UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2014March 31, 2015
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______to _______to
Commission File Number: 000-11486
CONNECTONE BANCORP, INC.
CONNECTONEBANCORP,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 No.) |
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)
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. YesSxNo£o
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 Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesSxNo£o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer
| Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes£oNoSx
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, no par value: | |
(Title of Class) | (Outstanding as of |
Table of Contents
2
CONNECTONE BANCORP,CONNECTONEBANCORP, INC. AND SUBSIDIARIESSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, except for share data) | September 30, 2014 | December 31, 2013 | ||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 41,041 | $ | 82,692 | ||||
Interest-bearing deposits with banks | 96,972 | — | ||||||
Cash and cash equivalents | 138,013 | 82,692 | ||||||
Investment securities: | ||||||||
Available-for-sale | 307,502 | 323,070 | ||||||
Held-to-maturity (fair value of $222,393 and $210,958) | 217,567 | 215,286 | ||||||
Loans held for sale | 920 | — | ||||||
Loans receivable | 2,426,765 | 960,943 | ||||||
Less: Allowance for loan losses | 12,118 | 10,333 | ||||||
Net loans receivable | 2,414,647 | 950,610 | ||||||
Investment in restricted stock, at cost | 17,922 | 8,986 | ||||||
Bank premises and equipment, net | 20,900 | 13,681 | ||||||
Accrued interest receivable | 10,976 | 6,802 | ||||||
Bank-owned life insurance | 51,999 | 35,734 | ||||||
Other real estate owned | 1,442 | 220 | ||||||
Due from brokers for investment securities | — | 8,759 | ||||||
Goodwill | 145,909 | 16,804 | ||||||
Core deposit intangibles | 5,070 | 24 | ||||||
Other assets | 23,390 | 10,414 | ||||||
Total assets | $ | 3,356,257 | $ | 1,673,082 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 471,151 | $ | 227,370 | ||||
Interest-bearing | 1,998,017 | 1,114,635 | ||||||
Total deposits | 2,469,168 | 1,342,005 | ||||||
Borrowings | 420,960 | 146,000 | ||||||
Subordinated debentures | 5,155 | 5,155 | ||||||
Other liabilities | 19,135 | 11,338 | ||||||
Total liabilities | 2,914,418 | 1,504,498 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $1,000 liquidation value per share, authorized 5,000,000 shares; issued and outstanding 11,250 shares of Series B preferred stock at September 30, 2014 and December 31, 2013; total liquidation value of $11,250,000 at September 30, 2014 and December 31, 2013 | 11,250 | 11,250 | ||||||
Common stock, no par value, authorized 50,000,000 shares; issued 31,728,997 shares at September 30, 2014 and 18,477,412 at December 31, 2013; outstanding 29,665,075 shares at September 30, 2014 and 16,369,012 at December 31, 2013 | 374,287 | 110,056 | ||||||
Additional paid-in capital | 5,818 | 4,986 | ||||||
Retained earnings | 66,623 | 61,914 | ||||||
Treasury stock, at cost (2,063,922 common shares at September 30, 2014 and 2,108,400 at December 31, 2013) | (16,717 | ) | (17,078 | ) | ||||
Accumulated other comprehensive income (loss) | 578 | (2,544 | ) | |||||
Total stockholders’ equity | 441,839 | 168,584 | ||||||
Total liabilities and stockholders’ equity | $ | 3,356,257 | $ | 1,673,082 |
See accompanying notes to unaudited consolidated financial statements.
(in thousands, except for share data) | March 31, 2015 | December 31, 2014 | ||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 30,127 | $ | 31,813 | ||||
Interest-bearing deposits with banks | 58,416 | 95,034 | ||||||
Cash and cash equivalents | 88,543 | 126,847 | ||||||
Investment securities: | ||||||||
Available-for-sale | 276,121 | 289,532 | ||||||
Held-to-maturity (fair value of $240,263 and $231,445) | 231,720 | 224,682 | ||||||
Loans held for sale | 1,392 | — | ||||||
Loans receivable | 2,640,739 | 2,538,641 | ||||||
Less: Allowance for loan and lease losses | 15,933 | 14,160 | ||||||
Net loans receivable | 2,624,806 | 2,524,481 | ||||||
Investment in restricted stock, at cost | 24,874 | 23,535 | ||||||
Bank premises and equipment, net | 20,358 | 20,653 | ||||||
Accrued interest receivable | 11,513 | 11,700 | ||||||
Bank-owned life insurance | 52,904 | 52,518 | ||||||
Other real estate owned | 870 | 1,108 | ||||||
Goodwill | 145,909 | 145,909 | ||||||
Core deposit intangibles | 4,584 | 4,825 | ||||||
Other assets | 22,297 | 22,782 | ||||||
Total assets | $ | 3,505,891 | $ | 3,448,572 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 479,652 | $ | 492,515 | ||||
Interest-bearing | 2,016,359 | 1,983,092 | ||||||
Total deposits | 2,496,011 | 2,475,607 | ||||||
Borrowings | 525,148 | 495,553 | ||||||
Subordinated debentures | 5,155 | 5,155 | ||||||
Other liabilities | 23,383 | 26,038 | ||||||
Total liabilities | 3,049,697 | 3,002,353 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $1,000 liquidation value per share, authorized 5,000,000 shares; issued and outstanding 11,250 shares of Series B preferred stock at March 31, 2015 and December 31, 2014; total liquidation value of $11,250 at March 31, 2015 and December 31, 2014 | 11,250 | 11,250 | ||||||
Common stock, no par value, authorized 50,000,000 shares; issued 31,928,524 shares at March 31, 2015 and 31,758,558 at December 31, 2014; outstanding 29,864,602 shares at March 31, 2015 and 29,694,636 at December 31, 2014 | 374,287 | 374,287 | ||||||
Additional paid-in capital | 7,084 | 6,015 | ||||||
Retained earnings | 80,526 | 72,398 | ||||||
Treasury stock, at cost (2,063,922 common shares at March 31, 2015 and December 31, 2014) | (16,717 | ) | (16,717 | ) | ||||
Accumulated other comprehensive loss | (236 | ) | (1,014 | ) | ||||
Total stockholders’ equity | 456,194 | 446,219 | ||||||
Total liabilities and stockholders’ equity | $ | 3,505,891 | $ | 3,448,572 |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands, except for share data) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Interest income | ||||||||||||||||
Interest and fees on loans | $ | 28,098 | $ | 10,148 | $ | 48,670 | $ | 29,963 | ||||||||
Interest and dividends on investment securities: | ||||||||||||||||
Taxable | 2,916 | 3,116 | 8,840 | 8,973 | ||||||||||||
Tax-exempt | 892 | 1,151 | 2,840 | 3,308 | ||||||||||||
Dividends | 349 | 126 | 639 | 378 | ||||||||||||
Interest on federal funds sold and other short-term investments | 88 | — | 88 | 2 | ||||||||||||
Total interest income | 32,343 | 14,541 | 61,077 | 42,624 | ||||||||||||
Interest expense | ||||||||||||||||
Deposits | 2,725 | 1,330 | 5,343 | 3,897 | ||||||||||||
Borrowings | 2,072 | 1,489 | 4,914 | 4,407 | ||||||||||||
Total interest expense | 4,797 | 2,819 | 10,257 | 8,304 | ||||||||||||
Net interest income | 27,546 | 11,722 | 50,820 | 34,320 | ||||||||||||
Provision for loan losses | 1,300 | — | 2,209 | — | ||||||||||||
Net interest income after provision for loan losses | 26,246 | 11,722 | 48,611 | 34,320 | ||||||||||||
Noninterest income | ||||||||||||||||
Service charges, commissions and fees | 315 | 780 | 1,645 | 1,890 | ||||||||||||
Annuities and insurance commissions | 94 | 92 | 299 | 338 | ||||||||||||
Bank-owned life insurance | 401 | 265 | 912 | 1,104 | ||||||||||||
Net gains on sale of loans held for sale | 65 | 26 | 144 | 255 | ||||||||||||
Net gains on sales of investment securities | 111 | 343 | 2,100 | 1,286 | ||||||||||||
Other income | 187 | 37 | 322 | 222 | ||||||||||||
Total other income | 1,173 | 1,543 | 5,422 | 5,095 | ||||||||||||
Noninterest expense | ||||||||||||||||
Salaries and employee benefits | 6,243 | 3,247 | 13,153 | 10,072 | ||||||||||||
Occupancy and equipment | 1,781 | 839 | 3,658 | 2,556 | ||||||||||||
FDIC insurance | 504 | 283 | 1,092 | 804 | ||||||||||||
Professional and consulting | 530 | 352 | 1,289 | 801 | ||||||||||||
Marketing and advertising | 209 | 94 | 276 | 257 | ||||||||||||
Data processing | 902 | 362 | 1,761 | 1,058 | ||||||||||||
Merger expenses | 8,784 | — | 10,573 | — | ||||||||||||
Loss on extinguishment of debt | 4,550 | — | 4,550 | — | ||||||||||||
Amortization of core deposit intangible | 248 | 6 | 260 | 19 | ||||||||||||
Other expenses | 1,649 | 1,022 | 3,028 | 3,252 | ||||||||||||
Total other expense | 25,400 | 6,205 | 39,640 | 18,819 | ||||||||||||
Income before income tax expense | 2,019 | 7,060 | 14,393 | 20,596 | ||||||||||||
Income tax expense | 253 | 1,966 | 3,851 | 5,655 | ||||||||||||
Net Income | 1,766 | 5,094 | 10,542 | 14,941 | ||||||||||||
Less: Preferred stock dividends | 28 | 28 | 84 | 112 | ||||||||||||
Net income available to common stockholders | $ | 1,738 | $ | 5,066 | $ | 10,458 | $ | 14,829 | ||||||||
Earnings per common share | ||||||||||||||||
Basic | $ | 0.06 | $ | 0.31 | $ | 0.50 | $ | 0.91 | ||||||||
Diluted | 0.06 | 0.31 | 0.49 | 0.91 | ||||||||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 29,636,001 | 16,349,480 | 20,819,241 | 16,348,875 | ||||||||||||
Diluted | 30,108,103 | 16,385,155 | 21,285,452 | 16,380,970 | ||||||||||||
Dividends per common share | $ | 0.075 | $ | 0.075 | $ | 0.225 | $ | 0.185 |
See accompanying notes to unaudited consolidated financial statements.
3
CONNECTONE BANCORP,CONNECTONEBANCORP, INC. AND SUBSIDIARIESSUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Net income | $ | 1,766 | $ | 5,094 | $ | 10,542 | $ | 14,941 | ||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Unrealized gains and losses on securities available-for-sale: | ||||||||||||||||
Unrealized holding (losses) gains on available-for-sale securities | (1,171 | ) | 383 | 5,656 | (10,771 | ) | ||||||||||
Tax effect | 584 | (118 | ) | (1,882 | ) | 4,371 | ||||||||||
Net of tax amount | (587 | ) | 265 | 3,774 | (6,400 | ) | ||||||||||
Reclassification adjustment of OTTI losses included in income | — | — | — | 24 | ||||||||||||
Tax effect | — | — | — | (6 | ) | |||||||||||
Net of tax amount | — | — | — | 18 | ||||||||||||
Reclassification adjustment for net gains arising during the period | (111 | ) | (343 | ) | (2,100 | ) | (1,286 | ) | ||||||||
Tax effect | 42 | 96 | 601 | 353 | ||||||||||||
Net of tax amount | (69 | ) | (247 | ) | (1,499 | ) | (933 | ) | ||||||||
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity | 57 | (42 | ) | 156 | 32 | |||||||||||
Tax effect | (24 | ) | 15 | (67 | ) | (13 | ) | |||||||||
Net of tax amount | 33 | (27 | ) | 89 | 19 | |||||||||||
Pension plan: | ||||||||||||||||
Actuarial gains | — | — | 1,281 | — | ||||||||||||
Tax effect | — | — | (523 | ) | — | |||||||||||
Net of tax amount | — | — | 758 | — | ||||||||||||
Total other comprehensive (loss) income | (623 | ) | (9 | ) | 3,122 | (7,296 | ) | |||||||||
Total comprehensive income | $ | 1,143 | $ | 5,085 | $ | 13,664 | $ | 7,645 |
Three Months Ended March 31, | ||||||||
(dollars in thousands, except for per share data) | 2015 | 2014 | ||||||
Interest income | ||||||||
Interest and fees on loans | $ | 29,314 | $ | 10,111 | ||||
Interest and dividends on investment securities: | ||||||||
Taxable | 2,910 | 3,057 | ||||||
Tax-exempt | 883 | 1,056 | ||||||
Dividends | 220 | 113 | ||||||
Interest on federal funds sold and other short-term investments | 43 | — | ||||||
Total interest income | 33,370 | 14,337 | ||||||
Interest expense | ||||||||
Deposits | 3,025 | 1,316 | ||||||
Borrowings | 2,053 | 1,411 | ||||||
Total interest expense | 5,078 | 2,727 | ||||||
Net interest income | 28,292 | 11,610 | ||||||
Provision for loan and lease losses | 1,825 | 625 | ||||||
Net interest income after provision for loan and lease losses | 26,467 | 10,985 | ||||||
Noninterest income | ||||||||
Annuities and insurance commissions | 86 | 100 | ||||||
Bank-owned life insurance | 386 | 255 | ||||||
Net gains on sale of loans held for sale | 114 | 36 | ||||||
Deposit, loan and other income | 463 | 715 | ||||||
Net gains on sale of investment securities | 506 | 1,415 | ||||||
Total other income | 1,555 | 2,521 | ||||||
Noninterest expense | ||||||||
Salaries and employee benefits | 6,628 | 3,332 | ||||||
Occupancy and equipment | 2,082 | 1,080 | ||||||
FDIC insurance | 560 | 300 | ||||||
Professional and consulting | 494 | 255 | ||||||
Marketing and advertising | 194 | 40 | ||||||
Data processing | 900 | 345 | ||||||
Merger expenses | — | 1,060 | ||||||
Amortization of core deposit intangible | 241 | 6 | ||||||
Other expenses | 1,532 | 1,078 | ||||||
Total other expense | 12,631 | 7,496 | ||||||
Income before income tax expense | 15,391 | 6,010 | ||||||
Income tax expense | 5,012 | 1,612 | ||||||
Net Income | 10,379 | 4,398 | ||||||
Less: Preferred stock dividends | 28 | 28 | ||||||
Net income available to common stockholders | $ | 10,351 | $ | 4,370 | ||||
Earnings per common share | ||||||||
Basic | $ | 0.35 | $ | 0.27 | ||||
Diluted | 0.34 | 0.27 | ||||||
Weighted average common shares outstanding | ||||||||
Basic | 29,757,316 | 16,350,183 | ||||||
Diluted | 30,149,469 | 16,405,540 | ||||||
Dividends per common share | $ | 0.075 | $ | 0.075 |
See accompanying notes to unaudited consolidated financial statements.
4
CONNECTONE BANCORP,CONNECTONEBANCORP, INC. AND SUBSIDIARIESSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYCOMPREHENSIVE INCOME
(Unaudited)(unaudited)
(in thousands, except for share and per share data) | Preferred Stock | Common Stock | Additional Paid In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||
Balance as of January 1, 2013 | $ | 11,250 | $ | 110,056 | $ | 4,801 | $ | 46,753 | $ | (17,232 | ) | $ | 5,063 | $ | 160,691 | |||||||||||||
Net income | — | — | — | 19,925 | — | — | 19,925 | |||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | (7,607 | ) | (7,607 | ) | |||||||||||||||||||
Dividend on series B preferred stock | — | — | — | (169 | ) | — | — | (169 | ) | |||||||||||||||||||
Issuance cost of common stock | — | — | — | (13 | ) | — | — | (13 | ) | |||||||||||||||||||
Cash dividends declared on common stock ($0.260 per share) | — | — | — | (4,581 | ) | — | — | (4,581 | ) | |||||||||||||||||||
Issuance of restricted stock awards (18,829 shares) | — | — | 91 | — | 152 | — | 243 | |||||||||||||||||||||
Dividend on restricted stock declared | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||||
Stock issued for options exercised (2,268 shares) | — | — | 19 | — | 2 | — | 21 | |||||||||||||||||||||
Stock-based compensation | 75 | 75 | ||||||||||||||||||||||||||
Balance as of December 31, 2013 | 11,250 | 110,056 | 4,986 | 61,914 | (17,078 | ) | (2,544 | ) | 168,584 | |||||||||||||||||||
Net income | — | — | — | 10,542 | — | 10,542 | ||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | 3,122 | 3,122 | |||||||||||||||||||||
Dividend on series B preferred stock | — | — | — | (84 | ) | — | — | (84 | ) | |||||||||||||||||||
Issuance cost of common stock | — | — | — | (7 | ) | — | — | (7 | ) | |||||||||||||||||||
Cash dividends declared on common stock ($0.225 per share) | — | — | — | (5,742 | ) | — | — | (5,742 | ) | |||||||||||||||||||
Stock issued for options exercised (74,911 shares) | — | — | 424 | — | 361 | — | 785 | |||||||||||||||||||||
Stock issued (13,221,152 shares) and options acquired (783,732 shares) in acquisition of Legacy ConnectOne | — | 264,231 | — | — | — | — | 264,231 | |||||||||||||||||||||
Stock-based compensation | — | — | 408 | — | — | — | 408 | |||||||||||||||||||||
Balance as of September 30, 2014 | $ | 11,250 | $ | 374,287 | $ | 5,818 | $ | 66,623 | $ | (16,717 | ) | $ | 578 | $ | 441,839 |
Three Months Ended March 31, | ||||||||
(in thousands) | 2015 | 2014 | ||||||
Net income | $ | 10,379 | $ | 4,398 | ||||
Other comprehensive income (loss), net of tax: | ||||||||
Unrealized gains and losses on securities available-for-sale: | ||||||||
Unrealized holding gains on available-for-sale securities | 1,509 | 3,516 | ||||||
Tax effect | (595 | ) | (1,190 | ) | ||||
Net of tax amount | 914 | 2,326 | ||||||
Reclassification adjustment for realized gains arising during period | (506 | ) | (1,415 | ) | ||||
Tax effect | 207 | 380 | ||||||
Net of tax amount | (299 | ) | (1,035 | ) | ||||
Amortization of unrealized losses holding gains on held-to-maturity securities transferred from available-for-sale securities | 65 | 45 | ||||||
Tax effect | (25 | ) | (20 | ) | ||||
Net of tax amount | 40 | 25 | ||||||
Unrealized losses on cash flow hedge | (534 | ) | — | |||||
Tax effect | 218 | — | ||||||
Net of tax amount | (316 | ) | — | |||||
Unrealized pension plan gains | 742 | 1,281 | ||||||
Tax effect | (303 | ) | (523 | ) | ||||
Net of tax amount | 439 | 758 | ||||||
Total other comprehensive income | 778 | 2,074 | ||||||
Total comprehensive income | $ | 11,157 | $ | 6,472 |
See accompanying notes to unaudited consolidated financial statements.
5
CONNECTONE BANCORP,CONNECTONEBANCORP, INC. AND SUBSIDIARIESSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)(unaudited)
(in thousands) | Nine Months Ended September 30, | |||||||
2014 | 2013 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 10,542 | $ | 14,941 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Amortization of premiums and accretion of discounts on investment securities, net | 1,966 | 2,665 | ||||||
Depreciation and amortization | 1,717 | 650 | ||||||
Provision for loan losses | 2,209 | — | ||||||
Stock-based compensation (excluding tax benefit) | 51 | 41 | ||||||
Other-than-temporary impairment losses on investment securities | — | 24 | ||||||
Gains on sales of investment securities, net | (2,100 | ) | (1,286 | ) | ||||
Net loss on sale of other real estate owned | 23 | 75 | ||||||
Loans originated for resale | (7,316 | ) | (14,045 | ) | ||||
Proceeds from sale of loans held for sale | 6,730 | 15,690 | ||||||
Gains on sale of loans held for sale | (144 | ) | (255 | ) | ||||
Decrease in accrued interest receivable | 296 | 277 | ||||||
Increase in cash surrender value of bank-owned life insurance | (912 | ) | (813 | ) | ||||
Life insurance death benefit | — | (291 | ) | |||||
Decrease (increase) in other assets | 1,128 | (2,351 | ) | |||||
(Decrease) increase in other liabilities | (3,791 | ) | 2,446 | |||||
Net cash provided by operating activities | 10,399 | 17,768 | ||||||
Cash flows from investing activities: | ||||||||
Investment securities available-for-sale: | ||||||||
Purchases | (31,550 | ) | (137,152 | ) | ||||
Sales | 66,738 | 90,773 | ||||||
Maturities, calls and principal repayments | 20,951 | 38,634 | ||||||
Investment securities held-to-maturity: | ||||||||
Purchases | (8,310 | ) | (23,531 | ) | ||||
Maturities and principal repayments | 6,235 | 3,248 | ||||||
Net (purchases) redemption of restricted investment in bank stocks | 4,710 | (22 | ) | |||||
Net increase in loans | (167,314 | ) | (68,099 | ) | ||||
Purchases of premises and equipment | (2,199 | ) | (535 | ) | ||||
Proceeds from bank-owned life insurance death benefits | — | 592 | ||||||
Proceeds from sale of other real estate owned | 1,562 | 1,230 | ||||||
Cash acquired in acquisition of Legacy ConnectOne | 70,318 | — | ||||||
Net cash used in investing activities | (38,859 | ) | (94,862 | ) | ||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 75,821 | 7,395 | ||||||
Net increase in borrowings | 11,590 | — | ||||||
Cash dividends on preferred stock | (84 | ) | (112 | ) | ||||
Cash dividends paid on common stock | (4,681 | ) | (3,025 | ) | ||||
Issuance of restricted stock awards | — | 243 | ||||||
Issuance cost of common stock | (7 | ) | (9 | ) | ||||
Tax benefit of options exercised | 357 | — | ||||||
Proceeds from exercise of stock options | 785 | 21 | ||||||
Net cash provided by financing activities | 83,781 | 4,513 | ||||||
Net change in cash and cash equivalents | 55,321 | (72,581 | ) | |||||
Cash and cash equivalents at beginning of period | 82,692 | 106,138 | ||||||
Cash and cash equivalents at end of period | $ | 138,013 | $ | 33,557 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash payments for: | ||||||||
Interest paid on deposits and borrowings | $ | 10,222 | $ | 8,357 | ||||
Income taxes | $ | 4,653 | $ | 2,195 |
(dollars in thousands, except for per share data) | Preferred Stock | Common Stock | Additional Paid In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||
Balance as of January 1, 2014 | $ | 11,250 | $ | 110,056 | $ | 4,986 | $ | 61,914 | $ | (17,078 | ) | $ | (2,544 | ) | $ | 168,584 | ||||||||||||
Net income | — | — | — | 18,565 | — | — | 18,565 | |||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | 1,530 | 1,530 | |||||||||||||||||||||
Dividend on series B preferred stock | — | — | — | (112 | ) | — | — | (112 | ) | |||||||||||||||||||
Issuance cost of common stock | — | — | — | (7 | ) | — | — | (7 | ) | |||||||||||||||||||
Cash dividends declared on common stock ($0.300 per share) | — | — | — | (7,962 | ) | — | — | (7,962 | ) | |||||||||||||||||||
Exercise of 100,911 stock options (including tax benefits of $282) | — | — | 806 | — | 361 | — | 1,167 | |||||||||||||||||||||
Stock issued (13,221,152 shares) and options acquired (783,732 shares) in acquisition of Legacy ConnectOne | — | 264,231 | — | — | — | — | 264,231 | |||||||||||||||||||||
Stock-based compensation expense | 223 | 223 | ||||||||||||||||||||||||||
Balance as of December 31, 2014 | 11,250 | 374,287 | 6,015 | 72,398 | (16,717 | ) | (1,014 | ) | 446,219 | |||||||||||||||||||
Net income | — | — | — | 10,379 | — | — | 10,379 | |||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | 778 | 778 | |||||||||||||||||||||
Dividend on series B preferred stock | — | — | — | (28 | ) | — | — | (28 | ) | |||||||||||||||||||
Cash dividends declared on common stock ($0.075 per share) | — | — | — | (2,223 | ) | — | — | (2,223 | ) | |||||||||||||||||||
Exercise of 110,500 stock options (including tax benefits of $165) | — | — | 590 | — | — | — | 590 | |||||||||||||||||||||
Granted 59,466 shares of restricted stock | — | — | — | — | — | — | — | |||||||||||||||||||||
Stock-based compensation expense | — | — | 479 | — | — | — | 479 | |||||||||||||||||||||
Balance as of March 31, 2015 | $ | 11,250 | $ | 374,287 | $ | 7,084 | $ | 80,526 | $ | (16,717 | ) | $ | (236 | ) | $ | 456,194 |
See accompanying notes to unaudited consolidated financial statements.
6
CONNECTONEBANCORP, INC. ANDSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31, | ||||||||
(in thousands) | 2015 | 2014 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 10,379 | $ | 4,398 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,040 | 204 | ||||||
Provision for loan and lease losses | 1,825 | 625 | ||||||
Stock-based compensation (excluding tax benefit) | 479 | 16 | ||||||
Gains on sales of investment securities, net | (506 | ) | (1,415 | ) | ||||
Gains on sale of loans held for sale | (114 | ) | (36 | ) | ||||
Loans originated for resale | (8,468 | ) | (2,168 | ) | ||||
Proceeds from sale of loans held for sale | 7,190 | 2,204 | ||||||
Net loss on sale of other real estate owned | 112 | — | ||||||
Increase in cash surrender value of bank-owned life insurance | (386 | ) | (255 | ) | ||||
Amortization of premiums and accretion of discounts on investments securities, net | 518 | 536 | ||||||
Decrease in accrued interest receivable | 187 | 461 | ||||||
(Increase) decrease in other assets | (49 | ) | 1,588 | |||||
Decrease in other liabilities | (2,388 | ) | (31 | ) | ||||
Net cash provided by operating activities | 9,819 | 6,127 | ||||||
Cash flows from investing activities | ||||||||
Investment securities available-for-sale: | ||||||||
Purchases | (1,543 | ) | (10,397 | ) | ||||
Sales | 9,537 | 50,611 | ||||||
Maturities, calls and principal repayments | 6,673 | 6,999 | ||||||
Investment securities held-to-maturity: | ||||||||
Purchases | (9,986 | ) | — | |||||
Maturities and principal repayments | 2,749 | 890 | ||||||
Net purchases of restricted investment in bank stocks | (1,339 | ) | — | |||||
Net increase in loans | (102,150 | ) | (26,911 | ) | ||||
Purchases of premises and equipment | (504 | ) | (350 | ) | ||||
Proceeds from sale of other real estate owned | 126 | — | ||||||
Net cash (used in) provided by investing activities | (96,437 | ) | 20,842 | |||||
Cash flows from financing activities | ||||||||
Net increase (decrease) in deposits | 20,404 | (2,120 | ) | |||||
Net increase in borrowings | 29,595 | — | ||||||
Cash dividends paid on preferred stock | (28 | ) | (28 | ) | ||||
Cash dividends paid on common stock | (2,247 | ) | (1,228 | ) | ||||
Issuance cost of common stock | — | (3 | ) | |||||
Proceeds from exercise of stock options | 590 | — | ||||||
Net cash provided by (used in) financing activities | 48,314 | (3,379 | ) | |||||
Net change in cash and cash equivalents | (38,304 | ) | 23,590 | |||||
Cash and cash equivalents at beginning of period | 126,847 | 82,692 | ||||||
Cash and cash equivalents at end of period | $ | 88,543 | $ | 106,282 | ||||
Supplemental disclosures of cash flow information | ||||||||
Cash payments for: | ||||||||
Interest paid on deposits and borrowings | $ | 4,724 | $ | 2,723 | ||||
Income taxes | 5,500 | 500 |
See accompanying notes to unaudited consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Note 1.Nature of Operations and Principles of Consolidation
The consolidated financial statements of ConnectOne Bancorp, Inc. (the “Parent Corporation”) are prepared on an accrual basis and include the accounts of the Parent Corporation and its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s other direct and indirect subsidiaries, the “Corporation”“Company”). All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements.
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 twenty-three other banking offices. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from business operations. There are no significant concentrations of loans to any one industry or customer.client. However, the customers’clients’ ability to repay their loans is dependent on the cash flows, real estate and general economic conditions in the area.
The following unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2014March 31, 2015 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014,2015, or for any other interim period. The Corporation’s 2013Company’s 2014 Annual Report on Form 10-K, should be read in conjunction with these financial statements.
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. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan and lease losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Some items in the prior year financial statements were reclassified to conform withto current presentation. Reclassifications had notno effect on prior year net income for stockholders’ equity.
Note 2. Recent Accounting Pronouncements
FASB ASU 2014-04:Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. EITF Issue 13-E sought to define “in substance repossession or foreclosure” because of the diversity in practice regarding when entities were reclassifying loans receivable to other real estate owned instead of as a loan receivable. The timing of loan reclassifications to OREO may be qualitatively significant to regulators and other financial statement users. “In substance repossession or foreclosure” is clarified by the ASU. A creditor is considered to have received physical possession (resulting from an in substance repossession) of residential real estate property collateralizing a consumer mortgage loan only upon the occurrence of either of the following: a) The creditor obtains legal title to the residential real estate property upon completion of a foreclosure. A creditor may obtain legal title to the residential real estate property even if the borrower has redemption rights that provide the borrower with a legal right for a period of time after a foreclosure to reclaim the real estate property by paying certain amounts specified by law; or b) The borrower conveys all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The deed in lieu of foreclosure or similar legal agreement is completed when agreed-upon terms and conditions have been satisfied by both the borrower and the creditor. The ASU is effective for fiscal years beginning after December 15, 2014, and interim periods therein. Early adoption is permitted. The Corporation will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
FASB ASU No. 2014-09:Revenue from Contracts with Customers. In May 2014, the FASB issued an update creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FASB ASC ASU No. 2014-11,Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. In September 2014, the FASB issued an update impacting FASB ASC 860, Transfers and Servicing. The amendments in this update change the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require new disclosures. An entity is required to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. An entity must also provide additional information about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The amendments in this update become effective for the first interim or annual period beginning after December 15, 2014. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
FASB ASC ASU No. 2014-12,Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In September 2014, the FASB issued an update impacting FASB ASC 860, Transfers and Servicing. Generally, an award with a performance target also requires an employee to render service until the performance target is achieved. In some cases, however, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. The amendments in this update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. An entity should apply guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the service has already been rendered. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
FASB issued ASU 2014-14,Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This update requires the creditors to reclassify loans that are within the scope of the ASU to “other receivables” upon foreclosure, rather than reclassifying them to other real estate owned. The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor. The new guidance is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The impact of adoption of this ASU by the Corporation is not expected to be material.
Note 3. AcquisitionBusiness Combinations
On January 20, 2014, the Parent Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ConnectOne Bancorp, Inc., a New Jersey corporationCompany (“Legacy ConnectOne”). Effective July 1, 2014 (the “Effective Time”), the Parent Corporation completed the merger contemplated by the Merger Agreement (the “Merger”) with Legacy ConnectOne. At closing, Legacy ConnectOne merged with and into the Parent Corporation, with the Parent Corporation as the surviving corporation.Company. Also at closing, the Parent Corporation changed its name from “Center Bancorp, Inc.” to “ConnectOne Bancorp, Inc.” and changed its NASDAQ trading symbol to “CNOB” from “CNBC.”
Pursuant to the Merger Agreement, holders of Legacy ConnectOne common stock, no par value per share (the “Legacy ConnectOne Common Stock”), received 2.6 shares of common stock of the Parent Corporation, no par value per share (the “Company Common Stock”), for each share of Legacy ConnectOne Common Stock held immediately prior to the effective time of the Merger, with cash to be paid in lieu of fractional shares. Each outstanding share of Company Common Stock remained outstanding and was unaffected by the Merger. Each option granted by Legacy ConnectOne to purchase shares of Legacy ConnectOne Common Stock was converted into an option to purchase Company Common Stock on the same terms and conditions as were applicable prior to the Merger (taking into account any acceleration or vesting by reason of the consummation of the Merger and its related transactions), subject to adjustment of the exercise price and the number of shares of Company Common Stock issuable upon exercise of such option based on the 2.6 exchange ratio.
Immediately following the Merger, Union Center National Bank, a bank organized pursuant to the laws of the United States, and a wholly owned subsidiary of the Parent Corporation (“UNCB”), merged (the “Bank Merger”) with and into ConnectOne Bank, a New Jersey state-chartered commercial bank and a wholly owned subsidiary of Legacy ConnectOne, with ConnectOne Bank as the surviving entity (the “Bank”). The Bank now conducts business only in the name of and under the brand of ConnectOne.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Note 2. Business Combinations – (continued)
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of July 1, 2014 based on management’s best estimate using the information available as of the Merger date. The application of the acquisition method of accounting resulted in the recognition of goodwill of $129,105,000 and a core deposit intangible of $5,308,000. As of July 1, 2014, Legacy ConnectOne had assets with a carrying value of approximately $1.5 billion, including loans with a carrying value of approximately $1.2 billion, and deposits with a carrying value of approximately $1.1 billion. The table below summarizes the amounts recognized as of the Merger date for each major class of assets acquired and liabilities assumed, the estimated fair value adjustments and the amounts recorded in the Corporation’sCompany’s financial statements at fair value at the Merger date (in thousands):
Consideration paid through Center Bancorp, Inc. common stock issued to Legacy ConnectOne shareholders and fair value of stock options acceleration was | $ | 264,231 | ||||||||||
Legacy ConnectOne carrying value | Fair value adjustments | As recorded at acquisition | ||||||||||
Cash and cash equivalents | $ | 70,318 | $ | — | $ | 70,318 | ||||||
Investment securities | 28,436 | 16 | (a) | 28,452 | ||||||||
Restricted stock | 13,646 | — | 13,646 | |||||||||
Loans held for sale | 190 | — | 190 | |||||||||
Loans | 1,304,600 | (5,316) | (b) | 1,299,284 | ||||||||
Bank owned life insurance | 15,481 | — | 15,481 | |||||||||
Premises and equipment | 7,380 | (905) | (c) | 6,475 | ||||||||
Accrued interest receivable | 4,470 | — | 4,470 | |||||||||
Core deposit and other intangibles | — | 5,308 | (d) | 5,308 | ||||||||
Other real estate owned | 2,455 | — | 2,455 | |||||||||
Other assets | 10,636 | 3,650 | (e) | 14,286 | ||||||||
Deposits | (1,049,666 | ) | (1,676) | (f) | (1,051,342 | ) | ||||||
FHLB borrowings | (262,046 | ) | (1,324) | (g) | (263,370 | ) | ||||||
Other liabilities | (10,527 | ) | — | (10,527 | ) | |||||||
Total identifiable net assets | $ | 135,373 | $ | (247 | ) | $ | 135,126 | |||||
Goodwill recorded in the Merger | $ | 129,105 |
Consideration paid through Parent Corporation common stock issued to Legacy ConnectOne shareholders and fair value of stock options acceleration was: $ 264,231
Legacy ConnectOne carrying value | Fair value adjustments | As recorded at acquisition | |||||||||||
Cash and cash equivalents | $ | 70,318 | $ | — | $ | 70,318 | |||||||
Investment securities | 28,436 | 16 | (a) | 28,452 | |||||||||
Restricted stock | 13,646 | — | 13,646 | ||||||||||
Loans held for sale | 190 | — | 190 | ||||||||||
Loans | 1,304,600 | (5,316 | ) | (b) | 1,299,284 | ||||||||
Bank owned life insurance | 15,481 | — | 15,481 | ||||||||||
Premises and equipment | 7,380 | (905 | ) | (c) | 6,475 | ||||||||
Accrued interest receivable | 4,470 | — | 4,470 | ||||||||||
Core deposit and other intangibles | — | 5,308 | (d) | 5,308 | |||||||||
Other real estate owned | 2,455 | — | 2,455 | ||||||||||
Other assets | 10,636 | 3,650 | (e) | 14,286 | |||||||||
Deposits | (1,049,666 | ) | (1,676 | ) | (f) | (1,051,342 | ) | ||||||
FHLB borrowings | (262,046 | ) | (1,324 | ) | (g) | (263,370 | ) | ||||||
Other liabilities | (10,527 | ) | — | (10,527 | ) | ||||||||
Total identifiable net assets | $ | 135,373 | $ | (247 | ) | $ | 135,126 | ||||||
Goodwill recorded in the Merger | $ | 129,105 |
The following provides an explanation of certain fair value adjustments presented in the above table:
a) | Represents the fair value adjustment on investment securities held to maturity. |
b) | Represents the elimination of Legacy ConnectOne’s allowance for loan and lease losses, deferred fees, deferred costs and an adjustment of the amortized cost of loans to estimated fair value, which includes an interest rate mark and credit mark. |
c) | Represent an adjustment to reflect the fair value of |
d) | Represents intangible assets recorded to reflect the fair value of core |
e) | Consist primarily of adjustments in net deferred tax assets resulting from the fair value adjustments related to acquired assets, liabilities assumed and identifiable intangibles recorded. |
f) | Represents fair value adjustment on time deposits as the weighted average interest rates of time deposits assumed exceeded the costs of similar funding available in the market at the time of the Merger, as well as the elimination of fees paid on brokered time deposits. |
g) | Represents the fair value adjustment on FHLB borrowings as the weighted average interest rate of FHLB borrowings assumed exceeded the cost of similar funding available in the market at the time of the Merger. |
The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired by the Company and reflects the economies of scale, increased market share and lending capabilities;capabilities, greater access to best-in-class banking technology, and related synergies that are expected to result from the acquisition, and represents the excess purchase price over the estimated fair value of the net assets acquired by ConnectOne.acquisition.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Note 2. Business Combinations – (continued)
Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired from Legacy ConnectOne were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimated future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. For collateral dependent loans with deteriorated credit quality, fair value was estimated by analyzing the value of the underlying collateral, assuming the fair values of the loan were derived from the eventual sale of the collateral. These values were discounted using marked derived raterates of returns, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of Legacy ConnectOne allowance for loan and lease losses associated with the loans that were acquired, as the loans were initially recorded at fair value on the date of the Merger.
The acquired loan portfolio subject to purchased credit impairment accounting guidance (ASC 310-30) as of July 1, 2014 was comprised of collateral dependent loans with deteriorated credit quality as follows (in thousands):
ASC 310-30 Loans | ||||
Contractual principal and accrued interest at acquisition | $ | 23,284 | ||
Principal not expected to be collected (non-accretable discount) | (6,942 | ) | ||
Expected cash flows at acquisition | 16,342 | |||
Interest component of expected cash flows (accretable discount) | (5,013 | ) | ||
Fair value of acquired loans | $ | 11,329 |
The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years utilizing the accelerated method. Other intangibles consist of below market rents, which are amortized over the remaining life of each lease using the straight-line method.
Goodwill is not amortized for book purposes; however, it is reviewed at least annually for impairment and is not deductible for tax purposes.
The fair value of retail demand and interest bearing deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities. The fair value of borrowed funds was estimated by discounting the future cash flows using market rates for similar borrowings.
Direct acquisition and integration costs of the Merger were expensed as incurred and totaled $10.6 million. These items were recorded as merger-related expenses on the statement of operations.
The following table presents selected unaudited pro forma financial information reflecting the Merger assuming it was completed as of January 1, 2014 and January 1, 2013. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the Merger actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full fiscal year period. Pro forma basic and diluted earnings per common share were calculated using the Corporation’s actual weighted average shares outstanding for the periods presented, plus the incremental shares issued, assuming the Merger occurred at the beginning of the periods presented. The unaudited pro forma information is based on the actual financial statements of the Corporation for the periods presented, and on the actual financial statements of the Corporation for the 2013 period presented and in 2014 until the date of the Merger, at which time Legacy ConnectOne’s results of operations were included in the Corporation’s financial statements.
The unaudited pro forma information, for the nine months ended September 30, 2014 and 2013, set forth below reflects the adjustments related to (a) purchase accounting fair value adjustments; (b) amortization of core deposit and other intangibles; and (c) adjustments to interest income and expense due to amortization of premiums and accretion discounts. The unaudited pro forma information give effect to the Merger as if it occurred on January 1, 2014 with respect to the pro forma information for the nine months ended September 30, 2014 and on January 1, 2013 with respect to the pro forma information for the nine months ended September 30, 2013. In the table below, merger-related expenses of $13.5 million were excluded from pro forma non-interest expenses for the nine months ended September 30, 2014. Income taxes were also adjusted to exclude income tax benefits of $3.9 million related to the merger expenses for the nine months ended September 30, 2014. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue enhancement opportunities or anticipated cost savings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pro Forma for the Nine Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
(in thousands, except per share amounts) | ||||||||
Net interest income | $ | 78,872 | $ | 71,091 | ||||
Noninterest income | 6,168 | 5,948 | ||||||
Noninterest expense | (41,073 | ) | (34,352 | ) | ||||
Net income | 26,490 | 26,125 | ||||||
Pro forma earnings per share from continuing operations: | ||||||||
Basic | $ | 0.89 | $ | 0.91 | ||||
Diluted | 0.88 | 0.90 |
The Corporation has determined that it is impractical to report the amounts of revenue and earnings of legacy ConnectOne since the acquisition date, July 1, 2014. The back-office systems conversion of the combined entity took place on July 21, 2014. Accordingly, reliable and separate complete revenue and earnings information are no longer available. In addition, such amounts would require significant estimates related to the proper allocation of merger cost saves that cannot be objectively made.
Note 4.3. Earnings per Common Share
Basic earnings per common share (“EPS”) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g., stock options). The Corporation’sCompany’s weighted average common shares outstanding for diluted EPS include the effect of stock options and restricted stock awards outstanding using the Treasury Stock Method, which are not included in the calculation of basic EPS.
Earnings per common share have been computed as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(in thousands, except share amounts) | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||
(in thousands, except for per share data) | 2015 | 2014 | ||||||||||||||||||||||
Net income | $ | 1,766 | $ | 5,094 | $ | 10,542 | $ | 14,941 | $ | 10,379 | $ | 4,398 | ||||||||||||
Preferred stock dividends | (28 | ) | (28 | ) | (84 | ) | (112 | ) | (28 | ) | (28 | ) | ||||||||||||
Net income available to common stockholders | $ | 1,738 | $ | 5,066 | $ | 10,458 | $ | 14,829 | $ | 10,351 | $ | 4,370 | ||||||||||||
Basic weighted average common shares outstanding | 29,636,001 | 16,349,480 | 20,819,241 | 16,348,875 | 29,757 | 16,350 | ||||||||||||||||||
Effect of dilutive options | 472,102 | 35,675 | 466,211 | 32,095 | 392 | 56 | ||||||||||||||||||
Diluted weighted average common shares outstanding | 30,108,103 | 16,385,155 | 21,285,452 | 16,380,970 | 30,149 | 16,406 | ||||||||||||||||||
Earnings per common share: | ||||||||||||||||||||||||
Basic | $ | 0.06 | $ | 0.31 | $ | 0.50 | $ | 0.91 | $ | 0.35 | $ | 0.27 | ||||||||||||
Diluted | 0.06 | 0.31 | 0.49 | 0.91 | 0.34 | 0.27 |
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5.4. Investment Securities
The Corporation’sCompany’s investment securities are classified as available-for-sale and held-to-maturity at September 30, 2014March 31, 2015 and December 31, 2013.2014. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date.as of March 31, 2015. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 78 of the Notes to Consolidated Financial Statements for a further discussion.
Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present information related to the Corporation’sCompany’s investment securities at September 30, 2014March 31, 2015 and December 31, 2013.2014.
September 30, 2014 | March 31, 2015 | |||||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||
(dollars in thousands) | March 31, 2015 | |||||||||||||||||||||||||||||||
Investment Securities Available-for-Sale: | ||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
U.S. Treasury and agency securities | $ | 11,517 | $ | — | $ | (132 | ) | $ | 11,385 | |||||||||||||||||||||||
Investment securities available-for-sale: | ||||||||||||||||||||||||||||||||
Federal agency obligations | 33,110 | 75 | (193 | ) | 32,992 | $ | 30,774 | $ | 463 | $ | (4 | ) | $ | 31,233 | ||||||||||||||||||
Residential mortgage pass-through securities | 58,459 | 1,332 | (100 | ) | 59,691 | 57,300 | 1,737 | (9 | ) | 59,028 | ||||||||||||||||||||||
Commercial mortgage pass-through securities | 3,057 | — | (41 | ) | 3,016 | 3,027 | 55 | — | 3,082 | |||||||||||||||||||||||
Obligations of U.S. states and political subdivisions | 8,204 | 225 | — | 8,429 | 8,197 | 238 | — | 8,435 | ||||||||||||||||||||||||
Trust preferred securities | 16,085 | 465 | (236 | ) | 16,314 | 16,086 | 648 | (278 | ) | 16,456 | ||||||||||||||||||||||
Corporate bonds and notes | 129,550 | 6,300 | (10 | ) | 135,840 | 110,671 | 6,190 | (22 | ) | 116,839 | ||||||||||||||||||||||
Asset-backed securities | 21,603 | 151 | (1 | ) | 21,753 | 26,045 | 127 | (80 | ) | 26,092 | ||||||||||||||||||||||
Certificates of deposit | 2,098 | 32 | (6 | ) | 2,124 | 2,097 | 31 | (5 | ) | 2,123 | ||||||||||||||||||||||
Equity securities | 376 | — | (87 | ) | 289 | 376 | — | (56 | ) | 320 | ||||||||||||||||||||||
Mutual funds and money market funds | 15,808 | — | (139 | ) | 15,669 | |||||||||||||||||||||||||||
Other securities | 12,474 | 89 | (50 | ) | 12,513 | |||||||||||||||||||||||||||
Total | $ | 299,867 | $ | 8,580 | $ | (945 | ) | $ | 307,502 | $ | 267,047 | $ | 9,578 | $ | (504 | ) | $ | 276,121 | ||||||||||||||
Investment Securities Held-to-Maturity: | ||||||||||||||||||||||||||||||||
Investment securities held-to-maturity: | ||||||||||||||||||||||||||||||||
U.S. Treasury and agency securities | $ | 28,212 | $ | 251 | $ | — | $ | 28,463 | $ | 28,315 | $ | 1,507 | $ | — | $ | 29,822 | ||||||||||||||||
Federal agency obligations | 21,119 | 112 | (74 | ) | 21,157 | 35,393 | 586 | (30 | ) | 35,949 | ||||||||||||||||||||||
Residential mortgage pass-through securities | 2,616 | 7 | — | 2,623 | ||||||||||||||||||||||||||||
Commercial mortgage pass-through securities | 4,304 | 38 | (19 | ) | 4,323 | |||||||||||||||||||||||||||
Residential mortgage-backed securities | 5,542 | 26 | (13 | ) | 5,555 | |||||||||||||||||||||||||||
Commercial mortgage-backed securities | 4,124 | 86 | — | 4,210 | ||||||||||||||||||||||||||||
Obligations of U.S. states and political subdivisions | 123,379 | 3,914 | (151 | ) | 127,142 | 119,384 | 4,966 | (46 | ) | 124,304 | ||||||||||||||||||||||
Corporate bonds and notes | 37,937 | 762 | (14 | ) | 38,685 | 38,962 | 1,472 | (11 | ) | 40,423 | ||||||||||||||||||||||
Total | $ | 217,567 | $ | 5,084 | $ | (258 | ) | $ | 222,393 | $ | 231,720 | $ | 8,643 | $ | (100 | ) | $ | 240,263 | ||||||||||||||
Total investment securities | $ | 517,434 | $ | 13,664 | $ | (1,203 | ) | $ | 529,895 | $ | 498,767 | $ | 18,221 | $ | (604 | ) | $ | 516,384 |
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
December 31, 2013 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Investment Securities Available-for-Sale: | ||||||||||||||||
U.S. Treasury and agency securities | $ | 14,344 | $ | — | $ | (825 | ) | $ | 13,519 | |||||||
Federal agency obligations | 20,567 | 29 | (655 | ) | 19,941 | |||||||||||
Residential mortgage pass-through securities | 48,312 | 791 | (229 | ) | 48,874 | |||||||||||
Commercial mortgage pass-through securities | 7,145 | 3 | (157 | ) | 6,991 | |||||||||||
Obligations of U.S. states and political subdivisions | 30,804 | 711 | (55 | ) | 31,460 | |||||||||||
Trust preferred securities | 19,763 | 150 | (510 | ) | 19,403 | |||||||||||
Corporate bonds and notes | 154,182 | 4,930 | (482 | ) | 158,630 | |||||||||||
Asset-backed securities | 15,733 | 246 | — | 15,979 | ||||||||||||
Certificates of deposit | 2,250 | 32 | (20 | ) | 2,262 | |||||||||||
Equity securities | 376 | — | (89 | ) | 287 | |||||||||||
Mutual funds and money market funds | 5,671 | 68 | (15 | ) | 5,724 | |||||||||||
Total | $ | 319,147 | $ | 6,960 | $ | (3,037 | ) | $ | 323,070 | |||||||
Investment Securities Held-to-Maturity: | ||||||||||||||||
U.S. Treasury and agency securities | $ | 28,056 | $ | — | $ | (1,019 | ) | $ | 27,037 | |||||||
Federal agency obligations | 15,249 | 23 | (389 | ) | 14,883 | |||||||||||
Residential mortgage-backed securities | 2,246 | — | (64 | ) | 2,182 | |||||||||||
Commercial mortgage-backed securities | 4,417 | 41 | (62 | ) | 4,396 | |||||||||||
Obligations of U.S. states and political subdivisions | 127,418 | 1,303 | (3,688 | ) | 125,033 | |||||||||||
Corporate bonds and notes | 37,900 | 149 | (622 | ) | 37,427 | |||||||||||
Total | $ | 215,286 | $ | 1,516 | $ | (5,844 | ) | $ | 210,958 | |||||||
Total investment securities | $ | 534,433 | $ | 8,476 | $ | (8,881 | ) | $ | 534,028 |
Note 4. Investment Securities – (continued)
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
December 31, 2014 | ||||||||||||||||
(in thousands) | ||||||||||||||||
Investment securities available-for-sale: | ||||||||||||||||
Federal agency obligations | $ | 32,650 | $ | 217 | $ | (50 | ) | $ | 32,817 | |||||||
Residential mortgage pass-through securities | 58,836 | 1,531 | (11 | ) | 60,356 | |||||||||||
Commercial mortgage pass-through securities | 3,042 | 4 | — | 3,046 | ||||||||||||
Obligations of U.S. states and political subdivisions | 8,201 | 205 | — | 8,406 | ||||||||||||
Trust preferred securities | 16,086 | 489 | (269 | ) | 16,306 | |||||||||||
Corporate bonds and notes | 119,838 | 5,950 | (11 | ) | 125,777 | |||||||||||
Asset-backed securities | 27,393 | 140 | (31 | ) | 27,502 | |||||||||||
Certificates of deposit | 2,098 | 27 | (2 | ) | 2,123 | |||||||||||
Equity securities | 376 | — | (69 | ) | 307 | |||||||||||
Other securities | 12,941 | 33 | (82 | ) | 12,892 | |||||||||||
Total | $ | 281,461 | $ | 8,596 | $ | (525 | ) | $ | 289,532 | |||||||
Investment securities held-to-maturity: | ||||||||||||||||
U.S. Treasury and agency securities | $ | 28,264 | $ | 920 | $ | — | $ | 29,184 | ||||||||
Federal agency obligations | 27,103 | 322 | (28 | ) | 27,397 | |||||||||||
Residential mortgage-backed securities | 5,955 | 28 | — | 5,983 | ||||||||||||
Commercial mortgage-backed securities | 4,266 | 50 | — | 4,316 | ||||||||||||
Obligations of U.S. states and political subdivisions | 120,144 | 4,512 | (60 | ) | 124,596 | |||||||||||
Corporate bonds and notes | 38,950 | 1,026 | (7 | ) | 39,969 | |||||||||||
Total | $ | 224,682 | $ | 6,858 | $ | (95 | ) | $ | 231,445 | |||||||
Total investment securities | $ | 506,143 | $ | 15,454 | $ | (620 | ) | $ | 520,977 |
The following table presents information for investment securities available-for-sale at September 30, 2014,March 31, 2015, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.
September 30, 2014 | March 31, 2015 | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Investment Securities Available-for-Sale: | ||||||||||||||||
Investment securities available-for-sale: | ||||||||||||||||
Due in one year or less | $ | 14,395 | $ | 14,543 | $ | 23,891 | $ | 24,248 | ||||||||
Due after one year through five years | 43,153 | 44,425 | 32,274 | 33,611 | ||||||||||||
Due after five years through ten years | 110,494 | 115,594 | 83,910 | 88,819 | ||||||||||||
Due after ten years | 54,125 | 54,275 | 53,795 | 54,500 | ||||||||||||
Residential mortgage pass-through securities | 58,459 | 59,691 | 57,300 | 59,028 | ||||||||||||
Commercial mortgage pass-through securities | 3,057 | 3,016 | 3,027 | 3,082 | ||||||||||||
Equity securities | 376 | 289 | 376 | 320 | ||||||||||||
Mutual funds and money market funds | 15,808 | 15,669 | ||||||||||||||
Other securities | 12,474 | 12,513 | ||||||||||||||
Total | $ | 299,867 | $ | 307,502 | $ | 267,047 | $ | 276,121 | ||||||||
Investment Securities Held-to-Maturity: | ||||||||||||||||
Investment securities held-to-maturity: | ||||||||||||||||
Due in one year or less | $ | 7,059 | $ | 7,140 | $ | 4,991 | $ | 5,020 | ||||||||
Due after one year through five years | 7,907 | 8,056 | 9,207 | 9,401 | ||||||||||||
Due after five years through ten years | 69,114 | 70,359 | 71,916 | 75,354 | ||||||||||||
Due after ten years | 126,567 | 129,892 | 135,940 | 140,723 | ||||||||||||
Residential mortgage-backed securities | 2,616 | 2,623 | 5,542 | 5,555 | ||||||||||||
Commercial mortgage pass-through securities | 4,304 | 4,323 | ||||||||||||||
Commercial mortgage-backed securities | 4,124 | 4,210 | ||||||||||||||
Total | $ | 217,567 | $ | 222,393 | $ | 231,720 | $ | 240,263 | ||||||||
Total investment securities | $ | 517,434 | $ | 529,895 | $ | 498,767 | $ | 516,384 |
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
For the nine months ended September 30, 2014, proceeds of available-for-sale investment securities sold amounted to approximately $67.0 million.Note 4. Investment Securities – (continued)
Gross gains and losses from the sales, calls, and maturities of investment securities for the three-monththree months ended March 31, 2015 and nine-month periods ended September 30, 2014 and 2013 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(in thousands) | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | ||||||||||||||||||
Proceeds | $ | 9,537 | $ | 50,611 | ||||||||||||||||||||
Gross gains on sales of investment securities | $ | 111 | $ | 343 | $ | 2,122 | $ | 1,375 | 506 | 1,432 | ||||||||||||||
Gross losses on sales of investment securities | — | — | 22 | 89 | — | (17 | ) | |||||||||||||||||
Net gains on sales of investment securities | 111 | 343 | 2,100 | 1,286 | 506 | 1,415 | ||||||||||||||||||
Less: tax provision on gross gains | 42 | 96 | 601 | 353 | ||||||||||||||||||||
Gross gains on sales of investments, net of tax | $ | 69 | $ | 247 | $ | 1,499 | $ | 933 | ||||||||||||||||
Less: tax provision on net gains | 207 | 380 | ||||||||||||||||||||||
Total | $ | 299 | $ | 1,035 |
The following summarizes OTTI charges for the periods indicated.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Other than temporary impairment charges | $ | — | $ | — | $ | — | $ | — | ||||||||
Principal losses on a variable rate CMO | — | — | — | 24 | ||||||||||||
Total other-than-temporary impairment charges | $ | — | $ | — | $ | — | $ | 24 |
The CorporationCompany performs regular analysis on all its investmentthe available-for-sale securities portfolio to determine whether a decline in fair value indicates that an investment is other-than-temporarily impaired in accordance with FASB ASC 320-10. FASB ASC 320-10 requires companies to record OTTIother-than-temporary impairment (“OTTI”) charges, through earnings, if they have the intent to sell, or if it is more likely than not that they will be required to sell, an impaired debt security before recovery of its amortized cost basis. If the CorporationCompany intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its estimated fair value at the balance sheet date. If the CorporationCompany does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, and as such, it determines that a decline in fair value is other than temporary, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
The Corporation’s assessmentCompany reviews all securities for potential recognition of whether an impairment is other than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced a restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed a deteriorating financial condition or sustained significant losses.other-than-temporary impairment. The CorporationCompany maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review. This could result frominclude credit rating downgrades.
The Company’s assessment of whether an impairment in the portfolio is other than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed deteriorating financial condition or sustained significant losses.
The following table presents detailed information for each single issuer trust preferred security held by the Company at March 31, 2015, of which all but one has at least one rating below investment grade (in thousands):
Issuer | Amortized Cost | Fair Value | Gross Unrealized Gain (Loss) | Lowest Credit Rating Assigned | ||||||||||
Countrywide Capital IV | $ | 1,771 | $ | 1,819 | $ | 48 | BB | |||||||
Countrywide Capital V | 2,747 | 2,848 | 101 | BB | ||||||||||
Countrywide Capital V | 250 | 259 | 9 | BB | ||||||||||
Nationsbank Cap Trust III | 1,575 | 1,297 | (278 | ) | BB | |||||||||
Morgan Stanley Cap Trust IV | 2,500 | 2,567 | 67 | BB | ||||||||||
Morgan Stanley Cap Trust IV | 1,743 | 1,795 | 52 | BB | ||||||||||
Goldman Sachs | 1,000 | 1,252 | 252 | BB | ||||||||||
Stifel Financial | 4,500 | 4,619 | 119 | BBB- | ||||||||||
Total | $ | 16,086 | $ | 16,456 | $ | 370 |
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
The following table presents detailed information for each trust preferred security held by the Corporation at September 30, 2014 which has at least one rating below investment grade.
Issuer | Single Issuer or Pooled | Class/ Tranche | Amortized Cost | Fair Value | Gross Unrealized Gain (Loss) | Lowest Credit Rating Assigned | Number of Banks Currently Performing | Deferrals and Defaults as % of Original Collateral | Expected Deferral/Defaults as % of Remaining Performing Collateral | |||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||
Countrywide Capital IV | Single | n/a | $ | 1,771 | $ | 1,813 | 42 | BB | 1 | None | None | |||||||||||||||
Countrywide Capital V | Single | n/a | 2,747 | 2,827 | 80 | BB | 1 | None | None | |||||||||||||||||
Countrywide Capital V | Single | n/a | 250 | 257 | 7 | BB | 1 | None | None | |||||||||||||||||
Nationsbank Cap Trust III | Single | n/a | 1,575 | 1,339 | (236 | ) | BB | 1 | None | None | ||||||||||||||||
Morgan Stanley Cap Trust IV | Single | n/a | 2,500 | 2,517 | 17 | BB | 1 | None | None | |||||||||||||||||
Morgan Stanley Cap Trust IV | Single | n/a | 1,742 | 1,760 | 18 | BB | 1 | None | None | |||||||||||||||||
Goldman Sachs | Single | n/a | 1,000 | 1,137 | 137 | BB | 1 | None | None | |||||||||||||||||
Stifel Financial | Single | n/a | 4,500 | 4,664 | 164 | BBB- | 1 | None | None | |||||||||||||||||
Total | $ | 16,085 | $ | 16,314 | 229 |
Credit Loss Portion of OTTI Recognized in Earnings on DebtNote 4. Investment Securities
Nine Months Ended September 30, 2014 | Year Ended December 31, 2013 | |||||||
(in thousands) | ||||||||
Balance of credit-related OTTI at January 1, | $ | — | $ | 4,450 | ||||
Addition: | ||||||||
Credit losses on investment securities for which other-than-temporary impairment was not previously recognized | — | 652 | ||||||
Reduction: | ||||||||
Credit losses on investment securities sold during the period | — | (5,102 | ) | |||||
Balance of credit-related OTTI at period end | $ | — | $ | — |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) – (continued)
Temporarily Impaired Investments
For all other securities, the CorporationCompany does not believe that the unrealized losses, which were comprised of 8439 and 54 investment securities as of September 30,March 31, 2015 and December 31, 2014, respectively, represent an other-than-temporary impairment. The gross unrealized losses of $1.2 million associated with U.S. Treasury and agency securities, federal agency obligations, mortgage-backed securities, corporate bonds, tax-exempt securities, asset-backed securities, trust preferred securities, mutual funds and equity securities are not considered to be other than temporary because these unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.
Factors affecting the market price include credit risk, market risk, interest rates, economic cycles, and liquidity risk. The magnitude of any unrealized loss may be affected by the relative concentration of the Corporation’sCompany’s investment in any one issuer or industry. The CorporationCompany has established policies to reduce exposure through diversification of concentration of the investment portfolio including limits on concentrations to any one issuer. The CorporationCompany believes the investment portfolio is prudently diversified.
The decline in value is related to a change in interest rates and subsequent change in credit spreads required for these issues affecting market price. All issues are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. Short to intermediate average durations and in certain cases monthly principal payments should reduce further market value exposure to increases in rates.
The CorporationCompany evaluates all securities with unrealized losses quarterly to determine whether the loss is other than temporary. Unrealized losses in the corporate debt securities category consistsconsist primarily of senior unsecured corporate debt securities issued by large financial institutions, insurance companies and other corporate issuers and singleissuers. Single issuer corporate trust preferred securities. Nonesecurities are also included, and in the case of one holding the market valuation loss is largely based upon the floating rate coupon and corresponding market valuation. Neither that trust preferred issuer, nor any other corporate issuers, have defaulted on interest payments. The unrealized loss in equity securities consists of losses on other bank equities. The decline in fair value is due in large part to the lack of an active trading market for these securities, changes in market credit spreads and rating agency downgrades. Management concluded that these securities were not other-than-temporarily impaired at September 30, 2014. Future deterioration in the credit quality of these large financial institution issuers of TRUP debt securities could result in impairment charges in the future.March 31, 2015.
In determining that the securities giving rise to the previously mentioned unrealized losses were not other-than-temporarily impaired,other than temporary, the CorporationCompany evaluated the factors cited above, which the CorporationCompany considers when assessing whether a security is other-than-temporarily impaired. In making these evaluations the CorporationCompany must exercise considerable judgment. Accordingly, there can be no assurance that the actual results will not differ from the Corporation’sCompany’s judgments and that such differences may not require the future recognition of other-than-temporary impairment charges that could have a material effect on the Corporation’sCompany’s financial position and results of operations. In addition, the value of, and the realization of any loss on, an investment security areis subject to numerous risks as cited above.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Note 4. Investment Securities – (continued)
The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at September 30, 2014March 31, 2015 and December 31, 2013:2014:
September 30, 2014 | March 31, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||
Total | Less than 12 Months | 12 Months or Longer | Total | Less than 12 Months | 12 Months or Longer | |||||||||||||||||||||||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Investment Securities Available-for-Sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury and agency securities | $ | 9,488 | $ | (132 | ) | $ | 4,744 | $ | (57 | ) | $ | 4,744 | $ | (75 | ) | |||||||||||||||||||||||||||||||||
Federal agency obligations | 22,682 | (193 | ) | 18,601 | (113 | ) | 4,081 | (80 | ) | |||||||||||||||||||||||||||||||||||||||
Investment securities available-for-sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
Federal agency obligation | $ | 1,656 | $ | (4 | ) | $ | 1,357 | $ | (1 | ) | $ | 299 | $ | (3 | ) | |||||||||||||||||||||||||||||||||
Residential mortgage pass-through securities | 16,327 | (100 | ) | 16,327 | (100 | ) | — | — | 1,026 | (9 | ) | 1,026 | (9 | ) | — | — | ||||||||||||||||||||||||||||||||
Commercial mortgage pass-through securities | 3,016 | (41 | ) | — | — | 3,016 | (41 | ) | ||||||||||||||||||||||||||||||||||||||||
Trust preferred securities | 1,338 | (236 | ) | — | — | 1,338 | (236 | ) | 1,297 | (278 | ) | — | — | 1,297 | (278 | ) | ||||||||||||||||||||||||||||||||
Corporate bonds and notes | 3,002 | (10 | ) | 3,002 | (10 | ) | — | — | 3,935 | (22 | ) | 3,935 | (22 | ) | — | — | ||||||||||||||||||||||||||||||||
Asset-backed securities | 1,952 | (1 | ) | 1,952 | (1 | ) | — | — | 9,698 | (80 | ) | 9,698 | (80 | ) | — | — | ||||||||||||||||||||||||||||||||
Certificates of deposit | 216 | (6 | ) | 216 | (6 | ) | — | — | 217 | (5 | ) | 217 | (5 | ) | — | — | ||||||||||||||||||||||||||||||||
Equity securities | 289 | (87 | ) | — | — | 289 | (87 | ) | 320 | (56 | ) | — | — | 320 | (56 | ) | ||||||||||||||||||||||||||||||||
Mutual funds and money market funds | 11,361 | (139 | ) | 10,379 | (122 | ) | 982 | (17 | ) | |||||||||||||||||||||||||||||||||||||||
Other securities | 5,477 | (50 | ) | — | — | 5,477 | (50 | ) | ||||||||||||||||||||||||||||||||||||||||
Total | 69,671 | $ | (945 | ) | $ | 55,221 | $ | (409 | ) | $ | 14,450 | $ | (536 | ) | $ | 23,626 | $ | (504 | ) | $ | 16,233 | $ | (117 | ) | $ | 7,393 | $ | (387 | ) | |||||||||||||||||||
Investment Securities Held-to-Maturity: | ||||||||||||||||||||||||||||||||||||||||||||||||
Federal agency obligations | $ | 8,325 | $ | (74 | ) | $ | 8,325 | $ | (74 | ) | $ | — | $ | — | ||||||||||||||||||||||||||||||||||
Commercial mortgage pass-through securities | 1,392 | (19 | ) | — | — | 1,392 | (19 | ) | ||||||||||||||||||||||||||||||||||||||||
Investment securities held-to-maturity: | ||||||||||||||||||||||||||||||||||||||||||||||||
Federal agency obligation | $ | 6,422 | $ | (30 | ) | $ | 6,422 | $ | (30 | ) | $ | — | $ | — | ||||||||||||||||||||||||||||||||||
Residential mortgage pass-through securities | 3,660 | (13 | ) | 3,660 | (13 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||
Obligations of U.S. states and political subdivisions | 14,789 | (151 | ) | 3,336 | (4 | ) | 11,453 | (147 | ) | 7,336 | (46 | ) | 7,336 | (46 | ) | — | — | |||||||||||||||||||||||||||||||
Corporate bonds and notes | 2,700 | (14 | ) | 2,700 | (14 | ) | — | — | 3,720 | (11 | ) | 3,720 | (11 | ) | — | — | ||||||||||||||||||||||||||||||||
Total | 27,206 | (258 | ) | 14,361 | (92 | ) | 12,845 | (166 | ) | $ | 21,138 | $ | (100 | ) | $ | 21,138 | $ | (100 | ) | $ | — | $ | — | |||||||||||||||||||||||||
Total Temporarily Impaired Securities | $ | 96,877 | $ | (1,203 | ) | $ | 69,582 | $ | (501 | ) | $ | 27,295 | $ | (702 | ) | |||||||||||||||||||||||||||||||||
Total temporarily impaired securities | $ | 44,764 | $ | (604 | ) | $ | 37,371 | $ | (217 | ) | $ | 7,393 | $ | (387 | ) |
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
December 31, 2013 | ||||||||||||||||||||||||
Total | Less than 12 Months | 12 Months or Longer | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Investment Securities Available-for-Sale: | ||||||||||||||||||||||||
U.S. Treasury and agency securities | $ | 13,519 | $ | (825 | ) | $ | 13,519 | $ | (825 | ) | $ | — | $ | — | ||||||||||
Federal agency obligation | 17,200 | (655 | ) | 17,200 | (655 | ) | — | — | ||||||||||||||||
Residential mortgage pass-through securities | 18,293 | (229 | ) | 18,293 | (229 | ) | — | — | ||||||||||||||||
Commercial mortgage pass-through securities | 2,924 | (157 | ) | 2,924 | (157 | ) | — | — | ||||||||||||||||
Obligations of U.S. states and political subdivisions | 4,199 | (55 | ) | 4,199 | (55 | ) | — | — | ||||||||||||||||
Trust preferred securities | 5,306 | (510 | ) | 4,031 | (211 | ) | 1,275 | (299 | ) | |||||||||||||||
Corporate bonds and notes | 32,498 | (482 | ) | 30,533 | (448 | ) | 1,965 | (34 | ) | |||||||||||||||
Certificates of deposit | 552 | (20 | ) | 552 | (20 | ) | — | — | ||||||||||||||||
Equity securities | 287 | (89 | ) | — | — | 287 | (89 | ) | ||||||||||||||||
Mutual funds and money market funds | 985 | (15 | ) | — | — | 985 | (15 | ) | ||||||||||||||||
Total | 95,763 | (3,037 | ) | 91,251 | (2,600 | ) | 4,512 | (437 | ) | |||||||||||||||
Investment Securities Held-to-Maturity: | ||||||||||||||||||||||||
U.S. Treasury and agency securities | $ | 27,037 | $ | (1,019 | ) | $ | 27,037 | $ | (1,019 | ) | $ | — | $ | — | ||||||||||
Federal agency obligation | 13,492 | (389 | ) | 13,197 | (388 | ) | 295 | (1 | ) | |||||||||||||||
Residential mortgage pass-through securities | 2,182 | (64 | ) | 2,182 | (64 | ) | — | — | ||||||||||||||||
Commercial mortgage pass-through securities | 1,395 | (62 | ) | 1,395 | (62 | ) | — | — | ||||||||||||||||
Obligations of U.S. states and political subdivisions | 66,034 | (3,688 | ) | 57,072 | (2,957 | ) | 8,962 | (731 | ) | |||||||||||||||
Corporate bonds and notes | 27,210 | (622 | ) | 27,210 | (622 | ) | — | — | ||||||||||||||||
Total | 137,350 | (5,844 | ) | 128,093 | (5,112 | ) | 9,257 | (732 | ) | |||||||||||||||
Total Temporarily Impaired Securities | $ | 233,113 | $ | (8,881 | ) | $ | 219,344 | $ | (7,712 | ) | $ | 13,769 | $ | (1,169 | ) |
Note 4. Investment Securities – (continued)
December 31, 2014 | ||||||||||||||||||||||||
Total | Less than 12 Months | 12 Months or Longer | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Investment securities available-for-sale: | ||||||||||||||||||||||||
Federal agency obligation | $ | 6,755 | $ | (50 | ) | $ | 2,770 | $ | (9 | ) | $ | 3,985 | $ | (41 | ) | |||||||||
Residential mortgage pass-through securities | 5,694 | (11 | ) | 5,694 | (11 | ) | — | — | ||||||||||||||||
Trust preferred securities | 1,307 | (269 | ) | — | — | 1,307 | (269 | ) | ||||||||||||||||
Corporate bonds and notes | 1,961 | (11 | ) | 1,961 | (11 | ) | — | — | ||||||||||||||||
Asset-backed securities | 9,773 | (31 | ) | 9,773 | (31 | ) | — | — | ||||||||||||||||
Certificates of deposit | 369 | (2 | ) | 369 | (2 | ) | — | — | ||||||||||||||||
Equity securities | 307 | (69 | ) | — | — | 307 | (69 | ) | ||||||||||||||||
Other securities | 5,417 | (82 | ) | 1,978 | (21 | ) | 3,439 | (61 | ) | |||||||||||||||
Total | $ | 31,583 | $ | (525 | ) | $ | 22,545 | $ | (85 | ) | $ | 9,038 | $ | (440 | ) | |||||||||
Investment securities held-to-maturity: | ||||||||||||||||||||||||
Federal agency obligation | $ | 3,228 | $ | (28 | ) | $ | 3,228 | $ | (28 | ) | $ | — | $ | — | ||||||||||
Obligations of U.S. states and political subdivisions | 8,341 | (60 | ) | 1,401 | (3 | ) | 6,940 | (57 | ) | |||||||||||||||
Corporate bonds and notes | 993 | (7 | ) | 993 | (7 | ) | — | — | ||||||||||||||||
Total | $ | 12,562 | $ | (95 | ) | $ | 5,622 | $ | (38 | ) | $ | 6,940 | $ | (57 | ) | |||||||||
Total temporarily impaired securities | $ | 44,145 | $ | (620 | ) | $ | 28,167 | $ | (123 | ) | $ | 15,978 | $ | (497 | ) |
Investment securities having a carrying value of approximately $232.9$215.9 million and $109.3$224.7 million at September 30, 2014March 31, 2015 and December 31, 2013,2014, respectively, were pledged to secure public deposits, borrowings, Federal Reserve Discount Window, and Federal Home Loan Bank advances and for other purposes required or permitted by law.
At September 30, 2014As of March 31, 2015 and December 31, 2013,2014, there were no holdings of securities of any one issuer, other than the U.S.U.S Government and its agencies, in an amount greater than 10% of stockholders’ equity.
Note 6. Loans5 - Derivatives
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 Allowance for Loan Losses
Loans are stated at their principal amounts inclusive of net deferred loan origination fees. Interest income is credited as earned except when a loan becomes past due 90 days or more and doubt exists as to the ultimate collection of interest or principal. In those cases the recognition of income is discontinued. Past due status is based on the contractualother terms of the loan. Loans that are past due 90 days or more that are both well secured and in the process of collection will remain on an accruing basis. When a loan is placed on non-accrual status,individual interest accruals cease and uncollected accrued interest is reversed and charged against current income.rate swap agreements.
Payments receivedInterest Rate Swaps Designated as Cash Flow Hedges: Interest rate swaps with a notional amount totaling $25.0 million and $25.0 million were entered into on non-accrual loans are generally applied against principal. A loan may onlyOctober 15, 2014 and December 30, 2014, respectively, and were designated as cash flow hedges of certain Federal Home Loan Bank advances. The swaps were determined to be restored to an accruing basis when it again becomes well securedfully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. Therefore, the process of collection or all past due amounts have been collected. Loan origination fees and certain direct loan origination costs are deferred and recognized over the lifeaggregate fair value of the loan as an adjustmentswaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the loan’s yield usinghedges no longer be considered effective. The Company expects the level yield method.hedges to remain fully effective during the remaining term of the swaps.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Portfolio segmentsNote 5 – Derivatives – (continued)
Summary information about the interest rate swaps designated as cash flow hedges as of period-end is as follows:
(dollars in thousands) | March 31, 2015 | March 31, 2014 | December 31, 2014 | |||||||||
Notional amount | $ | 50,000 | $ | — | $ | 50,000 | ||||||
Weighted average pay rates | 1.58 | % | — | % | 1.58 | % | ||||||
Weighted average receive rates | 0.25 | % | — | % | 0.24 | % | ||||||
Weighted average maturity | 4.2 years | — | 4.4 years | |||||||||
Fair value | $ | (486 | ) | $ | — | $ | 48 |
Interest expense recorded on these swap transactions totaled approximately $166,000 for the three months ended March 31, 2015 and there are defined asno related expenses for the level at which an entity developsthree months ended March 31, 2014.
Cash Flow Hedge
The following table presents the net gains (losses), recorded in other comprehensive income and documents a systematic methodologythe Consolidated Statements of Income relating to determine its allowance. Managementthe cash flow derivative instruments for the three months ended March 31, 2015:
(in thousands) | Amount of gain (loss) recognized in OCI (Effective Portion) | Amount of gain (loss) reclassified from OCI to interest income | Amount of gain (loss) recognized in other Non-interest income (Ineffective Portion) | |||||||||
Interest rate contracts | $ | (534 | ) | $ | — | $ | — |
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 three months ended March 31, 2014.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Loans and the Allowance for Loan and Lease Losses
Loans that management has determined that the Corporation has two portfolio segments of loansintent and leases (commercial and consumer) in determiningability to hold for the allowance. Both quantitative and qualitative factorsforeseeable future or until maturity or payoff are used by managementreported at the portfolio segment level in determining the adequacyprincipal balance outstanding, net of thedeferred loan fees and costs, and an allowance for loan and lease losses. Interest income is accrued on the Corporation. Classesunpaid principal balance. Loan origination fees, net of loanscertain direct origination costs, are deferred and leases are a disaggregation ofrecognized in interest income using the Corporation’s portfolio segments. Classeslevel-yield method without anticipating prepayments.
Loan segments are defined as a group of loans and leases, which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the CorporationCompany has five classessegments of loans and leases: commercial (including lease financing), commercial real estate, commercial construction, residential real estate (including home equity) and consumer.
Interest income on commercial, commercial real estate, commercial construction and residential loans are discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to nonaccrual status in accordance with the Company’s policy, typically after 90 days of non-payment.
All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The policy of the Company is to generally grant commercial, residential and consumer loans to New Jersey residents and businesses within its 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 loan and lease losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for a large majority of the Company’s loans.
Impaired LoansAllowance for Loan and Lease Losses
The Corporation accountsallowance for impaired loans in accordance with FASB ASC 310-10-35. The valueloan and lease losses is a valuation allowance for probable incurred credit losses. Losses are charged against the allowance when management believes the uncollectibility of impaired loansa loan balance is based onconfirmed. Subsequent recoveries, if any, are credited to the present value of expected future cash flows discounted atallowance. Management estimates the loan’s effective interest rate or, as a practical expedient, atallowance balance required using past loan and lease loss experience, the loan’s observable market price or at the fair valuenature and volume of the portfolio, information about specific borrower situations and estimated collateral ifvalues, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan is collateral dependent.that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
A loan is considered impaired when, based on current information and events, it is probable that the CorporationCompany will not be ableunable to collect all amounts due from the borrower in accordance withaccording to the contractual terms of the loan including scheduled interest payments. The Corporation has defined its population of impaired loans to include all classes of non-accrual,agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructuringrestructurings (“TDR”TDRs”) loans and loans with a specific reserve.classified as impaired. As part of the evaluation of impaired loans, the CorporationCompany individually reviews for impairment all non-homogeneous loans internally classified as substandard or below. Generally, smaller impaired non-homogeneous loans and impaired homogeneous loans are collectively evaluated for impairment.
WhenThe Bank has defined its population of impaired loans to include all loans on nonaccrual status; all troubled debt restructuring loans; and all loans (above an established dollar threshold of $250,000) internally classified as “Special Mention” or below that require a specific reserve.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan has been identified as being impaired,and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral-dependent. If the measurement of the impaired loan is less than the recorded investmentshortfall in the loan (including accrued interest, net of deferred loan fees or costs and unamortized premiums or discounts), impairment is recognized by creating or adjusting an existing allocation of the allowance, or by recording a partial charge-off of the loanrelation to its fair value. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which caseand interest income may be accrued or recognized on a cash basis.owed.
Loans Modified in a Troubled Debt Restructuring
Loans are considered to have been modified in a TDR when due to a borrower’s financial difficulties; the Corporation makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for a period of nine months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.
Reserve for Credit Losses
The Corporation’s reserve for credit losses is comprised of two components, the allowance for loan losses and the reserve for unfunded commitments (the “Unfunded Commitments”).
Allowance for Loan Losses
The allowance reflects management’s best estimate of probable losses within the existing loan portfolio. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risk inherent in the loan portfolio. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.
The Corporation’s allowance for loan losses includes (1) specific valuation allowances for impaired loans evaluated in accordance with FASB Codification Topic 310: Receivables; (2) formulaic allowances based on historical loss experience by loan category, adjusted, as necessary, to reflect the impact of current conditions; and (3) unallocated general valuation allowances determined in accordance with FASB Codification Topic 450: Contingencies based on general economic conditions and other qualitative risk factors both internal and external to the Corporation.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Material estimatesNote 6. Loans and the Allowance for Loan and Lease Losses – (continued)
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that are particularly susceptible to significant changesubsequently default, the Company determines the amount of reserve in accordance with the near-term relate to the determination ofaccounting policy for the allowance for loan and lease losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.
The ultimate collectability of a substantial portiongeneral component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience, the primary factor, is determined by loan class and is based on the actual loss history experienced by the Bank over an actual three year rolling calculation. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. This actual loss experience is supplemented with the exogenous factor adjustments based on the risks present for each loan category. These exogenous factors (nine total) include consideration of the Corporation’sfollowing: concentrations of credit; delinquency & nonaccrual trends; economic & business conditions including evaluation of the national and regional economies and industries with significant loan portfolio is susceptible toconcentrations; external factors including legal, regulatory or competitive pressures that may impact the loan portfolio; changes in the real estate market and economic conditions in the State of New Jersey and the impact of such conditions on the creditworthinessexperience, ability, or size of the borrowers.lending staff, management, or board of directors that may impact the loan portfolio; changes in underwriting standards, collection procedures, charge-off practices, or other changes in lending policies and procedures that may impact the loan portfolio; loss and recovery trends; changes in portfolio size and mix; and trends in problem loans.
Purchase Credit ImpairedPurchased Credit-Impaired Loans
The CorporationCompany purchases individual loans and groups of loans in conjunction with mergers, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan and lease losses. After acquisition, losses are recognized by an increase in the allowance for loan and lease losses.
Such purchased credit impaired loans are accounted for individually. The CorporationCompany estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Over the life of the loan, , expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other liabilities in the consolidated statements of condition. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, and credit risk. Net adjustments to the reserve for unfunded commitments are included in other expense.
Composition of Loan Portfolio
The following table sets forth the composition of the Corporation’sCompany’s loan portfolio, including net deferred loan fees, and costs, at September 30, 2014March 31, 2015 and December 31, 2013:2014:
September 30, | December 31, | |||||||||||||||
2014 | 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Commercial | $ | 470,510 | $ | 229,688 | $ | 562,931 | $ | 499,816 | ||||||||
Commercial real estate | 1,570,854 | 536,539 | 1,668,310 | 1,634,510 | ||||||||||||
Construction | 141,844 | 42,722 | ||||||||||||||
Commercial construction | 181,056 | 167,359 | ||||||||||||||
Residential real estate | 241,387 | 150,571 | 226,645 | 234,967 | ||||||||||||
Consumer | 2,640 | 1,084 | 3,581 | 2,879 | ||||||||||||
Subtotal | 2,427,235 | 960,604 | ||||||||||||||
Net deferred loan (fees) costs | (470 | ) | 339 | |||||||||||||
Loans receivable | $ | 2,426,765 | $ | 960,943 | ||||||||||||
Gross loans | 2,642,523 | 2,539,531 | ||||||||||||||
Net deferred loan fees | (1,784 | ) | (890 | ) | ||||||||||||
Total loans receivable | $ | 2,640,739 | $ | 2,538,641 |
At September 30, 2014March 31, 2015 and December 31, 2013,2014, loan balances of approximately $987.5 million$1.1 billion and $564.7 million,$1.0 billion, respectively, were pledged to secure borrowings from the Federal Home Loan Bank of New York.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Purchase Credit ImpairedNote 6. Loans and the Allowance for Loan and Lease Losses – (continued)
Purchased Credit-Impaired Loans
The CorporationCompany holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at September 30, 2014March 31, 2015 and December 31, 2013.2014.
September 30, | December 31, | |||||||||||||||
2014 | 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Commercial | $ | 7,255 | $ | — | $ | 7,146 | $ | 7,199 | ||||||||
Commercial real estate | 1,835 | — | 1,807 | 1,816 | ||||||||||||
Construction | — | — | ||||||||||||||
Residential real estate | 2,262 | — | 819 | 806 | ||||||||||||
Consumer | — | — | ||||||||||||||
Total carrying amount | $ | 11,352 | $ | — | $ | 9,772 | $ | 9,821 |
For those purchased loans disclosed above, the CorporationCompany did not increase the allowance for loan and lease losses for the ninethree months ended September 30, 2014,March 31, 2015, nor did it increase the allowance for loan and lease losses for purchased impaired loans during the ninethree months ended September 30, 2013.March 31, 2015.
The accretable yield, or income expected to be collected, on the purchased loans abovefor the three months ended March 31, 2015 is as follows at September 30, 2014 and December 31, 2013.(in thousands):
September 30, | ||||||||
2014 | ||||||||
Balance at July 1 | $ | 5,013 | ||||||
New loans purchased | — | |||||||
Accretion of income | (76 | ) | ||||||
Reclassifications from non-accretable difference | — | |||||||
Disposals | — | |||||||
Balance at September 30 | $ | 4,937 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, | ||||
2015 | ||||
Balance at January 1, 2015 | $ | 4,805 | ||
New loans purchased | — | |||
Accretion of income | (54 | ) | ||
Reclassifications from non-accretable difference | — | |||
Disposals | — | |||
Balance at March 31, 2015 | $ | 4,751 |
The following table presents information about the recorded investment in loan receivables on non-accrualnonaccrual status by class at September 30, 2014March 31, 2015 and December 31, 2013:2014:
Loans Receivable on Non-Accrual Status | ||||||||
September 30, 2014 | December 31, 2013 | |||||||
(in thousands) | ||||||||
Commercial | $ | 634 | $ | 753 | ||||
Commercial real estate | 3,765 | 744 | ||||||
Residential real estate | 1,684 | 1,640 | ||||||
Total loans receivable on non-accrual status | $ | 6,083 | $ | 3,137 |
Loans Receivable on Nonaccrual Status
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | ||||||||
Commercial | $ | 3,347 | $ | 616 | ||||
Commercial real estate | 8,009 | 8,197 | ||||||
Residential real estate | 3,229 | 2,796 | ||||||
Total loans receivable on nonaccrual status | $ | 14,585 | $ | 11,609 |
Non-accrualNonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)
The CorporationCompany continuously monitors the credit quality of its loans receivable. In addition to its internal staff, the CorporationCompany utilizes the services of a third party loan review firm to rate the credit quality of its loans receivable. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Corporation’sCompany’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. The following table presents information, excluding net deferred costs,loan fees, about the Corporation’sCompany’s loan credit quality at September 30, 2014March 31, 2015 and December 31, 2013:2014:
Credit Quality Indicators
March 31, 2015 | ||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Commercial | $ | 528,431 | $ | 23,975 | $ | 10,249 | $ | 276 | $ | 562,931 | ||||||||||
Commercial real estate | 1,621,181 | 24,509 | 22,620 | — | 1,668,310 | |||||||||||||||
Commercial construction | 179,577 | 1,479 | — | — | 181,056 | |||||||||||||||
Residential real estate | 223,148 | — | 3,497 | — | 226,645 | |||||||||||||||
Consumer | 3,484 | — | 97 | — | 3,581 | |||||||||||||||
Total loans | $ | 2,555,821 | $ | 49,963 | $ | 36,463 | $ | 276 | $ | 2,642,523 |
September 30, 2014 | ||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Commercial | $ | 449,688 | $ | 15,447 | $ | 5,073 | $ | 302 | $ | 470,510 | ||||||||||
Commercial real estate | 1,533,499 | 17,521 | 19,834 | — | 1,570,854 | |||||||||||||||
Construction | 140,365 | — | 1,479 | — | 141,844 | |||||||||||||||
Residential real estate | 238,516 | — | 2,871 | — | 241,387 | |||||||||||||||
Consumer | 2,534 | — | 106 | — | 2,640 | |||||||||||||||
Total loans | $ | 2,364,602 | $ | 32,968 | $ | 29,363 | $ | 302 | $ | 2,427,235 | ||||||||||
December 31, 2013 | ||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Commercial | $ | 226,013 | $ | 1,719 | $ | 1,284 | $ | 672 | $ | 229,688 | ||||||||||
Commercial real estate | 509,679 | 14,544 | 12,316 | — | 536,539 | |||||||||||||||
Construction | 41,492 | — | 1,230 | — | 42,722 | |||||||||||||||
Residential real estate | 147,379 | 978 | 2,214 | — | 150,571 | |||||||||||||||
Consumer | 964 | — | 120 | — | 1,084 | |||||||||||||||
Total loans | $ | 925,527 | $ | 17,241 | $ | 17,164 | $ | 672 | $ | 960,604 |
December 31, 2014 | ||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Commercial | $ | 481,638 | $ | 3,686 | $ | 14,203 | $ | 289 | $ | 499,816 | ||||||||||
Commercial real estate | 1,596,606 | 14,140 | 23,764 | — | 1,634,510 | |||||||||||||||
Commercial construction | 165,880 | 1,479 | — | — | 167,359 | |||||||||||||||
Residential real estate | 230,772 | — | 4,195 | — | 234,967 | |||||||||||||||
Consumer | 2,778 | — | 101 | — | 2,879 | |||||||||||||||
Total loans | $ | 2,477,674 | $ | 19,305 | $ | 42,263 | $ | 289 | $ | 2,539,531 |
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)
The following table provides an analysis of the impaired loans, by class,loan segment, at September 30, 2014March 31, 2015 and December 31, 2013:2014:
September 30, 2014 | ||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||
(in thousands) | ||||||||||||
No Related Allowance Recorded | ||||||||||||
Commercial | $ | 890 | $ | 663 | $ | — | ||||||
Commercial real estate | 5,005 | 5,654 | — | |||||||||
Residential real estate | 1,957 | 2,288 | — | |||||||||
Consumer | 106 | 106 | — | |||||||||
Total | $ | 7,958 | $ | 8,711 | — | |||||||
With An Allowance Recorded | ||||||||||||
Commercial real estate | $ | 3,600 | $ | 3,600 | $ | 323 | ||||||
Total | $ | 3,600 | $ | 3,600 | $ | 323 | ||||||
Total | ||||||||||||
Commercial | $ | 890 | $ | 663 | $ | — | ||||||
Commercial real estate | 8,605 | 9,254 | — | |||||||||
Residential real estate | 1,957 | 2,288 | — | |||||||||
Consumer | 106 | 106 | — | |||||||||
Total | $ | 11,558 | $ | 12,311 | $ | 323 |
December 31, 2013 | ||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||
(in thousands) | ||||||||||||
No Related Allowance Recorded | ||||||||||||
Commercial | $ | 449 | $ | 449 | $ | — | ||||||
Commercial real estate | 10,482 | 10,783 | — | |||||||||
Residential real estate | 1,858 | 2,000 | — | |||||||||
Consumer | 120 | 120 | — | |||||||||
Total | $ | 12,909 | $ | 13,352 | $ | — | ||||||
With An Allowance Recorded | ||||||||||||
Commercial | $ | 672 | $ | 672 | $ | 300 | ||||||
Commercial real estate | 4,344 | 4,344 | 115 | |||||||||
Total | $ | 5,016 | $ | 5,016 | $ | 415 | ||||||
Total | ||||||||||||
Commercial | $ | 1,121 | $ | 1,121 | $ | 300 | ||||||
Commercial real estate | 14,826 | 15,127 | 115 | |||||||||
Residential real estate | 1,858 | 2,000 | — | |||||||||
Consumer | 120 | 120 | — | |||||||||
Total | $ | 17,925 | $ | 18,368 | $ | 415 |
March 31, 2015 | ||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||
No related allowance recorded | (in thousands) | |||||||||||
Commercial | $ | 314 | $ | 334 | $ | — | ||||||
Commercial real estate | 5,774 | 6,468 | — | |||||||||
Residential real estate | 3,505 | 3,869 | — | |||||||||
Consumer | 105 | 97 | — | |||||||||
Total | $ | 9,698 | $ | 10,768 | $ | — | ||||||
With an allowance recorded | ||||||||||||
Commercial | $ | 382 | $ | 390 | $ | 188 | ||||||
Commercial real estate | 6,341 | 6,341 | 518 | |||||||||
Total | $ | 6,723 | $ | 6,731 | $ | 706 | ||||||
Total | ||||||||||||
Commercial | $ | 696 | $ | 724 | $ | 188 | ||||||
Commercial real estate | 12,115 | 12,809 | 518 | |||||||||
Residential real estate | 3,505 | 3,869 | — | |||||||||
Consumer | 105 | 97 | — | |||||||||
Total | $ | 16,421 | $ | 17,499 | $ | 706 |
December 31, 2014 | ||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||
No related allowance recorded | (in thousands) | |||||||||||
Commercial | $ | 481 | $ | 527 | $ | — | ||||||
Commercial real estate | 5,890 | 6,587 | — | |||||||||
Residential real estate | 3,072 | 3,407 | — | |||||||||
Consumer | 109 | 101 | — | |||||||||
Total | $ | 9,552 | $ | 10,622 | $ | — | ||||||
With an allowance recorded | ||||||||||||
Commercial | $ | 387 | $ | 390 | $ | 111 | ||||||
Commercial real estate | 3,520 | 3,520 | 151 | |||||||||
Total | $ | 3,907 | $ | 3,910 | $ | 262 | ||||||
Total | ||||||||||||
Commercial | $ | 868 | $ | 917 | $ | 111 | ||||||
Commercial real estate | 9,410 | 10,107 | 151 | |||||||||
Residential real estate | 3,072 | 3,407 | — | |||||||||
Consumer | 109 | 101 | — | |||||||||
Total | $ | 13,459 | $ | 14,532 | $ | 262 |
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)
The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by classsegment as of and for the three and nine months ended September 30,March 31, 2015 and 2014 and 2013.(in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||||||||||||||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||||||||||||||||||||||||||
Impaired loans with no related allowance recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||
Impaired loans with no related allowance recorded | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 897 | $ | — | $ | — | $ | — | $ | 778 | $ | 30 | $ | — | $ | — | $ | 290 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
Commercial real estate | 5,046 | 31 | 1,275 | 19 | 5,313 | 74 | 1,275 | 57 | 6,052 | 19 | 1,275 | 57 | ||||||||||||||||||||||||||||||||||||
Residential real estate | 1,975 | 0 | — | — | 2,044 | 31 | — | — | 3,613 | 2 | — | — | ||||||||||||||||||||||||||||||||||||
Consumer | 106 | 2 | — | — | 106 | 5 | — | — | 106 | 1 | — | — | ||||||||||||||||||||||||||||||||||||
Total | $ | 8,024 | 32 | $ | 1,275 | $ | 19 | $ | 8,241 | $ | 140 | $ | 1,275 | $ | 57 | $ | 10,061 | $ | 22 | $ | 1,275 | $ | 57 | |||||||||||||||||||||||||
Impaired loans with an allowance recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||
Impaired loans with an allowance recorded | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 387 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 6,335 | — | 2,302 | 68 | ||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | — | — | 1,226 | 31 | ||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 6,722 | $ | $ | 3,528 | $ | 99 | |||||||||||||||||||||||||||||||||||||||||
Total impaired loans | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 677 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
Commercial real estate | 3,600 | 37 | 175 | — | 3,600 | 122 | 2,302 | 68 | 12,387 | 19 | 3,477 | 125 | ||||||||||||||||||||||||||||||||||||
Residential real estate | — | — | 1,226 | 10 | — | — | 1,226 | 31 | 3,613 | 2 | 1,226 | 31 | ||||||||||||||||||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | 106 | 1 | — | — | |||||||||||||||||||||||||||||||||||||
Total | $ | 3,600 | $ | 37 | $ | 1,401 | $ | 10 | $ | 3,600 | $ | 122 | $ | 3,428 | $ | 99 | $ | 16,783 | $ | 22 | $ | 4,703 | $ | 156 | ||||||||||||||||||||||||
Total impaired loans: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 897 | $ | — | $ | — | $ | — | $ | 778 | $ | 30 | $ | — | $ | — | ||||||||||||||||||||||||||||||||
Commercial real estate | 8,646 | 68 | 1,450 | 19 | 8,913 | 196 | 3,477 | 125 | ||||||||||||||||||||||||||||||||||||||||
Residential real estate | 1,975 | 0 | 1,226 | 10 | 2,044 | 31 | 1,226 | 31 | ||||||||||||||||||||||||||||||||||||||||
Consumer | 106 | 2 | — | — | 106 | 5 | — | — | ||||||||||||||||||||||||||||||||||||||||
Total | $ | 11,624 | $ | 69 | $ | 2,676 | $ | 29 | 11,841 | $ | 262 | $ | 4,703 | $ | 156 |
Included in impaired loans at September 30,March 31, 2015, December 31, 2014 and March 31, 2014 are loans that are deemed troubled debt restructurings. The recorded investment in loans include accrued interest receivable and other capitalized costs such as real estate taxes paid on behalf of the borrower and loan origination fees, net, when applicable. Cash basis interest and interest income recognized on accrual basis approximate each other.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)
The following table provides an analysis of the aging of the recorded investment of loans, excluding net deferred costsloan fees that are past due at September 30, 2014March 31, 2015 and December 31, 20132014 by class:segment:
Aging Analysis
March 31, 2015 | ||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Loans Receivable | Loans Receivable 90 Days or Greater Past Due and Accruing | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Commercial | $ | 5,562 | $ | 554 | $ | 3,899 | $ | 10,015 | $ | 552,916 | $ | 562,931 | $ | 638 | ||||||||||||||
Commercial real estate | 2,567 | 5,092 | 4,180 | 11,839 | 1,656,471 | 1,668,310 | — | |||||||||||||||||||||
Commercial construction | 375 | — | — | 375 | 180,681 | 181,056 | — | |||||||||||||||||||||
Residential real estate | 1,925 | — | 2,937 | 4,862 | 221,783 | 226,645 | — | |||||||||||||||||||||
Consumer | 2 | 1 | — | 3 | 3,578 | 3,581 | ||||||||||||||||||||||
Total | $ | 10,431 | $ | 5,647 | $ | 11,016 | $ | 27,094 | $ | 2,615,429 | $ | 2,642,523 | $ | 638 |
Aging Analysis
September 30, 2014 | December 31, 2014 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Loans Receivable | Loans Receivable > 90 Days Past Due and Accruing | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Loans Receivable | Loans Receivable 90 Days or Greater Past Due and Accruing | |||||||||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 405 | $ | — | $ | 752 | $ | 1,157 | $ | 469,353 | $ | 470,510 | $ | — | $ | 6,060 | $ | — | $ | 662 | $ | 6,722 | $ | 493,094 | $ | 499,816 | $ | 45 | ||||||||||||||||||||||||||||
Commercial real estate | 951 | 2,044 | 4,020 | 7,015 | 1,563,839 | 1,570,854 | — | 4,937 | 638 | 5,961 | 11,535 | 1,622,975 | 1,634,510 | 609 | ||||||||||||||||||||||||||||||||||||||||||
Construction | — | — | — | — | 141,844 | 141,844 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Commercial construction | — | — | — | — | 167,359 | 167,359 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | 347 | 1,763 | 3,403 | 5,513 | 235,874 | 241,387 | — | 1,821 | 210 | 3,200 | 5,231 | 229,736 | 234,967 | 557 | ||||||||||||||||||||||||||||||||||||||||||
Consumer | 17 | — | — | 17 | 2,623 | 2,640 | 30 | 1 | — | 31 | 2,848 | 2,879 | — | |||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,720 | $ | 3,807 | $ | 8,175 | $ | 13,702 | $ | 2,413,533 | $ | 2,427,235 | $ | — | $ | 12,848 | $ | 849 | $ | 9,823 | $ | 23,519 | $ | 2,516,012 | $ | 2,539,531 | $ | 1,211 |
December 31, 2013 | ||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Loans Receivable | Loans Receivable > 90 Days Past Due and Accruing | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Commercial | $ | 18 | $ | — | $ | 753 | $ | 771 | $ | 228,917 | $ | 229,688 | $ | — | ||||||||||||||
Commercial Real Estate | 221 | — | 744 | 965 | 535,574 | 536,539 | — | |||||||||||||||||||||
Construction | — | — | — | — | 42,722 | 42,722 | — | |||||||||||||||||||||
Residential real estate | 990 | 258 | 1,640 | 2,888 | 147,683 | 150,571 | — | |||||||||||||||||||||
Consumer | 5 | — | — | 5 | 1,079 | 1,084 | ||||||||||||||||||||||
Total | $ | 1,234 | $ | 258 | $ | 3,137 | $ | 4,629 | $ | 955,975 | $ | 960,604 | $ | — |
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)
The following table details the amount of loans receivable that are evaluated individually, and collectively, for impairment (excluding net deferred costs)loan fees), acquired, and the related portion of the allowance for loan lossand lease losses that isare allocated to each loan portfolio class:segment:
September 30, 2014 | March 31, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Commercial real estate | Construction | Residential real estate | Consumer | Unallocated | Total | Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | 323 | $ | — | $ | — | $ | — | $ | — | $ | 323 | $ | 188 | $ | 518 | $ | — | $ | — | $ | — | $ | — | $ | 706 | ||||||||||||||||||||||||||||
Collectively evaluated for impairment | 2,478 | 6,699 | 524 | 1,052 | 5 | 1,037 | 11,795 | 3,739 | 8,328 | 1,518 | 981 | 4 | 657 | 15,227 | ||||||||||||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 2,478 | $ | 7,022 | $ | 524 | $ | 1,052 | $ | 5 | $ | 1,037 | $ | 12,118 | $ | 3,927 | $ | 8,846 | $ | 1,518 | $ | 981 | $ | 4 | $ | 657 | $ | 15,933 | ||||||||||||||||||||||||||||
Loans Receivable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans receivable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 68 | $ | 5,983 | $ | — | $ | 1,733 | $ | 106 | $ | — | $ | 7,890 | $ | 696 | $ | 12,115 | $ | — | $ | 3,905 | $ | 105 | $ | — | $ | 16,421 | ||||||||||||||||||||||||||||
Collectively evaluated for impairment | 463,187 | 1,563,036 | 141,844 | 237,391 | 2,534 | — | 2,407,992 | 555,089 | 1,654,388 | 181,056 | 222,321 | 3,476 | — | 2,616,330 | ||||||||||||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | 7,255 | 1,835 | — | 2,263 | — | — | 11,353 | 7,146 | 1,807 | — | 819 | — | — | 9,772 | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 470,510 | $ | 1,570,854 | $ | 141,844 | $ | 241,387 | $ | 2,640 | $ | — | $ | 2,427,235 | $ | 562,931 | $ | 1,668,310 | $ | 181,056 | $ | 226,645 | $ | 3,581 | $ | — | $ | 2,642,523 |
The tables above include approximately $1,275,000,000$1.1 billion of acquired loans for the period ended September 30,March 31, 2015 reported as collectively evaluated for impairment.
The following table details the amount of loans that are evaluated individually, and collectively, for impairment (excluding net deferred loan fees), acquired, and the related portion of the allowance for loan and lease losses that are allocated to each loan portfolio segment:
December 31, 2014 | ||||||||||||||||||||||||||||
Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Allowance for loan and lease losses | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 111 | $ | 151 | $ | — | $ | — | $ | — | $ | — | $ | 262 | ||||||||||||||
Collectively evaluated for impairment | 2,972 | 7,648 | 1,239 | 1,113 | 7 | 919 | 13,898 | |||||||||||||||||||||
Acquired with deteriorated credit quality | — | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 3,083 | $ | 7,799 | $ | 1,239 | $ | 1,113 | $ | 7 | $ | 919 | $ | 14,160 | ||||||||||||||
Loans receivable | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 452 | $ | 6,284 | $ | — | $ | 2,180 | $ | 101 | $ | — | $ | 9,017 | ||||||||||||||
Collectively evaluated for impairment | 492,165 | 1,626,410 | 167,359 | 231,981 | 2,778 | — | 2,520,693 | |||||||||||||||||||||
Acquired with deteriorated credit quality | 7,199 | 1,816 | — | 806 | — | — | 9,821 | |||||||||||||||||||||
Total | $ | 499,816 | $ | 1,634,510 | $ | 167,359 | $ | 234,967 | $ | 2,879 | $ | — | $ | 2,539,531 |
The tables above include approximately $1.2 billion of acquired loans for the period ended December 31, 2014 reported as collectively evaluated for impairment.
25
December 31, 2013 | ||||||||||||||||||||||||||||
Commercial | Commercial real estate | Construction | Residential real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Allowance for loan and lease losses: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 300 | $ | 115 | $ | — | $ | — | $ | — | $ | — | $ | 415 | ||||||||||||||
Collectively evaluated for impairment | 1,398 | 5,631 | 362 | 990 | 146 | 1,391 | 9,918 | |||||||||||||||||||||
Total | $ | 1,698 | $ | 5,746 | $ | 362 | $ | 990 | $ | 146 | $ | 1,391 | $ | 10,333 | ||||||||||||||
Loans Receivable | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,121 | $ | 14,826 | $ | — | $ | 1,858 | $ | 120 | $ | — | $ | 17,925 | ||||||||||||||
Collectively evaluated for impairment | 228,567 | 521,713 | 42,722 | 148,713 | 964 | — | 942,679 | |||||||||||||||||||||
Total | $ | 229,688 | $ | 536,539 | $ | 42,722 | $ | 150,571 | $ | 1,084 | $ | — | $ | 960,604 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The tables above include approximately $34,000,000 of acquired loansNote 6. Loans and the Allowance for the period ended December 31, 2013 reported as collectively evaluated for impairment.Loan and Lease Losses – (continued)
The Corporation’sCompany’s allowance for loan and lease losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit. There have been no material changes to the allowance for loan lossand lease losses methodology as disclosed in the Corporation’sCompany’s Annual Report on Form 10-K for the year ended December 31, 2013.2014.
A summary of the activity in the allowance for loan and lease losses is as follows:
Three Months Ended September 30, 2014 | ||||||||||||||||||||||||||||
Commercial | Commercial real estate | Construction | Residential real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Balance at July 1, | $ | 2,142 | $ | 5,741 | $ | 504 | $ | 1,011 | $ | 63 | $ | 1,364 | $ | 10,825 | ||||||||||||||
Charge offs | — | — | — | — | (18 | ) | — | (18 | ) | |||||||||||||||||||
Recoveries | — | — | — | — | 11 | — | 11 | |||||||||||||||||||||
Provision | 336 | 1,281 | 20 | 41 | (51 | ) | (327 | ) | 1,300 | |||||||||||||||||||
Balance at September 30, | $ | 2,478 | $ | 7,022 | $ | 524 | $ | 1,052 | $ | 5 | $ | 1,037 | $ | 12,118 |
Three Months Ended March 31, 2015 | ||||||||||||||||||||||||||||
Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Balance at January 1, 2015 | $ | 3,083 | $ | 7,799 | $ | 1,239 | $ | 1,113 | $ | 7 | $ | 919 | $ | 14,160 | ||||||||||||||
Charge-offs | (45 | ) | (4 | ) | — | — | (11 | ) | — | (60 | ) | |||||||||||||||||
Recoveries | 6 | — | — | 1 | 1 | — | 8 | |||||||||||||||||||||
Provision | 883 | 1,051 | 279 | (133 | ) | 7 | (262 | ) | 1,825 | |||||||||||||||||||
Balance at March 31, 2015 | $ | 3,927 | $ | 8,846 | $ | 1,518 | $ | 981 | $ | 4 | $ | 657 | $ | 15,933 |
Three Months Ended March 31, 2014 | ||||||||||||||||||||||||||||
Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Balance at January 1, 2014 | $ | 1,698 | $ | 5,746 | $ | 362 | $ | 990 | $ | 146 | $ | 1,391 | $ | 10,333 | ||||||||||||||
Charge-offs | (333 | ) | — | — | — | (3 | ) | — | (336 | ) | ||||||||||||||||||
Recoveries | — | — | — | 10 | 1 | — | 11 | |||||||||||||||||||||
Provision | 860 | (362 | ) | 72 | 4 | (65 | ) | 116 | 625 | |||||||||||||||||||
Balance at March 31, 2014 | $ | 2,225 | $ | 5,384 | $ | 434 | $ | 1,004 | $ | 79 | $ | 1,507 | $ | 10,663 |
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Nine Months Ended September 30, 2014 | ||||||||||||||||||||||||||||
Commercial | Commercial real estate | Construction | Residential real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Balance at January 1, | $ | 1,698 | $ | 5,746 | $ | 362 | $ | 990 | $ | 146 | $ | 1,391 | $ | 10,333 | ||||||||||||||
Charge offs | (333 | ) | — | — | (108 | ) | (7 | ) | — | (448 | ) | |||||||||||||||||
Recoveries | — | — | — | 11 | 13 | — | 24 | |||||||||||||||||||||
Provision | 1,113 | 1,276 | 162 | 159 | (147 | ) | (354 | ) | 2,209 | |||||||||||||||||||
Balance at September 30, | $ | 2,478 | $ | 7,022 | $ | 524 | $ | 1,052 | $ | 5 | $ | 1,037 | $ | 12,118 | ||||||||||||||
Three Months Ended September 30, 2013 | ||||||||||||||||||||||||||||
Commercial | Commercial real estate | Construction | Residential real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Balance at July 1, | $ | 2,422 | $ | 5,333 | $ | 318 | $ | 1,341 | $ | 29 | $ | 759 | $ | 10,202 | ||||||||||||||
Charge offs | (6 | ) | — | — | — | (4 | ) | — | (10 | ) | ||||||||||||||||||
Recoveries | — | — | — | — | 2 | — | 2 | |||||||||||||||||||||
Provision | (702 | ) | 455 | 51 | (37 | ) | 67 | 166 | — | |||||||||||||||||||
Balance at September 30, | $ | 1,714 | $ | 5,788 | $ | 369 | $ | 1,304 | $ | 94 | $ | 925 | $ | 10,194 | ||||||||||||||
Nine Months Ended September 30, 2013 | ||||||||||||||||||||||||||||
Commercial | Commercial real estate | Construction | Residential real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Balance at January 1, | $ | 2,424 | $ | 5,323 | $ | 313 | $ | 1,532 | $ | 113 | $ | 532 | $ | 10,237 | ||||||||||||||
Charge offs | (6 | ) | (50 | ) | — | — | (20 | ) | — | (76 | ) | |||||||||||||||||
Recoveries | 21 | 8 | — | — | 4 | — | 33 | |||||||||||||||||||||
Provision | (725 | ) | 507 | 56 | (228 | ) | (3 | ) | 393 | — | ||||||||||||||||||
Balance at September 30, | $ | 1,714 | $ | 5,788 | $ | 369 | $ | 1,304 | $ | 94 | $ | 925 | $ | 10,194 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)
TroubledTrouble Debt Restructurings
At September 30, 2014,March 31, 2015, there were no commitments to lend additional funds to borrowers whose loans were on non-accrualnonaccrual status or were contractually past due in excess of 90 days and still accruing interest, or whose terms have been modified in troubled debt restructurings.
The policy of the CorporationCompany generally is to grant commercial, mortgage and consumer loans to residents and businesses within its 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 Corporation.Company. The CorporationCompany is therefore subject to risk of loss. The CorporationCompany believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan and lease losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for virtually all loans. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
Loans modified in a troubled debt restructuring totaled a recorded investment of $2.8 million at September 30, 2014,March 31, 2015, of which $1.0$1.1 million were on non-accrualnonaccrual status. The remaining loans modified were current and have complied with the terms of their restructure agreement. At December 31, 2013,2014, loans modified in a troubled debt restructuring totaled $6.6$2.8 million, of which $826,000 was$1.0 million were on non-accrualnonaccrual status. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreement. The CorporationCompany has allocated no specific allocations with respect to loans whose loan terms had been modified in troubled debt restructurings as of September 30, 2014March 31, 2015 and December 31, 2013.2014. The TDRs presented as of March 31, 2015 and December 31, 2014 did not increase the allowance for loan and lease losses.
There were no troubled debt restructurings occurring during the three months ended March 31, 2015.
There were no charge-offs in connection with a loan modification at the time of modification during the three months ended March 31, 2015. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, 2015.
The following table presents loans by classsegment modified as troubled debt restructurings that occurred during the nine monthsyear ended September 30,March 31, 2014 (dollars in thousands):
Pre-Modification | Post-Modification | ||||||||
Outstanding | Outstanding | ||||||||
Number of | Recorded | Recorded | |||||||
Loans | Investment | Investment | |||||||
Troubled debt restructurings: | |||||||||
Commercial | 1 | $ | 672 | $ | 315 | ||||
Commercial real estate | 1 | 136 | 93 | ||||||
Construction | — | — | — | ||||||
Residential real estate | 2 | 275 | 273 | ||||||
Total | 4 | $ | 1,083 | $ | 681 |
Pre-Modification | Post-Modification | |||||||||||
Outstanding | Outstanding | |||||||||||
Number of | Recorded | Recorded | ||||||||||
Loans | Investment | Investment | ||||||||||
Troubled debt restructurings: | ||||||||||||
Commercial | 1 | $ | 672 | $ | 337 | |||||||
The CorporationCompany had a $333,000 charge-off in connection with a loan modification at the time of modification during the ninethree months ended September 30,March 31, 2014. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the ninethree months ended September 30,March 31, 2014.
There were no troubled debt restructurings that occurred during the year ended December 31, 2013. The Corporation had no loans charged-off in connection with a loan modification at the time of the modification during the year ended December 31, 2013. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the year ended December 31, 2013.
In an effort to proactively manage delinquent loans, the Corporation has selectively extended to certain borrowers concessions such as rate reductions, extension of maturity dates, principal or interest forgiveness, adjusted repayment terms, forbearance agreements, or combinations of two or more of these concessions. As of September 30, 2014, loans on which concessions were made with respect to adjusted repayment terms amounted to $2.0 million, and deemed troubled debt restructurings. Loans on which combinations of two or more concessions were made amounted to $1.3 million. The concessions granted included principal concessions, rate reduction, adjusted repayment, extended maturity and payment deferral.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Note 7. Fair Value Measurements and Fair Value of Financial Instruments
FairASC Topic 820, “Fair Value Measurements
Management uses its best judgment in estimating the and Disclosures,” establishes a fair value ofhierarchy that prioritizes the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. The estimated fair value amounts have been measured as of September 30, 2014 and December 31, 2013, and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequentinputs to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.
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. There are three levels of inputs that may bevaluation techniques used to measure fair values: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 are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. | ||
Level 2: Quoted prices |
Level 3: |
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.
Investment Securities Available-for-SaleThe 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. 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 at March 31, 2015 and December 31, 2014:
Securities available-for-sale - Where quoted prices are available in an active market, investment securities are classified inwith Level 1 of the valuation hierarchy. Level 1 inputs include investment 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 itstheir fair value and it isare classified as Level 3. Due to the inactive condition of the markets amidst the financial crisis, the CorporationCompany treated certain investment securities as Level 3 assetssecurities in order to provide more appropriate valuations. For assets in an inactive market, the infrequent trades that do occur are not a true indication of fair value. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Corporation’s valuationsCompany’s evaluations are based on market data and the CorporationCompany employs combinations of these approaches for its valuation methods depending on the asset class. In certain cases
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 there were limitedquoted 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 less transparent information provided bypricing curves, prepayment rate, and volatility factors to value the Corporation’sposition. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing service,services.
Loans held for sale - Loans held for sale are required to be measured at the lower of cost or fair value. Under FASB ASC 820-10-05, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions.
Loans receivable - The fair value wasof performing loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risks inherent in the loan. The estimate of maturity is based on the historical experience of the Bank with prepayments for each loan classification, modified as required by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by the use ofdiscounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary pricing services or through the use of non-binding third-party broker quotes.market sources adjusted to reflect differences in servicing and credit costs.
On a quarterly basis, management reviews the pricing information received from the Corporation’s third-party pricing service. This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the Corporation’s third-party pricing service.
Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the securities being valued. As of September 30, 2014 and December 31, 2013, management made no adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.
The Corporation determined that an income approach valuation technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at the prior measurement dates. As a result, the Corporation used the discount rate adjustment technique to determine fair value.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Note 7. Fair Value Measurements and Fair Value of Financial Instruments
Off-balance sheet financial instruments- The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rate and the committed rates.
The fair value of financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
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 at September 30, 2014March 31, 2015 and December 31, 20132014 are as follows:
Fair Value Measurements at Reporting Date Using | March 31, 2015 | |||||||||||||||||||||||||||||||
Assets Measured at Fair Value on a Recurring Basis | September 30, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
(in thousands) | Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||||
U.S. Treasury & agency securities | $ | 11,385 | $ | 11,385 | $ | — | $ | — | ||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Recurring fair value measurements: | ||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||||||||||
Federal agency obligations | 32,992 | — | 32,992 | — | $ | 31,233 | $ | — | $ | 31,233 | $ | — | ||||||||||||||||||||
Residential mortgage pass-through securities | 59,691 | — | 59,691 | — | 59,028 | — | 59,028 | — | ||||||||||||||||||||||||
Commercial mortgage pass-through securities | 3,016 | — | 3,016 | — | 3,082 | — | 3,082 | — | ||||||||||||||||||||||||
Obligations of U.S. states and political subdivisions | 8,429 | — | 8,429 | — | ||||||||||||||||||||||||||||
Obligations of U.S. states and political subdivision | 8,435 | — | 8,435 | — | ||||||||||||||||||||||||||||
Trust preferred securities | 16,314 | — | 16,314 | — | 16,456 | — | 16,456 | — | ||||||||||||||||||||||||
Corporate bonds and notes | 135,840 | — | 135,840 | — | 116,839 | — | 116,839 | — | ||||||||||||||||||||||||
Asset-backed securities | 21,753 | — | 21,753 | — | 26,092 | — | 26,092 | — | ||||||||||||||||||||||||
Certificates of deposit | 2,124 | — | 2,124 | — | 2,123 | — | 2,123 | — | ||||||||||||||||||||||||
Equity securities | 289 | 289 | — | — | 320 | 320 | — | — | ||||||||||||||||||||||||
Mutual funds and money market funds | 15,669 | 15,669 | — | — | ||||||||||||||||||||||||||||
Investment securities available-for-sale | $ | 307,502 | $ | 27,343 | $ | 280,159 | $ | — | ||||||||||||||||||||||||
Other securities | 12,513 | 12,513 | — | — | ||||||||||||||||||||||||||||
Total available-for-sale | 276,121 | 12,833 | 263,288 | — | ||||||||||||||||||||||||||||
Loans held for sale | 1,392 | — | 1,392 | — | ||||||||||||||||||||||||||||
Total assets | $ | 277,513 | $ | 12,833 | $ | 264,680 | $ | — | ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Derivatives | $ | 486 | $ | — | $ | 486 | $ | — | ||||||||||||||||||||||||
Total liabilities | $ | 486 | $ | — | $ | 486 | $ | — |
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Assets Measured at Fair Value on a Recurring Basis | December 31, 2013 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
(in thousands) | ||||||||||||||||
U.S. Treasury and agency securities | $ | 13,519 | $ | 13,519 | $ | — | $ | — | ||||||||
Federal agency obligations | 19,941 | — | 19,941 | — | ||||||||||||
Residential mortgage pass-through securities | 48,874 | — | 48,874 | — | ||||||||||||
Commercial mortgage pass-through securities | 6,991 | — | 6,991 | — | ||||||||||||
Obligations of U.S. states and political subdivisions | 31,460 | — | 31,460 | — | ||||||||||||
Trust preferred securities | 19,403 | — | 19,403 | — | ||||||||||||
Corporate bonds and notes | 158,630 | — | 158,630 | — | ||||||||||||
Asset-backed securities | 15,979 | — | 15,979 | — | ||||||||||||
Certificates of deposit | 2,262 | — | 2,262 | — | ||||||||||||
Equity securities | 287 | 287 | — | — | ||||||||||||
Mutual funds and money market funds | 5,724 | 5,724 | — | — | ||||||||||||
Investment securities available-for-sale | $ | 323,070 | $ | 19,530 | $ | 303,540 | $ | — |
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair values used by the Corporation are obtained from an independent pricing serviceNote 7. Fair Value Measurements and represent either quoted market prices for the identical securities (Level 1 inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2).Fair Value of Financial Instruments
December 31, 2014 | ||||||||||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||
(in thousands) | ||||||||||||||||
Recurring fair value measurements: | ||||||||||||||||
Assets | ||||||||||||||||
Investment securities: | ||||||||||||||||
Available-for-sale: | ||||||||||||||||
Federal agency obligations | $ | 32,817 | $ | — | $ | 32,817 | $ | — | ||||||||
Residential mortgage pass-through securities | 60,356 | — | 60,356 | — | ||||||||||||
Commercial mortgage pass-through securities | 3,046 | — | 3,046 | — | ||||||||||||
Obligations of U.S. states and political subdivision | 8,406 | — | 8,406 | — | ||||||||||||
Trust preferred securities | 16,306 | — | 16,306 | — | ||||||||||||
Corporate bonds and notes | 125,777 | — | 125,777 | — | ||||||||||||
Asset-backed securities | 27,502 | — | 27,502 | — | ||||||||||||
Certificates of deposit | 2,123 | — | 2,123 | — | ||||||||||||
Equity securities | 307 | 307 | — | — | ||||||||||||
Other securities | 12,892 | 12,892 | — | — | ||||||||||||
Total available-for-sale | 289,532 | 13,199 | 276,333 | — | ||||||||||||
Derivatives | 48 | — | 48 | — | ||||||||||||
Total assets | $ | 289,580 | $ | 13,199 | $ | 276,381 | $ | — |
The following tables present the changes in investment securities available-for-sale with significant unobservable inputs (Level 3) for
For the three months ended September 30, 2014 and 2013.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in thousands) | ||||||||||||||||
Balance, beginning of the period | $ | — | $ | 72 | $ | — | $ | 36 | ||||||||
Interest payment deferrals | — | 14 | — | 43 | ||||||||||||
Principal repayments | — | — | — | — | ||||||||||||
Total net losses included in net income | — | — | — | — | ||||||||||||
Total net unrealized (losses) gains | — | 8 | — | 15 | ||||||||||||
Balance, end of the period | — | $ | 94 | — | $ | 94 |
For the nine months ended September 30, 2014,March 31, 2015, there were no transfers of investment securities available-for-sale into or out of Level 1, Level 2, or Level 3 assets.
Assets Measured at Fair Value on a Non-Recurring Basis
For assets measured at fair value on a non-recurring basis, the unobservable inputs used to derive fair value measurements at September 30, 2014March 31, 2015 and December 31, 20132014 were as follows:
Impaired | Valuation Techniques | Range of Unobservable Inputs | ||
Commercial real estate | Appraisals of collateral value | Market capitalization rates between 8% | ||
Other real estate owned | ||||
Appraisals of collateral value | Adjustment for age of comparable sales, generally a decline of 0% to 25% |
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Assets Measured at Fair Value on a Non-Recurring Basis | September 30, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
(in thousands) | ||||||||||||||||
Impaired Loans | ||||||||||||||||
Commercial real estate | $ | 3,277 | $ | — | $ | — | $ | 3,277 | ||||||||
Other Real Estate Owned | ||||||||||||||||
Residential | 1,442 | — | — | 1,442 |
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(unaudited)
Note 7. Fair Value Measurements and Fair Value of Financial Instruments
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Assets Measured at Fair Value on a Non-Recurring Basis | December 31, 2013 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
(in thousands) | ||||||||||||||||
Impaired Loans | ||||||||||||||||
Commercial | $ | 372 | $ | — | $ | — | $ | 372 | ||||||||
Commercial real estate | 4,229 | — | — | 4,229 | ||||||||||||
Other Real Estate Owned | ||||||||||||||||
Residential | 220 | — | — | 220 |
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Assets measured at fair value on a nonrecurring basis: | March 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Impaired loans | (in thousands) | |||||||||||||||
Commercial | $ | 194 | $ | — | $ | — | $ | 194 | ||||||||
Commercial real estate | 5,823 | — | — | 5,823 | ||||||||||||
Other real estate owned | ||||||||||||||||
Commercial real estate | 870 | — | — | 870 |
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Assets Measured at Fair Value on a Non-Recurring Basis | December 31, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Impaired loans | (in thousands) | |||||||||||||||
Commercial | $ | 276 | $ | — | $ | — | $ | 276 | ||||||||
Commercial real estate | 3,369 | — | — | 3,369 | ||||||||||||
Other real estate owned | ||||||||||||||||
Commercial real estate | 1,108 | — | — | 1,108 |
The following methods and assumptions were used to estimate the fair values of the Corporation’sCompany’s assets measured at fair value on a non-recurring basis at September 30, 2014March 31, 2015 and December 31, 2013.2014.
Impaired Loans. The value of an impaired loan is measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans are specifically excluded from the impaired loan portfolio. The Corporation’s impaired loans are primarily collateral dependent. Impaired loans are individually assessed to determine that each loan’s carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows. -Impaired loans at September 30, 2014March 31, 2015 that required a valuation allowance during 20142015 were $3.6$6.7 million with a related valuation allowance of $323,000$706,000 compared to $5.0$3.9 million with a related valuation allowance of $415,000$262,000 at December 31, 2013.2014. Additional provision for loan and lease losses of $0 and $210,500$444,000 for the thirdfirst quarter and first nine months of 2014, respectively, were2015 was recorded. AdditionalAn additional provision for loan and lease losses of $415,000$262,000 for the year ended December 31, 2013 were2014 was recorded.
Other Real Estate Owned.real estate owned -Other real estate owned (“OREO”) is measured at fair value less costs to sell, generally a decline of 0% to 25% for residential OREO and a decline of 0% to 15% for commercial OREO.sell. The CorporationCompany believes that the fair value component in its valuation follows the provisions of FASB ASC 820-10-05. The fair value of OREO is determined by sales agreements or appraisals by qualified licensed appraisers approved and hired by the Corporation.Company. Costs to sell associated with OREO are based on estimation per the terms and conditions of the sales agreements or appraisals. For the three months ended March 31, 2015, no provision recorded.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. Fair Value Measurements and Fair Value of Financial Instruments
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 Corporation,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 Corporation’sCompany’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 Corporation’sCompany’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 CorporationCompany for the purposes of this disclosure.
Cash and due from banks and interest bearing deposits:cash equivalents -The carrying amounts of cash and short-term instruments approximate fair values and care classified as Level 1.values.
Investment in Restricted Stock:FHLB stock -It is not practical to determine the fair value of FHLB Stockstock due to restrictions placed on its transferability.
Investment Securities Held-to-Maturitysecurities held-to-maturity -. The fair value of the Corporation’sCompany’s investment securities held-to-maturity was primarily measured using information from a third-party pricing service. If quoted prices were not available, fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. In cases where there may be limited or less transparent information provided by the Corporation’sCompany’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.
Loans Held-for-Sale -. Fair value is estimated using the prices of the Corporation’s existing commitments to sell such loans and/or the quoted market price for commitments to sell similar loans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Loans.The fair value of the Corporation’sCompany’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans were segregated by types such as commercial, residential and consumer loans. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.
Noninterest-Bearing DepositsInterest-bearing deposits. The fair value for noninterest-bearing deposits is equal to the amount payable on demand at the reporting date.
Interest-Bearing Deposits-. The fair values of the Corporation’sCompany’s interest-bearing deposits were estimated using discounted cash flow analyses. The discounteddiscount rates used were based on rates currently offered for deposits with similar remaining maturities. The fair values of the Corporation’sCompany’s interest-bearing deposits do not take into consideration the value of the Corporation’sCompany’s long-term relationships with depositors, which may have significant value.
Term Borrowings and Subordinated Debenturessubordinated debentures -. The fair value of the Corporation’s long-termCompany’s 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/Payableinterest receivable/payable -. The carrying amounts of accrued interest approximate fair value resulting in a Levellevel 2 or Levellevel 3 classification based on the level of the asset or liability with which the accrual is associated.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. Fair Value Measurements and Fair Value of Financial Instruments
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation’sCompany’s financial instruments as of September 30, 2014March 31, 2015 and December 31, 2013.2014.
Fair Value Measurements | Fair Value Measurements | |||||||||||||||||||||||||||||||||||||||
Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||
September 30, 2014 | ||||||||||||||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||||||||||
March 31, 2015 | ||||||||||||||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 138,013 | $ | 138,013 | $ | 138,013 | $ | — | $ | — | $ | 88,543 | $ | 88,543 | $ | 88,543 | $ | — | $ | — | ||||||||||||||||||||
Investment securities available-for-sale | 307,502 | 307,502 | 27,343 | 280,159 | — | 276,121 | 276,121 | 12,833 | 263,288 | — | ||||||||||||||||||||||||||||||
Investment securities held-to-maturity | 217,567 | 222,393 | 28,463 | 175,105 | 18,825 | 231,720 | 240,263 | 29,822 | 191,722 | 18,719 | ||||||||||||||||||||||||||||||
Investment in restricted stock, at cost | 17,922 | n/a | n/a | n/a | n/a | |||||||||||||||||||||||||||||||||||
Restricted investment in bank stocks | 24,874 | n/a | n/a | n/a | n/a | |||||||||||||||||||||||||||||||||||
Loans held for sale | 1,392 | 1,392 | 1,392 | |||||||||||||||||||||||||||||||||||||
Net loans | 2,414,647 | 2,427,263 | — | — | 2,427,263 | 2,624,806 | 2,628,873 | — | — | 2,628,873 | ||||||||||||||||||||||||||||||
Accrued interest receivable | 10,976 | 10,976 | 278 | 3,176 | 7,522 | 11,513 | 11,513 | 199 | 2,943 | 8,371 | ||||||||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits | $ | 471,151 | $ | 471,151 | $ | 471,151 | $ | — | $ | — | 479,652 | 479,652 | 479,652 | — | — | |||||||||||||||||||||||||
Interest-bearing deposits | 1,998,017 | 2,004,084 | — | 2,004,084 | — | 2,016,359 | 2,021,144 | — | 2,021,144 | — | ||||||||||||||||||||||||||||||
Borrowings | 420,960 | 436,366 | — | 436,366 | — | 525,148 | 532,335 | — | 532,335 | — | ||||||||||||||||||||||||||||||
Subordinated debentures | 5,155 | 4,786 | — | 4,786 | — | 5,155 | 4,852 | — | 4,852 | — | ||||||||||||||||||||||||||||||
Derivatives | 486 | 486 | — | 486 | — | |||||||||||||||||||||||||||||||||||
Accrued interest payable | 3,811 | 3,811 | — | 3,811 | — | 4,316 | 4,316 | — | 4,316 | — |
Fair Value Measurements | ||||||||||||||||||||
Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 126,847 | $ | 126,847 | $ | 126,847 | $ | — | $ | — | ||||||||||
Investment securities available-for-sale | 289,532 | 289,532 | 13,199 | 276,333 | — | |||||||||||||||
Investment securities held-to-maturity | 224,682 | 231,445 | 29,184 | 183,489 | 18,772 | |||||||||||||||
Restricted investment in bank stocks | 23,535 | n/a | n/a | n/a | n/a | |||||||||||||||
Net loans | 2,524,481 | 2,538,415 | — | — | 2,538,415 | |||||||||||||||
Derivatives | 48 | 48 | — | 48 | — | |||||||||||||||
Accrued interest receivable | 11,700 | 11,700 | 68 | 3,674 | 7,958 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Noninterest-bearing deposits | 492,515 | 492,515 | 492,515 | — | — | |||||||||||||||
Interest-bearing deposits | 1,983,092 | 1,990,484 | — | 1,990,484 | — | |||||||||||||||
Borrowings | 495,553 | 505,641 | — | 505,641 | — | |||||||||||||||
Subordinated debentures | 5,155 | 4,768 | — | 4,768 | — | |||||||||||||||
Accrued interest payable | 3,930 | 3,930 | — | 3,930 | — |
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7. Fair Value Measurements and Fair Value of Financial Instruments
Fair Value Measurements | ||||||||||||||||||||
Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
December 31, 2013 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and due from banks | $ | 82,692 | $ | 82,692 | $ | 82,692 | $ | — | $ | — | ||||||||||
Investment securities available-for-sale | 323,070 | 323,070 | 19,530 | 303,540 | — | |||||||||||||||
Investment securities held-to-maturity | 215,286 | 210,958 | 27,037 | 164,940 | 18,981 | |||||||||||||||
Investment in restricted stock, at cost | 8,986 | n/a | n/a | n/a | n/a | |||||||||||||||
Net loans | 950,610 | 948,606 | — | — | 948,606 | |||||||||||||||
Accrued interest receivable | 6,802 | 6,802 | 102 | 4,034 | 2,666 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Noninterest-bearing deposits | 227,370 | 227,370 | 227,370 | — | — | |||||||||||||||
Interest-bearing deposits | 1,114,635 | 1,115,781 | — | 1,115,781 | — | |||||||||||||||
Borrowings | 146,000 | 157,440 | — | 157,440 | — | |||||||||||||||
Subordinated debentures | 5,155 | 5,143 | — | 5,143 | — | |||||||||||||||
Accrued interest payable | 963 | 963 | — | 963 | — |
The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.
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 8. Accumulated Other Comprehensive Income
Accumulated other comprehensive income (loss)loss (net of tax) at September 30, 2014March 31, 2015 and December 31, 20132014 consisted of the following:
September 30, 2014 | December 31, 2013 | |||||||
(in thousands) | ||||||||
Net unrealized gain on investment securities available-for-sale, net of tax | $ | 4,650 | $ | 2,374 | ||||
Unamortized component of securities transferred from available-for-sale to held-to-maturity, net of tax | (1,336 | ) | (1,425 | ) | ||||
Defined benefit pension and post-retirement plans, net of tax | (2,736 | ) | (3,493 | ) | ||||
Total accumulated other comprehensive income (loss) | $ | 578 | $ | (2,544 | ) |
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | ||||||||
Net unrealized gain on investment securities available-for-sale | $ | 5,491 | $ | 4,874 | ||||
Cash flow hedge | (288 | ) | 28 | |||||
Unamortized component of securities transferred from available-for-sale to held-to-maturity | (1,263 | ) | (1,301 | ) | ||||
Defined benefit pension and post-retirement plans | (4,176 | ) | (4,615 | ) | ||||
Total accumulated other comprehensive loss | $ | (236 | ) | $ | (1,014 | ) |
Note 9. Stock-Based Compensation
The Corporation maintains two stock-based compensation plans from which new grants could be issued. The Corporation’sCompany’s stock-based compensation plans permit Parent Corporation common stock to be issued to key employees and directors of the CorporationCompany and its subsidiaries. The options granted under the plans are intended to be either incentive stock options or non-qualified options. Under the 2009 Equity Incentive Plan, a total of 363,081303,615 shares are available for grant and issuance as of September 30, 2014. Under the 2003 Non-Employee Director Stock Option Plan, a total of 380,644 shares remain available for grant and issuance under the plan as of September 30, 2014.March 31, 2015. In addition, a total of 237,621 shares remain available for grant and issuance under Legacy ConnectOne equity plans. Options may be exercised with shares issued from Treasury shares, newly issued shares or a combination of both.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9. Stock-Based Compensation
Options have been granted to purchase common stock principally at the fair market value of the stock at the date of grant. Options are exercisable overafter a three-yearthree to five-year vesting period starting one year after the date of grant and generally expire ten years from the date of grant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Restricted shares have a vesting schedule ranging from 1-3 years.
Stock-based compensation expense for share-based payment awards is based on the grant date fair value estimated on the date of grant. The CorporationCompany recognizes compensation costs for those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of three years. The CorporationCompany estimates the forfeiture rate based on its historical experience during the preceding seven fiscal years.
For the nine months ended September 30, 2014 and September 30, 2013, total stock compensation (excluding tax benefit) was $51,000 and $60,000, respectively.
Under the principal stock-based compensation plans, the CorporationCompany may also grant stock awards to certain employees. Stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of any applicable restrictions. Unless fully vested at the time of grant, such awards generally vest within 30 days to five years from the date of grant. During that period, ownership of the shares cannot be transferred. Restricted stock and stock awards that are fully vested at the time of grant have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding. The CorporationCompany expenses the cost of stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which any restrictions lapse.
There were 52,46789,104 and 18,829 restricted stock awards outstanding at September 30,March 31, 2015 and March 31, 2014, and September 30, 2013, respectively. These awards were issued with an award price equal to the market price of the Corporation’sCompany’s common stock on the award date and with a three year vesting period. Forfeiture provisions exist for personnel that separate employment before the vesting period expires. A total of 37,110 shares of restricted stock became fully vested on July 1, 2014.
There were 0 and 31,257no shares of common stock underlying options that were granted during the three and nine months ended September 30,March 31, 2015 and 2014, and 2013, respectively. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values at the time the grants were awarded:
Nine Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
Weighted average fair value of grants | n/a | $ | 3.34 | |||||
Risk-free interest rate | n/a | 1.97 | % | |||||
Dividend yield | n/a | 1.32 | % | |||||
Expected volatility | n/a | 25.84 | % | |||||
Expected life in months | n/a | 74 |
ActivityOptions activity under the stock-based compensation plans as of September 30, 2014March 31, 2015 and changes during the ninththree months ended September 30, 2014March 31, 2015 were as follows:
Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2013 | 214,263 | $ | 10.59 | |||||||||||||
Options assumed in merger | 783,732 | 4.73 | ||||||||||||||
Exercised | (74,911 | ) | $ | 10.48 | ||||||||||||
Canceled/expired | — | |||||||||||||||
Forfeited | — | |||||||||||||||
Outstanding at September 30, 2014 | 923,084 | $ | 5.58 | 3.12 | $ | 12,522,584 | ||||||||||
Exercisable at September 30, 2014 | 923,084 | $ | 5.58 | 3.12 | $ | 12,522,584 |
Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2014 | 882,657 | $ | 5.65 | |||||||||||||
Exercised | (110,500 | ) | $ | 3.85 | ||||||||||||
Canceled/expired | — | |||||||||||||||
Forfeited | (3,362 | ) | ||||||||||||||
Outstanding at March 31, 2015 | 768,795 | $ | 5.87 | 2.67 | $ | 10,273,607 | ||||||||||
Exercisable at March 31, 2015 | 763,028 | $ | 5.80 | 2.62 | $ | 10,244,830 |
The aggregate intrinsic value of options above represents the total pre-tax intrinsic value (the difference between the Corporation’sCompany’s closing stock price on the last trading day of the secondfirst quarter of 20142015 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2014.March 31, 2015. This amount changes based on the fair value of the Corporation’sCompany’s stock.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9. Stock-Based Compensation – (continued)
In conjunction with the plans above, the Company granted restricted shares to certain executive officers. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date. The fair value of the stock granted was based on the closing market price of its common stock as of the grant date. Generally, grants of restricted shares vest one-third, each, on the first, second and third anniversaries of the grant date.
Nonvested Shares | Weighted- Average Grant Date Fair Value | |||||||
Nonvested at December 31, 2014 | 50,203 | $ | 11.79 | |||||
Granted | 59,466 | 18.47 | ||||||
Vested | (20,565 | ) | 10.76 | |||||
Forfeited/cancelled/expired | — | — | ||||||
Outstanding at March 31, 2015 | 89,104 | $ | 16.43 |
As of September 30, 2014,March 31, 2015, there was approximately $0$35,500 of total unrecognized compensation expense relating to unvested stock options. As of September 30, 2014,March 31, 2015, there was approximately $425,329$1,358,000 of total unrecognized compensation expense relating to unvested restricted stock awards. These costs are expected to be recognized over a weighted average period of 1.82.1 years.
Note 10. Components of Net Periodic Pension Cost
The CorporationCompany maintained a non-contributory defined benefit pension plan for substantially all of its employees until September 30,March 31, 2007, at which time the CorporationCompany froze the plan. The following table sets forth the net periodic pension cost of the Corporation’sCompany’s pension plan for the periods indicated.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | Three Months Ended March 31, | ||||||||||||||||||||
(in thousands) | 2015 | 2014 | ||||||||||||||||||||||
Interest cost | $ | 143 | $ | 133 | $ | 429 | $ | 397 | $ | 138 | $ | 144 | ||||||||||||
Expected return on plan assets | (148 | ) | (122 | ) | (444 | ) | (366 | ) | (137 | ) | (149 | ) | ||||||||||||
Net amortization and deferral | 55 | 93 | 165 | 281 | ||||||||||||||||||||
Net periodic pension cost | $ | 50 | $ | 104 | $ | 150 | $ | 312 | ||||||||||||||||
Net amortization | 108 | 56 | ||||||||||||||||||||||
Recognized settlement loss | 450 | — | ||||||||||||||||||||||
Total periodic pension expense | $ | 559 | $ | 51 | ||||||||||||||||||||
Net actuarial gain | $ | (742 | ) | $ | (1,281 | ) | ||||||||||||||||||
Total recognized in other comprehensive income | $ | (742 | ) | $ | (1,281 | ) | ||||||||||||||||||
Total recognized in net periodic expense and other comprehensive income (before tax) | $ | (183 | ) | $ | (1,230 | ) |
Contributions
The CorporationCompany presently estimates that it will not contribute $2.0 million to its Pension Trust for 2014.in 2015. The trust is established to provide retirement and other benefits for eligible employees and their beneficiaries. No part of the trust assets may be applied to any purpose other than providing benefits under the plan and for defraying expenses of administering the plan and the trust.
Note 11. Supplemental disclosure of non-cash activities
Nine Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Investing: | ||||||||
Due to broker, net | $ | — | $ | 2,983 | ||||
Transfer of loans to other real estate owned | 352 | 236 | ||||||
Transfer of investment securities available-for-sale to investment securities held-to-maturity | — | 75,694 | ||||||
Financing: | ||||||||
Dividends declared, not paid | $ | 1,061 | $ | 327 | ||||
Acquisition of legacy ConnectOne: | ||||||||
Non-cash assets acquired: | ||||||||
Securities available-for-sale | $ | 28,452 | $ | — | ||||
Restricted investments | 13,646 | — | ||||||
Loans held for sale | 190 | — | ||||||
Loans | 1,299,284 | — | ||||||
Accrued interest receivable | 4,470 | — | ||||||
Premise and equipment, net | 6,475 | — | ||||||
Goodwill | 129,105 | — | ||||||
Core deposit intangible | 5,308 | — | ||||||
Bank-owned life insurance | 15,481 | — | ||||||
Other real estate owned | 2,455 | — | ||||||
Other assets | 14,286 | — | ||||||
Total non-cash assets acquired | $ | 1,519,152 | $ | — | ||||
Non-cash liabilities assumed: | ||||||||
Deposits | $ | 1,051,342 | $ | — | ||||
Borrowings | 263,370 | — | ||||||
Other liabilities | 10,527 | — | ||||||
Total non-cash liabilities assumed | $ | 1,325,239 | $ | — | ||||
Net non-cash assets acquired | $ | 193,913 | $ | — |
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12. Borrowings11. FHLB and other borrowings
The components ofCompany’s FHLB and other borrowings and weighted average interest rates are summarized below:
March 31, 2015 | December 31, 2014 | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
(in thousands) | ||||||||||||||||
By type of borrowing: | ||||||||||||||||
FHLB borrowings | $ | 494,148 | 1.23% | $ | 464,553 | 1.18% | ||||||||||
Repurchase agreements | 31,000 | 5.90% | 31,000 | 5.90% | ||||||||||||
Total borrowings | $ | 525,148 | 1.51% | $ | 495,553 | 1.48% | ||||||||||
By remaining period to maturity: | ||||||||||||||||
One year or less | $ | 238,148 | 0.50% | 258,553 | 0.50% | |||||||||||
One to two years | 55,000 | 1.20% | 30,000 | 1.40% | ||||||||||||
Two to three years | 71,000 | 2.33% | 71,000 | 2.33% | ||||||||||||
Three to four years | 96,000 | 2.67% | 96,000 | 2.67% | ||||||||||||
Four to five years | 25,000 | 1.85% | — | — | ||||||||||||
Greater than five years | 40,000 | 3.43% | 40,000 | 3.42% | ||||||||||||
Total borrowings | $ | 525,148 | 1.51% | $ | 495,553 | 1.48% |
The FHLB borrowings are as follows (dollars in thousands):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.
September 30, 2014 | December 31, 2013 | |||||||||||||||||||||
Type | Maturity Date | InterestRate | Oustanding | Type | Maturity Date | InterestRate | Oustanding | |||||||||||||||
FRB Discount Window | 10/01/14 | 0.07 | % | $ | 50,000 | Citi REPO | 06/15/17 | 5.95 | % | $ | 15,000 | |||||||||||
FHLB | 10/28/14 | 0.38 | 25,000 | FHLB | 11/16/17 | 3.18 | 5,000 | |||||||||||||||
FHLB | 10/29/14 | 0.30 | 50,000 | FHLB | 11/16/17 | 3.29 | 5,000 | |||||||||||||||
FHLB | 02/23/15 | 0.88 | 10,000 | FHLB | 11/16/17 | 3.10 | 5,000 | |||||||||||||||
FHLB | 05/07/15 | 0.81 | 15,000 | FHLB | 11/16/17 | 3.49 | 10,000 | |||||||||||||||
FHLB | 05/11/15 | 2.17 | 785 | FHLB | 11/27/17 | 3.16 | 5,000 | |||||||||||||||
FHLB | 05/11/15 | 2.91 | 5,000 | FHLB | 11/27/17 | 3.40 | 5,000 | |||||||||||||||
FHLB | 06/09/15 | 0.44 | 25,000 | FHLB | 01/03/18 | 3.25 | 4,000 | |||||||||||||||
FHLB | 06/26/15 | 0.48 | 25,000 | FHLB | 01/03/18 | 2.99 | 3,000 | |||||||||||||||
FHLB | 08/05/15 | 1.49 | 2,000 | FHLB | 01/03/18 | 2.74 | 3,000 | |||||||||||||||
FHLB | 08/03/16 | 1.93 | 10,000 | FHLB | 01/31/18 | 3.34 | 10,000 | |||||||||||||||
FHLB | 08/26/16 | 1.04 | 5,000 | FHLB | 01/31/18 | 2.44 | 10,000 | |||||||||||||||
FHLB | 10/11/16 | 1.15 | 5,000 | FHLB | 01/31/18 | 2.78 | 5,000 | |||||||||||||||
FHLB | 01/23/17 | 1.16 | 10,000 | Citi REPO | 08/08/18 | 5.85 | 16,000 | |||||||||||||||
FHLB | 04/28/17 | 1.26 | 5,000 | FHLB | 09/12/18 | 4.16 | 5,000 | |||||||||||||||
Citi REPO | 06/15/17 | 5.95 | 15,000 | FHLB | 11/02/20 | 3.62 | 20,000 | |||||||||||||||
FHLB | 06/26/17 | 1.30 | 25,000 | FHLB | 11/30/20 | 3.24 | 20,000 | |||||||||||||||
FHLB | 07/08/17 | 1.29 | 5,000 | |||||||||||||||||||
FHLB | 09/25/17 | 1.41 | 11,000 | $ | 146,000 | |||||||||||||||||
FHLB | 02/12/18 | 1.56 | 10,000 | |||||||||||||||||||
FHLB | 04/02/18 | 2.50 | 2,500 | |||||||||||||||||||
FHLB | 04/02/18 | 1.98 | 7,500 | |||||||||||||||||||
FHLB | 04/30/18 | 1.75 | 5,000 | |||||||||||||||||||
FHLB | 07/16/18 | 2.99 | 5,000 | |||||||||||||||||||
Citi REPO | 08/08/18 | 5.85 | 16,000 | |||||||||||||||||||
FHLB | 09/11/18 | 4.15 | 5,000 | |||||||||||||||||||
FHLB | 10/23/18 | 1.68 | 10,000 | |||||||||||||||||||
FHLB | 11/19/18 | 1.68 | 10,000 | |||||||||||||||||||
FHLB | 01/30/19 | 1.79 | 4,000 | |||||||||||||||||||
FHLB | 02/11/19 | 1.99 | 6,000 | |||||||||||||||||||
FHLB | 10/30/20 | 3.23 | 20,000 | |||||||||||||||||||
FHLB | 11/02/20 | 3.61 | 20,000 | |||||||||||||||||||
$ | 419,785 | |||||||||||||||||||||
Fair value mark: | 1,175 | |||||||||||||||||||||
$ | 420,960 |
The Company has entered into agreements under which it has sold securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. The obligation to repurchase the securities is reflected as a liability in the Company’s consolidated statement of condition, while the securities underlying the securities sold under agreements to repurchase remain in the respective asset accounts and are delivered to and held as collateral by third party trustees.
On September 30, 2014,Three of the Corporation extinguished $70,000,000 of FHLBNYFHLB notes ($2,500,000 and $7,500,000 each due April 2, 2018, and $5,000,000 due July 16, 2018) contain a convertible option which allows the FHLB, at quarterly intervals, to convert the fixed convertible advance into replacement funding for the same or lesser principal based on any advance then offered by the FHLB at its current market rate. The Company has the option to repay these advances, if converted, without penalty. The remaining advances are payable at its stated maturity, with a weighted averageprepayment penalty for fixed rate of 3.10 percent and a weighted average maturity of 3.2 years.advances. All FHLB advances are fixed rate while the REPOs are variable rate advances. The advances at March 31, 2015 were putable atcollateralized by approximately $809 million of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement. At March 31, 2015 the optionCompany had remaining borrowing capacity of approximately $315 million.
Note 12 - Subordinated Debentures:
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 FHLBNY. A pre-tax prepayment penaltyTrust; (ii) investing the gross proceeds of $4.6the 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 associatedof, MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier I capital. 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 in part prior to maturity. The floating interest rate on the subordinate debentures is three-month LIBOR plus 2.85% and reprices quarterly. The rate at March 31, 2015 was 3.10%. 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 FASB ASC 810-10. Distributions on the extinguishment was recorded to noninterest expense.subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income.
The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II at March 31, 2015 and December 31, 2014.
Issuance Date | Securities Issued | Liquidation Value | Coupon Rate | Maturity | Redeemable by Issuer Beginning | |||||||
12/19/2003 | $ | 5,000,000 | $1,000 per Capital Security | Floating 3-month LIBOR + 285 Basis Points | 01/23/2034 | 01/23/2009 |
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13.13 – Subsequent Event
On November 5, 2014,April 27, 2015, the Corporation discovered that during the fourth quarter the accountreceived a pretax recovery amounting to $2.2 million from one of one its business customers had been the targetinsurance carriers with regard to a wire fraud pretax loss of a fraud involving hacking of the customer’s e-mail account and subsequent unauthorized funds transfers. The fraud did not involve an intrusion of the Corporation’s computer systems. The Corporation is still investigating the matter and the after-tax charge, to be$2.4 million recorded duringin the fourth quarter of 2014, is expected to2014. This recovery will be no higher than $1.5 million. Therecognized in the second quarter of 2015. At this time, the Corporation is reviewing all available avenues of recovery, including the return of funds from recipient financial institutions and potential insurance claims.
does not expect any further recoveries on this matter.
38
Item 2. Management’s Discussion and Analysis 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 Corporation’sCompany’s results of operations for the periods presented herein and financial condition as of September 30, 2014March 31, 2015 and December 31, 2013.2014. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.
Cautionary Statement Concerning Forward-Looking Statements
This report 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. This report contains certain forward-looking statements with respect to 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) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan and lease loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp is engaged, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; (7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; and (10)the outcome of regulatory and legal investigations and proceedings may not be anticipated. Further information on other factors that could affect the financial results of ConnectOne Bancorp is included in Item 1A. of ConnectOne Bancorp’s 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 at http://www.sec.gov and/or from ConnectOne Bancorp, Inc.
Critical Accounting Policies and Estimates
The accounting and reporting policies followed by ConnectOne Bancorp, Inc. and its subsidiaries (collectively, the “Corporation”“Company”) conform, in all material respects, to U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the consolidated statements of operations. Actual results could differ significantly from those estimates.
The Corporation’sCompany’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. The CorporationCompany has identified the determination of the allowance for loan and lease losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies is provided below.
Allowance for Loan Lossesloan and lease losses and Related Provision
The allowance for loan and lease losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, individual credit situation and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated statements of condition.
The evaluation of the adequacy of the allowance for loan and lease losses includes, among other factors, an analysis of historical loss rates by loan category applied to current loan totals. However, actual loan and lease 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.
39 |
The allowance for loan and lease losses is established through a provision for loan and lease losses charged to expense. Management believes that the current allowance for loan and lease losses will be adequate to absorb loan and lease losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the 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 the borrowers’ ability to pay. The evaluation also details historical losses by loan category and the resulting loan and lease loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the allowance for loan and lease losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan and lease losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 1 of the Notes to Consolidated Financial Statements.
Other-Than-Temporary Impairment of Investment Securities
Investment securities are 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 should be considered when determining whether a debt security is other–than-temporarily impaired. For debt securities, management assesses whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery.
In instances when 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, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.
Fair Value of Investment Securities
FASB ASC 820-10-35 clarifies the application of the provisions of FASB ASC 820-10-05 in an inactive market and how an entity would determine fair value in an inactive market. The CorporationCompany applies the guidance in FASB ASC 820-10-35 when determining fair value for the Corporation’sCompany’s private label collateralized mortgage obligations, pooled trust preferred securities and single name corporate trust preferred securities. See Note 8 of the Notes to Consolidated Financial Statements for further discussion.
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.
Goodwill
The CorporationCompany adopted the provisions of FASB ASC 350-10, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but rather tested for impairment annually or more frequently if impairment indicators arise. No impairment charge was deemed necessary for the three and nine months ended September 30, 2014March 31, 2015 and 2013.2014.
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 Corporation’sCompany’s consolidated financial statements or tax returns.
Fluctuations in the actual outcome of these future tax consequences could impact the Corporation’sCompany’s consolidated financial condition or results of operations. Note 12 of the 2013 Form 10-K of the Notes to Consolidated Financial Statements included in the Company’s 2014 Form 10-K includes additional discussion on the accounting for income taxes.
40 |
Operating Results Overview
On July 1, 2014, the merger of equals with Center Bancorp, Inc. and the legacy ConnectOne was completed (the “Merger”); therefore third. Accordingly, first quarter 20142015 results reflect the operations of the combined entity. Historicalentity, whereas, historical financial information prior to July 1, 2014 includes only the operations of Center Bancorp, Inc., the legal and accounting acquirer in the transaction. On July 1, 2014, the combined company changed its name to ConnectOne.
Net income available to common stockholders for the three months ended September 30, 2014March 31, 2015 amounted to $1.7$10.4 million compared to $5.1$4.4 million for the comparable three-month period ended September 30, 2013.March 31, 2014. The Corporation’sCompany’s diluted earnings per share was $0.06were $0.34 for the three months ended September 30, 2014March 31, 2015 as compared with diluted earnings per share of $0.31$0.27 for the same three months of 2013. The annualized return on average assets was 0.21% for the three months ended September 30, 2014, compared to 1.23% for the three months ended September 30, 2013. The annualized return on average stockholders’ equity was 1.59% for the three-month period ended September 30, 2014, compared to 12.53% for the three months ended September 30, 2013.
Net income available to common stockholders for the nine months ended September 30, 2014 amounted to $10.5 million compared to $14.8 million for the comparable nine-month period ended September 30, 2013. The Corporation recorded earnings per diluted common share of $0.49 for the nine months ended September 30, 2014 as compared with earnings of $0.91 per diluted common share for the same nine months of 2013. The annualized return on average assets was 0.63% for the nine months ended September 30, 2014, compared to 1.23% for nine months ended September 30, 2013. The annualized return on average stockholders’ equity was 5.25% for the nine-month period ended September 30, 2013, compared to 12.15% for the nine months ended September 30, 2013.2014.
Net Interest Income and Margin
Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets. Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (primarily interest earned on obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues. Net interest margin is defined as net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.
NetFully taxable equivalent (“FTE”) net interest income on a tax-equivalent basis increased to $28.1 million and $52.6 million for the three- and nine-month periods ended September 30, 2014, respectively, from $12.4first quarter of 2015 was $28.9 million, and $36.2 million for the three- and nine-month periods ended September 30, 2013, respectively. The increases were primarily due an increase of $16.6 million, or 135.4%, from the same quarter of 2014. This was a result of a 112.4% increase in average interest-earning assets and a 40 basis-point widening of the net interest rate margin, resulting fromboth due to the Merger. Average interest earning assets increased to $3.1 billion and $2.0 billion for the three- and nine-month periods ended September 30, 2014, respectively, from $1.5 billion for both the three- and nine-month periods ended September 30, 2014, respectively. Net interest margin widened to 3.66% and 3.49% for the three- and nine-month periods ended September 30, 2014, respectively, from 3.31% and 3.30% for the three- and nine-month periods ended September 30, 2014, respectively. Net interest income during the thirdfirst quarter and first nine months of 20142015 was positively impacted by $2.9$1.8 million of accretion and amortization of purchase accounting adjustments.
41 |
The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three and nine months ended September 30,March 31, 2015 and 2014, and 2013, the Corporation’sCompany’s average assets, liabilities and stockholders’ equity. The Corporation’sCompany’s net interest income, net interest spread and net interest margin are also reflected.
Average Statements of Condition with Interest and Average Rates
Three Months Ended September 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
(tax-equivalent basis) | Average Balance | Interest Income/ Expense | Average Rate (7) | Average Balance | Interest Income/ Expense | Average Rate (7) | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Investment securities (1) (2) | $ | 520,568 | $ | 4,372 | 3.33 | % | $ | 567,971 | $ | 4,914 | 3.46 | % | ||||||||||||
Loans (2) (3) (4) | 2,344,410 | 28,218 | 4.78 | 921,523 | 10,202 | 4.43 | ||||||||||||||||||
Restricted investment in bank stocks | 21,107 | 265 | 4.98 | 8,986 | 99 | 4.41 | ||||||||||||||||||
Other interest-bearing deposits | 163,471 | 88 | 0.21 | — | — | — | ||||||||||||||||||
Total interest-earning assets | 3,049,556 | 32,943 | 4.29 | 1,498,480 | 15,215 | 4.06 | ||||||||||||||||||
Non interest-earning assets: | ||||||||||||||||||||||||
Noninterest earning assets | 312,293 | 163,732 | ||||||||||||||||||||||
Allowance for loan losses | (11,250 | ) | (10,200 | ) | ||||||||||||||||||||
Total assets | $ | 3,350,599 | $ | 1,652,012 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Money market deposits | $ | 698,686 | $ | 677 | 0.38 | % | $ | 427,387 | $ | 485 | 0.45 | % | ||||||||||||
Savings deposits | 233,041 | 144 | 0.25 | 182,382 | 151 | 0.33 | ||||||||||||||||||
Time deposits | 676,291 | 1,474 | 0.86 | 170,996 | 381 | 0.89 | ||||||||||||||||||
Other interest-bearing deposits | 375,041 | 429 | 0.45 | 305,992 | 313 | 0.41 | ||||||||||||||||||
Total interest-bearing deposits | 1,983,059 | 2,724 | 0.54 | 1,086,757 | 1,330 | 0.49 | ||||||||||||||||||
Borrowings and FHLB advances | 430,238 | 1,988 | 1.83 | 146,598 | 1,449 | 3.95 | ||||||||||||||||||
Capital lease | 3,044 | 45 | 5.87 | — | — | — | ||||||||||||||||||
Subordinated debentures | 5,155 | 40 | 3.08 | 5,155 | 40 | 3.10 | ||||||||||||||||||
Total interest-bearing liabilities | 2,421,496 | 4,797 | 0.79 | 1,238,510 | 2,819 | 0.91 | ||||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 465,369 | 238,194 | ||||||||||||||||||||||
Other liabilities | 17,349 | 12,751 | ||||||||||||||||||||||
Total noninterest-bearing liabilities | 482,718 | 250,945 | ||||||||||||||||||||||
Stockholders’ equity | 446,385 | 162,557 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 3,350,599 | $ | 1,652,012 | ||||||||||||||||||||
Net interest income (tax-equivalent basis) | 12,396 | |||||||||||||||||||||||
Net interest spread (5) | 28,146 | 3.50 | % | 3.15 | % | |||||||||||||||||||
Net interest margin (6) | 3.66 | % | 3.31 | % | ||||||||||||||||||||
Tax-equivalent adjustment | (600 | ) | (674 | ) | ||||||||||||||||||||
Net interest income | $ | 27,546 | $ | 11,722 |
Three Months Ended March 31, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
Average Balance | Interest Income/ Expense | Average Rate (7) | Average Balance | Interest Income/ Expense | Average Rate (7) | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Investment securities (1) (2) | $ | 509,931 | $ | 4,268 | 3.39 | % | $ | 526,526 | $ | 4,682 | 3.56 | % | ||||||||||||
Loans (2) (3) (4) | 2,571,552 | 29,453 | 4.65 | % | 963,098 | 10,214 | 4.24 | % | ||||||||||||||||
Restricted investment in bank stocks | 25,273 | 220 | 3.54 | % | 8,986 | 113 | 5.03 | % | ||||||||||||||||
Federal funds sold and interest bearing with banks | 76,138 | 43 | 0.23 | % | — | — | — | % | ||||||||||||||||
Total interest-earning assets | 3,182,894 | 33,984 | 4.33 | % | 1,498,610 | 15,009 | 4.01 | % | ||||||||||||||||
Allowance for loan and lease losses | (14,749 | ) | (10,358 | ) | ||||||||||||||||||||
Noninterest earning assets | 298,675 | 188,684 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 3,466,820 | $ | 1,676,936 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Money market deposits | $ | 707,474 | $ | 722 | 0.41 | % | $ | 430,086 | $ | 519 | 0.48 | % | ||||||||||||
Savings deposits | 222,613 | 162 | 0.29 | % | 162,621 | 127 | 0.31 | % | ||||||||||||||||
Time deposits | 688,989 | 1,818 | 1.07 | % | 171,145 | 368 | 0.86 | % | ||||||||||||||||
Other interest-bearing deposits | 349,628 | 323 | 0.37 | % | 349,361 | 302 | 0.35 | % | ||||||||||||||||
Total interest-bearing deposits | 1,968,704 | 3,025 | 0.62 | % | 1,113,213 | 1,316 | 0.47 | % | ||||||||||||||||
Borrowings | 534,052 | 1,968 | 1.49 | % | 146,500 | 1,372 | 3.75 | % | ||||||||||||||||
Capital lease | 2,989 | 45 | 6.10 | % | — | — | — | % | ||||||||||||||||
Subordinated debentures | 5,155 | 40 | 3.14 | % | 5,155 | 39 | 3.03 | % | ||||||||||||||||
Total interest-bearing liabilities | 2,510,900 | 5,078 | 0.82 | % | 1,264,868 | 2,727 | 0.86 | % | ||||||||||||||||
Demand deposits | 481,500 | 225,407 | ||||||||||||||||||||||
Other liabilities | 20,200 | 13,477 | ||||||||||||||||||||||
Total noninterest-bearing liabilities | 501,700 | 238,884 | ||||||||||||||||||||||
Stockholders’ equity | 454,220 | 173,184 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 3,466,820 | $ | 1,676,936 | ||||||||||||||||||||
Net interest income (tax equivalent basis) | 28,906 | 12,282 | ||||||||||||||||||||||
Net interest spread (5) | 3.51 | % | 3.15 | % | ||||||||||||||||||||
Net interest margin (6) | 3.68 | % | 3.28 | % | ||||||||||||||||||||
Tax equivalent adjustment | (614 | ) | (672 | ) | ||||||||||||||||||||
Net interest income | $ | 28,292 | $ | 11,610 |
(1) | Average balances are based on amortized cost. |
(2) | Interest income is presented on a tax equivalent basis using |
(3) | Includes loan fee income. |
(4) | Loans include |
(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. |
(6) | Represents net interest income on a tax equivalent basis divided by average total interest-earning assets |
(7) | Rates are annualized. |
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Average Statements of Condition with Interest and Average Rates
Nine Months Ended September 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
(tax-equivalent basis) | Average Balance | Interest Income/ Expense | Average Rate (7) | Average Balance | Interest Income/ Expense | Average Rate (7) | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Investment securities (1) (2) | $ | 513,221 | $ | 13,441 | 3.50 | % | $ | 557,117 | $ | 14,134 | 3.38 | % | ||||||||||||
Loans (2) (3) (4) | 1,437,381 | 48,969 | 4.55 | 894,712 | 30,017 | 4.47 | ||||||||||||||||||
Restricted investment in bank stocks | 13,146 | 408 | 4.15 | 8,982 | 306 | 4.54 | ||||||||||||||||||
Other interest-bearing deposits | 55,089 | 88 | 0.21 | 470 | 2 | 0.57 | ||||||||||||||||||
Total interest-earning assets | 2,018,837 | 62,906 | 4.17 | 1,461,281 | 44,459 | 4.06 | ||||||||||||||||||
Non interest-earning assets: | ||||||||||||||||||||||||
Noninterest earning assets | 226,410 | 172,611 | ||||||||||||||||||||||
Allowance for loan losses | (10,791 | ) | (10,214 | ) | ||||||||||||||||||||
Total assets | $ | 2,234,456 | $ | 1,623,678 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Money market deposits | $ | 509,212 | $ | 1,771 | 0.46 | % | $ | 402,656 | $ | 1,303 | 0.43 | % | ||||||||||||
Savings deposits | 185,986 | 394 | 0.28 | 193,153 | 481 | 0.33 | ||||||||||||||||||
Time deposits | 342,177 | 2,205 | 0.86 | 174,142 | 1,213 | 0.93 | ||||||||||||||||||
Other interest-bearing deposits | 358,482 | 973 | 0.36 | 299,332 | 900 | 0.40 | ||||||||||||||||||
Total interest-bearing deposits | 1,395,857 | 5,343 | 0.51 | 1,069,283 | 3,897 | 0.49 | ||||||||||||||||||
Borrowings and FHLB advances | 243,597 | 4,752 | 2.61 | 146,568 | 4,288 | 3.90 | ||||||||||||||||||
Capital lease | 1,026 | 45 | 5.87 | — | — | — | ||||||||||||||||||
Subordinated debentures | 5,155 | 117 | 3.03 | 5,155 | 119 | 3.08 | ||||||||||||||||||
Total interest-bearing liabilities | 1,645,635 | 10,257 | 0.83 | 1,221,006 | 8,304 | 0.91 | ||||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 307,429 | 223,766 | ||||||||||||||||||||||
Other liabilities | 15,018 | 14,975 | ||||||||||||||||||||||
Total noninterest-bearing liabilities | 322,447 | 238,741 | ||||||||||||||||||||||
Stockholders’ equity | 266,374 | 163,931 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 2,234,456 | $ | 1,623,678 | ||||||||||||||||||||
Net interest income (tax-equivalent basis) | 52,649 | 36,155 | ||||||||||||||||||||||
Net interest spread (5) | 3.34 | % | 3.15 | % | ||||||||||||||||||||
Net interest margin (6) | 3.49 | % | 3.30 | % | ||||||||||||||||||||
Tax-equivalent adjustment | (1,829 | ) | (1,835 | ) | ||||||||||||||||||||
Net interest income | $ | 50,820 | $ | 34,320 |
Noninterest Income
Noninterest income totaled $1.2$1.6 million in the thirdfirst quarter of 2014,2015, a decline of $0.3$1.0 million from $1.5$2.5 million in the comparable prior-year quarter. The decline was primarily a result of a decline ofNet securities gains were $0.5 million in service charges, commissions and fees as$1.4 million for the Company has de-emphasized service charges, focusing instead on customer growth and retention. This strategy was particularly important during the merger conversion process as the implementation of certain fees and other charges were intentionally delayed or waived. Also contributing to the decline in noninterest income were net securities gains, which declined by $0.2 million in the thirdfirst quarter of 2015 and 2014, from the third quarter of 2013. Offsetting these declines were increases inrespectively. Noninterest income includes bank-owned life insurance income, net gains on the sale of residential mortgage loans,deposit and other miscellaneous income, including card-related fees.
Noninterest income totaled $5.4 million for the nine months ended September 30, 2014, an increase of $0.3 million from $5.1 million in the comparable prior-year period. The increase was primarily due to higher net securities gains, increasing by $0.8 million to $2.1 million for the first nine months of 2014 from $1.3 million in the prior-year period. Offsetting the increase in net securities gains were lower service chargesloan fees, annuities and commissions, bank-owned life insurance incomecommissions, and gains on sales of residential mortgages.mortgages in the secondary market and represents a relatively small portion of the Bank’s total revenue. Although management intends to continue its strategy of de-emphasizing service charges in order to attract new and retain existing clients, it expects fee income to increase modestly over the course of 2015.
Noninterest Expense
Noninterest expenses totaled $25.4$12.6 million for the thirdfirst quarter of 2014,2015, an increase of $19.2$5.1 million from $6.2$7.5 million for the prior year quarter. The significant increase in noninterest expense levels for the first quarter 2015 from the first quarter of 2014 was primarily due to the Merger including merger-related chargeswith Legacy ConnectOne on July 1, 2014, which approximately doubled the size of $8.8 million.the Company. At that date, Legacy ConnectOne had approximately $1.5 billion in total assets, $1.3 billion in total loans, $1.0 billion in total deposits, 8 branches, and 100 employees. In addition, at the endCompany experienced an increased level of business and staff resulting from organic growth. Partially offsetting the increased size of the third quarter of 2014, the Company repurchased $70.0institution was merger cost saves, estimated to be approximately $7.0 million of putable Federal Home Loan Bank advances which resulted in a loss on debt extinguishment of $4.6 million. The repurchase is expected to reduce interest expense and improve the Bank’s interest rate risk profile in future periods.annually, or approximately $1.8 million per quarter.
Income Taxes
Income tax expense was $0.3$5.0 million and $3.9$1.6 million for the thirdfirst quarter of 2015 and first nine months of 2014, respectively, compared with $2.0 million and $5.7 million, for the third quarter and first nine months of 2013, respectively. Theresulting in an effective tax rates were 12.5%rate of 32.6% and 26.8% for the thirdfirst quarter of 2015 and first nine months of 2014, respectively, compared with 27.8% and 27.5%, for the third quarter and first nine months of 2013, respectively. The decreaseincrease in the effective tax rate for 20142015 reflects a lower leveldecline in the percentage of taxabletax-exempt income to total pretax income. The effective tax rate for the remainder of 2015 is expected to remain fairly constant.
Financial Condition
Investment Portfolio
At September 30, 2014,March 31, 2015, the principal components of the investment securities portfolio were U.S. Treasury and agency obligations, federal agency obligations, mortgage-backed securities, obligations of U.S. states and political subdivisions, corporate bonds and notes, trust preferred securities, asset backed securities and equity securities.
During the ninethree months ended September 30, 2014,March 31, 2015, approximately $67.0$9.6 million in investment securities were sold from the available-for-sale portfolio. The cash flow from the sale of investment securities was primarily used to either fund loan growth orand purchase new securities.
For the three months ended September 30, 2014,March 31, 2015, average investment securities decreased $47.4$16.6 million to approximately $520.6$509.9 million, or 17.1%16.0% of average interest-earning assets, from $568.0$526.5 million on average, or 37.9%35.1% of average interest-earning assets, for the comparable period in 2013. For2014. The decrease in the nine months ended September 30, 2014, average investment securities decreased $43.9 million to approximately $513.2 million, or 25.42% of average interest-earning assets, from $557.1 millionportfolio, vis-à-vis an increase in loans receivable, reflects the Company’s strategic focus on average, or 38.1% of average interest-earning assets, for the comparable period in 2013.relationship-based clients.
At September 30, 2014,March 31, 2015, net unrealized gains on investment securities available-for-sale, which are carried as a component of accumulated other comprehensive income and included in stockholders’ equity, net of tax, amounted to $4.7$5.5 million as compared with net unrealized gains of $2.4$4.9 million at December 31, 2013.2014. At September 30, 2014,March 31, 2015, the net unrealized gains and losses on investment securities held-to-maturity that were transferred from securities available-for-sale, are carried, net of tax, as a component of accumulated other comprehensive income and included in stockholders’ equity. The gross unrealized losses associated with agency securities and federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other-than-temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.
Loan Portfolio
LendingCommercial lending is one of the Corporation’sCompany’s primary business activities.activity. The Corporation’sCompany’s loan portfolio consists of commercial, residential and retailconsumer loans, serving the diverse customerclient base in its market area. The composition of the Corporation’sCompany’s portfolio continues toremains relatively constant but can change due to the local economy. Factorsfactors such as the economic climate, the level and fluctuations in interest rates, real estate values and employment all contribute to these changes. Growthmetrics. Organic growth (i.e., growth other than through mergers and acquisitions) is generated through business development, efforts, repeat customerclient requests for new financings, penetration into existing markets and entry into new markets.
The CorporationCompany seeks to create growth in commercial lending by offering customer-focusedclient-focused products, and competitive pricing and by capitalizing on the positive trends in its market area. Products offered are designed to meet the financial requirements of the Corporation’s customers.Company’s clients. It is the objective of the Corporation’sCompany’s credit policies to diversify the commercial loan portfolio to limit concentrations in any single industry.segment.
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At September 30, 2014,March 31, 2015, total loans amounted to $2.4$2.6 billion, an increase of $1.5$0.1 billion, or 152.5%4.0%, as compared to December 31, 2013. For the period ended September 30, 2014,2014. The increase in loans was attributable to organic growth generated through our relationship banking teams. As of $240.8 millionMarch 31, 2015, our loan composition was approximately 21.3% in the commercial, portfolio, $1.0 billion63.1% in the commercial real estate, portfolio, $99.1 million6.9% in thecommercial construction, portfolio and $92.4 million8.6% in the residential real estate portfolio were primarily attributed to the merger. Total grossand 0.1% in consumer loans. At March 31, 2015, acquired loans recordedremaining in the quarter included $200.0 millionloan portfolio totaled $1.1 billion, compared to $1.2 billion as of new loans and advances, offset by payoffs and principal payments of $80.0 million.December 31, 2014.
Allowance for Loan and lease Losses and Relatedrelated Provision
The purpose of the allowance for loan and lease losses (the “allowance”“ALLL”) is to establish a valuation allowance for probable incurred losses in the loan portfolio. Additions to the allowanceALLL are made through provisions charged against current operations and through recoveries made on loans previously charged-off.charged off. The allowance for loan lossesALLL is maintained at an amount considered adequate by management to provide for probable credit losses inherent in the loan portfolio based upon historical losses and a periodic evaluation of the portfolio’sexternal and portfolio risk characteristics.factors. In establishing an appropriate allowance,ALLL, an assessment of the individual borrowers, a determination of the value of the underlying collateral, a review of historical loss experience and an analysis of the levels and trends of loan categories, delinquencies and problem loans are considered. Such factors as the level and trend of interest rates and current economic conditions and peer group statistics are also reviewed. Given the extraordinary economic volatility impacting national, regional and local markets, the Corporation’sThe Company’s analysis of its allowance for loan lossesALLL also takes into consideration the potential impact that current trends may have on the Corporation’sCompany’s borrower base.
Although management uses the best information available, the level of the allowance for loan and lease losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’sCompany’s allowance for loan and lease losses. Such agencies may require the CorporationCompany to increase the allowanceALLL based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the Corporation’sCompany’s loans are secured by real estate in the State of New Jersey. Future adjustments to the allowanceALLL may be necessary due to economic factors impacting New Jersey real estate and the economy in general, as well as operating, regulatory and other conditions beyond the Corporation’sCompany’s control.
At September 30, 2014,March 31, 2015, the level of the allowance was $12.1$15.9 million as compared to $10.3$14.2 million at December 31, 2013.2014. Provisions to the allowance for the nine-monththree-month period ended September 30, 2014March 31, 2015 totaled $2.2$1.8 million compared to $0$0.6 for the same period in 2013.2014. The net charge-offs were $448,000$52 thousand for the ninethree months ended September 30, 2014March 31, 2015 compared to $43,000$325 thousand in net charge-offs for the ninethree months ended September 30, 2013.March 31, 2014. The allowance for loan and lease losses as a percentage of total loans amounted to 0.50%0.60% at September 30, 2014March 31, 2015 compared to 1.08%0.56% at December 31, 20132014 and 1.06%1.08% at September 30, 2013.March 31, 2014.
The level of the allowance for the respective periods of 20142015 and 20132014 reflects the credit quality within the loan portfolio, the loan volume recorded during the periods, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the allowanceALLL at September 30, 2014March 31, 2015 is adequate to cover losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.
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Changes in the allowance for loan and lease losses are presented in the following table for the periods indicated.
Nine Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Average loans for the period | $ | 1,437,381 | $ | 894,712 | ||||
Total loans at end of period | 2,426,765 | 957,492 | ||||||
Analysis of the Allowance for Loan Losses: | ||||||||
Balance - beginning of year | $ | 10,333 | $ | 10,237 | ||||
Charge-offs: | ||||||||
Commercial | (333 | ) | (6 | ) | ||||
Commercial real estate | (50 | ) | ||||||
Residential mortgage loans | (108 | ) | — | |||||
Consumer | (7 | ) | (20 | ) | ||||
Total charge-offs | (448 | ) | (76 | ) | ||||
Recoveries: | ||||||||
Commercial and industrial | — | 21 | ||||||
Commercial real estate | — | 8 | ||||||
Residential mortgage loans | 24 | 4 | ||||||
Total recoveries | 24 | 33 | ||||||
Net charge-offs | (424 | ) | (43 | ) | ||||
Provision for loan losses | 2,209 | — | ||||||
Balance - end of period | $ | 12,118 | $ | 10,194 | ||||
Ratio of net charge-offs during the period to average loans during the period(1) | 0.04 | % | 0.00 | % | ||||
Allowance for loan losses as a percent of total loans | 0.50 | % | 1.06 | % |
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
(dollars in thousands) | ||||||||
Average loans for the period | $ | 2,571,552 | $ | 963,098 | ||||
Loans receivable at end of period | 2,640,739 | 987,529 | ||||||
Analysis of the Allowance for loan and lease losses: | ||||||||
Balance - beginning of year | $ | 14,160 | $ | 10,237 | ||||
Charge-offs: | ||||||||
Commercial | (45 | ) | (6 | ) | ||||
Commercial real estate | (4 | ) | (126 | ) | ||||
Residential real estate | — | (175 | ) | |||||
Consumer | (11 | ) | (22 | ) | ||||
Total charge-offs | (60 | ) | (329 | ) | ||||
Recoveries: | ||||||||
Commercial | 6 | 41 | ||||||
Commercial real estate | — | 28 | ||||||
Residential real estate | 1 | — | ||||||
Consumer | 1 | 6 | ||||||
Total recoveries | 8 | 75 | ||||||
Net charge-offs | (52 | ) | (254 | ) | ||||
Provision for loan and lease losses | 1,825 | 350 | ||||||
Balance - end of period | $ | 15,933 | $ | 10,333 | ||||
Ratio of annualized net charge-offs during the period to average loans during the period | 0.01 | % | 0.13 | % | ||||
Allowance for loan and lease losses as a percent of total loans | 0.60 | % | 1.12 | % |
Asset Quality
The CorporationCompany manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix. The CorporationCompany strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for loan and lease losses at all times.
It is generally the Corporation’sCompany’s policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of ninety days. When a loan is placed on non-accrualnonaccrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrualnonaccrual loans are generally applied against principal. A loan may be restored to an accruing basis when it again becomes well-secured, all past due amounts have been collected and the borrower continues to make payments for the next nine months on a timely basis. Accruing loanscollected. Loans past due 90 days or more which are generallyboth well-secured and in the process of collection.collection may remain on an accrual basis.
Non-Performing Assets and Troubled Debt Restructured Loans
Non-performing loansNonperforming assets include non-accrualnonaccrual loans and accruing loans past due 90 days or more. Non-accrualother real estate owned. Nonaccrual loans represent loans on which interest accruals have been suspended. In general, it is the policy of management to consider the charge-off of uncollectible amounts of loans at the point they become past due in excess of 90 days, with the exception of loans that are both well-secured and in the process of collection. Non-performing assets include non-performing loans and other real estate owned.days. Performing troubled debt restructured loans represent loans to borrowers experiencing financial difficulties on which a concession was granted, such as a reduction in interest rate below the current market rate for new debt with similar risks or modified repayment terms, and are performing under the restructured terms. Such loans, as restructured, are not included within the Corporation’s non-performing loans.
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The following table sets forth, as of the dates indicated, the amount of the Corporation’s non-accrualCompany’s nonaccrual loans, accruingother real estate owned, loans past due 90 days or more other real estate ownedpast due and troubled debt restructured loans.
September 30, 2014 | December 31, 2013 | |||||||
(in thousands) | ||||||||
Non-accrual loans | $ | 6,083 | $ | 3,137 | ||||
Accruing loans past due 90 days or more | — | — | ||||||
Total non-performing loans | 6,083 | 3,137 | ||||||
Other real estate owned | 1,442 | 220 | ||||||
Total non-performing assets | $ | 7,525 | $ | 3,357 | ||||
Troubled debt restructured loans - performing | $ | 1,782 | $ | 5,746 |
At September 30, 2014, non-performing assets totaled $7.5 million, or 0.22% of total assets, as compared with $1.7 million, or 0.14% of total assets, at September 30, 2013 and $3.4 million, or 0.20%, at December 31, 2013.
The Corporation held $1.4 million and $0.2 million in other real estate owned at September 30, 2014 and December 31, 2013, respectively.
Troubled debt restructured loans totaled $2.9 million at September 30, 2014 and $6.6 million at December 31, 2013. A total of $1.9 million and $5.7 million ofstill accruing, performing troubled debt restructured loans were performing pursuant toand the termscarrying amount of their respective modifications at September 30, 2014 andthe purchased-credit impaired loans.
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | ||||||||
Nonaccrual loans | $ | 14,585 | $ | 11,610 | ||||
Other real estate owned | 870 | 1,108 | ||||||
Total nonperforming assets | $ | 15,455 | $ | 12,718 | ||||
Performing troubled debt restructured loans | $ | 1,731 | $ | 1,763 | ||||
Loans 90 days or more past due and still accruing | 638 | 1,211 | ||||||
Purchased-credit impaired loans (carrying amount) | 9,772 | 9,821 |
During the first quarter of 2015, “special mention” loans, which include acceptable credit quality loans which possess higher risk characteristics than satisfactory assets, increased from $19.3 million, or 0.8% of total loans, at December 31, 2013, respectively.2014 to $50.0 million, or 1.9% of total loans, at March 31, 2015. The increase in “special mention” loans was due to downgrades of specific credits in both the commercial and commercial real estate segments of the loan portfolio. The commercial loans were downgraded due to a weakening financial condition of one guarantor of certain taxi medallion loans, while the commercial real estate loans were downgraded due to borrowers’ declining operating cash flows. The aforementioned loans are accruing and current as of March 31, 2015.
At September 30, 2014,March 31, 2015, other than the loans set forth above, the CorporationCompany is not aware of any loans which present serious doubts as to the ability of its borrowers to comply with present loan repayment terms and which are expected to fall into one of the categories set forth in the tables or descriptions above.
Recent Accounting Pronouncements
Note 2 of the Notes to Consolidated Financial Statements discusses the expected impact of accounting pronouncements recently issued or proposed and adopted or not yet required to be adopted.
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 September 30, 2014March 31, 2015 and December 31, 20132014 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.
In our model, which was run as of September 30,March 31, 2015, we estimated that, over the next one-year period, a 200 basis-point increase in the general level of interest rates will increase our net interest income by 0.23%, while a 100 basis-point decrease in interest rates would decrease net interest income by 3.06%. As of December 31, 2014, we estimated that, over the next one-year period, a 200 basis-point increase in the general level of interest rates will decreasewould increase our net interest income by 1.47%, while a 100 basis-point decrease in interest rates will also decrease net interest income by 2.73%. As of December 31, 2013, we estimated that, over the next one-year period, a 200 basis-point increase in the general level of interest rates will decrease our net interest income by 1.44%0.29%, while a 100 basis-point decrease in the general level of interest rates willwould decrease our net interest income by 0.89%3.41%.
In our model, which was run as of September 30,March 31, 2015, we estimated that, over the next three years on a cumulative basis, a 200 basis-point increase in the general level of interest rates will increase our net interest income by 2.40%, while a 100 basis-point decrease in interest rates will decrease net interest income by 5.79%. As of December 31, 2014, we estimated that, over the next three years on a cumulative basis, a 200 basis-point increase in the general level of interest rates will increase our net interest income by 0.72%2.76%, while a 100 basis-point decrease in interest rates will decrease net interest income by 5.38%. As of December 31, 2013, we estimated that, over the next three years on a cumulative basis, a 200 basis-point increase in the general level of interest rates will increase our net interest income by 0.81%, while a 100 basis-point decrease in interest rates will decrease net interest income by 4.93%6.54%.
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An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with 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 September 30, 2014,March 31, 2015, would decline by 16.58%14.54% with a rate shock of up 200 basis points, and increase by 13.67%13.18% with a rate shock of down 100 basis points. Our EVE as of December 31, 2013,2014, would decline by 16.65%15.02% with a rate shock of up 200 basis points, and increase by 14.04%13.65% with a rate shock of down 100 basis points.
The following table reflects the Company’s net interest income sensitivity over a one-year period and economic value of equity sensitivity as of March 31, 2015:
Interest Rates | Estimated | Estimated change in EVE | Estimated | Estimated change in NII | ||||||||||||||||||||||
(basis points) | EVE | Amount | % | NII | Amount | % | ||||||||||||||||||||
+300 | $ | 316,960 | $ | (95,354 | ) | (23.1 | )% | $ | 114,601 | $ | 1,002 | 0.9 | % | |||||||||||||
+200 | 352,365 | (59,949 | ) | (14.5 | ) | 113,858 | 259 | 0.2 | ||||||||||||||||||
+100 | 384,231 | (28,082 | ) | (6.8 | ) | 113,413 | (186 | ) | (0.1 | ) | ||||||||||||||||
0 | 412,313 | — | — | 113,599 | — | — | ||||||||||||||||||||
-100 | 466,655 | 54,341 | 13.1 | 110,128 | (3,472 | ) | (3.1 | ) |
Estimates of Fair Value
The estimation of fair value is significant to a number of the Corporation’sCompany’s assets, including loans held for sale and investment securities available-for-sale. 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, 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. 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 operations; unlike most industrial companies, nearly all of the Corporation’sCompany’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.
At September 30, 2014,March 31, 2015, 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 customerclient credit needs could be satisfied. As of September 30, 2014,March 31, 2015, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $417.8$380.5 million, which represented 12.4%10.9% of total assets and 14.4%12.6% of total deposits and borrowings, compared to $515.8$416.4 million at December 31, 2013,2014, which represented 30.8%12.1% of total assets 34.5%and 14.0% 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 September 30, 2014,March 31, 2015, had the ability to borrow $745.1million.$808.7 million. In addition, at September 30, 2014,March 31, 2015, the Bank had in place borrowing capacity of $43.0$62.0 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 approximate capacity based on pledged collateral of $116$107.0 million. At September 30, 2014,March 31, 2015, the Bank had aggregate available and unused credit of $515.3$484.4 million, which represents the aforementioned facilities totaling $909.1$977.7 million net of the $388.6$493.3 million in outstanding borrowings. At September 30, 2014,March 31, 2015, outstanding commitments for the Bank to extend credit were $497.5$558.1 million.
Cash and cash equivalents totaled $138.0$88.5 million on September 30, 2014, increasingMarch 31, 2015, decreasing by $55.3$38.3 million or 66.9%30.2%, from $82.7$126.8 million at December 31, 2013.2014. Operating activities provided $10.4$9.8 million in net cash. Investing activities used $38.9$96.4 million in net cash, primarily
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reflecting an increase in loans, which was partially offset in part by cash flow of from the securities portfolio. Financing activities provided $83.8$48.3 million in net cash, primarily reflecting a net increase of $75.8$30.0 million in borrowings and $20.4 million in deposits.
Deposits
Total deposits increased by $1.2 billion$20.4 million, or 0.8% to $2.5 billion at September 30, 2014March 31, 2015. Total noninterest-bearing deposits decreased $12.9 million or 2.6% from $1.3 billion at December 31, 2013. Total non interest-bearing deposits increased from $227.4$492.5 million at December 31, 20132014 to $471.2$480.0 million at September 30, 2014, an increase of $243.8 million or 107.2%.March 31, 2015. Money market deposits increaseddecreased by $258.1$11.1 million from $470.7$723.5 at December 31, 20132014 to $728.8$712.4 million at June 30, 2014.March 31, 2015. Time deposits increased by $508.7$71.5 million to $673.0$740.9 million at September 30, 2014,March 31, 2015, up from $164.2$669.4 million at December 31, 2013.2014. The increases during the quarter are mostly dueincrease in deposits was mainly attributable to the merger. Strong organic deposit growth as well as the use of the brokeredoriginations in listing services and listing service markets also contributed to the increase.other time deposits, offset by seasonal decreases in noninterest-bearing and interest-bearing demand deposits.
September 30, 2014 | December 31, 2013 | Dollar Change | March 31, 2015 | December 31, 2014 | Dollar Change | |||||||||||||||||||||||||||||||||||
Amount | percent | Amount | percent | 2014 vs. 2013 | Amount | % | Amount | % | 2015 vs. 2014 | |||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
Non interest-bearing demand | $ | 471,151 | 19.0 | % | $ | 227,370 | 16.9 | % | $ | 243,781 | ||||||||||||||||||||||||||||||
Noninterest-bearing demand | $ | 479,652 | 19.2 | % | $ | 492,515 | 19.9 | % | $ | (12,863 | ) | |||||||||||||||||||||||||||||
Interest-bearing demand | 364,607 | 14.8 | 318,475 | 23.8 | 46,132 | 342,261 | 13.7 | 365,550 | 14.8 | (23,289 | ) | |||||||||||||||||||||||||||||
Savings Deposits | 231,648 | 9.4 | 161,232 | 12.0 | 70,416 | 220,764 | 8.8 | 224,638 | 9.1 | (3,874 | ) | |||||||||||||||||||||||||||||
Money market deposits | 728,803 | 29.5 | 470,714 | 35.2 | 258,089 | 712,427 | 28.6 | 723,505 | 29.2 | (11,078 | ) | |||||||||||||||||||||||||||||
Time Deposits | 672,959 | 27.3 | 164,214 | 12.1 | 508,745 | 740,907 | 29.7 | 669,399 | 27.0 | 71,508 | ||||||||||||||||||||||||||||||
Total deposits | $ | 2,469,168 | 100.0 | % | $ | 1,342,005 | 100.0 | % | $ | 1,127,163 | $ | 2,496,011 | 100.0 | % | $ | 2,475,607 | 100.0 | % | $ | 20,404 |
Subordinated Debentures
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 trust loaned the proceeds of this offering to the CorporationCompany 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 repricesre-prices quarterly. The rate at September 30, 2014March 31, 2015 was 3.09%3.10%.
Stockholders’ Equity
Total stockholders’ equity amounted to $441.8$456.2 million or 13.2% of total assets, at September 30, 2014,March 31, 2015, compared to $168.6$446.2 million or 10.1% of total assets at December 31, 2013.2014. The increase in total stockholders’ equity was primarily attributable to an increase in retained earnings of $8.1 million, a $0.8 million increase in other comprehensive income (primarily $0.7 million in unrealized gains on available for sale securities and $0.4 million in pension plan actuarial gains, offset by a $0.3 million in unrealized losses on cash flow hedges), and approximately $1.1 million of equity issuance related to stock-based compensation, including the exercise of options. Book value per common share was $14.52$14.90 at September 30, 2014,March 31, 2015, compared to $9.61$14.65 at December 31, 2013.2014. Tangible book value (i.e., total stockholders’ equity less preferred stock, goodwill and other intangible assets) per common share was $9.43$9.86 at September 30, 2014,March 31, 2015, compared to $8.58$9.57 at December 31, 2013.2014.
Tangible book value per share is a non-GAAP financial measure and represents tangible stockholders’ equity (or tangible book value) calculated on a per common share basis. The CorporationCompany believes that a disclosure of tangible book value per share may be helpful for those investors who seek to evaluate the Corporation’sCompany’s book value per share without giving effect to goodwill and other intangible assets. The following table presents a reconciliation of total book value per share to tangible book value per share as of September 30, 2014March 31, 2015 and December 31, 2013.2014.
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2014 | 2013 | 2015 | 2014 | |||||||||||||
(in thousands, except for share data) | (in thousands, except for share data) | |||||||||||||||
Stockholders’ equity | $ | 441,839 | $ | 168,584 | $ | 456,194 | $ | 446,219 | ||||||||
Less: Preferred stock | 11,250 | 11,250 | 11,250 | 11,250 | ||||||||||||
Less: Goodwill and other intangible assets | 150,978 | 16,828 | 150,493 | 150,734 | ||||||||||||
Tangible common stockholders’ equity | $ | 279,611 | $ | 140,506 | $ | 294,451 | $ | 284,235 | ||||||||
Book value per common share | $ | 14.52 | $ | 9.61 | $ | 14.90 | $ | 14.65 | ||||||||
Less: Goodwill and other intangible assets | 5.09 | 1.03 | 5.04 | 5.08 | ||||||||||||
Tangible book value per common share | $ | 9.43 | $ | 8.58 | $ | 9.86 | $ | 9.57 |
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On September 15, 2011, the CorporationCompany issued $11.25 million in nonvoting senior preferred stock to the Treasury under the SBLF Program. Under the Securities Purchase Agreement, the CorporationCompany issued to the Treasury a total of 11,250 shares of the Corporation’sCompany’s Senior non-cumulative perpetual preferred stock, Series B, having a liquidation value of $1,000 per share. Simultaneously, using the proceeds from the issuance of the SBLF Preferred Stock, the CorporationCompany redeemed from the Treasury, all 10,000 outstanding shares of its fixed rate cumulative perpetual preferred stock, Series A, liquidation amount $1,000 per share, for a redemption price of $10,041,667, including accrued but unpaid dividends up to the date of redemption. The investment in the SBLF program provided the CorporationCompany with approximately $1.25 million in additional Tier 1 capital. The capital that the CorporationCompany received under the program enabled it to continue to serve small business clients through the commercial lending program. On December 7, 2011, the CorporationCompany repurchased the warrants issued on January 12, 2009 to the Treasury as part of its participation in the Treasury’s TARP Capital Purchase Program. In the repurchase, the CorporationCompany paid the Treasury $245,000 for the warrants.
During the three and nine months ended September 30, 2014,March 31, 2015, the CorporationCompany had no purchases of common stock associated with its stock buyback programs. At September 30, 2014,March 31, 2015, there were 652,868 shares available for repurchase under the Corporation’sCompany’s stock buyback programs.
Regulatory Capital and Capital Adequacy
The maintenance of a solid capital foundation is a primary goal for the Corporation.Company. Accordingly, capital plans and dividend policies are monitored on an ongoing basis. The Corporation’sCompany’s objective with respect to the capital planning process is to effectively balance the retention of capital to support future growth with the goal of providing stockholders with an attractive long-term return on their investment.
The CorporationCompany and the Bank are subject to regulatory guidelines establishing minimum capital standards that involve quantitative measures of assets, and certain off-balance sheet items, as risk-adjusted assets under regulatory accounting practices.
The following is a summary of regulatory capital amounts and ratios as of September 30, 2014March 31, 2015 for the Parent Corporation and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution.
ConnectOne Bancorp, Inc. | For Capital Adequacy Purposes | To Be Well-Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
At September 30, 2014 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Tier 1 leverage capital | $ | 295,345 | 9.23 | % | $ | 127,985 | 4.00 | % | N/A | N/A | ||||||||||||||
Tier 1 risk-based capital | 295,345 | 10.63 | % | 111,182 | 4.00 | % | N/A | N/A | ||||||||||||||||
Total risk-based capital | 307,673 | 11.07 | % | 222,364 | 8.00 | % | N/A | N/A |
ConnectOne Bank | For Capital Adequacy Purposes | To Be Well-Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
At September 30, 2014 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Tier 1 leverage capital | $ | 293,194 | 9.16 | % | $ | 127,985 | 4.00 | % | $ | 159,981 | 5.00 | % | ||||||||||||
Tier 1 risk-based capital | 293,194 | 10.59 | % | 110,709 | 4.00 | % | 166,063 | 6.00 | % | |||||||||||||||
Total risk-based capital | 305,522 | 11.04 | % | 221,418 | 8.00 | % | 276,772 | 10.00 | % |
ConnectOne Bancorp, Inc. | For Capital Adequacy Purposes | To Be Well-Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||||
At March 31, 2015 | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
Tier 1 leverage capital | $ | 313,471 | 9.45 | % | $ | 132,749 | 4.00 | % | N/A | N/A | |||||||||||||
CET I risk-based ratio | 297,066 | 9.75 | 132,127 | 4.50 | N/A | N/A | |||||||||||||||||
Tier 1 risk-based capital | 313,471 | 10.29 | 182,836 | 6.00 | N/A | N/A | |||||||||||||||||
Total risk-based capital | 329,614 | 10.82 | 243,782 | 8.00 | N/A | N/A | |||||||||||||||||
ConnectOne Bank | For Capital Adequacy Purposes | To Be Well-Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
At March 31, 2015 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Tier 1 leverage capital | $ | 312,112 | 9.41 | % | $ | 132,730 | 4.00 | % | $ | 165,913 | 5.00 | % | ||||||||||||
CET I risk-based ratio | 312,112 | 10.24 | 137,116 | 4.50 | 198,056 | 6.50 | % | |||||||||||||||||
Tier 1 risk-based capital | 312,112 | 10.24 | 182,821 | 6.00 | 243,761 | 8.00 | % | |||||||||||||||||
Total risk-based capital | 328,255 | 10.77 | 243,761 | 8.00 | 304,702 | 10.00 | % |
N/A - not applicable
As of September 30, 2014,March 31, 2015, management believes that each of the Bank and the CorporationCompany meet all capital adequacy requirements to which they are subject.
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Basel III
The Basel Committee on Banking Supervision (the “Basel Committee”) provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. At times, the Basel Committee uses this common understanding to develop guidelines and supervisory standards in areas where they are considered desirable. In this regard, the Basel Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision.
The Basel Committee released a comprehensive list of proposals for changes to capital, leverage, and liquidity requirements for banks in December 2009 (commonly referred to as “Basel III”). In July 2010, the Basel Committee announced the design for its capital and liquidity reform proposals and in September 2010, the oversight body of the Basel Committee announced minimum capital ratios and transition periods.
In December 2010 and January 2011, the Basel Committee published the final texts of reforms on capital and liquidity generally referred to as “Basel III.” Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions have also been considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including the Bank.
On July 9, 2013, the Office of the Comptroller of the Currency approved a final rule revising regulatory capital rules applicable to national banks, implementing Basel III. This rule redefines Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity Tier 1 Risk-based Capital Ratio) and implements a capital conservation buffer. It also revises the prompt corrective action thresholds and makes changes to risk weighs for certain assets and off-balance-sheet exposures. Banks arewere required to transition into the new rule beginning on January 1, 2015, although, based on the Corporation’sCompany’s capital levels and balance sheet composition at September 30, 2014,March 31, 2015, the CorporationCompany does not believe implementation of the new rule will have a material impact on the Corporation’sCompany’s capital needs; however, due to the complexity of the rules, the CorporationCompany will continue to evaluate the impact of these changes to our regulatory capital. The new rules also include a one-time opportunity to opt-out of the changes to the treatment of accumulated other comprehensive income (“AOCI”) components. By making the election to opt-out, an institution may continue to treat AOCI items in a manner consistent with risk-based capital rules in effect prior to January 1, 2015. The election, which cannot be reversed, must be made in the institution’s regulatory financial report for the period ending March 31, 2015. As of March 31, 2015, the company elected to opt-out of the treatment of AOCI within Basel III. This statement regarding the impact of the new regulations constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from this statement as a result of various factors, including modifications to the new regulations that may be adopted prior to the effective dates of the new regulations.
Looking Forward
One of the Corporation’s primary objectives is to achieve balanced asset and revenue growth, and at the same time expand market presence and diversify its financial products. However, it is recognized that objectives, no matter how focused, are subject to factors beyond the control of the Corporation, which can impede its ability to achieve these goals. The following factors should be considered when evaluating the Corporation’s ability to achieve its objectives:
The financial marketplace is rapidly changing and currently is in flux. The United States Treasury and banking regulators have implemented, and may continue to implement, a number of programs under new legislation to address capital and liquidity issues in the banking system. In addition, new financial system reform legislation may affect banks’ abilities to compete in the marketplace. It is difficult to assess whether these programs and actions will have short-term and/or long-term positive effects.
Banks are not the only place to obtain loans, nor the only place to keep financial assets. The banking industry has lost market share to other financial service providers. The future is predicated on the Corporation’s ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace.
Net interest income, the primary source of earnings, is impacted favorably or unfavorably by changes in interest rates. Although the impact of interest rate fluctuations can be mitigated by appropriate asset/liability management strategies, significant changes in interest rates can have a material adverse impact on profitability.
The ability of customers to repay their obligations is often impacted by changes in the regional and local economy. Although the Corporation sets aside loan loss provisions toward the allowance for loan losses when the Board determines such action to be appropriate, significant unfavorable changes in the economy could impact the assumptions used in the determination of the adequacy of the allowance.
Technological changes will have a material impact on how financial service companies compete for and deliver services. It is recognized that these changes will have a direct impact on how the marketplace is approached and ultimately on profitability. The Corporation has taken steps to improve its traditional delivery channels. However, continued success will likely be measured by the ability to anticipate and react to future technological changes.
This “Looking Forward” description constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the Corporation’s forward-looking statements due to numerous known and unknown risks and uncertainties, including the factors referred to in this quarterly report and in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.
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Item 3. Qualitative and Quantitative Disclosures about Market Risks
Market Risk
Interest rate risk management is our primary market risk. See "Item“Item 2- Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operation- Interest Rate Sensitivity Analysis"Analysis” herein for a discussion of our management of our interest rate risk.
Equity Price Risk
The Corporation is exposed to equity price risk inherent in its portfolio of publicly traded equity securities, which had an estimated fair value of approximately $289,000 and $287,000 at September 30, 2014 and December 31, 2013, respectively. We monitor equity investment holdings for impairment on a quarterly basis. In the event that the carrying value of the equity investment exceeds its fair value, and the decline in value is determined to be to be other than temporary, the carrying value is reduced to its current fair value by recording a charge to current operations. For the three months ended September 30, 2014 and 2013, the Corporation recorded no other-than-temporary impairment charges on its equity security holdings.
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Item 4. Controls and Procedures
a)Disclosure controls and procedures. As of the end of the Corporation’sCompany’s most recently completed fiscal quarter covered by this report, the CorporationCompany carried out an evaluation, with the participation of the Corporation’sCompany’s management, including the Corporation’sCompany’s chief executive officer and chief financial officer, of the effectiveness of the Corporation’sCompany’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Corporation’sCompany’s chief executive officer and chief financial officer concluded that due exclusively to the event described in Note 13. Subsequent Events, and as further described below, the Corporation’sCompany’s disclosure controls and procedures are not effective in ensuring that information required to be disclosed by the CorporationCompany in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and are operating in an effective manner and that such information is accumulated and communicated to management, including the Corporation’sCompany’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Due to the fraud, in conjunction with our normal evaluation, we commenced a review of our internal control over funds transfer to determine how the fraud occurred and determined that the internal control we have identified as critical to the process were present, but not functioning with sufficient precision that are required as part of the Corporation’s policies and procedures over the safeguarding of assets, which resulted in a loss to the Corporation. As a result of this determination of a material weakness, we will be undertaking an evaluation of internal controls to ensure that the controls function as management has designed them to function, or whether enhancements to current controls are necessary to be able to conclude that internal controls over financial reporting are effective going forward. In addition, we have performed procedures to determine that there was no impact on financial results previously presented.
b)Changes in internal controls over financial reporting.reporting : There have been no changes in the Corporation’sCompany’s internal controls over financial reporting that occurred during the Corporation’sCompany’s last fiscal quarter to which this report relates that have materially affected, or are reasonable likely to materially affect, the Corporation’sCompany’s internal control over financial reporting.
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The CorporationCompany is not subject to any legal proceedings, which could have a materially adverse impact on its results of operations and financial condition.
In addition to the risks described under Item 1A –Risk Factors of our Annual Report on Form 10-K, investors in our securities should consider the following additional information:
Our internal control systems could failRisk Related to detect certain events.our Mortgage Banking Operations
WeThe Bank sells residential mortgage loans in the secondary market, primarily to Fannie Mae but also to other investors. The agreements governing these loan sales include various representations and warranties regarding the origination and characteristics of the residential mortgage loans sold as well as its servicing by the Bank. In addition, the agreements require the Bank to deliver various documents to the purchaser or its agent. Although the Bank sells residential mortgage loans on a non-recourse basis, the Bank may be obligated to repurchase sold loans where required documents are subjectnot delivered or are defective or there is a breach of a representation or warranty made by the Bank. . Investors may require the immediate repurchase of a mortgage loan when an early payment default occurs, even if the mortgage loan has subsequently been brought current. As of March 31, 2015, there were no pending repurchase requests related to certain operational risks, including butrepresentation and warranty provisions. However, we can give you no assurance that we will not limitedbe required to data processing system failures and errors and third-party, customerrepurchase sold loans in the future, or employee fraud. We maintain a system of internal controlsthat our mortgage banking operations will not expose us to mitigate such occurrences and maintain insurance coverage for such risks. However, should such an event occur that is not prevented or detected by our internal controls, or is uninsured or in excess of applicable insurance limits, it could have a significant adverse effect on our business, results of operations, financial condition or prospects.potential future losses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Not applicable
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Exhibit No. | Description | |
31.1 | Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1* | Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2* | Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Definition Taxonomy Extension Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
*Furnished and not filed.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.
CONNECTONE BANCORP, INC.ConnectOne Bancorp, Inc.
(Registrant)
By: | /s/ Frank Sorrentino III | By: | /s/ William S. Burns | |
Frank Sorrentino III | William S. Burns | |||
Chairman and Chief Executive Officer | Executive Vice President, and Chief Financial Officer | |||
Date: | Date: |
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