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, 2017March 31, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission File Number: 000-11486
CONNECTONE BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
| New Jersey | 52-1273725 |
(State or Other Jurisdiction of | |
Incorporation or Organization) | (IRS Employer Identification 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)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered |
| Common stock | CNOB | NASDAQ |
| Depositary Shares (each representing a 1/40th interest in a share of 5.25% Series A Non-Cumulative, perpetual preferred stock) | CNOBP | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to 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). Yes☒No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company or emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):
| Large accelerated filer | Accelerated filer | Non-accelerated filer☐ | ||||
(Do not check if smaller reporting company) | Smaller reporting company ☐ Emerging growth company☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No☒
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
Item 1. Financial Statements
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
| September 30, | December 31, | |||||||
| (in thousands, except for share data) | 2017 | 2016 | ||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 41,114 | $ | 37,150 | ||||
| Interest-bearing deposits with banks | 100,148 | 163,249 | ||||||
| Cash and cash equivalents | 141,262 | 200,399 | ||||||
| Securities available-for-sale | 400,516 | 353,290 | ||||||
| Loans held-for-sale (net of valuation allowance of $15,287 and $-0-, respectively) | 89,386 | 78,005 | ||||||
| Loans receivable | 3,889,289 | 3,475,832 | ||||||
| Less: Allowance for loan losses | 29,870 | 25,744 | ||||||
| Net loans receivable | 3,859,419 | 3,450,088 | ||||||
| Investment in restricted stock, at cost | 29,672 | 24,310 | ||||||
| Bank premises and equipment, net | 21,917 | 22,075 | ||||||
| Accrued interest receivable | 14,841 | 12,965 | ||||||
| Bank owned life insurance | 110,762 | 98,359 | ||||||
| Other real estate owned | - | 626 | ||||||
| Goodwill | 145,909 | 145,909 | ||||||
| Core deposit intangibles | 2,533 | 3,088 | ||||||
| Other assets | 28,538 | 37,234 | ||||||
| Total assets | $ | 4,844,755 | $ | 4,426,348 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing | $ | 719,582 | $ | 694,977 | ||||
| Interest-bearing | 2,904,187 | 2,649,294 | ||||||
| Total deposits | 3,623,769 | 3,344,271 | ||||||
| Borrowings | 585,124 | 476,280 | ||||||
| Subordinated debentures (net of debt issuance costs of $498 and $621, respectively) | 54,657 | 54,534 | ||||||
| Other liabilities | 23,514 | 20,231 | ||||||
| Total liabilities | 4,287,064 | 3,895,316 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, no par value, authorized 50,000,000 shares; issued 34,079,239 shares at September 30, 2017 and 34,018,731 at December 31, 2016; outstanding 32,015,317 shares at September 30, 2017 and 31,948,307 at December 31, 2016 | 412,546 | 412,726 | ||||||
| Additional paid-in capital | 12,840 | 11,407 | ||||||
| Retained earnings | 151,851 | 126,462 | ||||||
| Treasury stock, at cost (2,063,922 common shares at September 30, 2017 and December 31, 2016) | (16,717 | ) | (16,717 | ) | ||||
| Accumulated other comprehensive loss | (2,829 | ) | (2,846 | ) | ||||
| Total stockholders’ equity | 557,691 | 531,032 | ||||||
| Total liabilities and stockholders’ equity | $ | 4,844,755 | $ | 4,426,348 | ||||
(unaudited)
| (in thousands, except for share data) | March 31, 2022 | December 31, 2021 | ||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 61,849 | $ | 54,352 | ||||
| Interest-bearing deposits with banks | 249,695 | 211,184 | ||||||
| Cash and cash equivalents | 311,544 | 265,536 | ||||||
| Investment securities | 512,030 | 534,507 | ||||||
| Equity securities | 13,198 | 13,794 | ||||||
| Loans held-for-sale | 2,742 | 250 | ||||||
| Loans receivable | 6,979,595 | 6,828,622 | ||||||
| Less: Allowance for credit losses - loans | 80,070 | 78,773 | ||||||
| Net loans receivable | 6,899,525 | 6,749,849 | ||||||
| Investment in restricted stock, at cost | 25,254 | 27,826 | ||||||
| Bank premises and equipment, net | 28,779 | 29,032 | ||||||
| Accrued interest receivable | 34,081 | 34,152 | ||||||
| Bank owned life insurance | 196,937 | 195,731 | ||||||
| Right of use operating lease assets | 10,400 | 11,017 | ||||||
| Other real estate owned | 316 | - | ||||||
| Goodwill | 208,372 | 208,372 | ||||||
| Core deposit intangibles | 8,564 | 8,997 | ||||||
| Other assets | 82,559 | 50,417 | ||||||
| Total assets | $ | 8,334,301 | $ | 8,129,480 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing | $ | 1,631,292 | $ | 1,617,049 | ||||
| Interest-bearing | 4,929,113 | 4,715,904 | ||||||
| Total deposits | 6,560,405 | 6,332,953 | ||||||
| Borrowings | 412,170 | 468,193 | ||||||
| Subordinated debentures, net | 153,027 | 152,951 | ||||||
| Operating lease liabilities | 11,773 | 12,417 | ||||||
| Other liabilities | 58,407 | 38,754 | ||||||
| Total liabilities | 7,195,782 | 7,005,268 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred Stock, no par value; $1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of March 31, 2022 and as of December 31, 2021; outstanding 115,000 shares as of March 31, 2022 and as of December 31, 2021 | 110,927 | 110,927 | ||||||
| Common stock, no par value: Authorized 100,000,000 shares; issued 42,652,378 shares as of March 31, 2022 and 42,557,264 shares as of December 31, 2021; outstanding 39,518,411 shares as of March 31, 2022 and 39,568,090 as of December 31, 2021 | 586,946 | 586,946 | ||||||
| Additional paid-in capital | 28,484 | 27,246 | ||||||
| Retained earnings | 464,889 | 440,169 | ||||||
| Treasury stock, at cost 3,133,967 common shares as of March 31, 2022 and 2,989,174 as of December 31, 2021 | (44,458 | ) | (39,672 | ) | ||||
| Accumulated other comprehensive loss | (8,269 | ) | (1,404 | ) | ||||
| Total stockholders’ equity | 1,138,519 | 1,124,212 | ||||||
| Total liabilities and stockholders’ equity | $ | 8,334,301 | $ | 8,129,480 | ||||
See accompanying notes to unaudited consolidated financial statements.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| (in thousands, except for per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||
| Interest income | ||||||||||||
| Interest and fees on loans | $ | 43,241 | $ | 37,803 | $ | 121,879 | $ | 109,381 | ||||
| Interest and dividends on securities: | ||||||||||||
| Taxable | 1,695 | 1,774 | 5,042 | 5,879 | ||||||||
| Tax-exempt | 870 | 988 | 2,655 | 2,867 | ||||||||
| Dividends | 362 | 352 | 982 | 1,074 | ||||||||
| Interest on federal funds sold and other short-term investments | 170 | 261 | 555 | 541 | ||||||||
| Total interest income | 46,338 | 41,178 | 131,113 | 119,742 | ||||||||
| Interest expense | ||||||||||||
| Deposits | 6,113 | 5,159 | 16,717 | 13,532 | ||||||||
| Borrowings | 3,206 | 2,995 | 9,135 | 9,472 | ||||||||
| Total interest expense | 9,319 | 8,154 | 25,852 | 23,004 | ||||||||
| Net interest income | 37,019 | 33,024 | 105,261 | 96,738 | ||||||||
| Provision for loan losses | 1,450 | 6,750 | 4,000 | 13,500 | ||||||||
| Net interest income after provision for loan losses | 35,569 | 26,274 | 101,261 | 83,238 | ||||||||
| Noninterest income | ||||||||||||
| Annuities and insurance commissions | - | 68 | 39 | 140 | ||||||||
| Income on bank owned life insurance | 985 | 615 | 2,402 | 1,843 | ||||||||
| Net gains on sale of loans held-for-sale | 50 | 56 | 120 | 147 | ||||||||
| Deposit, loan and other income | 721 | 706 | 2,023 | 1,984 | ||||||||
| Net gains on sales of securities available-for-sale | - | 4,131 | 1,596 | 4,234 | ||||||||
| Total noninterest income | 1,756 | 5,576 | 6,180 | 8,348 | ||||||||
| Noninterest expenses | ||||||||||||
| Salaries and employee benefits | 8,872 | 7,791 | 25,710 | 23,143 | ||||||||
| Occupancy and equipment | 1,969 | 2,049 | 6,215 | 6,450 | ||||||||
| FDIC insurance | 840 | 745 | 2,550 | 1,955 | ||||||||
| Professional and consulting | 740 | 667 | 2,192 | 2,078 | ||||||||
| Marketing and advertising | 225 | 293 | 770 | 817 | ||||||||
| Data processing | 1,176 | 1,002 | 3,474 | 3,036 | ||||||||
| Amortization of core deposit intangible | 169 | 193 | 555 | 627 | ||||||||
| Increase in valuation allowance, loans held-for-sale | 3,000 | - | 15,325 | - | ||||||||
| Other expenses | 1,650 | 1,811 | 5,402 | 5,150 | ||||||||
| Total noninterest expenses | 18,641 | 14,551 | 62,193 | 43,256 | ||||||||
| Income before income tax expense | 18,684 | 17,299 | 45,248 | 48,330 | ||||||||
| Income tax expense | 5,607 | 5,443 | 12,608 | 15,224 | ||||||||
| Net income | 13,077 | 11,856 | 32,640 | 33,106 | ||||||||
| Less: Preferred stock dividends | - | - | - | 22 | ||||||||
| Net income available to common stockholders | $ | 13,077 | $ | 11,856 | $ | 32,640 | $ | 33,084 | ||||
| Earnings per common share: | ||||||||||||
| Basic | $ | 0.41 | $ | 0.39 | $ | 1.02 | $ | 1.10 | ||||
| Diluted | 0.41 | 0.39 | 1.01 | 1.09 | ||||||||
| Dividends per common share | $ | 0.075 | $ | 0.075 | $ | 0.225 | $ | 0.225 | ||||
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (dollars in thousands, except for per share data) | ||||||||
| Interest income | ||||||||
| Interest and fees on loans | $ | 76,025 | $ | 70,462 | ||||
| Interest and dividends on investment securities: | ||||||||
| Taxable | 1,873 | 1,088 | ||||||
| Tax-exempt | 709 | 766 | ||||||
| Dividends | 214 | 256 | ||||||
| Interest on federal funds sold and other short-term investments | 120 | 49 | ||||||
| Total interest income | 78,941 | 72,621 | ||||||
| Interest expense | ||||||||
| Deposits | 5,010 | 7,585 | ||||||
| Borrowings | 3,573 | 3,873 | ||||||
| Total interest expense | 8,583 | 11,458 | ||||||
| Net interest income | 70,358 | 61,163 | ||||||
| Provision for (reversal of) credit losses | 1,450 | (5,766 | ) | |||||
| Net interest income after provision for (reversal of) credit losses | 68,908 | 66,929 | ||||||
| Noninterest income | ||||||||
| Deposit, loan and other income | 1,743 | 1,168 | ||||||
| Income on bank owned life insurance | 1,206 | 1,064 | ||||||
| Net gains on sale of loans held-for-sale | 701 | 707 | ||||||
| Gain on sale of branches | - | 674 | ||||||
| Net losses on equity securities | (596 | ) | (187 | ) | ||||
| Total noninterest income | 3,054 | 3,426 | ||||||
| Noninterest expenses | ||||||||
| Salaries and employee benefits | 18,783 | 15,632 | ||||||
| Occupancy and equipment | 1,929 | 3,404 | ||||||
| FDIC insurance | 606 | 935 | ||||||
| Professional and consulting | 1,792 | 1,956 | ||||||
| Marketing and advertising | 351 | 241 | ||||||
| Information technology and communications | 2,866 | 2,525 | ||||||
| Amortization of core deposit intangibles | 433 | 507 | ||||||
| Other components of net periodic pension expense | (143 | ) | (67 | ) | ||||
| Increase in value of acquisition price | 683 | - | ||||||
| Other expenses | 1,930 | 1,352 | ||||||
| Total noninterest expenses | 29,230 | 26,485 | ||||||
| Income before income tax expense | 42,732 | 43,870 | ||||||
| Income tax expense | 11,351 | 10,871 | ||||||
| Net income | 31,381 | 32,999 | ||||||
| Preferred dividends | 1,509 | - | ||||||
| Net income available to common stockholders | $ | 29,872 | $ | 32,999 | ||||
| Earnings per common share | ||||||||
| Basic | $ | 0.76 | $ | 0.83 | ||||
| Diluted | 0.75 | 0.82 | ||||||
See accompanying notes to unaudited consolidated financial statements.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Net income | $ | 13,077 | $ | 11,856 | $ | 32,640 | $ | 33,106 | ||||||||
| Other comprehensive income: | ||||||||||||||||
| Unrealized gains and losses: | ||||||||||||||||
| Unrealized holding gains (losses) on available-for-sale securities arising during the period | 415 | (523 | ) | 1,332 | 1,551 | |||||||||||
| Tax effect | (165 | ) | 187 | (525 | ) | (634 | ) | |||||||||
| Net of tax | 250 | (336 | ) | 807 | 917 | |||||||||||
| Unrealized gains on securities transferred from held-to-maturity to available-for-sale the period | - | 10,069 | - | 10,069 | ||||||||||||
| Tax effect | - | (3,815 | ) | - | (3,815 | ) | ||||||||||
| Net of tax | - | 6,254 | 6,254 | |||||||||||||
| Reclassification adjustment for realized gains included in net income | - | (4,131 | ) | (1,596 | ) | (4,234 | ) | |||||||||
| Tax effect | - | 1,640 | 579 | 1,682 | ||||||||||||
| Net of tax | - | (2,491 | ) | (1,017 | ) | (2,552 | ) | |||||||||
| Amortization of unrealized net losses on held-to-maturity securities transferred from available-for-sale securities | - | 1,890 | - | 1,986 | ||||||||||||
| Tax effect | - | (774 | ) | - | (813 | ) | ||||||||||
| Net of tax | 1,116 | - | 1,173 | |||||||||||||
| Unrealized gains (losses) on cash flow hedges | 119 | 644 | 76 | (1,081 | ) | |||||||||||
| Tax effect | (48 | ) | (263 | ) | (31 | ) | 441 | |||||||||
| Net of tax | 71 | 381 | 45 | (640 | ) | |||||||||||
| Unrealized pension plan gains and losses: | ||||||||||||||||
| Unrealized pension plan losses before reclassifications | - | - | (2 | ) | (1 | ) | ||||||||||
| Tax effect | - | - | 1 | - | ||||||||||||
| Net of tax | - | - | (1 | ) | (1 | ) | ||||||||||
| Reclassification adjustment for amortization included in net income | 103 | 204 | 309 | 306 | ||||||||||||
| Tax effect | (42 | ) | (83 | ) | (126 | ) | (124 | ) | ||||||||
| Net of tax | 61 | 121 | 183 | 182 | ||||||||||||
| Total other comprehensive income | 382 | 5,045 | 17 | 5,333 | ||||||||||||
| Total comprehensive income | $ | 13,459 | $ | 16,901 | $ | 32,657 | $ | 38,439 | ||||||||
| Three Months Ended March 31, | ||||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| Net income | $ | 31,381 | $ | 32,999 | ||||
| Other comprehensive income (loss): | ||||||||
| Unrealized holding losses on available-for-sale securities arising during the period | (30,625 | ) | (5,440 | ) | ||||
| Tax effect | 8,139 | 1,432 | ||||||
| Net of tax | (22,486 | ) | (4,008 | ) | ||||
| Unrealized gains on cash flow hedges | 19,000 | 24 | ||||||
| Tax effect | (5,341 | ) | (11 | ) | ||||
| Net of tax | 13,659 | 13 | ||||||
| Reclassification adjustment for realized losses on cash flow hedges included in net income | 525 | 631 | ||||||
| Tax effect | (147 | ) | (177 | ) | ||||
| Net of tax | 378 | 454 | ||||||
| Unrealized gains on pension plan | 2,187 | - | ||||||
| Tax effect | (615 | ) | - | |||||
| Net of tax | 1,572 | - | ||||||
| Reclassification adjustment for realized losses on pension plan included in net income | 16 | 75 | ||||||
| Tax effect | (4 | ) | (20 | ) | ||||
| Net of tax | 12 | 55 | ||||||
| Total other comprehensive loss | (6,865 | ) | (3,486 | ) | ||||
| Total comprehensive income | $ | 24,516 | $ | 29,513 | ||||
See accompanying notes to unaudited consolidated financial statements.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
| (dollars in thousands, except for per share data) | Preferred Stock | Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive (Loss) Income | Total Stockholders’ Equity | |||||||||||||||||||||
| Balance as of December 31, 2020 | $ | - | $ | 586,946 | $ | 23,887 | $ | 331,951 | $ | (30,271 | ) | $ | 2,797 | $ | 915,310 | |||||||||||||
| Cumulative effect of change in accounting principle (see note 1b. “Authoritative Accounting Guidance Presentation”), net of tax | - | - | - | (2,925 | ) | - | - | (2,925 | ) | |||||||||||||||||||
| Balance as of January 1, 2021 as adjusted for changes in accounting principle | - | 586,946 | 23,887 | 329,026 | (30,271 | ) | 2,797 | 912,385 | ||||||||||||||||||||
| Net income | - | - | - | 32,999 | - | - | 32,999 | |||||||||||||||||||||
| Other comprehensive loss, net of tax | - | - | - | - | - | (3,486 | ) | (3,486 | ) | |||||||||||||||||||
| Cash dividends declared on common stock ($0.11 per share) | - | - | - | (3,584 | ) | - | - | (3,584 | ) | |||||||||||||||||||
| Exercise of stock options (5,449 shares) | - | - | 45 | - | - | - | 45 | |||||||||||||||||||||
| Restricted stock grants (26,769 shares) | - | - | - | - | - | - | - | |||||||||||||||||||||
| Stock grants (446 shares) | - | - | - | - | - | - | - | |||||||||||||||||||||
| Net shares issued in satisfaction of restricted stock units earned (14,711 shares) | - | - | - | - | - | - | - | |||||||||||||||||||||
| Net shares issued in satisfaction of performance units earned (34,458 shares) | - | - | - | - | - | - | - | |||||||||||||||||||||
| Share redemption for tax withholdings on performance units and restricted stock units earned | - | - | (1,283 | ) | - | - | - | (1,283 | ) | |||||||||||||||||||
| Repurchase of treasury stock (93,629 shares) | - | - | - | - | (2,411 | ) | - | (2,411 | ) | |||||||||||||||||||
| Stock-based compensation | - | - | 972 | - | - | - | 972 | |||||||||||||||||||||
| Balance as of March 31, 2021 | $ | - | $ | 586,946 | $ | 23,621 | $ | 358,441 | $ | (32,682 | ) | $ | (689 | ) | $ | 935,637 | ||||||||||||
| Balance as of December 31, 2021 | $ | 110,927 | $ | 586,946 | $ | 27,246 | $ | 440,169 | $ | (39,672 | ) | $ | (1,404 | ) | $ | 1,124,212 | ||||||||||||
| Net income | - | - | - | 31,381 | - | - | 31,381 | |||||||||||||||||||||
| Other comprehensive loss, net of tax | - | - | - | - | - | (6,865 | ) | (6,865 | ) | |||||||||||||||||||
| Cash dividends declared on common stock ($0.13 per share) | - | - | - | (5,152 | ) | - | - | (5,152 | ) | |||||||||||||||||||
| Cash dividends declared on preferred stock ($0.328125 per depositary share) | - | - | - | (1,509 | ) | - | - | (1,509 | ) | |||||||||||||||||||
| Exercise of stock options (8,774 shares) | - | - | 91 | - | - | - | 91 | |||||||||||||||||||||
| Restricted stock grants, net of forfeitures (32,454 shares) | - | - | - | - | - | - | - | |||||||||||||||||||||
| Stock grants (153 shares) | - | - | - | - | - | - | - | |||||||||||||||||||||
| Net shares issued in satisfaction of restricted stock units earned (31,383 shares) | - | - | - | - | - | - | - | |||||||||||||||||||||
| Net shares issued in satisfaction of performance units earned (22,350 shares) | - | - | - | - | - | - | - | |||||||||||||||||||||
| Repurchase of treasury stock (144,793 shares) | - | - | - | - | (4,786 | ) | - | (4,786 | ) | |||||||||||||||||||
| Stock-based compensation | - | - | 1,147 | - | - | - | 1,147 | |||||||||||||||||||||
| Balance as of March 31, 2022 | $ | 110,927 | $ | 586,946 | $ | 28,484 | $ | 464,889 | $ | (44,458 | ) | $ | (8,269 | ) | $ | 1,138,519 | ||||||||||||
| Accumulated | |||||||||||||||||||||||||||
| Additional | Other | Total | |||||||||||||||||||||||||
| (dollars in thousands, except for per | Preferred | Common | Paid-In | Retained | Treasury | Comprehensive | Stockholders’ | ||||||||||||||||||||
| share data) | Stock | Stock | Capital | Earnings | Stock | (Loss) Income | Equity | ||||||||||||||||||||
| Balance as of December 31, 2015 | $ | 11,250 | $ | 374,287 | $ | 8,527 | $ | 104,606 | $ | (16,717 | ) | $ | (4,609 | ) | $ | 477,344 | |||||||||||
| Net income | - | - | - | 33,106 | - | - | 33,106 | ||||||||||||||||||||
| Other comprehensive income, net of tax | - | - | - | - | - | 5,333 | 5,333 | ||||||||||||||||||||
| Dividend on series B preferred stock | - | - | - | (22 | ) | - | - | (22 | ) | ||||||||||||||||||
| Cash dividends declared on common stock ($0.225 per share) | - | - | - | (6,805 | ) | - | - | (6,805 | ) | ||||||||||||||||||
| Redemption of preferred stock | (11,250 | ) | - | - | - | - | - | (11,250 | ) | ||||||||||||||||||
| Exercise of stock options (36,135 shares) | - | - | 232 | - | - | - | 232 | ||||||||||||||||||||
| Restricted stock and performance units grants (75,520 shares) | - | - | - | - | - | - | - | ||||||||||||||||||||
| Stock-based compensation expense | - | - | 1,650 | - | - | - | 1,650 | ||||||||||||||||||||
| Balance as of September 30, 2016 | $ | - | $ | 374,287 | $ | 10,409 | $ | 130,885 | $ | (16,717 | ) | $ | 724 | $ | 499,588 | ||||||||||||
| Balance as of December 31, 2016 | $ | - | $ | 412,726 | $ | 11,407 | $ | 126,462 | $ | (16,717 | ) | $ | (2,846 | ) | $ | 531,032 | |||||||||||
| Net income | - | - | - | 32,640 | - | - | 32,640 | ||||||||||||||||||||
| Other comprehensive income, net of tax | - | - | - | - | - | 17 | 17 | ||||||||||||||||||||
| Cash dividends declared on common stock ($0.225 per share) | - | - | - | (7,251 | ) | - | - | (7,251 | ) | ||||||||||||||||||
| Stock issuance costs | - | (180 | ) | - | - | - | - | (180 | ) | ||||||||||||||||||
| Exercise of stock options (10,846 shares) | - | - | 118 | - | - | - | 118 | ||||||||||||||||||||
| Restricted stock grants (57,164 shares) | - | - | - | - | - | - | - | ||||||||||||||||||||
| Stock-based compensation expense | - | - | 1,315 | - | - | - | 1,315 | ||||||||||||||||||||
| Balance as of September 30, 2017 | $ | - | $ | 412,546 | $ | 12,840 | $ | 151,851 | $ | (16,717 | ) | $ | (2,829 | ) | $ | 557,691 | |||||||||||
See accompanying notes to unaudited consolidated financial statements.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Three Months Ended March 31, | ||||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 31,381 | $ | 32,999 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization of premises and equipment | 983 | 880 | ||||||
| Provision for (reversal of) credit losses | 1,450 | (5,766 | ) | |||||
| Amortization of intangibles | 433 | 507 | ||||||
| Net accretion of loans | (874 | ) | (1,406 | ) | ||||
| Accretion on bank premises | (12 | ) | (23 | ) | ||||
| Accretion on deposits | (321 | ) | (650 | ) | ||||
| Amortization (accretion) on borrowings, net | 16 | (17 | ) | |||||
| Stock-based compensation | 1,147 | 972 | ||||||
| Losses on equity securities, net | 596 | 187 | ||||||
| Gains on sale of loans held-for-sale, net | (701 | ) | (707 | ) | ||||
| Loans originated for resale | (8,872 | ) | (23,348 | ) | ||||
| Proceeds from sale of loans held-for-sale | 9,472 | 21,856 | ||||||
| Gain on sale of branches | - | (674 | ) | |||||
| Net losses on disposition of other premises and equipment | - | 22 | ||||||
| Increase in cash surrender value of bank owned life insurance | (1,206 | ) | (1,064 | ) | ||||
| Amortization of premiums and accretion of discounts on securities available-for-sale | 872 | 1,605 | ||||||
| Amortization of subordinated debentures issuance costs | 76 | 76 | ||||||
| Decrease in accrued interest receivable | 71 | 68 | ||||||
| Net change in operating leases | (27 | ) | (131 | ) | ||||
| (Increase) decrease in other assets | (10,585 | ) | 47,156 | |||||
| Increase in other liabilities | 21,945 | 7,589 | ||||||
| Net cash provided by operating activities | 45,844 | 80,131 | ||||||
| Cash flows from investing activities | ||||||||
| Investment securities available-for-sale: | ||||||||
| Purchases | (52,970 | ) | (33,305 | ) | ||||
| Maturities, calls and principal repayments | 43,950 | 72,193 | ||||||
| Net redemptions of restricted investment in bank stocks | 2,572 | 2,616 | ||||||
| Payments on loans held-for-sale | - | 9 | ||||||
| Net increase in loans | (153,048 | ) | (36,553 | ) | ||||
| Purchases of premises and equipment | (718 | ) | (67 | ) | ||||
| Proceeds from sale of branches | - | 729 | ||||||
| Net cash (used in) provided by investing activities | (160,214 | ) | 5,622 | |||||
| Cash flows from financing activities | ||||||||
| Net increase (decrease) in deposits | 227,773 | (7,240 | ) | |||||
| Advances of Federal Home Loan Bank (“FHLB”) borrowings | 150,000 | - | ||||||
| Repayments of FHLB borrowings | (206,039 | ) | (66,227 | ) | ||||
| Decrease in subordinated debt | - | (50,000 | ) | |||||
| Cash dividends on preferred stock | (1,509 | ) | - | |||||
| Cash dividends paid on common stock | (5,152 | ) | (3,584 | ) | ||||
| Repurchase of treasury stock | (4,786 | ) | (2,411 | ) | ||||
| Proceeds from exercise of stock options | 91 | 45 | ||||||
| Net cash provided by (used in) financing activities | 160,378 | (129,417 | ) | |||||
| Net change in cash and cash equivalents | 46,008 | (43,664 | ) | |||||
| Cash and cash equivalents at beginning of period | 265,536 | 303,756 | ||||||
| Cash and cash equivalents at end of period | $ | 311,544 | $ | 260,092 | ||||
(continued)
(unaudited)Supplemental disclosures of cash flow information
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| (dollars in thousands) | 2017 | 2016 | ||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 32,640 | $ | 33,106 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization of premises and equipment | 2,364 | 2,084 | ||||||
| Provision for loan losses | 4,000 | 13,500 | ||||||
| Increase in valuation allowance | 15,325 | - | ||||||
| Amortization of intangibles | 555 | 627 | ||||||
| Net accretion of loans | (1,106 | ) | (3,381 | ) | ||||
| Accretion on bank premises | (58 | ) | (94 | ) | ||||
| Accretion on deposits | (19 | ) | (167 | ) | ||||
| Accretion on borrowings | (156 | ) | (250 | ) | ||||
| Stock-based compensation | 1,315 | 1,650 | ||||||
| Gains on sales of investment securities, net | (1,596 | ) | (4,234 | ) | ||||
| Gains on sales of loans held-for-sale, net | (120 | ) | (147 | ) | ||||
| Gains on sales of fixed assets, net | (8 | ) | - | |||||
| Loans originated for resale | (6,790 | ) | (6,399 | ) | ||||
| Proceeds from sale of loans held-for sale | 12,015 | 4,948 | ||||||
| Net loss (gain) on sale of other real estate owned | 82 | (182 | ) | |||||
| Increase in cash surrender value of bank owned life insurance | (2,402 | ) | (1,843 | ) | ||||
| Amortization of premiums and accretion of discounts on investments securities, net | 1,808 | 1,148 | ||||||
| (Increase) decrease in accrued interest receivable | (1,876 | ) | 48 | |||||
| Decrease (increase) in other assets | 8,894 | (2,813 | ) | |||||
| Increase (decrease) in other liabilities | 3,444 | (981 | ) | |||||
| Net cash provided by operating activities | 68,311 | 36,620 | ||||||
| Cash flows from investing activities | ||||||||
| Investment securities available-for-sale: | ||||||||
| Purchases | (138,945 | ) | (114,844 | ) | ||||
| Sales | 29,543 | 85,253 | ||||||
| Maturities, calls and principal repayments | 61,700 | 109,452 | ||||||
| Investment securities held-to-maturity: | ||||||||
| Purchases | - | (1,000 | ) | |||||
| Maturities and principal repayments | - | 14,758 | ||||||
| Net (purchases) redemptions of restricted investment in bank stocks | (5,362 | ) | 8,077 | |||||
| Payments on loans held-for-sale | 2,841 | - | ||||||
| Net increase in loans | (447,457 | ) | (359,945 | ) | ||||
| Proceeds from sales of fixed assets | 8 | - | ||||||
| Purchases of premises and equipment | (2,148 | ) | (1,769 | ) | ||||
| Purchases of bank owned life insurance | (10,000 | ) | (17,000 | ) | ||||
| Proceeds from sale of other real estate owned | 1,124 | 2,992 | ||||||
| Net cash used in investing activities | (508,696 | ) | (274,026 | ) | ||||
| Cash flows from financing activities | ||||||||
| Net increase in deposits | 279,517 | 478,150 | ||||||
| Advances of Federal Home Loan Bank (“FHLB”) borrowings | 780,000 | 375,000 | ||||||
| Repayments of FHLB borrowings | (656,000 | ) | (565,000 | ) | ||||
| Repayment of repurchase agreement | (15,000 | ) | - | |||||
| Cash dividends paid on common stock | (7,207 | ) | (6,805 | ) | ||||
| Cash dividends paid on preferred stock | - | (22 | ) | |||||
| Common stock issuance costs | (180 | ) | - | |||||
| Redemption of preferred stock | - | (11,250 | ) | |||||
| Proceeds from exercise of stock options | 118 | 232 | ||||||
| Net cash provided by financing activities | 381,248 | 270,305 | ||||||
| Net change in cash and cash equivalents | (59,137 | ) | 32,899 | |||||
| Cash and cash equivalents at beginning of period | 200,399 | 200,895 | ||||||
| Cash and cash equivalents at end of period | $ | 141,262 | $ | 233,794 | ||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash payments for: | ||||||||
| Interest paid on deposits and borrowings | $ | 25,807 | $ | 22,791 | ||||
| Income taxes | 4,670 | 18,195 | ||||||
| Supplemental disclosures of noncash investing activities | ||||||||
| Transfer of loans to other real estate owned | $ | 580 | $ | 887 | ||||
| Transfer of loans from held-for-investment to held-for-sale | 34,652 | 13,514 | ||||||
| Transfer of investment securities from held-to-maturity to available-for-sale | - | 209,855 | ||||||
| Cash payments for: | ||||||||
| Interest paid on deposits and borrowings | $ | 8,794 | $ | 11,690 | ||||
| Income taxes | 300 | 4,350 | ||||||
Supplemental disclosures of noncash activities
| Investing: | ||||||||
| Transfer of loans to other real estate owned | $ | 316 | $ | - | ||||
| Transfer of loans from held-for-investment to held-for-sale | 2,391 | - | ||||||
See accompanying notes to unaudited consolidated financial statements.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. 1a. Nature of Operations, and Principles of Consolidation and Risk and Uncertainties
Nature of Operations
ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company.company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Parent Corporation’s business currently consists of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”). The Bank’s subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a Delaware investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), and NJCB Spec-1, LLC (a New Jersey limited liability company), Port Jervis Holdings, LLC (a New Jersey limited liability company), BONJ Special Properties, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey financial technology company).
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 twentytwenty-three other banking offices. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’ business, real estate rental and consumer wages.
The preceding unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) 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 GAAP 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 months and nine months ended September 30, 2017March 31, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017,2022, or for any other interim period. The Company’s 20162021 Annual Report on Form 10-K should be read in conjunction with these consolidated financial statements.
Basis of Presentation
The consolidated financial statements have been prepared in conformity with GAAP. Some items in the prior year consolidated financial statements were reclassified to conform to current presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.
Use of Estimates
In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates.
Risks and Uncertainties
As previously disclosed, on March 11, 2020 the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to impact the United States and the world. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The consolidated financial statementsCOVID-19 pandemic has adversely affected, and continues to adversely affect economic activity globally, nationally and locally. Although economic activity began to accelerate in 2021, and the United States continues to implement a COVID-19 vaccination program, COVID-19, it’s variants and actions taken to mitigate the spread of it have been prepared in conformity with GAAP. Some itemshad and may in the prior year consolidatedfuture have an adverse impact on the economies and financial statements were reclassifiedmarkets of many countries and parts of the United States, including the New Jersey/New York metropolitan area in which the Company primarily operates. Although the Company has been able to conformcontinue operations while taking steps to current presentation. Reclassifications had no effectensure the safety of employees and clients, COVID-19 could impact the Company’s operations in the future. The effects of the COVID-19 pandemic may adversely affect the Company’s financial condition and results of operations in future periods. Although state and local governments have lifted many restrictions on prior year net income or stockholders’ equity.conducting business, it is possible that restrictions could be reimposed.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 2. New1b. Authoritative Accounting Guidance
Newly Issued, But Not Yet Effective Accounting Standards
In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures” (“ASU No. 2017-12 “Derivatives2022-02”). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings (“TDRs”) in ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors” for entities that have adopted the current expected credit loss (“CECL”) model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13”). ASU 2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.”net investments in leases within the scope of Subtopic 326-20, “Financial Instruments—Credit Losses—Measured at Amortized Cost”. ASU No. 2017-12 refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. ASU 2017-12 will be2022-02 is effective for public business entitiesthe Company for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Although management continues to evaluate the potential impact of ASU 2017-12 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact to our consolidated financial statements.
ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” ASU No. 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 will be effective for us on January 1, 2019 and we are currently evaluating this ASU to determine the impact on our consolidated financial statements.
ASU No. 2017-04,“Intangibles – Goodwill and Other (Topic 350).”ASU 2017-04 aims to simplify the subsequent measurement of goodwill. Under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets and still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019. Although management continues to evaluate the potential impact of ASU 2017-04 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact to our consolidated financial statements.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Note 2. New Authoritative Accounting Guidance – (continued)
ASU No. 2016-15, “Statement of Cash Flows (Topic 230):Classification of Certain Cash Receipts and Cash Payments” provides guidance on the following eight specific cash flow issues: (1) Debt prepayment or debt extinguishment costs; (2) Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) Contingent consideration payments made after a business combination; (4) Proceeds from the settlement of insurance claims; (5) Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) Distributions received from equity method investees; (7) Beneficial interests in securitization transactions; and (8) Separately identifiable cash flows and application of the predominance principle. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. Although management continues to evaluate the potential impact of ASU 2016-05 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact to our consolidated financial statements.
ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Assets Measured at Amortized Cost.” ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates and affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019,2022, including interim periods within those fiscal years. The Company has formed a CECL committee that will be assessing our data and system needs. The Company has also met with multiple third-party vendors who may provide assistance in implementation and model creation. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the ASU is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the ASU on our consolidated financial statements.
ASU No. 2016-02, “Leases (Topic 842)” requires the recognition of a right of use asset and related lease liability by lessees for leases classified as operating leases under current GAAP. Topic 842, which replaces the current guidance under Topic 840, retains a distinction between finance leases and operating leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee also will not significantly change from current GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities. Topic 842 will be effective for the Company for reporting periods beginning January 1, 2019,years, with early adoption permitted. The Company must apply a modified retrospective transition approach foris evaluating the applicable leases existing at, or entered into after, the beginning of the earliest comparative period presented in theeffect that ASU 2022-02 will have on its consolidated financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The Company is currently leasing seventeen properties as branch locations and is leasing certain office equipment. The adoption of ASU 2016-02 will result in increases to the Company's assets and liabilities. We are currently in the process of evaluating all of our leases for compliance with the new ASU.
ASU No. 2016-01,Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01, among other things; (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-01 will be effective for us on January 1, 2018 and we are currently evaluating the potential impact of ASU No. 2016-01 on our consolidated financial statements.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Note 2. New Authoritative Accounting Guidance – (continued)
ASU No. 2014-09,“Revenue from Contracts with Customers (Topic 606).”ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 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. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective for us on January 1, 2017; however, the FASB recently issued ASU 2015-14,“Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date” which deferred the effective date of ASU 2014-09 by one year to January 1, 2018. Although management continues to evaluate the potential impact of ASU 2014-09 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact to our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08,Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments relate to when another party, along with the entity, is involved in providing a good or service to a customer. The amendments in this update affect the guidance in ASU No. 2014-09 above, which is not yet effective. The effective date will be the same as the effective date of ASU No. 2014-09.
In April 2016, the FASB issued ASU No. 2016-10,Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: identifying performance obligations, and the licensing implementation guidance. The amendments in this update are intended to improve the operability and understandability of the licensing implementation guidance. The amendments in this update affect the guidance in ASU No. 2014-09 above, which is not yet effective. The effective date will be the same as the effective date of ASU No. 2014-09.
In May 2016, the FASB issued ASU No. 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients.
In December 2016, the FASB issued ASU No. 2016-20,Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements. The FASB board decided to issue a separate update for technical corrections and improvements to Topic 606 and other Topics amended by ASU No. 2014-09 to increase awareness of the proposals and to expedite improvements to ASU No. 2014-09. The amendment affects narrow aspects of the guidance issued in ASU No. 2014-09.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Note 3.2. Earnings per Common Share
Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). The restricted stock awards previously granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities. The two-class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities.
Earnings per common share have been computed based on the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (in thousands, except for per share data) | ||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net income available to common stockholders | $ | 13,035 | $ | 11,812 | $ | 32,534 | $ | 33,084 | ||||||||
| Earnings allocated to participating securities | 42 | 44 | 106 | 22 | ||||||||||||
| Net income | $ | 13,077 | $ | 11,856 | $ | 32,640 | $ | 33,106 | ||||||||
| Weighted average common shares outstanding, including participating securities | 32,015 | 30,143 | 31,999 | 30,094 | ||||||||||||
| Weighted average participating securities | (103 | ) | (113 | ) | (104 | ) | (98 | ) | ||||||||
| Weighted average common shares outstanding | 31,912 | 30,030 | 31,895 | 29,996 | ||||||||||||
| Incremental shares from assumed conversions of options, performance units and restricted shares | 270 | 329 | 272 | 351 | ||||||||||||
| Weighted average common and equivalent shares outstanding | 32,182 | 30,359 | 32,167 | 30,347 | ||||||||||||
| Earnings per common share: | ||||||||||||||||
| Basic | $ | 0.41 | $ | 0.39 | $ | 1.02 | $ | 1.10 | ||||||||
| Diluted | 0.41 | 0.39 | 1.01 | 1.09 | ||||||||||||
| Three Months Ended March 31, | ||||||||
| (dollars in thousands, except for per share data) | 2022 | 2021 | ||||||
| Net income available to common stockholders | $ | 29,872 | $ | 32,999 | ||||
| Earnings allocated to participating securities | (80 | ) | (186 | ) | ||||
| Income attributable to common stock | $ | 29,792 | $ | 32,813 | ||||
| Weighted average common shares outstanding, including participating securities | 39,560 | 39,738 | ||||||
| Weighted average participating securities | (107 | ) | (181 | ) | ||||
| Weighted average common shares outstanding | 39,453 | 39,557 | ||||||
| Incremental shares from assumed conversions of options, performance units and restricted shares | 274 | 232 | ||||||
| Weighted average common and equivalent shares outstanding | 39,727 | 39,789 | ||||||
| Earnings per common share: | ||||||||
| Basic | $ | 0.76 | $ | 0.83 | ||||
| Diluted | 0.75 | 0.82 | ||||||
There were no antidilutive share equivalents asfor the quarters ended March 31, 2022 and March 31, 2021.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 3. Investment Securities
Note 4. Securities Available-For-Sale
The Company’s investment securities are all classified as available-for-sale at September 30, 2017as of March 31, 2022 and December 31, 2016. Securities2021. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in stockholders’ equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value as of September 30, 2017March 31, 2022 and December 31, 2016.2021. 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 76 of the Notes to Consolidated Financial Statements for a further discussion.
During the quarter ended September 30, 2016, the Company transferred all securities previously categorized as held-to-maturity to available-for-sale classification. The transfer resulted in an increase of approximately $210 million in amortized cost basis of available-for-sale securities and resulted in a net increase to accumulated other comprehensive income of $7.4 million, net of tax. The transfer enhanced liquidity and increased flexibility with regard to asset-liability management and balance sheet composition. As a result of the transfer, the Company believes it has tainted its held-to-maturity classification and judgment will be required in the future in determining when circumstances have changed such that management can assert that it has the intent and ability to hold debt securities to maturity. Based on this guidance, the Company does not expect to classify any securities as held-to-maturity within the near future.
Transfers of debt securities from the held-to-maturity category to the available-for-sale category are made at fair value at the date of transfer. For transfers from the available-for-sale category to the held-to maturity category 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 security. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted out of other comprehensive income with an offsetting entry to interest income as a yield adjustment through earnings over the remaining terms of the securities. For transfers from the held-to-maturity category to the available-for-sale category unrealized holding gain or loss at the date of the transfer shall be recognized in accumulated other comprehensive income, net of applicable taxes.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Note 4. Securities Available-For-Sale – (continued)
The following tables present information related to the Company’s portfolio of securities at September 30, 2017available-for-sale as of March 31, 2022 and December 31, 2016:2021.
| Gross | Gross | ||||||||||||
| Amortized | Unrealized | Unrealized | Fair | ||||||||||
| September 30, 2017 | Cost | Gains | Losses | Value | |||||||||
| (dollars in thousands) | |||||||||||||
| Federal agency obligations | $ | 55,819 | $ | 290 | $ | (171 | ) | $ | 55,938 | ||||
| Residential mortgage pass-through securities | 133,517 | 668 | (1,021 | ) | 133,164 | ||||||||
| Commercial mortgage pass-through securities | 4,088 | 42 | - | 4,130 | |||||||||
| Obligations of U.S. states and political subdivisions | 143,787 | 2,233 | (1,044 | ) | 144,976 | ||||||||
| Trust preferred securities | 4,576 | 122 | (71 | ) | 4,627 | ||||||||
| Corporate bonds and notes | 30,052 | 255 | (219 | ) | 30,088 | ||||||||
| Asset-backed securities | 12,605 | 66 | (38 | ) | 12,633 | ||||||||
| Certificates of deposit | 622 | 5 | - | 627 | |||||||||
| Equity securities | 376 | 254 | - | 630 | |||||||||
| Other securities | 13,976 | - | (273 | ) | 13,703 | ||||||||
| Total securities available-for-sale | $ | 399,418 | $ | 3,935 | $ | (2,837 | ) | $ | 400,516 | ||||
| Gross | Gross | ||||||||||||
| Amortized | Unrealized | Unrealized | Fair | ||||||||||
| December 31, 2016 | Cost | Gains | Losses | Value | |||||||||
| (dollars in thousands) | |||||||||||||
| Federal agency obligations | $ | 52,826 | $ | 282 | $ | (271 | ) | $ | 52,837 | ||||
| Residential mortgage pass-through securities | 72,922 | 519 | (944 | ) | 72,497 | ||||||||
| Commercial mortgage pass-through securities | 4,186 | 23 | - | 4,209 | |||||||||
| Obligations of U.S. states and political subdivisions | 148,747 | 2,789 | (931 | ) | 150,605 | ||||||||
| Trust preferred securities | 5,575 | 242 | (151 | ) | 5,666 | ||||||||
| Corporate bonds and notes | 36,717 | 586 | (375 | ) | 36,928 | ||||||||
| Asset-backed securities | 14,867 | 2 | (286 | ) | 14,583 | ||||||||
| Certificates of deposit | 973 | 10 | - | 983 | |||||||||
| Equity securities | 376 | 192 | - | 568 | |||||||||
| Other securities | 14,739 | - | (325 | ) | 14,414 | ||||||||
| Total securities available-for-sale | $ | 351,928 | $ | 4,645 | $ | (3,283 | ) | $ | 353,290 | ||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Allowance for Investment Credit Losses | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||
| Securities available-for-sale | ||||||||||||||||||||
| Federal agency obligations | $ | 51,506 | $ | 46 | $ | (3,003 | ) | $ | 48,549 | $ | - | |||||||||
| Residential mortgage pass-through securities | 320,605 | 160 | (19,789 | ) | 300,976 | - | ||||||||||||||
| Commercial mortgage pass-through securities | 18,713 | 8 | (1,313 | ) | 17,408 | - | ||||||||||||||
| Obligations of U.S. states and political subdivisions | 144,474 | 446 | (7,869 | ) | 137,051 | - | ||||||||||||||
| Corporate bonds and notes | 5,477 | 35 | (11 | ) | 5,501 | - | ||||||||||||||
| Asset-backed securities | 2,364 | 7 | (17 | ) | 2,354 | |||||||||||||||
| Other securities | 191 | - | - | 191 | - | |||||||||||||||
| Total securities available-for-sale | $ | 543,330 | $ | 702 | $ | (32,002 | ) | $ | 512,030 | $ | - | |||||||||
| December 31, 2021 | ||||||||||||||||||||
| Securities available-for-sale | ||||||||||||||||||||
| Federal agency obligations | $ | 50,336 | $ | 649 | $ | (625 | ) | $ | 50,360 | $ | - | |||||||||
| Residential mortgage pass-through securities | 317,111 | 1,868 | (2,884 | ) | 316,095 | - | ||||||||||||||
| Commercial mortgage pass-through securities | 10,814 | 118 | (463 | ) | 10,469 | - | ||||||||||||||
| Obligations of U.S. states and political subdivisions | 145,045 | 1,562 | (982 | ) | 145,625 | - | ||||||||||||||
| Corporate bonds and notes | 8,968 | 81 | - | 9,049 | - | |||||||||||||||
| Asset-backed securities | 2,563 | 3 | (2 | ) | 2,564 | - | ||||||||||||||
| Certificates of deposit | 150 | - | - | 150 | - | |||||||||||||||
| Other securities | 195 | - | - | 195 | - | |||||||||||||||
| Total securities available-for-sale | $ | 535,182 | $ | 4,281 | $ | (4,956 | ) | $ | 534,507 | $ | - | |||||||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 4.3. Investment Securities Available-For-Sale – (continued)
The following table presents information for securities at September 30, 2017, 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, 2017 | ||||||
| Amortized | Fair | |||||
| Cost | Value | |||||
| (dollars in thousands) | ||||||
| Securities available-for-sale: | ||||||
| Due in one year or less | $ | 6,775 | $ | 6,801 | ||
| Due after one year through five years | 30,824 | 31,197 | ||||
| Due after five years through ten years | 39,489 | 40,174 | ||||
| Due after ten years | 170,373 | 170,717 | ||||
| Residential mortgage pass-through securities | 133,517 | 133,164 | ||||
| Commercial mortgage pass-through securities | 4,088 | 4,130 | ||||
| Equity securities | 376 | 630 | ||||
| Other securities | 13,976 | 13,703 | ||||
| Total | $ | 399,418 | $ | 400,516 | ||
Gross gains and losses from the sales, calls and maturities of securities for periods presented were as follows (dollars in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||
| Net gains on sales of securities, after tax | $ | - | $ | 78,680 | $ | 29,543 | $ | 85,253 | ||||
| Gross gains on sales of securities | - | 4,131 | 1,596 | 4,234 | ||||||||
| Gross losses on sales of securities | - | - | - | - | ||||||||
| Net gains on sales of securities | - | 4,131 | 1,596 | 4,234 | ||||||||
| Less: tax provision on net gains | - | 1,640 | 579 | 1,682 | ||||||||
| Net gains on sales of securities, after tax | $ | - | $ | 2,491 | $ | 1,017 | $ | 2,552 | ||||
The Company reviews all securities for potential recognition of other-than-temporary impairment. The Company maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review. This could include 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.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Note 4. Securities Available-For-Sale – (continued)
Temporarily Impaired Securities
The Company does not believe that any of the unrealized losses, which were comprised of 75 and 84 securities as of September 30, 2017 and December 31, 2016, respectively, represent an other-than-temporary impairment (“OTTI”). The gross unrealized losses 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 which may contribute to unrealized losses include credit risk, market risk, changes in interest rates, economic cycles, and liquidity risk. The magnitude of any unrealized loss may be affected by the relative concentration of the Company’s investment in any one issuer or industry. The Company has established policies to reduce exposure through diversification of the securities portfolio including limits on concentrations to any one issuer. The Company believes the securities portfolio is prudently diversified.
The unrealized losses included in the tables below are primarily related to changes in interest rates and credit spreads. All of the Company’s securities are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. These are largely intermediate duration holdings and, in certain cases, monthly principal payments can further reduce loss exposure resulting from an increase in rates.
The Company evaluates all securities with unrealized losses quarterly to determine whether the loss is other-than-temporary. Unrealized losses in the corporate debt securities category consist primarily of senior unsecured corporate debt securities issued by large financial institutions, insurance companies and other corporate issuers. Single issuer corporate trust preferred securities 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 OTTI at September 30, 2017.
In determining whether or not securities are OTTI, the Company must exercise considerable judgment. Accordingly, there can be no assurance that the actual results will not differ from the Company’s judgments and that such differences may not require the future recognition of OTTI charges that could have a material effect on the Company’s financial position and results of operations. In addition, the value of, and the realization of any loss on, a security is subject to numerous risks as cited above.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Note 4. Securities Available-For-Sale – (continued)
The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individualInvestment securities have been in a continuous unrealized loss position at September 30, 2017 and December 31, 2016:
| September 30, 2017 | |||||||||||||||||||||
| Total | Less than 12 Months | 12 Months or Longer | |||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
| Federal agency obligation | $ | 21,451 | $ | (171 | ) | $ | 17,679 | $ | (116 | ) | $ | 3,772 | $ | (55 | ) | ||||||
| Residential mortgage pass-through securities | 77,391 | (1,021 | ) | 49,079 | (457 | ) | 28,312 | (564 | ) | ||||||||||||
| Obligations of U.S. states and political subdivisions | 54,073 | (1,044 | ) | 47,016 | (829 | ) | 7,057 | (215 | ) | ||||||||||||
| Trust preferred securities | 1,507 | (71 | ) | - | - | 1,507 | (71 | ) | |||||||||||||
| Corporate bonds and notes | 13,123 | (219 | ) | 3,946 | (38 | ) | 9,177 | (181 | ) | ||||||||||||
| Asset-backed securities | 7,929 | (38 | ) | - | - | 7,929 | (38 | ) | |||||||||||||
| Other securities | 11,193 | (273 | ) | 5,911 | (56 | ) | 5,282 | (217 | ) | ||||||||||||
| Total temporarily impaired securities | $ | 186,667 | $ | (2,837 | ) | $ | 123,631 | $ | (1,496 | ) | $ | 63,036 | $ | (1,341 | ) | ||||||
| December 31, 2016 | |||||||||||||||||||||
| Total | Less than 12 Months | 12 Months or Longer | |||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
| Federal agency obligation | $ | 22,672 | $ | (271 | ) | $ | 21,416 | $ | (262 | ) | $ | 1,256 | $ | (9 | ) | ||||||
| Residential mortgage pass-through securities | 50,136 | (944 | ) | 49,817 | (937 | ) | 319 | (7 | ) | ||||||||||||
| Obligations of U.S. states and political subdivisions | 52,307 | (931 | ) | 52,307 | (931 | ) | - | - | |||||||||||||
| Trust preferred securities | 1,427 | (151 | ) | - | - | 1,427 | (151 | ) | |||||||||||||
| Corporate bonds and notes | 15,930 | (375 | ) | 7,671 | (265 | ) | 8,259 | (110 | ) | ||||||||||||
| Asset-backed securities | 13,404 | (286 | ) | 3,743 | (88 | ) | 9,661 | (198 | ) | ||||||||||||
| Other securities | 11,467 | (325 | ) | - | - | 11,467 | (325 | ) | |||||||||||||
| Total temporarily impaired securities | $ | 167,343 | $ | (3,283 | ) | $ | 134,954 | $ | (2,483 | ) | $ | 32,389 | $ | (800 | ) | ||||||
Securities having a carrying value of approximately $139.5$95.0 million and $121.9$71.2 million at September 30, 2017as of March 31, 2022 and December 31, 2016,2021, respectively, were pledged to secure public deposits, borrowings, repurchase agreements, Federal Reserve Bank discount windowDiscount Window borrowings and Federal Home Loan Bank (“FHLB”) advances and for other purposes required or permitted by law.
As of September 30, 2017March 31, 2022 and December 31, 2016,2021, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
The following table presents information for investments in securities available-for-sale as of March 31, 2022, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer. Securities not due at a single maturity date are shown separately.
| March 31, 2022 | ||||||||
| Amortized Cost | Fair Value | |||||||
| (dollars in thousands) | ||||||||
| Securities available-for-sale: | ||||||||
| Due in one year or less | $ | 3,391 | $ | 3,394 | ||||
| Due after one year through five years | 6,118 | 6,135 | ||||||
| Due after five years through ten years | 4,694 | 4,774 | ||||||
| Due after ten years | 189,618 | 179,152 | ||||||
| Residential mortgage pass-through securities | 320,605 | 300,976 | ||||||
| Commercial mortgage pass-through securities | 18,713 | 17,408 | ||||||
| Other securities | 191 | 191 | ||||||
| Total securities available-for-sale | $ | 543,330 | $ | 512,030 | ||||
We had no gross gains or losses from the sale of securities for the three months ended March 31, 2022 and 2021.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5.3. Investment Securities – (continued)
Impairment Analysis of Available--for-sale Debt Securities
The following tables indicate gross unrealized losses in an unrealized loss position for which an allowance for credit losses (“ACL”) has not been recorded, aggregated by investment category and by the length of continuous time individual securities have been in an unrealized loss position as of March 31, 2022 and December 31, 2021.
| March 31, 2022 | ||||||||||||||||||||||||
| Total | Less than 12 Months | 12 Months or Longer | ||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Investment Securities Available-for-Sale: | ||||||||||||||||||||||||
| Federal agency obligations | $ | 43,257 | $ | (3,003 | ) | $ | 43,257 | $ | (3,003 | ) | $ | - | $ | - | ||||||||||
| Residential mortgage pass-through securities | 284,118 | (19,789 | ) | 223,718 | (14,696 | ) | 60,400 | (5,093 | ) | |||||||||||||||
| Commercial mortgage pass-through securities | 14,437 | (1,313 | ) | 10,532 | (483 | ) | 3,905 | (830 | ) | |||||||||||||||
| Obligations of U.S. states and political subdivisions | 111,635 | (7,869 | ) | 111,635 | (7,869 | ) | - | - | ||||||||||||||||
| Corporate bonds and notes | 1,988 | (11 | ) | 1,988 | (11 | ) | - | - | ||||||||||||||||
| Asset-backed securities | 1,837 | (17 | ) | 1,837 | (17 | ) | - | - | ||||||||||||||||
| Total temporarily impaired securities | $ | 457,272 | $ | (32,002 | ) | $ | 392,967 | $ | (26,079 | ) | $ | 64,305 | $ | (5,923 | ) | |||||||||
| December 31, 2021 | ||||||||||||||||||||||||
| Total | Less than 12 Months | 12 Months or Longer | ||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Investment Securities Available-for-Sale: | ||||||||||||||||||||||||
| Federal agency obligations | $ | 28,974 | $ | (625 | ) | $ | 28,974 | $ | (625 | ) | $ | - | $ | - | ||||||||||
| Residential mortgage pass-through securities | 246,396 | (2,884 | ) | 214,701 | (2,111 | ) | 31,695 | (773 | ) | |||||||||||||||
| Commercial mortgage pass-through securities | 8,370 | (463 | ) | 4,682 | (75 | ) | 3,688 | (388 | ) | |||||||||||||||
| Obligations of U.S. states and political subdivisions | 89,473 | (982 | ) | 89,473 | (982 | ) | - | - | ||||||||||||||||
| Asset-backed securities | 802 | (2 | ) | 802 | (2 | ) | - | - | ||||||||||||||||
| Total Temporarily Impaired Securities | $ | 374,015 | $ | (4,956 | ) | $ | 338,632 | $ | (3,795 | ) | $ | 35,383 | $ | (1,161 | ) | |||||||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 3. Investment Securities – (continued)
The Company has elected to exclude accrued interest from the amortized cost of its investment securities available-for-sale. Accrued interest receivable for investment securities available for sale as of March 31, 2022 and December 31, 2021, totaled $1.4 million and $1.6 million, respectively.
The Company evaluates securities in unrealized loss position for impairment related to credit losses on at least a quarterly basis. Securities in unrealized loss positions are first assessed as to whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If one of the criteria is met, the security’s amortized cost basis is written down to fair value through current earnings. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value resulted from credit losses or other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Unrealized losses on asset backed securities and state and municipal securities have not been recognized into income because the issuers are of high credit quality, we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale securities was recorded as of March 31, 2022.
Federal agency obligations, residential mortgage backed pass-through securities and commercial mortgage back pass-through securities are issued by U.S. Government agencies and U.S. Government sponsored enterprises. Although a government guarantee exists on these investments, these entities are not legally backed by the full faith and credit of the federal government, and the current support they receive is subject to a cap as part of the agreement entered into in 2008. Nonetheless, at this time we do not foresee any set of circumstances in which the government would not fund its commitments on these investments as the issuers are an integral part of the U.S. housing market in providing liquidity and stability. Therefore, we concluded that a zero-allowance approach for these investment securities is appropriate.
Note 4. 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 other terms of the individual interest rate swap agreements.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Note 5. Derivatives – (continued)
Interest An interest rate swaps wereswap was entered into on April 13, 2017 August 24, 2015, December 30, 2014 and October 15, 2014, each with a respective notional amount of $25$25.0 million and werewas designated as a cash flow hedgeshedge of an FHLBa Federal Home Loan Bank advance. We are required to pay a fixed-rate of interest of 1.93% and receive variable rates of interest that reset quarterly based on three-month LIBOR. The swaps wereexpiration date for the swap is April 2022. The swap is determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income whileincome. Therefore, the aggregate fair value of the swapsswap 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 hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.swap.
Summary information about
In addition, during 2021, the Company entered into 9 forward starting pay fixed-rate interest rate swaps, 7 of which have since commenced, with a total notional amount of $400 million, which are also designated as a cash flow hedges as of September 30, 2017,current, or future, Federal Home Loan Bank advance. We are required to pay fixed rates of interest ranging from 0.631% to 1.23% and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”). The 2 remaining forward starting swaps have commencing payment dates in May 2022 and August 2022, with expiration dates on the 9 positions ranging from December 31, 2016 and September 30, 2016 are presented in the following table.2025 to March 2028.
| September 30, | December 31, | September 30, | ||||||||||
| 2017 | 2016 | 2016 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Notional amount | $ | 100,000 | $ | 75,000 | $ | 75,000 | ||||||
| Weighted average pay rates | 1.52 | % | 1.59 | % | 1.58 | % | ||||||
| Weighted average receive rates | 1.07 | % | 0.69 | % | 0.70 | % | ||||||
| Weighted average maturity | 2.7 years | 2.8 years | 3.1 years | |||||||||
| Fair value | $ | 164 | $ | 88 | $ | (1,212 | ) | |||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 4. Derivatives – (continued)
Interest expense recorded on these swap transactions totaled approximately $95,000$0.5 million and $326,000 for$0.6 million during the three and nine months ended September 30, 2017,March 31, 2022 and 2021, respectively, and $167,000 and $534,000 for the three and nine months ended September 30, 2016, respectively.is reported as a component of interest expense on FHLB Advances.
Cash Flow Hedge
The following table presents the net losses recorded in other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the following periods:
| Three Months Ended March 31, 2022 | ||||||||||||
| Amount of gain (loss) recognized in OCI (Effective Portion) | Amount of (gain) loss reclassified from OCI to interest income | Amount of gain recognized in other Noninterest income (Ineffective Portion) | ||||||||||
| (dollars in thousands) | ||||||||||||
| Interest rate contracts | $ | 19,000 | $ | 525 | $ | - | ||||||
| Three Months Ended March 31, 2021 | ||||||||||||
| Amount of gain (loss) recognized in OCI (Effective Portion) | Amount of gain (loss) reclassified from OCI to interest income | Amount of gain recognized in other Noninterest income (Ineffective Portion) | ||||||||||
| (dollars in thousands) | ||||||||||||
| Interest rate contracts | $ | 24 | $ | 631 | $ | - | ||||||
The following table reflects the cash flow hedges included in the consolidated statements of condition as of September 30, 2017March 31, 2022 and December 31, 2016:2021:
| September 30, 2017 | December 31,2016 | |||||||||||
| Notional | Notional | |||||||||||
| Amount | Fair Value | Amount | Fair Value | |||||||||
| (dollars in thousands) | ||||||||||||
| Interest rate swaps related to FHLB advances included in assets | $ | 100,000 | $ | 164 | $ | 75,000 | $ | 88 | ||||
| March 31, 2022 | December 31, 2021 | |||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Interest rate swaps related to FHLB advances included in assets | $ | 425,000 | $ | 22,872 | $ | 475,000 | $ | 3,347 | ||||||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6.5. Loans and the Allowance for LoanCredit Losses
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, premiums and discounts related to purchase accounting, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
Loan segments are defined as a group of loans, which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Company has five segments of loans: commercial, commercial real estate, commercial construction, residential real estate (including home equity) and consumer.
The recognition of interest income on commercial, commercial real estate, commercial construction and residential loans is 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 is 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 residents and businesses within our 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 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.
Loans Held-for-Sale
Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan.
Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. A portion of these loans, taxi medallion loans, have no material observable trading in any market. Fair value is established with consideration of a range of market participant indications, for all or parts of these loans, and discounted cash flow analyses, which have significant unobservable inputs. See Note 7 for further discussion.
Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Allowance for Loan losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan 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.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Note 6. Loans and the Allowance for Loan LossesReceivable – (continued)
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired. As part of the evaluation of impaired loans, the Company 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.
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 and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
TDRs 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 TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general 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 and with the exogenous factor adjustments based on the risks present for each loan category. These exogenous factors include consideration of the following: concentrations of credit; delinquency & nonaccrual trends; economic & business conditions including evaluation of the national and regional economies and industries with significant loan concentrations; external factors including legal, regulatory or competitive pressures that may impact the loan portfolio; changes in the experience, ability, or size of the 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.
Purchased Credit-Impaired Loans
The Company acquires 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 their estimated fair value, such that there is no carryover of the seller’s allowance for loan losses (“ALLL”). After acquisition, probable incurred credit losses are recognized by an increase in the ALLL.
Such purchased credit-impaired loans (“PCI”) are identified on an individual basis. The Company estimates the amount and timing of expected cash flows for each loan 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).
A PCI loan may be resolved either through a sale of the loan, by working with the customer and obtaining partial or full repayment, by short sale of the collateral, or by foreclosure. A gain or loss on resolution would be recognized based on the difference between the proceeds received and the carrying amount of the loan.
PCI loans that met the criteria for nonaccrual may be considered performing, regardless of whether the customer is contractually delinquent, if management can reasonably estimate the timing and amount of the expected cash flows on such loans and if management expects to fully collect the new carrying value of the loans. As such, management may no longer consider the loans to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Note 6. Loans and the Allowance for Loan Losses – (continued)
Loans held-for-sale
The following table presents loans held-for-sale by loan segment:
| September 30, | December 31, | ||||
| 2017 | 2016 | ||||
| (dollars in thousands) | |||||
| Commercial | $ | 47,430 | $ | 70,105 | |
| Commercial real estate | 41,811 | 7,712 | |||
| Residential real estate | 145 | 188 | |||
| Total carrying amount | $ | 89,386 | $ | 78,005 | |
As of September 30, 2017 and December 31, 2016, the commercial loans held-for-sale segment included the Company’s entire taxi medallion portfolio, with a carrying value of $47.4 million and $65.6 million, net of $15.3 million and $-0- million valuation allowance, respectively. The commercial real estate segment reflects multifamily loans, with a carrying value of $41.8 million as of September 30, 2017. These loans were designated as loans held-for-sale during the quarter ended September 30, 2017. No portion of the valuation allowance has been designated toward the loans held-for-sale within the commercial real estate segment.
Activity in the valuation allowance was as follows for periods presented:
| Three Months | Three Months | ||||||
| Ended | Ended | ||||||
| September 30, | September 30, | ||||||
| 2017 | 2016 | ||||||
| (dollars in thousands) | |||||||
| Balance at beginning of period | $ | 12,325 | $ | - | |||
| Reduction from loans paid off | (38 | ) | - | ||||
| Increase in valuation allowance | 3,000 | - | |||||
| Balance at end of period | $ | 15,287 | $ | - | |||
| Nine Months | Nine Months | ||||||
| Ended | Ended | ||||||
| September 30, | September 30, | ||||||
| 2017 | 2016 | ||||||
| (dollars in thousands) | |||||||
| Balance at beginning of period | $ | - | $ | - | |||
| Reduction from loans paid off | (38 | ) | - | ||||
| Increase in valuation allowance | 15,325 | - | |||||
| Balance at end of period | $ | 15,287 | $ | - | |||
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Note 6. Loans and the Allowance for Loan Losses – (continued)
Loans receivable: The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred loan fees, at September 30, 2017as of March 31, 2022 and December 31, 2016:2021:
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (dollars in thousands) | ||||||||
| Commercial | $ | 641,613 | $ | 553,576 | ||||
| Commercial real estate | 2,585,205 | 2,204,710 | ||||||
| Commercial construction | 399,453 | 486,228 | ||||||
| Residential real estate | 264,244 | 232,547 | ||||||
| Consumer | 1,912 | 2,380 | ||||||
| Gross loans | 3,892,427 | 3,479,441 | ||||||
| Net deferred loan fees | (3,138 | ) | (3,609 | ) | ||||
| Total loans receivable | $ | 3,889,289 | $ | 3,475,832 | ||||
| March 31, 2022 | December 31, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Commercial (1) | $ | 1,278,477 | $ | 1,299,428 | ||||
| Commercial real estate | 4,919,093 | 4,741,590 | ||||||
| Commercial construction | 539,058 | 540,178 | ||||||
| Residential real estate | 250,205 | 255,269 | ||||||
| Consumer | 1,140 | 1,886 | ||||||
| Gross loans | 6,987,973 | 6,838,351 | ||||||
| Net deferred loan fees | (8,378 | ) | (9,729 | ) | ||||
| Total loans receivable | $ | 6,979,595 | $ | 6,828,622 | ||||
| (1) | Included in commercial loans as of March 31, 2022 and December 31, 2021 are PPP loans of $54.3 million and $93.1 million, respectively. |
At September 30, 2017As of both March 31, 2022 and December 31, 2016,2021, loan balances of approximately $1.9$2.5 billion and $1.8 billion, respectively, were pledged to secure borrowings from the FHLB of New York.
Purchased Credit-Impaired Loans:Loans held-for-sale - The Company holds purchasedfollowing table sets forth the composition of the Company’s loans for which there was, at their acquisition date, evidenceheld-for-sale portfolio as of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investment of those loans is as follows at September 30, 2017March 31, 2022 and December 31, 2016.2021:
| September 30, | December 31, | |||||
| 2017 | 2016 | |||||
| (dollars in thousands) | ||||||
| Commercial | $ | 5,243 | $ | 7,098 | ||
| Commercial real estate | 232 | 982 | ||||
| Total carrying amount | $ | 5,475 | $ | 8,080 | ||
| March 31, 2022 | December 31, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Commercial real estate | $ | 2,390 | $ | - | ||||
| Residential real estate | 352 | 250 | ||||||
| Total carrying amount | $ | 2,742 | $ | 250 | ||||
For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during both the three and nine months ended September 30, 2017 and September 30, 2016. There were no reversals from the allowance for loan losses during the three and nine months ended September 30, 2017 and 2016.
Loans Receivable on Nonaccrual Status - The following tables presents the accretable yield, or income expected to be collected, on the purchased credit-impairedpresent nonaccrual loans for the following periods:with an ACL and nonaccrual loans without an ACL as of March 31, 2022 and December 31, 2021:
| Three Months | Three Months | |||||||
| Ended | Ended | |||||||
| September 30, | September 30, | |||||||
| 2017 | 2016 | |||||||
| (dollars in thousands) | ||||||||
| Balance at beginning of period | $ | 2,496 | $ | 3,233 | ||||
| Accretion of income | (180 | ) | (185 | ) | ||||
| Balance at end of period | $ | 2,316 | $ | 3,048 | ||||
| Nine Months | Nine Months | |||||||
| Ended | Ended | |||||||
| September 30, | September 30, | |||||||
| 2017 | 2016 | |||||||
| (dollars in thousands) | ||||||||
| Balance at beginning of period | $ | 2,860 | $ | 3,599 | ||||
| Accretion of income | (544 | ) | (551 | ) | ||||
| Balance at end of period | $ | 2,316 | $ | 3,048 | ||||
| March 31, 2022 | ||||||||||||
| Nonaccrual loans with ACL | Nonaccrual loans without ACL | Total Nonaccrual loans | ||||||||||
| (dollars in thousands) | ||||||||||||
| Commercial | $ | 29,148 | $ | 1,193 | $ | 30,341 | ||||||
| Commercial real estate | 17,497 | 8,819 | 26,316 | |||||||||
| Commercial construction | - | - | - | |||||||||
| Residential real estate | 1,172 | 1,574 | 2,746 | |||||||||
| Consumer | - | - | - | |||||||||
| Total | $ | 47,817 | $ | 11,586 | $ | 59,403 | ||||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)
Loans Receivable on Nonaccrual Status:The following tables presents nonaccrual loans included in loans receivable by loan segment as of the periods presented:
| September 30, | December 31, | |||||
| 2017 | 2016 | |||||
| (dollars in thousands) | ||||||
| Commercial | $ | 951 | $ | 1,460 | ||
| Commercial real estate | 8,369 | 1,081 | ||||
| Residential real estate | 4,435 | 3,193 | ||||
| Total loans receivable on nonaccrual status | $ | 13,755 | $ | 5,734 | ||
| December 31, 2021 | ||||||||||||
| Nonaccrual loans with ACL | Nonaccrual loans without ACL | Total Nonaccrual loans | ||||||||||
| (dollars in thousands) | ||||||||||||
| Commercial | $ | 28,746 | $ | 1,316 | $ | 30,062 | ||||||
| Commercial real estate | 15,362 | 10,031 | 25,393 | |||||||||
| Commercial construction | - | 3,150 | 3,150 | |||||||||
| Residential real estate | 1,239 | 1,856 | 3,095 | |||||||||
| Consumer | - | - | - | |||||||||
| Total | $ | 45,347 | $ | 16,353 | $ | 61,700 | ||||||
Nonaccrual loans and loans 90 days or greater past due and still accruing include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.
Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. 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 Company’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. All loans past due 90 days or greater and all impaired loans are included in the appropriate category below.
Credit Quality Indicators:The following table presents information, excluding loans held-for-sale and net deferred loan fees, about the Company’s loan credit quality at September 30, 2017 and December 31, 2016:
| September 30, 2017 | |||||||||||||||
| Special | |||||||||||||||
| Pass | Mention | Substandard | Doubtful | Total | |||||||||||
| (dollars in thousands) | |||||||||||||||
| Commercial | $ | 630,818 | $ | 3,882 | $ | 6,913 | $ | - | $ | 641,613 | |||||
| Commercial real estate | 2,535,005 | 30,875 | 19,325 | - | 2,585,205 | ||||||||||
| Commercial construction | 393,625 | 3,239 | 2,589 | - | 399,453 | ||||||||||
| Residential real estate | 264,244 | - | - | - | 264,244 | ||||||||||
| Consumer | 1,912 | - | - | - | 1,912 | ||||||||||
| Gross loans | $ | 3,825,604 | $ | 37,996 | $ | 28,827 | $ | - | $ | 3,892,427 | |||||
| December 31, 2016 | |||||||||||||||
| Special | |||||||||||||||
| Pass | Mention | Substandard | Doubtful | Total | |||||||||||
| (dollars in thousands) | |||||||||||||||
| Commercial | $ | 539,961 | $ | 3,255 | $ | 10,360 | $ | - | $ | 553,576 | |||||
| Commercial real estate | 2,154,343 | 31,173 | 19,194 | - | 2,204,710 | ||||||||||
| Commercial construction | 480,319 | 3,388 | 2,521 | - | 486,228 | ||||||||||
| Residential real estate | 228,990 | - | 3,557 | - | 232,547 | ||||||||||
| Consumer | 2,318 | - | 62 | - | 2,380 | ||||||||||
| Gross loans | $ | 3,405,931 | $ | 37,816 | $ | 35,694 | $ | - | $ | 3,479,441 | |||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)
We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP. Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below. The following table provides an analysis of the impairedpresents loans by segmentorigination and risk designation as of September 30, 2017 and DecemberMarch 31, 2016:2022 (dollars in thousands):
| September 30, 2017 | |||||||||
| Unpaid | |||||||||
| Recorded | Principal | Related | |||||||
| Investment | Balance | Allowance | |||||||
| No related allowance recorded | (dollars in thousands) | ||||||||
| Commercial | $ | 3,068 | $ | 3,073 | |||||
| Commercial real estate | 19,221 | 19,283 | |||||||
| Commercial construction | 4,340 | 4,340 | |||||||
| Residential real estate | 2,520 | 2,749 | |||||||
| Consumer | 46 | 46 | |||||||
| Total | $ | 29,195 | $ | 29,491 | |||||
| With an allowance recorded | |||||||||
| Commercial real estate | $ | 1,640 | $ | 2,052 | $ | 110 | |||
| Total | |||||||||
| Commercial | $ | 3,068 | $ | 3,073 | $ | - | |||
| Commercial real estate | 20,861 | 21,335 | 110 | ||||||
| Commercial construction | 4,340 | 4,340 | - | ||||||
| Residential real estate | 2,520 | 2,749 | - | ||||||
| Consumer | 46 | 46 | - | ||||||
| Total (including allowance) | $ | 30,835 | $ | 31,543 | $ | 110 | |||
| December 31, 2016 | |||||||||
| Unpaid | |||||||||
| Recorded | Principal | Related | |||||||
| Investment | Balance | Allowance | |||||||
| No related allowance recorded | (dollars in thousands) | ||||||||
| Commercial | $ | 3,637 | $ | 4,063 | |||||
| Commercial real estate | 18,288 | 18,288 | |||||||
| Commercial construction | 5,909 | 5,909 | |||||||
| Residential real estate | 1,851 | 2,055 | |||||||
| Consumer | 62 | 62 | |||||||
| Total | $ | 29,747 | $ | 30,377 | |||||
| With an allowance recorded | |||||||||
| Commercial real estate | $ | 1,244 | $ | 1,244 | $ | 145 | |||
| Total | |||||||||
| Commercial | $ | 3,637 | $ | 4,063 | $ | - | |||
| Commercial real estate | 19,532 | 19,532 | 145 | ||||||
| Commercial construction | 5,909 | 5,909 | - | ||||||
| Residential real estate | 1,851 | 2,055 | - | ||||||
| Consumer | 62 | 62 | - | ||||||
| Total (including allowance) | $ | 30,991 | $ | 31,621 | $ | 145 | |||
| Term loans amortized cost basis by origination year | Revolving | Total | ||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Loans | Gross Loans | |||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||
| Pass | $ | 38,767 | $ | 371,431 | $ | 56,980 | $ | 41,829 | $ | 58,230 | $ | 175,970 | $ | 471,742 | $ | 1,214,949 | ||||||||||||||||
| Special mention | - | - | - | - | 632 | 9,656 | 4,310 | 14,598 | ||||||||||||||||||||||||
| Substandard | 448 | 164 | - | 1,649 | 12,203 | 20,388 | 14,078 | 48,930 | ||||||||||||||||||||||||
| Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total Commercial | $ | 39,215 | $ | 371,595 | $ | 56,980 | $ | 43,478 | $ | 71,065 | $ | 206,014 | $ | 490,130 | $ | 1,278,477 | ||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||||||||
| Pass | $ | 371,604 | $ | 1,655,013 | $ | 507,117 | $ | 389,017 | $ | 452,309 | $ | 1,241,085 | $ | 166,342 | $ | 4,782,487 | ||||||||||||||||
| Special mention | - | - | - | 3,340 | - | 53,982 | 15,537 | 72,859 | ||||||||||||||||||||||||
| Substandard | - | 1,958 | 4,500 | 7,302 | 20,445 | 21,117 | 8,425 | 63,747 | ||||||||||||||||||||||||
| Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total Commercial Real Estate | $ | 371,604 | $ | 1,656,971 | $ | 511,617 | $ | 399,659 | $ | 472,754 | $ | 1,316,184 | $ | 190,304 | $ | 4,919,093 | ||||||||||||||||
| Commercial Construction | ||||||||||||||||||||||||||||||||
| Pass | $ | - | $ | 1,518 | $ | 7,370 | $ | 6,508 | $ | 2,600 | $ | - | $ | 510,174 | $ | 528,170 | ||||||||||||||||
| Special mention | - | - | - | - | 350 | - | 1,443 | 1,793 | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | - | 9,095 | 9,095 | ||||||||||||||||||||||||
| Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total Commercial Construction | $ | - | $ | 1,518 | $ | 7,370 | $ | 6,508 | $ | 2,950 | $ | - | $ | 520,712 | $ | 539,058 | ||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||||||||||
| Pass | $ | 9,604 | $ | 25,905 | $ | 27,697 | $ | 23,056 | $ | 23,589 | $ | 88,610 | $ | 42,361 | $ | 240,822 | ||||||||||||||||
| Special mention | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | 5,919 | 3,464 | 9,383 | ||||||||||||||||||||||||
| Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total Residential Real Estate | $ | 9,604 | $ | 25,905 | $ | 27,697 | $ | 23,056 | $ | 23,589 | $ | 94,529 | $ | 45,825 | $ | 250,205 | ||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||
| Pass | $ | 908 | $ | - | $ | 75 | $ | 35 | $ | 17 | $ | 4 | $ | 101 | $ | 1,140 | ||||||||||||||||
| Special mention | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total Consumer | $ | 908 | $ | - | $ | 75 | $ | 35 | $ | 17 | $ | 4 | $ | 101 | $ | 1,140 | ||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Pass | $ | 420,883 | $ | 2,053,867 | $ | 599,239 | $ | 460,445 | $ | 536,745 | $ | 1,505,669 | $ | 1,190,720 | $ | 6,767,568 | ||||||||||||||||
| Special mention | - | - | - | 3,340 | 982 | 63,638 | 21,290 | 89,250 | ||||||||||||||||||||||||
| Substandard | 448 | 2,122 | 4,500 | 8,951 | 32,648 | 47,424 | 35,062 | 131,155 | ||||||||||||||||||||||||
| Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Grand Total | $ | 421,331 | $ | 2,055,989 | $ | 603,739 | $ | 472,736 | $ | 570,375 | $ | 1,616,731 | $ | 1,247,072 | $ | 6,987,973 | ||||||||||||||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)
The following table provides an analysis related to the average recorded investment and interest income recognized on impairedpresents loans by segmentorigination and risk designation as of andDecember 31, 2021 (dollars in thousands):
| Term loans amortized cost basis by origination year | Revolving | Total | ||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2018 | 8.5 | Prior | Loans | Gross Loans | |||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||
| Pass | $ | 403,203 | $ | 58,534 | $ | 54,485 | $ | 60,409 | $ | 95,727 | $ | 86,556 | $ | 471,588 | $ | 1,230,502 | ||||||||||||||||
| Special mention | - | - | - | - | 1 | 4,045 | 4,266 | 8,312 | ||||||||||||||||||||||||
| Substandard | 170 | - | 1,842 | 13,298 | 9,740 | 21,024 | 14,540 | 60,614 | ||||||||||||||||||||||||
| Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total Commercial | $ | 403,373 | $ | 58,534 | $ | 56,327 | $ | 73,707 | $ | 105,468 | $ | 111,625 | $ | 490,394 | $ | 1,299,428 | ||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||||||||
| Pass | $ | 1,692,098 | $ | 533,315 | $ | 420,995 | $ | 452,262 | $ | 497,065 | $ | 842,244 | $ | 170,721 | $ | 4,608,700 | ||||||||||||||||
| Special mention | - | - | - | - | 5,142 | 50,438 | 6,601 | 62,181 | ||||||||||||||||||||||||
| Substandard | 1,968 | 9,039 | 4,006 | 20,624 | - | 26,108 | 8,964 | 70,709 | ||||||||||||||||||||||||
| Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total Commercial Real Estate | $ | 1,694,066 | $ | 542,354 | $ | 425,001 | $ | 472,886 | $ | 502,207 | $ | 918,790 | $ | 186,286 | $ | 4,741,590 | ||||||||||||||||
| Commercial Construction | ||||||||||||||||||||||||||||||||
| Pass | $ | 8,018 | $ | 7,370 | $ | 12,625 | $ | 2,600 | $ | 2,339 | $ | - | $ | 490,119 | $ | 523,071 | ||||||||||||||||
| Special mention | - | - | - | - | 350 | - | 1,443 | 1,793 | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | - | 15,314 | 15,314 | ||||||||||||||||||||||||
| Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total Commercial Construction | $ | 8,018 | $ | 7,370 | $ | 12,625 | $ | 2,600 | $ | 2,689 | $ | - | $ | 506,876 | $ | 540,178 | ||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||||||||||
| Pass | $ | 27,081 | $ | 29,539 | $ | 23,611 | $ | 25,070 | $ | 28,701 | $ | 66,249 | $ | 44,221 | $ | 244,472 | ||||||||||||||||
| Special mention | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | 7,262 | 3,535 | 10,797 | ||||||||||||||||||||||||
| Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total Residential Real Estate | $ | 27,081 | $ | 29,539 | $ | 23,611 | $ | 25,070 | $ | 28,701 | $ | 73,511 | $ | 47,756 | $ | 255,269 | ||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||
| Pass | $ | 1,594 | $ | 85 | $ | 39 | $ | 21 | $ | 28 | $ | (4 | ) | $ | 123 | $ | 1,886 | |||||||||||||||
| Special mention | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total Consumer | $ | 1,594 | $ | 85 | $ | 39 | $ | 21 | $ | 28 | $ | (4 | ) | $ | 123 | $ | 1,886 | |||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Pass | $ | 2,131,994 | $ | 628,843 | $ | 511,755 | $ | 540,362 | $ | 623,860 | $ | 995,045 | $ | 1,176,772 | $ | 6,608,631 | ||||||||||||||||
| Special mention | - | - | - | - | 5,493 | 54,483 | 12,310 | 72,286 | ||||||||||||||||||||||||
| Substandard | 2,138 | 9,039 | 5,848 | 33,922 | 9,740 | 54,394 | 42,353 | 157,434 | ||||||||||||||||||||||||
| Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Grand Total | $ | 2,134,132 | $ | 637,882 | $ | 517,603 | $ | 574,284 | $ | 639,093 | $ | 1,103,922 | $ | 1,231,435 | $ | 6,838,351 | ||||||||||||||||
Collateral Dependent Loans: Loans which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses. The evaluation is determined on an individual basis using the three and nine months ended September 30, 2017 and 2016:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||
| Average | Interest | Average | Interest | Average | Interest | Average | Interest | |||||||||||||||||
| Recorded | Income | Recorded | Income | Recorded | Income | Recorded | Income | |||||||||||||||||
| Investment | Recognized | Investment | Recognized | Investment | Recognized | Investment | Recognized | |||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Impaired loans (no allowance) | ||||||||||||||||||||||||
| Commercial | $ | 3,100 | $ | 34 | $ | 6,704 | $ | 66 | $ | 3,149 | $ | 115 | $ | 4,317 | $ | 86 | ||||||||
| Commercial real estate | 19,302 | 221 | 9,129 | 65 | 18,813 | 424 | 8,167 | 118 | ||||||||||||||||
| Commercial construction | 4,285 | 63 | 1,224 | 21 | 4,273 | 215 | 979 | 54 | ||||||||||||||||
| Residential real estate | 2,529 | 2 | 3,271 | 5 | 2,551 | 6 | 3,247 | 15 | ||||||||||||||||
| Consumer | 48 | 1 | 70 | 1 | 54 | 2 | 74 | 3 | ||||||||||||||||
| Total | $ | 29,264 | $ | 321 | $ | 20,398 | $ | 158 | $ | 28,840 | $ | 762 | $ | 16,784 | $ | 276 | ||||||||
| Impaired loans (allowance): | ||||||||||||||||||||||||
| Commercial | $ | - | $ | - | $ | 91,393 | $ | 925 | $ | - | $ | - | $ | 85,620 | $ | 2,447 | ||||||||
| Commercial real estate | 1,645 | 2 | 153 | - | 1,654 | 39 | 153 | - | ||||||||||||||||
| Total | $ | 1,645 | $ | 2 | $ | 91,546 | $ | 925 | $ | 1,654 | $ | 39 | $ | 85,773 | $ | 2,447 | ||||||||
| Total impaired loans: | ||||||||||||||||||||||||
| Commercial | $ | 3,100 | $ | 34 | $ | 98,097 | $ | 991 | $ | 3,149 | $ | 115 | $ | 89,937 | $ | 2,533 | ||||||||
| Commercial real estate | 20,947 | 223 | 9,282 | 65 | 20,467 | 463 | 8,320 | 118 | ||||||||||||||||
| Commercial construction | 4,285 | 63 | 1,224 | 21 | 4,273 | 215 | 979 | 54 | ||||||||||||||||
| Residential mortgage | 2,259 | 2 | 3,271 | 5 | 2,551 | 6 | 3,247 | 15 | ||||||||||||||||
| Consumer | 48 | 1 | 70 | 1 | 54 | 2 | 74 | 3 | ||||||||||||||||
| Total | $ | 30,909 | $ | 323 | $ | 111,944 | $ | 1,083 | $ | 30,494 | $ | 801 | $ | 102,557 | $ | 2,723 | ||||||||
Included in impairedfair value of the collateral as of the reporting date. The following table presents collateral dependent loans at September 30, 2017that were individually evaluated for impairment as of March 31, 2022 and December 31, 2016 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 behalf2021:
| March 31, 2022 | ||||||||||||
| Real Estate | Other | Total | ||||||||||
| (dollars in thousands) | ||||||||||||
| Commercial | $ | 6,120 | $ | 25,982 | $ | 32,102 | ||||||
| Commercial real estate | 62,753 | - | 62,753 | |||||||||
| Commercial construction | 7,042 | - | 7,042 | |||||||||
| Residential real estate | 7,528 | - | 7,528 | |||||||||
| Consumer | - | - | - | |||||||||
| Total | $ | 83,443 | $ | 25,982 | $ | 109,425 | ||||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)
| December 31, 2021 | ||||||||||||
| Real Estate | Other | Total | ||||||||||
| (dollars in thousands) | ||||||||||||
| Commercial | $ | 6,385 | $ | 26,182 | $ | 32,567 | ||||||
| Commercial real estate | 55,244 | - | 55,244 | |||||||||
| Commercial construction | 13,196 | - | 13,196 | |||||||||
| Residential real estate | 8,856 | - | 8,856 | |||||||||
| Consumer | - | - | - | |||||||||
| Total | $ | 83,681 | $ | 26,182 | $ | 109,863 | ||||||
Aging Analysis -
The following table provides an analysis of the aging of grossthe loans (excluding loans held-for-sale)by class, excluding net deferred fees, that are past due at September 30, 2017as of March 31, 2022 and December 31, 2016 by segment:2021:
Aging Analysis
| September 30, 2017 | |||||||||||||||||||||
| 90 Days or | |||||||||||||||||||||
| Greater Past | Total Past | ||||||||||||||||||||
| 30-59 Days | 60-89 Days | Due and Still | Due and | ||||||||||||||||||
| Past Due | Past Due | Accruing | Nonaccrual | Nonaccrual | Current | Gross Loans | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
| Commercial | $ | 199 | $ | 288 | $ | 4,209 | $ | 951 | $ | 5,647 | $ | 635,966 | $ | 641,613 | |||||||
| Commercial real estate | 586 | 8,057 | - | 8,369 | 17,012 | 2,568,193 | 2,585,205 | ||||||||||||||
| Commercial construction | - | - | - | - | - | 399,453 | 399,453 | ||||||||||||||
| Residential real estate | 918 | 541 | - | 4,435 | 5,894 | 258,350 | 264,244 | ||||||||||||||
| Consumer | - | 2 | - | - | 2 | 1,910 | 1,912 | ||||||||||||||
| Total | $ | 1,703 | $ | 8,888 | $ | 4,209 | $ | 13,755 | $ | 28,555 | $ | 3,863,872 | $ | 3,892,427 | |||||||
| December 31, 2016 | |||||||||||||||||||||
| 90 Days or | |||||||||||||||||||||
| Greater Past | Total Past | ||||||||||||||||||||
| 30-59 Days | 60-89 Days | Due and Still | Due and | ||||||||||||||||||
| Past Due | Past Due | Accruing | Nonaccrual | Nonaccrual | Current | Gross Loans | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
| Commercial | $ | 475 | $ | 18 | $ | 4,630 | $ | 1,460 | $ | 6,583 | $ | 546,993 | $ | 553,576 | |||||||
| Commercial real estate | 4,928 | 1,584 | 663 | 1,081 | 8,256 | 2,196,454 | 2,204,710 | ||||||||||||||
| Commercial construction | - | - | - | - | - | 486,228 | 486,228 | ||||||||||||||
| Residential real estate | 2,131 | 388 | - | 3,193 | 5,712 | 223,835 | 232,547 | ||||||||||||||
| Consumer | - | - | - | - | - | 2,380 | 2.380 | ||||||||||||||
| Total | $ | 7,534 | $ | 1,990 | $ | 5,293 | $ | 5,734 | $ | 20,551 | $ | 3,458,890 | $ | 3,479,441 | |||||||
| March 31, 2022 | ||||||||||||||||||||||||||||
| 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due and Still Accruing | Nonaccrual | Total Past Due and Nonaccrual | Current | Gross Loans | ||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| Commercial | $ | 3,561 | $ | - | $ | 4,420 | $ | 30,341 | $ | 38,322 | $ | 1,240,155 | $ | 1,278,477 | ||||||||||||||
| Commercial real Estate | 3,098 | - | 5,848 | 26,316 | 35,262 | 4,883,831 | 4,919,093 | |||||||||||||||||||||
| Commercial construction | 123 | - | - | - | 123 | 538,935 | 539,058 | |||||||||||||||||||||
| Residential real Estate | 1,970 | - | 1,487 | 2,746 | 6,203 | 244,002 | 250,205 | |||||||||||||||||||||
| Consumer | - | - | 625 | - | 625 | 515 | 1,140 | |||||||||||||||||||||
| Total | $ | 8,752 | $ | - | $ | 12,380 | $ | 59,403 | $ | 80,535 | $ | 6,907,438 | $ | 6,987,973 | ||||||||||||||
Included in the 90 days or greater past due and still accruing/accreting category as of both September 30, 2017 and December 31, 2016 are three purchased credit-impaired loans, net of their fair value marks, which are accreting income per their valuation at date of acquisition.
| December 31, 2021 | ||||||||||||||||||||||||||||
| 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due and Still Accruing | Nonaccrual | Total Past Due and Nonaccrual | Current | Gross Loans | ||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| Commercial | $ | 4,305 | $ | 729 | $ | 4,457 | $ | 30,062 | $ | 39,553 | $ | 1,259,875 | $ | 1,299,428 | ||||||||||||||
| Commercial real Estate | 1,622 | 1,009 | 5,935 | 25,393 | 33,959 | 4,707,631 | 4,741,590 | |||||||||||||||||||||
| Commercial construction | - | - | - | 3,150 | 3,150 | 537,028 | 540,178 | |||||||||||||||||||||
| Residential real Estate | 1,437 | 292 | 3,139 | 3,095 | 7,963 | 247,306 | 255,269 | |||||||||||||||||||||
| Consumer | - | - | - | - | - | 1,886 | 1,886 | |||||||||||||||||||||
| Total | $ | 7,364 | $ | 2,030 | $ | 13,531 | $ | 61,700 | $ | 84,625 | $ | 6,753,726 | $ | 6,838,351 | ||||||||||||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)
The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated credit quality, and the related portion of the allowance for loancredit losses (“ALLL”) that are allocated to each loan portfolio segment:
| September 30, 2017 | |||||||||||||||||||||
| Commercial | Commercial | Residential | |||||||||||||||||||
| Commercial | real estate | construction | real estate | Consumer | Unallocated | Total | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
| ALLL | |||||||||||||||||||||
| Individually evaluated for impairment | $ | - | $ | 110 | $ | - | $ | - | $ | - | $ | - | $ | 110 | |||||||
| Collectively evaluated for impairment | 7,716 | 15,224 | 3,940 | 1,052 | 2 | 326 | 28,260 | ||||||||||||||
| Acquired portfolio | - | 1,500 | - | - | - | - | 1,500 | ||||||||||||||
| Acquired with deteriorated credit quality | - | - | - | - | - | - | - | ||||||||||||||
| Total ALLL | $ | 7,716 | $ | 16,834 | $ | 3,940 | $ | 1,052 | $ | 2 | $ | 326 | $ | 29,870 | |||||||
| Gross loans | |||||||||||||||||||||
| Individually evaluated for impairment | $ | 3,068 | $ | 20,861 | $ | 4,340 | $ | 2,520 | $ | 46 | $ | 30,835 | |||||||||
| Collectively evaluated for impairment | 618,012 | 2,142,385 | 395,113 | 199,902 | 1,410 | 3,356,822 | |||||||||||||||
| Acquired portfolio | 15,290 | 421,727 | - | 61,822 | 456 | 499,295 | |||||||||||||||
| Acquired with deteriorated credit quality | 5,243 | 232 | - | - | - | 5,475 | |||||||||||||||
| Total gross loans | $ | 641,613 | $ | 2,585,205 | $ | 399,453 | $ | 264,244 | $ | 1,912 | $ | 3,892,427 | |||||||||
| December 31, 2016 | |||||||||||||||||||||
| Commercial | Commercial | Residential | |||||||||||||||||||
| Commercial | real estate | construction | real estate | Consumer | Unallocated | Total | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
| ALLL | |||||||||||||||||||||
| Individually evaluated for impairment | $ | - | $ | 145 | $ | - | $ | - | $ | - | $ | - | $ | 145 | |||||||
| Collectively evaluated for impairment | 6,632 | 12,438 | 4,789 | 958 | 3 | 779 | 25,599 | ||||||||||||||
| Acquired portfolio | - | - | - | - | - | - | - | ||||||||||||||
| Acquired with deteriorated credit quality | - | - | - | - | - | - | - | ||||||||||||||
| Total ALLL | $ | 6,632 | $ | 12,583 | $ | 4,789 | $ | 958 | $ | 3 | $ | 779 | $ | 25,744 | |||||||
| Gross loans | |||||||||||||||||||||
| Individually evaluated for impairment | $ | 3,637 | $ | 19,532 | $ | 5,909 | $ | 1,851 | $ | 62 | $ | 30,991 | |||||||||
| Collectively evaluated for impairment | 517,869 | 1,621,745 | 478,865 | 163,686 | 1,757 | 2,783,922 | |||||||||||||||
| Acquired portfolio | 24,972 | 562,451 | 1,454 | 67,010 | 561 | 656,448 | |||||||||||||||
| Acquired with deteriorated credit quality | 7,098 | 982 | - | - | - | 8,080 | |||||||||||||||
| Total gross loans | $ | 553,576 | $ | 2,204,710 | $ | 486,228 | $ | 232,547 | $ | 2,380 | $ | 3,479,441 | |||||||||
| March 31, 2022 | ||||||||||||||||||||||||
| Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Total | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Allowance for credit losses - loans | ||||||||||||||||||||||||
| Individually evaluated impairment | $ | 14,028 | $ | 1,859 | $ | - | $ | 94 | $ | - | $ | 15,981 | ||||||||||||
| Collectively evaluated impairment | 9,154 | 44,088 | 3,281 | 3,361 | 7 | 59,891 | ||||||||||||||||||
| Acquired with deteriorated credit quality individually analyzed | 2,277 | 1,921 | - | - | - | 4,198 | ||||||||||||||||||
| Total | $ | 25,459 | $ | 47,868 | $ | 3,281 | $ | 3,455 | $ | 7 | $ | 80,070 | ||||||||||||
| Gross loans | ||||||||||||||||||||||||
| Individually evaluated impairment | $ | 34,224 | $ | 56,905 | $ | 7,042 | $ | 5,415 | $ | - | $ | 103,586 | ||||||||||||
| Collectively evaluated impairment | 1,239,157 | 4,856,340 | 532,016 | 242,678 | 1,140 | 6,871,331 | ||||||||||||||||||
| Acquired with deteriorated credit quality individually analyzed | 5,096 | 5,848 | - | 2,112 | - | 13,056 | ||||||||||||||||||
| Total | $ | 1,278,477 | $ | 4,919,093 | $ | 539,058 | $ | 250,205 | $ | 1,140 | $ | 6,987,973 | ||||||||||||
December 31, 2021 | ||||||||||||||||||||||||
| Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Total | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Allowance for credit losses - loans | ||||||||||||||||||||||||
| Individually evaluated impairment | $ | 15,131 | $ | 955 | $ | - | $ | 131 | $ | - | $ | 16,217 | ||||||||||||
| Collectively evaluated impairment | 8,561 | 42,713 | 3,580 | 3,497 | 7 | 58,358 | ||||||||||||||||||
| Acquired with deteriorated credit quality individually analyzed | 2,277 | 1,921 | - | �� | - | - | 4,198 | |||||||||||||||||
| Total | $ | 25,969 | $ | 45,589 | $ | 3,580 | $ | 3,628 | $ | 7 | $ | 78,773 | ||||||||||||
| Gross loans | ||||||||||||||||||||||||
| Individually evaluated impairment | $ | 33,726 | $ | 49,310 | $ | 13,196 | $ | 5,717 | $ | - | $ | 101,949 | ||||||||||||
| Collectively evaluated impairment | 1,260,537 | 4,686,346 | 526,982 | 246,413 | 1,886 | 6,722,164 | ||||||||||||||||||
| Acquired with deteriorated credit quality individually analyzed | 5,165 | 5,934 | - | 3,139 | - | 14,238 | ||||||||||||||||||
| Total | $ | 1,299,428 | $ | 4,741,590 | $ | 540,178 | $ | 255,269 | $ | 1,886 | $ | 6,838,351 | ||||||||||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)
The Company’s allowance for loan 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 losses (“ALLL”) methodology as disclosed
Activity in the Company’s Annual Report on Form 10-KACL for loans for the yearthree months ended March 31, 2022 is summarized in the table below.
| Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||
| Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | 25,969 | $ | 45,589 | $ | 3,580 | $ | 3,628 | $ | 7 | $ | - | $ | 78,773 | ||||||||||||||
| Charge-offs | (49 | ) | (225 | ) | - | - | - | - | (274 | ) | ||||||||||||||||||
| Recoveries | 1 | - | - | 31 | - | - | 32 | |||||||||||||||||||||
| (Reversal of) provision for credit losses (loans) | (462 | ) | 2,504 | (299 | ) | (204 | ) | - | - | 1,539 | ||||||||||||||||||
| Balance as of March 31, 2022 | $ | 25,459 | $ | 47,868 | $ | 3,281 | $ | 3,455 | $ | 7 | $ | - | $ | 80,070 | ||||||||||||||
Activity in the Company’s ACL for loans for the three months ended March 31, 2021 is summarized in the table below. The CECL Day 1 row presents adjustments recorded through retained earnings to adopt the CECL standard and the increase to the ACL for loans associated with nonaccretable purchase accounting marks on loans that were classified as PCI as of December 31, 2016.2020.
A summary of the activity in the ALLL is as follows:
| Three Months Ended September 30, 2017 | ||||||||||||||||||||||||||||
| Commercial | Commercial | Residential | ||||||||||||||||||||||||||
| Commercial | real estate | construction | real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| Balance at June 30, 2017 | $ | 7,238 | $ | 15,389 | $ | 4,241 | $ | 985 | $ | 2 | $ | 546 | $ | 28,401 | ||||||||||||||
| Charge-offs | - | - | - | - | (1 | ) | - | (1 | ) | |||||||||||||||||||
| Recoveries | 17 | 2 | - | - | 1 | - | 20 | |||||||||||||||||||||
| Provision for loan losses | 461 | 1,443 | (301 | ) | 67 | - | (220 | ) | 1,450 | |||||||||||||||||||
| Balance at September 30,2017 | $ | 7,716 | $ | 16,834 | $ | 3,940 | $ | 1,052 | $ | 2 | $ | 326 | $ | 29,870 | ||||||||||||||
| Three Months Ended September 30, 2016 | ||||||||||||||||||||||||||||
| Commercial | Commercial | Residential | ||||||||||||||||||||||||||
| Commercial | real estate | construction | real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| Balance at June 30, 2016 | $ | 15,548 | $ | 11,371 | $ | 4,040 | $ | 1,091 | $ | 4 | $ | 709 | $ | 32,763 | ||||||||||||||
| Charge-offs | (1,878 | ) | - | - | (27 | ) | (5 | ) | - | (1,910 | ) | |||||||||||||||||
| Recoveries | 1 | 10 | - | - | 1 | - | 12 | |||||||||||||||||||||
| Provision for loan losses | 6,725 | (6 | ) | 32 | 110 | 4 | (115 | ) | 6,750 | |||||||||||||||||||
| Balance at September 30, 2016 | $ | 20,396 | $ | 11,375 | $ | 4,072 | $ | 1,174 | $ | 4 | $ | 594 | $ | 37,615 | ||||||||||||||
| Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||
| Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | 28,443 | $ | 39,330 | $ | 8,194 | $ | 2,687 | $ | 4 | $ | 568 | $ | 79,226 | ||||||||||||||
| Day 1 effect of CECL | (4,225 | ) | 9,605 | (961 | ) | 2,697 | 9 | (568 | ) | 6,557 | ||||||||||||||||||
| Balance as of January 1, 2021 as adjusted for changes in accounting principle | 24,218 | 48,935 | 7,233 | 5,384 | 13 | - | 85,783 | |||||||||||||||||||||
| Charge-offs | - | - | - | - | - | - | - | |||||||||||||||||||||
| Recoveries | 60 | - | - | - | 1 | - | 61 | |||||||||||||||||||||
| (Reversal of) provision for credit losses (loans) | 2,157 | (5,038 | ) | (1,712 | ) | (680 | ) | (3 | ) | - | (5,276 | ) | ||||||||||||||||
| Balance as of March 31, 2021 | $ | 26,435 | $ | 43,897 | $ | 5,521 | $ | 4,704 | $ | 11 | $ | - | $ | 80,568 | ||||||||||||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)
| Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||||||
| Commercial | Commercial | Residential | ||||||||||||||||||||||||||
| Commercial | real estate | construction | real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| Balance at December 31, 2016 | $ | 6,632 | $ | 12,583 | $ | 4,789 | $ | 958 | $ | 3 | $ | 779 | $ | 25,744 | ||||||||||||||
| Charge-offs | - | (71 | ) | - | - | (12 | ) | - | (83 | ) | ||||||||||||||||||
| Recoveries | 158 | 50 | - | - | 1 | - | 209 | |||||||||||||||||||||
| Provision for loan losses | 926 | 4,272 | (849 | ) | 94 | 10 | (453 | ) | 4,000 | |||||||||||||||||||
| Balance at September 30, 2017 | $ | 7,716 | $ | 16,834 | $ | 3,940 | $ | 1,052 | $ | 2 | $ | 326 | $ | 29,870 | ||||||||||||||
| Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||||||
| Commercial | Commercial | Residential | ||||||||||||||||||||||||||
| Commercial | real estate | construction | real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| Balance at December 31, 2015 | $ | 10,949 | $ | 10,926 | $ | 3,253 | $ | 976 | $ | 4 | $ | 464 | $ | 26,572 | ||||||||||||||
| Charge-offs | (2,396 | ) | - | - | (94 | ) | (10 | ) | - | (2,500 | ) | |||||||||||||||||
| Recoveries | 2 | 35 | - | 3 | 3 | - | 43 | |||||||||||||||||||||
| Provision for loan losses | 11,841 | 414 | 819 | 289 | 7 | 130 | 13,500 | |||||||||||||||||||||
| Balance at September 30, 2016 | $ | 20,396 | $ | 11,375 | $ | 4,072 | $ | 1,174 | $ | 4 | $ | 594 | $ | 37,615 | ||||||||||||||
Troubled Debt Restructurings
Loans are considered to have been modified in a troubled debt restructuring (“TDRs”) when, except as discussed below, due to a borrower’s financial difficulties, the Company 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 nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of ninesix 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 nonaccrual status.
At September 30, 2017,
As of March 31, 2022, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in troubled debt restructurings.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Note 6. Loans and the Allowance for Loan Losses – (continued)
The following table presents a rollforwardAs of TDRs and the related changes to the allowance for loan losses (“ALLL”) that occurred for the periods presented:
| Nine Months Ended | Year Ended | ||||||||||||||
| September 30, 2017 | December 31, 2016 | ||||||||||||||
| (dollars in thousands) | |||||||||||||||
| Recorded | Recorded | ||||||||||||||
| Investment | ALLL | Investment | ALLL | ||||||||||||
| Troubled Debt Restructurings | |||||||||||||||
| Beginning balance | $ | 13,818 | $ | - | $ | 86,629 | $ | 4,500 | |||||||
| Additions | 5,668 | - | 26,325 | 8,250 | |||||||||||
| Payoffs/paydowns | (1,309 | ) | - | (2,616 | ) | - | |||||||||
| Transfers | (580 | ) | - | (96,520 | ) | - | |||||||||
| Other | - | - | - | (12,750 | ) | ||||||||||
| Ending balance | $ | 17,597 | $ | - | $ | 13,818 | $ | - | |||||||
March 31, 2022, TDRs totaled $17.6$76.5 million, at September 30, 2017, of which $4.8$29.1 million were on nonaccrual status and $12.8$47.4 million were performing under their restructured terms. AtAs of December 31, 2016,2021, TDRs totaled $13.8$79.5 million, of which $0.5$35.9 million were on nonaccrual status and $13.3$43.6 million were performing under their restructured terms. The Company has allocated $9.1 million and $10.4 million of specific allowance related to TDRs as of September 30, 2017 did not increase the ALLLMarch 31, 2022 and December 31, 2021, respectively.
The following table presents loans by class modified as TDRs that occurred during the three and nine months ended September 30, 2017. There were no charge-offs in connection withMarch 31, 2022:
| Pre-Modification | Post-Modification | |||||||||||
| Outstanding | Outstanding | |||||||||||
| Number of | Recorded | Recorded | ||||||||||
| Loans | Investment | Investment | ||||||||||
| (dollars in thousands) | ||||||||||||
| Troubled debt restructurings: | ||||||||||||
| Commercial | 1 | $ | 98 | $ | 98 | |||||||
| Commercial real estate | 1 | 8,751 | 8,251 | |||||||||
| Total | 2 | $ | 8,849 | $ | 8,349 | |||||||
The commercial loan modified as a loan modification at the time of modificationTDR during the three or nine months ended September 30, 2017. March 31, 2022 was a maturity extension, while the commercial real estate loan modified as a TDR during the three months ended March 31, 2022 was an interest rate reduction, that was commensurate with a one-time, $500,000, principal paydown.
The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2021:
| Pre-Modification | Post-Modification | |||||||||||
| Outstanding | Outstanding | |||||||||||
| Number of | Recorded | Recorded | ||||||||||
| Loans | Investment | Investment | ||||||||||
| (dollars in thousands) | ||||||||||||
| Troubled debt restructurings: | ||||||||||||
| Commercial real estate | 1 | $ | 1,658 | $ | 1,658 | |||||||
| Residential real estate | 2 | 1,996 | 1,996 | |||||||||
| Total | 3 | $ | 3,654 | $ | 3,654 | |||||||
The two residential real estate loans modified as TDRs during the three months ended March 31, 2021 were maturity extensions, while the one commercial real estate loan was a recast of a nonaccrual credit.
There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2017.March 31, 2022 and March 31, 2021.
TDRs totaled $106.7 million at September 30, 2016, of which $1.4 million were on nonaccrual status and $105.3 million were performing under restructured terms. The Company had allocated $12.5 in specific allocations with respect to loans whose loan terms had been modified in troubled debt restructurings as of September 30, 2016. TDRs as of September 30, 2016 increased the ALLL by $5.0 and $8.3 million during the three and nine months ended September 30, 2016, respectively.
The $12.5 million in specific allocations referenced above were associated with New York City taxi medallion lending and were calculated based on the present value of estimated cash flows, including contractual debt interest service through maturity, and principal repayments based on the estimated fair value of the collateral excluding any consideration for personal guarantees of borrowers, which provide an additional source of repayment but cannot be relied upon.
The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2016 (dollars in thousands):
| Pre-Modification | Post-Modification | |||||||
| Outstanding | Outstanding | |||||||
| Number of | Recorded | Recorded | ||||||
| Loans | Investment | Investment | ||||||
| Troubled debt restructurings: | ||||||||
| Commercial | 16 | $ | 19,311 | $ | 19,311 | |||
| Commercial real estate | 2 | 581 | 581 | |||||
| Commercial construction | - | - | - | |||||
| Residential real estate | - | - | - | |||||
| Consumer | - | - | - | |||||
| Total | 18 | $ | 19,892 | $ | 19,892 | |||
Included in the above TDRs were 14 loans secured by 25 New York City taxi medallions totaling $17.3 million. These loan modifications included interest rate reductions and maturity extensions. All 14 loans were accruing prior to modification, while 13 remained in accrual status post-modification.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)
Allowance for Credit Losses for Unfunded Commitments
The TDRs described above increasedCompany has recorded an ACL for unfunded credit commitments, which was recorded in other liabilities. The provision is recorded within the (reversal of) provision for credit losses on the Company’s income statement. The following table presents a rollforward of the allowance for loancredit losses by $8.3 million duringfor unfunded commitments for the ninethree months ended September 30, 2016. There were no charge-offs in connection with a loan modification atMarch 31, 2022 and March 31, 2021:
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Balance at beginning of period | $ | 2,351 | $ | - | ||||
| Day 1 Effect of CECL | - | 2,833 | ||||||
| (Reversal of) provision for credit losses (unfunded commitments) | (89 | ) | (490 | ) | ||||
| Balance at end of period | $ | 2,262 | $ | 2,343 | ||||
Components of (Reversal of) Provision for Credit Losses
The following table summarizes the time of modification during(reversal of) provision for credit losses for the three and nine months ended September 30, 2016. There were no TDRs for which there was a payment default within twelve months following the modification during the three or nine months ended September 30, 2016.March 31, 2022 and March 31, 2021:
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Provision for (Reversal of) credit losses (loans) | $ | 1,539 | $ | (5,276 | ) | |||
| Reversal of credit losses (unfunded commitments) | (89 | ) | (490 | ) | ||||
| Provision for (Reversal of) credit losses | $ | 1,450 | $ | (5,766 | ) | |||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. -6. Fair Value Measurements and Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
FASB ASC 820-10-05 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurements and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
| Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
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.
Level 2: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | ||
| Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity). |
FASB ASC 820-10-05 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820-10-05 are as follows:
Level 1:Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2:Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3:Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at September 30, 2017as of March 31, 2022 and December 31, 2016:2021:
Securities Available-for-Sale
and Equity Securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)
Derivatives
: The fair value of derivatives is based on valuation models using observable market data as of the measurement date (level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to
value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
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, 2017as of March 31, 2022 and December 31, 20162021 are as follows:
| September 30, 2017 | ||||||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||
| Quoted Prices | ||||||||||||
| in Active | Significant | |||||||||||
| Markets for | Other | Significant | ||||||||||
| Identical | Observable | Unobservable | ||||||||||
| Assets | Inputs | Inputs | ||||||||||
| (Level 1) | (Level 2) | (Level 3) | ||||||||||
| (dollars in thousands) | ||||||||||||
| Recurring fair value measurements: | ||||||||||||
| Assets | ||||||||||||
| Securities: | ||||||||||||
| Federal agency obligations | $ | 55,938 | $ | - | $ | 55,938 | $ | - | ||||
| Residential mortgage pass-through securities | 133,164 | - | 133,164 | - | ||||||||
| Commercial mortgage pass-through securities | 4,130 | - | 4,130 | - | ||||||||
| Obligations of U.S. states and political subdivisions | 144,976 | - | 127,111 | 17,865 | ||||||||
| Trust preferred securities | 4,627 | - | 4,627 | - | ||||||||
| Corporate bonds and notes | 30,088 | - | 30,088 | - | ||||||||
| Asset-backed securities | 12,633 | - | 12,633 | - | ||||||||
| Certificates of deposit | 627 | - | 627 | - | ||||||||
| Equity securities | 630 | 630 | - | - | ||||||||
| Other securities | 13,703 | 13,703 | - | - | ||||||||
| Total available-for-sale | 400,516 | 14,333 | 368,318 | 17,865 | ||||||||
| Derivatives | 164 | - | 164 | - | ||||||||
| Total Assets | $ | 400,680 | $ | 14,333 | $ | 368,482 | $ | 17,865 | ||||
| March 31, 2022 | ||||||||||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Recurring fair value measurements: Assets | ||||||||||||||||
| Investment securities: | ||||||||||||||||
| Available-for-sale: | ||||||||||||||||
| Federal agency obligations | $ | 48,549 | $ | - | $ | 48,549 | $ | - | ||||||||
| Residential mortgage pass-through securities | 300,976 | - | 300,976 | - | ||||||||||||
| Commercial mortgage pass-through securities | 17,408 | - | 17,408 | - | ||||||||||||
| Obligations of U.S. states and political subdivision | 137,051 | - | 128,558 | 8,493 | ||||||||||||
| Corporate bonds and notes | 5,501 | - | 5,501 | - | ||||||||||||
| Asset-backed securities | 2,354 | - | 2,354 | - | ||||||||||||
| Certificates of deposit | - | - | - | - | ||||||||||||
| Other securities | 191 | 191 | - | - | ||||||||||||
| Total available-for-sale | 512,030 | 191 | 503,346 | 8,493 | ||||||||||||
| Equity securities | 13,198 | 10,550 | 2,648 | - | ||||||||||||
| Derivatives | 22,872 | - | 22,872 | - | ||||||||||||
| Total assets | $ | 548,100 | $ | 10,741 | $ | 528,866 | $ | 8,493 | ||||||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. -6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
| December 31, 2016 | ||||||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||
| Quoted Prices | ||||||||||||
| in Active | Significant | |||||||||||
| Markets for | Other | Significant | ||||||||||
| Identical | Observable | Unobservable | ||||||||||
| Assets | Inputs | Inputs | ||||||||||
| (Level 1) | (Level 2) | (Level 3) | ||||||||||
| (dollars in thousands) | ||||||||||||
| Recurring fair value measurements: | ||||||||||||
| Assets | ||||||||||||
| Securities: | ||||||||||||
| Federal agency obligations | $ | 52,837 | $ | - | $ | 52,837 | $ | - | ||||
| Residential mortgage pass-through securities | 72,497 | - | 72,497 | - | ||||||||
| Commercial mortgage pass-through securities | 4,209 | - | 4,209 | - | ||||||||
| Obligations of U.S. states and political subdivisions | 150,605 | - | 132,387 | 18,218 | ||||||||
| Trust preferred securities | 5,666 | - | 5,666 | - | ||||||||
| Corporate bonds and notes | 36,928 | - | 36,928 | - | ||||||||
| Asset-backed securities | 14,583 | - | 14,583 | - | ||||||||
| Certificates of deposit | 983 | - | 983 | - | ||||||||
| Equity securities | 568 | 568 | - | - | ||||||||
| Other securities | 14,414 | 14,414 | - | - | ||||||||
| Total available-for-sale | 353,290 | 14,982 | 320,090 | 18,218 | ||||||||
| Derivatives | 88 | - | 88 | - | ||||||||
| Total assets | $ | 353,378 | $ | 14,982 | $ | 320,178 | $ | 18,218 | ||||
| December 31, 2021 | ||||||||||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Recurring fair value measurements: Assets | ||||||||||||||||
| Investment securities: | ||||||||||||||||
| Available-for-sale: | ||||||||||||||||
| Federal agency obligations | $ | 50,360 | $ | - | $ | 50,360 | $ | - | ||||||||
| Residential mortgage pass- through securities | 316,095 | - | 316,095 | - | ||||||||||||
| Commercial mortgage pass-through securities | 10,469 | - | 10,469 | - | ||||||||||||
| Obligations of U.S. states and political subdivision | 145,625 | - | 137,060 | 8,565 | ||||||||||||
| Corporate bonds and notes | 9,049 | - | 9,049 | - | ||||||||||||
| Asset-backed securities | 2,564 | - | 2,564 | - | ||||||||||||
| Certificates of deposit | 150 | - | 150 | - | ||||||||||||
| Other securities | 195 | 195 | - | - | ||||||||||||
| Total available-for-sale | $ | 534,507 | $ | 195 | $ | 525,747 | $ | 8,565 | ||||||||
| Equity securities | 13,794 | 11,081 | 2,713 | - | ||||||||||||
| Derivatives | 3,347 | - | 3,347 | - | ||||||||||||
| Total assets | $ | 551,648 | $ | 11,276 | $ | 531,807 | $ | 8,565 | ||||||||
There were no transfers between Level 1 and Level 2 during the quarterthree months ended September 30, 2017March 31, 2022 and during the year ended December 31, 2016.2021.
Assets Measured at Fair Value on a Non-RecurringNonrecurring Basis
The Company may be required periodically to measure certain assets at fair value on a non-recurringnonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurringnonrecurring basis at September 30, 2017as of March 31, 2022 and December 31, 2016:2021.
Loans Held-for-Sale
: Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. Management obtains quotes or bids on all or partparts of these loans directly from the purchasing financial institutions (Level 2).
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)
Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. A portionFair value of these loans taxi medallion loans, have no material observable trading in any market. The approach to determining fair value involved several steps, including a detailed collateral analysisis determined based on the terms of the underlying medallions, performance projections for individual loans, discounted cash flow modeling and considerationloan, such as interest rate, maturity date, reset term, as well as sales of indicative bids, which at September 30, 2017 did not necessarily contemplate whole loan salessimilar assets (Level 3).
Impaired
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
Collateral Dependent Loans
: The Company may record adjustments to the carrying value of loans based on fair value measurements, generally as partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with GAAP. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the market placemarketplace and are also based on Level 3 inputs.
For assets measured at fair value on a non-recurringnonrecurring basis, the fair value measurements at September 30, 2017as of March 31, 2022 and December 31, 20162021 are as follows:
| Fair Value Measurements at Reporting Date Using | ||||||||||||
| Quoted | ||||||||||||
| Prices | ||||||||||||
| in Active | Significant | |||||||||||
| Markets for | Other | Significant | ||||||||||
| Identical | Observable | Unobservable | ||||||||||
| September | Assets | Inputs | Inputs | |||||||||
| Assets measured at fair value on a nonrecurring basis: | 30, 2017 | (Level 1) | (Level 2) | (Level 3) | ||||||||
| (dollars in thousands) | ||||||||||||
| Impaired loans: | ||||||||||||
| Commercial real estate | $ | 1,198 | $ | - | $ | - | $ | 1,198 | ||||
| Loans held-for-sale: | ||||||||||||
| Commercial | 47,430 | - | - | 47,430 | ||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||
| Quoted | ||||||||||||
| Prices | ||||||||||||
| in Active | Significant | |||||||||||
| Markets for | Other | Significant | ||||||||||
| Identical | Observable | Unobservable | ||||||||||
| December 31, | Assets | Inputs | Inputs | |||||||||
| Assets measured at fair value on a nonrecurring basis: | 2016 | (Level 1) | (Level 2) | (Level 3) | ||||||||
| (dollars in thousands) | ||||||||||||
| Impaired loans: | ||||||||||||
| Commercial real estate | $ | 1,099 | $ | - | $ | - | $ | 1,099 | ||||
| Loans held-for-sale: | ||||||||||||
| Commercial | 70,105 | - | 4,509 | 65,596 | ||||||||
| Commercial real estate | 7,712 | - | 7,712 | - | ||||||||
Impaired loans –
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Assets measured at fair value on a nonrecurring basis: | Carrying Value as of March 31, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Collateral dependent loans: | (dollars in thousands) | |||||||||||||||
| Commercial | $ | 14,698 | $ | - | $ | - | $ | 14,698 | ||||||||
| Commercial real estate | 29,370 | - | - | 29,370 | ||||||||||||
| Residential real estate | 1,366 | - | - | 1,366 | ||||||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Assets measured at fair value on a nonrecurring basis: | December 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Collateral dependent loans: | (dollars in thousands) | |||||||||||||||
| Commercial | $ | 13,399 | $ | - | $ | - | $ | 13,399 | ||||||||
| Commercial real estate | 20,185 | - | - | 20,185 | ||||||||||||
| Residential real estate | 2,794 | - | - | 2,794 | ||||||||||||
Collateral dependent impairedloans– Collateral dependent loans at September 30, 2017as of March 31, 2022 that required a valuation allowance were $1.3$62.4 million with a related valuation allowance of $0.1$16.9 million compared to $1.2$54.1 million with a related valuation allowance of $0.1$17.8 million atas of December 31, 2016.2021.
Loans held-for-sale –Loans held-for-sale at September 30, 2017 that required a valuation allowance were $62.7 million with a related valuation allowance of $15.3 million compared to $65.6 million with no valuation allowance at December 31, 2016.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. -6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
Assets Measured Withwith Significant Unobservable Level 3 Inputs
Recurring basis
The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the ninethree months ended September 30, 2017March 31, 2022 and for the year ended December 31, 2016:2021:
| Municipal | ||||
| Securities | ||||
| (dollars in thousands) | ||||
| Beginning balance, January 1, 2017 | $ | 18,218 | ||
| Principal paydowns | (353 | ) | ||
| Ending balance, September 30, 2017 | $ | 17,865 | ||
| Municipal | ||||
| Securities | ||||
| (dollars in thousands) | ||||
| Beginning balance, January 1, 2016 | $ | - | ||
| Other(1) | 18,335 | |||
| Principal paydowns | (117 | ) | ||
| Ending balance, December 31, 2016 | $ | 18,218 | ||
| Municipal Securities | ||||
| (dollars in thousands) | ||||
| Beginning balance, December 31, 2021 | $ | 8,565 | ||
| Principal paydowns | (72 | ) | ||
| Ending balance, March 31, 2022 | $ | 8,493 | ||
| Municipal Securities | ||||
| (dollars in thousands) | ||||
| Beginning balance, December 31, 2020 | $ | 8,844 | ||
| Principal paydowns | (279 | ) | ||
| Ending balance, December 31, 2021 | $ | 8,565 | ||
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 September 30, 2017as of March 31, 2022 and December 31, 2016.2021. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.
| September 30, 2017 | |||||||||
| Valuation | Unobservable | ||||||||
| Fair Value | Techniques | Input | Range | ||||||
| (dollars in thousands) | |||||||||
| Securities available-for-sale: | |||||||||
| Municipal securities | $ | 17,865 | Discounted cash flows | Discount rate | 2.8% | ||||
| December 31, 2016 | |||||||||
| Valuation | Unobservable | ||||||||
| Fair Value | Techniques | Input | Range | ||||||
| (dollars in thousands) | |||||||||
| Securities available-for-sale: | |||||||||
| Municipal securities | $ | 18,218 | Discounted cash flows | Discount rate | 2.8% | ||||
| March 31, 2022 | ||||||||||||
| Fair Value | Valuation Techniques | Unobservable Input | Rate | |||||||||
| Securities available-for-sale: | (dollars in thousands) | |||||||||||
| Municipal securities | $ | 8,493 | Discounted cash flows | Discount rate | 2.9 | % | ||||||
| December 31, 2021 | ||||||||||||
| Fair Value | Valuation Techniques | Unobservable Input | Rate | |||||||||
| Securities available-for-sale: | (dollars in thousands) | |||||||||||
| Municipal securities | $ | 8,565 | Discounted cash flows | Discount rate | 2.9 | % | ||||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. -6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
Nonrecurring basisNon-recurring basis:
The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurringnonrecurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.hierarchy of collateral dependent loans.
| September 30, 2017 | |||||||||
| Valuation | |||||||||
| Techniques | Unobservable | ||||||||
| Type | Fair Value | (weightings) | Input | Range (weighted average) | |||||
| (dollars in thousands) | |||||||||
| Impaired loans: | |||||||||
| Commercial real estate | $ | 1,918 | Appraisals of collateral value | Comparable sales | 0% - 15% (6%) | ||||
| Loans held-for-sale: | |||||||||
| Commercial taxi medallion loans | $ | 47,430 | Market approach (70%) | Indications expressed as a price to unpaid principal balance | 37 - 100 (46) | ||||
| Discounted cash flows (30%) | Discount rate | 14% | |||||||
| December 31, 2016 | |||||||||
| Valuation | |||||||||
| Techniques | Unobservable | ||||||||
| Type | Fair Value | (weightings) | Input | Range (weighted average) | |||||
| (dollars in thousands) | |||||||||
| Impaired loans: | |||||||||
| Commercial real estate | $ | 1,099 | Appraisals of collateral value | Comparable sales | 0% - 15% (6%) | ||||
| Loans held-for-sale: | |||||||||
| Commercial taxi medallion loans | $ | 65,596 | Market approach (70%) | Indications under securitized transactions expressed as a price to unpaid principal balance | 40 - 100 (59) | ||||
| Discounted cash flows (30%) | Discount Rate | 14% | |||||||
| March 31, 2022 | |||||||||||
| (dollars in thousands) | Fair Value | Valuation Techniques | Unobservable Input | Range (weighted average) | |||||||
| Commercial | $ | 13,993 | Market approach (100%) | Average transfer price as a price to unpaid principal balance | 56% – 85% (57%) | ||||||
| Commercial | $ | 705 | Appraisals of collateral value | Comparable sales | -10% to +35% (+8%) | ||||||
| Commercial real estate | $ | 29,370 | Appraisals of collateral value | Comparable sales | -25% to 10% (-14%) | ||||||
| Residential real estate | $ | 1,366 | Appraisals of collateral value | Comparable sales | +21% to +39% (+22%) | ||||||
| December 31, 2021 | |||||||||||
| (dollars in thousands) | Fair Value | Valuation Techniques | Unobservable Input | Range (weighed average) | |||||||
| Commercial | $ | 12,193 | Market approach (100%) | Average transfer price as a price to unpaid principal balance | 48% to 73% (49%) | ||||||
| Commercial | $ | 1,206 | Appraisals of collateral value | Adjustment for comparable sales | -10% to +35% (+6%) | ||||||
| Commercial real estate | $ | 20,185 | Appraisals of collateral value | Adjustment for comparable sales | -20% to +15% (-6%) | ||||||
| Residential real estate | $ | 2,794 | Appraisals of collateral value | Adjustment for comparable sales | -15% to +39% (5%) | ||||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. -6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
Fair Value
As of Financial Instruments
FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-sale and securities available-for-sale. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Company for the purposes of this disclosure.
Cash and Cash Equivalents. The carrying amounts of cash and short-term instruments approximate fair values.
FHLB Stock. It is not practical to determineMarch 31, 2022 the fair value of FHLB stock due to restrictions placed on its transferability.
Loans. Themeasurements presented are consistent with Topic 820, Fair Value Measurement, in which fair value of the Company’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. The methods utilized to estimate the fair value of loans do not necessarily represent anrepresents exit price and therefore, while permissible for presentation purposes under ASC 825-10, do not conform to ASC 820-10.
Deposits.The carrying amounts of deposits with no stated maturities (i.e., noninterest-bearing, savings, NOW, and money market deposits) are assigned fair values equal to the carrying amounts payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for alternative funding sources of similar remaining maturity.
Term Borrowings and Subordinated Debentures. The fair value of the Company’s long-term borrowings and subordinated debentures was calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities.
Accrued Interest Receivable/Payable. The carrying amounts of accrued interest approximate fair value resulting in a level 2 or level 3 classification based on the level of the asset or liability with which the accrual is associated.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)
price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2017March 31, 2022 and December 31, 2016:2021:
| Fair Value Measurements | |||||||||||||||
| Quoted | |||||||||||||||
| Prices in | |||||||||||||||
| Active | Significant | ||||||||||||||
| Markets for | Other | Significant | |||||||||||||
| Identical | Observable | Unobservable | |||||||||||||
| Carrying | Fair | Assets | Inputs | Inputs | |||||||||||
| Amount | Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||
| (dollars in thousands) | |||||||||||||||
| September 30, 2017 | |||||||||||||||
| Financial assets: | |||||||||||||||
| Cash and due from banks | $ | 141,262 | $ | 141,262 | $ | 141,262 | $ | - | $ | - | |||||
| Securities available-for-sale | 400,516 | 400,516 | 14,333 | 368,318 | 17,865 | ||||||||||
| Restricted investment in bank stocks | 29,672 | n/a | n/a | n/a | n/a | ||||||||||
| Loans held-for-sale | 89,386 | 89,386 | - | 41,956 | 47,430 | ||||||||||
| Net loans | 3,859,419 | 3,862,104 | - | - | 3,862,104 | ||||||||||
| Derivatives | 164 | 164 | - | 164 | - | ||||||||||
| Accrued interest receivable | 14,841 | 14,841 | - | 2,011 | 12,830 | ||||||||||
| Financial liabilities: | |||||||||||||||
| Noninterest-bearing deposits | 719,582 | 719,582 | 719,582 | - | - | ||||||||||
| Interest-bearing deposits | 2,904,187 | 2,904,285 | 1,825,846 | 1,078,439 | - | ||||||||||
| Borrowings | 585,124 | 586,474 | - | 586,474 | - | ||||||||||
| Subordinated debentures | 54,657 | 56,519 | - | 56,519 | - | ||||||||||
| Accrued interest payable | 4,304 | 4,304 | - | 4,304 | - | ||||||||||
| December 31, 2016 | |||||||||||||||
| Financial assets: | |||||||||||||||
| Cash and due from banks | $ | 200,399 | $ | 200,399 | $ | 200,399 | $ | - | $ | - | |||||
| Securities available-for-sale | 353,290 | 353,290 | 14,982 | 320,090 | 18,218 | ||||||||||
| Restricted investment in bank stocks | 24,310 | n/a | n/a | n/a | n/a | ||||||||||
| Loans held-for-sale | 78,005 | 78,005 | - | 12,409 | 65,596 | ||||||||||
| Net loans | 3,450,088 | 3,462,138 | - | - | 3,462,138 | ||||||||||
| Derivatives | 88 | 88 | - | 88 | - | ||||||||||
| Accrued interest receivable | 12,965 | 12,965 | - | 2,026 | 10,939 | ||||||||||
| Financial liabilities: | |||||||||||||||
| Noninterest-bearing deposits | 694,977 | 694,977 | 694,977 | - | - | ||||||||||
| Interest-bearing deposits | 2,649,294 | 2,649,717 | 1,681,044 | 968,673 | - | ||||||||||
| Borrowings | 476,280 | 478,286 | - | 478,286 | - | ||||||||||
| Subordinated debentures | 54,534 | 55,901 | - | 55,901 | - | ||||||||||
| Accrued interest payable | 4,142 | 4,142 | - | 4,142 | - | ||||||||||
| 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) | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and due from banks | $ | 311,544 | $ | 311,544 | $ | 311,544 | $ | - | $ | - | ||||||||||
| Securities available-for-sale | 512,030 | 512,030 | 191 | 503,346 | 8,493 | |||||||||||||||
| Restricted investments in bank stocks | 25,254 | n/a | n/a | n/a | n/a | |||||||||||||||
| Equity securities | 13,198 | 13,198 | 10,550 | 2,648 | - | |||||||||||||||
| Net loans | 6,899,525 | 6,874,974 | - | - | 6,874,974 | |||||||||||||||
| Derivatives | 22,872 | 22,872 | - | 22,872 | - | |||||||||||||||
| Accrued interest receivable | 34,081 | 34,081 | - | 1,472 | 32,609 | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Noninterest-bearing deposits | 1,631,292 | 1,631,292 | 1,631,292 | - | - | |||||||||||||||
| Interest-bearing deposits | 4,929,113 | 4,909,128 | 3,863,299 | 1,045,829 | - | |||||||||||||||
| Borrowings | 412,170 | 410,535 | - | 410,535 | - | |||||||||||||||
| Subordinated debentures | 153,027 | 155,940 | - | 155,940 | - | |||||||||||||||
| Accrued interest payable | 2,889 | 2,889 | - | 2,889 | - | |||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and due from banks | $ | 265,536 | $ | 265,536 | $ | 265,536 | $ | - | $ | - | ||||||||||
| Investment securities available-for-sale | 534,507 | 534,507 | 195 | 525,747 | 8,565 | |||||||||||||||
| Restricted investment in bank stocks | 27,826 | n/a | n/a | n/a | n/a | |||||||||||||||
| Equity securities | 13,794 | 13,794 | 11,081 | 2,713 | - | |||||||||||||||
| Net loans | 6,749,849 | 6,800,287 | - | - | 6,800,287 | |||||||||||||||
| Derivatives | 3,347 | 3,347 | - | 3,347 | - | |||||||||||||||
| Accrued interest receivable | 34,152 | 34,152 | - | 1,554 | 32,598 | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Noninterest-bearing deposits | ||||||||||||||||||||
| Interest-bearing deposits | 1,617,049 | 1,617,049 | 1,617,049 | - | - | |||||||||||||||
| Borrowings | 4,715,904 | 4,716,358 | 3,565,795 | 1,150,563 | - | |||||||||||||||
| Subordinated debentures | 468,193 | 469,671 | - | 469,671 | - | |||||||||||||||
| Accrued interest payable | 152,951 | 163,995 | - | 163,995 | - | |||||||||||||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. -6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
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. The fair value of commitments to originate loans is immaterial and not included in the tables above.
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 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. Other7. Comprehensive (Loss) Income (Loss)
Total comprehensive (loss) income includes all changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s other comprehensive income is comprised of unrealized holding gains and losses on securities available-for-sale, unrealized gains (losses) on cash flow hedges, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, each net of taxes.
The following table represents the reclassificationsreclassification out of accumulated other comprehensive (loss) income for the periods presented:presented (dollars in thousands):
| Affected Line item in the | ||||||||||||||||||
| Details about Accumulated Other | Amounts Reclassified from Accumulated | Amounts Reclassified from Accumulated | Statement Where Net Income is | |||||||||||||||
| Comprehensive Income Components | Other Comprehensive Income/(Loss) | Other Comprehensive Income/(Loss) | Presented | |||||||||||||||
| (dollars in thousands) | ||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||||
| Sale of securities available-for-sale | $ | - | $ | 4,131 | $ | 1,596 | $ | 4,234 | Net gains on sales of securities available for sale | |||||||||
| - | (1,640 | ) | (579 | ) | (1,682 | ) | Income tax expense | |||||||||||
| - | 2,491 | 1,017 | 2,552 | |||||||||||||||
| Amortization of pension plan net actuarial losses | (103 | ) | (204 | ) | (309 | ) | (306 | ) | Salaries and employee benefits | |||||||||
| 42 | 83 | 126 | 124 | Income tax benefit | ||||||||||||||
| (61 | ) | (121 | ) | (183 | ) | (182 | ) | |||||||||||
| Total reclassification | $ | (61 | ) | $ | 2,370 | $ | 834 | $ | 2,370 | |||||||||
| Details about Accumulated Other Comprehensive Income Components | Amounts Reclassified from Accumulated Other Comprehensive Income | Affected Line item in the Consolidated Statements of Income | ||||||||
| Three Months Ended March 31, | ||||||||||
| 2022 | 2021 | |||||||||
| Net interest income on swaps | $ | (525 | ) | $ | (631 | ) | Interest expense | |||
| 147 | 177 | Income tax expense | ||||||||
| $ | (378 | ) | $ | (454 | ) | |||||
| Amortization of pension plan net actuarial losses | $ | (16 | ) | $ | (75 | ) | Other components of net periodic pension expense | |||
| 4 | 20 | Income tax expense | ||||||||
| $ | (12 | ) | $ | (55 | ) | |||||
| Total reclassification | $ | (390 | ) | $ | (509 | ) | ||||
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 8. Other7. Comprehensive (Loss) Income – (continued)
Accumulated other comprehensive (loss) income (netas of tax) at September 30, 2017March 31, 2022 and December 31, 20162021 consisted of the following:
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (dollars in thousands) | ||||||||
| Securities available-for-sale | $ | 723 | $ | 933 | ||||
| Cash flow hedge | 97 | 52 | ||||||
| Defined benefit pension and post-retirement plans | (3,649 | ) | (3,831 | ) | ||||
| Total accumulated other comprehensive loss | $ | (2,829 | ) | $ | (2,846 | ) | ||
| March 31, 2022 | December 31, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Investment securities available-for-sale, net of tax | $ | (22,970 | ) | $ | (484 | ) | ||
| Cash flow hedge, net of tax | 16,443 | 2,406 | ||||||
| Defined benefit pension and post-retirement plans, net of tax | (1,742 | ) | (3,326 | ) | ||||
| Total | $ | (8,269 | ) | $ | (1,404 | ) | ||
Note 9. Stock-Based8. Stock-based Compensation
The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of September 30, 2017.March 31, 2022. The maximum number of shares of common stock or equivalents which may be issued under the Plan, is 750,000. Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, restricted share units or performance units. Shares available for grant and issuance under the Plan as of September 30, 2017March 31, 2022 are 750,000.approximately 222,593. The Company intends to issue all shares under the Plan in the form of newly issued shares.
Restricted stock, options and option awardsrestricted stock units typically have a three-year vesting period starting one year after the date of grant with one-third vesting each year. The options generally expire ten years from the date of grant. Restricted stock awardsand units granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control. All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the awards vesting. Restricted sharesstock have the same dividend and voting rights as common stock, while options, performance units and performancerestricted stock units do not.
All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are handled on a case-by-case basis.
No options or performance units were granted duringrecorded as incurred. Stock-based compensation expense for the three months ended September 30, 2017 or 2016.March 31, 2022 and March 31, 2021 was $1.1 million and $1.0 million, respectively.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Stock-Based Compensation – (continued)
Activity under the Company’s option plans as of andoptions for the ninethree months ended September 30, 2017 wereMarch 31, 2022 was as follows:
| Weighted- | ||||||||||
| Average | ||||||||||
| Weighted- | Remaining | |||||||||
| Average | Contractual | |||||||||
| Exercise | Term | Aggregate | ||||||||
| Shares | Price | (In Years) | Intrinsic Value | |||||||
| Outstanding at December 31, 2016 | 358,367 | $ | 6.26 | |||||||
| Granted | - | - | ||||||||
| Exercised | 10,846 | 10.89 | ||||||||
| Forfeited/cancelled/expired | - | - | ||||||||
| Outstanding at September 30, 2017 | 347,521 | $ | 6.11 | 1.90 | $ | 6,425,663 | ||||
| Exercisable at September 30, 2017 | 343,991 | $ | 6.03 | 1.86 | $ | 6,387,912 | ||||
| Number of Stock Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of December 31, 2021 | 23,766 | $ | 9.94 | |||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | (8,774 | ) | 9.09 | |||||||||||||
| Forfeited/cancelled/expired | ||||||||||||||||
| Outstanding as of March 31, 2022 | 14,992 | 10.44 | 0.63 | $ | 323,303 | |||||||||||
| Exercisable as of March 31, 2022 | 14,992 | $ | 10.44 | 0.63 | $ | 323,303 | ||||||||||
The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on September 30, 2017March 31, 2022 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, 2017.March 31, 2022. This amount changes based on the fair market value of the Parent Corporation’sCompany’s stock.
The below table represents information regarding
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 8. Stock-Based Compensation – (continued)
Activity under the Company’s restricted shares currently outstanding at September 30, 2017:for the three months ended March 31, 2022 was as follows:
| Weighted- | ||||||
| Average | ||||||
| Nonvested | Grant Date | |||||
| Shares | Fair Value | |||||
| Nonvested at December 31, 2016 | 111,273 | $ | 16.81 | |||
| Granted | 57,164 | 23.82 | ||||
| Vested | (65,359 | ) | 16.49 | |||
| Forfeited/cancelled/expired | - | - | ||||
| Nonvested at September 30, 2017 | 103,078 | $ | 20.41 | |||
| Nonvested Shares | Weighted- Average Grant Date Fair Value | |||||||
| Nonvested as of December 31, 2021 | 82,693 | $ | 21.78 | |||||
| Granted | 32,522 | 32.71 | ||||||
| Vested | (18,742 | ) | 23.13 | |||||
| Forfeited/cancelled/expired | (68 | ) | 23.23 | |||||
| Nonvested March 31, 2022 | 96,405 | $ | 25.20 | |||||
As of September 30, 2017,March 31, 2022, there was approximately $1,366,000$1.4 million of total unrecognized compensation cost related to nonvested restricted shares granted under the plans.granted. The cost is expected to be recognized over a weighted average period of one year.1.6 years.
At September 30, 2017,
A summary of the status of unearned performance unit awards and the change during the period is presented in the table below:
| Units (expected) | Units (maximum) | Weighted Average Grant Date Fair Value | ||||||||||
| Unearned as of December 31, 2021 | 209,994 | $ | 16.18 | |||||||||
| Awarded | 34,874 | 32.80 | ||||||||||
| Vested shares | (49,604 | ) | 20.79 | |||||||||
| Unearned as of March 31, 2022 | 195,264 | 221,541 | $ | 17.98 | ||||||||
As of March 31, 2022, the specific number of shares related to performance unit awardsunits that were expected to vest was 151,194,195,264, determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed. At September 30, 2017As of March 31, 2022, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 226,791.
221,541. During the three months ended March 31, 2022, 49,604 shares vested. A summarytotal of 27,254 shares were netted from the statusvested shares to satisfy employee tax obligations. The net shares issued from vesting of unearned performance unit awards and the changeunits during the period is presented in the table below:
| Weighted | ||||||||
| Average Grant | ||||||||
| Units | Units | Date Fair | ||||||
| (expected) | (maximum) | Value | ||||||
| Unearned at December 31, 2016 | 151,572 | 189,455 | $ | 18.47 | ||||
| Awarded | 24,891 | 37,336 | 22.75 | |||||
| Forfeited | - | - | - | |||||
| Adjustments | (25,269 | ) | - | 18.47 | ||||
| Unearned at September 30, 2017 | 151,194 | 226,791 | $ | 19.19 | ||||
At September 30, 2017,three months ended March 31, 2022 were 22,350 shares. As of March 31, 2022, compensation cost of approximately $1,006,000$2.1 million related to non-vested performance unit awardsunits not yet recognized is expected to be recognized over a weighted-average period of 1.32.1 years.
A summary of the status of unearned restricted stock units and the changes in restricted stock units during the period is presented in the table below:
| Units (expected) | Weighted Average Grant Date Fair Value | |||||||
| Unearned as of December 31, 2021 | 136,948 | $ | 16.52 | |||||
| Awarded | 52,312 | 32.80 | ||||||
| Vested shares | (69,584 | ) | 16.13 | |||||
| Unearned as of March 31, 2022 | 119,676 | $ | 23.86 | |||||
Any forfeitures would result in previously recognized expense being reversed. A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient. During the three months ended March 31, 2022, 69,584 shares vested. A total of 38,201 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of restricted stock units during the three months ended March 31, 2022 were 31,383 shares. As of March 31, 2022, compensation cost of approximately $2.4 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.8 years.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Stock-Based Compensation – (continued)(unaudited)
Effective January 1, 2017, the Company implemented ASU 2016-09,Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment.Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Included in income tax expense for the three and nine months ended September 30, 2017 is a benefit of $-0- and $180 thousand, respectively, which resulted from the effect of implementing ASU 2016-09.
Note 10.9. Components of Net Periodic Pension Cost
The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until March 31,June 30, 2007, at which time the Company froze the plan. The following table sets forth the net periodic pension cost of the Company’s pension plan for the periods indicated.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Interest cost | $ | 119 | $ | 129 | $ | 358 | $ | 386 | ||||||||
| Expected return on plan assets | (160 | ) | (166 | ) | (480 | ) | (457 | ) | ||||||||
| Net amortization | 103 | 101 | 309 | 305 | ||||||||||||
| Recognized settlement loss | - | - | 2 | - | ||||||||||||
| Net periodic pension cost | $ | 62 | $ | 64 | $ | 189 | $ | 234 | ||||||||
| Amortization of actuarial loss | $ | (103 | ) | $ | (204 | ) | $ | (309 | ) | $ | (306 | ) | ||||
| Total recognized in other comprehensive income | $ | (103 | ) | $ | (204 | ) | $ | (309 | ) | $ | (306 | ) | ||||
| Total recognized in net expense and OCI (before tax) | $ | (41 | ) | $ | (140 | ) | $ | (120 | ) | $ | (72 | ) | ||||
| Three Months Ended | Affected Line Item in the Consolidated | |||||||||
| March 31, | Statements of Income | |||||||||
| 2022 | 2021 | |||||||||
| (dollars in thousands) | ||||||||||
| Service cost | $ | - | $ | - | ||||||
| Interest cost | 78 | 71 | Other components of net periodic pension expense | |||||||
| Expected return on plan assets | (237 | ) | (213 | ) | Other components of net periodic pension expense | |||||
| Net amortization | 16 | 75 | Other components of net periodic pension expense | |||||||
| Total periodic pension income | $ | (143 | ) | $ | (67 | ) | ||||
Contributions
The Company did not make any contributionscontribute to the Pension Trust during the ninethree months ended September 30, 2017.March 31, 2022. The Company does not plan on contributing amounts to the Pension Trust for the remainder of 2017.2022. 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 –10. FHLB Borrowings
The Company’s FHLB borrowings and weighted average interest rates are summarized below:
| September 30, 2017 | December 31, 2016 | |||||||||||
| Amount | Rate | Amount | Rate | |||||||||
| (dollars in thousands) | ||||||||||||
| Total FHLB borrowings | $ | 585,124 | 1.61 | % | $ | 461,280 | 1.55 | % | ||||
| By remaining period to maturity: | ||||||||||||
| Less than 1 year | $ | 415,124 | 1.41 | % | $ | 231,280 | 1.02 | % | ||||
| 1 year through less than 2 years | 105,000 | 1.69 | % | 130,000 | 1.84 | % | ||||||
| 2 years through less than 3 years | 25,000 | 1.85 | % | 35,000 | 1.60 | % | ||||||
| 3 years through less than 4 years | 40,000 | 3.43 | % | 65,000 | 2.82 | % | ||||||
| 4 years through 5 years | - | - | - | - | ||||||||
| Total FHLB borrowings | $ | 585,124 | 1.61 | % | $ | 461,280 | 1.55 | % | ||||
| March 31, 2022 | December 31, 2021 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| By remaining period to maturity: | ||||||||||||||||
| Less than 1 year | $ | 359,526 | 0.79 | % | $ | 390,549 | 0.56 | % | ||||||||
| 1 year through less than 2 years | 25,000 | 2.92 | % | 50,000 | 1.84 | % | ||||||||||
| 2 years through less than 3 years | - | n/a | - | n/a | ||||||||||||
| 3 years through less than 4 years | 25,000 | 1.00 | % | 25,000 | 1.00 | % | ||||||||||
| 4 years through 5 years | 2,050 | 2.23 | % | 2,050 | 2.23 | % | ||||||||||
| After 5 years | 698 | 2.91 | % | 714 | 2.91 | % | ||||||||||
| FHLB borrowings - gross | 412,274 | 0.94 | % | 468,313 | 0.73 | % | ||||||||||
| Fair value (discount) | (104 | ) | (120 | ) | ||||||||||||
| Total FHLB borrowings | $ | 412,170 | $ | 468,193 | ||||||||||||
The FHLB borrowings are secured by pledges of certain collateral including, but not limited to, U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – FHLB Borrowings – (continued)
Three of the FHLB notes ($2.5 million and $7.5 million each due April 2, 2018, and $5.0 million 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 advancesAdvances are payable at stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances are fixed rate.rates. The advances at September 30, 2017as of March 31, 2022 were primarily collateralized by approximately $1.4$1.9 billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement. At September 30, 2017As of March 31, 2022 the Company had remaining borrowing capacity of approximately $796 million$1.0 billion at FHLB.
Note 12 – Securities Sold Under Agreements to Repurchase
Repurchase agreements are secured borrowings. The Company pledges securities to secure those borrowings. Information concerning repurchase agreements is summarized as follows for the periods presented:
| September 30, | December 31, | September 30, | ||||||||||
| 2017 | 2016 | 2016 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Average daily balance during the year-to-date | $ | 9,065 | $ | 15,000 | $ | 15,000 | ||||||
| Average interest rate during the year-to-date | 5.95 | % | 5.95 | % | 5.95 | % | ||||||
| Maximum month end balance during the year-to-date | $ | 15,000 | $ | 15,000 | $ | 15,000 | ||||||
| Weighted average interest rate during the year-to-date | 5.95 | % | 5.95 | % | 5.95 | % | ||||||
As of September 30, 2017, there were no repurchase agreements outstanding. The previous outstanding repurchase agreement of $15.0 million was repaid on June 15, 2017.
| December 31, 2016 | |||||||||||||||
| Remaining Contractual Maturity of the Agreements | |||||||||||||||
| Overnight and | Up to 30 | Greater Than | |||||||||||||
| Continuous | Days | 31-90 Days | 90 Days | Total | |||||||||||
| (dollars in thousands) | |||||||||||||||
| Repurchase agreements & repurchase-to-maturity transaction | |||||||||||||||
| U.S. Treasury and agency securities | $ | - | $ | - | $ | - | $ | - | $ | - | |||||
| Residential mortgage pass-through securities | - | - | - | 16,826 | 16,826 | ||||||||||
| Total borrowings | $ | - | $ | - | $ | - | $ | 16,826 | $ | 16,826 | |||||
| Amounts related to agreements not included in offsetting disclosure in Note 14: | $ | 1,826 | |||||||||||||
The fair value of securities pledged to secure repurchase agreements may decline. By contractual agreement, the fair value of securities pledged to secure repurchase agreements must meet or exceed the gross outstanding balance by 8%, or be subject to margin calls. Securities sold under agreements to repurchase are secured by securities with a carrying amount of $-0- and $16.8 million at September 30, 2017 and December 31, 2016, respectively.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 13 -11. 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 Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-ownedwholly owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier 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.part. The floating interest rate on the subordinatesubordinated debentures is three monththree-month LIBOR plus 2.85% and repricesre-prices quarterly. The rate at September 30, 2017as of March 31, 2022 was 4.16%3.15%. 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 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 September 30, 2017as of March 31, 2022 and December 31, 2016.2021.
| 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 | ||||||
During June 2015,2020, the Parent Corporation issued $50$75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding, June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2020. From and including June 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.
During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”). to certain accredited investors. The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity. The Notes are non-callable for five years, have a stated maturity of JulyFebruary 1, 2025,2028 and bear interest at a fixed rate of 5.75%5.20% per year, from and including September 30, 2015January 17, 2018 to, but excluding JulyFebruary 1, 2020.2023. From and including JulyFebruary 1, 20202023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three monththree-month LIBOR rate plus 393284 basis points. As of September 30, 2017, unamortized costs related to the debt issuance was approximately $498,000.
CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Preferred Stock
Note 14 – Offsetting Assets and Liabilities
Certain financial instrument-related assets and liabilities may be eligible for offset on the consolidated statements of condition because they are subject to master netting agreements or similar agreements. However,On August 19, 2021, the Company does not elect to offset such arrangements on the consolidated financial statements. The Company enters intocompleted an underwritten public offering of 115,000 shares, or $115.0 million in aggregate liquidation preference, of its depositary shares, each representing a 1/40th interest rate swap agreements with financial institution counterparties. For additional detail regarding interest rate swap agreements refer to Note 5. In the eventin a share of default on, or termination of, any one contract, both parties have the right to net settle multiple contracts. Also, certain interest rate swap agreements may require the Company to receive or pledge cash or financial instrument collateral based on the contract provisions.
The Company also entered into an agreement to sell securities subject to an obligation to repurchase the same or similar securities, referred to as a repurchase agreement. Under this agreement, 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 statement5.25% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A, no par value, with a liquidation preference of condition, while$1,000 per share. The net proceeds received from the securities underlying the repurchase agreements remain in the respective securities account, therefore there is no offsetting or nettingissuance of the securities assets with the repurchase agreement liability. The following table presents information about financial instruments that are eligible for offset as of September 30, 2017 and December 31, 2016:
| Gross Amounts Not Offset | ||||||||||||||||||
| Gross Amounts | Net Amounts of | Cash or | ||||||||||||||||
| Offset in the | Assets Presented in | Financial | Financial | |||||||||||||||
| Gross Amounts | Statement of | the Statement of | Instruments | Instrument | Net | |||||||||||||
| Recognized | Financial Position | Financial Position | Recognized | Collateral | Amount | |||||||||||||
| (dollars in thousands) | ||||||||||||||||||
| September 30, 2017 | ||||||||||||||||||
| Assets: | ||||||||||||||||||
| Interest rate swaps | $ | 164 | $ | - | $ | 164 | $ | - | $ | - | $ | 164 | ||||||
| Liabilities: | ||||||||||||||||||
| Repurchase agreements | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||
| December 31, 2016 | ||||||||||||||||||
| Assets: | ||||||||||||||||||
| Interest rate swaps | $ | 88 | $ | - | $ | 88 | $ | - | $ | - | $ | 88 | ||||||
| Liabilities: | ||||||||||||||||||
| Repurchase agreements | $ | 15,000 | $ | - | $ | 15,000 | $ | - | $ | 15,000 | $ | - | ||||||
Note 15 – Subsequent Event
On November 2, 2017, all of the Bank’s loans secured by New York City medallions, which had been classified as held-for-sale since December 31, 2016, were returned to the loans held-for-investment portfolio. As of September 30, 2017, the portfolio totaled $47.4 million, net of a $15.3 million valuation allowance. This transfer of the loans to held-for-investment will be recordedpreferred stock at the fair valuetime of the loans held-for-sale with any difference between the fair value determined asclosing were $110.9 million.
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 Company’s results of operations for the periods presented herein and financial condition as of September 30, 2017March 31, 2022 and December 31, 2016.2021. 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 loancredit 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 such as the ongoing conflict between Ukraine and Russia, 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 and regulations issued thereunder;engaged; (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.anticipated, and (11) the impact of the COVID-19 pandemic on our employees and operations, and those of our customers. 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 as amended and updated 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 “Company”) conform, in all material respects, to GAAP. 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.income. Actual results could differ significantly from those estimates.
The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. The Company has identified the determination of the allowance for loancredit 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 LoanCredit Losses and Related Provision
: The allowance for loancredit losses (“ALLL”ACL”) represents management’s estimate of probable incurredcurrent expected credit losses inherent inconsidering available information relevant to assessing collectability of cash flows over the loan portfolio.contractual term of the financial asset(s). Determining the amount of the ALLLACL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related toincluding reasonable and supportable forecasts that affect the amount and timingcollectability of expected futurethe remaining cash flows on impaired loans, estimated losses on poolsover the contractual term 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.financial assets.
The evaluation of the adequacy of the ALLLACL includes, among other factors, an analysis of historical loss rates by loan categorysegment applied to current loan totals. However, actual loancredit losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.
The ALLLACL is established through a provision for loancredit losses charged to expense. Management believes that the current ALLLACL will be adequate to absorb loancredit 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 categorysegment and the resulting loancredit 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 ALLLACL may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loancredit losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 15 of the Notes to Consolidated Financial Statements.
Other-Than-Temporary Impairment
Securities available-for-sale 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 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 Company applies the guidance in FASB ASC 820-10-35 when determining fair value for the Company’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 Company 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.
Income Taxes
: The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns.
Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of operations. Note 1210 of the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 20162021 includes additional discussion on the accounting for income taxes.
Impact of COVID-19
COVID-19 continues to impact the Company’s operations and financial results, as well as those of our customers. In response to the COVID-19 pandemic, the Company continued to offer temporary relief to effected customers, deferring either their full loan payment, the principal component or the interest component of their loan payment for an initial period of time ranging from 30 to 120 days. As of March 31, 2022, the Company has one deferred loan with a total outstanding loan balance of $0.5 million. As provided for under the CARES act, these short-term deferrals are not considered troubled debt restructurings, provided that the modification is related to COVID-19, executed on a loan that was not more than 30 days past due as of December 31, 2019 or the date of the deferral, and executed between March 1, 2020 and January 1, 2022, or the date that is 60 days after the termination date of the national emergency declared by the president on March 13, 2020, under the National Emergencies Act related to the outbreak of COVID-19.
With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company was an active participant in assisting its customers with applications for resources through the program. PPP loans originated prior to June 5, 2020 have a two-year term, which may be extended to five years with the consent of the Company, and those originated on or after June 5, 2020 have a five-year term, and the loans bear interest at 1%, along with an origination fee payable from the SBA to the Company. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of March 31, 2022, PPP loans were $54.3 million. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government and, as such, the Company has not included the PPP loans in calculation of the ACL as of March 31, 2022. Should those circumstances change, the Company could be required to establish additional provisions for credit loss expense charged to earnings. As of March 31, 2022 remaining deferred and unrecognized PPP fees were $2.6 million. We currently anticipate recognizing a majority of this balance by December 31, 2022, reflecting the expected timing of PPP loan forgiveness granted by the Small Business Administration.
Operating Results Overview
Net income available to common stockholders for the three months ended September 30, 2017 amounted to $13.1March 31, 2022 was $29.9 million compared to $11.9$33.0 million for the comparable three-month period ended September 30, 2016.March 31, 2021. The Company’s diluted earnings per share were $0.41$0.75 for the three months ended September 30, 2017March 31, 2022 as compared with diluted earnings per share of $0.39$0.82 for the comparable three-month period ended September 30, 2016.March 31, 2021. The increase in net income available to common stockholders and diluted earnings per share was primarily attributable to an increase in net interest income and a decrease in provision for loan losses, partially offset by a decrease in net gains on sale of investment securities and an increase in other expenses. The increase in other expenses was primarily the result of an increase in a valuation allowance related to loans held-for-sale.
Net income available to common stockholders for the nine months ended September 30, 2017 amounted to $32.6$3.1 million compared to $33.1 million for the comparable nine-month period ended September 30, 2016. The Company’s diluted earnings per share were $1.01 for the nine months ended September 30, 2017 as compared with diluted earnings per share of $1.09 for the comparable nine-month period ended September 30, 2016. The decrease in net income available to common stockholders and $0.07 decrease in diluted earnings per share was primarily attributableversus the first quarter of 2021 were due to ana $7.2 million increase to provision for credit losses, a $2.7 million increase in noninterest expenses, which was primarily the result of an$1.5 million in preferred dividends, a $0.4 million decrease in noninterest income and a $0.5 million increase in a valuation allowance related to loans held-for-sale and a decrease in net gains on sale of investment securities,income tax expenses, partially offset by ana $9.2 million increase in net interest income, a decrease in provision for loan losses, and a decrease in income tax expense.income.
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(including interest earned tax-free loans and on obligations of state and local 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.
Fully taxable equivalent net interest income for the third quarter of 2017three months ended March 31, 2022 increased by $4.2$9.2 million, or 12.3%15.0%, from the third quarter of 2016, resultingcomparable three-month period ended March 31, 2021. The increase from anthe three months ended March 31, 2021 resulted primarily from a 10.1% increase in average interest-earning assets of 8.4%loans and thea 15 basis-point widening of the net interest margin by 12 basis-points to 3.44%3.71% from 3.32%. Included in net interest income was accretion and amortization of purchase accounting adjustments of $0.3 million and $1.0 million during the third quarter of 2017 and 2016, respectively. Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.41% in the third quarter of 2017, widening by 19 basis-points from the third quarter of 2016 adjusted net interest margin of 3.22%3.56%. The increase in the adjusted net interest margin was primarily attributable to a higher volume of loans which reduced excess cash balances resulting in an improved asset-mix, partially offset by increased cost in deposit funding and lower yields on securities.
Fully taxable equivalent net interest income for the nine months ended September 30, 2017 was $108.0 million, an increase of $9.1 million, or 9.2%, from the nine months ended September 30, 2016, resulting from an increase in average interest-earning assets of 7.8% and the widening of the net interest margin by 5 basis-points to 3.44%resulted from 3.39%. Included in net interest income was accretion and amortization of purchase accounting adjustments of $1.3 million and $3.6 million during the nine months ended September 30, 2017 and 2016, respectively. Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.40% for the nine months ended September 30, 2017, widening by 14 basis-points from the nine months ended September 30, 2016 adjusted net interest margin of 3.26%. The increasea 27 basis-point reduction in the adjusted net interest margin was primarily attributable to higher yields on loans and an improved asset-mix,cost of interest-bearing liabilities, partially offset by lower yieldsan 8 basis-point reduction in the yield on securities and an increased cost in deposit funding.average interest-earning assets.
The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three and nine months ended September 30, 2017March 31, 2022 and 2016,2021, the Company’s average assets, liabilities and stockholders’ equity. The Company’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, | ||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||
| Interest | Interest | |||||||||||||||||||||
| Average | Income/ | Average | Average | Income/ | Average | |||||||||||||||||
| Balance | Expense | Rate(8) | Balance | Expense | Rate(8) | |||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||
| Securities(1) (2) | $ | 397,077 | $ | 3,033 | 3.03 | % | $ | 406,802 | $ | 3,293 | 3.22 | % | ||||||||||
| Total loans(2) (3) (4) | 3,898,404 | 43,683 | 4.45 | 3,407,278 | 38,010 | 4.44 | ||||||||||||||||
| Federal funds sold and interest-bearing with banks | 53,820 | 170 | 1.25 | 202,106 | 261 | 0.51 | ||||||||||||||||
| Restricted investment in bank stocks | 29,236 | 362 | 4.91 | 24,834 | 352 | 5.64 | ||||||||||||||||
| Total interest-earning assets | 4,378,537 | 47,248 | 4.28 | 4,041,020 | 41,916 | 4.13 | ||||||||||||||||
| Noninterest-earning assets: | ||||||||||||||||||||||
| Allowance for loan losses | (28,999 | ) | (34,052 | ) | ||||||||||||||||||
| Other noninterest-earning assets | 364,474 | 337,828 | ||||||||||||||||||||
| Total assets | $ | 4,714,012 | $ | 4,344,796 | ||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||
| Interest-bearing deposits: | ||||||||||||||||||||||
| Time deposits | $ | 1,005,997 | 3,593 | 1.42 | $ | 1,007,530 | 3,323 | 1.31 | ||||||||||||||
| Other interest-bearing deposits | 1,816,162 | 2,520 | 0.55 | 1,637,500 | 1,836 | 0.45 | ||||||||||||||||
| Total interest-bearing deposits | 2,822,159 | 6,113 | 0.86 | 2,645,030 | 5,159 | 0.78 | ||||||||||||||||
| Borrowings | 570,711 | 2,353 | 1.64 | 488,015 | 2,139 | 1.74 | ||||||||||||||||
| Subordinated debentures(5) | 55,155 | 813 | 5.85 | 55,155 | 814 | 5.87 | ||||||||||||||||
| Capital lease | 2,688 | 40 | 5.90 | 2,814 | 42 | 5.94 | ||||||||||||||||
| Total interest-bearing liabilities | 3,450,713 | 9,319 | 1.07 | 3,191,014 | 8,154 | 1.02 | ||||||||||||||||
| Demand deposits | 688,707 | 640,323 | ||||||||||||||||||||
| Other liabilities | 17,972 | 18,318 | ||||||||||||||||||||
| Total noninterest-bearing liabilities | 706,679 | 658,641 | ||||||||||||||||||||
| Stockholders’ equity | 556,620 | 495,141 | ||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 4,714,012 | $ | 4,344,796 | ||||||||||||||||||
| Net interest income (tax-equivalent basis) | 37,929 | 33,762 | ||||||||||||||||||||
| Net interest spread(6) | 3.21 | % | 3.11 | % | ||||||||||||||||||
| Net interest margin(7) | 3.44 | % | 3.32 | % | ||||||||||||||||||
| Tax-equivalent adjustment | (910 | ) | (738 | ) | ||||||||||||||||||
| Net interest income | $ | 37,019 | $ | 33,024 | ||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||
| Average Balance | Interest Income/ Expense | Average Rate (7) | Average Balance | Interest Income/ Expense | Average Rate (7) | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Securities (1) (2) | $ | 545,203 | $ | 2,771 | 2.06 | % | $ | 473,181 | $ | 2,058 | 1.76 | % | ||||||||||||
| Total loans (2) (3) (4) | 6,871,477 | 76,320 | 4.50 | 6,242,960 | 70,676 | 4.59 | ||||||||||||||||||
| Federal funds sold and interest-bearing with banks | 312,224 | 120 | 0.16 | 269,537 | 49 | 0.07 | ||||||||||||||||||
| Restricted investment in bank stocks | 24,977 | 214 | 3.47 | 22,822 | 256 | 4.55 | ||||||||||||||||||
| Total interest-earning assets | 7,753,881 | 79,425 | 4.15 | 7,008,500 | 73,039 | 4.23 | ||||||||||||||||||
| Noninterest-earning assets: | ||||||||||||||||||||||||
| Allowance for credit losses | (79,763 | ) | (81,549 | ) | ||||||||||||||||||||
| Other noninterest-earning assets | 589,264 | 573,083 | ||||||||||||||||||||||
| Total assets | $ | 8,263,382 | $ | 7,500,034 | ||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Interest-bearing deposits: | ||||||||||||||||||||||||
| Time deposits | $ | 1,124,614 | 2,154 | 0.78 | $ | 1,422,295 | 2,434 | 0.69 | ||||||||||||||||
| Other interest-bearing deposits | 3,851,558 | 2,856 | �� | 0.30 | 3,225,751 | 5,151 | 0.65 | |||||||||||||||||
| Total interest-bearing deposits | 4,976,172 | 5,010 | 0.41 | 4,648,046 | 7,585 | 0.66 | ||||||||||||||||||
| Borrowings | 404,907 | 1,377 | 1.38 | 375,511 | 1,674 | 1.81 | ||||||||||||||||||
| Subordinated debentures | 152,977 | 2,168 | 5.75 | 154,341 | 2,167 | 5.70 | ||||||||||||||||||
| Finance lease | 1,917 | 28 | 5.92 | 2,115 | 32 | 6.14 | ||||||||||||||||||
| Total interest-bearing liabilities | 5,535,973 | 8,583 | 0.63 | 5,180,013 | 11,458 | 0.90 | ||||||||||||||||||
| Demand deposits | 1,547,055 | 1,348,585 | ||||||||||||||||||||||
| Other liabilities | 48,386 | 43,340 | ||||||||||||||||||||||
| Total noninterest-bearing liabilities | 1,595,441 | 1,391,925 | ||||||||||||||||||||||
| Stockholders’ equity | 1,131,968 | 928,096 | ||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 8,263,382 | $ | 7,500,034 | ||||||||||||||||||||
| Net interest income (tax-equivalent basis) | 70,842 | 61,581 | ||||||||||||||||||||||
| Net interest spread (5) | 3.53 | % | 3.33 | % | ||||||||||||||||||||
| Net interest margin (6) | 3.71 | % | 3.56 | % | ||||||||||||||||||||
| Tax-equivalent adjustment | (484 | ) | (418 | ) | ||||||||||||||||||||
| Net interest income | $ | 70,358 | $ | 61,163 | ||||||||||||||||||||
| (1) | Average balances are based on amortized |
| (2) | Interest income is presented on a tax-equivalent basis using |
| (3) | Includes loan fee |
| (4) | |
| (5) | |
| Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis. | |
| Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets. | |
| Rates are annualized. |
Average Statements of Condition with Interest and Average RatesNoninterest Income
| Nine Months Ended September 30, | ||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||
| Interest | Interest | |||||||||||||||||||||
| Average | Income/ | Average | Average | Income/ | Average | |||||||||||||||||
| Balance | Expense | Rate(8) | Balance | Expense | Rate(8) | |||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||
| Securities(1) (2) | $ | 384,782 | $ | 9,272 | 3.22 | % | $ | 413,493 | $ | 10,290 | 3.32 | % | ||||||||||
| Total loans(2) (3) (4) | 3,716,876 | 123,009 | 4.42 | 3,310,788 | 109,959 | 4.44 | ||||||||||||||||
| Federal funds sold and interest-bearing with banks | 73,424 | 555 | 1.01 | 143,517 | 541 | 0.50 | ||||||||||||||||
| Restricted investment in bank stocks | 26,177 | 982 | 5.02 | 29,818 | 1,074 | 4.81 | ||||||||||||||||
| Total interest-earning assets | 4,201,259 | 133,818 | 4.26 | 3,897,616 | 121,864 | 4.18 | ||||||||||||||||
| Noninterest-earning assets: | ||||||||||||||||||||||
| Allowance for loan losses | (27,533 | ) | (30,412 | ) | ||||||||||||||||||
| Other noninterest-earning assets | 358,726 | 331,544 | ||||||||||||||||||||
| Total assets | $ | 4,532,452 | $ | 4,198,748 | ||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||
| Interest-bearing deposits: | ||||||||||||||||||||||
| Time deposits | $ | 982,149 | 9,996 | 1.36 | $ | 902,017 | 8,714 | 1.29 | ||||||||||||||
| Other interest-bearing deposits | 1,745,742 | 6,722 | 0.51 | 1,515,785 | 4,818 | 0.42 | ||||||||||||||||
| Total interest-bearing deposits | 2,727,891 | 16,718 | 0.82 | 2,417,802 | 13,532 | 0.75 | ||||||||||||||||
| Borrowings | 509,625 | 6,581 | 1.73 | 603,423 | 6,908 | 1.53 | ||||||||||||||||
| Subordinated debentures(5) | 55,155 | 2,431 | 5.89 | 55,155 | 2,436 | 5.90 | ||||||||||||||||
| Capital lease | 2,720 | 123 | 6.05 | 2,844 | 128 | 6.01 | ||||||||||||||||
| Total interest-bearing liabilities | 3,295,391 | 25,853 | 1.05 | 3,079,224 | 23,004 | 1.00 | ||||||||||||||||
| Demand deposits | 670,709 | 610,568 | ||||||||||||||||||||
| Other liabilities | 17,652 | 21,872 | ||||||||||||||||||||
| Total noninterest-bearing liabilities | 688,361 | 632,440 | ||||||||||||||||||||
| Stockholders’ equity | 548,700 | 487,084 | ||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 4,532,452 | $ | 4,198,748 | ||||||||||||||||||
| Net interest income (tax-equivalent basis) | 107,965 | 98,860 | ||||||||||||||||||||
| Net interest spread(6) | 3.21 | % | 3.18 | % | ||||||||||||||||||
| Net interest margin(7) | 3.44 | % | 3.39 | % | ||||||||||||||||||
| Tax-equivalent adjustment | (2,704 | ) | (2,122 | ) | ||||||||||||||||||
| Net interest income | $ | 105,261 | $ | 96,738 | ||||||||||||||||||
|
Noninterest Income
Noninterest income totaled $1.8$3.1 million for the three months ended September 30, 2017,March 31, 2022, compared with $5.6$3.4 million for the three months ended September 30, 2016. There were no net securities gains/(losses) for the three months ended September 30, 2017 and $4.1 millionMarch 31, 2021. Included in net securities gains for the three months ended September 30, 2016. Excluding the securities gains, noninterest income increased by $0.3 million when compared to the prior year third quarter. The increase was due primarily to a bank owned life insurance death benefit recorded during the third quarterwere net losses on equity securities of 2017. Noninterest income also includes bank owned life insurance and deposit, loan and other income for the three month periods.
Noninterest income totaled $6.2 million for the nine months ended September 30, 2017, compared with $8.3 million for the nine months ended September 30, 2016. For the nine months ended September 30, 2017 and 2016, there were $1.6$0.6 million and $4.2 million of net securities gains, respectively. Excluding the securities gains, noninterest income increased by $0.5 million when compared to the nine months ended September 30, 2016. The increase was due primarily to a bank owned life insurance death benefit recorded during the third quarter of 2017. Noninterest income also includes annuities and insurance commissions, bank owned life insurance and deposit, loan and other income for the nine month periods.
Noninterest Expenses
Noninterest expenses totaled $18.6$0.2 million for the three months ended September 30, 2017, compared to $14.6March 31, 2022 and three months ended 2021, respectively, and a $0.7 million gain on the sale of branches in the first quarter 2021. Excluding the aforementioned items, noninterest income was $3.7 million and $2.9 million for the three months ended September 30, 2016.March 31, 2022 and three-month period ended March 31, 2021, respectively. The $0.7 million increase in noninterest income excluding the items discussed above for the three months ended March 31, 2022 versus the comparable three-month period ended March 31, 2021 was primarily due to increases in deposit, loan and other income of $0.4 million, BoeFly income of $0.2 million and BOLI income of $0.1 million.
Noninterest Expenses
Noninterest expenses totaled $29.2 million for the three months ended March 31, 2022, compared to $26.5 million for the three months ended March 31, 2021. The increase in noninterest expenses of $2.7 million from the prior yearcomparable three-month period ended period March 31, 2021 was mainlyprimarily attributable to an increase in the taxi medallions loans held-for-sale valuation allowance of $3.0 million. In addition, increases in salaries and employee benefits ($1.1 million), FDIC insurance premiums ($0.1 million)of $3.1 million, a $0.7 million increase acquisition expenses related to BoeFly and data processing ($0.2 million) wereincreases in other expenses of $0.6 million, and information technology and communications of $0.3 million, partially offset by decreases in occupancy and equipment expenses ($0.1 million)of $1.5 million, which included a $0.9 million favorable dissolution of a merger lease obligation, FDIC insurance of $0.3 million and other expense ($0.2 million), contributing to the overall increase in noninterest expenses from the prior year third quarter.
Noninterest expenses totaled $62.2 million for the nine months ended September 30, 2017, compared to $43.3 million for the nine months ended September 30, 2016.professional and consulting of $0.2 million. The increase from the prior year period was mainly attributable to an increase in the taxi medallions loans held-for-sale valuation allowance of $15.3 million. In addition, increases in salaries and employee benefits ($2.6 million), FDIC insurance premiums ($0.6 million), data processing ($0.4 million) and other expense ($0.3 million) were partially offset by decreases in occupancy and equipment expenses ($0.2 million) contributing to the overall increase in noninterest expenses from the prior year nine month period.
On November 2, 2017, all of the Bank’s loans secured by New York City medallions, which had been classifiedquarter was attributable to new hires, a seasonal increase in payroll taxes, as held-for-sale since December 31, 2016, were returned to the loans held-for-investment portfolio. As of September 30, 2017, the portfolio totaled $47.4 million, net of a $15.3 million valuation allowance. This transfer of the loans to held-for-investment will be recorded at the fair value of the loans held-for-sale with any difference between the fair value determinedwell as of the transfer date and the carrying value as of September 30, 2017 to be recognized in noninterest expense during the fourth quarter 2017. The Company currently estimates a pretax charge of approximately $0.5 million to reflect this transfer. Management’s decision is based on its current view that a strategy to work out the credits through cash flow generated by borrowers’ operations is now superior, from a financial perspective, to a disposition via a sale to a third-party. This decision reflects (i) a reduced level of interest on the part of institutional investors to purchase taxi medallion loans, especially for relatively smaller portfolios such as the Bank’s and (ii) the Company’s increasing success at restructuring loans in the portfolio to monthly payment terms that can be supported through borrowers’ operations, although the collectability of principal balloon payments at maturity remains uncertain.higher incentive-based, stock compensation expense.
Income Taxes
Income tax expense was $5.6$11.4 million for the three months ended September 30, 2017,March 31, 2022, compared to $5.4$10.9 million for the three months ended September 30, 2016.March 31, 2021. The effective tax rate for the current quarter was 30.0% versus 31.5% for the prior-year quarter.
Income tax expense was $12.6 million for the ninethree months ended September 30, 2017, compared to $15.2 million for the nine months ended September 30, 2016. Included in income tax expense for the nine months ended September 30, 2017 is a benefit of $180 thousand which resulted from the effect of implementing ASU 2016-09, which relates to the recognition of excess tax benefits in the income statement (formerly through equity) that result from employee share-based payment awards.March 31, 2022 and March 31, 2021 was 26.6% and 24.8%, respectively. The effective tax rate for the nine months ended September 30, 2017first quarter of 2022 was 27.9% versus 31.5% for the prior-year period. Excluding any changeshigher compared to the taxi medallion valuation allowance, the effective tax rate for 2017 is expected to be maintained in the low 30% range.
Financial Condition
Loan Portfolio
Commercial lending is the Company’s primary business activity. The Company’s loan portfolio consists of commercial, residential and consumer loans, serving the diverse client base in the Company’s market area. The composition of the Company’s portfolio remains relatively constant but can changeMarch 31, 2021 due to factors such as the economic climate, the level and fluctuations in interest rates, real estate values and employment metrics. Organic growth (i.e., growth other than through mergers and acquisitions) is generated through business development, repeat client requests for new financings, penetration into existing markets and entry into new markets.
The Company seeks to create growth in commercial lending by offering client-focused products, competitive pricing and by capitalizing on the positive trends in its market area. Products offered are designed to meet the financial requirementsdifferent proportions of the Company’s clients. It is the objective of the Company’s credit policies to diversify the commercial loan portfolio to limit concentrations in any single segment.income from non-taxable sources.
Financial Condition Loan Portfolio |
The following table sets forth the composition of our loan portfolio, excluding loans held-for-sale and unearned net origination fees and costs, by loan segment at the periods indicated.
| September 30, 2017 | December 31, 2016 | Amount Increase/ | ||||||||||||||
| Amount | % | Amount | % | (Decrease) | ||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Commercial | $ | 641,613 | 16.5 | % | $ | 553,576 | 15.9 | % | $ | 88,037 | ||||||
| Commercial real estate | 2,585,205 | 66.4 | 2,204,710 | 63.3 | 380,495 | |||||||||||
| Commercial construction | 399,453 | 10.2 | 486,228 | 14.0 | (86,775 | ) | ||||||||||
| Residential real estate | 264,244 | 6.8 | 232,547 | 6.7 | 31,697 | |||||||||||
| Consumer | 1,912 | 0.1 | 2,380 | 0.1 | (468 | ) | ||||||||||
| Gross loans | $ | 3,892,427 | 100.0 | % | $ | 3,479,441 | 100.0 | % | $ | 412,986 | ||||||
At September 30, 2017,
| March 31, 2022 | December 31, 2021 | Amount Increase/ | ||||||||||||||||||
| Amount | % | Amount | % | (Decrease) | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Commercial (1) | $ | 1,278,477 | 18.3 | % | $ | 1,299,428 | 19.0 | % | $ | (20,951 | ) | |||||||||
| Commercial real estate | 4,919,093 | 70.4 | 4,741,590 | 69.3 | 177,503 | |||||||||||||||
| Commercial construction | 539,058 | 7.7 | 540,178 | 7.9 | (1,120 | ) | ||||||||||||||
| Residential real estate | 250,205 | 3.5 | 255,269 | 3.7 | (5,064 | ) | ||||||||||||||
| Consumer | 1,140 | 0.1 | 1,886 | 0.1 | (746 | ) | ||||||||||||||
| Gross loans | $ | 6,987,973 | 100.0 | % | $ | 6,838,351 | 100.0 | % | $ | 149,622 | ||||||||||
As of March 31, 2022, gross loans totaled $3.9$7.0 billion, an increase of $0.4 billion,$149.6 million, or 11.9%2.2%, as compared to December 31, 2016.2021. Net loan growth was attributable to organic loan originations.
| (1) | Included in commercial loans as of March 31, 2022 and December 31, 2021 are PPP loans of $54.3 million and $93.1 million, respectively. |
Allowance for Credit Losses and Related Provision
As of March 31, 2022, the Company’s allowance for credit losses for loans was $80.1 million, an increase of $1.3 million from $78.8 million December 31, 2021. The allowance for credit losses for loans as of December 31, 2021 included a $6.6 million increase that was related to the “Day 1” CECL adjustment resulting from adopting CECL as of January 1, 2021. Excluding that increase, the allowance for credit losses for loans increased by $7.8 million. The increase was primarily attributable to commercial real estate ($380 million), commercial ($88 million)an increase in provision for credit losses for loans of $6.6 million and residential real estate ($32 million),a decrease of $2.1 million in charge-offs, partially offset by a decrease of $0.4 million in construction ($87 million).recoveries.
At September 30, 2017, acquired loans remaining in the loan portfolio totaled $0.5 billion, compared to $0.7 billion as of December 31, 2016.
Allowance for Loan Losses and Related Provision
The purpose of the allowanceprovision for loan losses (“ALLL”) is to establish a valuation allowance for probable incurred(reversal of) credit losses in the loan portfolio. Additions to the ALLL are made through provisions charged against current operations and through recoveries made on loans previously charged off. The ALLL is maintained at an amount considered adequate by management to provide for probable incurred credit losses inherent in the loan portfolio based upon historical losses and a periodic evaluation of external and portfolio risk factors. In establishing an appropriate 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. The Company’s analysis of its ALLL also takes into consideration the potential impact that current trends may have on the Company’s borrower base.
Although management uses the best information available, the level of the ALLL 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 Company’s ALLL. Such agencies may require the Company to increase the ALLL based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in the State of New Jersey. Future adjustments to the ALLL 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 Company’s control.
At September 30, 2017, the ALLL was $29.9$1.5 million as compared to $25.7 million at December 31, 2016. Provisions to the ALLL for the three and nine months ended September 30, 2017 totaled $1.5 millionMarch 31, 2022 and $4.0 million, respectively, compared to $6.8 million and $13.5$(5.8) million for the same periods in 2016.three months ended March 31, 2021. The decrease from the prior year quarter and prior year nine month period was largely attributable to decreases in specific reserves, primarily related to the portfolio of taxi medallion loans.
There were $(19) thousand in net recoveries and $1.9 million in net charge-offsprovision for credit losses during the three months ended September 30, 2017March 31, 2022 reflected strong organic loan growth and 2016, respectively. stabilizing macroeconomic forecasts. The reversal of provision for credit losses during the three months ended March 31, 2021 was the result of an improved macroeconomic forecast when compared to January 1, 2021, the date of CECL implementation.
There were $(126) thousand$0.2 million net charge-offs for the three months ended March 31, 2022, compared with $0.1 million in net recoveries and $2.5 million in net charge-offs duringfor the ninethree months ended September 30, 2017 and September 30, 2016, respectively.March 31, 2021. The ALLLACL as a percentage of total loans receivable amounted to 0.77% at September 30, 20171.15% as of both March 31, 2022 and December 31, 2021. Excluding the impact of PPP loans in the calculation of the ACL as a percentage of loans receivable, the ratio increases to 1.16% as of March 31, 2022, compared to 0.74% at1.17% as of December 31, 2016 and 1.09 % at September 30, 2016.2021. PPP loans do not have allowance for credit losses attributable to them, as they are fully guaranteed by the SBA.
The level of the allowance for the respective periods of 20172022 and 20162021 reflects the credit quality within the loan portfolio, the loan volume recorded during the periods,growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the ALLL at September 30, 2017ACL as of March 31, 2022 is adequate to cover credit 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 ALLLACL are presented in the following table for the periods indicated.
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2017 | 2016 | |||||||
| (dollars in thousands) | ||||||||
| Average loans receivable at end of period | $ | 3,847,396 | $ | 3,406,800 | ||||
| Analysis of the ALLL: | ||||||||
| Balance - beginning of quarter | $ | 25,744 | $ | 26,572 | ||||
| Charge-offs: | ||||||||
| Commercial | - | (2,396 | ) | |||||
| Commercial real estate | (71 | ) | - | |||||
| Residential real estate | - | (94 | ) | |||||
| Consumer | (12 | ) | (10 | ) | ||||
| Total charge-offs | (83 | ) | (2,500 | ) | ||||
| Recoveries: | ||||||||
| Commercial | 158 | 2 | ||||||
| Commercial real estate | 50 | 35 | ||||||
| Residential real estate | - | 3 | ||||||
| Consumer | 1 | 3 | ||||||
| Total recoveries | 209 | 43 | ||||||
| Net recoveries (charge-offs) | 126 | (2,457 | ) | |||||
| Provision for loan and losses | 4,000 | 13,500 | ||||||
| Balance - end of period | $ | 29,870 | $ | 37,615 | ||||
| Ratio of annualized net charge-offs during the period to average loans receivable during the period | - | % | 0.06 | % | ||||
| Loans receivable | $ | 3,889,289 | $ | 3,445,476 | ||||
| ALLL as a percentage of loans receivable | 0.77 | % | 1.09 | % | ||||
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (dollars in thousands) | ||||||||
| Average loans receivable at end of period | $ | 6,871,095 | $ | 6,238,723 | ||||
| Analysis of the ACL: | ||||||||
| Balance - beginning of quarter | $ | 78,773 | $ | 79,226 | ||||
| CECL Day 1 Adjustment | - | 6,557 | ||||||
| Balance – beginning of quarter (as adjusted) | 78,773 | 85,783 | ||||||
| Charge-offs: | ||||||||
| Commercial | (274 | ) | - | |||||
| Total charge-offs | (274 | ) | - | |||||
| Recoveries: | ||||||||
| Commercial | 1 | 60 | ||||||
| Consumer | 31 | 1 | ||||||
| Total recoveries | 32 | 61 | ||||||
| Net (charge-offs) recoveries | (242 | ) | 61 | |||||
| Provision for (reversal of) credit losses (loans) | 1,539 | (5,276 | ) | |||||
| Balance - end of period | $ | 80,070 | $ | 80,568 | ||||
| Ratio of annualized net charge-offs during the period to average loans receivable during the period | 0.01 | % | 0.00 | % | ||||
| Loans receivable | $ | 6,979,595 | $ | 6,277,191 | ||||
| ACL as a percentage of loans receivable | 1.15 | % | 1.28 | % | ||||
Asset Quality
The Company 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 Company 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 loancredit losses at all times.
It is generally the Company’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 nonaccrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on nonaccrual loans are generally applied against principal. A loan may be restored to an accruing basis when all past due amounts have been collected. Loans past due 90 days or more which are both well-secured and in the process of collection may remain on an accrual basis.
Nonperforming assets include nonaccrual loans and other 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 90 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.
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The following table sets forth, as of the dates indicated, the amount of the Company’s nonaccrual loans, other real estate owned (“OREO”), performing troubled debt restructurings (“TDRs”) and loans past due 90 days or greater and still accruing/accreting:accruing:
| September 30, | December 31, | |||||
| 2017 | 2016 | |||||
| (dollars in thousands) | ||||||
| Nonaccrual loans (held-for-investment) | $ | 13,755 | $ | 5,734 | ||
| Nonaccrual loans (held-for-sale) | 47,430 | 63,044 | ||||
| OREO | - | 626 | ||||
| Total nonperforming assets(1) | $ | 61,185 | $ | 69,404 | ||
| Performing TDRs | $ | 12,749 | $ | 13,338 | ||
| Loans 90 days or greater past due and still accruing (non-PCI) | - | - | ||||
| Loans 90 days or greater past due and still accruing/accreting (PCI) | $ | 4,209 | $ | 5,293 | ||
| March 31, 2022 | December 31, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Nonaccrual loans | $ | 59,403 | $ | 61,700 | ||||
| OREO | 316 | - | ||||||
| Total nonperforming assets (1) | $ | 59,719 | $ | 61,700 | ||||
| Performing TDRs | $ | 47,441 | $ | 43,587 | ||||
| Loans 90 days or greater past due and still accruing (non PCD) | $ | - | $ | - | ||||
| Loans 90 days or greater past due and still accruing (PCD) | $ | 12,380 | $ | 13,531 | ||||
| (1) | Nonperforming assets are defined as nonaccrual loans |
| Nonaccrual loans to total loans receivable | 0.85 | % | 0.90 | % | ||||
| Nonperforming assets to total assets | 0.72 | % | 0.76 | % | ||||
| Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable | 1.71 | % | 1.74 | % |
| Nonaccrual loans (held-for-investment) to total loans receivable | 0.35% | 0.16% | ||
| Nonperforming assets to total assets | 1.26% | 1.57% | ||
| Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to total loans | 1.96% | 2.48% |
Investment Securities Portfolio
At September 30, 2017,
As of March 31, 2022, the principal components of the securities portfolio were 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 For the quarter ended September 30, 2016, the Company transferred all securities previously categorized as held-to-maturity to available-for-sale classification. The transfer resulted in an increase of approximately $210 million in amortized cost basis of available-for-sale securities and resulted in a net increase to accumulated other comprehensive income of $7.4 million, net of tax. This transfer enhanced liquidity and increased flexibility with regard to asset-liability management and balance sheet composition. As a result of the transfer, the Company believes it has tainted its held-to-maturity classification and judgment will be required in the future in determining when circumstances have changed such that management can assert that it has the intent and ability to hold debt securities to maturity. Based on this guidance, the Company does not expect to classify any securities as held-to-maturity within the near future.
For the three months ended September 30, 2017,March 31, 2022, average securities decreased $9.7increased $65.1 million to $397.1approximately $545.2 million, or 9.1%7.0% of average total interest-earning assets, from approximately $480.1 million, or 6.4% of average interest-earning assets, from $406.8 million, or 10.1%compared to December 31, 2021.
As of average interest-earning assets, for the comparable period in 2016. For the nine months ended September 30, 2017, average securities decreased $28.7 million to $384.8 million, or 9.2% of average interest-earning assets, from $413.5 million, or 10.6% of average interest-earning assets, for the comparable period in 2016.
At September 30, 2017,March 31, 2022, net unrealized gainslosses on securities available-for-sale, which are carried as a component of accumulated other comprehensive incomeloss and included in stockholders’ equity, net of tax, amounted to $0.7$23.0 million as compared to $0.9with net unrealized losses of $0.5 million atas of December 31, 2016.2021. The decreaseincrease in net unrealized gainslosses is predominantlypredominately attributable to the sales of available-for-sale securities during 2017changes in market conditions and fluctuations in prevailing market interest rates. Unrealized losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The 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 relateddecline in fair value is largely due to changes in interest rates and doother market conditions. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not affect the expected cash flowsbeen recorded through an allowance for credit losses is recognized in other comprehensive income, net of the underlying collateral or issue.applicable taxes. The Company did not record an allowance for credit losses for available-for-sale as of March 31, 2022.
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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, 2017March 31, 2022 and December 31, 20162021, 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 the Bank’s management.
The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates.
Based on our model, which was run as of September 30, 2017,March 31, 2022, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 1.65%3.60%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 1.84%6.28%. As of December 31, 2016,2021, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 5.79%3.35%, while a 100 basis-point instantaneous decrease in the general level of interest rates would decrease our net interest income by 2.93%5.64%.
Based on our model, which was run as of September 30, 2017,March 31, 2022, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 2.43%9.20%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.75%10.89%. As of December 31, 2016,2021, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 6.65%9.77%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 4.43%10.41%.
An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of September 30, 2017,March 31, 2022, would declineincrease by 12.49%0.65% with an instantaneous rate shock of up 200 basis points, and increasedecline by 4.51%6.89% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2016,2021, would declineincrease by 7.97%0.24% with an instantaneous rate shock of up 200 basis points, and increasedecline by 2.96%5.20% with an instantaneous rate shock of down 100 basis points.
| Estimated Change in | ||||||||||||||
| Interest Rates | Estimated | EVE | Interest Rates | Estimated | Estimated Change in NII | |||||||||
| (basis points) | EVE | Amount | % | (basis points) | NII | Amount | % | |||||||
| (dollars in thousands) | ||||||||||||||
| +300 | $443,173 | $(108,035) | (19.6) | +300 | $154,260 | $3,080 | 2.0 | |||||||
| +200 | 482,343 | (68,865) | (12.5) | +200 | 153,672 | 2,491 | 1.7 | |||||||
| +100 | 520,848 | (30,360) | (5.5) | +100 | 152,821 | 1,640 | 1.1 | |||||||
| 0 | 551,208 | - | 0.0 | 0 | 151,180 | - | 0.0 | |||||||
| -100 | 576,090 | 24,882 | 4.5 | -100 | 148,406 | (2,775) | (1.8) | |||||||
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The following table illustrates the most recent results for EVE and one-year NII sensitivity as of March 31, 2022.
| Interest Rates | Estimated | Estimated Change in EVE | Interest Rates | Estimated | Estimated Change in NII | |||||||||||||||||||||||
| (basis points) | EVE | Amount | % | (basis points) | NII | Amount | % | |||||||||||||||||||||
| +300 | $ | 1,144,436 | $ | (10,469 | ) | (0.72 | ) | +300 | $ | 305,198 | $ | 15,172 | 5.23 | |||||||||||||||
| +200 | 1,464,299 | 9,394 | 0.65 | +200 | 300,455 | 10,429 | 3.60 | |||||||||||||||||||||
| +100 | 1,471,303 | 16,398 | 1.13 | +100 | 295,712 | 5,686 | 1.96 | |||||||||||||||||||||
| 0 | 1,454,905 | - | - | 0 | 290,026 | - | - | |||||||||||||||||||||
| -100 | 1,354,701 | (100,204 | ) | (6.89 | ) | -100 | 271,825 | (18,201 | ) | (6.28 | ) | |||||||||||||||||
Estimates of Fair Value
The estimation of fair value is significant to a number of the Company’s assets, including loans held-for-sale and 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 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 consolidated financial statements and notes thereto presented elsewhere herein have been prepared in accordance with GAAP, which requirerequires 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 Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Liquidity
Liquidity is a measure of a bank’s ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.
At September 30, 2017,
As of March 31, 2022, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of September 30, 2017,March 31, 2022, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $399.2$742.8 million, which represented 8.2%9.1% of total assets and 9.5%10.9% of total deposits and borrowings, compared to $428.2$742.1 million atas of December 31, 2016,2021, which represented 9.7%9.1% of total assets and 11.2%10.9% of total deposits and borrowings on such date.borrowings.
The Bank is a member of the FHLBFederal Home Loan Bank of New York and, based on available qualified collateral as of September 30, 2017,March 31, 2022, had the ability to borrow $1.4$1.9 billion. In addition, at September 30, 2017,as of March 31, 2022, the Bank had in place borrowing capacity of $25 million through correspondent banks. The Bank also has a credit facility established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral of $10.9$1.8 million. At September 30, 2017,As of March 31, 2022, the Bank had aggregate available and unused credit of approximately $796 million,$1.0 billion, which represents the aforementioned facilities totaling $1.4$1.9 billion net of $610 million$0.9 billion in outstanding borrowings and letters of credit. At September 30, 2017,As of March 31, 2022, outstanding commitments for the Bank to extend credit were approximately $635 million.$1.2 billion.
Cash and cash equivalents totaled $141.3$311.5 million on September 30, 2017, decreasingas of March 31, 2022, increasing by $59.1$46.0 million from $200.4$265.5 million atas of December 31, 2016.2021. Operating activities provided $68.3$45.8 million in net cash. Investing activities used $508.7$160.2 million in net cash, primarily reflecting an increase in loans and securities.loans. Financing activities provided $381.2$160.4 million in net cash, primarily reflecting a netan increase of $279.5 million in deposits, and a net increase of $109 million in borrowings (consisting of $780.0 million in new FHLB borrowingspartially offset by notional repayments of $656.0 millionnet repayment of FHLB borrowings and $15.0 million of repayments of repurchase agreements).$56 million.
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Deposits
Total deposits increased by $279.5$227.5 million, or 8.4%3.6%, to $3.6$6.6 billion at September 30, 2017as of March 31, 2022 from December 31, 2016.2021. The increase was primarily attributabledue to increases in timedemand, interest-bearing and NOW, savings, and demand, noninterest bearing deposits, money market, interest-bearing demand and noninterest-bearing demand deposits and partially offset by a slight decrease in savingstime deposits. The following table sets forth the composition of our deposit base by the periods indicated.
| Amount | ||||||||||||||||
| Increase/ | ||||||||||||||||
| September 30, 2017 | December 31, 2016 | (Decrease) | ||||||||||||||
| Amount | % | Amount | % | 2017 vs. 2016 | ||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Demand, noninterest-bearing | $ | 719,582 | 19.8 | % | $ | 694,977 | 20.8 | % | $ | 24,605 | ||||||
| Demand, interest-bearing | 623,027 | 17.2 | 563,740 | 16.9 | 59,287 | |||||||||||
| Money market | 1,024,975 | 28.3 | 911,867 | 27.3 | 113,108 | |||||||||||
| Savings | 177,826 | 4.9 | 205,551 | 6.1 | (27,725 | ) | ||||||||||
| Time | 1,078,359 | 29.8 | 968,136 | 28.9 | 110,223 | |||||||||||
| Total deposits | $ | 3,623,769 | 100.0 | % | $ | 3,344,271 | 100.0 | % | $ | 279,498 | ||||||
| March 31, 2022 | December 31, 2021 | Amount Increase/ | ||||||||||||||||||
| Amount | % | Amount | % | (Decrease) | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Demand, noninterest-bearing | $ | 1,631,292 | 24.9 | % | $ | 1,617,049 | 25.5 | % | $ | 14,243 | ||||||||||
| Demand, interest-bearing and NOW | 3,403,099 | 51.9 | 3,127,350 | 49.4 | % | 275,749 | ||||||||||||||
| Savings | 460,200 | 7.0 | 438,445 | 6.9 | % | 21,755 | ||||||||||||||
| Time | 1,065,814 | 16.2 | 1,150,109 | 18.2 | % | (84,295 | ) | |||||||||||||
| Total deposits | $ | 6,560,405 | 100.0 | % | $ | 6,332,953 | 100.0 | % | $ | 227,452 | ||||||||||
Subordinated Debentures
During December 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 Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part prior to maturity. The floating interest rate on the subordinated debentures is three month LIBOR plus 2.85% and repricesre-prices quarterly. The rate at September 30, 2017as of March 31, 2022 was 4.16%3.15%.
During June 2015,2020, the Parent Corporation issued $50$75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”“2020 Notes”). The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding, June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2020. From and including June 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.
During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2018 Notes”) to certain institutional accredited investors. The net proceeds from the sale of the 2018 Notes were used by the Parent Corporation to contribute $35.0 million of common equity to the Bank on September 30, 2015, and to repay $11.25 million of SBLF preferred issued to the U.S. Treasury on March 11, 2016. Remaining funds were used for general corporate purposes.purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity in the first quarter of 2018. The 2018 Notes are non-callable for five years, have a stated maturity of JulyFebruary 1, 2025,2028 and bear interest at a fixed rate of 5.75%5.20% per year, from and including September 30, 2015January 17, 2018 to, but excluding JulyFebruary 1, 2020.2023. From and including JulyFebruary 1, 20202023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three monththree-month LIBOR rate plus 393284 basis points.
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Stockholders’ Equity
The Company’s stockholders’ equity was $558 million at September 30, 2017,$1.1 billion as of March 31, 2022, an increase of $26.7$14.3 million from December 31, 2016.2021. The increase in stockholders’ equity was primarily attributable to retained earnings, in addition to an increase in additional paid-in capital, partially offset by a decrease in accumulated other comprehensive income, reflecting the after-tax decline in the fair value of $25.4 millioninvestment securities net of unrealized hedge gains recorded in retained earningsother assets, and approximately $1.4 million of equity issuance related to stock-based compensation.an increase in treasury stock. As of September 30, 2017,March 31, 2022, the Company’s tangible common equity ratio and tangible book value per share were 8.71%9.99% and $12.78,$20.51, respectively. As of December 31, 2016,2021, the tangible common equity ratio and tangible book value per share were 8.93%10.06% and $11.96,$20.12, respectively. Total goodwill and other intangible assets were approximately $148$216.9 million and $149$217.4 million, as of September 30, 2017March 31, 2022 and December 31, 2016,2021, respectively.
| September 30, | December 31, | |||||
| 2017 | 2016 | |||||
| (dollars in thousands, except for share and | ||||||
| per share data) | ||||||
| Stockholders’ equity | $ | 557,691 | $ | 531,032 | ||
| Less: Goodwill and other intangible assets | 148,442 | 148,997 | ||||
| Tangible common stockholders’ equity | $ | 409,249 | $ | 382,035 | ||
| Common stock outstanding at period end | 32,015,317 | 31,948,307 | ||||
| Book value per common share | $ | 17.42 | $ | 16.62 | ||
| Less: Goodwill and other intangible assets | 4.64 | 4.66 | ||||
| Tangible book value per common share | $ | 12.78 | $ | 11.96 | ||
The following table shows the reconciliation of common equity to tangible common equity and the tangible common equity ratio.
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (dollars in thousands, except for share and per share data) | ||||||||
| Common equity | $ | 1,027,592 | $ | 1,013,285 | ||||
| Less: intangible assets | (216,936 | ) | (217,369 | ) | ||||
| Tangible common stockholders’ equity | $ | 810,656 | $ | 795,916 | ||||
| Total assets | $ | 8,334,301 | $ | 8,129,480 | ||||
| Less: intangible assets | (216,936 | ) | (217,369 | ) | ||||
| Tangible assets | $ | 8,117,365 | $ | 7,912,111 | ||||
| Common stock outstanding at period end | 39,518,411 | 39,568,090 | ||||||
| Tangible common equity ratio (1) | 9.99 | % | 10.06 | % | ||||
| Book value per common share | $ | 26.00 | $ | 25.61 | ||||
| Less: intangible assets | 5.49 | 5.49 | ||||||
| Tangible book value per common share | $ | 20.51 | $ | 20.12 | ||||
| Tangible common equity ratio is a non-GAAP measure. |
Regulatory Capital and Capital Adequacy
The maintenance of a solid capital foundation is a primary goal for the Company. Accordingly, capital plans, stock repurchases and dividend policies are monitored on an ongoing basis. The Company’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 Company 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, 2017March 31, 2022 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution (dollars in thousands)(for the Bank).
| To Be Well-Capitalized Under | ||||||||||||||||||
| For Capital Adequacy | Prompt Corrective Action | |||||||||||||||||
| ConnectOne Bancorp, Inc. | Purposes | Provisions | ||||||||||||||||
| At September 30, 2017 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
| (dollars in thousands) | ||||||||||||||||||
| Tier 1 leverage capital | $ | 416,736 | 9.13 | % | $ | 182,603 | 4.00 | % | N/A | N/A | ||||||||
| CET I risk-based ratio | 411,582 | 9.40 | 197,042 | 4.50 | N/A | N/A | ||||||||||||
| Tier 1 risk-based capital | 416,736 | 9.52 | 262,723 | 6.00 | N/A | N/A | ||||||||||||
| Total risk-based capital | 496,606 | 11.34 | 350,397 | 8.00 | N/A | N/A | ||||||||||||
| To Be Well-Capitalized Under | ||||||||||||||||||
| For Capital Adequacy | Prompt Corrective Action | |||||||||||||||||
| ConnectOne Bank | Purposes | Provisions | ||||||||||||||||
| At September 30, 2017 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
| (dollars in thousands) | ||||||||||||||||||
| Tier 1 leverage capital | $ | 461,300 | 10.11 | % | $ | 182,539 | 4.00 | % | $ | 228,173 | 5.00 | % | ||||||
| CET I risk-based ratio | 461,300 | 10.54 | 197,019 | 4.50 | 284,583 | 6.50 | ||||||||||||
| Tier 1 risk-based capital | 461,300 | 10.54 | 262,692 | 6.00 | 350,255 | 8.00 | ||||||||||||
| Total risk-based capital | 491,170 | 11.22 | 350,255 | 8.00 | 437,819 | 10.00 | ||||||||||||
| ConnectOne Bancorp, Inc. | For Capital Adequacy Purposes | To Be Well-Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||
| The Company | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||
| As of March 31, 2022 | (dollars in thousands) | |||||||||||||||||||||
| Tier 1 leverage capital | $ | 931,398 | 11.57 | % | $ | 322,078 | 4.00 | % | $ | N/A | N/A | |||||||||||
| CET I risk-based ratio | 815,316 | 10.69 | 343,288 | 4.50 | N/A | N/A | ||||||||||||||||
| Tier 1 risk-based capital | 931,398 | 12.21 | 457,717 | 6.00 | N/A | N/A | ||||||||||||||||
| Total risk-based capital | 1,161,468 | 15.23 | 610,289 | 8.00 | N/A | N/A | ||||||||||||||||
N/A - not applicable
| ConnectOne Bank | For Capital Adequacy Purposes | To Be Well-Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
| The Bank | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
| As of March 31, 2022 | (dollars in thousands) | |||||||||||||||||||||||
| Tier 1 leverage capital | $ | 918,787 | 11.41 | % | $ | 322,041 | 4.00 | % | 402,552 | 5.00 | % | |||||||||||||
| CET I risk-based ratio | 918,787 | 12.04 | 343,279 | 4.50 | 495,847 | 6.50 | ||||||||||||||||||
| Tier 1 risk-based capital | 918,787 | 12.04 | 457,705 | 6.00 | 610,273 | 8.00 | ||||||||||||||||||
| Total risk-based capital | 1,031,107 | 13.52 | 610,273 | 8.00 | 762,841 | 10.00 | ||||||||||||||||||
As of September 30, 2017, management believes that each of the Bank and the Company meet all capital adequacy requirements to which they are subject.
Basel III rules require a “capital conservation buffer” for both the Company and the Bank. When fully phased in on January 1, 2019, each of the Company and the Bank will be required to maintain a 2.5% capital conservation buffer, above and beyond the capital levels otherwise required under applicable regulation. The implementation of this capital conservation buffer began on January 1, 2016 at a level of 0.625%, and will increase by 0.625% on each subsequent January 1 until it reaches 2.5% on January 1, 2019. Under this guidance banking institutions with a CET1, Tier 1 Capital Ratio and Total Risk Based Capital Ratio above the minimum regulatory adequate capital ratios but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall.
As of September 30, 2017March 31, 2022, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the TotalCET I Risk Based Capital Ratio which was 2.09%3.69% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 1.97%3.02% above the minimum buffer ratio.
|
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-Operations - Interest Rate Sensitivity Analysis"Analysis” herein for a discussion of our management of our interest rate risk.
Item 4. Controls and Procedures
a)Disclosure controls and procedures. As of the end of the Company’s most recently completed fiscal quarter covered by this report, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company 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 Company’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
b)Changes in internal controls over financial reporting. There have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not subject to any legal proceedings, which could have a materially adverse impact on its results of operations and financial condition.
Item 1a. Risk Factors
There have been no material changes to the risks inherent in our business from those described under Item 1A – Risk Factors of our Annual Report on Form 10-K.10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase Program
Not applicable
Historically, repurchases have been made from time to time as, in the opinion of management, market conditions warranted, in the open market or in privately negotiated transactions.
During the quarter ended March 31, 2022, the Company repurchased a total of 144,793 shares. As of March 31, 2022, shares remaining for repurchase under the program were 2,129,955.
The following table details share repurchases for the three months ended March 31, 2022:
| Shares Authorized | Total Number of Shares Purchased | Average Price Paid per Share | Cumulative Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||
| January 1, 2022 – January 31, 2022 | - | - | $ | - | - | 2,274,748 | ||||||||||||||
| February 1, 2022 – February 28, 2022 | - | 110,193 | 33.22 | 110,193 | 2,164,555 | |||||||||||||||
| March 1, 2022 – March 31, 2022 | - | 34,600 | 32.42 | 34,600 | 2,129,955 | |||||||||||||||
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5.5 Other Information
Not applicable
Item 6. Exhibits
| Exhibit No. | Description | |
| 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 | ||
| 32.2 | ||
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | ||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |
SIGNATURES
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.
(Registrant)
| By: | /s/ Frank Sorrentino III | By: | /s/ William S. Burns | |
| Frank Sorrentino III | William S. Burns | |||
| Chairman and Chief Executive Officer | Senior Executive Vice President and Chief Financial Officer | |||
| Date: | Date: |
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