | 28,393 | 1.25 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits | 2,789,006 | 23,670 | 0.85 | % | 2,467,952 | 18,667 | 0.76 | % | 2,032,043 | 13,756 | 0.68 | % | 4,752,035 | 24,768 | 0.52 | % | 4,612,476 | 52,386 | 1.14 | % | 3,817,512 | 65,570 | 1.72 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Borrowings | 529,445 | 9,178 | 1.73 | % | 571,626 | 9,013 | 1.58 | % | 565,408 | 8,181 | 1.45 | % | 318,700 | 5,300 | 1.66 | % | 537,773 | 8,435 | 1.57 | % | 502,314 | 12,079 | 2.40 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Subordinated debentures | 54,610 | 3,245 | 5.94 | % | 54,534 | 3,246 | 5.95 | % | 29,685 | 1,700 | 5.73 | % | 153,199 | 8,669 | 5.66 | % | 169,139 | 9,254 | 5.47 | % | 128,708 | 7,371 | 5.73 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Capital lease obligation | 2,704 | 162 | 5.99 | % | 2,829 | 170 | 6.01 | % | 2,946 | 177 | 6.01 | % | 2,041 | 123 | 6.03 | % | 2,233 | 134 | 6.00 | % | 2,414 | 145 | 6.01 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 3,375,765 | 36,255 | 1.07 | % | 3,096,941 | 31,096 | 1.00 | % | 2,630,894 | 23,814 | 0.91 | % | 5,225,975 | 38,860 | 0.74 | % | 5,321,621 | 70,209 | 1.32 | % | 4,450,948 | 85,165 | 1.91 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits | 681,215 | 624,731 | 537,287 | 1,454,148 | 1,195,547 | 819,917 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 19,010 | 21,824 | 25,839 | 48,082 | 55,586 | 38,174 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 553,390 | 493,262 | 467,286 | 1,007,023 | 880,720 | 705,496 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 4,629,380 | $ | 4,236,758 | $ | 3,661,306 | $ | 7,735,228 | $ | 7,453,474 | $ | 6,014,535 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income/interest rate spread(6) | 148,481 | 3.22 | % | 132,978 | 3.17 | % | 119,706 | 3.35 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income/interest rate spread (5) | 264,657 | 3.46 | % | 239,879 | 3.15 | % | 187,964 | 2.96 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax-equivalent adjustment | (3,412) | (2,833) | (2,553) | (1,779 | ) | (1,888 | ) | (1,645 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income as reported | $ | 145,069 | $ | 130,145 | $ | 117,153 | $ | 262,878 | $ | 237,991 | $ | 186,319 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest margin(7) | 3.45 | % | 3.38 | % | 3.55 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest margin (6) | 3.66 | % | 3.46 | % | 3.35 | % |
(1) | Average balances are based on amortized cost. |
(2) | Interest income is presented on a tax equivalent basis using |
(3) | Includes loan fee |
(4) | Loans include nonaccrual loans. |
(5) | |
Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax equivalent basis. | |
Represents net interest income on a tax equivalent basis divided by average total interest-earning |
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Rate/Volume Analysis
The following table presents, by category, the major factors that contributed to the changes in net interest income. Changes due to both volume and rate have been allocated in proportion to the relationship of the dollar amount change in each.
2021/2020 Increase (Decrease) Due to Change in: | 2020/2019 Increase (Decrease) Due to Change in: | |||||||||||||||||||||||
Average Volume | Average Rate | Net Change | Average Volume | Average Rate | Net Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Investment securities: | $ | 325 | $ | (2,866 | ) | $ | (2,541 | ) | $ | (775 | ) | $ | (3,114 | ) | $ | (3,889 | ) | |||||||
Loans receivable and loans held-for-sale | 10,138 | (13,208 | ) | (3,070 | ) | 55,206 | (13,749 | ) | 41,457 | |||||||||||||||
Federal funds sold and interest-earnings deposits with banks | 69 | (358 | ) | (289 | ) | 549 | (1,022 | ) | (473 | ) | ||||||||||||||
Restricted investment in bank stocks | (298 | ) | (373 | ) | (671 | ) | (12 | ) | (124 | ) | (136 | ) | ||||||||||||
Total interest income: | $ | 10,234 | $ | (16,805 | ) | $ | (6,571 | ) | $ | 54,968 | $ | (18,009 | ) | $ | 36,959 | |||||||||
Interest expense: | ||||||||||||||||||||||||
Savings, NOW, money market, interest checking | $ | 1,822 | $ | (9,440 | ) | $ | (7,618 | ) | $ | 3,441 | $ | (14,261 | ) | $ | (10,820 | ) | ||||||||
Time deposits | (5,608 | ) | (14,392 | ) | (20,000 | ) | 4,717 | (7,081 | ) | (2,364 | ) | |||||||||||||
Borrowings and subordinated debentures | (4,545 | ) | 825 | (3,720 | ) | 2,768 | (4,529 | ) | (1,761 | ) | ||||||||||||||
Capital lease obligation | (12 | ) | 1 | (11 | ) | (11 | ) | - | (11 | ) | ||||||||||||||
Total interest expense: | $ | (8,343 | ) | $ | (23,006 | ) | $ | (31,349 | ) | $ | 10,915 | $ | (25,871 | ) | $ | (14,956 | ) | |||||||
Net interest income: | $ | 18,577 | $ | 6,201 | $ | 24,778 | $ | 44,053 | $ | 7,862 | $ | 51,915 |
2017/2016 Increase (Decrease) Due to Change in: | 2016/2015 Increase (Decrease) Due to Change in: | |||||||||||||||||||||||
Average Volume | Average Rate | Net Change | Average Volume | Average Rate | Net Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Investment securities: | $ | (109) | $ | (754) | $ | (863) | $ | (2,855) | $ | (120) | $ | (2,975) | ||||||||||||
Loans receivable and loans held-for-sale | 20,395 | 1,164 | 21,559 | 24,893 | (2,271) | 22,622 | ||||||||||||||||||
Federal funds sold and interest-earnings deposits with banks | (825) | 780 | (45) | 431 | 147 | 578 | ||||||||||||||||||
Restricted investment in bank stocks | (71) | 82 | 11 | 55 | 274 | 329 | ||||||||||||||||||
Total interest income: | $ | 19,390 | $ | 1,272 | $ | 20,662 | $ | 22,524 | $ | (1,970) | $ | 20,554 | ||||||||||||
Interest expense: | ||||||||||||||||||||||||
Savings, NOW, money market, interest checking | $ | 1,225 | $ | 1,523 | $ | 2,748 | $ | 1,159 | $ | 623 | $ | 1,782 | ||||||||||||
Time deposits | 1,290 | 965 | 2,255 | 2,203 | 926 | 3,129 | ||||||||||||||||||
Borrowings and subordinated debentures | (726) | 890 | 164 | 1,564 | 814 | 2,378 | ||||||||||||||||||
Capital lease obligation | (7) | (1) | (8) | (7) | - | (7) | ||||||||||||||||||
Total interest expense: | $ | 1,782 | $ | 3,377 | $ | 5,159 | $ | 4,919 | $ | 2,363 | $ | 7,282 | ||||||||||||
Net interest income: | $ | 17,608 | $ | (2,105) | $ | 15,503 | $ | 17,605 | $ | (4,333) | $ | 13,272 | ||||||||||||
Provision for Loan(Reversal of) Credit Losses
In determining the provision for loancredit losses, management considers national and local economic trends and conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; effects of changes in lending policies, trends in volume and terms of loans; levels and trends in delinquencies, impaired loans and net charge-offs and the results of independent third party loan review.
The Bank adopted CECL beginning on January 1, 2021. Provision expense may therefore become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance. See Note 1b to our audited financial statements included herein.
For the year ended December 31, 2017,2021, the (reversal of) provision for loancredit losses was $6.0($5.5) million, a decrease of $32.7$46.5 million, compared to the provision for loan losses of $38.7$41.0 million for 2016,the year ended December 31, 2020. The elevated provision for loan losses for the year ended December 31, 2020 was due primarily to $36.5 million in charge-offs of taxi medallion loans in 2016. These taxi medallion loans were transferred back to the loans held-for-investment portfolio in November 2017 at their fair value, with a modest earnings impact.economic uncertainties of the COVID-19 pandemic, including consideration of related borrower payment deferrals requested and/or granted. The release of allowance for credit losses during the year ended December 31, 2021 was the result of the continually improving macro-economic outlook during the course of 2021.
For the year ended December 31, 2016,2020, the provision for loancredit losses was $38.7$41.0 million, an increase of $26.1$32.9 million, compared to the provision for loancredit losses of $12.6$8.1 million for 2015.2019. The increase was largely attributable to an increase in reserves allocateddue to the Bank’s taxi medallion portfoliocontinued economic uncertainties associated with the COVID-19 pandemic and increases to specific reserves within our commercial portfolio.
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Noninterest Income
Noninterest income for the full-year 2017 decreased2021 increased by $1.3 million, or 9.0%, to $15.7 million from $14.4 million in 2020. The increase was primarily due to increases in net gains on loans held for sale of $1.7 million, gain on sale of branches of $0.7 million and net gains on sale/redemption of investment securities of $0.2 million, partially offset by decreases in deposit, loan and other income of $0.5 million, income on bank owned life insurance of $0.2 million and net gains on equity securities of $0.6 million. The increase in net gains on loans held-for-sale resulted from mortgage loan sales, SBA loan sales and elevated commercial loan sales. The increase in gain on sale of branches was the result of the Bank selling two branches during the first quarter of 2021 related to the BNJ acquisition.
Noninterest income for the full-year 2020 increased by $6.4 million, or 17.3%79.2%, to $8.2$14.4 million from $9.9$8.0 million in 2016.2019. The decreaseincrease was primarily the result of a $2.6$3.0 million decreaseincrease in deposit, loan and other income. This increase was largely attributable to loan referral fee income of $2.3 million generated by BoeFly as a result of its participation in the PPP program. Additionally, increases in net gains on sale of investment securities, partly offset by an increase in BOLI income of $0.6 million and higher gains of the sale of loans held-for-sale of $0.5$1.6 million primarily relatedand increases in bank owned life insurance of $1.5 million contributed to the sale of approximately $50 million of non-relationship multifamily loans which resulted in a gain on sale of approximately $550 thousand.
Noninterest income for the full-year 2016 decreased by $1.3 million, or 11.2% to $9.9 million from $11.2 million in 2015. The decrease was primarily the result of a 2015 insurance recovery of $2.2 million, offset by anoverall increase in BOLI income of $0.8 million and higher net investment securities gains, which increased by $0.3 million to $4.2 million for the year ended December 31, 2016 from $3.9 million for the year ended December 31, 2015.noninterest income.
Noninterest Expense
Noninterest expenses for the full-year 20172021 decreased by $12.0 million, or 9.9%, to $109.0 million from $121.0 million in 2020. The decrease was primarily due to decreases in merger expenses of $14.6 million, change in value of acquisition price of $2.3 million, occupancy and equipment of $2.2 million, and FDIC insurance of $1.3 million, partially offset by increases in salaries and employee benefits of $5.5 million, other expenses of $2.6 million and professional and consulting of $0.9 million. Excluding the impact on expenses related to mergers costs, expense increases were mainly attributable to increased levels of business.
Noninterest expenses for the full-year 2020 increased by $20.3$28.8 million, or 34.6%31.2%, to $78.8$121.0 million from $58.5$92.2 million in 2016.2019. The increase was primarily attributable to an increase of $15.6 millionincreases in the valuation allowance for loans held-for-sale related to the Company’s taxi medallion loans. The balance of the increase was attributable to an increased level of business and staff resulting from organic growth. Salariessalaries and employee benefits increased by $4.0of $9.9 million, FDIC insurance increased by $0.5 million and data processing increased by $0.4 million.
Noninterestmerger expenses for the full-year 2016 increased by $4.0 million, or 7.4% to $58.5 million from $54.5 million in 2015. The increase was primarily attributable to an increased level of business and staff resulting from organic growth. Salary and employee benefits increased by $3.3$5.7 million, occupancy and equipment expenses increased by $1.0of $4.2 million, increase in value of acquisition price of $2.3 million, FDIC insurance increased by $0.8expense of $2.0 million, data processing increased by $0.4 million, marketingprofessional and advertising increased by $0.2consulting of $1.9 million and other expenses increased by $0.6 million, partially offset by a 2015 loss on an extinguishmentamortization of debt for $2.4core deposit intangibles of $1.1 million. These increases were mainly the result of the acquisition of BNJ.
Income Taxes
On December 22, 2017, H.R. 1, commonly known as the Tax Cuts and Jobs Act (the “Act”), was signed into law. The Act includes provisions that will affect the Company’s income tax expense, including the reducing the federal tax rate from 35% to 21% effective January 1, 2018. As a result of the rate reduction, the Company was required to re-measure, through income tax expense in the period of enactment, its deferred tax assets and liabilities using the enacted rate at which the Company expects them to be recovered or settled. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), given the amount and complexity of the changes in tax law resulting from the Tax Reform Act, the Company has not finalized the accounting for the income tax effects of the Tax Reform Act. This includes the re-measurement of deferred taxes.
The impact of the Tax Reform Act may differ from this estimate, during the one-year measurement period due to, among other things, further refinement of the Company’s calculations, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Reform Act. As a result of the Tax Reform Act, the Company recorded a tax charge of approximately $5.6 million due to a re-measurement of deferred tax assets and liabilities.
Income tax expense was $25.3$44.7 million for the full-year 20172021 compared to $11.8$19.1 million for the full-year 20162020 and $19.9$20.6 million for the full-year 2015. Tax expense for 2017 included the aforementioned, estimated $5.6 million charge to adjust the value of deferred tax assets to reflect the lower corporate tax rate, resulting from the Act.2019. The higher level ofincrease in income tax expense in 2017 also reflected increased pretax2021 when compared to 2020 was primarily the result of higher taxable income. The slight decrease in income tax expense in 2020 when compared to 2019 was primarily the result of lower taxable income. The effective tax rates were 36.9%25.5% in 2017, 27.5%2021, 21.1% in 2020 and 21.9% for 2016 and 32.5% for 2015. Excluding the effect of the $5.6 million charge, the2019. The higher effective tax rate in 2017during 2021 when compared to 2020 and 2019, was 28.8%.the result of a higher percentage of income being derived from taxable sources. The Company expects its effective tax rate to increase in 2016 from 2015 decreased due to2022, as a decreaseresult of the Company’s revenue growth in the proportion of income subject to income taxes.existing and new markets.
For a more detailed description of income taxes see Note 1210 of the Notes to Consolidated Financial Statements.
Financial Condition Overview
AtAs of December 31, 2017,2021, the Company’s total assets were $5.1$8.1 billion, an increase of $682 million$0.6 billion from December 31, 2016.2020. Total loans (including loans held-for-sale) were $4.2$6.8 billion, an increase of $642 million$0.6 billion from December 31, 2016.2020. Deposits were $3.8$6.3 billion, an increase of $451 million$0.4 billion from December 31, 2016.2020.
AtAs of December 31, 2016,2020, the Company’s total assets were $4.4$7.5 billion, an increase of $410 million$1.4 billion from December 31, 2015.2019. Total loans (including loans held-for-sale) were $3.6$6.2 billion, an increase of $455 million$1.1 billion from December 31, 2015.2019. Deposits were $3.3$6.0 billion, an increase of $553 million$1.2 billion from December 31, 2015.2019. These increases were primarily the result of the acquisition of BNJ.
Loan Portfolio
The Bank’s lending activities are generally oriented to small-to-medium sized businesses, high net worth individuals, professional practices and consumer and retail clients living and working in the Bank’s metropolitan, New York market area, consisting of Bergen, Union, Morris, Essex, Hudson, Mercer and Monmouth counties, New Jersey, as well as NYC’s five boroughs, Nassau, Rockland, Orange and commencingWestchester counties, in 2018, Long Island through its Melville, New York office.York. The Bank has not made loans to borrowers outside of the United States. The Bank believes that its strategy of high-quality client service, competitive rate structures and selective marketing have enabled it to gain market share.
Commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, inventory and equipment and liens on commercial and residential real estate. Commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include loans secured by first liens on completed commercial properties, including multi-family properties, to purchase or refinance such properties. Residential mortgages include loans secured by first liens on residential real estate and are generally made to existing clients of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences. Consumer loans are made to individuals who qualify for auto loans, cash reserve, credit cards and installment loans.
During 2017 and 2016, loan portfolio growth was positively impacted in several ways including (i) an increase in demand for small business lines-36-
Table of credit and business termContents
Gross loans as economic conditions remained strong (ii) industry consolidation and lending restrictions involving larger competitors allowing the Bank to gain market share, (iii) an increase in refinancing strategies employed by borrowers during the current low rate environment, and (iv) the Bank’s success in attracting highly experienced commercial loan officers with substantial local market knowledge.
Total gross loans atof December 31, 20172021 totaled $4.2$6.8 billion, an increase of $695.4 million,$0.6 billion, or 20.0%9.5%, over gross loans at December 31, 2016 of $3.5 billion. Asas of December 31, 2017, the Bank had transferred $46.8 million2020 of loans secured by NYC taxi medallions that were categorized as held-for-sale to loans held-for-investment. Gross loans were also reduced at December 31, 2017 by the sale of $49.1 million of non-relationship multifamily loans which resulted in a gain on sale of approximately $0.5 million. Excluding this transfer and sale, total gross loans at December 31, 2017 increased by $698 million, or 20.1% over gross loans at December 31, 2016. The increase in gross loans was attributable to organic loan growth.$6.3 billion.
The largest component of ourthe gross loan portfolio atas of December 31, 20172021 and December 31, 20162020 was commercial real estate loans. OurCommercial real estate loans as of December 31, 2021 totaled $4.7 billion, an increase of $958.0 million, or 25.3%, compared to commercial real estate loans atas of December 31, 2017 totaled $2.6 billion, an2020 of $3.8 billion. The main component contributing to the increase of $388 million, or 17.6%, overin commercial real estate loans atis an increase in the multifamily loans. Commercial loans totaled $1.3 billion as of December 31, 20162021, a decrease of $2.2 billion. Our$222.5 million, or 14.6%, compared to commercial loans totaled $824.1 million atas of December 31, 2017, an increase2020 of $270.5 million, or 48.9%, over commercial loans at December 31, 2016 of $554.1 million.$1.5 billion. Included in commercial loans atwere PPP loans of $93.1 million as of December 31, 20172021 and $397.5 million as of December 31, 2020. The decrease in commercial loans was the entire taxi medallion portfolio ($46.8 million) that was the result of a transfer backmainly attributable to loans held-for-investment from the loans held-for-sale portfolio. Excluding this transferaccelerated forgiveness of the taxi medallion portfolio, the commercial loan portfolio increased by $223.7 million, or 40.4% over commercialoutstanding PPP loans. Commercial construction loans atas of December 31, 2016.
Our commercial construction loans at December 31, 20172021 totaled $483.2$540.2 million, a decrease of $3.0$77.6 million, or (0.6%)12.6%, over commercialcompared to construction loans atas of December 31, 20162020 of $486.2$617.8 million. Our
Residential real estate loans totaled $255.3 million as of December 31, 2021, a decrease of $67.3 million, or 20.9%, compared to residential real estate loans totaled $271.8 million atas of December 31, 2017, an increase2020 of $39.2 million, or 16.9%, over residential real estate$322.6 million. Consumer loans atas of December 31, 2016 of $232.5 million. Our consumer loans at2021 and December 31, 20172020 totaled $2.8 million, an increase of $0.4 million, 18.0%, over consumer loans of $2.4 million at December 31, 2016. The growth in our loan portfolio reflects the success of our business strategy, in particular emphasizing high-quality client service, which has led to continued client referrals.$1.9 million.
The following table sets forth the classification of our loans by loan portfolio segment for the periods presented.
December 31, | December 31, 2021 | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Commercial | $ | 824,082 | $ | 553,576 | $ | 570,116 | $ | 499,816 | $ | 229,688 | ||||||||||||||||||||||
Commercial (1) | $ | 1,299,428 | $ | 1,521,967 | $ | 1,129,661 | ||||||||||||||||||||||||||
Commercial real estate | 2,592,909 | 2,204,710 | 1,966,696 | 1,634,510 | 536,539 | 4,741,590 | 3,783,550 | 3,041,959 | ||||||||||||||||||||||||
Commercial construction | 483,216 | 486,228 | 328,838 | 167,359 | 42,722 | 540,178 | 617,747 | 623,326 | ||||||||||||||||||||||||
Residential real estate | 271,795 | 232,547 | 233,690 | 234,967 | 150,571 | 255,269 | 322,564 | 320,020 | ||||||||||||||||||||||||
Consumer | 2,808 | 2,380 | 2,454 | 2,879 | 1,084 | 1,886 | 1,853 | 3,328 | ||||||||||||||||||||||||
Gross loans | 4,174,810 | 3,479,441 | 3,101,794 | 2,539,531 | 960,604 | 6,838,351 | 6,247,681 | 5,118,294 | ||||||||||||||||||||||||
Net deferred (fees) costs | (3,354) | (3,609) | (2,787) | (890) | 339 | (9,729 | ) | (11,374 | ) | (4,767 | ) | |||||||||||||||||||||
Loans receivable | 4,171,456 | 3,475,832 | 3,099,007 | 2,538,641 | 960,943 | 6,828,622 | 6,236,307 | 5,113,527 | ||||||||||||||||||||||||
Allowance for loan losses | (31,748) | (25,744) | (26,572) | (14,160) | (10,333) | |||||||||||||||||||||||||||
Allowance for credit losses | (78,773 | ) | (79,226 | ) | (38,293 | ) | ||||||||||||||||||||||||||
Net loans receivable | $ | 4,139,708 | $ | 3,450,088 | $ | 3,072,435 | $ | 2,524,481 | $ | 950,610 | $ | 6,749,849 | $ | 6,157,081 | $ | 5,075,234 |
(1) | Included in commercial loans were PPP loans of $93.1 million and $397.5 million as of December 31, 2021 and December 31, 2020, respectively. |
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The following table sets forth the classification of our gross loans by loan portfolio segment and by fixed and adjustable rate loans as of December 31, 20172021 by remaining of contractual maturity.
At December 31, 2017, Maturing | ||||||||||||||||||||||||||||||||||||
In One Year or Less | After One Year through Five Years | After Five Years | Total | As of December 31, 2021, Maturing | ||||||||||||||||||||||||||||||||
(dollars in thousands) | In One Year or Less | After One Year through Five Years | After Five Years through Fifteen Years | After Fifteen Years | Total | |||||||||||||||||||||||||||||||
Commercial | $ | 360,413 | $ | 243,514 | $ | 220,155 | $ | 824,082 | $ | 582,103 | $ | 256,805 | $ | 323,171 | $ | 137,349 | $ | 1,299,428 | ||||||||||||||||||
Commercial real estate | 231,678 | 566,611 | 1,794,620 | 2,592,909 | 399,352 | 1,114,270 | 2,998,632 | 229,336 | 4,741,590 | |||||||||||||||||||||||||||
Commercial construction | 428,099 | 55,117 | - | 483,216 | 425,835 | 114,343 | - | - | 540,178 | |||||||||||||||||||||||||||
Residential real estate | 7,199 | 27,102 | 237,494 | 271,795 | 2,552 | 21,547 | 45,966 | 185,204 | 255,269 | |||||||||||||||||||||||||||
Consumer | 2,448 | 325 | 35 | 2,808 | 1,695 | 155 | 20 | 16 | 1,886 | |||||||||||||||||||||||||||
Total | $ | 1,029,837 | $ | 892,669 | $ | 2,252,304 | $ | 4,174,810 | $ | 1,411,537 | $ | 1,507,120 | $ | 3,367,789 | $ | 551,905 | $ | 6,838,351 | ||||||||||||||||||
Loans with: | ||||||||||||||||||||||||||||||||||||
Fixed rates | $ | 354,245 | $ | 524,850 | $ | 762,460 | $ | 1,641,555 | $ | 443,332 | $ | 1,027,257 | $ | 997,116 | $ | 329,483 | $ | 2,797,188 | ||||||||||||||||||
Variable rates | 675,592 | 367,819 | 1,489,844 | 2,533,255 | 968,205 | 479,863 | 2,370,673 | 222,422 | $ | 4,041,163 | ||||||||||||||||||||||||||
Total | $ | 1,029,837 | $ | 892,669 | $ | 2,252,304 | $ | 4,174,810 | $ | 1,411,537 | $ | 1,507,120 | $ | 3,367,789 | $ | 551,905 | $ | 6,838,351 |
For additional information regarding loans, see Note 54 of the Notes to the Consolidated Financial Statements.Statements
Asset Quality
General. One of our key objectives is to maintain a high level of asset quality. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by sending late notices, as well as making personal contact with the borrower. Initial contacts typicallyTypically, late notices are made 15sent approximately 10 days after the date the payment is due, and late notices are sentfollowed up by direct contact with the borrower approximately 15 days after the date the payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed, and additional efforts are made to collect the deficiency. AllTotal loans which are delinquent 30 days or more are reported to the board of directors of the Bank on a monthly basis.
On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases (“nonaccrual” loans). Except for loans that are well securedwell-secured and in the process of collection, it is our policy to discontinue accruing additional interest and reverse any interest accrued on any loan that is 90 days or greater past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to his/herthe borrower’s ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt. Typically, a nonaccrual loan may return to accrual status if the borrower makes the loan current, and then makes six consecutive payments as scheduled.
Real estate acquired as a result of foreclosure is classified as other real estate owned (“OREO”) until sold. OREO is recorded at the lower of cost or fair value less estimated selling costs. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of OREO are charged to operations, as incurred.
The Company evaluates individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. The Company evaluates the pooling methodology at least annually. Loans transition from defined segments for individual analysis when credit characteristics, or risk traits, change in a material manner. A loan is considered impairedfor individual analysis when, based on current information and events, it is probable that the BankCompany will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by managementthe Company in determining impairmentindividual analysis include payment status and the probability of collecting scheduled principal and interest payments when due. Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties are considered troubled debt restructurings (“TDR”) and are classified as impaired. Loans considered to be TDRs can be categorized asindividually analyzed if carrying value is $250,000 or higher. Additionally, nonaccrual loans that are $250,000 or performing. The impairment of a loan can be measured at (1) the fair value of the collateral less costs to sell, if the loan is collateral dependent, (2) at the value of expected future cash flows using the loan’s effective interest rate, or (3) at the loan’s observable market price. Generally, the Bank measures impairment of suchhigher are also individually analyzed. All PCD loans by reference to the fair value of the collateral less costs to sell. Loans that experience minor payment delays and payment shortfall generally are not classified as impaired.
Loans $250,000 and over are individually evaluated for impairment. If a loan that is identifiedanalyzed. For loans designated as impaired and the individual test results in an impairment, a portion of the allowance is allocated so that the loan is reported, net, at the fair value of collateral less costs to sell if repayment is expected solely from the collateralTDR or at the present value of estimated future cash flows using the loan’s existing rate if the loan is dependent on cash flow. Loansnonaccrual with balances less than $250,000, these loans are collectively evaluated, for impairment, and, accordingly, are not separately identified for impairmentanalysis or disclosures. Instruments will not be included in both collective and individual analysis. Individual analysis will establish a specific reserve for instruments in scope.
Asset Classification.Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special mention.”
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When an insured institution classifies one or more assets, or portions thereof, as “substandard” or “doubtful,” it is required that a general valuation allowance for loancredit losses must be established for loan losses in an amount deemed prudent by management. General valuation allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as “loss,” it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.
A bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for loancredit losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Our management believes that, based on information currently available, our allowance for loancredit losses is maintained at a level which covers all known and probable incurred losses in the portfolio at each reporting date. However, actual losses are dependent upon future events and, as such, further additions to the level of allowances for loancredit losses may become necessary.
The table below sets forth information on our classified loans and loans designated as special mention (excluding loans held-for-sale) as of the dates presented:
December 31, | ||||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Classified Loans: | ||||||||||||||||
Substandard | $ | 85,201 | $ | 35,693 | $ | 157,434 | $ | 119,710 | ||||||||
Doubtful | - | - | - | 215 | ||||||||||||
Loss | - | - | - | - | ||||||||||||
Total classified loans | 85,201 | 35,693 | 157,434 | 119,925 | ||||||||||||
Special Mention Loans | 43,620 | 37,816 | 72,286 | 79,868 | ||||||||||||
Total classified and special mention loans | $ | 128,821 | $ | 73,509 | $ | 229,720 | $ | 199,793 |
During the year ended December 31, 2017,2021, “substandard” loans and “doubtful” loans, which include lower credit quality loans which possess higher riskcharacteristics than special mention assets,“special mention” loans, increased to $157.4 million, or 2.3% of loans receivable, as of December 31, 2021 from $35.7$119.9 million, or 1.9% of loans receivable, as of December 31, 2020. The increase of $37.7 million is primarily attributable to loans migrating to substandard that have recently come off deferment status. During the year ended December 31, 2021, “special mention” loans were $72.3 million, or 1.0% of total loans receivable, atwhile “special mention” loans as of December 31, 2016 to $83.52020 were $79.9 million, or 2.0%1.3% of loans receivable, atreceivable. As of December 31, 2017. The increase is primarily attributable to the entire taxi medallion portfolio (approximately $46.8 million, or 1.1% of2021, deferred loans receivable) moving back to the loans held-for-investment category from the loans held-for-sale category.were $0.5 million.
NonperformingNonaccrual Loans, Performing Troubled Debt Restructurings, OREO and Loans 90 Days or Greater Past Due Loans and OREOStill Accruing
Nonperforming loans include nonaccrual loans and accruing loans which are contractually past due 90 days or greater.loans. Nonaccrual loans represent loans on which interest accruals have been suspended. The Company considers charging off loans, or a portion thereof, when they become contractually past due ninety days or more as to interest or principal payments or when other internal or external factors indicate that collection of principal or interest is doubtful. Performing troubled debt restructurings represent loans on which a concession was granted to a borrower, such as a reduction in interest rate to a rate lower than the current market rate for new debt with similar risks, and which are currently performing in accordance with the modified terms. For additional information regarding loans, see Note 54 of the Notes to the Consolidated Financial Statements.
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The following table sets forth, as of the dates indicated, the amount of the Company’s nonaccrual loans, other real estate owned (“OREO”), performing troubled debt restructurings (“TDRs”) and loans past due 90 days or greater and still accruing:
At December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Nonaccrual loans | $ | 65,613 | $ | 5,734 | $ | 20,737 | $ | 11,609 | $ | 3,137 | ||||||||||
Nonaccrual loans (held-for-sale) | - | 63,044 | - | - | - | |||||||||||||||
OREO | 538 | 626 | 2,549 | 1,108 | 220 | |||||||||||||||
Total nonperforming assets(1) | $ | 66,151 | $ | 69,404 | $ | 23,286 | $ | 12,717 | $ | 3,357 | ||||||||||
Performing TDRs | $ | 14,920 | $ | 13,338 | $ | 85,925 | $ | 1,763 | $ | 5,746 | ||||||||||
Loans 90 days or greater past due and still accruing (non-PCI) | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Loans 90 days or greater past due and still accruing (PCI) | $ | 1,664 | $ | 5,293 | $ | - | $ | - | $ | - | ||||||||||
Nonaccrual loans (excluding loans held-for-sale) to loans receivable | 1.57 | % | 0.16 | % | 0.67 | % | 0.46 | % | 0.33 | % | ||||||||||
Nonperforming assets to total assets | 1.29 | % | 1.57 | % | 0.58 | % | 0.37 | % | 0.20 | % | ||||||||||
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to total loans(2) | 1.97 | % | 2.48 | % | 3.52 | % | 0.62 | % | 0.95 | % |
December 31, | December 31, | December 31, | ||||||||||
2021 | 2020 | 2019 | ||||||||||
Nonaccrual loans | $ | 61,700 | $ | 61,696 | $ | 49,481 | ||||||
OREO | - | - | - | |||||||||
Total nonperforming assets | $ | 61,700 | $ | 61,696 | $ | 49,481 | ||||||
Performing TDRs | $ | 43,587 | $ | 23,655 | $ | 21,410 | ||||||
Loans 90 days or greater past due and still accruing | $ | 13,531 | $ | 12,821 | $ | 3,107 | ||||||
Nonaccrual loans to loans receivable | 0.90 | % | 0.99 | % | 0.97 | % | ||||||
Nonperforming assets to total assets | 0.76 | % | 0.82 | % | 0.80 | % | ||||||
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to total loans | 1.74 | % | 1.57 | % | 1.44 | % |
Allowance for LoanCredit Losses and Related Provision
The allowance for loancredit losses is a reserve established through charges to earnings in the form of a provision for loancredit losses. We maintain an allowance for loancredit losses at a level considered adequate to provide for all known and probable incurred losses in the portfolio. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited. Our officers analyze risks within the loan portfolio on a continuous basis and through an external independent loan review function, and the results of the loan review function are also reviewed by our Audit Committee. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly and, as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to our allowance for loancredit losses.
AtAs of December 31, 2017,2021, the allowance for loancredit losses for loans was $31.7$78.8 million, an increasea decrease of $6.0$0.5 million, or 23.3%0.6%, from $25.7$79.2 million for the year endedas of December 31, 2016.2020. The increase inBank adopted CECL as of January 1, 2021. As a result of the adoption, the Bank recorded a “Day 1” CECL adjustment on January 1, 2021 of $6.5 million that increased the allowance for loancredit losses for loans. This increase was primarily attributable to organic loan growth and an increaseoffset by a release of provision to the acquired portfolio, slightly offset by decreasesfor credit losses of $5.5 million as well as $2.0 million in specific reserves.
During the year ended December 31, 2017, the Bank recorded net recoveries of $4 thousand, compared with $39.5 million of net charge-offs during the year ended December 31, 2016. 2021. The $5.5 million release of provision for credit losses during the year ended December 31, 2021 was the result of a continued improvement in the macroeconomic outlook during 2021. Included in the $2.0 million net charge-offs for the year ended December 31, 2021 was a $1.4 million charge-off of a commercial real estate loan that previously had a specific credit reserve.
The allowance for loancredit losses for loans as a percentage of loans receivable was 1.15% as of December 31, 2021 and 1.27% as of December 31, 2020. Excluding PPP loans receivable, which are 100% federally guaranteed, the allowance for credit losses as a percentage of loans receivable was 0.76% at1.17% as of December 31, 2017 and 0.74% at December 31, 2016. During 2016, the Bank charged-off $36.7 million related to the taxi medallion loan portfolio, which contributed to the large decrease in net charge-off activity when compared to the current year.2021.
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Five-Year
Three-Year Statistical Allowance for LoanCredit Losses for Loans
The following table reflects the relationship of loan volume, the provision and allowance for loancredit losses for loans and net charge-offs for the past five years.periods presented.
Years Ended December 31, | December 31, 2021 | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Balance at the January 1, | $ | 25,744 | $ | 26,572 | $ | 14,160 | $ | 10,333 | $ | 10,237 | ||||||||||||||||||||||
Balance as of January 1, | $ | 79,226 | $ | 38,293 | $ | 34,954 | ||||||||||||||||||||||||||
CECL Day 1 Adjustment | 6,557 | - | - | |||||||||||||||||||||||||||||
Balance as of January 1, as adjusted for changes in accounting principal | 85,783 | 38,293 | 34,954 | |||||||||||||||||||||||||||||
Charge-offs: | ||||||||||||||||||||||||||||||||
Commercial-other | 70 | 1,446 | 507 | 777 | 132 | |||||||||||||||||||||||||||
Commercial-taxi medallions | – | 36,750 | – | – | – | |||||||||||||||||||||||||||
Commercial-lease financing receivable | – | 1,147 | – | – | – | |||||||||||||||||||||||||||
Commercial (1) | 382 | 552 | 1,029 | |||||||||||||||||||||||||||||
Commercial real estate | 155 | 107 | – | – | – | 1,780 | - | 3,470 | ||||||||||||||||||||||||
Residential real estate | 14 | 94 | – | 159 | 175 | 235 | 341 | 557 | ||||||||||||||||||||||||
Consumer | – | 29 | 31 | – | 22 | - | 7 | 20 | ||||||||||||||||||||||||
Total charge-offs | 239 | 39,573 | 538 | 936 | 329 | 2,397 | 900 | 5,076 | ||||||||||||||||||||||||
Recoveries: | ||||||||||||||||||||||||||||||||
Commercial-other | 178 | 4 | 340 | 50 | 69 | |||||||||||||||||||||||||||
Commercial | 289 | 4 | 265 | |||||||||||||||||||||||||||||
Commercial real estate | 51 | 35 | – | – | – | 85 | 802 | 30 | ||||||||||||||||||||||||
Residential real estate | 12 | 3 | 2 | 19 | – | 20 | 23 | 3 | ||||||||||||||||||||||||
Consumer | 2 | 3 | 3 | 11 | 6 | 11 | 4 | 17 | ||||||||||||||||||||||||
Total recoveries | 243 | 45 | 345 | 80 | 75 | 405 | 833 | 315 | ||||||||||||||||||||||||
Net charge-offs (recoveries) | (4) | 39,528 | 193 | 856 | 254 | |||||||||||||||||||||||||||
Provision for loan losses | 6,000 | 38,700 | 12,605 | 4,683 | 350 | |||||||||||||||||||||||||||
Net charge-offs | 1,992 | 67 | 4,761 | |||||||||||||||||||||||||||||
(Release of) provision for credit losses for loans | (5,018 | ) | 41,000 | 8,100 | ||||||||||||||||||||||||||||
Balance at end of year | $ | 31,748 | $ | 25,744 | $ | 26,572 | $ | 14,160 | $ | 10,333 | $ | 78,773 | $ | 79,226 | $ | 38,293 | ||||||||||||||||
Ratio of net charge-offs (recoveries) during the year to average loans outstanding during the year | 0.00 | % | 1.18 | % | 0.01 | % | 0.05 | % | 0.03 | % | ||||||||||||||||||||||
Allowance for loan losses as a percentage of loans receivable at December 31, | 0.76 | % | 0.74 | % | 0.86 | % | 0.56 | % | 1.08 | % | ||||||||||||||||||||||
Ratio of net charge-offs during the year to average loans receivable outstanding during the year | 0.03 | % | 0.00 | % | 0.09 | % | ||||||||||||||||||||||||||
Allowance for credit losses for loans as a percentage of loans receivable | 1.15 | % | 1.27 | % | 0.75 | % |
(1) For the years ended December 31, 2019 the loan charge-offs within the commercial loan segment included $1.0 million related to the taxi medallion portfolio.
For additional information regarding loans, see Note 54 of the Notes to the Consolidated Financial Statements.
Implicit in the lending function is the fact that loancredit losses will be experienced and that the risk of loss will vary with the type of loan being made, the creditworthiness of the borrower and prevailing economic conditions. The allowance for loancredit losses has been allocated in the table below according to the estimated amount deemed to be reasonably and supportably necessary to provide for the possibility of either lifetime expected losses or losses being incurred within the following categories of loans atas of December 31, for each of the past fivethree years.
The table below shows, for three types of loans, the amounts of the allowance allocable to such loans and the percentage of such loans to gross loans, along with the amount of the unallocated allowance. Commercial loan type shown below includes commercial, commercial real estate and commercial construction loans.
Commercial | Residential Real Estate | Consumer | Unallocated | |||||||||||||||||||||||||||||
Amount of Allowance | Loans to Gross Loans | Amount of Allowance | Loans to Gross Loans | Amount of Allowance | Loans to Gross Loans | Amount of Allowance | Total Allowance | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
2021 | $ | 75,138 | 95.4 | % | $ | 3,628 | 4.6 | % | $ | 7 | 0.1 | % | $ | - | $ | 78,773 | ||||||||||||||||
2020 | 75,967 | 94.8 | % | 2,687 | 5.2 | % | 4 | 0.0 | % | 568 | 79,226 | |||||||||||||||||||||
2019 | 36,506 | 93.7 | % | 1,685 | 6.3 | % | 3 | 0.1 | % | 99 | 38,293 |
Commercial | Residential real estate | Consumer | Unallocated | |||||||||||||||||||||||||||||
Amount of Allowance | Loans to Gross Loans | Amount of Allowance | Loans to Gross Loans | Amount of Allowance | Loans to Gross Loans | Amount of Allowance | Total Allowance | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
2017 | $ | 30,090 | 93.4% | $ | 1,051 | 6.5% | $ | 2 | 0.1% | $ | 605 | $ | 31,748 | |||||||||||||||||||
2016 | 24,005 | 93.2 | 957 | 6.7 | 3 | 0.1 | 779 | 25,744 | ||||||||||||||||||||||||
2015 | 25,127 | 92.4 | 977 | 7.5 | 4 | 0.1 | 464 | 26,572 | ||||||||||||||||||||||||
2014 | 12,121 | 90.6 | 1,113 | 9.3 | 7 | 0.1 | 919 | 14,160 | ||||||||||||||||||||||||
2013 | 7,806 | 84.2 | 990 | 15.7 | 146 | 0.1 | 1,391 | 10,333 |
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Investments
For the year ended December 31, 2017,2021, the average volume of investment securities, decreasedincluding equity securities, increased by $3.5$20.3 million to approximately $393.1$464.3 million or 9.1%6.4% of average earning assets, from $396.6$444.1 million, on average, or 10.1%6.4% of average earning assets, in 2016. Atfor the year ended December 31, 2017, the total investment portfolio amounted to $435.3 million, an increase2020. As of $82.0 million from December 31, 2016. At December 31, 2017,2021, the principal components of the investment portfolio are U.S. Treasury and Government Agency Obligations, Federal Agency Obligations including mortgage-backed securities, Obligations of U.S. statesStates and political subdivision, corporate bonds and notes,Political Subdivisions, Corporate Bonds and other debt and equity securities.
Transfers of debt securities from the held-to-maturity category to the available-for-sale category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of the transfer is recognized in accumulated other comprehensive income, net of applicable taxes. During the quarter ended September 30, 2016 the Company transferred all securities previously categorized as held-to-maturity to available-for-sale classification. The transfer resulted in an increase of approximately $210 million in amortized cost basis of securities and resulted in a net increase to accumulated other comprehensive income of $7.4 million, net of tax. This transfer will enhance liquidity and increase flexibility with regard to asset-liability management and balance sheet composition.
During the year ended December 31, 2017,2021, rate related factors decreased investment revenue by $0.8$2.8 million, while volume related factors increased investment revenue by $0.3 million. The tax-equivalent yield on investments decreased by 1964 basis points to 3.13%1.61% from a yield of 3.32%2.25% during the year ended December 31, 2016.2020. This was caused byprimarily due to overall declines in prevailing interest rates over the Company decreasing the sizecourse of its investment portfolio in an effort to deploy excess cash into loans.2021.
Securities available-for-sale are a part of the Company’s interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. The Company continues to reposition the investment portfolio as part of an overall corporate-wide strategy to produce reasonable and consistent margins where feasible, while attempting to limit risks inherent in the Company’s balance sheet.Consolidated Statement of Condition.
AtAs of December 31, 2017, the2021, net unrealized lossgains on securities available-for-sale, which are carried as a component of accumulated other comprehensive income (loss) and included in stockholders’ equity, net of tax, amounted to ($1.2)$0.5 million as compared with a net unrealized gaingains of $0.9$7.9 million atas of December 31, 2016, resulting from2020. The decrease in unrealized gains is predominately attributable to changes in market conditions and interest rates at December 31, 2017.rates. For additional information regarding the Company’s investment portfolio, see Note 4,3, Note 1715 and Note 2220 of the Notes to the Consolidated Financial Statements.
During 2017, securities sold2021, there were no sales from the Company’s available-for-sale portfolio, amounted to $29.5 million, as compared with $85.3$19.6 million in 2016sales in 2020 and $65.2$183.7 million in 2015.2019. The gross realized gains (losses) on securities sold, called or matured amountedmounted to approximately $1.6 million$195 thousand in 2017, $4.2 million2021, $29 thousand in 20162020 and $3.9 million$(280) thousand in 2015,2019, while there were no gross realized losses, or impairment charges in 2017, 20162021, 2020 and 2015.
2019. The table below illustrates the maturity distribution and weighted average yield on a tax-equivalent basis for amortized cost of our investment securities, atexcluding equity securities, as of December 31, 2017,2021, on a contractual maturity basis.
Due in 1 year or less | Due after 1 year through 5 years | Due after 5 years through 10 years | Due after 10 years | Total | Due in 1 year or less | Due after 1 year through 5 years | Due after 5 years through 10 years | Due after 10 years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Market Value | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Market Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment Securities Available-for-Sale | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Federal Agency Obligations | $ | 2,507 | 1.79 | % | $ | 785 | 1.80 | % | $ | 3,298 | 1.98 | % | $ | 49,707 | 2.58 | % | $ | 56,297 | 2.50 | % | $ | 56,022 | $ | - | - | % | $ | - | - | % | $ | - | - | % | $ | 50,336 | 2.38 | % | $ | 50,336 | 2.38 | % | $ | 50,360 | ||||||||||||||||||||||||||||||||||||||||||||
Residential Mortgage Pass-through Securities | 12 | 2.51 | 582 | 2.59 | 7,546 | 2.26 | 175,369 | 2.93 | 183,509 | 2.90 | 181,891 | 3 | 3.57 | 442 | 2.56 | 3,535 | 3.29 | 313,131 | 1.63 | 317,111 | 1.65 | 316,095 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Mortgage Pass-through Securities | - | - | 4,054 | 2.40 | - | - | - | - | 4,054 | 2.40 | 4,054 | - | - | - | - | 4,079 | 1.52 | 6,735 | 1.62 | 10,814 | 1.58 | 10,469 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of U.S. States and Political Subdivisions | 652 | 4.21 | 6,613 | 3.99 | 24,211 | 4.65 | 99,247 | 4.61 | 130,723 | 4.58 | 131,128 | 395 | 4.11 | 4,216 | 4.15 | 4,275 | 4.18 | 136,159 | 3.31 | 145,045 | 3.36 | 145,625 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trust Preferred | - | - | - | - | 1,579 | 2.00 | 2,998 | 7.01 | 4,577 | 5.28 | 4,671 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate Bonds and Notes | 4,504 | 2.97 | 20,338 | 2.99 | 4,959 | 3.11 | - | - | 29,801 | 3.01 | 29,693 | 2,500 | 3.28 | 5,987 | 2.05 | 481 | 7.33 | - | - | 8,968 | 2.68 | 9,049 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed Securities | - | - | - | - | 5,599 | 2.35 | 6,422 | 2.14 | 12,021 | 2.24 | 12,050 | - | - | - | - | 380 | 0.76 | 2,183 | 0.93 | 2,563 | 0.90 | 2,564 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Certificates of Deposit | 301 | 2.12 | 320 | 2.65 | - | - | - | - | 621 | 2.39 | 625 | 150 | 1.54 | - | - | - | - | - | - | 150 | 1.54 | 150 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity Securities | - | - | - | - | - | - | 11,843 | 0.04 | 11,843 | 0.04 | 11,728 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Securities | 3,422 | 0.02 | - | - | - | - | - | - | 3,422 | 0.02 | 3,422 | 195 | 0.25 | - | - | - | - | - | - | 195 | 0.25 | 195 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Investment Securities | $ | 11,398 | 1.87 | % | $ | 32,692 | 3.08 | % | $ | 47,192 | 3.56 | % | $ | 345,586 | 3.28 | % | $ | 436,868 | 3.26 | % | $ | 435,284 | $ | 3,243 | 3.12 | % | $ | 10,645 | 2.90 | % | $ | 12,750 | 3.10 | % | $ | 508,544 | 2.15 | % | $ | 535,182 | 2.19 | % | $ | 534,507 |
For information regarding the carrying value of the investment portfolio, see Note 4,3, Note 1715 and Note 2220 of the Notes to the Consolidated Financial Statements.
The securities listed in the table above are either rated investment grade by Moody’s and/or Standard and Poor’s or have shadow credit ratings from a credit agency supporting an investment grade and conform to the Company’s investment policy guidelines. There were no municipal securities, or corporate securities, of any single issuer exceeding 10% of stockholders’ equity atas of December 31, 2017.Equity securities and other2021. Other securities do not have a contractual maturity and are included in the “Due after ten years”in 1 year or less” maturity in the table above.
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The following table sets forth the carrying value of the Company’s investment securities, as of December 31 for each of the last three years.
2017 | 2016 | 2015 | 2021 | 2020 | 2019 | |||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||
Investment Securities Available-for-Sale: | ||||||||||||||||||||||||
Federal agency obligations | $ | 56,022 | $ | 52,837 | $ | 29,146 | $ | 50,360 | $ | 38,458 | $ | 28,237 | ||||||||||||
Residential mortgage pass-through securities | 181,891 | 72,497 | 44,910 | 316,095 | 270,884 | 200,496 | ||||||||||||||||||
Commercial mortgage pass-through securities | 4,054 | 4,209 | 2,972 | 10,469 | 6,922 | 4,997 | ||||||||||||||||||
Obligations of U.S. States and political subdivisions | 131,128 | 150,605 | 8,357 | 145,625 | 142,808 | 136,519 | ||||||||||||||||||
Trust preferred securities | 4,671 | 5,666 | 16,255 | |||||||||||||||||||||
Corporate bonds and notes | 29,693 | 36,928 | 53,976 | 9,049 | 25,095 | 28,382 | ||||||||||||||||||
Asset-backed securities | 12,050 | 14,583 | 19,725 | 2,564 | 3,480 | 5,780 | ||||||||||||||||||
Certificates of deposit | 625 | 983 | 1,905 | 150 | 151 | 150 | ||||||||||||||||||
Equity securities | 11,728 | 11,710 | 11,688 | |||||||||||||||||||||
Other securities | 3,422 | 3,272 | 6,836 | 157 | 157 | 140 | ||||||||||||||||||
Total | $ | 435,284 | $ | 353,290 | $ | 195,770 | $ | 534,507 | $ | 487,955 | $ | 404,701 | ||||||||||||
Investment Securities Held-to-Maturity: | ||||||||||||||||||||||||
U.S. treasury & agency securities | $ | - | $ | - | $ | 28,471 | ||||||||||||||||||
Federal agency obligations | - | - | 33,616 | |||||||||||||||||||||
Residential mortgage pass-through securities | - | - | 3,805 | |||||||||||||||||||||
Commercial mortgage-backed securities | - | - | 4,110 | |||||||||||||||||||||
Obligations of U.S. States and political subdivisions | - | - | 118,015 | |||||||||||||||||||||
Corporate bonds and notes | - | - | 36,039 | |||||||||||||||||||||
Total | $ | - | $ | - | $ | 224,056 | ||||||||||||||||||
Total investment securities | $ | 435,284 | $ | 353,290 | $ | 418,676 |
For other information regarding the Company’s investment securities portfolio, see Note 43, Note 15 and Note 2220 of the Notes to the Consolidated Financial Statements.
Interest Rate Sensitivity Analysis
The principal objective of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”). The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.
We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of December 31, 20172021, and December 31, 2016,2020, the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and Bank’s management.
The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates.
Based on our model, which was run as of December 31, 2017,2021, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 1.31%3.35%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 1.40%5.64%. As of December 31, 2016,2020, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 5.79%0.70%, while a 100 basis-point instantaneous decrease in the general level of interest rates would decrease our net interest income by 2.93%5.18%.
Based on our model, which was run as of December 31, 2017,2021, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 2.16%9.77%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.41%10.41%. As of December 31, 2016,2020, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 6.65%3.89%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 4.43%8.56%.
An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of December 31, 2017,2021, would declineincrease by 12.83%0.24% with an instantaneous rate shock of up 200 basis points, and increasedecline by 4.02%5.20% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2016,2020, would decline by 7.97%7.76% with an instantaneous rate shock of up 200 basis points, and increase by 2.96%5.70% with an instantaneous rate shock of down 100 basis points.
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The following table illustrates the most recent results for EVE and NII as of December 31, 2017. 2021.
Interest Rates | Estimated | Estimated Change in EVE | Interest Rates | Estimated | Estimated Change in NII | ||||
(basis points) | EVE | Amount | % | (basis points) | NII | Amount | % | ||
+300 | $451,286 | $(112,800) | (20.00)% | +300 | $157,382 | $2,460 | 1.59% | ||
+200 | 491,693 | (72,393) | (12.83) | +200 | 156,944 | 2,022 | 1.31 | ||
+100 | 531,852 | (32,234) | (5.71) | +100 | 156,376 | 1,454 | 0.94 | ||
0 | 564,086 | - | 0.0 | 0 | 154,922 | - | 0.0 | ||
-100 | 586,735 | 22,649 | 4.02 | -100 | 152,700 | (2,162) | (1.40) |
Interest Rates | Estimated | Estimated Change in EVE | Interest Rates | Estimated | Estimated Change in NII | |||||||||||||||||||||||||
(basis points) | EVE | Amount | % | (basis points) | NII | Amount | % | |||||||||||||||||||||||
+300 | $ | 1,191,457 | $ | (18,961 | ) | (1.57 | ) | +300 | $ | 275,470 | $ | 12,565 | 4.78 | |||||||||||||||||
+200 | 1,213,269 | 2,851 | 0.24 | +200 | 271,700 | 8,795 | 3.35 | |||||||||||||||||||||||
+100 | 1,220,872 | 10,454 | 0.86 | +100 | 267,500 | 4,595 | 1.75 | |||||||||||||||||||||||
0 | 1,210,418 | - | 0.0 | 0 | 262,905 | - | 0.0 | |||||||||||||||||||||||
-100 | 1,147,448 | (62,970 | ) | (5.20 | ) | -100 | 248,081 | (14,824 | ) | (5.64 | ) |
Estimates of Fair Value
The estimation of fair value is significant to certain assets of the Company, including available-for-sale investment securities. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, expected cash flows, credit quality, discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. See Note 2220 of the Notes to Consolidated Financial Statements for additional discussion.
These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the operations; unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Liquidity
Liquidity is a measure of a bank’s ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.
AtAs of December 31, 2017,2021, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of December 31, 2017,2021, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $423.4$742.1 million, which represented 8.3%9.1% of total assets and 9.5%10.9% of total deposits and borrowings, compared to $428.2$697.4 million atas of December 31, 2016,2020, which represented 9.7%9.2% of total assets and 11.2%10.9% of total deposits and borrowings on such date.
The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of December 31, 2017,2021, had the ability to borrow $1.5$1.9 billion. In addition, atas of December 31, 2017,2021, the Bank had in place borrowing capacity of $25 million through correspondent banks. The Bank also has a credit facility established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral of $8.4$1.8 million. AtAs of December 31, 2017,2021, the Bank had aggregate available and unused credit of approximately $812$894.0 million, which represents the aforementioned facilities totaling $1.5$1.9 billion net of $720 million$1.0 billion in outstanding borrowings and letters of credit. AtAs of December 31, 2017,2021, outstanding commitments for the Bank to extend credit were $678 million.$1.2 billion.
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Cash and cash equivalents totaled $149.6$265.5 million onas of December 31, 2017,2021, decreasing by $50.8$38.2 million from $200.4$303.8 million atas of December 31, 2016.2020. Operating activities provided $131.1$202.3 million in net cash. Investing activities used $817.7$689.9 million in net cash, primarily reflecting an increase in loans and net cash flow from the securities portfolio.loans. Financing activities provided $635.8$449.4 million in net cash, primarily reflecting a net increase of $450.9 million in deposits andof $376.0 million, net proceeds raised from FHLB advancesthe issuance of $209.0preferred stock of $110.9 million, slightly offset by $15.0a decrease of $50.0 million from the redemption of subordinate debt and an increase in repaymentsnet borrowings of repurchase agreements.$42.3 million.
Deposits
Deposits are our primary source of funds. Average total deposits increased $378by $0.4 billion, or 6.9%, to $6.2 billion in 2021 from $5.8 billion in 2020 and increased $1.2 million, or 12.2%25.3%, to $3.5$5.8 billion in 20172020 from $3.1$4.6 billion in 20162019. The increase in total average deposits in 2021 was attributable to organic growth, while the increase in 2020 was attributable to both the acquisition of BNJ and increased $523.4 million, or 20.4% to $3.1 billion in 2016 from 2015. During 2017 we saw substantial increases in demand accounts, money market accounts and time deposits. This was due to several promotional items as well as increased efforts to attract new customers.
organic growth. The following table sets forth the year-to-date average balances and weighted average rates for various types of deposits for 2017, 20162021, 2020 and 2015.2019.
2017 | 2016 | 2015 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||
Balance | Rate | Balance | Rate | Balance | Rate | Balance | Rate | Balance | Rate | Balance | Rate | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Demand, noninterest-bearing | $ | 681,215 | - | $ | 624,731 | - | $ | 537,287 | - | $ | 1,454,148 | - | $ | 1,195,547 | - | $ | 819,917 | - | ||||||||||||||||||||||||||||||
Demand, interest-bearing & NOW | 603,796 | 0.36 | % | 530,169 | 0.33 | % | 450,359 | 0.36 | % | 3,081,899 | 0.29 | % | 2,583,590 | 0.66 | % | 2,102,274 | 1.33 | % | ||||||||||||||||||||||||||||||
Money market accounts | 983,956 | 0.71 | % | 802,839 | 0.54 | % | 609,797 | 0.45 | % | |||||||||||||||||||||||||||||||||||||||
Savings | 185,703 | 0.16 | % | 211,830 | 0.29 | % | 219,507 | 0.28 | % | 369,866 | 0.31 | % | 236,318 | 0.27 | % | 165,538 | 0.24 | % | ||||||||||||||||||||||||||||||
Time | 1,015,552 | 1.40 | % | 923,114 | 1.29 | % | 752,380 | 1.17 | % | 1,300,270 | 1.14 | % | 1,792,568 | 1.94 | % | 1,549,700 | 2.40 | % | ||||||||||||||||||||||||||||||
Total Deposits | $ | 3,470,221 | 0.68 | % | $ | 3,092,683 | 0.60 | % | $ | 2,569,330 | 0.54 | % | ||||||||||||||||||||||||||||||||||||
Average Total Deposits | $ | 6,206,183 | 0.52 | % | $ | 5,808,023 | 0.90 | % | $ | 4,637,429 | 1.41 | % |
The following table sets forth the distribution of total deposit accounts, by account types for each of the dates indicated.
December 31, 2017 | December 31, 2016 | |||||||||||||||
Amount | % of total | Amount | % of total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Demand, noninterest-bearing | $ | 776,843 | 20.47 | % | $ | 694,977 | 20.78 | % | ||||||||
Demand, interest-bearing & NOW | 636,339 | 16.77 | % | 563,740 | 16.86 | % | ||||||||||
Money market accounts | 1,033,525 | 27.23 | % | 911,867 | 27.27 | % | ||||||||||
Savings | 168,452 | 4.44 | % | 205,551 | 6.15 | % | ||||||||||
Time | 1,179,969 | 31.09 | % | 968,136 | 28.94 | % | ||||||||||
Total Deposits | $ | 3,795,128 | 100.00 | % | $ | 3,344,271 | 100.00 | % |
December 31, 2021 | December 31, 2020 | |||||||||||||||
Amount | % of total | Amount | % of total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Demand, noninterest-bearing | $ | 1,617,049 | 25.5 | % | $ | 1,339,108 | 22.5 | % | ||||||||
Demand, interest-bearing & NOW | 3,127,350 | 49.4 | % | 2,861,820 | 48.0 | % | ||||||||||
Savings | 438,445 | 6.9 | % | 294,163 | 4.9 | % | ||||||||||
Time | 1,150,109 | 18.2 | % | 1,464,133 | 24.6 | % | ||||||||||
Total Deposits | $ | 6,332,953 | 100.0 | % | $ | 5,959,224 | 100.0 | % |
As of December 31, 2021, we held $250.5 million of time deposits that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit, which was a decrease of $117.8 million from $368.3 million as of December 31, 2020. The following table summarizesprovides information on the maturity distribution of the time deposits in denominationexceeding the FDIC insurance limit as of $100,000 or more:December 31, 2021 and 2020:
December 31, | December 31, | |||||||
2021 | 2020 | |||||||
(dollars in thousands) | ||||||||
3 months or less | $ | 71,293 | $ | 100,654 | ||||
Over 3 to 6 months | 69,394 | 101,487 | ||||||
Over 6 to 12 months | 63,549 | 95,061 | ||||||
Over 12 months | 46,288 | 71,079 | ||||||
Total | $ | 250,524 | $ | 368,281 |
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December 31, | December 31, | ||||||
2017 | 2016 | ||||||
(dollars in thousands) | |||||||
3 months or less | $ | 109,164 | $ | 107,350 | |||
Over 3 to 6 months | 125,474 | 72,972 | |||||
Over 6 to 12 months | 122,725 | 158,890 | |||||
Over 12 months | 320,078 | 228,201 | |||||
Total | $ | 677,441 | $ | 567,413 |
Borrowings
Borrowings consist of long and short-term advances from the Federal Home Loan Bank and securities sold under agreements to repurchase. Advances
Federal Home Loan Bank advances are secured, under the terms of a blanket collateral agreement, primarily by commercial mortgage loans. As of December 31, 2017,2021, the Company had $670.1a gross carrying value of $468.3 million, excluding a net fair value discount of $120 thousand, in notes outstanding at a weighted average interest rate of 1.76%0.73%. As of December 31, 2016,2020, the Company had $476.3a gross carrying value of $426.0 million, excluding a net fair value discount of $84 thousand, in notes outstanding at a weighted average interest rate of 1.69%1.07%.
Contractual Obligations and Other Commitments
The following table summarizes contractual obligations atas of December 31, 20172021 and the effect such obligations are expected to have on liquidity and cash flows in future periods.
Total | Less than 1 year | 1 – 3 years | 4 – 5 years | Over 5 years | ||||||||||||||||
December 31, 2017 | (dollars in thousands) | |||||||||||||||||||
Contractual obligations: | ||||||||||||||||||||
Operating lease obligations | $ | 16,272 | $ | 2,821 | $ | 5,096 | $ | 3,374 | $ | 4,981 | ||||||||||
Other long-term liabilities/long-term debt: | ||||||||||||||||||||
Time Deposits | $ | 1,179,969 | $ | 597,735 | $ | 553,372 | $ | 28,862 | $ | - | ||||||||||
Federal Home Loan Bank advances and repurchase agreements | 670,077 | 505,077 | 120,000 | 45,000 | - | |||||||||||||||
Capital lease | 2,634 | 294 | 641 | 641 | 1,058 | |||||||||||||||
Subordinated debentures | 54,699 | - | - | - | 54,699 | |||||||||||||||
Total other long-term liabilities/long-term debt | $ | 1,907,379 | $ | 1,103,106 | $ | 674,013 | $ | 74,503 | $ | 55,757 | ||||||||||
Other commercial commitments – off balance sheet: | ||||||||||||||||||||
Commitments under commercial loans and lines of credit | $ | 344,142 | $ | 270,092 | $ | 65,958 | $ | 5,051 | $ | 3,041 | ||||||||||
Home equity and other revolving lines of credit | 44,483 | 16,133 | 8,531 | 13,642 | 6,177 | |||||||||||||||
Outstanding commercial mortgage loan commitments | 254,710 | 245,484 | 9,226 | - | - | |||||||||||||||
Standby letters of credit | 34,114 | 34,114 | - | - | - | |||||||||||||||
Overdraft protection lines | 688 | 330 | 31 | - | 327 | |||||||||||||||
Total off balance sheet arrangements and contractual obligations | $ | 678,137 | $ | 566,153 | $ | 83,746 | $ | 18,693 | $ | 9,545 | ||||||||||
Total contractual obligations and other commitments | $ | 2,601,788 | $ | 1,672,080 | $ | 762,855 | $ | 96,570 | $ | 70,283 |
Total | Less than 1 year | 1 – 3 years | 4 – 5 years | Over 5 years | ||||||||||||||||
December 31, 2021 | (dollars in thousands) | |||||||||||||||||||
Contractual obligations: | ||||||||||||||||||||
Operating lease obligations | $ | 13,579 | $ | 2,807 | $ | 4,651 | $ | 3,441 | $ | 2,680 | ||||||||||
Other long-term liabilities/long-term debt: | ||||||||||||||||||||
Time Deposits, gross sub-total | 1,149,993 | 745,411 | 273,245 | 131,337 | - | |||||||||||||||
Federal Home Loan Bank advances and repurchase agreements, gross | 468,313 | 390,549 | 50,000 | 27,050 | 714 | |||||||||||||||
Finance lease | 1,935 | 321 | 676 | 706 | 232 | |||||||||||||||
Subordinated debentures, net of debt issuance costs | 152,951 | - | - | - | 152,951 | |||||||||||||||
Total other long-term liabilities/long-term debt | 1,773,192 | 1,136,281 | 323,921 | 159,093 | 153,897 | |||||||||||||||
Other commercial commitments – off balance sheet: | ||||||||||||||||||||
Commitments under commercial loans and lines of credit | 647,971 | 408,664 | 187,544 | 47,253 | 4,510 | |||||||||||||||
Home equity and other revolving lines of credit | 53,180 | 8,736 | 13,758 | 11,270 | 19,416 | |||||||||||||||
Outstanding commercial mortgage loan commitments | 514,473 | 136,136 | 358,486 | 350 | 19,501 | |||||||||||||||
Standby letters of credit | 25,271 | 22,738 | 2,533 | - | - | |||||||||||||||
Overdraft protection lines | 973 | 472 | 42 | 152 | 307 | |||||||||||||||
Total off-balance sheet arrangements and contractual obligations | 1,241,868 | 576,746 | 562,363 | 59,025 | 43,734 | |||||||||||||||
Total contractual obligations and other commitments | $ | 3,028,639 | $ | 1,715,834 | $ | 890,935 | $ | 221,559 | $ | 200,311 |
Capital
The maintenance of a solid capital foundation continues to be a primary goal for the Company. Accordingly, capital plans, stock repurchases, and dividend policies are monitored on an ongoing basis. The most important objective of the capital planning process is to balance effectively the retention of capital to support future growth and the goal of providing stockholders with an attractive long-term return on their investment.
The Company’s Tier 1 leverage capital (defined as tangible stockholders’ equity for common stock and Trust Preferred Capital Securities) atas of December 31, 20172021 amounted to $425.4$909.6 million or 8.9%11.7% of average total assets. AtAs of December 31, 2016,2020, the Company’s Tier 1 leverage capital amounted to $390.2$694.9 million or 9.3%9.5% of average total assets. The increase in Tier 1 capital reflects the Company’s retained earnings during 2017.2021, and the issuance of $115 million in aggregate Tier 1 capital at December 31, 2016 reflects its issuance of 1,659,794 shares of commonqualifying fixed-rate non-cumulative perpetual preferred stock at a price of $24.25 per share for net proceeds of $38.4 million. Tier 1 capital excludes the effect of FASB ASC 320-10-05, which amounted to ($1.2) million of net unrealized losses, after tax, on securities available-for-sale at December 31, 2017 (and would be reported as a component of accumulated other comprehensive income which is included in stockholders’ equity), and is reduced by goodwill and intangible assets, which amounted to $148.3 million as of December 31, 2017. For information on goodwill and intangible assets, see Note 1 to the Consolidated Financial Statements..
United States bank regulators have issued guidelines establishing minimum capital standards related to the level of assets and off balance-sheet exposures adjusted for credit risk. Specifically, these guidelines categorize assets and off balance-sheet items into four risk-weightings and require banking institutions to maintain a minimum ratio of capital to risk-weighted assets. AtAs of December 31, 2017,2021, the Company’s CET 1, Tier 1 and total risk-based capital ratios were 9.2%10.64%, 9.3%12.19% and 11.0%15.26%, respectively. For information on risk-based capital and regulatory guidelines for the Parent Corporation and its bank subsidiary, see Note 1615 to the Consolidated Financial Statements.
The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the bank regulators regarding capital components, risk weightings, and other factors.
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Subordinated Debentures
During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-ownedwholly owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85% and re-prices quarterly. The rate atas of December 31, 20172021 was 4.23%2.98%.
During June 2015,September 2020, the Parent Corporation issued $50$75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “fixed-to-floating rate“2020 Notes”) to certain institutional accredited investors.. The net proceeds from the sale of the fixed-to-floating rate2020 Notes were used in the first quarter of 2016 to redeem $11.3 million in the Company’s outstanding. Senior Noncumulative Perpetual Preferred Stock issued to the U.S. Treasury under the Small Business Lending Fund Program, and for general corporate purposes, which included the Parent Corporation contributing $35 million of the net proceeds to the Bank in the form of common equity. The fixed-to-floating rate Notes are non-callable for five years, have a stated maturity of July 1, 2025, and bear interest at a fixed rate of 5.75% per year,annually from, and including, June 30, 2015the date of initial issuance to, but excluding, July 1,September 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on September 15 and December 15 of each year, commencing December 15, 2020. From and including July 1, 2020 to theSeptember 15, 2025 through maturity date or earlyearlier redemption, date, the interest rate willshall reset quarterly to a levelan interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then current three-month LIBORthe benchmark rate plus 393 basis points.shall be deemed to be zero.
During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain accredited investors. The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity. The Notes are non-callable for five years, have a stated maturity of February 1, 2028 and bear interest at a fixed rate of 5.20% per year, from and including January 17, 2018 to, but excluding February 1, 2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points.
During September 2015, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2015 Notes”). As of December 31, 2020, the 2015 Notes had a stated maturity of July 1, 2025, and bore interest until the maturity date or early redemption date at a variable rate equal to the then current three-month LIBOR rate plus 393 basis points. As of December 31, 2020, the variable interest rate was 4.16% and all costs related to 2015 issuance have been amortized. The 2015 Notes were redeemed in full on January 1, 2021.
Preferred Stock
On August 19, 2021, the Company completed an underwritten public offering of 115,000 shares, or $115 million in aggregate liquidation preference, of its depositary shares, each representing a 1/40th interest in a share of the Company’s 5.25% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A, no par value, with a liquidation preference of $1,000 per share. The net proceeds received from the issuance of preferred stock at the time of closing were $110.9 million.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Sensitivity
Market Risk
Interest rate risk management is our primary market risk. See “Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operation- Interest Rate Sensitivity Analysis” herein for a discussion of our management of our interest rate risk.
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PART II
Item 8. Financial Statements and Supplementary Data
All Financial Statements:
The following financial statements are filed as part of this report under Item 8 - “Financial Statements and Supplementary Data.”
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 173) The Board of Directors and Stockholders of ConnectOne Bancorp, Inc. and Subsidiaries Englewood Cliffs, New Jersey Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statements of financial condition of ConnectOne Bancorp, Inc. and Subsidiaries (the In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, Explanatory Paragraph – Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of ASC 326. The adoption of ASC 326 and its subsequent application is also communicated as a critical audit matter below. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. - 49 - Definition and Limitations of Internal Control A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter
Allowance for Credit Losses – Loans The Company adopted ASC 326, Financial Instruments – Credit Losses on January 1, 2021, using the modified retrospective method. Upon adoption the Company recorded a decrease to retained earnings of $2,925,000, net of tax, for the cumulative effect of adopting ASC 326, as noted in the Consolidated Statements of Changes in Stockholders’ Equity. As of December 31, 2021, the allowance for credit losses (“ACL”) on loans was $78,773,000 inclusive of reversal of credit losses on loans of $5,018,000 for the year then ended. The Company has disclosed the impact of adoption in Note 1b (see change in accounting principle explanatory paragraph above) to the consolidated financial statements and the allowance for credit losses on loans as of December 31, 2021 in Notes 1b and 4. ASC 326 requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost at the reporting date. The measurement is based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organizations portfolio. Management employs a process and methodology to estimate the ACL on pooled loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors includes pooling loans into portfolio segments for loan that share similar characteristics. Pooled loan portfolio segments include commercial, commercial real estate, commercial construction, residential real estate, and consumer loans. For pooled loans, the Company utilizes a discounted cash flow (”DCF”) methodology to estimate credit losses over the expected life of the loan. The DCF methodology combines probability of default, the loss given default, maturity date and prepayment speed assumptions to estimate a reserve for each loan. The quantitative loss rates are adjusted by macroeconomic scenarios and reverts, on a straight-line basis, to average historical losses after the forecasted periods. The sum of all the loan level reserves are aggregated for each portfolio segment and a quantitative loss factor is derived. The quantitative factors are also supplemented by certain qualitative loss factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. Qualitative loss factors, for each loan segment within the portfolio, incorporates consideration for a minimum to maximum range for qualitative loss factor derived from either the Company’s historical loss experience or peer group historical loss experience. Changes in these assumptions could have a material effect on the Company’s financial results. We identified auditing the ACL on pooled loans as a critical audit matter because the methodology to determine the estimate of credit losses significantly changes upon adoption of ASC 326, including the application of new accounting policies, the use of subjective judgments for both the quantitative and qualitative calculations and overall changes made to the loss estimation models. Performing audit procedures to evaluate the implementation and subsequent application of ASC 326 for loans involved a high degree of auditor judgment and required significant effort, including the need to involve more experienced audit personnel and valuation specialists. - 50 - The primary procedures we performed to address this critical audit matter included: • Testing the design and operating effectiveness of controls over the evaluation of the ACL on pooled loans, including controls addressing: ○ The selection and application of new accounting policies. ○ Data inputs, judgments and calculations used to determine the loss factors. ○ Information technology general controls and application controls. ○ Problem loan identification and delinquency monitoring. ○ Management’s evaluation of qualitative loss factors. • Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the ACL on pooled loans, which included: ○ Evaluating the appropriateness of the Company’s accounting policies, judgments and elections involved in adoption of ASC 326. ○ Testing the mathematical accuracy of the calculation. ○ Utilizing internal specialists to perform procedures to assist in evaluating the relevance of the macroeconomic loss drivers. ○ Utilizing internal specialists to assist in testing the mathematical accuracy of the underlying peer data used to calculated probability of the default and loss given default rates used within the discounted cash flow model. ○ Evaluating the reasonableness of management’s judgments related to the probability of default, loss given default, including evaluating the use of peer data used to estimate these metrics in the absence of relevant and reliable internal data. ○ Evaluating the reasonableness of management’s judgments related to qualitative adjustments to determine if they are calculated to conform with management’s policies and were consistently applied from the point of adoption to year end.
- 51 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
See the accompanying notes to the consolidated financial statements. Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
See the accompanying notes to the consolidated financial statements. Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See the accompanying notes to the consolidated financial statements. Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
See the accompanying notes to the consolidated financial statements. Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See the accompanying notes to the consolidated financial statements. CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note
Nature of Operations ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its Basis of The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. The consolidated financial statements of the Parent Corporation are prepared on an accrual basis and include the accounts of the Parent Corporation and the Company. All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements.
Segments FASB ASC 28, “Segment Reporting,” requires companies to report certain information about operating segments. The Company is managed as one segment: a community bank. All decisions including but not limited to loan growth, deposit funding, interest rate risk, credit risk and pricing are determined after assessing the effect on the totality of the organization. For example, loan growth is dependent on the ability of the organization to fund this growth through deposits or other borrowings. As a result, the Company is managed as one operating segment. Use of Estimates In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates. Risks and Uncertainties As previously disclosed, on March 11, 2020 the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to impact the United States and the world. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The COVID-19 pandemic has adversely affected, and continues to adversely affect economic activity globally, nationally and locally. Although economic activity has accelerated in 2021, and the United States continues to implement a COVID-19 vaccination program, COVID-19, it’s variants and actions taken to mitigate the spread of it have had and may in the future have an adverse impact on the economies and financial markets of many countries and parts of the United States, including the New Jersey/New York metropolitan area in which the Company primarily operates. Although the Company has been able to continue operations while taking steps to ensure the safety of employees and clients, COVID-19 could impact the Company’s operations in the future. Federal Reserve reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company's financial condition and results of operations in future periods. Although state and local governments have lifted many restrictions on conducting business, it is possible that restrictions could be reimposed. - 57 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) It is therefore unknown how long COVID-19 may continue to impact the economy and what the complete financial effect will be to the Company. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including the determination of the allowance for credit losses on loans, fair value of financial instruments, impairment of goodwill and other intangible assets and income taxes. Federal Reserve reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company's financial condition and results of operations in future periods. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including the determination of the allowance for credit losses, fair value of financial instruments, impairment of goodwill and other intangible assets and income taxes. Cash and Cash Equivalents Cash and cash equivalents include cash, deposits with other financial institutions with maturities of less than 90 days, and federal funds sold. Net cash flows are reported for Investment Securities
Investment securities are adjusted for amortization of premiums and accretion of discounts as adjustments to interest income, which are recognized on a level yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Investment securities gains or losses are determined using the specific identification method. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in comprehensive income, net of tax. Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are generally amortized using the level-yield method without estimating prepayments, except for mortgage-backed securities, where prepayment rates are estimated. Premiums on callable investment securities are amortized to their earliest call date. Gains and losses on sales of securities are recorded on the trade date and determined using the specific identification method.
Prior to January 1, 2021, securities were evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FASB ASC 320-10-65 clarifies the interaction of the factors that - 58 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FASB ASC 320-10-65 changed the presentation and amount of the other-than-temporary impairment recognized in the Consolidated Statement of Income. The other-than-temporary impairment Equity Securities The Company’s investments in equity securities are recorded at fair value, with unrealized gains and losses included in earnings. Loans Held-for-Sale Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. Fair value on these loans is determined based on the terms of the loan, such as interest rate, maturity date, reset term, as well as sales of similar assets. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, purchase premium and discounts and an allowance for Loan segments are defined as a group of loans, which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Company has Loans that are 90 days past due are placed on nonaccrual and previously accrued interest is reversed and charged against interest income unless the loans credit losses. All interest accrued but not received for loans placed on nonaccrual
The policy of the Company is to generally grant commercial, residential and consumer loans to residents and businesses within its New Jersey and New York market area. The borrowers’ abilities to repay their obligations are dependent upon various factors including the borrowers’ income and net worth, cash flows generated by the borrowers’ underlying collateral, value of the underlying collateral, and priority of the lender’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the control of the Company. The Company is therefore subject to risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for - 59 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Allowance for The allowance for For financial assets, the allowance for credit losses is a valuation account that is deducted from, or added to, the amortized cost basis of the financial assets to present the net amount expected to be collected on the financial assets. The Company 's methodology to estimate the allowance for credit losses has two components: (i) a collective reserve component for estimated lifetime expected credit losses for pools of loans that share common risk characteristics and (ii) an individual reserve component for loans that do not share common risk characteristics. The Company maintains an allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial letters of credit. Information relevant to establishing an estimate of current expected credit losses includes historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the Expected credit losses of financial assets are measured on a collective (pool) basis when similar risk characteristic(s) exist. If the Company determines that a financial asset does not share risk characteristics with other financial assets, the Company shall evaluate the financial asset for expected credit losses on an individual basis. Financial assets are assessed once, either through collective assessments or individual assessments. Standard expected losses are evaluated on a collective, or pool, basis when financial assets share similar risk characteristics. For pooled loan segments, utilizing a quantitative analysis, the Company calculates estimated credit losses using a probability of default and loss given default methodology, the results of which are applied to the aggregated discounted cash flow of each individual loan within the segment. In the absence of relevant and reliable internal data, probability of default and loss given default rates are determined using peer data. The point in time probability of default and loss given default are then conditioned by macroeconomic scenarios to incorporate reasonable and supportable forecasts that affect the collectability of the reported amount. Financial assets may be segmented based on one characteristic, or a combination of characteristics. Examples of risk characteristics relevant to the Company’s evaluation included, but were not limited to: (1) Internal or external credit scores or credit ratings, (2) Risk ratings or classifications, (3) Financial asset type, (4) Collateral type, (5) Size, (6) Effective interest rate, (7) Term, (8) Geographical location, (9) Industry of the borrower and (10) Vintage. The Company’s quantitative analysis also considers relevant available information Included in the allowance The Bank evaluates individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. The Company evaluates the pooling methodology at least annually. Loans transition from defined segments for individual analysis when credit characteristics, or risk traits, change in a material manner. A loan is considered - 60 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) when due. Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties are
Purchased Credit-Deteriorated Loans Loans acquired in a business combination that have experienced a more-than-significant deterioration in credit quality since origination are considered PCD loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not
Derivatives The Company records cash flow hedges at the inception of the derivative contract based on the Company’s intentions and belief as to likely effectiveness as a hedge. Cash flow hedges represent a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. The changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest income. - 61 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged. The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.
Restricted Stock The Bank is a member of the Federal Home Loan Bank (“FHLB”) of New York. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends on the stock are reported as income. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Premises and Equipment Land is carried at cost and premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 4 to Leases Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease team. The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term. The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The Company has elected not to recognize leases with original terms of 12 months or less on the consolidated balance sheet. - 62 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Other Real Estate Owned Other real estate owned (“OREO”), representing property acquired through foreclosure and held-for-sale, is initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequently, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs relating to holding the assets are charged to expenses. Employee Benefit Plans The Company has a noncontributory pension plan that covered all eligible employees up until September 30, 2007, at which time the Company froze its defined benefit pension plan. As such, all future benefit accruals in this pension plan were discontinued and all retirement benefits that employees would have earned as of September 30, 2007 were preserved. The Company’s policy is to fund at least the minimum contribution required by the Employee Retirement Income Security Act of 1974. The costs associated with the plan are accrued based on actuarial assumptions and included in salaries and employee benefits expense. The Company accounts for its defined benefit pension plan in accordance with FASB ASC 715-30. FASB ASC 715-30 requires that the funded status of defined benefit postretirement plans be recognized on the Company’s statement of financial condition and changes in the funded status be reflected in other comprehensive income. FASB ASC 715-30 also requires companies to measure the funded status of the plan as of the date of its fiscal year-end. The Company maintains a 401(k) Stock-Based Compensation Stock compensation accounting guidance (FASB ASC 718, “Compensation-Stock Compensation”) requires that the compensation cost related to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. Stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Treasury Stock Subject to limitations applicable to the Parent Corporation, treasury stock purchases may be made from time to time as, in the opinion of management, market conditions warrant, in the open market or in privately negotiated transactions. Shares repurchased are added to the corporate treasury and will be used for future stock dividends and other issuances. The repurchased shares are recorded as treasury stock, which results in a decrease in stockholders’ equity. Treasury stock is recorded using the cost method and accordingly is presented as a reduction of stockholders’ equity. During the Goodwill Goodwill arises from business combinations and is generally determined as - 63 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Other Intangible Assets Other intangible assets consist of core Comprehensive Income Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from nonowner sources. The Company’s other comprehensive income (loss) is comprised of unrealized holding gains and losses on securities available-for-sale, unrecognized actuarial gains and losses of the Company’s defined benefit pension plan and unrealized gains and losses on cash flow hedges, net of taxes. Restrictions on Cash Cash on hand or on deposit with the Federal Reserve Bank is required to meet regulatory reserve and clearing requirements. Dividend Restriction Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Parent Corporation or by the Parent Corporation to the stockholders. Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Bank Owned Life Insurance The Company invests in Bank Owned Life Insurance (“BOLI”) to help offset the cost of employee benefits. The change in the cash surrender value of the BOLI is recorded as a component of noninterest income.
Income Taxes Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Advertising Costs The Company recognizes its marketing and advertising cost as incurred. Reclassifications Certain reclassifications have been made in the consolidated financial statements and footnotes for - 64 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Adoption of New Accounting Standards in 2021 Effective January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) 2016-13 “ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaced the prior incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL” or the “CECL Standard”). The measurement of expected credit losses under the CECL Standard is applicable to financial assets measured at amortized cost, including portfolio loans and investment securities classified as held-to-maturity (“HTM”). It also applies to off-balance sheet credit exposures including loan commitments, standby letters of credit, financial guarantees and other similar instruments. In addition, the CECL Standard changes the accounting for investment securities classified as available-for-sale (“AFS”), including a requirement that estimated credit losses on AFS securities be presented as an allowance rather than as a direct write-down of the carrying balance of securities which we do not intend to sell, or believe that it is more likely than not, that we will be required to sell. The Company adopted the CECL Standard using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. As discussed further below, purchased credit deteriorated assets were measured on a prospective basis in accordance with the CECL Standard and all purchased credit impaired loans as of December 31, 2020 were considered purchased credit deteriorated loans upon adoption. Results for reporting periods beginning after January 1, 2021 are presented under the CECL Standard while prior period amounts continue to be reported in accordance with previously applicable accounting guidance. The adoption of the CECL Standard resulted in the following adjustments to our financial statements as of January 1, 2021 (dollars in thousands):
Loans designated as purchased credit impaired loans (“PCI”) and accounted for under Accounting Standards Codification (“ASC”) 310-30 were designated as purchased with credit deterioration loans (“PCD”). In accordance with the CECL Standard, the Company did not reassess whether PCI loans met the criteria of PCD loans as of the date of adoption and determined all PCI loans were PCD loans. The Company recorded an increase to the balance of PCD loans and an increase to the ACL for loans of $5.2 million, which represented the expected credit losses for PCD loans. The remaining non-credit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021 over the remaining estimated life of the loans. Also, in accordance with the CECL Standard, the Company did not reassess whether modifications to individual acquired financial assets were troubled debt restructurings (“TDRs”) as of the date of adoption. ASU No. ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the ASU - 65 -
CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Newly Issued, But Not Yet Effective Accounting Standards
Note Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). The restricted stock awards Earnings per common share have been computed based on the following:
There were no antidilutive common share equivalents as of December 31, CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note The Company’s investment securities are classified as available-for-sale
The following tables present information related to the Company’s portfolio of securities available-for-sale
- 67 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities – (continued) Investment securities having a carrying value of approximately
The following table presents information for investments in securities available-for-sale
Gross gains and losses from the sales
- 68 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note
The following tables indicate gross unrealized losses for which an ACL has not
On January 1, 2021, the Company adopted ASU 2016-13 and implemented the CECL methodology for allowance for credit losses on its investment securities available-for-sale. The new CECL methodology replaces the other-than-temporary impairment model that previously existed. The Company did not have a CECL day 1 impact attributable to its investment securities portfolio and did not have an allowance for credit losses as of December 31, 2021. The Company has elected to exclude accrued interest from the amortized cost of its investment securities available-for-sale. Accrued interest receivable for investment securities available for sale as of December 31, 2021 and December 31, 2020, totaled $1.6 million and $1.7 million, respectively. - 69 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities – (continued) The Company evaluates securities in an unrealized loss position for impairment related to credit losses on at least a quarterly basis. Securities in unrealized loss positions are first assessed as to whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If one of the criteria is met, the security’s amortized cost basis is written down to fair value through current earnings. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value resulted from credit losses or other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Unrealized losses on asset backed securities and state and municipal securities have not been recognized into income because the issuers are of high credit quality, we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale securities was recorded as of December 31, 2021. Federal agency obligations, residential mortgage-backed pass-through securities and commercial mortgage-backed pass-through securities are issued by U.S. Government agencies and U.S. Government sponsored enterprises. Although a government guarantee exists on these investments, these entities are not legally backed by the full faith and credit of the federal government, and the current support they receive is subject to a cap as part of the agreement entered into in 2008. Nonetheless, at this time we do not foresee any set of circumstances in which the government would not fund its commitments on these investments as the issuers are an integral part of the U.S. housing market in providing liquidity and stability. Therefore, we concluded that a zero-allowance approach for these investment securities is appropriate. - 70 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Loans
The loan segments in the above table have unique risk characteristics with respect to credit quality: • The repayment of commercial loans is generally dependent on the creditworthiness and cash flow of borrowers, and if applicable, guarantors, which may be negatively impacted by adverse economic conditions. While the majority of these loans are secured, collateral type, marketing, coverage, valuation and monitoring is not as uniform as in other portfolio classes and recovery from liquidation of such collateral may be subject to greater variability. • Payment on commercial mortgages is driven principally by operating results of the managed properties or underlying business and secondarily by the sale or refinance of such properties. Both primary and secondary sources of repayment, and value of the properties in liquidation, may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. • Properties underlying construction, land and land development loans often do not generate sufficient cash flows to service debt and thus repayment is subject to ability of the borrower and, if applicable, guarantors, to complete development or construction of the property and carry the project, often for extended periods of time. As a result, the performance of these loans is contingent upon future events whose probability at the time of origination is uncertain. • The ability of borrowers to service debt in the residential and consumer loan portfolios is generally subject to personal income which may be impacted by general economic conditions, such as increased unemployment levels. These loans are predominately collateralized by first and/or second liens on single family properties. If a borrower cannot maintain the loan, the Company’s ability to recover against the collateral in sufficient amount and in a timely manner may be significantly influenced by market, legal and regulatory conditions. • The Company considers loan classes and loan segments to be one and the same. - 71 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans Loans Held-For-Sale: The following table presents loans held-for-sale by loan segment as of December 31,
Nonaccrual loans CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Credit Quality Indicators We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP. Generally, loans
- 73 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the The following table presents information about the loan credit quality by loan
Collateral Dependent Loans: Loans which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses. The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date. The following table presents collateral dependent loans that were individually evaluated for impairment as of December 31, 2021:
- 74 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Impaired loans - Impaired loans disclosures presented below as of December 31, 2020 and as of and for the three and twelve months ended December 31, 2020 represent requirements prior to the adoption of CECL on January 1, 2021. The following table provides an analysis of the impaired loans by
- 75 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note
90 days or greater past due and still accruing
- 76 - Table of CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for
- 77 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note
A summary of the activity in the allowance for credit losses for loans by loan
Troubled Debt Restructurings Loans are considered to have been modified in a troubled debt restructuring (“
CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note
2021, TDRs totaled
TDRs as of December 31,
2019. The following table presents loans by
2021 included maturity extensions and interest rate reductions. The following table presents loans by
The five loan modifications during the year ended December 31, 2020 were maturity extensions: The following table presents loans by class modified as TDRs that occurred during the year ended December 31,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) Included in
In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with clients affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were Allowance for Credit Losses for Unfunded Commitments The Company has recorded an ACL for unfunded credit commitments, which
Components of (Reversal of) Provision for Credit Losses The following table summarizes the provision for (reversal of) provision for credit losses for the year ended December 31, 2021 (dollars in thousands):
- 80 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Premises and equipment are summarized as follows:
Depreciation and amortization expense of premises and equipment was
The Company has included this lease in premises and equipment as follows:
The following is a schedule by year of future minimum lease payments under the
CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note
A maturity analysis of
Note A goodwill impairment test is required under ASC 350, Intangibles – Goodwill and Other, and the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment,” allowing an initial qualitative assessment of goodwill commonly known as step zero impairment testing. In general, the step zero test allows an entity to first assess qualitative factors to determine whether it is more likely than not (i.e., more than 50%) that the fair value of a reporting unit is less than its carrying value. If a step zero impairment test results in the conclusion that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, then no further testing is required.
Goodwill The change in goodwill during the year is as follows:
- 82 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 – Goodwill and Other Intangible Assets – (continued) Acquired Intangible Assets The table below provides information regarding the carrying amounts and accumulated amortization of total amortized intangible assets as of the dates set forth below.
Aggregate amortization expense was
Note Time Deposits As of December 31,
The amount of time deposits with balances in excess of $250,000 - 83 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note The Company’s FHLB borrowings and weighted average interest rates are summarized below:
The FHLB borrowings are secured by pledges of certain collateral including, but not limited to, U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans.
- 84 -
CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note During 2003, the Company formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II
On January 11, 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2018 Notes”). The 2018 Notes bear interest at 5.20% annually from, and including, the date of initial issuance to, but excluding, February 1, 2023, payable semi-annually in arrears. From and including February 1, 2023 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 284 basis points (2.84%) payable quarterly in arrears. If three-month LIBOR is not available for During June 2015, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2015 Notes”). As of December 31, 2020, the 2015 Notes had a stated maturity of July 1, 2025, and - 85 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note The current and deferred amounts of income tax expense for
On July 1, 2018 New Jersey Governor Phil Murphy signed Assembly Bill 4202 (“the Bill”) into law. The dividends received. Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory federal tax rate for the following
- 86 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 – Income Taxes – (continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all The Company’s federal income tax returns are open and subject to examination from the - 87 -
CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11 – Preferred Stock On August 19, 2021, the Company completed an underwritten public offering of 115,000 shares, or $115 million in aggregate liquidation preference, of its depositary shares, each representing a 1/40th interest in a share of the Company’s 5.25% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A, no par value, with a liquidation preference of $1,000 per share. The net proceeds received from the issuance of preferred stock at the time of closing were $110.9 million. Note In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as standby and commercial letters of credit, unused portions of lines of credit and commitments to extend various types of credit. Commitments to extend credit and standby letters of credit generally do not exceed one year. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The commitment or contract amount of these financial instruments is an indicator of the Company’s level of involvement in each type of instrument as well as the exposure to credit loss in the event of nonperformance by the other party to the financial instrument. The Company controls the credit risk of these financial instruments through credit approvals, limits and monitoring procedures. To minimize potential credit risk, the Company generally requires collateral and other credit-related terms and conditions from the The following table provides a summary of financial instruments with off-balance sheet risk
The Company is subject to claims and lawsuits that arise in the ordinary course of business. Based upon the information currently available in connection with such claims, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse impact on the consolidated financial position, results of operations, or liquidity of the Company. - 88 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Loans to principal officers, directors, and their affiliates during the years ended December 31,
Deposits from principal officers, directors, and their affiliates The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal stockholders, their immediate families and affiliated companies (commonly referred to as related parties). The Company leases banking offices from related party entities. In addition, the Company also utilizes an advertising and public relations agency at which one of the Company’s directors is President and CEO and a principal owner. For these transactions, the expenses are not significant to the operations of the Company.
Note Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is classified as adequately capitalized or lower, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is growth and expansion, and capital restoration plans are required. As of December 31, - 89 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14 – Stockholders’ Equity and Regulatory Requirements – (continued) The following is a summary of the Bank’s and the Parent Corporation’s actual capital amounts and ratios as of December 31,
As of December 31, CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from The following table represents the reclassification out of accumulated other comprehensive (loss) income for the periods presented:
Accumulated other comprehensive
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CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Defined Benefit Plans The Company maintains a frozen noncontributory pension plan covering employees of the Company prior to the The following table sets forth changes in projected benefit obligation, changes in fair value of plan assets, funded status, and amounts recognized in the consolidated statements of condition for the Company’s pension plans
The accumulated benefit obligation was Amounts recognized as a component of accumulated other comprehensive loss as of year-end that have not been recognized as a component of the net periodic pension expense for the plan are presented in the following table. The Company expects to recognize approximately
The net periodic pension expense and other comprehensive income (before tax) for
- 92 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note The following table presents the weighted average assumptions used to determine the pension benefit obligations
The following table presents the weighted average assumptions used to determine net periodic pension cost for the following three years:
The process of determining the overall expected long-term rate of return on plan assets begins with a review of appropriate investment data, including current yields on fixed income securities, historical investment data, historical plan performance and forecasts of inflation and future total returns for the various asset classes. This data forms the basis for the construction of a best-estimate range of real investment Plan Assets The general investment policy of the Pension Trust is for the fund to experience growth in assets that will allow the market value to exceed the value of benefit obligations over time. The Company’s pension plan asset allocation as of December 31,
- 93 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note The fair values of the Company’s pension plan assets
- 94 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Fair Value of Plan Assets The Company used the following valuation methods and assumptions to estimate the fair value of assets held by the plan (for further information on fair value methods, see Note Equity securities and real estate funds: The fair values for equity securities and real estate funds are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). Debt and fixed income securities: Certain debt securities are valued at the closing price reported in the active market in which the bond is traded (Level 1 inputs). Other debt securities are valued based upon recent bid prices or the average of recent bid and asked prices when available (Level 2 inputs) and, if not available, they are valued through matrix pricing models developed by sources considered by management to be reliable. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations. The investment manager is not authorized to purchase, acquire or otherwise hold certain types of market securities (subordinated bonds, real estate investment trusts, limited partnerships, naked puts, naked calls, stock index futures, oil, gas or mineral exploration ventures or unregistered securities) or to employ certain types of market techniques (margin purchases or short sales) or to mortgage, pledge, hypothecate, or in any manner transfer as security for indebtedness, any security owned or held by the Plan. Cash Flows Contributions The Bank Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, for the following years are as follows (dollars in thousands):
401(k) The Company maintains a 401(k) Supplemental Executive Retirement Plan (“SERP”) During 2019 and in 2021, the Company adopted supplemental executive retirement plans (“SERP’s”) for the benefit of several of its executive officers. Each SERP is a non-qualified plan which provides supplemental retirement benefits to the participating officers of the Company. SERP compensation expense was $1.0 million and $0.4 million for the years ended December 31, 2021 and December 31, 2020, respectively. CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of December 31, Restricted stock, options and All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are
Activity under the
The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on December 31, Activity under the Company’s restricted shares for year ended December 31, 2021 was as follows:
- 96 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note
As of December 31, A summary of the status of unearned performance unit awards and the change during the period is presented in the table below:
A summary of the status of unearned restricted stock units and the changes in restricted stock units during the period is presented in the table below:
Any forfeitures would result in previously recognized expense being reversed. A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient. During the year ended December 31, 2021, 68,916 shares vested. A total of 34,458 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of restricted stock units during the year ended December 31, 2021 were 34,458 shares. As of December 31, 2021, compensation cost of approximately $1.1 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.3 years. Note Certain restrictions, including capital requirements, exist on the availability of undistributed net profits of the Bank for the future payment of dividends to the Parent Corporation. A dividend may not be paid if it would impair the capital of the Bank. - 97 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. Interest rate swaps were entered into on April 13, 2017,
a future Federal Home Loan Bank advance. We are required to pay fixed rates of interest ranging from 0.631% to 1.23% and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”). The forward starting swaps have commencing payment dates ranging from October 2021 to August 2022, with expiration dates ranging from December 2025 to March 2028. Interest expense recorded on these swap transactions totaled approximately Cash Flow Hedge The following table presents the net gains (losses), recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the years ended December 31:
The following table reflects the cash flow hedges included in the Consolidated
- 98 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 19 – Derivatives – (continued) There were no net gains (losses) recorded in accumulated other comprehensive income or in the Consolidated Statement of Income relating to cash flow derivative instruments for the years ended December 31, Note Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820-10-05 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurements and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly. FASB ASC 820-10-05 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820-10-05 are as follows: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis Securities Available-for-Sale:Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class. - 99 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) Derivatives:The fair value of derivatives are based on valuation models using observable market data as of the measurement date (level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used
There were no transfers between Level 1 and Level 2 during the years ended December 31, - 100 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued)
Assets Measured at Fair Value on a Non-Recurring Basis The Company may be required periodically to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis - 101 -
CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note
: The Company may record adjustments to the carrying value of loans based on fair value measurements, For assets measured at fair value on a
Impaired loans - Collateral dependent impaired loans as of December 31, 2020 that required a valuation allowance were $26.5 million with a CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Assets Measured With Significant Unobservable Level 3 Inputs Recurring basis The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the
The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis December 31, 2021
December 31, 2020
- 103 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Non-recurring basis The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.
December 31, 2021
December 31, 2020
- 104 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) Fair Value of Financial Instruments FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-sale and investment securities available-for-sale. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Company for the purposes of this disclosure. Fair values for financial instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These estimates are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with ASC Topic 825 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs. Cash and cash equivalents. The carrying amounts of cash and short-term instruments approximate fair values. FHLB stock. It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Deposits.The carrying amounts of deposits with no stated maturities (i.e., Term Borrowings and Subordinated Debentures. The fair value of the Company’s long-term borrowings and subordinated debentures were calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities. Accrued Interest Receivable/Payable.The carrying amounts of accrued interest approximate fair value resulting in a level 2 or level 3 classification based on the level of the asset or liability with which the accrual is associated. CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31,
- 106 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company’s core deposit base is required by FASB ASC 825-10. Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as the brokerage network, deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Note The Parent Corporation operates its wholly-owned subsidiary, the Bank. The earnings of this subsidiary are recognized by the Parent Corporation using the equity method of accounting. Accordingly, earnings are recorded as increases in the Parent Corporation’s investment in the subsidiaries and dividends paid reduce the investment in the subsidiaries. The ability of the Parent Corporation to pay dividends will largely depend upon the dividends paid to it by the Bank. Dividends payable by the Bank to the Parent Corporation are restricted under supervisory regulations (see Note
Condensed financial statements of the Parent Corporation only are as follows: Condensed Statements of Condition
- 107 -
CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Condensed Statements of Income
Condensed Statements of Cash Flows
- 108 - CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note
Note: Due to rounding, quarterly earnings per share may not sum to reported annual earnings per share. - 109 -
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of its management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of December 31,
(b) Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) of the Exchange Act. The Company’s internal control system is a process designed to provide reasonable assurance to the Company’s management, Board of Directors and shareholders regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As part of the Company’s program to comply with Section 404 of the Sarbanes-Oxley Act of 2002, our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
Based on this Assessment, management determined that, as of December 31,
Crowe
(c) Changes in Internal Controls over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s
None. -110- PART III
Item 10. Directors,
Information required by this part is included in the definitive Proxy Statement for the Company’s
Item 11. Executive Compensation
Information concerning executive compensation is included in the definitive Proxy Statement for the Company’s
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning security ownership of certain beneficial owners and management is included in the definitive Proxy statement for the Company’s Item 13. Certain Relationships and Related Transactions, and Director Independence
Information concerning certain relationships and related transactions is included in the definitive Proxy Statement for the Company’s
Item 14. Principal Accounting Fees and Services
The information concerning principal accountant fees and services as well as related pre-approval policies under the caption “RATIFICATION OF INDEPENDENT AUDITORS” in the Proxy Statement for the Company’s -111- PART IV
Item 15. Exhibits, Financial Statement Schedules
The following Financial Statements and Supplementary Data are filed as part of this annual report:
-112- -113-
All financial statement schedules are omitted because they are either inapplicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto.
-114- SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ConnectOne Bancorp, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the Registrant, in the capacities described below on
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