UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the Quarterly Period Ended September 30, | ||
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OR | ||
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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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 |
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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See definition of “large accelerated filer”, “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the 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 ☒
Securities registered pursuant to Section 12(b) of the Act:
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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: |
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(Title of Class) | (Outstanding as of November 6, |
Table of Contents
Page | |
PART I – FINANCIAL INFORMATION | |
Item 1.Financial Statements | 3 |
Consolidated Statements of Condition | 3 |
Consolidated Statements of Income for the three and nine months ended September 30, | 4 |
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, | 5 |
Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, | 6 |
Consolidated Statements of Cash Flows for the nine months ended September 30, | 8 |
Notes to Consolidated Financial Statements (unaudited) |
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Item 2. |
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Item 3.Qualitative and Quantitative Disclosures about Market Risks | 60 |
Item 4.Controls and Procedures | 61 |
PART II – OTHER INFORMATION | |
Item 1.Legal Proceedings | 62 |
Item 1a.Risk Factors | 62 |
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds | 63 |
Item 3.Defaults Upon Senior Securities | 63 |
Item 4.Mine Safety Disclosures | 63 |
Item 5.Other Information | 63 |
Item 6.Exhibits | 64 |
SIGNATURES |
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2
Item 1. Financial Statements
ConnectOne Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
|
| September 30, |
| December 31, | ||||||||||||
(in thousands, except for share data) | September 30, 2019 | December 31, 2018 |
| 2020 |
| 2019 | ||||||||||
(unaudited) |
| (unaudited) |
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ASSETS |
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Cash and due from banks | $ | 54,792 | $ | 39,161 |
| $ | 59,422 |
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| $ | 65,717 |
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Interest-bearing deposits with banks |
| 139,217 |
|
| 133,205 |
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| 196,697 |
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| 135,766 |
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Cash and cash equivalents | 194,009 | 172,366 |
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| 256,119 |
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| 201,483 |
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Securities available-for-sale | 425,849 | 412,034 |
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| 453,015 |
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| 404,701 |
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Equity securities | 11,231 | 11,460 |
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| 13,400 |
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| 11,185 |
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Loans held-for-sale | 33,245 | - |
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| 8,508 |
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| 33,250 |
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Loans receivable | 5,110,471 | 4,541,092 |
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| 6,251,051 |
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| 5,113,527 |
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Less: Allowance for loan losses |
| 38,771 |
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| 34,954 |
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| 74,267 |
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| 38,293 |
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Net loans receivable | 5,071,700 | 4,506,138 |
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| 6,176,784 |
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| 5,075,234 |
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Investment in restricted stock, at cost | 27,946 | 31,136 |
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| 28,713 |
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| 27,397 |
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Bank premises and equipment, net | 19,754 | 19,062 |
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| 29,922 |
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| 19,236 |
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Accrued interest receivable | 21,024 | 18,214 |
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| 34,326 |
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| 20,949 |
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Bank owned life insurance | 137,048 | 113,820 |
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| 165,676 |
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| 137,961 |
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Right of use operating lease assets | 15,789 | - |
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| 22,830 |
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| 15,137 |
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OREO | 907 | - | ||||||||||||||
Goodwill | 162,574 | 145,909 |
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| 208,372 |
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| 162,574 |
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Core deposit intangibles | 5,800 | 1,737 |
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| 11,605 |
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| 5,460 |
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Other assets |
| 34,393 |
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| 30,216 |
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| 40,289 |
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| 59,465 |
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Total assets | $ | 6,161,269 |
| $ | 5,462,092 |
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| $ | 7,449,559 |
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| $ | 6,174,032 |
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LIABILITIES |
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Deposits: |
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Noninterest-bearing | $ | 828,190 | $ | 768,584 |
| $ | 1,270,021 |
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| $ | 861,728 |
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Interest-bearing |
| 3,923,044 |
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| 3,323,508 |
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| 4,528,735 |
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| 3,905,814 |
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Total deposits |
| 4,751,234 |
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| 4,092,092 |
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| 5,798,756 |
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| 4,767,542 |
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Borrowings | 512,456 | 600,001 |
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| 506,225 |
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| 500,293 |
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Subordinated debentures (net of unamortized debt issuance costs of $1,353 and $1,599, respectively) | 128,802 | 128,556 | ||||||||||||||
Operating lease liabilities | 17,148 | - |
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| 26,726 |
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| 16,449 |
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Subordinated debentures, net of debt issuance costs |
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| 202,552 |
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| 128,885 |
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Other liabilities |
| 31,469 |
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| 27,516 |
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| 24,564 |
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| 29,673 |
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Total liabilities |
| 5,441,109 |
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| 4,848,165 |
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| 6,558,823 |
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| 5,442,842 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS’ EQUITY |
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Preferred Stock: |
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Authorized 5,000,000 shares | - | - |
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| - |
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| - |
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Common stock, no par value: |
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Authorized 50,000,000 shares; issued 37,668,785 shares at September 30, 2019 and 34,392,464 shares at December 31, 2018; outstanding 35,364,845 shares at September 30, 2019 and 32,328,542 at December 31, 2018 | 468,571 | 412,546 | ||||||||||||||
Authorized 50,000,000 shares; issued 42,412,684 shares as of September 30, 2020 and 37,676,006 shares as of December 31, 2019; outstanding 39,754,051 shares as of September 30, 2020 and 35,072,067 as of December 31, 2019 |
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| 586,946 |
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| 468,571 |
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Additional paid-in capital | 20,450 | 15,542 |
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| 22,867 |
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| 21,344 |
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Retained earnings | 254,159 | 211,345 |
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| 309,893 |
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| 271,782 |
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Treasury stock, at cost 2,303,940 common shares at September 30, 2019 and 2,063,922 at December 31, 2018 | (21,892 | ) | (16,717 | ) | ||||||||||||
Accumulated other comprehensive loss |
| (1,128 | ) |
| (8,789 | ) | ||||||||||
Treasury stock, at cost 2,658,633 common shares as of September 30, 2020 and 2,603,940 as of December 31, 2019 |
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| (30,271 | ) |
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| (29,360 | ) | ||||||||
Accumulated other comprehensive income (loss) |
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| 1,301 |
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| (1,147 | ) | ||||||||
Total stockholders’ equity |
| 720,160 |
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| 613,927 |
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| 890,736 |
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| 731,190 |
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Total liabilities and stockholders’ equity | $ | 6,161,269 |
| $ | 5,462,092 |
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| $ | 7,449,559 |
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| $ | 6,174,032 |
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See accompanying notes to unaudited consolidated financial statements.
3
ConnectOne Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in thousands, except for per share data) | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||
Interest income | ||||||||||||||||||||||||||||||||
Interest and fees on loans | $ | 66,796 | $ | 51,699 | $ | 190,646 | $ | 148,218 | $ | 74,755 |
| $ | 66,796 | $ | 223,488 |
| $ | 190,646 | ||||||||||||||
Interest and dividends on investment securities: |
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Taxable | 1,916 | 2,154 | 7,431 | 6,191 |
| 1,305 |
| 1,916 |
| 5,083 |
| 7,431 | ||||||||||||||||||||
Tax-exempt | 897 | 785 | 3,105 | 2,377 |
| 688 |
| 897 |
| 2,148 |
| 3,105 | ||||||||||||||||||||
Dividends | 502 | 530 | 1,369 | 1,517 |
| 426 |
| 502 |
| 1,268 |
| 1,369 | ||||||||||||||||||||
Interest on federal funds sold and other short-term investments |
| 278 |
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| 183 |
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|
| 925 |
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| 607 |
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| 47 |
|
| 278 |
| 625 |
|
| 925 | |||||||
Total interest income |
| 70,389 |
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| 55,351 |
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| 203,476 |
|
| 158,910 |
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| 77,221 |
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| 70,389 |
| 232,612 |
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| 203,476 | ||||||||||
Interest expense |
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Deposits | 17,351 | 10,681 | 49,298 | 27,538 |
| 11,947 |
| 17,351 |
| 42,756 |
| 49,298 | ||||||||||||||||||||
Borrowings and subordinated debentures |
| 4,632 |
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| 4,708 |
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| 15,290 |
|
| 14,318 |
| ||||||||||||||||||||
Borrowings |
| 4,725 |
|
| 4,632 |
| 13,236 |
|
| 15,290 | ||||||||||||||||||||||
Total interest expense |
| 21,983 |
|
| 15,389 |
|
| 64,588 |
|
| 41,856 |
|
| 16,672 |
|
| 21,983 |
| 55,992 |
|
| 64,588 | ||||||||||
Net interest income | 48,406 | 39,962 | 138,888 | 117,054 |
| 60,549 |
| 48,406 |
| 176,620 |
| 138,888 | ||||||||||||||||||||
Provision for loan losses |
| 2,000 |
|
| 1,100 |
|
| 7,600 |
|
| 20,000 |
|
| 5,000 |
|
| 2,000 |
| 36,000 |
|
| 7,600 | ||||||||||
Net interest income after provision for loan losses |
| 46,406 |
|
| 38,862 |
|
| 131,288 |
|
| 97,054 |
|
| 55,549 |
|
| 46,406 |
| 140,620 |
|
| 131,288 | ||||||||||
Noninterest income |
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Income on bank owned life insurance | 915 | 751 | 2,570 | 2,300 |
| 1,598 |
| 915 |
| 3,693 |
| 2,570 | ||||||||||||||||||||
Net gains on sale of loans held-for-sale | 278 | 2 | 343 | 31 |
| 614 |
| 278 |
| 1,244 |
| 343 | ||||||||||||||||||||
Deposit, loan and other income | 1,116 | 676 | 2,816 | 1,893 |
| 1,278 |
| 1,116 |
| 5,777 |
| 2,816 | ||||||||||||||||||||
Net gains (losses) on equity securities | 79 | (157 | ) | 340 | (325 | ) | ||||||||||||||||||||||||||
Net losses on sales of securities available-for-sale |
| (279 | ) |
|
| - |
|
| (280 | ) |
| - |
| |||||||||||||||||||
Net (losses) gains on equity securities |
| (7 | ) | 79 |
| 215 |
| 340 | ||||||||||||||||||||||||
Net (losses) gains on sales of securities available-for-sale |
| - |
|
| (279 | ) |
| 29 |
|
| (280 | ) | ||||||||||||||||||||
Total noninterest income |
| 2,109 |
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| 1,272 |
|
| 5,789 |
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| 3,899 |
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| 3,483 |
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| 2,109 |
| 10,958 |
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| 5,789 | ||||||||||
Noninterest expenses |
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Salaries and employee benefits | 12,420 | 10,174 | 36,168 | 29,575 |
| 15,144 |
| 12,420 |
| 44,266 |
| 36,168 | ||||||||||||||||||||
Occupancy and equipment | 2,480 | 2,137 | 7,332 | 6,311 |
| 3,566 |
| 2,480 |
| 10,193 |
| 7,332 | ||||||||||||||||||||
FDIC insurance | (364 | ) | 735 | 1,216 | 2,350 |
| 1,105 |
| (364 | ) |
| 3,054 |
| 1,216 | ||||||||||||||||||
Professional and consulting | 1,499 | 891 | 4,078 | 2,439 |
| 1,926 |
| 1,499 |
| 5,173 |
| 4,078 | ||||||||||||||||||||
Marketing and advertising | 473 | 192 | 1,080 | 736 |
| 214 |
| 473 |
| 944 |
| 1,080 | ||||||||||||||||||||
Data processing | 1,058 | 1,102 | 3,352 | 3,341 |
| 1,470 |
| 1,058 |
| 4,529 |
| 3,352 | ||||||||||||||||||||
Merger expenses | 191 | 375 | 8,084 | 399 | ||||||||||||||||||||||||||||
Merger and restructuring expenses |
| - |
| 191 |
| 14,640 |
| 8,084 | ||||||||||||||||||||||||
Loss on extinguishment of debt | - | - | 1,047 | - |
| - |
| - |
| - |
| 1,047 | ||||||||||||||||||||
Amortization of core deposit intangibles | 340 | 145 | 1,068 | 483 |
| 627 |
| 340 |
| 1,931 |
| 1,068 | ||||||||||||||||||||
Other components of net periodic pension expense | 29 | 7 | 86 | 21 | ||||||||||||||||||||||||||||
Increase in value of acquisition price |
| - |
| - |
| 2,333 |
| - | ||||||||||||||||||||||||
Other components of net periodic pension (income) expense |
| (30 | ) | 29 |
| (89 | ) | 86 | ||||||||||||||||||||||||
Other expenses |
| 2,253 |
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| 2,372 |
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| 6,520 |
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| 6,474 |
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| 2,456 |
| 2,253 |
| 7,625 |
| 6,520 | ||||||||||||
Total noninterest expenses |
| 20,379 |
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| 18,130 |
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| 70,031 |
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| 52,129 |
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| 26,478 |
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| 20,379 |
| 94,599 |
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| 70,031 | ||||||||||
Income before income tax expense | 28,136 | 22,004 | 67,046 | 48,824 |
| 32,554 |
| 28,136 |
| 56,979 |
| 67,046 | ||||||||||||||||||||
Income tax expense |
| 6,440 |
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| 2,102 |
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| 14,434 |
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| 7,144 |
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| 7,768 |
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| 6,440 |
| 11,331 |
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| 14,434 | ||||||||||
Net income | $ | 21,696 |
| $ | 19,902 |
| $ | 52,612 |
| $ | 41,680 |
| $ | 24,786 |
| $ | 21,696 | $ | 45,648 |
| $ | 52,612 | ||||||||||
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Earnings per common share: |
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Basic | $ | 0.61 | $ | 0.62 | $ | 1.49 | $ | 1.30 | $ | 0.62 |
| $ | 0.61 | $ | 1.15 |
| $ | 1.49 | ||||||||||||||
Diluted | 0.61 | 0.61 | 1.48 | 1.29 |
| 0.62 |
| 0.61 |
| 1.15 |
| 1.48 |
See accompanying notes to unaudited consolidated financial statements.
4
ConnectOne Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
|
| Three Months Ended |
| Nine Months Ended | ||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, |
| September 30, |
| September 30, | |||||||||||||||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||||||||||||||
Net income | $ | 21,696 | $ | 19,902 | $ | 52,612 | $ | 41,680 |
| $ | 24,786 |
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| $ | 21,696 |
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| $ | 45,648 |
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| $ | 52,612 |
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Other comprehensive income (loss): |
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Unrealized gains and losses: |
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Unrealized holding gains (losses) on available-for-sale securities arising during the period | 2,236 | (2,840 | ) | 11,821 | (9,639 | ) | ||||||||||||||||||||||||||
Unrealized holding gains on available-for-sale securities arising during the period |
|
| 703 |
| 2,236 |
|
| 5,532 |
|
| 11,821 | |||||||||||||||||||||
Tax effect |
| (584 | ) |
| 729 |
|
|
| (3,061 | ) |
|
| 2,466 |
|
|
| (160 | ) |
| (584 | ) |
|
| (1,459 | ) |
| (3,061 | ) | ||||
Net of tax | 1,652 | (2,111 | ) | 8,760 | (7,173 | ) |
|
| 543 |
| 1,652 |
|
| 4,073 |
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| 8,760 | |||||||||||||||
Reclassification adjustment for realized losses included in net income | 279 | - | 280 | - | ||||||||||||||||||||||||||||
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Reclassification adjustment for realized losses (gains) included in net income |
|
| - |
| 279 |
|
| (29 | ) |
| 280 | |||||||||||||||||||||
Tax effect |
| (62 | ) |
| - |
|
| (62 | ) |
| - |
|
| - |
|
| (62 | ) |
|
| 6 |
|
| (62 | ) | |||||||
Net of tax | 217 | - | 218 | - |
|
| - |
| 217 |
|
| (23 | ) |
| 218 | |||||||||||||||||
Unrealized (losses) gains on cash flow hedges | (49 | ) | 14 | (977 | ) | 1,108 | ||||||||||||||||||||||||||
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Unrealized losses on cash flow hedges |
|
| (82 | ) |
| (49 | ) |
|
| (3,397 | ) |
| (977 | ) | ||||||||||||||||||
Tax effect |
| 27 |
|
| (5 | ) |
| 309 |
| (312 | ) |
|
| 42 |
|
| 27 |
|
| 955 |
|
| 309 | |||||||||
Net of tax | (22 | ) | 9 | (668 | ) | 796 |
|
| (40 | ) |
| (22 | ) |
|
| (2,442 | ) |
| (668 | ) | ||||||||||||
Reclassification adjustment for gains included in net income | (204 | ) | - | (563 | ) | - | ||||||||||||||||||||||||||
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Reclassification adjustment for realized losses (gains) included in net income |
|
| 631 |
| (204 | ) |
|
| 942 |
| (563 | ) | ||||||||||||||||||||
Tax effect |
| 46 |
|
| - |
| 125 |
| - |
|
| (196 | ) |
| 46 |
|
| (265 | ) |
| 125 | |||||||||||
Net of tax | (158 | ) | - | (438 | ) | - |
|
| 435 |
| (158 | ) |
|
| 677 |
| (438 | ) | ||||||||||||||
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|
|
|
|
|
|
|
|
| ||||||||||||||||
Unrealized pension plan gains and losses: |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Unrealized pension plan (losses) gains before reclassifications | - | - | (562 | ) | 236 | |||||||||||||||||||||||||||
Unrealized pension plan losses before reclassifications |
|
| - |
|
|
| - |
|
|
| - |
|
| (562 | ) | |||||||||||||||||
Tax effect |
| - |
| - |
| 158 |
| (67 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
| 158 | |||||||||
Net of tax |
| - |
| - |
| (404 | ) |
| 169 |
|
| - |
|
|
| - |
|
|
| - |
| (404 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Reclassification adjustment for amortization included in net income | 90 | 91 | 269 | 274 |
|
| 75 |
|
| 90 |
|
| 226 |
|
| 269 | ||||||||||||||||
Tax effect | (26 | ) | (26 | ) | (76 | ) | (77 | ) |
|
| (21 | ) |
| (26 | ) |
|
| (63 | ) |
| (76 | ) | ||||||||||
Net of tax |
| 64 |
|
| 65 |
|
| 193 |
|
| 197 |
|
|
| 54 |
|
| 64 |
|
| 163 |
|
| 193 | ||||||||
Total other comprehensive income (loss) |
| 1,753 |
| (2,037 | ) |
| 7,661 |
| (6,011 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total other comprehensive income |
|
| 992 |
|
| 1,753 |
|
|
| 2,448 |
|
|
| 7,661 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total comprehensive income | $ | 23,449 |
| $ | 17,865 |
| $ | 60,273 |
| $ | 35,669 |
|
| $ | 25,778 |
|
| $ | 23,449 |
|
| $ | 48,096 |
|
| $ | 60,273 |
|
See accompanying notes to unaudited consolidated financial statements.
5
ConnectOne Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||
| |||||||||||||||||||||||||
(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, 2018 | $ | - | $ | 412,546 | $ | 15,542 | $ | 211,345 | $ | (16,717 | ) | $ | (8,789 | ) | $ | 613,927 | |||||||||
Net income | - | - | - | 52,612 | - | - | 52,612 | ||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | - | 7,661 | 7,661 | ||||||||||||||||||
Cash dividends declared on common stock ($0.27 per share) | - | - | - | (9,798 | ) | - | - | (9,798 | ) | ||||||||||||||||
Exercise of stock options (28,937 shares) | - | - | 265 | - | - | - | 265 | ||||||||||||||||||
Restricted stock grants (64,459 shares) | - | - | - | - | - | - | - | ||||||||||||||||||
Net restricted stock units issued (4,904 shares) | - | - | - | - | - | - | - | ||||||||||||||||||
Repurchase of stock (240,018 shares) | - | - | - | - | (5,175 | ) | - | (5,175 | ) | ||||||||||||||||
Net performance units issued (26,517 shares) | - | - | 196 | - | - | - | 196 | ||||||||||||||||||
Stock issued (3,032,496 shares) in acquisition of Greater Hudson Bank | - | 56,025 | - | - | - | - | 56,025 | ||||||||||||||||||
Restricted stock issued (119,008 shares) in acquisition of BoeFly, LLC | - | - | 2,500 | - | - | - | 2,500 | ||||||||||||||||||
Stock-based compensation expense |
| - |
| - |
| 1,947 |
| - |
|
| - |
| - |
| 1,947 |
| |||||||||
Balance as of September 30, 2019 | $ | - | $ | 468,571 | $ | 20,450 | $ | 254,159 |
| $ | (21,892 | ) | $ | (1,128 | ) | $ | 720,160 |
|
|
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||
(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, 2019 |
| $ | - |
| $ | 468,571 |
| $ | 21,344 |
| $ | 271,782 |
|
| $ | (29,360 | ) |
| $ | (1,147 | ) |
| $ | 731,190 |
|
Net income |
|
| - |
|
| - |
|
| - |
|
| 45,648 |
|
|
| - |
|
|
| - |
|
|
| 45,648 |
|
Other comprehensive income, net of tax |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
| - |
|
|
| 2,448 |
|
|
| 2,448 |
|
Cash dividends declared on common stock ($0.18 per share) |
|
| - |
|
| - |
|
| - |
|
| (7,537 | ) |
|
| - |
|
|
| - |
|
|
| (7,537 | ) |
Exercise of stock options (25,413 shares) |
|
| - |
|
| - |
|
| 163 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 163 |
|
Restricted stock grants, net of forfeitures (68,531 shares) |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Stock grants issued (1,340 shares) | - | - | - | - | - | - | - | ||||||||||||||||||
Net shares issued in satisfaction of restricted stock units earned (16,541 shares) |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Net shares issued in satisfaction of performance units earned (22,402 shares) |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Share redemption for tax withholdings on performance units and restricted stock units earned |
|
| - |
|
| - |
|
| (639 | ) |
| - |
|
|
| - |
|
|
| - |
|
|
| (639 | ) |
Repurchase of treasury stock (54,693 shares) |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
| (911 | ) |
|
| - |
|
|
| (911 | ) |
Stock issued (4,602,450 shares) in acquisition of Bancorp of New Jersey |
|
| - |
|
| 118,375 |
|
| - |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 118,375 |
|
Stock-based compensation |
|
| - |
|
| - |
|
| 1,999 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,999 |
|
Balance as of September 30, 2020 |
| $ | - |
| $ | 586,946 |
| $ | 22,867 |
| $ | 309,893 |
|
| $ | (30,271 | ) |
| $ | 1,301 |
|
| $ | 890,736 |
|
Three Months Ended September 30, 2019 | |||||||||||||||||||||||||
| |||||||||||||||||||||||||
(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 June 30, 2019 | $ | - | $ | 468,571 | $ | 19,777 | $ | 235,649 | $ | (21,892 | ) | $ | (2,881 | ) | $ | 699,224 | |||||||||
Net income | - | - | - | 21,696 | - | - | 21,696 | ||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | - | 1,753 | 1,753 | ||||||||||||||||||
Cash dividends declared on common stock ($0.09 per share) | - | - | - | (3,186 | ) | - | - | (3,186 | ) | ||||||||||||||||
Restricted stock grants (11,979 shares) | - | - | - | - | - | - | - | ||||||||||||||||||
Stock-based compensation expense |
| - |
| - |
| 673 |
| - |
|
| - |
|
| - |
|
| 673 |
| |||||||
Balance as of September 30, 2019 | $ | - | $ | 468,571 | $ | 20,450 | $ | 254,159 |
| $ | (21,892 | ) | $ | (1,128 | ) | $ | 720,160 |
|
Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||
(dollars in thousands, except for per share data) |
| Preferred Stock |
| Common Stock |
| Additional Paid-In Capital |
| Retained Earnings |
| Treasury Stock |
| Accumulated Other (Loss) Income |
| Total Stockholders’ Equity |
| ||||||||||||
Balance as of June 30, 2020 |
| $ | - |
| $ | 586,946 |
| $ | 22,069 |
|
| $ | 288,688 |
|
| $ | (30,271 | ) |
| $ | 309 |
| $ | 867,741 |
|
| |
Net income |
|
| - |
|
| - |
|
| - |
|
|
| 24,786 |
|
|
| - |
|
|
| - |
|
|
| 24,786 |
|
|
Other comprehensive income, net of tax |
|
| - |
|
| - |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 992 |
|
| 992 |
| ||
Cash dividends declared on common stock ($0.09 per share) |
|
| - |
|
| - |
|
| - |
|
|
| (3,581 | ) |
|
| - |
|
|
| - |
|
|
| (3,581 | ) | |
Restricted stock grants, net of forfeitures (1,018 shares) |
|
| - |
|
| - |
|
| - |
|
|
| - |
|
| - |
|
|
| - |
|
|
| - |
| ||
Stock-based compensation |
|
| - |
|
| - |
|
| 798 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 798 |
| |
| |||||||||||||||||||||||||||
Balance as of September 30, 2020 |
| $ | - |
| $ | 586,946 |
| $ | 22,867 |
|
| $ | 309,893 |
|
| $ | (30,271 | ) |
| $ | 1,301 |
|
| $ | 890,736 |
|
|
6
(continued)
6
Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||
(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, 2018 | $ | - | $ | 412,546 | $ | 15,542 | $ | 211,345 | $ | (16,717 | ) | $ | (8,789 | ) | $ | 613,927 | |||||||||
Net income | - | - | - | 52,612 | - | - | 52,612 | ||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | - | 7,661 | 7,661 | ||||||||||||||||||
Cash dividends declared on common stock ($0.27 per share) | - | - | - | (9,798 | ) | - | - | (9,798 | ) | ||||||||||||||||
Exercise of stock options (28,937 shares) | - | - | 265 | - | - | - | 265 | ||||||||||||||||||
Restricted stock grants (64,459 shares) | - | - | - | - | - | - | - | ||||||||||||||||||
Net shares issued in satisfaction of restricted stock units earned (4,904 shares) | - | - | - | - | - | - | - | ||||||||||||||||||
Repurchase of stock (240,018 shares) | - | - | - | - | (5,175 | ) | - | (5,175 | ) | ||||||||||||||||
Net shares issued in satisfaction of performance units earned (26,517 shares) | - | - | 196 | - | - | - | 196 | ||||||||||||||||||
Stock issued (3,032,496 shares) in acquisition of Greater Hudson Bank | - | 56,025 | - | - | - | - | 56,025 | ||||||||||||||||||
Restricted stock issued (119,008 shares) in acquisition of BoeFly, LLC | - | - | 2,500 | - | - | - | 2,500 | ||||||||||||||||||
Stock-based compensation |
| - |
| - |
| 1,947 |
| - |
|
| - |
| - |
| 1,947 |
| |||||||||
Balance as of September 30, 2019 | $ | - | $ | 468,571 | $ | 20,450 | $ | 254,159 |
| $ | (21,892 | ) | $ | (1,128 | ) | $ | 720,160 |
|
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||
(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, 2017 | $ | - | $ | 412,546 | $ | 13,602 | $ | 160,025 | $ | (16,717 | ) | $ | (4,019 | ) | $ | 565,437 | ||||||||||
Reclassification of stranded tax effects (ASU 2018-02) (see Note 8) | - | - | - | 709 | - | (709 | ) | - | ||||||||||||||||||
Cumulative effect of adopting ASU 2016-01 (see Note 8) | - | - | - | (55 | ) | - | 55 | - | ||||||||||||||||||
Net income | - | - | - | 41,680 | - | - | 41,680 | |||||||||||||||||||
Other comprehensive loss, net of tax | - | - | - | - | - | (6,011 | ) | (6,011 | ) | |||||||||||||||||
Cash dividends declared on common stock ($0.225 per share) | - | - | - | (7,258 | ) | - | - | (7,258 | ) | |||||||||||||||||
Exercise of stock options (102,378) shares) | - | - | 524 | - | - | - | 524 | |||||||||||||||||||
Restricted stock grants (23,018 shares) | - | - | - | - | - | - | - | |||||||||||||||||||
Net performance units issued (42,672 shares) | - | - | (819 | ) | - | - | - | (819 | ) | |||||||||||||||||
Stock-based compensation expense |
| - |
| - |
| 1,318 |
|
| - |
|
| - |
|
| - |
|
| 1,318 |
| |||||||
Balance as of September 30, 2018 | $ | - | $ | 412,546 | $ | 14,625 |
| $ | 195,101 |
| $ | (16,717 | ) | $ | (10,684 | ) | $ | 594,871 |
|
Three Months Ended September 30, 2018 | |||||||||||||||||||||||||
| |||||||||||||||||||||||||
(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 June 30, 2018 | $ | - | $ | 412,546 | $ | 13,756 | $ | 177,619 | $ | (16,717 | ) | $ | (8,647 | ) | $ | 578,557 | |||||||||
Net income | - | - | - | 19,902 | - | - | 19,902 | ||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | - | (2,037 | ) | (2,037 | ) | ||||||||||||||||
Cash dividends declared on common stock ($0.075 per share) | - | - | - | (2,420 | ) | - | - | (2,420 | ) | ||||||||||||||||
Exercise of stock options (55,881 shares) | - | - | 272 | - | - | - | 272 | ||||||||||||||||||
Stock-based compensation expense |
| - |
|
| - |
| 597 |
| - |
|
| - |
|
| - |
|
| 597 |
| ||||||
Balance as of September 30, 2018 | $ | - | $ | 412,546 | $ | 14,625 | $ | 195,101 |
| $ | (16,717 | ) | $ | (10,684 | ) | $ | 594,871 |
|
Three Months Ended September 30, 2019 | |||||||||||||||||||||||||
(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 June 30, 2019 | $ | - | $ | 468,571 | $ | 19,777 | $ | 235,649 | $ | (21,892 | ) | $ | (2,881 | ) | $ | 699,224 | |||||||||
Net income | - | - | - | 21,696 | - | - | 21,696 | ||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | - | 1,753 | 1,753 | ||||||||||||||||||
Cash dividends declared on common stock ($0.09 per share) | - | - | - | (3,186 | ) | - | - | (3,186 | ) | ||||||||||||||||
Restricted stock grants (11,979 shares) | - | - | - | - | - | - | - | ||||||||||||||||||
Stock-based compensation expense |
| - |
| - |
| 673 |
| - |
|
| - |
|
| - |
|
| 673 |
| |||||||
Balance as of September 30, 2019 | $ | - | $ | 468,571 | $ | 20,450 | $ | 254,159 |
| $ | (21,892 | ) | $ | (1,128 | ) | $ | 720,160 |
|
See accompanying notes to unaudited consolidated financial statements.
7
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
| Nine Months Ended | ||||||||||||||
Nine Months Ended September 30, |
| September 30, | ||||||||||||||
(dollars in thousands) | 2019 | 2018 |
| 2020 |
| 2019 | ||||||||||
Cash flows from operating activities |
|
|
|
|
| |||||||||||
Net income | $ | 52,612 | $ | 41,680 |
| $ | 45,648 |
|
| $ | 52,612 |
| ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization of premises and equipment | 2,333 | 2,336 |
|
| 3,102 |
|
| 2,333 | ||||||||
Provision for loan losses | 7,600 | 20,000 |
|
| 36,000 |
|
| 7,600 | ||||||||
Amortization of intangibles | 1,068 | 483 |
|
| 1,931 |
|
| 1,068 | ||||||||
Net accretion of loans | (3,790 | ) | (969 | ) |
|
| (5,225 | ) |
| (3,790 | ) | |||||
Accretion on bank premises | (65 | ) | (46 | ) |
|
| (68 | ) |
| (65 | ) | |||||
Accretion on deposits | (917 | ) | (46 | ) |
|
| (3,568 | ) |
| (917 | ) | |||||
Amortization (accretion) on borrowings | 166 | (98 | ) | |||||||||||||
Stock-based compensation expense | 2,143 | 499 | ||||||||||||||
Losses on sales of investment securities, net | 280 | - | ||||||||||||||
(Gains) losses on equity securities, net | (340 | ) | 325 | |||||||||||||
(Accretion) amortization on borrowings, net |
|
| (139 | ) |
| 166 | ||||||||||
Stock-based compensation |
|
| 1,999 |
|
| 2,143 | ||||||||||
(Gains) losses on sales of securities available-for-sale, net |
|
| (29 | ) |
| 280 | ||||||||||
Gains on equity securities, net |
|
| (215 | ) |
| (340 | ) | |||||||||
Gains on sales of loans held-for-sale, net | (343 | ) | (31 | ) |
|
| (1,244 | ) |
| (343 | ) | |||||
Loans originated for resale | (11,807 | ) | (2,206 | ) |
|
| (34,328 | ) |
| (11,807 | ) | |||||
Proceeds from sale of loans held-for sale | 10,552 | 2,337 |
|
| 51,367 |
|
| 10,552 | ||||||||
Net loss on sale of other real estate owned | - | 192 | ||||||||||||||
Loss on extinguishment of debt | 1,047 | - |
|
| - |
|
| 1,047 | ||||||||
Increase in cash surrender value of bank owned life insurance | (2,570 | ) | (1,715 | ) |
|
| (3,693 | ) |
| (2,570 | ) | |||||
Amortization of premiums and accretion of discounts on investments securities, net | 3,069 | 2,577 | ||||||||||||||
Amortization of subordinated debt issuance costs | 246 | 250 | ||||||||||||||
Amortization of premiums and accretion of discounts on securities available-for-sale, net |
|
| 4,000 |
|
| 3,069 | ||||||||||
Amortization of subordinated debentures issuance costs |
|
| 247 |
|
| 246 | ||||||||||
Increase in accrued interest receivable | (376 | ) | (2,220 | ) |
|
| (10,467 | ) |
| (376 | ) | |||||
Net change in operating leases | 1,359 | - |
|
| 2,071 |
| 1,359 | |||||||||
Decrease in other assets | 2,483 | 42 |
|
| 18,117 |
|
| 2,483 | ||||||||
(Decrease) increase in other liabilities |
| (1,396 | ) |
|
| 3,945 |
| |||||||||
Decrease in other liabilities |
|
| (5,750 | ) |
| (1,396 | ) | |||||||||
Net cash provided by operating activities |
| 63,354 |
|
| 67,335 |
|
|
| 99,756 |
|
| 63,354 | ||||
|
| |||||||||||||||
Cash flows from investing activities |
|
|
|
|
|
|
|
| ||||||||
Investment securities available-for-sale: |
|
|
|
|
|
|
|
| ||||||||
Purchases | (203,494 | ) | (114,457 | ) |
|
| (222,062 | ) |
| (203,494 | ) | |||||
Sales | 183,728 | - |
|
| 19,624 |
|
| 183,728 | ||||||||
Maturities, calls and principal repayments | 136,375 | 115,757 |
|
| 175,729 |
|
| 136,375 | ||||||||
Purchases of equity securities |
|
| (2,000 | ) |
|
| - | |||||||||
Sales of equity securities | 569 | - |
|
| - |
| 569 | |||||||||
Net redemptions of restricted investment in bank stocks | 3,190 | 1,011 | ||||||||||||||
Net redemptions (purchases) of restricted investment in bank stocks |
|
| 1,748 |
| 3,190 | |||||||||||
Payments on loans held-for-sale | - | 159 |
|
| 204 |
|
| - | ||||||||
Net increase in loans | (239,012 | ) | (283,283 | ) |
|
| (348,861 | ) |
| (239,012 | ) | |||||
Purchases of bank owned life insurance |
|
| (25,000 | ) |
|
| (10,000 | ) | ||||||||
Purchases of premises and equipment | (1,336 | ) | (1,629 | ) |
|
| (894 | ) |
|
| (1,336 | ) | ||||
Purchases of bank owned life insurance | (10,000 | ) | - | |||||||||||||
Proceeds from sale of other real estate owned | - | 884 | ||||||||||||||
Proceeds from life insurance death benefits | 978 | - | ||||||||||||||
Proceeds from sale of OREO |
|
| 992 |
|
|
| - |
| ||||||||
Cash and cash equivalents acquired in acquisition | 13,741 | - |
|
| 111,368 |
|
| 13,741 | ||||||||
Cash consideration paid in acquisition |
| (2,530 | ) |
| - |
|
|
| (23,977 | ) |
|
| (2,530 | ) | ||
Net cash used in investing activities |
| (118,769 | ) |
| (281,558 | ) |
|
| (312,151 | ) |
|
| (118,769 | ) | ||
|
| |||||||||||||||
Cash flows from financing activities |
|
|
|
|
|
|
|
| ||||||||
Net increase in deposits | 243,949 | 193,683 |
|
| 249,404 |
|
| 243,949 |
| |||||||
Increase in subordinated debentures | - | 73,525 |
|
| 73,420 |
|
| - |
| |||||||
Advances of Federal Home Loan Bank (“FHLB”) borrowings | 1,576,000 | 1,256,000 | ||||||||||||||
Repayments of FHLB borrowings | (1,728,944 | ) | (1,296,000 | ) | ||||||||||||
Repurchase of stock | (5,175 | ) | - | |||||||||||||
Advances of borrowings |
|
| 1,476,489 |
|
|
| 1,576,000 |
| ||||||||
Repayments of borrowings |
|
| (1,520,160 | ) |
|
| (1,728,944 | ) | ||||||||
Repurchase of treasury stock |
|
| (911 | ) |
|
| (5,175 | ) | ||||||||
Cash dividends paid on common stock | (9,037 | ) | (7,243 | ) |
|
| (10,735 | ) |
|
| (9,037 | ) | ||||
Proceeds from exercise of stock options |
| 265 |
|
| 524 |
|
|
| 163 |
|
|
| 265 |
| ||
Share redemption for tax withholdings on performance units and restricted stock units earned |
|
| (639 | ) |
|
| - |
| ||||||||
Net cash provided by financing activities |
| 77,058 |
|
| 220,489 |
|
|
| 267,031 |
|
|
| 77,058 |
| ||
Net change in cash and cash equivalents | 21,643 | 6,266 |
|
| 54,636 |
|
|
| 21,643 |
| ||||||
Cash and cash equivalents at beginning of period |
| 172,366 |
|
| 149,582 |
|
|
| 201,483 |
|
|
| 172,366 |
| ||
|
| |||||||||||||||
Cash and cash equivalents at end of period | $ | 194,009 |
| $ | 155,848 |
|
| $ | 256,119 |
|
| $ | 194,009 |
| ||
Supplemental disclosures of cash flow information | ||||||||||||||||
Cash payments for: | ||||||||||||||||
Interest paid on deposits and borrowings | $ | 67,443 | $ | 40,200 | ||||||||||||
Income taxes | 13,199 | 2,507 | ||||||||||||||
Supplemental disclosures of noncash investing activities | ||||||||||||||||
Transfer of loans to other real estate owned | $ | 907 | $ | 538 | ||||||||||||
Transfer of loans held-for-investment to loans held-for-sale | 31,647 | 21,236 | ||||||||||||||
Transfer of loans held-for-sale to held-for-investment | - | 45,552 | ||||||||||||||
Business combinations: | ||||||||||||||||
Fair value of net assets acquired, net of cash and cash equivalents | $ | 534,146 | $ | - | ||||||||||||
Fair value of liabilities assumed | 488,475 | - |
8
(continued)
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
Cash payments for: |
|
|
|
|
|
|
|
|
Interest paid on deposits and borrowings |
| $ | 59,231 |
|
| $ | 67,443 | |
Income taxes |
|
| 19,117 |
|
| 13,199 | ||
|
| |||||||
Supplemental disclosures of noncash activities |
|
|
|
|
|
|
|
|
Investing: |
|
|
|
|
|
|
|
|
Transfer of loans to other real estate owned | $ | - | $ | 907 | ||||
Transfer of loans from held-for-investment to held-for-sale |
| 10,995 |
|
|
| 31,647 |
| |
Transfer of loans from held-for-sale to held-for-investment |
| 19,738 |
|
|
| - |
| |
|
| |||||||
Business combinations: |
|
|
|
|
|
|
|
|
Fair value of assets acquired |
| $ | 949,282 |
|
| $ | 534,146 | |
Fair value of liabilities assumed |
|
| 852,729 |
|
| 488,475 |
See accompanying notes to unaudited consolidated financial statements.
89
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. 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 DelawareNew Jersey 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), NJCB Spec-1, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey online business lending marketplace).
The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its twenty-eighttwenty-seven 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 borrower’sborrowers’ 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 and nine months ended September 30, 20192020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019,2020, or for any other interim period. The Company’s 20182019 Annual Report on Form 10-K should be read in conjunction with these consolidated financial statements.
Principals of Consolidation
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 spread throughout the United States and around 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 consolidatedCOVID-19 pandemic has adversely affected, and continues to adversely affect economic activity globally, nationally and locally. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the New Jersey/New York metropolitan area in which the Company primarily operates. Although the Company has been able to continue operations while taking steps to ensure the safety of employees and customers, COVID-19 could also potentially create widespread business continuity issues for the Company.
Federal Reserve reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company's financial condition and results of operations in future periods. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. It is reasonably possible that estimates made in the financial statements have been prepared in conformity with GAAP. Some itemscould be materially and adversely impacted in the prior year consolidatednear term as a result of these conditions, including the determination of the allowance for loan losses, fair value of financial statements were reclassified to conform to current presentation. Reclassifications had no effect on prior year netinstruments, impairment of goodwill and other intangible assets and income or stockholders’ equity.taxes.
10
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 1a.1b. Authoritative Accounting Guidance
Newly Issued, But Not Yet EffectiveAdoption of New Accounting Standards
ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Assets Measured at Amortized Cost.” (modified by ASU 2018-19, ASU 2019-04 and ASU 2019-05). 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, 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, including interim periods within those fiscal years.
As previously disclosed, the Company has formed a CECL committee which has assessed our data and system needs. The Company has engaged third-party vendors to assist in analyzing our data and developing a CECL model. The Company, in conjunction with these vendors, has researched and analyzed modeling standards, loan segmentation, as well as potential external inputs to supplement our loss history. We recently completed reconciliation, testing and validation of our historical data, including balances, charge-offs and recoveries for the last 5 years. We have identified distinct loan segments and are in the process of evaluating and reviewing loss drivers, data fits and modeling. 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.
9
CONNECTONE BANCORP, INC. AND SUBSIDIARIES2020
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1a. Authoritative Accounting Guidance – (continued)
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 public business entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. We are currently evaluating this ASU to determine the impact on our consolidated financial statements.
ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018-15 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.
ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.
ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update modify disclosure requirements on fair value measurements by removing, modifying and adding certain disclosure requirements. The amendments primarily pertain to Level 3 fair value measurements and depending on the amendment are applied either prospectively or retrospectively. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We believe the adoption of this standard will not have a significant 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 deductibletax-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. ASU 2017-04 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.
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 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.
ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update modify disclosure requirements on fair value measurements by removing, modifying and adding certain disclosure requirements. The amendments primarily pertain to Level 3 fair value measurements and depending on the amendment are applied either prospectively or retrospectively. ASU 2018-03 was effective for public business entitiesthe Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.
ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018-15 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.
Newly Issued, But Not Yet Effective Accounting Standards
In June 2016, the FASB issued guidance related to credit losses on financial instruments. This update, commonly referred to as the current expected credit losses methodology (“CECL”), will change the accounting for credit losses on loans and debt securities. Under the new guidance, the Company’s measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. For loans, this measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model previously required, but still permitted, under GAAP, which delays recognition until it is probable a loss has been incurred. ASU 2016-13 was effective, subject to optional delay discussed below, for the Company on January 1, 2020.
In accordance with the accounting relief provisions of the CARES Act, as it currently stands, the Company elected to delay the adoption of FASB’s new standard covering the CECL until the earlier of the termination date of the national emergency declared by President Trump on March 13, 2020 under the National Emergencies Act, related to the outbreak of COVID-19, and December 31, 2020. Management reached this decision due to the complexities of CECL loan loss forecasting exacerbated by the quickly changing economic environment resulting from the COVID-19 pandemic. Once the delay provision has been terminated, adoption will be retroactive to January 1, 2020. During 2019, the Company implemented the CECL methodology and ran it concurrently with the historical incurred method. While the Company has not finalized the impact of implementing CECL, the Company expects to recognize a one-time cumulative effect adjustment to the allowance and beginning retained earnings, net of tax, upon adoption. The future impact of CECL on the Company’s allowance for credit losses and provision expense subsequent to the initial adoption will depend on changes in the loan portfolio, economic conditions and refinements to key assumptions including forecasting and qualitative factors. The Company measured its allowance under its current incurred loan loss model as of September 30, 2020.
11
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 1b. Authoritative Accounting Guidance – (continued)
ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 is effective for fiscal years beginningending after December 15, 2019. Although management continues to evaluate the potential impact of ASU 2017-04 on our consolidated financial statements, at this time, we2020. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.
10
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 2. Business Combination
Greater Hudson BankBancorp of New Jersey, Inc.
On July 11, 2018, the Company entered into an Agreement and PlanJanuary 2, 2020, Bancorp of Merger with Greater Hudson BankNew Jersey, Inc. (“GHB”BNJ”), under which GHB would merge merged with and into ConnectOne Bank,the Company, with ConnectOne Bankthe Company as the surviving bank. This transaction was completed effective January 2, 2019 (“Merger date”).entity. As parta result of thisthe merger, the Company acquired sevennine branch offices all located in Rockland, OrangeBergen County, New Jersey. Subject to the allocation and Westchester Counties, New York. Pursuant toproration procedures set forth in the merger agreement, holders of GHBBNJ common stock received 0.245 shareshad the right to elect, with respect to each share of BNJ common stock, to receive either (i) $16.25 in cash or (ii) 0.780 of ConnectOne witha share of Company common stock (plus cash paid in lieu of any fractional shares.shares of Company common stock to which such holder would otherwise be entitled). The allocation and proration procedures set forth in the merger agreement required that approximately 20% of the shares of BNJ common stock be converted into cash and the remaining approximately 80% of BNJ common shares be converted into shares of the Company’s common stock.
The acquisition of GHBBNJ was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date. The application of the acquisition method of accounting resulted in the recognition of goodwill of $10.3$45.8 million and a core deposit intangible of $5.1$8.1 million. The assets acquired and liabilities assumed and consideration paid in the acquisition of GHBBNJ were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates, accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period, which runs through January 2, 2020,2021, in the measurement period in which the adjustment amounts are determined. The acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition. As of September 30, 20192020 there were no material changes to the provisional fair value adjustments recorded on January 2, 2019.2020.
12
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 2. Business Combinations – (continued)
In connection with the acquisition, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table:
Estimated Fair | ||||||
Value at | ||||||
Estimated Fair Value at January 2, 2019 | January 2, 2020 | |||||
(in thousands) | (in thousands) | |||||
Consideration paid: | ||||||
Common stock issued in acquisition | $ | 56,025 | $ | 118,375 | ||
Cash paid in acquisition | 23,977 | |||||
Total consideration paid: | 142,352 | |||||
|
| |||||
Assets acquired: | ||||||
Cash and cash equivalents | 13,741 | 111,368 | ||||
Securities available-for-sale | 121,672 | 20,073 | ||||
Loans, net | 362,914 | 774,720 | ||||
Premises and equipment, net | 1,624 | 12,826 | ||||
Accrued interest receivable | 2,434 | 2,910 | ||||
Core deposit intangibles | 5,131 | 8,076 | ||||
Other assets |
| 26,650 | 19,309 | |||
Total assets acquired |
| 534,166 | 949,282 | |||
|
| |||||
Liabilities assumed: | ||||||
Deposits | 416,110 | 785,378 | ||||
Borrowings | 64,186 | 49,742 | ||||
Other liabilities |
| 8,179 | 17,609 | |||
Total liabilities assumed |
| 488,475 | 852,729 | |||
|
| |||||
Net assets acquired |
| 45,691 | 96,553 | |||
|
| |||||
Goodwill recorded in acquisition | $ | 10,334 | $ | 45,799 |
The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired by ConnectOnethe Company and reflects the economies of scale, increased market share and lending capabilities, greater access to best-in-class banking technology, and related synergies that are expected to result from the acquisition.
Loans acquired in the GHBBNJ acquisition were recorded at fair value, and there was no carryover related allowance for loan losses. The fair values of loans acquired from GHBBNJ were estimated based on the value of the expected cash flows, which were projected based on the contractual terms of the loans, including both maturity and contractual amortization. The monthly principal and interest cash flows were adjusted for expected losses and prepayments, where appropriate. Projected cash flows were then discounted to present value using a discount rate developed based on the relative risk of the cash flows, considering the loan type, liquidity risk, the maturity of the loans, servicing costs and a required return on capital.
11
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 2. Business Combination – (continued)
The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the GHBBNJ acquisition as of the Merger date:
Estimated Fair | ||||||||
Value at | ||||||||
Estimated Fair Value at January 2, 2019 | January 2, 2020 | |||||||
(in thousands) | (in thousands) | |||||||
Contractually required principal and interest acquisition | $ | 19,874 | $ | 14,416 | ||||
Contractual cash flows not expected to be collected (non-accretable discount) |
| (12,167 | ) | (2,111 | ) | |||
Expected cash flows at acquisition | 7,707 | 12,305 | ||||||
Interest component of expected cash flows (accretable discount) |
| (1,286 | ) | (605 | ) | |||
Fair value of acquired loans | $ | 6,421 |
| $ | 11,700 |
13
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 2. Business Combinations – (continued)
Goodwill related to GHBBNJ is not amortized for book purposes; however, it is reviewed at least annually for impairment and is not deductible for tax purposes.
The fair value of retail demand and interest-bearing deposit accounts was assumed to approximate the carrying value as those accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities. The fair value of borrowed funds was estimated by discounting the future cash flows using market rates for similar borrowings.
Direct acquisition and integration costs of the GHBBNJ acquisition were expensed as incurred. These items were recorded as merger-relatedmerger expenses on the consolidated statement of income. During the three months and nine months ended September 30, 2019,2020, merger expenses related to the GHBBNJ acquisition were $-0- and $7.6$11.6 million, respectively.
BoeFly, LLC
On May 31, 2019, ConnectOne Bank, through a wholly owned subsidiary, completed the acquisition of certain assets of New York/Boston-based BoeFly, LLC, which operates an online business lending marketplace connecting small- to medium-sized businesses, largely related to the franchise business sector, with lenders and professional loan brokers across the United States. The business will operate as BoeFly, Inc., a wholly owned subsidiary of ConnectOne Bank, and is expected to generate fee income and small business lending opportunities for the Bank. The consideration exchanged was a combination of cash, restricted stock and a potential cash earn-out based on predefined business origination targets. The Company recorded $6.3 million as goodwill on its consolidated statement of condition as of the acquisition date. The acquisition of the assets of BoeFly, LLC were not material to the results of operations or financial condition of the Company.
Direct acquisition and integration costs of the BoeFly, LLC acquisition were expensed as incurred. These items were recorded as merger-related expenses on the consolidated statement of income. Merger expenses related to the BoeFly, LLC acquisition were $0.3 million for both the three and nine months ended September 30, 2019.
Pending Acquisition with Bancorp of New Jersey, Inc.
On August 15, 2019, Parent Corporation and Bancorp of New Jersey, Inc., a New Jersey corporation (“BKJ”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which BKJ will merge with and into Parent Corporation (the “Merger”). The Merger Agreement was approved by the Boards of Directors of each of Parent Corporation and BKJ at meetings held on August 15, 2019. Following the Merger, BKJ’s wholly owned bank subsidiary, Bank of New Jersey, will merge with and into the Bank, with the Bank as the surviving bank (the “Bank Merger” and, together with the Merger, the “Transaction”). Under the terms of the Merger Agreement, shareholders of BKJ will have the opportunity to elect to receive either $16.25 or 0.780 of a share of Parent Corporation’s common stock for each share of BKJ common stock, subject to proration and allocation procedures set forth in the Merger Agreement. Closing of the Merger is subject to customary conditions, including, among others, approval of the Merger Agreement by shareholders of BKJ and Parent Corporation, receipt of required regulatory approvals, and approval for listing on NASDAQ with respect to the Parent Corporation common stock to be issued in the Merger. The Merger is expected to close in the first quarter of 2020.
12
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 3. 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 September 30, |
| Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||
(in thousands, except for per share data) | (in thousands, except for per share data) | ||||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||
Net income | $ | 21,696 | $ | 19,902 | $ | 52,612 | $ | 41,680 | $ | 24,786 | $ | 21,696 | $ | 45,648 | $ | 52,612 | |||||||||||||||
Earnings allocated to participating securities |
| (117 | ) |
|
| (42 | ) |
|
| (176 | ) |
|
| (98 | ) | (133 | ) |
| (117 | ) | (218 | ) |
| (176 | ) | ||||||
Income attributable to common stock | $ | 21,579 |
| $ | 19,860 |
| $ | 52,436 |
| $ | 41,582 |
| $ | 24,653 | $ | 21,579 |
| $ | 45,430 | $ | 52,436 |
| |||||||||
| |||||||||||||||||||||||||||||||
Weighted average common shares outstanding, including participating securities | 35,307 | 32,167 | 35,317 | 32,127 | 39,656 | 35,307 | 39,624 | 35,317 | |||||||||||||||||||||||
Weighted average participating securities |
| (141 | ) |
| (25 | ) |
| (65 | ) |
| (34 | ) | (119 | ) | (141 | ) | (125 | ) | (65 | ) | |||||||||||
Weighted average common shares outstanding | 35,166 | 32,142 | 35,252 | 32,093 | 39,537 | 35,166 | 39,499 | 35,252 | |||||||||||||||||||||||
Incremental shares from assumed conversions of options, performance units and non-participating restricted shares |
| 97 |
|
| 177 |
|
| 82 |
|
| 220 |
| |||||||||||||||||||
|
| ||||||||||||||||||||||||||||||
Incremental shares from assumed conversions of options, | |||||||||||||||||||||||||||||||
performance units and non-participating restricted shares | 117 | 97 | 111 | 82 | |||||||||||||||||||||||||||
Weighted average common and equivalent shares outstanding |
| 35,263 |
|
| 32,319 |
|
| 35,334 |
|
| 32,313 |
| 39,654 | 35,263 | 39,610 | 35,334 | |||||||||||||||
| |||||||||||||||||||||||||||||||
Earnings per common share: | |||||||||||||||||||||||||||||||
Basic | $ | 0.61 | $ | 0.62 | $ | 1.49 | $ | 1.30 | $ | 0.62 | $ | 0.61 | $ | 1.15 | $ | 1.49 | |||||||||||||||
Diluted | 0.61 | 0.61 | 1.48 | 1.29 | 0.62 | 0.61 | 1.15 | 1.48 |
There were no antidilutive share equivalents as of September 30, 20192020 and September 30, 2018.2019.
1314
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 4. Securities Available-for-Sale
The Company’s investment securities are all classified as available-for-sale as of September 30, 2020 and December 31, 2019. 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, 2020 and December 31, 2019. 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 7 of the Notes to Consolidated Financial Statements for a further discussion.
The following tables present information related to the Company’s portfolio of securities available-for-sale as of September 30, 2020 and December 31, 2019.
Gross | Gross | ||||||||||||
Amortized | Unrealized | Unrealized | Fair | ||||||||||
Cost | Gains | Losses | Value | ||||||||||
September 30, 2020 | (dollars in thousands) | ||||||||||||
Securities available-for-sale | |||||||||||||
Federal agency obligations | $ | 44,431 | $ | 1,768 | $ | (54 | ) | $ | 46,145 | ||||
Residential mortgage pass-through securities | 238,193 | 4,166 | (135 | ) | 242,224 | ||||||||
Commercial mortgage pass-through securities | 6,176 | 213 | (142 | ) | 6,247 | ||||||||
Obligations of U.S. states and political subdivisions | 124,790 | 3,649 | (43 | ) | 128,396 | ||||||||
Corporate bonds and notes | 24,916 | 256 | (369 | ) | 24,803 | ||||||||
Asset-backed securities | 5,023 | - | (155 | ) | 4,868 | ||||||||
Certificates of deposit | 149 | 2 | - | 151 | |||||||||
Other securities | 181 | - | - | 181 | |||||||||
Total securities available-for-sale | $ | 443,859 | $ | 10,054 | $ | (898 | ) | $ | 453,015 |
Gross | Gross | ||||||||||||
Amortized | Unrealized | Unrealized | Fair | ||||||||||
Cost | Gains | Losses | Value | ||||||||||
December 31, 2019 | (dollars in thousands) | ||||||||||||
Securities available-for-sale | |||||||||||||
Federal agency obligations | $ | 27,667 | $ | 612 | $ | (42 | ) | $ | 28,237 | ||||
Residential mortgage pass-through securities | 199,611 | 1,528 | (643 | ) | 200,496 | ||||||||
Commercial mortgage pass-through securities | 4,995 | 37 | (35 | ) | 4,997 | ||||||||
Obligations of U.S. states and political subdivisions | 134,500 | 2,411 | (392 | ) | 136,519 | ||||||||
Corporate bonds and notes | 28,142 | 285 | (45 | ) | 28,382 | ||||||||
Asset-backed securities | 5,845 | - | (65 | ) | 5,780 | ||||||||
Certificates of deposit | 148 | 2 | - | 150 | |||||||||
Other securities |
| 140 |
| - |
| - |
| 140 | |||||
Total securities available-for-sale | $ | 401,048 | $ | 4,875 | $ | (1,222 | ) | $ | 404,701 |
15
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 4. Securities Available-for-Sale – (continued)
The following table summarizes the amortized cost and fair value ofInvestment securities available-for-sale at September 30, 2019 and December 31, 2018 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss).
Amortized Cost |
| Gross Unrealized Gains |
| Gross Unrealized Losses |
| Fair Value | ||||||||
September 30, 2019 | (dollars in thousands) | |||||||||||||
Securities available-for-sale | ||||||||||||||
Federal agency obligations | $ | 23,712 | $ | 824 | $ | (1 | ) | $ | 24,535 | |||||
Residential mortgage pass-through securities | 215,378 | 1,286 | (859 | ) | 215,805 | |||||||||
Commercial mortgage pass-through securities | 5,017 | 73 | - | 5,090 | ||||||||||
Obligations of U.S. states and political subdivisions | 140,870 | 3,222 | (436 | ) | 143,656 | |||||||||
Corporate bonds and notes | 28,135 | 308 | (193 | ) | 28,250 | |||||||||
Asset-backed securities | 6,132 | 3 | (41 | ) | 6,094 | |||||||||
Certificates of deposit | 148 | 2 | - | 150 | ||||||||||
Other securities |
| 2,269 |
| - |
| - |
|
| 2,269 | |||||
Total securities available-for-sale | $ | 421,661 | $ | 5,718 | $ | (1,530 | ) | $ | 425,849 |
Amortized Cost |
| Gross Unrealized Gains |
| Gross Unrealized Losses |
| Fair Value | ||||||||
December 31, 2018 | (dollars in thousands) | |||||||||||||
Securities available-for-sale | ||||||||||||||
Federal agency obligations | $ | 45,509 | $ | 51 | $ | (605 | ) | $ | 44,955 | |||||
Residential mortgage pass-through securities | 189,721 | 85 | (4,602 | ) | 185,204 | |||||||||
Commercial mortgage pass-through securities | 3,919 | - | (45 | ) | 3,874 | |||||||||
Obligations of U.S. states and political subdivisions | 141,496 | 1,091 | (3,402 | ) | 139,185 | |||||||||
Corporate bonds and notes | 26,308 | 45 | (540 | ) | 25,813 | |||||||||
Asset-backed securities | 9,685 | 22 | (16 | ) | 9,691 | |||||||||
Certificates of deposit | 319 | 3 | - | 322 | ||||||||||
Other securities |
| 2,990 |
| - |
| - |
|
| 2,990 | |||||
Total securities available-for-sale | $ | 419,947 | $ | 1,297 | $ | (9,210 | ) | $ | 412,034 |
Investment securities having a carrying value of approximately $119.6$107.1 million and $151.5$111.5 million atas of September 30, 20192020 and December 31, 2018,2019, respectively, were pledged to secure public deposits, borrowings, repurchase agreements, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law. As of September 30, 20192020 and December 31, 2018,2019, 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.
14
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 4. Securities Available-for-Sale – (continued)
The following table presents information for investments in securities available-for-sale atas of September 30, 2019,2020, 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.
September 30, 2020 | |||||||||||
September 30, 2019 | Amortized | Fair | |||||||||
Amortized Cost |
| Fair Value | Cost | Value | |||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||
Securities available-for-sale: | |||||||||||
Due in one year or less | $ | 4,309 | $ | 4,333 | $ | 5,947 | $ | 5,982 | |||
Due after one year through five years | 28,344 | 28,503 | 23,657 | 23,651 | |||||||
Due after five years through ten years | 24,060 | 24,757 | 21,837 | 22,345 | |||||||
Due after ten years | 142,284 | 145,092 | 147,868 | 152,385 | |||||||
Residential mortgage pass-through securities | 215,378 | 215,804 | 238,193 | 242,224 | |||||||
Commercial mortgage pass-through securities | 5,017 | 5,091 | 6,176 | 6,247 | |||||||
Other securities |
| 2,269 |
| 2,269 | 181 | 181 | |||||
Total securities available-for-sale | $ | 421,661 | $ | 425,849 | $ | 443,859 | $ | 453,015 |
Gross gains and losses from the sales of securities for periods presented were as follows:
Three Months Ended September 30, |
| Nine Months Ended September 30, |
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||||||||||
(dollars in thousands) |
| (dollars in thousands) |
| ||||||||||||||||||||||||||
2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||||||||||
Proceeds | $ | 33,432 |
|
| $ | - |
| $ | 183,728 |
|
| $ | - |
| $ | - |
|
| $ | 33,432 |
|
| $ | 19,624 |
|
| $ | 183,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Gross gains on sales of securities |
| 1 |
|
| - |
| 401 |
|
| - |
|
| - |
|
|
| 1 |
|
|
| 29 |
|
|
| 401 |
| |||
Gross losses on sales of securities |
| (280 | ) |
| - |
| (681 | ) |
| - |
|
| - |
|
|
| (280 | ) |
|
| - |
|
|
| (681 | ) | |||
Net losses on sales of securities |
| (279 | ) |
| - |
| (280 | ) |
| - |
|
| - |
|
|
| (279 | ) |
|
| 29 |
|
|
| (280 | ) | |||
Tax provision on net losses |
| 62 |
| - |
| 62 |
|
| - | ||||||||||||||||||||
Less: tax provision on net losses |
|
| - |
|
| 62 |
|
| (6 | ) |
|
| 62 |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net losses on sales of securities, after tax | $ | (217 | ) |
| $ | - |
| $ | (218 | ) | $ | - |
| $ | - |
|
| $ | (217 | ) |
| $ | 23 |
|
| $ | (218 | ) |
16
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 4. Securities Available-for-Sale – (continued)
Other-than-Temporarily Impaired Investments
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-temporaryother-than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced a restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed deteriorating financial condition or sustained significant losses.
15
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 4. Securities Available-For-Sale – (continued)
Temporarily Impaired SecuritiesInvestments
The Company does not believe that any of the unrealized losses, which were comprised of 4932 and 14853 securities as of September 30, 20192020 and December 31, 2018,2019, 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, and asset-backed securities are not considered to be other-than-temporary because these unrealized losses are related to changes in interest rates and credit spreads 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. No corporate issuers have defaulted on interest payments. The declines in fair value are 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, 2019 and at December 31, 2018.
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.
1617
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 4. Securities Available-For-SaleAvailable-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 individual securities have been in a continuous unrealized loss position atas of September 30, 20192020 and December 31, 2018:2019.
September 30, 2019 | September 30, 2020 | |||||||||||||||||||||||||||||||||||||||
Total |
| Less than 12 Months |
| 12 Months or Longer | Total | Less than 12 Months | 12 Months or Longer | |||||||||||||||||||||||||||||||||
Fair Value |
| Unrealized Losses |
| Fair Value |
| Unrealized Losses |
| Fair Value |
| Unrealized Losses | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||||||
(dollars in thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||||||||||||||||||
Investment Securities Available-for-Sale: | ||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Investment Securities |
| |||||||||||||||||||||||||||||||||||||||
Available-for-Sale: |
| |||||||||||||||||||||||||||||||||||||||
Federal agency obligation | $ | 95 | $ | (1 | ) | $ | - | $ | - | $ | 95 | $ | (1 | ) | $ | 13,305 | $ | (54 | ) | $ | 13,299 | $ | (54 | ) | $ | 6 | $ | - |
| |||||||||||
Residential mortgage pass-through securities | 110,586 | (859 | ) | 47,169 | (210 | ) | 63,417 | (649 | ) | 70,465 | (135 | ) | 70,455 | (135 | ) | 10 | - |
| ||||||||||||||||||||||
Commercial mortgage pass-through securities | 4,016 | (142 | ) | 4,016 | (142 | ) | - | - | ||||||||||||||||||||||||||||||||
Obligations of U.S. states and political subdivisions | 31,550 | (436 | ) | 4,054 | - | 27,496 | (436 | ) | 8,468 | (43 | ) | 8,468 | (43 | ) | - | - | ||||||||||||||||||||||||
Corporate bonds and notes | 5,286 | (193 | ) | 2,462 | (38 | ) | 2,824 | (155 | ) | 5,610 | (369 | ) | 5,610 | (369 | ) | - | - |
| ||||||||||||||||||||||
Asset-backed securities |
| 5,316 |
| (41 | ) |
| 2,427 |
| (7 | ) |
|
| 2,889 |
| (34 | ) | 4,868 | (155 | ) | 1,288 | (38 | ) | 3,580 | (117 | ) | |||||||||||||||
Total temporarily impaired securities | $ | 152,833 | $ | (1,530 | ) | $ | 56,112 | $ | (255 | ) |
| $ | 96,721 |
| $ | (1,275 | ) | $ | 106,732 | $ | (898 | ) | $ | 103,136 | $ | (781 | ) | $ | 3,596 | $ | (117 | ) |
December 31, 2018 | ||||||||||||||||||||
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 obligation | $ | 35,472 | $ | (605 | ) | $ | 810 | $ | (1 | ) | $ | 34,662 | $ | (604 | ) | |||||
Residential mortgage pass-through securities | 178,365 | (4,602 | ) | 42,040 | (393 | ) | 136,325 | (4,209 | ) | |||||||||||
Commercial mortgage pass-through securities | 3,874 | (45 | ) | - | - | 3,874 | (45 | ) | ||||||||||||
Obligations of U.S. states and political subdivisions | 64,367 | (3,402 | ) | 7,765 | (21 | ) | 56,602 | (3,381 | ) | |||||||||||
Corporate bonds and notes | 15,534 | (540 | ) | 7,767 | (133 | ) | 7,767 | (407 | ) | |||||||||||
Asset-backed securities |
| 3,957 |
| (16 | ) |
| 2,219 |
| (11 | ) |
| 1,738 |
| (5 | ) | |||||
Total Temporarily Impaired Securities | $ | 301,569 | $ | (9,210 | ) |
| $ | 60,601 |
| $ | (559 | ) |
| $ | 240,968 |
| $ | (8,651 | ) |
December 31, 2019 | ||||||||||||||||||||
Total | Less than 12 Months | 12 Months or Longer | ||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Investment Securities |
| |||||||||||||||||||
Available-for-Sale: |
| |||||||||||||||||||
Federal agency obligation | $ | 6,512 | $ | (42 | ) | $ | 6,498 | $ | (42 | ) | $ | 14 | $ | - |
| |||||
Residential mortgage pass-through securities | 94,980 | (643 | ) | 49,154 | (179 | ) | 45,826 | (464 | ) | |||||||||||
Commercial mortgage pass-through securities | 2,006 | (35 | ) | 2,006 | (35 | ) | - | - |
| |||||||||||
Obligations of U.S. states and political subdivisions | 34,775 | (392 | ) | 10,306 | (8 | ) | 24,469 | (384 | ) | |||||||||||
Corporate bonds and notes | 5,437 | (45 | ) | 2,478 | (23 | ) | 2,959 | (22 | ) | |||||||||||
Asset-backed securities | 5,718 | (65 | ) | 2,268 | (22 | ) | 3,450 | (43 | ) | |||||||||||
Total Temporarily Impaired Securities | $ | 149,428 | $ | (1,222 | ) | $ | 72,710 | $ | (309 | ) | $ | 76,718 | $ | (913 | ) |
Note 5. 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.
17
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5. Derivatives – (continued)
Interest rate swaps were entered into on April 13, 2017, January 27, 2020 and March 3, 2020 each with a respective notional amount of $25.0 million and were designated as a cash flow hedge of a Federal Home Loan Bank (“FHLB”) advance. In addition, interest rate swaps were entered into on June 4, 2019 and August 6, 2019, each with a notional amount of $50 million and in April 13, 2017, August 24, 2015, and December 30, 2014 each with a respective notional amount of $25$50.0 million and were designated as a cash flow hedgeshedge of an FHLBa Federal Home Loan Bank advance. The swaps were 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 swaps 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.
18
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 5. Derivatives – (continued)
Summary information about the interest rate swaps designated as cash flow hedges as of September 30, 2019,2020, December 31, 20182019 and September 30, 20182019 are presented in the following table.
September 30, | December 31, | September 30, | |||||||||||||||||||||
September 30, 2019 |
| December 31, 2018 |
| September 30, 2018 | 2020 | 2019 | 2019 | ||||||||||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||
Notional amount | $ | 175,000 | $ | 75,000 | $ | 100,000 | $ | 175,000 | $ | 150,000 | $ | 175,000 | |||||||||||
Weighted average pay rates | 1.83 | % | 1.70 | % | 1.68 | % | 1.69 | % | 1.82 | % | 1.83 | % | |||||||||||
Weighted average receive rates | 2.53 | % | 2.19 | % | 2.12 | % | 1.03 | % | 2.37 | % | 2.53 | % | |||||||||||
Weighted average maturity | 1.5 years | 2.0 years | 1.7 years | 1.1 years | 1.5 years | 1.5 years | |||||||||||||||||
| |||||||||||||||||||||||
Fair value | $ | (380 | ) | $ | 1,159 | $ | 1,906 | $ | (2,728 | ) | $ | (273 | ) | $ | (380 | ) |
Interest expense recorded on these swap transactions totaled approximately $(204,000)$631 thousand and $(563,000) for$942 thousand during the three and nine months ended September 30, 2020, respectively, compared to $(204) thousand and $(563) thousand during the three and nine months ended September 30, 2019, respectively, and $(173,000) and $(326,000) for the three and nine months ended September 30, 2018, respectively.is reported as a component of interest expense on FHLB Advances.
Cash Flow Hedge
The following table presents the net gains/losses recorded in other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the following periods:
Nine Months Ended September 30, 2019 | |||||||||
| 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 | $ | (976) | $ | (563) | $ | - |
Nine Months Ended September 30, 2020 | |||||||||||
Amount of gain | Amount of (gain) | Amount of gain | |||||||||
(loss) recognized | loss reclassified | recognized in other | |||||||||
in OCI (Effective | from OCI to | Noninterest income | |||||||||
Portion) | interest income | (Ineffective Portion) | |||||||||
(dollars in thousands) | |||||||||||
Interest rate contracts | $ | (3,397 | ) | $ | 942 | $ | - |
Nine Months Ended September 30, 2018 | |||||||||
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 | $ | 796 | $ | - | $ | - |
18
Nine Months Ended September 30, 2019 | |||||||||||
Amount of gain | Amount of gain | Amount of gain | |||||||||
(loss) recognized | (loss) reclassified | recognized in other | |||||||||
in OCI (Effective | from OCI to | Noninterest income | |||||||||
Portion) | interest income | (Ineffective Portion) | |||||||||
(dollars in thousands) | |||||||||||
Interest rate contracts | $ | (976 | ) | $ | (563 | ) | $ | - |
The following table reflects the cash flow hedges included in the consolidated statements of condition as of September 30, 20192020 and December 31, 2018:2019:
September 30, 2019 |
| December 31, 2018 | ||||||||||
Notional Amount | Fair Value |
| Notional Amount | Fair Value | ||||||||
(dollars in thousands) | ||||||||||||
Interest rate swaps related to FHLB advances included in assets | $ | 175,000 | $ | (380) | $ | 75,000 | $ | 1,159 |
September 30, 2020 | December 31, 2019 | |||||||||||
Notional | Notional | |||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||
(dollars in thousands) | ||||||||||||
Interest rate swaps related to FHLB advances included in assets | $ | 175,000 | $ | (2,728 | ) | $ | 150,000 | $ | (273) |
19
19
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 6. Loans and the Allowance for Loan Losses
Loans receivableReceivable - The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred loan fees, atas of September 30, 20192020 and December 31, 2018:2019:
September 30, 2019 |
| December 31, 2018 | September 30, | December 31, | |||||||||||
(dollars in thousands) | 2020 | 2019 | |||||||||||||
Commercial | $ | 1,113,743 | $ | 988,758 | |||||||||||
(dollars in thousands) | |||||||||||||||
Commercial(1) | $ | 1,631,434 | $ | 1,129,661 | |||||||||||
Commercial real estate | 3,030,816 | 2,778,167 | 3,672,462 | 3,041,959 | |||||||||||
Commercial construction | 646,172 | 465,389 | 614,112 | 623,326 | |||||||||||
Residential real estate | 322,307 | 309,991 | 343,376 | 320,020 | |||||||||||
Consumer |
| 2,435 |
|
|
| 2,594 | 1,876 |
| 3,328 | ||||||
Gross loans | 5,115,473 | 4,544,899 | 6,263,260 | 5,118,294 | |||||||||||
Net deferred loan fees | (5,002 | ) |
| (3,807 | ) | (12,209 | ) |
| (4,767 | ) | |||||
Total loans receivable | $ | 5,110,471 | $ | 4,541,092 | $ | 6,251,051 | $ | 5,113,527 |
(1) | Includes Paycheck Protection Program ("PPP") loans of $474 million as of September 30, 2020. |
AtAs of September 30, 20192020 and December 31, 2018,2019, loan balances of approximately $2.5$2.7 billion and $2.3$2.5 billion, respectively, were pledged to secure borrowings from the FHLB of New York.
Loans held-for-sale - The following table sets forth the composition of the Company'sCompany’s loans held-for-sale portfolio atas of September 30, 20192020 and December 31, 2018:2019:
September 30, | December 31, | ||||||||||
September 30, 2019 |
| December 31, 2018 | 2020 | 2019 | |||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||
Commercial | $ | 2,294 | $ | - | $ | - | $ | 2,285 | |||
Commercial real estate | 29,353 |
| - | 6,460 | 30,965 | ||||||
Residential real estate | 1,598 |
| - | 2,048 | - | ||||||
Total carrying amount | $ | 33,245 | $ | - | $ | 8,508 | $ | 33,250 |
Purchased Credit-Impaired Loans - The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investment inof those loans is as follows atas of September 30, 20192020 and December 31, 2018.2019.
September 30, | December 31, | ||||||||||
September 30, 2019 |
| December 31, 2018 | 2020 | 2019 | |||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||
Commercial | $ | 5,459 | $ | 2,509 | $ | 3,868 | $ | 5,452 | |||
Commercial real estate | 1,123 |
| - | 5,525 |
| 1,101 | |||||
Commercial construction | 4,127 | - | |||||||||
$ | 6,582 | $ | 2,509 | $ | 13,520 | $ | 6,553 |
For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during either the three months and nine months ended September 30, 2019 and2020 or September 30, 2018.2019. There were no reversals from the allowance for loan losses during the three and nine months ended September 30, 2019 and2020 or September 30, 2018.2019.
20
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 6. Loans and the Allowance for Loan Losses – (continued)
The following table presents the accretable yield, or income expected to be collected, on the purchased credit-impaired loans for the three and nine months ended September 30, 20192020 and September 30, 2018:2019:
|
| Three Months |
| Three Months | |||||||||||
|
| Ended |
| Ended | |||||||||||
|
| September 30, |
| September 30, | |||||||||||
Three Months Ended September 30, 2019 | Three Months Ended September 30, 2018 |
| 2020 |
| 2019 | ||||||||||
(dollars in thousands) |
| (dollars in thousands) | |||||||||||||
Balance at June 30 | $ | 1,637 | $ | 1,259 |
| $ | 1,325 |
|
| $ | 2,213 |
| |||
Accretion of income | (167 | ) |
| (63 | ) |
|
| (124 | ) |
| (575 | ) | |||
Balance at September 30 | $ | 1,470 |
| $ | 1,196 | ||||||||||
Balance as of September 30 |
| $ | 1,201 |
|
| $ | 1,638 |
|
Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 | ||||||
(dollars in thousands) | |||||||
Balance at January 1 | $ | 1,134 | $ | 1,387 | |||
New loans purchased | 1,286 | - | |||||
Accretion of income | (950 | ) |
| (191 | ) | ||
Balance at September 30 | $ | 1,470 |
| $ | 1,196 |
|
| Nine Months |
| Nine Months | ||||
|
| Ended |
| Ended | ||||
|
| September 30, |
| September 30, | ||||
|
| 2020 |
| 2019 | ||||
|
| (dollars in thousands) | ||||||
Balance as of December 31 |
| $ | 1,301 |
|
| $ | 1,134 |
|
New loans acquired |
|
| 605 |
|
| 1,286 |
| |
Accretion of income |
|
| (705 | ) |
| (782 | ) | |
Balance as of September 30 |
| $ | 1,201 |
|
| $ | 1,638 |
|
Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans included in loans receivable by loan class as of September 30, 20192020 and December 31, 2018:2019:
September 30, | December 31, | ||||||||||||
September 30, 2019 | December 31, 2018 | 2020 | 2019 | ||||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||||
Commercial | $ | 33,781 | $ | 29,340 | $ | 33,108 | $ | 31,455 | |||||
Commercial real estate | 7,529 | 15,135 | 9,378 | 8,338 | |||||||||
Commercial construction | 7,101 | 2,934 | 17,727 | 6,773 | |||||||||
Residential real estate |
| 2,910 |
| 4,446 | 5,281 |
| 2,915 | ||||||
Total nonaccrual loans | $ | 51,321 | $ | 51,855 | $ | 65,494 | $ | 49,481 |
Nonaccrual loans includeand loans 90 days or greater past due and still accruing included both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.
21
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 6. Loans and the Allowance for Loan Losses – (continued)
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. The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) atas of September 30, 20192020 and December 31, 2018:2019:
September 30, 2020 | |||||||||||||||||||||||||||||
September 30, 2019 | Special | ||||||||||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total | Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||
Commercial | $ | 1,040,210 | $ | 23,219 | $ | 50,314 | $ | - | $ | 1,113,743 | $ | 1,566,486 | $ | 20,608 | $ | 44,340 | $ | - | $ | 1,631,434 | |||||||||
Commercial real estate | 3,007,226 | 6,418 | 17,172 | - | 3,030,816 | 3,637,852 | 13,419 | 21,191 | - | 3,672,462 | |||||||||||||||||||
Commercial construction | 629,778 | 1,918 | 14,475 | - | 646,172 | 583,749 | - | 30,363 | - | 614,112 | |||||||||||||||||||
Residential real estate | 318,754 | - | 3,553 | - | 322,307 | 332,686 | - | 10,690 | - | 343,376 | |||||||||||||||||||
Consumer |
| 2,434 |
| - |
| 1 |
| - |
| 2,435 | 1,874 | - | 2 | - | 1,876 | ||||||||||||||
Gross loans | $ | 4,998,403 | $ | 31,555 | $ | 85,515 | $ | - | $ | 5,115,473 | $ | 6,121,647 | $ | 34,027 | $ | 106,586 | $ | - | $ | 6,263,260 |
December 31, 2019 | |||||||||||||||||||||||||||||
December 31, 2018 | Special | ||||||||||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total | Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||
Commercial | $ | 951,610 | $ | 3,371 | $ | 33,777 | $ | - | $ | 988,758 | $ | 1,059,852 | $ | 22,159 | $ | 47,650 | $ | - | $ | 1,129,661 | |||||||||
Commercial real estate | 2,742,989 | 12,574 | 22,604 | - | 2,778,167 | 3,014,956 | 10,301 | 16,702 | - | 3,041,959 | |||||||||||||||||||
Commercial construction | 453,598 | 5,515 | 6,276 | - | 465,389 | 604,298 | 4,609 | 14,419 | - | 623,326 | |||||||||||||||||||
Residential real estate | 305,414 | - | 4,577 | - | 309,991 | 316,476 | - | 3,544 | - | 320,020 | |||||||||||||||||||
Consumer |
| 2,576 |
| - |
| 18 |
| - |
|
| 2,594 |
| 3,328 |
| - |
| - |
| - |
| 3,328 | ||||||||
Gross loans | $ | 4,456,187 | $ | 21,460 | $ | 67,252 | $ | - | $ | 4,544,899 | $ | 4,998,910 | $ | 37,069 | $ | 82,315 | $ | - | $ | 5,118,294 |
22
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 6. Loans and the Allowance for Loan Losses – (continued)
The following table provides an analysis of the impaired loans by segmentclass as of September 30, 20192020 and December 31, 2018:2019.
September 30, 2020 | |||||||||||||||||
Unpaid | |||||||||||||||||
September 30, 2019 | Recorded | Principal | Related | ||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Investment | Balance | Allowance | ||||||||||||
No related allowance recorded | (dollars in thousands) | (dollars in thousands) | |||||||||||||||
Commercial | $ | 41,030 | $ | 87,716 | $ | 12,185 | $ | 12,588 | |||||||||
Commercial real estate | 12,136 | 12,301 | 12,400 | 12,696 | |||||||||||||
Commercial construction | 6,079 | 6,085 | 21,019 | 21,490 | |||||||||||||
Residential real estate |
| 1,533 |
|
| 1,897 |
| 3,981 | 4,311 | |||||||||
Total (no related allowance) | $ | 60,778 | $ | 107,999 | $ | 49,585 | $ | 51,085 | |||||||||
|
| ||||||||||||||||
With an allowance recorded | |||||||||||||||||
Commercial | 23,024 | 68,406 | $ | 10,000 | |||||||||||||
Commercial real estate | $ | 388 | $ | 388 | $ | 23 | 2,722 | 2,722 | 1,000 | ||||||||
Commercial construction | 6,467 | 6,467 | 1,339 | 2,934 | 2,934 | 302 | |||||||||||
Residential real estate |
| 264 |
| 264 |
|
| 24 | 261 | 261 | 47 | |||||||
Total (with allowance) | $ | 7,119 | $ | 7,119 |
| $ | 1,386 | $ | 28,941 | $ | 74,323 | $ | 11,349 | ||||
|
| ||||||||||||||||
Total | |||||||||||||||||
Commercial | $ | 41,030 | $ | 87,716 | $ | - | $ | 35,209 | $ | 80,994 | $ | 10,000 | |||||
Commercial real estate | 12,524 | 12,689 | 23 | 15,122 | 15,418 | 1,000 | |||||||||||
Commercial construction | 12,546 | 12,552 | 1,339 | 23,953 | 24,424 | 302 | |||||||||||
Residential real estate |
| 1,797 |
| 2,161 |
| 24 | 4,242 | 4,572 | 47 | ||||||||
Total | $ | 67,897 | $ | 115,118 |
| $ | 1,386 | $ | 78,526 | $ | 125,408 | $ | 11,349 |
December 31, 2019 | |||||||||||||||||
Unpaid | |||||||||||||||||
December 31, 2018 | Recorded | Principal | Related | ||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Investment | Balance | Allowance | ||||||||||||
No related allowance recorded | (dollars in thousands) | (dollars in thousands) | |||||||||||||||
Commercial | $ | 29,896 | $ | 83,596 | $ | 37,984 | $ | 83,225 | |||||||||
Commercial real estate | 16,839 | 17,935 | 15,249 | 15,467 | |||||||||||||
Commercial construction | 9,240 | 9,240 | 8,649 | 8,649 | |||||||||||||
Residential real estate |
| 2,209 |
| 2,521 | 1,311 | 1,463 | |||||||||||
Consumer |
| - |
| - | |||||||||||||
Total (no related allowance) | $ | 58,184 | $ | 113,292 | $ | 63,193 | $ | 108,804 | |||||||||
|
| ||||||||||||||||
With an allowance recorded | |||||||||||||||||
Commercial real estate | $ | 1,488 | $ | 1,488 | $ | 7 | |||||||||||
Commercial construction | $ | 3,530 | $ | 3,530 | $ | 1,244 | |||||||||||
Residential real estate |
| 260 |
| 266 |
| 29 | 263 | 263 | 23 | ||||||||
$ | 1,748 | $ | 1,754 |
| $ | 36 | |||||||||||
Total (with allowance) | $ | 3,793 | $ | 3,793 | $ | 1,267 | |||||||||||
|
| ||||||||||||||||
Total | |||||||||||||||||
Commercial | $ | 29,896 | $ | 83,596 | $ | - | $ | 37,984 | $ | 83,225 | $ | - | |||||
Commercial real estate | 18,327 | 19,423 | 7 | 15,249 | 15,467 | - | |||||||||||
Commercial construction | 9,240 | 9,240 | - | 12,179 | 12,179 | 1,244 | |||||||||||
Residential real estate |
| 2,469 |
| 2,787 |
| 29 | 1,574 | 1,726 | 23 | ||||||||
Consumer |
| - |
| - |
| - | |||||||||||
Total | $ | 59,932 | $ | 115,046 |
| $ | 36 | $ | 66,986 | $ | 112,597 | $ | 1,267 |
23
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 6. Loans and the Allowance for Loan Losses – (continued)
The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by segment as of and for the three and nine months ended September 30, 20192020 and 2018:2019:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | 2019 |
| 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
Impaired loans (no allowance) | |||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 41,332 | $ | 570 | $ | 31,769 | $ | 36 | $ | 41,731 | $ | 733 | $ | 39,132 | $ | 102 | $ | 12,266 | $ | 50 | $ | 41,332 | $ | 570 | $ | 12,100 | $ | 150 | $ | 41,731 | $ | 733 | |||||||||||||||
Commercial real estate | 12,178 | 79 | 21,557 | 105 | 12,213 | 221 | 21,714 | 475 | 12,460 | 74 | 12,178 | 79 | 12,415 | 229 | 12,213 | 221 | |||||||||||||||||||||||||||||||
Commercial construction | 6,044 | 58 | 10,297 | 92 | 6,047 | 138 | 11,718 | 387 | 21,297 | 91 | 6,044 | 58 | 21,149 | 262 | 6,047 | 138 | |||||||||||||||||||||||||||||||
Residential real estate |
| 1,552 |
| - |
| 2,249 |
| - |
| 1,579 |
| 19 |
| 2,304 |
| - | 4,011 | 16 |
| 1,552 |
| - | 3,761 | 16 |
| 1,579 |
| 19 | |||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 61,106 | $ | 707 | $ | 65,872 | $ | 233 |
| $ | 61,570 |
| $ | 1,111 |
| $ | 74,868 |
| $ | 964 | $ | 50,034 | $ | 231 | $ | 61,106 | $ | 707 | $ | 49,425 | $ | 657 | $ | 61,570 |
| $ | 1,111 |
| |||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||
Impaired loans (allowance): | |||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | $ | 392 | $ | - | $ | 8,534 | $ | 11 | $ | 393 | $ | - | $ | 8,544 | $ | 34 | |||||||||||||||||||||||||||||||
Commercial construction | 6,439 | 220 | - | - | 6,378 | 220 | - | - | |||||||||||||||||||||||||||||||||||||||
Residential real estate |
| 252 |
| 9 |
| 264 |
| - |
|
| 255 |
| 9 |
| 267 |
| - | ||||||||||||||||||||||||||||||
Total | $ | 7,083 | $ | 936 | $ | 8,798 | $ | 11 | $ | 7,026 | $ | 229 | $ | 8,811 | $ | 34 | |||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||
Total impaired loans: | |||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 41,332 | $ | 570 | $ | 31,769 | $ | 36 | $ | 41,731 | $ | 733 | $ | 39,132 | $ | 102 | $ | 23,024 | $ | - | $ | 392 | $ | - | $ | 23,195 | $ | - | $ | 393 | $ | - | |||||||||||||||
Commercial real estate | 12,570 | 79 | 30,091 | 116 | 12,606 | 221 | 30,258 | 509 | 2,722 | - | 392 | - | 2,722 | - | 393 | - | |||||||||||||||||||||||||||||||
Commercial construction | 12,483 | 278 | 10,297 | 92 | 12,425 | 358 | 11,718 | 387 | 2,934 | - | 6,439 | 220 | 2,934 | - | 6,378 | 220 | |||||||||||||||||||||||||||||||
Residential real estate |
| 1,804 |
| 9 |
| 2,513 |
| - |
|
| 1,834 |
| 28 |
| 2,571 |
| - | 261 | 5 |
| 252 |
| 9 | 262 | 5 |
| 255 |
| 9 | ||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 68,189 | $ | 936 | $ | 74,760 | $ | 244 | $ | 68,596 | $ | 1,340 | $ | 83,679 | $ | 998 | $ | 28,941 | $ | 5 | $ | 7,083 | $ | 936 | $ | 29,113 | $ | 5 | $ | 7,026 | $ | 229 | |||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||
Total impaired loans: | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 35,290 | $ | 50 | $ | 41,332 | $ | 570 | $ | 35,295 | $ | 150 | $ | 41,731 | $ | 733 | |||||||||||||||||||||||||||||||
Commercial real estate | 15,182 | 74 | 12,570 | 79 | 15,137 | 229 | 12,606 | 221 | |||||||||||||||||||||||||||||||||||||||
Commercial construction | 24,231 | 91 | 12,483 | 278 | 24,083 | 262 | 12,425 | 358 | |||||||||||||||||||||||||||||||||||||||
Residential real estate | 4,272 | 21 |
| 1,804 |
| 9 | 4,023 | 21 |
| 1,834 |
| 28 | |||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 78,975 | $ | 236 | $ | 68,189 | $ | 936 | $ | 78,538 | $ | 662 | $ | 68,596 | $ | 1,340 |
Included in impaired loans atas of September 30, 20192020 and December 31, 20182019 are loans that are deemed troubled debt restructurings. The recorded investment in loans include accrued interest receivable and other capitalized costs such as real estate taxes paid on behalf of the borrower and loan origination fees, net, when applicable. Cash basis interest and interest income recognized on accrual basis approximate each other.
24
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 6. Loans and the Allowance for Loan Losses – (continued)
Aging Analysis - The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due atas of September 30, 20192020 and December 31, 2018:2019:
September 30, 2019 | September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
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 | 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) | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 5,812 | $ | 1,438 | $ | 3,098 | $ | 33,781 | $ | 44,129 | $ | 1,069,614 | $ | 1,113,743 | $ | 119 | $ | 403 | $ | 3,156 | $ | 33,108 | $ | 36,786 | $ | 1,594,648 | $ | 1,631,434 | |||||||||||||
Commercial real estate | - | 689 | - | 7,529 | 8,218 | 3,022,598 | 3,030,816 | - | 3,927 | 5,525 | 9,378 | 18,830 | 3,653,632 | 3,672,462 | |||||||||||||||||||||||||||
Commercial construction | - | - | - | 7,101 | 7,101 | 639,071 | 646,172 | 338 | 1,265 | - | 17,727 | 19,330 | 594,782 | 614,112 | |||||||||||||||||||||||||||
Residential real estate | 698 | - | - | 2,910 | 3,608 | 318,699 | 322,307 | 1,434 | 227 | 4,127 | 5,281 | 11,069 | 332,307 | 343,376 | |||||||||||||||||||||||||||
Consumer |
| - |
| - |
| - |
| - |
| - |
| 2,435 |
| 2,435 | - | - | - | - | - | 1,876 | 1,876 | ||||||||||||||||||||
Total | $ | 6,510 |
| $ | 2,127 |
| $ | 3,098 |
| $ | 51,321 |
| $ | 63,056 |
| $ | 5,052,417 |
| $ | 5,115,473 | $ | 1,891 | $ | 5,822 | $ | 12,808 | $ | 65,494 | $ | 86,015 | $ | 6,177,245 | $ | 6,263,260 |
Included in the 90 days or greater past due and still accruing category as of September 30, 20192020 are purchased credit-impaired loans, net of fair value marks, which accretesaccrete income per the valuation at date of acquisition.
December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||
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 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
(dollars in thousands) | 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 | Total Loans Receivable | ||||||||||||||||||||||||||||||||||
Commercial | $ | 1,673 | $ | - | $ | 1,647 | $ | 29,340 | $ | 32,660 | $ | 956,098 | $ | 988,758 | $ | 239 | $ | - | $ | 3,107 | $ | 31,455 | $ | 34,801 | $ | 1,094,860 | $ | 1,129,661 | |||||||||||||
Commercial real estate | 6,162 | 1,840 | - | 15,135 | 23,137 | 2,755,030 | 2,778,167 | 1,980 | 490 | - | 8,338 | 10,808 | 3,031,151 | 3,041,959 | |||||||||||||||||||||||||||
Commercial construction | 2,496 | 564 | - | 2,934 | 5,994 | 459,395 | 465,389 | - | - | - | 6,773 | 6,773 | 616,553 | 623,326 | |||||||||||||||||||||||||||
Residential real estate | 3,455 | 119 | - | 4,446 | 8,020 | 301,971 | 309,991 | 3,357 | 143 | - | 2,915 | 6,415 | 313,605 | 320,020 | |||||||||||||||||||||||||||
Consumer | - |
| - |
| - |
| - |
| - |
| 2,594 |
| 2,594 |
| - |
| - |
| - |
| - |
| - |
| 3,328 |
| 3,328 | ||||||||||||||
Total | $ | 13,786 | $ | 2,523 |
| $ | 1,647 |
| $ | 51,855 |
| $ | 69,811 |
| $ | 4,475,088 |
| $ | 4,544,899 | $ | 5,576 | $ | 633 | $ | 3,107 | $ | 49,481 | $ | 58,797 | $ | 5,059,497 | $ | 5,118,294 |
Included in the 90 days or greater past due and still accruing category as of December 31, 20182019 are purchased credit-impaired loans, net of fair value marks, which accretesaccrete income per the valuation at date of acquisition.
25
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 6. Loans and the Allowance for Loan 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 quality, and the related portion of the allowance for loan losses that are allocated to each loan portfolio segment:
September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||
September 30, 2019 | Commercial | Commercial | Residential | ||||||||||||||||||||||||||||||||||||||
Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Unallocated | Total | Commercial | real estate | construction | real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
ALLL | |||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | 23 | $ | 1,339 | $ | 24 | $ | - | $ | - | $ | 1,386 | $ | 10,000 | $ | 1,000 | $ | 302 | $ | 47 | $ | - | $ | 11,349 | |||||||||||||||
Collectively evaluated for impairment | 8,125 | 19,987 | 5,836 | 1,737 | 4 | 496 | 36,185 | 14,158 | 37,519 | 6,389 | 1,811 | 3 | 59,880 | ||||||||||||||||||||||||||||
Acquired portfolio | 200 | 1,000 | - | - | - | - | 1,200 | - | 1,559 | 291 | 642 | - | 2,492 | ||||||||||||||||||||||||||||
Acquired with deteriorated credit quality |
| - |
| - |
| - |
| - |
| - |
| - |
| - | - | - | - | - | - | - | |||||||||||||||||||||
Unallocated | - | - | - | - | - | 546 | 546 | ||||||||||||||||||||||||||||||||||
Total | $ | 8,325 |
| $ | 21,010 |
| $ | 7,175 |
| $ | 1,761 |
| $ | 4 |
| $ | 496 |
| $ | 38,771 | $ | 24,158 | $ | 40,078 | $ | 6,982 | $ | 2,500 | $ | 3 | $ | 546 | $ | 74,267 | |||||||
|
| ||||||||||||||||||||||||||||||||||||||||
Gross loans | |||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 41,030 | $ | 12,524 | $ | 12,545 | $ | 1,797 | $- | $ | 67,896 | $ | 35,209 | $ | 15,122 | $ | 23,953 | $ | 4,242 | $ | - | $ | 78,526 | ||||||||||||||||||
Collectively evaluated for impairment | 977,895 | 2,645,903 | 597,352 | 276,457 | 2,162 | 4,499,769 | 1,509,236 | 2,790,162 | 559,665 | 252,418 | 1,564 | 5,113,045 | |||||||||||||||||||||||||||||
Acquired portfolio | 89,359 | 371,266 | 36,275 | 44,053 | 273 | 541,226 | 83,121 | 861,653 | 30,494 | 82,589 | 312 | 1,058,169 | |||||||||||||||||||||||||||||
Acquired with deteriorated credit quality |
| 5,459 |
| 1,123 |
| - |
| - |
| - |
| 6,582 | 3,868 | 5,525 | - | 4,127 | - | 13,520 | |||||||||||||||||||||||
Total | $ | 1,113,743 | $ | 3,030,816 | $ | 646,172 | $ | 322,307 | $ | 2,435 | $ | 5,115,473 | $ | 1,631,434 | $ | 3,672,462 | $ | 614,112 | $ | 343,376 | $ | 1,876 | $ | 6,263,260 |
|
| December 31, 2019 | |||||||||||||||||||||||||||||||||||||||
December 31, 2018 |
|
|
| Commercial |
| Commercial |
| Residential |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Unallocated | Total |
| Commercial |
| real estate |
| construction |
| real estate |
| Consumer |
| Unallocated |
| Total | |||||||||||||||||||||
(dollars in thousands) |
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
Allowance for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | 7 | $ | - | $ | 29 | $ | - | $ | - | $ | 36 |
| $ | - |
| $ | - |
| $ | 1,244 |
| $ | 23 |
| $ | - |
|
|
|
| $ | 1,267 | ||||||
Collectively evaluated for impairment | 9,675 | 17,840 | 4,519 | 1,237 | 2 | 445 | 33,718 |
|
| 8,309 |
|
| 19,967 |
|
| 5,744 |
|
| 1,662 |
|
| 3 |
|
|
|
|
| 35,685 | |||||||||||||
Acquired portfolio | 200 | 1,000 | - | - | - | - | 1,200 |
|
| 40 |
|
| 886 |
|
| 316 |
|
| - |
|
| - |
|
|
|
|
| 1,242 | |||||||||||||
Acquired with deteriorated credit quality |
| - |
|
| - |
| - |
| - |
| - |
| - |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
|
|
| - | |||||
Unallocated |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 99 |
|
| 99 | ||||||||||||||||||||
Total | $ | 9,875 | $ | 18,847 | $ | 4,519 |
| $ | 1,266 |
| $ | 2 |
| $ | 445 |
| $ | 34,954 |
| $ | 8,349 |
| $ | 20,853 |
| $ | 7,304 |
| $ | 1,685 |
| $ | 3 |
| $ | 99 |
| $ | 38,293 | ||
|
| ||||||||||||||||||||||||||||||||||||||||
Gross loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Individually evaluated for impairment | $ | 29,896 | $ | 18,327 | $ | 9,240 | $ | 2,469 | $ | - | $ | 59,932 |
| $ | 37,984 |
| $ | 15,249 |
| $ | 12,179 |
| $ | 1,574 |
| $ | - |
|
|
|
| $ | 66,986 | ||||||||
Collectively evaluated for impairment | 949,129 | 2,500,132 | 456,149 | 263,449 | 2,484 | 4,171,343 |
|
| 1,011,708 |
|
| 2,669,999 |
|
| 578,620 |
|
| 276,177 |
|
| 3,064 |
|
|
|
|
| 4,539,568 | ||||||||||||||
Acquired portfolio | 7,224 | 259,708 | - | 44,073 | 110 | 311,115 |
|
| 74,517 |
|
| 355,610 |
|
| 32,527 |
|
| 42,269 |
|
| 264 |
|
|
|
|
| 505,187 | ||||||||||||||
Acquired with deteriorated credit quality |
| 2,509 |
| - |
| - |
| - |
| - |
| 2,509 |
|
| 5,452 |
|
| 1,101 |
|
| - |
|
| - |
|
| - |
|
|
|
|
| 6,553 | ||||||||
|
| $ | 1,129,661 |
| $ | 3,041,959 |
| $ | 623,326 |
| $ | 320,020 |
| $ | 3,328 |
|
|
|
| $ | 5,118,294 | ||||||||||||||||||||
Total | $ | 988,758 | $ | 2,778,167 |
| $ | 465,389 |
| $ | 309,991 | $ | 2,594 | $ | 4,544,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 6. Loans and the Allowance for Loan 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 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
A summary of the activity in the ALLLallowance for loan losses by loan segment is as follows:
Three Months Ended September 30, 2019 | Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Unallocated | Total | Commercial | Commercial | Residential |
| |||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Commercial | real estate | construction | real estate | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | $ | 8,721 | $ | 21,485 | $ | 5,542 | $ | 1,208 | $ | 2 | $ | 740 | $ | 37,698 | |||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2020 | $ | 9,345 | $ | 22,655 | $ | 8,026 | $ | 1,690 | $ | 5 | $ | 27,003 | $ | 68,724 |
| ||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
Charge-offs | - | (387 | ) | - | (557 | ) | (20 | ) | - | (964 | ) | (48 | ) | - | - | (209 | ) | - | - | (257 | ) | ||||||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
Recoveries | 28 | - | - | - | 9 | - | 37 | - | 800 | - | - | - | - | 800 |
| ||||||||||||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision |
| (424 | ) |
| (88 | ) |
| 1,633 |
| 1,110 |
|
| 13 |
|
| (244 | ) |
| 2,000 |
| 14,861 | 16,623 | (1,044 | ) | 1,019 | (2 | ) | (26,457 | ) | 5,000 |
| ||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | $ | 8,325 |
| $ | 21,010 |
| $ | 7,175 | $ | 1,761 |
| $ | 4 |
| $ | 496 |
| $ | 38,771 |
| |||||||||||||||||||||||||||||||||
Balance as of September 30, 2020 | $ | 24,158 | $ | 40,078 | $ | 6,982 | $ | 2,500 | $ | 3 | $ | 546 | $ | 74,267 |
|
Three Months Ended September 30, 2018 | |||||||||||||||||||||||||||
Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Unallocated | Total | |||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||||
Balance at June 30, 2018 | $ | 8,960 | $ | 18,221 | $ | 4,812 | $ | 1,167 | $ | 3 | $ | 431 | $ | 33,594 | |||||||||||||
| |||||||||||||||||||||||||||
Charge-offs | - | - | - | - | (6 | ) | - | (6 | ) | ||||||||||||||||||
| |||||||||||||||||||||||||||
Recoveries | 56 | - | - | - | 5 | - | 61 | ||||||||||||||||||||
| |||||||||||||||||||||||||||
Provision for loan losses |
| 933 |
| 7 |
| (22 | ) |
| 48 |
|
| 1 |
|
| 133 |
|
| 1,100 |
| ||||||||
| |||||||||||||||||||||||||||
Balance at September 30, 2018 | $ | 9,949 | $ | 18,228 | $ | 4,790 |
| $ | 1,215 |
| $ | 3 |
|
| $ | 564 |
| $ | 34,749 |
|
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||
Commercial | Commercial | Residential | ||||||||||||||||||||||||
Commercial | real estate | construction | real estate | Consumer | Unallocated | Total | ||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||
Balance as of June 30, 2019 | $ | 8,721 | $ | 21,485 | $ | 5,542 | $ | 1,208 | $ | 2 | $ | 740 | $ | 37,698 | ||||||||||||
| ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||
Charge-offs | - | (387 | ) | - | (557 | ) | (20 | ) | - | (964 | ) | |||||||||||||||
| ||||||||||||||||||||||||||
Recoveries | 28 | - | - | - | 9 | - | 37 | |||||||||||||||||||
| ||||||||||||||||||||||||||
Provision |
| (424 | ) |
| (88 | ) |
| 1,633 |
| 1,110 |
| 13 |
| (244 | ) |
| 2,000 |
| ||||||||
Balance as of September 30, 2019 | $ | 8,325 |
| $ | 21,010 |
| $ | 7,175 | $ | 1,761 | $ | 4 | $ | 496 | $ | 38,771 |
|
27
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 6. Loans and the Allowance for Loan Losses – (continued)
Nine Months Ended September 30, 2019 |
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Unallocated | Total |
|
|
|
| Commercial |
| Commercial |
| Residential |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
(dollars in thousands) |
| Commercial |
| real estate |
| construction |
| real estate |
| Consumer |
| Unallocated |
| Total | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | $ | 9,875 | $ | 18,847 | $ | 4,519 | $ | 1,266 | $ | 2 | $ | 445 | $ | 34,954 | |||||||||||||||||||||||||||||||||||||||
|
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2019 |
| $ | 8,349 |
|
| $ | 20,853 |
|
| $ | 7,304 |
| $ | 1,685 |
|
| $ | 3 |
|
| $ | 99 |
| $ | 38,293 |
| |||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
Charge-offs | - | (3,469 | ) | - | (557 | ) | (20 | ) | - | (4,046 | ) |
|
| (552 | ) |
|
| - |
|
| - |
|
| (278 | ) |
|
| (3 | ) |
|
| - |
|
| (833 | ) | |||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
Recoveries | 214 | 30 | - | 3 | 16 | - | 263 |
|
| 2 |
|
|
| 802 |
|
|
| - |
|
| - |
|
|
| 3 |
|
|
| - |
|
| 807 |
| ||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision |
| (1,764) |
| 5,602 |
|
| 2,656 |
| 1,049 |
| 6 |
| 51 |
| 7,600 |
|
|
| 16,359 |
|
| 18,423 |
|
|
| (322 | ) |
| 1,093 |
|
| - |
|
| 447 |
|
| 36,000 |
| ||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | $ | 8,325 | $ | 21,010 |
| $ | 7,175 |
| $ | 1,761 |
| $ | 4 |
|
| $ | 496 |
| $ | 38,771 |
| ||||||||||||||||||||||||||||||||
Balance as of September 30, 2020 |
| $ | 24,158 |
|
| $ | 40,078 |
|
| $ | 6,982 |
| $ | 2,500 |
|
| $ | 3 |
|
| $ | 546 |
| $ | 74,267 |
|
Nine Months Ended September 30, 2018 |
| Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Commercial real estate | Commercial construction | Residential real estate | Consumer | Unallocated | Total |
|
|
|
| Commercial |
| Commercial |
| Residential |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
(dollars in thousands) |
| Commercial |
| real estate |
| construction |
| real estate |
| Consumer |
| Unallocated |
| Total | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 | $ | 8,233 | $ | 17,112 | $ | 4,747 | $ | 1,050 | $ | 1 | $ | 605 | $ | 31,748 | |||||||||||||||||||||||||||||||||||||||
|
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2018 |
| $ | 9,875 | $ | 18,847 | $ | 4,519 | $ | 1,266 | $ | 2 | $ | 445 | $ | 34,954 | ||||||||||||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
Charge-offs | (17,066 | ) | - | - | (18 | ) | (7 | ) | - | (17,091 | ) |
| - | (3,469 | ) | - | (557 | ) | (20 | ) | - | (4,046 | ) | ||||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
Recoveries | 87 | - | - | - | 5 | - | 92 |
| 214 | 30 | - | 3 | 16 | - | 263 | ||||||||||||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision |
| 18,695 |
|
| 1,116 |
| 43 |
|
| 183 |
|
| 4 |
|
|
| (41 | ) |
| 20,000 |
|
|
| (1,764 | ) |
| 5,602 |
|
| 2,656 |
| 1,049 |
| 6 |
| 51 |
| 7,600 |
| ||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 | $ | 9,949 |
| $ | 18,228 | $ | 4,790 |
| $ | 1,215 |
|
| $ | 3 |
|
| $ | 564 |
|
| $ | 34,749 |
| ||||||||||||||||||||||||||||||
Balance as of September 30, 2019 |
| $ | 8,325 |
| $ | 21,010 |
| $ | 7,175 | $ | 1,761 |
| $ | 4 |
| $ | 496 | $ | 38,771 |
|
28
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 6. Loans and the Allowance for Loan Losses – (continued)
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, longer amortization of principal payments, maturity extension, 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 six 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.
AtAs of September 30, 2019,2020, 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.
As of September 30, 2019,2020, TDRs totaled $51.5$47.8 million, of which $31.8$29.5 million were on nonaccrual status and $19.7$18.3 million were performing under their restructured terms. As of December 31, 2018,2019, TDRs totaled $34.5$52.0 million, of which $23.3$30.6 million were on nonaccrual status and $11.2$21.4 million were performing under their restructured terms. The Company has allocated $1.4$4.4 million and $0.1 million$23 thousand of specific allowance as of September 30, 2020 and December 31, 2019, andrespectively for its TDRs.
The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2018, respectively. 2020:
Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||
Troubled debt restructurings: | (dollars in thousands) | ||||||
Commercial | 1 | $ | 191 | $ | 191 | ||
Commercial real estate | 1 |
| 97 |
| 97 | ||
|
|
|
| ||||
Total | 2 | $ | 288 | $ | 288 |
The two loan modifications during the nine months ended September 30, 2020 were maturity extensions.
There were no charge-offs in connection withTDRs for which there was a loan modification atpayment default within twelve months following the time of modification during the three and nine months ended September 30, 2019. 2020.
The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2019:
Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||
Troubled debt restructurings: | (dollars in thousands) | ||||||
Commercial | 8 | $ | 13,753 | $ | 13,753 | ||
Commercial real estate | 2 | 2,635 | 2,635 | ||||
Commercial construction | 3 |
| 5,630 |
| 5,630 | ||
|
|
|
| ||||
Total | 13 | $ | 22,018 | $ | 22,018 |
The 13 loan modifications during the nine months ended September 30, 2019 were maturity extensions.
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, 2019.
29
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 6. Loans and the Allowance for Loan Losses – (continued)
In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The following table presentsinteragency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., three to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Provisions of the CARES Act largely mirrored the provisions of the interagency statement, providing that modified loans by class modified as TDRswould not be considered TDR’s if they were performing at year-end 2019, and the other conditions set forth in the interagency statement were met. Borrowers considered current are those that occurred duringare less than 30 days past due on their contractual payments at the nine months endedtime a modification program is implemented or at year-end 2019. As of September 30, 2019:
Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||
Troubled debt restructurings: | (dollars in thousands) | ||||||
Commercial | 8 | $ | 13,753 | $ | 13,753 | ||
Commercial real estate | 2 | 2,635 | 2,635 | ||||
Commercial construction | 3 |
| 5,630 |
| 5,630 | ||
|
|
|
| ||||
Total | 13 | $ | 22,018 | $ | 22,018 |
These 13 loan modifications included2020, the Bank had 199 deferred loans totaling approximately $355.2 million. The majority of these loans were maturity extensions.deferred between 90 and 120 days.
The following table presentssets forth the composition of these loans by class modifiedloan segments as TDRs that occurred during the nine months endedof September 30, 2018:2020:
Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Unpaid | ||||||||||||
TDRs | (dollars in thousands) | ||||||||||||||
Number of | Principal | ||||||||||||||
Loans | Balance | ||||||||||||||
(dollars in thousands) | |||||||||||||||
Commercial | 31 | $ | 15,737 | $ | 15,737 | 77 | $ | 51,594 |
| ||||||
Commercial real estate | 2 | 209 | 209 | 105 | 281,636 |
| |||||||||
Commercial construction | 2 | 1,839 | 1,839 | 6 | 20 |
| |||||||||
Residential real estate | 2 |
| 454 |
| 454 | 11 | 5,284 |
| |||||||
|
|
|
| ||||||||||||
Total | 37 | $ | 18,239 | $ | 18,239 | 199 | $ | 355,167 |
|
Included in the commercial loan segment of the troubled debt restructurings are 27 taxi medallion loans totaling $11.2 million. All 27 taxi medallion loans included above were on nonaccrual status prior to modification, and remain on nonaccrual status post-modification. All loan modifications during the nine months ended September
30 2018 included interest rate reductions and maturity extensions.
29
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 7. 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.
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 atas of September 30, 20192020 and December 31, 2018:2019:
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.
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.
3031
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 7. 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 atas of September 30, 20192020 and December 31, 20182019 are as follows:
September 30, 2019 |
|
|
| September 30, 2020 | ||||||||||||||||||||
Fair Value Measurements at Reporting Date Using |
|
|
| 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) |
| 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: | ||||||||||||||||||||||||
Investment securities: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Federal agency obligations | $ | 24,535 | $ | - | $ | 24,535 | $ | - |
| $ | 46,145 |
| $ | - |
| $ | 46,145 |
| $ | - | ||||
Residential mortgage pass-through securities | 215,805 | - | 215,805 | - |
|
| 242,224 |
|
| - |
|
| 242,224 |
|
| - | ||||||||
Commercial mortgage pass-through securities | 5,090 | - | 5,090 | - |
|
| 6,247 |
|
| - |
|
| 6,247 |
|
| - | ||||||||
Obligations of U.S. states and political subdivision | 143,656 | - | 134,475 | 9,181 |
|
| 128,396 |
|
| - |
|
| 119,484 |
|
| 8,912 | ||||||||
Corporate bonds and notes | 28,250 | - | 28,250 | - |
|
| 24,803 |
|
| - |
|
| 24,803 |
|
| - | ||||||||
Asset-backed securities | 6,094 | - | 6,094 | - |
|
| 4,868 |
|
| - |
|
| 4,868 |
|
| - | ||||||||
Certificates of deposit | 150 | - | 150 | - |
|
| 151 |
|
| - |
|
| 151 |
|
| - | ||||||||
Other securities |
| 2,269 |
| 2,269 |
| - |
| - |
|
| 181 |
|
| 181 |
|
| - |
|
| - | ||||
Total available-for-sale | $ | 425,849 | $ | 2,269 | $ | 414,399 | $ | 9,181 |
| $ | 453,015 |
| $ | 181 |
| $ | 443,922 |
| $ | 8,912 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Equity securities |
| 11,231 |
| 11,231 |
| - |
| - |
|
| 13,400 |
|
| 11,440 |
|
| 1,960 |
|
| - | ||||
Total assets | $ | 437,080 | $ | 13,500 | $ | 414,399 | $ | 9,181 |
| $ | 466,415 |
| $ | 11,621 |
| $ | 445,882 |
| $ | 8,912 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Derivatives |
| 380 |
| - |
| 380 |
| - |
| $ | (2,728 | ) | $ | - |
| $ | (2,728 | ) | $ | - | ||||
Total liabilities | $ | 380 | $ | - | $ | 380 | $ | - |
| $ | (2,728 | ) | $ | - |
| $ | (2,728 | ) | $ | - |
3132
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 7. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
December 31, 2018 | December 31, 2019 | |||||||||||||||||||||||
Fair Value Measurements at Reporting Date Using | 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) | 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: | ||||||||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||
Federal agency obligations | $ | 44,955 | $ | - | $ | 44,955 | $ | - | $ | 28,237 | $ | - | $ | 28,237 | $ | - | ||||||||
Residential mortgage pass-through securities | 185,204 | - | 185,204 | - | 200,496 | - | 200,496 | - | ||||||||||||||||
Commercial mortgage pass-through securities | 3,874 | - | 3,874 | - | 4,997 | - | 4,997 | - | ||||||||||||||||
Obligations of U.S. states and political subdivision | 139,185 | - | 129,808 | 9,377 | 136,519 | - | 127,405 | 9,114 | ||||||||||||||||
Corporate bonds and notes | 25,813 | - | 25,813 | - | 28,382 | - | 28,382 | - | ||||||||||||||||
Asset-backed securities | 9,691 | - | 9,691 | - | 5,780 | - | 5,780 | - | ||||||||||||||||
Certificates of deposit | 322 | - | 322 | - | 150 | - | 150 | - | ||||||||||||||||
Other securities |
| 2,990 |
| 2,990 |
| - |
| - |
| 140 |
| 140 |
| - |
| - | ||||||||
Total available-for-sale | $ | 412,034 | $ | 2,990 | $ | 399,667 | $ | 9,377 | 404,701 | 140 | 395,447 | 9,114 | ||||||||||||
| ||||||||||||||||||||||||
Equity securities | 11,460 | 11,460 | - | - | 11,185 | 11,185 | - | - | ||||||||||||||||
Total assets | $ | 415,886 | $ | 11,325 | $ | 395,447 | $ | 9,114 | ||||||||||||||||
| ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Derivatives |
| 1,159 |
| - |
| 1,159 |
| - | $ | (273) | $ | - | $ | (273) | $ | - | ||||||||
Total assets | $ | 424,653 | $ | 14,450 | $ | 400,826 | $ | 9,377 | ||||||||||||||||
Total liabilities | $ | (273) | - | $ | (273) | $ | - |
There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 20192020 and during the year ended December 31, 2018.2019.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company may be required periodically to measure certain assets at fair value on a nonrecurring 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 nonrecurring basis atas of September 30, 20192020 and December 31, 2018:2019.
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 parts of these loans directly from the purchasing financial institutions (Level 2).
Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. Fair value of these loans is determined based on the terms of the loan, such as interest rate, maturity date, reset term, as well as sales of similar assets (Level 3).
3233
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 7. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
Impaired 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 nonrecurring basis, the fair value measurements atas of September 30, 20192020 and December 31, 20182019 are as follows:
Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
Assets measured at fair value on a nonrecurring basis: | Carrying Value at September 30, 2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
Quoted | ||||||||||||||||||||||||
Prices | ||||||||||||||||||||||||
in Active | Significant | |||||||||||||||||||||||
Markets for | Other | Significant | ||||||||||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||||||||||
Assets measured at fair value on a nonrecurring | September 30, | Assets | Inputs | Inputs | ||||||||||||||||||||
basis: | 2020 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||
Impaired loans: | (dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||
Commercial | $ | 13,024 | $ | - | $ | - | $ | 13,024 | ||||||||||||||||
Commercial real estate | $ | 365 | $ | - | $ | - | $ | 365 |
| 1,722 |
| - |
| - |
| 1,722 | ||||||||
Commercial construction | 5,128 | - | - | 5,128 | 2,632 | - | - | 2,632 | ||||||||||||||||
Residential real estate | 240 | - | - | 240 | 214 | - | - | 214 |
Fair Value Measurements at Reporting Date Using | ||||||||||||
Assets measured at fair value on a nonrecurring basis: | Carrying Value at December 31, 2018 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
Impaired loans: | (dollars in thousands) | |||||||||||
Commercial real estate | $ | 1,481 | $ | - | $ | - | $ | 1,481 | ||||
Residential real estate | 231 | - | - | 231 |
Fair Value Measurements at Reporting Date Using | ||||||||||||
Quoted | ||||||||||||
Prices | ||||||||||||
in Active | Significant | |||||||||||
Markets for | Other | Significant | ||||||||||
Identical | Observable | Unobservable | ||||||||||
Assets measured at fair value on a nonrecurring | December 31, | Assets | Inputs | Inputs | ||||||||
basis: | 2019 | (Level 1) | (Level 2) | (Level 3) | ||||||||
Impaired loans: | (dollars in thousands) | |||||||||||
Commercial construction | $ | 2,286 | $ | - | $ | - | $ | 2,286 | ||||
Residential | 240 | - | - | 240 |
Impaired loans– Collateral dependent impaired loans atas of September 30, 20192020 that required a valuation allowance were $7.1$28.9 million with a related valuation allowance of $1.4$11.3 million compared to $1.7$3.8 million with a related valuation allowance of $36 thousand at$1.3 million as of December 31, 2018.2019.
3334
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 7. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
Assets Measured With Significant Unobservable Level 3 Inputs
Recurring basis
The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 20192020 and for the year ended December 31, 2018:2019:
Municipal Securities | |||
(dollars in thousands) | |||
Beginning balance, January 1, 2019 | $ | 9,377 | |
Principal paydowns |
| (196 | ) |
Ending balance, September 30, 2019 | $ | 9,181 |
|
Municipal | |||||
Securities | |||||
(dollars in thousands) | |||||
Balance as of December 31, 2019 | $ | 9,114 | |||
Principal paydowns | (202 | ) | |||
Balance as of September 30, 2020 | $ | 8,912 |
Municipal Securities | |||
(dollars in thousands) | |||
Beginning balance, January 1, 2018 | $ | 9,632 | |
Principal paydowns |
| (255 | ) |
Ending balance, December 31, 2018 | $ | 9,377 |
|
Municipal | |||||
Securities | |||||
(dollars in thousands) | |||||
Balance as of December 31, 2018 | $ | 9,377 | |||
Principal paydowns | (263 | ) | |||
Balance as of December 31, 2019 | $ | 9,114 |
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 atas of September 30, 20192020 and December 31, 2018.2019. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.
September 30, 2019
September 30, 2020 | ||||||||||
Valuation | Unobservable | |||||||||
Fair Value | Techniques | Input | Rate | |||||||
Securities available-for-sale: | (dollars in thousands) | |||||||||
Municipal securities | $ | 8,912 | Discounted cash flows | Discount rate | 2.9 | % |
Fair Value | Valuation Techniques | Unobservable Input | Range | |||||||
Securities available-for-sale: | (dollars in thousands) | |||||||||
Municipal securities | $ | 9,181 | Discounted cash flows | Discount rate | 2.9 | % |
December 31, 2018
December 31, 2019 | ||||||||||
Valuation | Unobservable | |||||||||
Fair Value | Techniques | Input | Rate | |||||||
Securities available-for-sale: | (dollars in thousands) | |||||||||
Municipal securities | $ | 9,114 | Discounted cash flows | Discount rate | 2.9 | % |
Fair Value | Valuation Techniques | Unobservable Input | Range | |||||||
Securities available-for-sale: | (dollars in thousands) | |||||||||
Municipal securities | $ | 9,377 | Discounted cash flows | Discount rate | 2.9 | % |
3435
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 7. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
Nonrecurring basis: The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.
September 30, 2020
Valuation | Unobservable | ||||||||
(dollars in thousands) | Fair Value | Techniques | Input | Range (weighed average) | |||||
Impaired loans: | |||||||||
Commercial | $ | 13,024 | Market approach (100%) | Average transfer price as a price to unpaid principal balance | 62 - 68 (63) | ||||
Commercial real estate | $ | 1,722 | Appraisals of collateral value | Adjustment for comparable sales | -25% to 20% (-8%) | ||||
| |||||||||
Commercial Construction | $ | 2,632 | Appraisals of collateral value | Adjustment for comparable sales | -13% to +6% (-3%) | ||||
| |||||||||
Residential | $ | 214 | Appraisals of collateral value | Adjustment for comparable sales | -3% to +11% (0%) |
December 31, 2019
Valuation | Unobservable | ||||||||
(dollars in thousands) | Fair Value | Techniques | Input | Range (weighed average) | |||||
Impaired loans: | |||||||||
Commercial construction | $ | 2,286 | Appraisals of collateral value | Comparable sales | 0% - 5% (3%) | ||||
| |||||||||
Residential | $ | 240 | Appraisals of collateral value | Comparable sales | 2% - 14% (9%) |
36
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| |||||
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| ||||||||
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|
|
|
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| ||||
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| |||||
| |||||||||
|
|
|
|
December 31, 2018 | Fair Value | Valuation Techniques | Unobservable Input | Range | |||||
Impaired loans: | (dollars in thousands) | ||||||||
Commercial real estate | $ | 1,481 | Sales comparison approach | Adjustment for differences between the comparable sales | 6% to 9% [8%] | ||||
Residential real estate | 231 | Sales comparison approach | Adjustment for differences between the comparable sales | 0% to 10% [5%] |
35
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
As of September 30, 20192020 the fair value measurements presented are consistent with Topic 820, Fair Value Measurement, in which fair value represents exit 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, 20192020 and December 31, 2018:2019:
Fair Value Measurements | Fair Value Measurements | ||||||||||||||||||||||||||||
Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Quoted | ||||||||||||||||||||||||
(dollars in thousands) | Prices in | ||||||||||||||||||||||||||||
September 30, 2019 | |||||||||||||||||||||||||||||
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, 2020 | |||||||||||||||||||||||||||||
Financial assets: | |||||||||||||||||||||||||||||
Cash and due from banks | $ | 194,009 | $ | 194,009 | $ | 194,009 | $ | - | $ | - | $ | 256,119 | $ | 256,119 | $ | 256,119 | $ | - | $ | - | |||||||||
Securities available-for-sale | 425,849 | 425,849 | 2,269 | 414,399 | 9,181 | 453,015 | 453,015 | 181 | 443,992 | 8,912 | |||||||||||||||||||
Investment in restricted stocks | 27,946 | n/a | n/a | n/a | n/a | 28,713 | n/a | n/a | n/a | n/a | |||||||||||||||||||
Equity securities | 11,231 | 11,231 | 11,231 | - | - | 13,400 | 13,400 | 11,440 | 1,960 | - | |||||||||||||||||||
Net loans | 5,071,700 | 5,087,076 | - | - | 5,087,076 | 6,176,784 | 6,270,322 | - | - | 6,270,322 | |||||||||||||||||||
Loans held-for-sale | 33,245 | 33,245 | - | 1,598 | 31,647 | ||||||||||||||||||||||||
Accrued interest receivable | 21,024 | 21,024 | - | 2,262 | 18,762 | 34,326 | 34,326 | - | 1,788 | 32,538 | |||||||||||||||||||
| |||||||||||||||||||||||||||||
Financial liabilities: | |||||||||||||||||||||||||||||
Noninterest-bearing deposits | 828,190 | 828,190 | 828,190 | - | - | 1,270,021 | 1,270,021 | 1,270,021 | - | - | |||||||||||||||||||
Interest-bearing deposits | 3,923,044 | 3,935,294 | 2,349,308 | 1,585,986 | - | 4,528,735 | 4,547,338 | 2,909,126 | 1,638,212 | - | |||||||||||||||||||
Borrowings | 512,456 | 514,331 | - | 514,331 | - | 506,225 | 510,736 | - | 510,736 | - | |||||||||||||||||||
Subordinated debentures | 128,802 | 137,790 | - | 137,790 | - | 202,552 | 209,328 | - | 209,328 | - | |||||||||||||||||||
Derivatives | 380 | 380 | - | 380 | - | 2,728 | 2,728 | - | 2,728 | - | |||||||||||||||||||
Accrued interest payable | 4,509 | 4,509 | - | 4,509 | - | 4,240 | 4,240 | - | 4,240 | - | |||||||||||||||||||
| |||||||||||||||||||||||||||||
December 31, 2018 | |||||||||||||||||||||||||||||
December 31, 2019 | |||||||||||||||||||||||||||||
Financial assets: | |||||||||||||||||||||||||||||
Cash and due from banks | $ | 172,366 | $ | 172,366 | $ | 172,366 | $ | - | $ | - | $ | 201,483 | $ | 201,483 | $ | 201,483 | $ | - | $ | - | |||||||||
Securities available-for-sale | 412,034 | 412,034 | 2,990 | 399,667 | 9,377 | ||||||||||||||||||||||||
Investment in restricted stocks | 31,136 | n/a | n/a | n/a | n/a | ||||||||||||||||||||||||
Investment securities available-for-sale | 404,701 | 404,701 | 140 | 395,447 | 9,114 | ||||||||||||||||||||||||
Restricted investment in bank stocks | 27,397 | n/a | n/a | n/a | n/a | ||||||||||||||||||||||||
Equity securities | 11,460 | 11,460 | 11,460 | - | - | 11,185 | 11,185 | 11,185 | - | - | |||||||||||||||||||
Net loans | 4,506,138 | 4,402,878 | - | - | 4,402,878 | 5,075,234 | 5,096,669 | - | - | 5,096,669 | |||||||||||||||||||
Derivatives | 1,159 | 1,159 | - | 1,159 | - | ||||||||||||||||||||||||
Accrued interest receivable | 18,214 | 18,214 | - | 2,064 | 16,150 | 20,949 | 20,949 | - | 2,187 | 18,762 | |||||||||||||||||||
| |||||||||||||||||||||||||||||
Financial liabilities: | |||||||||||||||||||||||||||||
Noninterest-bearing deposits | 768,584 | 768,584 | 768,584 | - | - | 861,728 | 861,728 | 861,728 | - | - | |||||||||||||||||||
Interest-bearing deposits | 3,323,508 | 3,320,640 | 1,957,503 | 1,363,137 | - | 3,905,814 | 3,917,405 | 2,352,093 | 1,565,312 | - | |||||||||||||||||||
Borrowings | 600,001 | 598,598 | - | 598,598 | - | 500,293 | 502,026 | - | 502,026 | - | |||||||||||||||||||
Subordinated debentures | 128,556 | 132,426 | - | 132,426 | - | 128,885 | 134,973 | - | 134,973 | - | |||||||||||||||||||
Derivatives | 273 | 273 | - | 273 | - | ||||||||||||||||||||||||
Accrued interest payable | 6,764 | 6,764 | - | 6,764 | - | 4,018 | 4,018 | - | 4,018 | - | |||||||||||||||||||
|
3637
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 7. 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 accountconsidering 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.
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. Comprehensive Income
Total comprehensive 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 (loss) 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 reclassification out of accumulated other comprehensive (loss) income for the periods presented:
Details about Accumulated Other Comprehensive Loss Components | Amounts Reclassified from Accumulated Other Comprehensive Income | Affected Line item in the Statement Where Net Income is Presented | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||
Sale of investment securities available for sale | $ | (279 | ) | $ | - | $ | (280 | ) | $ | - | Net losses on sale of securities available-for-sale | |||||||
| 62 |
|
| - |
|
| 62 |
|
| - |
| Income tax benefit | ||||||
(217 | ) | - | (218 | ) | - | |||||||||||||
Net interest income on swaps | 204 | - | 563 | - | Borrowings | |||||||||||||
| (46 | ) |
| - |
|
| (125 | ) |
| - |
| Income tax expense | ||||||
158 | - | 438 | - | |||||||||||||||
Amortization of pension plan net actuarial losses | (90 | ) | (91 | ) | (269 | ) | (274 | ) | Other components of net periodic pension expense | |||||||||
| 26 |
|
| 26 |
|
| 76 |
|
| 77 | Income tax benefit | |||||||
| (64 | ) | (65 | ) |
| (193 | ) | (197 | ) | |||||||||
Total reclassification | $ | (123 | ) | $ | (65 | ) | $ | (27 | ) | $ | (197 | ) |
Details about Accumulated Other Comprehensive Loss Components | Amounts Reclassified from Accumulated Other Comprehensive Income | Affected Line item in the Statement Where Net Income is Presented | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||
Sale of investment securities | $ | - | $ | (279 | ) | $ | 29 | $ | (280 | ) | Net (losses) gains on sale of securities available-for-sale | |||||||
available for sale | - |
| 62 |
| (6 | ) |
| 62 |
| Income tax expense | ||||||||
- | (217 | ) | 23 | (218 | ) | |||||||||||||
| ||||||||||||||||||
Net interest income on swaps | $ | (631 | ) | 204 | $ | (942 | ) | 563 | Interest expense | |||||||||
196 |
| (46 | ) | 265 |
| (125 | ) | Income tax expense | ||||||||||
(435 | ) | 158 | (677 | ) | 438 | |||||||||||||
| ||||||||||||||||||
Amortization of pension plan net | (75 | ) | (90 | ) | (226 | ) | (269 | ) | Other components of net periodic pension expense | |||||||||
actuarial losses | 21 |
| 26 |
| 63 |
| 76 |
| Income tax expense | |||||||||
(54 | ) |
| (64 | ) | (163 | ) |
| (193 | ) | |||||||||
| ||||||||||||||||||
Total reclassification | $ | (489 | ) | $ | (123 | ) | $ | (817 | ) | $ | (27 | ) |
3738
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 8. Comprehensive Income – (continued)
Accumulated other comprehensive loss atincome (loss) as of September 30, 20192020 and December 31, 20182019 consisted of the following:
September 30, | December 31, | ||||||||||||||
September 30, 2019 | December 31, 2018 | 2020 | 2019 | ||||||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||||||
Investment securities available-for-sale, net of tax | $ | 3,138 | $ | (5,841 | ) | $ | 6,774 | $ | 2,724 | ||||||
Cash flow hedge, net of tax | (270 | ) | 837 | (1,958 | ) | (193 | ) | ||||||||
Defined benefit pension and post-retirement plans, net of tax |
| (3,996 | ) |
| (3,785 | ) | (3,515 | ) | (3,678 | ) | |||||
Total | $ | (1,128 | ) | $ | (8,789 | ) | $ | 1,301 | $ | (1,147 | ) |
Note 9. Premises and Equipment
The Company leases certain premises and equipment under operating leases. At September 30, 2019, the Company had lease liabilities totaling $17.1 million and right-of-use assets totaling $15.8 million. As of September 30, 2019, the weighted average remaining lease term for operating leases was 7.4 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.0%. Total lease costs for the three and nine months ended September 30, 2019 was $0.7 million and $2.3 million, respectively.
Rent expense for the three and nine months ended September 30, 2018 prior to adoption of ASU 2016-02, was $0.6 million and $1.6 million, respectively.
There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the nine months ended September 30, 2019.
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
September 30, 2019 | |||
(dollars in thousands) | |||
Lease payments due: | |||
Less than 1 year | $ | 3,265 | |
1 year through less than 2 years | 2,887 | ||
2 years through less than 3 years | 2,479 | ||
3 years through less than 4 years | 2,133 | ||
4 years through 5 years | 1,870 | ||
After 5 years |
| 6,709 |
|
Total undiscounted cash flows | 19,343 | ||
Impact of discounting |
| (2,195 | ) |
Total lease liability | $ | 17,148 |
|
38
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 10.9. 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, 2019.2020. 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, 20192020 are approximately 400,593.313,054. The Company intends to issue all shares under the Plan in the form of newly issued shares.
Restricted stock, options and restricted 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 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 shares have the same dividend and voting rights as common stock, while options, performance units and restricted 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 recorded as incurred. Stock-based compensation expense was $0.7 million and $1.9 million for the three months and nine months ended September 30, 2020 and September 30, 2019 respectively, and $0.6were $0.8 million and $1.3$2.0 million, for the three and nine months ended September 30, 2018, respectively.
Activity under the Company’s options for the nine months ended September 30, 20192020 was as follows:
Number of Stock Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | Number of Stock Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | ||||||||||||||
Outstanding at December 31, 2018 | 108,463 | $ | 8.35 | ||||||||||||||||||
Outstanding as of December 31, 2019 | 73,426 | $ | 8.19 | ||||||||||||||||||
Granted | - | - | - | - | |||||||||||||||||
Exercised | (28,937 | ) | 8.96 | (25,413 | ) | 7.39 | |||||||||||||||
Forfeited/cancelled/expired | - |
| - | - | - | ||||||||||||||||
Outstanding at September 30, 2019 | 79,526 |
| 8.13 | 2.3 | $ | 1,119,313 | |||||||||||||||
Exercisable at September 30, 2019 | 79,526 |
| $ | 8.13 | 2.3 | $ | 1,119,313 | ||||||||||||||
Outstanding as of September 30, 2020 | 48,013 | $ | 8.61 | 1.5 | $ | 262,366 | |||||||||||||||
| |||||||||||||||||||||
Exercisable as of September 30, 2020 | 48,013 | $ | 8.61 | 1.5 | $ | 262,366 |
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, 20192020 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, 2019.2020. This amount changes based on the fair market value of the Company’s stock.
39
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 9. Stock Based Compensation – (continued)
Activity under the Company’s restricted shares for the nine months ended September 30, 20192020 was as follows:
Nonvested Shares | Weighted- Average Grant Date Fair Value | ||||
Nonvested at December 31, 2018 | 68,428 | $ | 23.04 | ||
Granted | 183,467 | 21.40 | |||
Vested | (52,629 | ) | 21.98 | ||
Forfeited/cancelled/expired | - |
| - | ||
Nonvested September 30, 2019 | 199,266 |
| $ | 21.81 |
39
Weighted- | ||||||
Average | ||||||
Nonvested | Grant Date | |||||
Shares | Fair Value | |||||
Nonvested as of December 31, 2019 | 75,351 | $ | 21.61 | |||
Granted | 68,853 | 17.42 | ||||
Vested | (51,292 | ) | 21.33 | |||
Forfeited/cancelled/expired | (322 | ) | 23.65 | |||
Nonvested September 30, 2020 | 92,590 | $ | 18.64 |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 10. Stock Based Compensation – (continued)
As of September 30, 2019,2020, there was approximately $1,233,743$1.2 million of total unrecognized compensation cost related to nonvested restricted shares granted. The cost is expected to be recognized over a weighted average period of 2.31.1 years. A total of 11,979 restricted shares were granted during the three months ended September 30, 2019.
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 at December 31, 2018 | 86,009 | $ | 22.06 | ||||
Awarded | 35,636 | 20.79 | |||||
Change in estimate | 23,375 | 30.95 | |||||
Vested | (52,508 | ) | 21.26 | ||||
Unearned at September 30, 2019 | 92,512 |
|
| 120,212 | $ | 24.27 |
Weighted | |||||||||
Average Grant | |||||||||
Units | Units | Date Fair | |||||||
(expected) | (maximum) | Value | |||||||
Unearned as of December 31, 2019 | 90,097 | $ | 23.85 | ||||||
Awarded | 82,579 | 10.77 | |||||||
Change in estimate | 2,490 | 22.75 | |||||||
Vested shares | (37,337 | ) | 22.75 | ||||||
Unearned as of September 30, 2020 | 137,829 | 206,744 | $ | 16.29 |
AtAs of September 30, 2019,2020, the specific number of shares related to performance units that were expected to vest was 92,512,137,829, 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. AtAs of September 30, 20192020 the maximum amountnumber of shares related to performance units that ultimately could vest if performance targets were exceeded is 120,212.206,744. During the nine months ended September 30, 2020, 37,337 shares vested. A total of 25,99114,935 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of performance units during the nine months ended September 30, 20192020 were 26,51722,402 shares.
At As of September 30, 2019,2020, compensation cost of approximately $0.8$1.1 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.71.9 years. A total of 35,636 performance units were awarded during the nine months ended September 30, 2019.
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 at December 31, 2018 | 29,423 | $ | 31.35 | |||
Awarded | 53,454 | 20.79 | ||||
Vested | (9,808 | ) | 21.28 | |||
Unearned at September 30, 2019 | 73,069 | $ | 24.98 |
Weighted | |||||||
Average Grant | |||||||
Units | Date Fair | ||||||
(expected) | Value | ||||||
Unearned as of December 31, 2019 | 73,069 | $ | 23.62 | ||||
Awarded | 123,870 | 10.77 | |||||
Vested shares | (27,626 | ) | 24.53 | ||||
Unearned as of September 30, 2020 | 169,313 | $ | 14.07 |
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 nine months ended September 30, 2019, a2020, 27,626 shares vested. A total of 4,90411,085 shares were netted outfrom the vested shares to satisfy employee tax obligations, resulting inobligations. The net issuanceshares issued from vesting of 4,904 shares.
Atrestricted stock units during the nine months ended September 30, 2019,2020 were 16,541 shares. As of September 30, 2020, compensation cost of approximately $1.4$1.8 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 2.42.0 years. A total of 53,454 restricted stock units were awarded during the nine months ended September 30, 2019.
40
40
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 11.10. Components of Net Periodic Pension Cost
The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until 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 | Three Months | ||||||||||||||
Ended | Ended | ||||||||||||||
Three Months Ended September 30, 2019 | Three Months Ended September 30, 2018 |
| September 30, 2020 |
| September 30, 2019 | ||||||||||
(dollars in thousands) |
| (dollars in thousands) | |||||||||||||
Service cost | $ | - | $ | - |
| $ | - |
|
| $ | - |
| |||
Interest cost | 113 | 106 |
|
| 91 |
|
|
| 113 |
| |||||
|
| ||||||||||||||
Expected return on plan assets | (174 | ) | (190 | ) |
|
| (196 | ) |
|
| (174 | ) | |||
Net amortization |
| 90 |
|
| 91 |
|
|
| 75 |
|
|
| 90 |
| |
Total periodic pension cost | $ | 29 |
| $ | 7 |
| |||||||||
|
|
|
|
|
|
|
|
| |||||||
Total periodic pension (income) cost |
| $ | (30 | ) |
| $ | 29 |
|
Nine Months | Nine Months | ||||||||||||||
Ended | Ended | ||||||||||||||
Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 |
| September 30, 2020 |
| September 30, 2019 | ||||||||||
(dollars in thousands) |
| (dollars in thousands) | |||||||||||||
Service cost | $ | - | $ | - |
| $ | - |
|
| $ | - |
| |||
Interest cost | 339 | 320 |
|
| 273 |
|
|
| 339 |
| |||||
|
| ||||||||||||||
Expected return on plan assets | (522 | ) | (573 | ) |
|
| (588 | ) |
|
| (522 | ) | |||
Net amortization |
| 269 |
|
| 274 |
|
|
| 226 |
|
|
| 269 |
| |
Total periodic pension cost | $ | 86 |
| $ | 21 |
| |||||||||
|
|
|
|
|
|
|
|
| |||||||
Total periodic pension (income) cost |
| $ | (89) |
|
| $ | 86 |
|
Contributions
The Company did not make a contributioncontribute to the Pension Trust during the nine months ended September 30, 2019. The Company2020, and does not plan on contributing any amounts to the Pension Trust for the remainder of 2019.2020. 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.
41
CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 12.11. FHLB Borrowings
The Company’s FHLB borrowings and weighted average interest rates are summarized below:
September 30, 2019 | December 31, 2018 | September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||
Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | ||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||
Total FHLB borrowings | $ | 512,456 |
| 2.25 | % | $ | 600,001 | 2.59 | % | $ | 506,225 | 1.09 | % | $ | 500,293 | 1.96 | % | ||||||||||||
|
|
|
|
|
|
| |||||||||||||||||||||||
By remaining period to maturity: | |||||||||||||||||||||||||||||
Less than 1 year | $ | 392,169 | 2.21 | % | $ | 405,000 | 2.57 | % | $ | 352,758 | 0.82 | % | $ | 400,000 | 1.84 | % | |||||||||||||
1 year through less than 2 years | 57,000 | 2.27 | % | 110,000 | 2.75 | % | 93,277 | 1.52 | % | 62,000 | 2.26 | % | |||||||||||||||||
2 years through less than 3 years | 28,338 | 2.15 | % | 60,000 | 2.27 | % | 57,391 | 1.93 | % | 10,737 | 2.45 | % | |||||||||||||||||
3 years through less than 4 years | 32,421 | 2.82 | % | - | - | - | - | 25,000 | 2.92 | % | |||||||||||||||||||
4 years through less than 5 years | - |
| - |
| - | - | |||||||||||||||||||||||
4 years through 5 years | - | - |
| - | - | ||||||||||||||||||||||||
After 5 years |
| 2,898 | 2.43 | % |
| 25,000 | 2.92 | % | 2,839 | 2.42 | % |
| 2,882 | 2.43 | % | ||||||||||||||
Total FHLB borrowings | 512,826 | 2.25 | % | 600,000 | 2.59 | % | 506,265 | 1.09 | % | 500,619 | 1.96 | % | |||||||||||||||||
Fair value (discount) premium |
| (370 | ) |
| 1 | ||||||||||||||||||||||||
FHLB borrowings, net | $ | 512,456 |
| $ | 600,001 |
| |||||||||||||||||||||||
Fair value premium (discount) | (40 | ) | (326 | ) | |||||||||||||||||||||||||
Total borrowings | $ | 506,225 | $ | 500,293 |
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.
Advances are payable at stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances are fixed rates. The advances atas of September 30, 20192020 were primarily collateralized by approximately $1.9$2.0 billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement. AtAs of September 30, 20192020 the Company had remaining borrowing capacity of approximately $1.1 billion at FHLB.
In June of 2019, the Corporation extinguished $65 million of FHLBNY advances with a weighted average rate of 3.29 percent and a weighted average maturity of 1.1 years. Of that total $40 million of those extinguished advances were putable at the option of the FHLBNY. A pre-tax prepayment penalty of $1.0 million associated with the extinguishment was recorded to noninterest expense.
Note 13. Revenue Recognition
Effective January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company’s revenues come from interest income and other sources, including loans, leases, securities, and derivatives that are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include deposit service charges on deposits, interchange income, and the sale of OREO.
The Company, using a modified retrospective transition approach, determined that there will neither be a cumulative effect adjustment to retained earnings as a result of adopting the new standard, nor will the standard have a material impact on our consolidated financial statements including the timing or amounts of revenue recognized.
42
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 13. Revenue Recognition – (continued)
All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the three months and nine months ended September 30, 2019 and 2018. Items outside of ASC 606 are noted as such.
Three Months Ended September 30, 2019 | Three Months Ended September 30, 2018 | ||||||
(dollars in thousands) | |||||||
Noninterest income | |||||||
Service charges on deposits | |||||||
Overdraft fees | $ | 354 | $ | 222 | |||
Other | 184 | 186 | |||||
Interchange income | 199 | 152 | |||||
Net gains on sales of loans (1) | 278 | 2 | |||||
Net gains (losses) on equity securities (1) | 79 | (157 | ) | ||||
Net losses on sale of securities available-for-sale (1) | (279 | ) | - | ||||
Wire transfer fees (1) | 128 | 73 | |||||
Loan servicing fees (1) | 216 | 16 | |||||
Bank owned life insurance (1) | 915 | 751 | |||||
Other |
| 35 |
| 27 | |||
Total noninterest income | $ | 2,109 | $ | 1,272 |
Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 | ||||||
(dollars in thousands) | |||||||
Noninterest income | |||||||
Service charges on deposits | |||||||
Overdraft fees | $ | 947 | $ | 590 | |||
Other | 556 | 482 | |||||
Interchange income | 558 | 465 | |||||
Net gains on sales of loans (1) | 343 | 31 | |||||
Net gains (losses) on equity securities (1) | 340 | (325 | ) | ||||
Net losses on sale of securities available-for-sale (1) | (280 | ) | - | ||||
Wire transfer fees (1) | 353 | 222 | |||||
Loan servicing fees (1) | 313 | 64 | |||||
Bank owned life insurance (1) | 2,570 | 2,300 | |||||
Other |
| 89 |
| 70 | |||
Total noninterest income | $ | 5,789 | $ | 3,899 |
|
|
43
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 13. Revenue Recognition – (continued)
A description of the Company’s revenue streams accounted for under ASC 606 is as follows:
Service Charges on Deposit Accounts: The Company earns fees from deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in the time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.
Interchange Income: The Company earns interchange fees from debit and credit card holder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided by the cardholder.
Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether the collectability of the transaction prices is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.
Note 14.12. Subordinated Debentures
During 2003, the Company formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier I capital. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or in part prior to maturity. The floating interest rate on the subordinate debentures is three monththree-month LIBOR plus 2.85% and reprices quarterly. The rate atas of September 30, 20192020 was 5.12%3.19%. 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.
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CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 12. Subordinated Debentures – (continued)
The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II atas of September 30, 20192020 and December 31, 2018.2019.
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 |
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, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”“2015 Notes”). The 2015 Notes are non-callable for five years,may now be redeemed by the Company, have a stated maturity of July 1, 2025, and bear interest at a fixed rate of 5.75% per year, from and including June 30, 2015 to, but excluding July 1, 2020. From and including July 1, 2020 tountil the maturity date or early redemption date the interestat a variable rate will reset quarterly to a level equal to the then current three monththree-month LIBOR rate plus 393 basis points. As of September 30, 2019, unamortized2020 the variable interest rate was 4.23% and all costs related to this debt2015 issuance were approximately $136,000.have been amortized. Management currently anticipates that these notes will be redeemed, in full, during the first half of 2021.
On January 11, 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”“2018 Notes”). The 2018 Notes bear interest at 5.20% annually from, and including, the date of initial issuance to, but excluding, February 1, 2023, payable semi-annually in arrears. From and including February 1, 2023 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 284 basis points (2.84%) payable quarterly in arrears. If three-month LIBOR is not available for any reason, then the rate for that interest period will be determined by such alternate method as provided in the Supplemental Indenture. Interest on the 2018 Notes will be paid on February 1, and August 1, commencing August 1, 2018 to but not including February 1, 2023, and from and including February 1, 2023, on February 1, May 1, August 1, and November 1, of each year to but excluding the stated maturity date, unless in any case previously redeemed. As of September 30, 2019,2020, unamortized costs related to this debt issuance were approximately $1,217,000.$1.1 million.
On June 10, 2020, the Parent Corporation issued $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. As of September 30, 2020, unamortized costs related to this debt issuance were approximately $1.5 million.
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CONNECTONE BANCORP, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
Note 15.13. Offsetting Assets and Liabilities
Certain financial instrument-related assets and liabilities may, under GAAP, be offset on the consolidated statements of condition because they are subject to master netting agreements or similar agreements, although the Company has elected to disclose such arrangements on a gross basis on its consolidated financial statements. The Company enters into interest rate swap agreements with financial institution counterparties. For additional detail regarding interest rate swap agreements refer to Note 5 within this section. In the event 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 following table presents information about financial instruments that are eligible for offset as of September 30, 20192020 and December 31, 2018:2019:
Gross Amounts Not Offset | Gross Amounts Not Offset | ||||||||||||||||||||||||||||||||||||||
Gross Amounts Recognized | Gross Amounts Offset in the Statement of Financial Condition | Net Amounts of Assets Presented in the Statement of Financial Condition | Financial Instruments Recognized | Cash or Financial Instrument Collateral | Net Amount | Gross Amounts Recognized | Gross Amounts Offset in the Statement of Financial Condition | Net Amounts of Assets Presented in the Statement of Financial Condition | Financial Instruments Recognized | Cash or Financial Instrument Collateral | Net Amount | ||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
September 30, 2019 | |||||||||||||||||||||||||||||||||||||||
September 30, 2020 | |||||||||||||||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 380 | $ | - | $ | 380 | $ | - | $ | 380 | $ | - | $ | (2,728 | ) | $ | - | $ | (2,728 | ) | $ | - | $ | (2,728 | ) | $ | - | ||||||||||||
| |||||||||||||||||||||||||||||||||||||||
December 31, 2018 | |||||||||||||||||||||||||||||||||||||||
December 31, 2019 | |||||||||||||||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 1,159 | $ | - | $ | 1,159 | $ | - | $ | - | $ | 1,159 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | (273 | ) | $ | - | $ | (273 | ) | $ | - | $ | - | $ | (273 | ) |
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Note 14. Goodwill
In accordance with ASC 350, the Company performs goodwill impairment test at least annually, or more frequently if triggering event occurs. In the second quarter of 2020, the impact of COVID-19, prompted the Company to quantitatively evaluate goodwill for impairment. The Company engaged an independent third-party to evaluate the fair value of the Company compared to its carrying value. To estimate the fair value of the Company, the third-party relied on a weighted discounted cash flow method, guideline public company method, and transaction method. The results concluded that the fair value of the Company exceeded its current carrying value and goodwill impairment did not exist. As of December 31, 2018,September 30, 2020 the Company reassessed the prior quarter’s conclusion and, finding no material changes to our previous methodology, assumptions or results, concluded there was no financial collateral pledged to our interest rate swaps.impairment. As these swap positions were not within the contractually agreed upon collateral requirement thereof September 30, 2020 and December 31, 2019, goodwill was no collateral pledged to, or from, the respective counterparties.$208.4 million and $162.6 million, respectively.
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Note 15. Subsequent Event
On October 26, 2020, the Company announced it had entered into a purchase and assumption agreement to sell two of the Bank’s leased branch offices in Warwick, NY and Monroe, NY and the deposit accounts associated with the two branches. Under the terms of the purchase and assumption agreement, the acquiring bank will assume the remaining lease and deposit obligations held at each branch. The total right of use asset and lease liability as of September 30, 2020 for both branches was $0.2 million and $0.2 million, respectively.
Additionally, under the terms of the purchase and assumption agreement, a portion of the deposits at each branch will be acquired at a set premium, while the remaining deposits will be acquired at no premium or discount. We anticipate the gain on the deposits with a premium will not have a material impact on our financial statements. The transaction is expected to close in the first quarter of 2021, subject to regulatory approvals and satisfaction of customary closing conditions.
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Item 2. Management'sManagement’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, 20192020 and December 31, 2018.2019. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.
Cautionary Statement Concerning Forward-Looking Statements
This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp is engaged; (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 aboveherein on such matters as business generation and retention, funding and liquidity could be significant; (10) the outcome of regulatory and legal investigations and proceedings may not be anticipated, and (11) the ability to complete, the proposed merger transaction with BKJ (the “BKJ Transaction”) on the proposed terms within the expected timeframe; the risk that the businesses of BKJBNJ and ConnectOne Bancorp will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; expected revenue synergies and cost savings from the BKJ Transactionacquisition of BNJ may not be fully realized within the expected timeframe; revenues following the BKJ Transactionacquisition of BNJ may be lower than expected; and customer and employee relationships and business operations may be disrupted by the BKJ Transaction.acquisition of BNJ; and (12) 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 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 loan losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies is provided below.
Allowance for Loan Losses and Related Provision: The allowance for loan losses (“ALLL”) represents management’s estimate of probable incurred credit losses inherent in the loan portfolio. Determining the amount of the ALLL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, individual credit situation and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated statements of condition.
The evaluation of the adequacy of the ALLL includes, among other factors, an analysis of historical loss rates by loan segment applied to current loan totals. However, actual loan losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.
The ALLL is established through a provision for loan losses charged to expense. Management believes that the current ALLL will be adequate to absorb loan 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 segment and the resulting loan loss rates which are projected for current loan total amounts. Loss estimates for specified problem
47
loans are also detailed. All of the factors considered in the analysis of the adequacy of the ALLL may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 6 of the Notes to Consolidated Financial Statements.
46
Other-Than-Temporary Impairment of Securities Available-for-Sale: 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 7 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.
Business Combinations: We account for business combinations under the acquisition method of accounting. Using this method, assets acquired, liabilities assumed and consideration paid are recorded at their estimated fair values as of the acquisition date. The application of this method of accounting requires the use of significant estimates and assumptionsassumptions. The application of the acquisition method of accounting usually results in the recognition of goodwill and a core deposit intangible (if the acquiree has deposits). The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired, including any identifiable intangibles, if applicable. Goodwill is not amortized for book purposes; however, it is reviewed at least annually for impairment and is usually not deductible for tax purposes.
The assets acquired and liabilities assumed and consideration paid in the acquisition are recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. Our estimates are based upon assumptions that we believe to be reasonable and the Company may use an outside service provider to assist with the valuations.
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. The Company performs an annual goodwill impairment test in the fourth quarter of each year, or more often if events or circumstances warrant. We will continue to monitor and evaluate the impact of COVID-19 and its impact on our market capitalization, overall economic conditions and any other potential triggering events that may indicate an impairment of goodwill in the future. In the event we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or our regulatory capital ratios.
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 12 of the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 20182019 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. More specifically, the impact of COVID-19 resulted in a significant increase to loan loss reserves. In response to the COVID-19 pandemic, the Company has temporarily closed certain branch locations and is directing those branch customers affected to drive-thru windows and online banking services. The Company has also offered 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 September 30, 2020, the Company has 199 deferred loans with a total outstanding loan balance of $355.2 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 and executed between March 1, 2020 through December 31, 2020.
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 September 30, 2020, PPP loans were $474.4 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 allowance for loan losses as of September 30, 2020. Should those circumstances change, the Company could be required to establish an additional allowance for loan loss through additional provisions for loan loss expense charged to earnings. Additionally, management has elected to participate in the Federal Reserve Bank’s PPP Lending Facility ("PPPLF") and as of June 30, 2020 had funded $206.6 million in PPP loans via the PPPLF. During the third quarter of 2020, the Company elected to pay off the entire PPPLF balance which was previously outstanding as of June 30, 2020.
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Operating Results Overview
Net income for the three months ended September 30, 2019 amounted to $21.72020 was $24.8 million compared to $19.9$21.7 million for the comparable three-month period ended September 30, 2018.2019. The Company’s diluted earnings per share were $0.61 for both the three months ended September 30, 2019 and September 30, 2018. The increase in net income was primarily attributable to an increase in net interest income and an increase in other income, offset by increases in provision for loan losses, noninterest expenses and income tax expense. Included in noninterest expense$0.62 for the three months ended September 30, 2019 was a FDIC small bank assessment credit of $1.3 million.
Net income for the nine months ended September 30, 2019 amounted to $52.6 million compared to $41.7 million for the comparable nine-month period ended September 30, 2018. The Company’s diluted earnings per share were $1.48 for the nine months ended September 30, 20192020 as compared with diluted earnings per share of $1.29$0.61 for the comparable six-monththree-month period ended September 30, 2018.2019. The increase in net income and diluted earnings per share was primarily attributable to an increase in net interest income and a decreasenoninterest income, offset by increases in provision for loan losses partially offset by increases inand noninterest expenses and income tax expense.expenses. The increase in net interest income, was mainly attributable to loan growth resulting from the GHB acquisition. The increase in noninterest expenses was primarily attributable to merger-related expenses, a loss on extinguishment of debt and an increase in salariesinterest and employee benefitsfees on loans, due to the acquisition of Bancorp of NJ (“BNJ”) and professional and consulting expenses, partially offset by the aforementioned FDIC credit.a decrease in interest expense largely due to reductions in interest rates related to deposits. The decreaseincrease in provision for loan losses was primarily attributable to provisioning related to the taxi medallion portfolio duringeconomic uncertainties surrounding COVID-19 for the three months ended March 31, 2018.September 30, 2020.
Net income for the nine months ended September 30, 2020 was $45.6 million compared to $52.6 million for the comparable nine-month period ended September 30, 2019. The Company’s diluted earnings per share were $1.15 for the nine months ended September 30, 2020 as compared with diluted earnings per share of $1.48 for the comparable nine-month period ended September 30, 2019. The decrease in net income and diluted earnings per share was primarily attributable to an increase in provision for loan losses and noninterest expenses, partially offset by an increase in net interest income, an increase in noninterest income and a decrease in income tax expense. The increase in provision for loan losses was primarily attributable to provisioning related to the economic uncertainties surrounding COVID-19 for the nine months ended September 30, 2020. The increase in net interest income was primarily attributable to an increase in interest and fees on loans, due to the acquisition of BNJ, and decreases in interest expense largely due to reductions in interest rates related to deposits.
Net Interest Income and Margin
Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets. Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (primarily interest earned on obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues. Net interest margin is defined as net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.
Fully taxable equivalent net interest income for the three months ended September 30, 2019 was $48.9 million, an increase of $8.52020 increased by $12.1 million, or 21.0%24.7%, from the three monthscomparable three-month period ended September 30, 2018,2019, resulting from an increase in average total interest-earning assets of 27.0%23.3%, primarily loans, that resultedresulting from the BNJ acquisition, of GHB and a widening of the net interest margin of 14 basis-point5 basis-points to 3.44% for the three months ended September 30, 20193.49% from 3.30% for3.44%. The widening of the three months ended September 30, 2018. Included in net interest income was accretion and amortization of purchase accounting adjustments of $1.6 million during the three months ended September 30, 2019 and $0.2 million during the three months ended September 30, 2018. Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.33% for the three months ended September 30, 2019, widening by 4resulted from a 59 basis-points from 3.29% for the three months ended September 30, 2018. The increasereduction in the adjusted net interest margin was primarily attributable to increased loan portfolio yields, primarily due to an improved loan mix and higher spreads on new business.cost of funding interest-earning assets, partially offset by a 54 basis-point reduction in the rate of average interest-earning assets.
Fully taxable equivalent net interest income for the nine months ended September 30, 2020 increased by $37.5 million, or 26.7%, from the comparable nine-month period ended September 30, 2019, was $140.5 million,resulting from an increase in average interest-earning assets of $22.1 million, or 18.6%26.1%, primarily resulting from the BNJ acquisition, and a widening of the net interest margin of 8 basis-points to 3.44% from 3.36%. The widening of the net interest margin resulted primarily from the favorable impact the Fed’s first quarter 2020 interest rate reductions had on our funding costs, which more than offset declines in our interest-earning asset yields. Included in interest income in the nine months ended September 30, 2018, resulting from an increase in total average interest-earning assets2020 was PPP fee income of 16.0% dueapproximately $7.2 million. The benefit to the acquisition of GHB. Net interest margin was 3.36% for the nine months ended September 30, 2019, widening by 7 basis-points from 3.29% for the nine months ended September 30, 2018. Included in net interest income was accretion and amortization of purchase accounting adjustments of $4.5 million and $1.1 million during the nine months ended September 30, 2019 and 2018, respectively. Excluding these purchase accounting adjustments, the adjusted2020 net interest margin attributable to the PPP was 3.25% for bothoffset by additional liquidity on the nine months ended September 30, 2019 and September 30, 2018.Bank’s balance sheet.
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The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three and nine months ended September 30, 20192020 and 2018,2019, 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, | |||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Interest | Interest | |||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | Average | Income/ | Average | Average | Income/ | Average | ||||||||||||||||||||||||||||||||||||||
Average Balance | Interest Income/ Expense | Average Rate (8) | Average Balance | Interest Income/ Expense | Average Rate (8) | Balance | Expense | Rate (7) | Balance | Expense | Rate (7) | ||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||||||||||||||||||||
Securities (1) (2) | $ | 445,492 | $ | 3,053 | 2.72 | % | $ | 423,566 | $ | 3,147 | 2.95 | % | |||||||||||||||||||||||||||||||||
Loans receivable and loans held-for-sale (2) (3) (4) | 5,127,365 | 67,068 | 5.19 | 4,362,905 | 51,973 | 4.73 | |||||||||||||||||||||||||||||||||||||||
Federal funds sold and interest-bearing with banks | 50,289 | 278 | 2.19 | 42,164 | 183 | 1.72 | |||||||||||||||||||||||||||||||||||||||
Investment securities (1) (2) | $ | 420,362 | $ | 2,176 | 2.06 | % | $ | 445,492 | $ | 3,053 | 2.72 | % | |||||||||||||||||||||||||||||||||
Total loans (2) (3) (4) | 6,288,443 | 75,028 | 4.75 | 5,127,365 | 67,068 | 5.19 | |||||||||||||||||||||||||||||||||||||||
Federal funds sold and interest-bearing deposits with banks | 227,617 | 47 | 0.08 | 50,289 | 278 | 2.19 | |||||||||||||||||||||||||||||||||||||||
Restricted investment in bank stocks |
| 25,912 |
| 502 | 7.69 |
| 28,043 |
| 530 | 7.50 | 26,077 | 426 | 6.50 | 25,912 | 502 | 7.69 | |||||||||||||||||||||||||||||
Total interest-earning assets |
| 5,649,058 |
| 70,901 | 4.98 |
| 4,856,678 |
| 55,833 | 4.56 | 6,962,499 | 77,677 | 4.44 | 5,649,058 | 70,901 | 4.98 | |||||||||||||||||||||||||||||
Noninterest-earning assets: | |||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses | (37,704 | ) | (33,943 | ) | (69,381) | (37,704) | |||||||||||||||||||||||||||||||||||||||
Other noninterest-earning assets |
| 448,059 |
|
| 363,438 |
| 580,884 | 448,059 | |||||||||||||||||||||||||||||||||||||
Total assets | $ | 6,059,413 |
| $ | 5,186,173 |
| $ | 7,474,002 | $ | 6,059,413 | |||||||||||||||||||||||||||||||||||
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Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits: | |||||||||||||||||||||||||||||||||||||||||||||
Time deposits | $ | 1,598,378 | $ | 9,934 | 2.47 |
| 1,296,165 | $ | 6,477 | 1.98 | $ | 1,728,129 | $ | 8,174 | 1.88 | $ | 1,598,378 | $ | 9,934 | 2.47 | |||||||||||||||||||||||||
Other interest-bearing deposits |
| 2,300,886 |
| 7,416 | 1.28 |
| 1,854,763 |
| 4,204 | 0.90 | 2,881,592 | 3,773 | 0.52 | 2,300,886 | 7,416 | 1.28 | |||||||||||||||||||||||||||||
Total interest-bearing deposits | 3,899,264 | 17,350 | 1.77 | 3,150,928 | 10,681 | 1.34 | 4,609,721 | 11,947 | 1.03 | 3,899,264 | 17,350 | 1.77 | |||||||||||||||||||||||||||||||||
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Borrowings | 467,230 | 2,754 | 2.34 | 531,251 | 2,839 | 2.12 | 467,399 | 1,992 | 1.70 | 467,230 | 2,754 | 2.34 | |||||||||||||||||||||||||||||||||
Subordinated debentures (5) | 128,747 | 1,843 | 5.68 | 128,420 | 1,831 | 5.66 | |||||||||||||||||||||||||||||||||||||||
Capital lease |
| 2,393 |
| 36 | 5.97 |
| 2,554 |
| 38 | 5.90 | |||||||||||||||||||||||||||||||||||
Subordinated debentures, net of debt issuance costs | 202,502 | 2,700 | 5.30 | 128,747 | 1,843 | 5.68 | |||||||||||||||||||||||||||||||||||||||
Capital lease obligation | 2,211 | 33 | 5.94 | 2,393 | 36 | 5.97 | |||||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 4,497,634 | 21,983 | 1.94 | 3,813,153 | 15,389 | 1.60 | 5,281,833 | 16,672 | 1.26 | 4,497,634 | 21,983 | 1.94 | |||||||||||||||||||||||||||||||||
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Noninterest-bearing demand deposits | 810,247 | 761,782 | 1,253,235 | 810,247 | |||||||||||||||||||||||||||||||||||||||||
Other liabilities |
| 37,530 |
|
| 21,110 |
| 55,570 | 37,530 | |||||||||||||||||||||||||||||||||||||
Total noninterest-bearing liabilities | 847,777 | 782,892 | 1,308,805 | 847,777 | |||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity |
| 714,002 |
|
| 590,128 |
| 883,364 | 714,002 | |||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 6,059,413 |
| $ | 5,186,173 |
| $ | 7,474,002 | $ | 6,059,413 | |||||||||||||||||||||||||||||||||||
Net interest income (tax-equivalent basis) | 48,918 | 40,444 | 61,005 | 48,918 | |||||||||||||||||||||||||||||||||||||||||
Net interest spread (6) | 3.04 | % | 2.96 | % | |||||||||||||||||||||||||||||||||||||||||
Net interest margin (7) | 3.44 | % | 3.30 | % | |||||||||||||||||||||||||||||||||||||||||
Net interest spread (5) | 3.18 | % | 3.04 | % | |||||||||||||||||||||||||||||||||||||||||
Net interest margin (6) | 3.49 | % | 3.44 | % | |||||||||||||||||||||||||||||||||||||||||
Tax-equivalent adjustment |
| (512 | ) |
| (482 | ) | (456) | (512) | |||||||||||||||||||||||||||||||||||||
Net interest income | $ | 48,406 |
| $ | 39,962 |
| $ | 60,549 | $ | 48,406 |
(1) | Average balances are based on amortized cost and include equity securities. |
(2) | Interest income is presented on a tax-equivalent basis using 21%. |
(3) | Includes loan fee income. |
(4) | Total loans includes loans held-for-sale and nonaccrual loans. |
(5) | Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis. |
(6) | Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets. |
(7) | Rates are annualized. |
50
Average Statements of Condition with Interest and Average Rates
Nine Months Ended September 30, | ||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | Income/ | Average | Average | Income/ | Average | |||||||||||||||||||
Balance | Expense | Rate (7) | Balance | Expense | Rate (7) | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Securities (1) (2) | $ | 438,563 | $ | 7,802 | 2.38 | % | $ | 496,886 | $ | 11,361 | 3.06 | % | ||||||||||||
Total loans (2) (3) (4) | 6,192,822 | 224,336 | 4.84 | 5,014,324 | 191,466 | 5.11 | ||||||||||||||||||
Federal funds sold and interest-bearing with banks | 244,539 | 625 | 0.34 | 54,172 | 925 | 2.28 | ||||||||||||||||||
Restricted investment in bank stocks | 28,124 | 1,268 | 6.02 | 28,106 | 1,369 | 6.51 | ||||||||||||||||||
Total interest-earning assets | 6,904,048 | 234,031 | 4.53 | 5,593,488 | 205,121 | 4.90 | ||||||||||||||||||
Noninterest-earning assets: | ||||||||||||||||||||||||
Allowance for loan losses | (54,009) | (36,873) | ||||||||||||||||||||||
Other noninterest-earning assets | 571,628 | 433,900 | ||||||||||||||||||||||
Total assets | $ | 7,421,667 | $ | 5,990,515 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Time deposits | $ | 1,864,835 | $ | 28,130 | 2.01 | $ | 1,555,185 | $ | 27,603 | 2.37 | ||||||||||||||
Other interest-bearing deposits | 2,727,696 | 14,625 | 0.72 | 2,240,535 | 21,695 | 1.29 | ||||||||||||||||||
Total interest-bearing deposits | 4,592,531 | 42,755 | 1.24 | 3,795,720 | 49,298 | 1.74 | ||||||||||||||||||
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Borrowings | 580,641 | 6,580 | 1.51 | 518,988 | 9,647 | 2.49 | ||||||||||||||||||
Subordinated debentures, net of debt issuance costs | 157,936 | 6,555 | 5.54 | 128,667 | 5,533 | 5.75 | ||||||||||||||||||
Capital lease | 2,257 | 101 | 5.98 | 2,436 | 110 | 6.02 | ||||||||||||||||||
Total interest-bearing liabilities | 5,333,365 | 55,991 | 1.40 | 4,445,811 | 64,588 | 1.94 | ||||||||||||||||||
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Noninterest-bearing demand deposits | 1,162,340 | 811,689 | ||||||||||||||||||||||
Other liabilities | 53,788 | 36,508 | ||||||||||||||||||||||
Total noninterest-bearing liabilities | 1,216,129 | 848,197 | ||||||||||||||||||||||
Stockholders’ equity | 872,173 | 696,507 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 7,421,667 | $ | 5,990,515 | ||||||||||||||||||||
Net interest income (tax-equivalent basis) | 178,040 | 140,533 | ||||||||||||||||||||||
Net interest spread (5) | 3.13 | % | 2.96 | % | ||||||||||||||||||||
Net interest margin (6) | 3.44 | % | 3.36 | % | ||||||||||||||||||||
Tax-equivalent adjustment | (1,419) | (1,645) | ||||||||||||||||||||||
Net interest income | $ | 176,621 | $ | 138,888 |
(1) | Average balances are based on amortized cost and include equity securities. |
(2) | Interest income is presented on a tax-equivalent basis using 21%. |
(3) | Includes loan fee income. |
(4) | Total loans include loans held-for-sale and nonaccrual loans. |
(5) |
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| Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a |
| Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets. |
| Rates are annualized. |
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Average Statements of Condition with Interest and Average Rates
Nine Months Ended September 30, | |||||||||||||||||||||
2019 | 2018 | ||||||||||||||||||||
Average Balance | Interest Income/ Expense | Average Rate (8) | Average Balance | Interest Income/ Expense | Average Rate (8) | ||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||
Securities (1) (2) | $ | 496,886 | $ | 11,361 | 3.06 | % | $ | 432,475 | $ | 9,200 | 2.84 | % | |||||||||
Loans receivable and loans held-for-sale (2) (3) (4) | 5,014,324 | 191,466 | 5.11 | 4,294,792 | 148,994 | 4.64 | |||||||||||||||
Federal funds sold and interest-bearing with banks | 54,172 | 925 | 2.28 | 63,506 | 607 | 1.28 | |||||||||||||||
Restricted investment in bank stocks |
| 28,106 |
| 1,369 | 6.51 |
| 30,402 |
| 1,517 | 6.67 | |||||||||||
Total interest-earning assets |
| 5,593,488 |
| 205,121 | 4.90 |
| 4,821,175 |
| 160,318 | 4.45 | |||||||||||
Noninterest-earning assets: | |||||||||||||||||||||
Allowance for loan losses | (36,873 | ) | (32,915 | ) | |||||||||||||||||
Other noninterest-earning assets |
| 433,900 |
| 337,509 |
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Total assets | $ | 5,990,515 | $ | 5,125,769 | |||||||||||||||||
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Interest-bearing liabilities: | |||||||||||||||||||||
Interest-bearing deposits: | |||||||||||||||||||||
Time deposits | $ | 1,555,185 | $ | 27,603 | 2.37 | $ | 1,261,660 | $ | 17,096 | 1.81 | |||||||||||
Other interest-bearing deposits |
| 2,420,535 |
| 21,695 | 1.29 |
| 1,811,966 |
| 10,442 | 0.77 | |||||||||||
Total interest-bearing deposits | 3,795,720 | 49,298 | 1.74 | 3,073,626 | 27,538 | 1.20 | |||||||||||||||
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Borrowings | 518,988 | 9,647 | 2.49 | 591,348 | 8,856 | 2.00 | |||||||||||||||
Subordinated debentures (5) | 128,667 | 5,533 | 5.75 | 124,029 | 5,345 | 5.76 | |||||||||||||||
Capital lease |
| 2,436 |
| 110 | 6.02 |
| 2,588 |
| 117 | 6.04 | |||||||||||
Total interest-bearing liabilities | 4,445,811 | 64,588 | 1.94 | 3,791,591 | 41,856 | 1.48 | |||||||||||||||
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Noninterest-bearing demand deposits | 811,689 | 735,345 | |||||||||||||||||||
Other liabilities |
| 36,508 |
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| 18,728 | ||||||||||||||||
Total noninterest-bearing liabilities | 848,197 | 754,073 | |||||||||||||||||||
Stockholders’ equity |
| 696,507 |
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| 580,105 |
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Total liabilities and stockholders’ equity | $ | 5,990,515 |
| $ | 5,125,769 |
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Net interest income (tax-equivalent basis) | 140,533 | 118,462 | |||||||||||||||||||
Net interest spread (6) | 2.96 | % | 2.97 | % | |||||||||||||||||
Net interest margin (7) | 3.36 | % | 3.29 | % | |||||||||||||||||
Tax-equivalent adjustment |
| (1,645 | ) |
| (1,408 | ) | |||||||||||||||
Net interest income | $ | 138,888 | $ | 117,054 |
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Noninterest Income
Noninterest income totaled $3.5 million for the three months ended September 30, 2020, compared with $2.1 million for the three months ended September 30, 2019, compared with $1.3 million for the three months ended September 30, 2018. Included2019. The increase in noninterest income for the three months ended September 30, 2019 were losses on sales of securities available-for-sale of $0.3 million. Excluding those losses, noninterest income increased $1.1$1.4 million from the three months ended September 30, 2018. Noninterest income consists of2019 was primarily attributable to increases in income on bank owned life insurance (“BOLI”),of $0.7 million, mainly resulting from a death benefit of $0.5 million, net gains on salessale of loans held-for-sale, deposit service fees, loan fees,primarily commercial real estate, of $0.3 million and net gains on equitysale of securities and other income.available-for-sale of $0.3 million.
Noninterest income totaled $11.0 million for the nine months ended September 30, 2020, compared with $5.8 million for the nine months ended September 30, 2019. The increase in noninterest income of $5.2 million from the prior year third quarternine months ended September 30, 2019 was attributableprimarily attributed to increases in deposit, loan and other income of $0.4$3.0 million, net gainswhich included $2.3 million of loan referral fee income generated by BoeFly as a result of its participation in the PPP program. Additional increases were in income on equity securities $0.2 million, BOLI incomebank owned life insurance of $0.2$1.1 million and net gains on sale of loans held-for-sale of $0.3$0.9 million. The increase in deposit, loan and other income was mainly attributable to increases in overdraft fees, loan servicing fees, wire transfer fees, and fees related to our BoeFly subsidiary.
Noninterest income totaled $5.8 million for the nine months ended September 30, 2019, compared with $3.9 million for the nine months ended September 30, 2018. Included in noninterest income for the nine months ended September 30, 2019 were losses on sale of securities available-for-sale of $0.3 million. Excluding these losses, noninterest income increased $2.2 million from the nine months ended September 30, 2018. The increase from the prior year comparable period was attributable to increases in deposit, loan and other income of $0.9 million, net gains on equity securities of $0.7 million, BOLI income of $0.3 million and increases in net gains saleson sale of loans held-for-sale of $0.3 million. The increase in deposit, loan and other income was mainly attributable to increases in overdraft fees, loan servicing feessales of commercial real estate loans originated for sale during the first and wire transfer fees.third quarters of 2020.
Noninterest Expenses
Noninterest expenses totaled $20.4$26.5 million for the three months ended September 30, 2019,2020, compared to $18.1with $21.4 million for the three months ended September 30, 2018. Included in noninterest expenses was a FDIC small bank assessment credit for $1.3 million. Excluding this item, noninterest2019. Noninterest expenses increased $3.6by $6.1 million from the three months ended September 30, 2018. The increase from the prior year third quarter was2019, primarily attributable to increases in salaries and employee benefits of $2.2$2.7 million, professional and consulting expensesFDIC insurance of $0.6$1.5 million, occupancy and equipment expenses of $0.3$1.1 million, and marketing and advertising expensesincreases in data processing of $0.3$0.4 million. The increases over the prior year third quarterin salaries and employee expenses, occupancy and equipment expenses and data processing were primarilymainly attributable to the acquisition of GHB.BNJ. The increase in FDIC insurance expense was primarily the result of a third-quarter 2019 non-recurring FDIC assessment credit of $1.3 million.
Noninterest expenses totaled $94.6 million for the nine months ended September 30, 2020, compared with $70.0 million for the nine months ended September 30, 2019, compared to $52.1 million for the nine months ended September 30, 2018.2019. Included in noninterest expenses were merger and restructuring expense charges totaling $14.6 million and $8.1 million during the nine months ended September 30, 2020 and 2019, respectively. Excluding merger and September 30, 2018 were $8.1 million and $0.4 million, respectively, in merger-related expenses. Also included inrestructuring expense charges, noninterest expenses duringincreased by $18.0 million from the nine months ended SeptemberJune 30, 2019, was $1.0 million related to a loss on extinguishment of debt and a $1.3 million FDIC assessment credit. Excluding these items, noninterest expenses increased $10.5 million from the prior year comparable period. The increase from the prior year comparable period was primarily attributable to increases in salaries and employee benefits of $6.7 million, professional and consulting expenses of $1.6$8.1 million, occupancy and equipment of $2.9 million, FDIC insurance of $1.8 million, data processing of $1.2 million, professional and consulting of $1.1 million, other expenses of $1.1 million, partially offset by a $1.0 million amortizationloss on extinguishment of core deposit intangiblesdebt that took place during the second quarter of $0.62019. There was no extinguishment of debt in the current period. Also contributing to the increase was an additional $2.3 million and marketing and advertisingin expenses of $0.3 million.related to the BoeFly acquisition. The increases over the prior year comparable period were primarilyin salaries and employee expenses, occupancy and equipment, data processing, professional and consulting and other expenses are mainly attributable to the acquisition of GHB.BNJ. The increase in FDIC insurance was primarily the result of the aforementioned FDIC assessment credit of $1.3 million in 2019.
Income Taxes
Income tax expense was $7.8 million for the three months ended September 30, 2020, compared to $6.4 million for the three months ended September 30, 2019, compared to $2.1 million for the three months ended September 30, 2018.2019. The increase in income tax expense was primarily attributable to higher income before taxes.the result of an increase in taxable income. The effective tax rate for the three months ended September 30, 20192020 and September 30, 20182019 was 22.7%23.9% and 9.6%22.7%, respectively. Included in income tax expense for the third quarter of 2018 were benefits of $1.4 million resulting from Federal and NJ deferred tax asset adjustments.
Income tax expense was $11.3 million for the nine months ended September 30, 2020, compared to $14.4 million for the nine months ended September 30, 2019, compared to $7.1 million for the nine months ended September 30, 2018.2019. The effective tax rate for the nine months ended September 30, 2019 was 21.4%19.9% versus 14.6%21.5% for the comparable prior-year period. At the present time, the Bank is projecting a 2019 combined federal and state effective tax rate of approximately 22%.
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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 a diverse client base in the Company’s market area. The composition of the Company’s portfolio remains relatively constant but can change 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.
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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 requirements 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.
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, 2019 | December 31, 2018 | Amount Increase/ (Decrease) | Amount | |||||||||||||||||||||||||||
Amount | % | Amount | % | September 30, 2020 | December 31, 2019 | Increase/ | ||||||||||||||||||||||||
(dollars in thousands) | Amount | % | Amount | % | (Decrease) | |||||||||||||||||||||||||
Commercial | $ | 1,113,743 | 21.8 | % | $ | 988,758 | 21.8 | % | $ | 124,985 | ||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||
Commercial (1) | $ | 1,631,434 | 26.1 | % | $ | 1,129,661 | 22.1 | % | $ | 501,773 | ||||||||||||||||||||
Commercial real estate | 3,030,816 | 59.2 | 2,778,167 | 61.1 | 252,649 | 3,672,462 | 58.6 | 3,041,959 | 59.4 | 630,503 | ||||||||||||||||||||
Commercial construction | 646,172 | 12.6 | 465,389 | 10.2 | 180,783 | 614,112 | 9.8 | 623,326 | 12.2 | (9,214) | ||||||||||||||||||||
Residential real estate | 322,307 | 6.3 | 309,991 | 6.8 | 12,316 | 343,376 | 5.5 | 320,020 | 6.2 | 23,356 | ||||||||||||||||||||
Consumer | 2,435 | 0.1 | 2,594 | 0.1 | (159 | ) | 1,876 | 0.0 | 3,328 | 0.1 | (1,452) | |||||||||||||||||||
Gross loans | $ | 5,115,473 | 100.0 | % | $ | 4,544,899 | 100.0 | % | $ | 570,574 | $ | 6,263,260 | 100.0 | % | $ | 5,118,294 | 100.0 | % | $ | 1,144,966 |
(1) | Includes PPP loans of $474 million as of September 30, 2020. |
AtAs of September 30, 2019,2020, gross loans totaled $5.1$6.3 billion, an increase of $571 million,$1.1 billion, or 12.6%22.4%, as compared to December 31, 2018.2019. Net loan growth was primarily attributable to the Greater Hudson BankBNJ acquisition with increases in commercial real estate ($253 million), commercial construction ($181 million), commercial loans ($125 million), and residential real estate and consumer ($12 million). Atthe origination of PPP loans.
As of September 30, 2019,2020, acquired loans within the loan portfolio totaled $550 million,$1.1 billion, compared to $315 million$0.5 billion as of December 31, 2018.2019. The increase was attributable to the Greater Hudson BankBNJ acquisition.
Allowance for Loan Losses and Related Provision
The purposeIn accordance with the accounting relief provisions of the allowance for loanCARES Act and regulatory guidance, the Company has postponed the adoption of the current expected credit losses (“ALLL”CECL”) is to establish a valuation allowance for probable incurred credit losses in the loan portfolio. Additionsaccounting standards. Management reached this decision due to the ALLL are made through provisions charged againstcomplexities of CECL loan loss forecasting exacerbated by the quickly changing economic environment resulting from the COVID-19 pandemic. The Company measured its allowance under its 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 evaluationloss model as 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 segments, 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 New York metropolitan area. Future adjustments to the ALLL may be necessary due to economic factors impacting New York metropolitan area real estate and the economy in general, as well as operating, regulatory and other conditions beyond the Company’s control.
At September 30, 2019,2020.
As of September 30, 2020, the ALLL was $38.8$74.3 million as compared to $35.0$38.3 million atas of December 31, 2018.2019. The provision for loan losses for the three months and nine months ended September 30, 20192020 was $5.0 million and $36.0 million, respectively, compared to $2.0 million and $7.6 million, respectively, compared to $1.1 million and $20.0 million for the three and nine months ended September 30, 2018,2019, respectively. Provision for loan losses for the three months ended September 30, 2019 increased by $0.9 million when compared to the prior year third quarter. The increase was primarily attributable to an increase in charge-offs, which totaled $0.9 million for the quarter. The decrease in the provision for loan losses duringwas for both the three and nine months ended September 30, 2020 was primarily attributable to the economic uncertainties caused by the COVID-19 pandemic.
There were $(0.5) million and $-0- in net (recoveries) charge-offs for the three and nine months ended September 30, 2020, compared with $0.9 million and $3.8 million in net charge-offs for the three and nine months ended September 30, 2019, when compared torespectively. During the comparable prior year period was primarily attributable to $17.0third quarter of 2020, the Bank received a $0.8 million of provision related to the taxi medallion loan portfolio for the three months ended March 31, 2018, offset by a $3.0 million provision related to a single loan secured by a commercial office building for the three months ended March 31, 2019.
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There were $927 thousand and $(55) thousand in net charge-offs/(recoveries) for the three months ended September 30, 2019 and September 30, 2018, respectively and $3.8 million and $17.0 million for the nine months ended September 30, 2019 and September 30, 2018, respectively. Net charge-offs for the three months ended September 30, 2019 increased $982 thousand from the prior year period. The increase was primarily related to charge-offs of one home equity line of credit for $0.4 million, and two small commercial mortgage loans of $0.5 million. Net charge-offs for the nine months ended September 30, 2018 include a $17.0 million partial charge-off related to the taxi medallion loan portfolio, resulting from a decrease in the transfer values of medallions as reported by the New York City Taxi and Limousine Commission, as well as a reduction in the Company’s cash flow valuation model. Included in net charge-offs for the nine months ended September 30, 2019 was a $2.1 million partial charge-offrecovery on a single loan secured by apreviously charged-off commercial office building.real estate credit. The ALLL as a percentage of loans receivable amounted to 0.76% at1.19% as of September 30, 20192020 compared to 0.77% at0.75% as of December 31, 20182019 and 0.780.76 % atas of September 30, 2018.2019. Excluding the impact of PPP loans in the calculation of the ALLL as a percentage of loans receivable, the ratio increases to 1.29% as of September 30, 2020. PPP loans do not have allowance for loan losses attributable to them, as they are fully guaranteed by the SBA.
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The level of the allowance for the respective periods of 20192020 and 20182019 reflects the credit quality within the loan portfolio, loan growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors. Additionally, the higher allowance for loan losses for 2020 is a result of the impact of the COVID-19 pandemic.
In management’s view, the level of the ALLL atas of September 30, 20192020 is adequate to cover losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.
Changes in the ALLL are presented in the following table for the periods indicated.
Three Months Ended September 30, | Three Months Ended | ||||||||||||||
2019 | 2018 | September 30, | |||||||||||||
(dollars in thousands) | 2020 | 2019 | |||||||||||||
Average loans at end of period | $ | 5,127,365 | $ | 4,362,905 | |||||||||||
(dollars in thousands) | |||||||||||||||
Average loans receivable at end of period | $ | 6,277,671 | $ | 5,126,374 | |||||||||||
Average loans held-for-sale at end of period | 10,772 | 991 | |||||||||||||
Average total loans at end of period | $ | 6,288,443 | $ | 5,127,365 | |||||||||||
|
|
| |||||||||||||
Analysis of the ALLL: | |||||||||||||||
Balance - beginning of quarter | $ | 37,698 | $ | 33,594 | 68,724 | 37,698 | |||||||||
Charge-offs: | |||||||||||||||
Commercial | (48 | ) | - | ||||||||||||
Commercial real estate | (387 | ) | - | - | (387 | ) | |||||||||
Home equity | (557 | ) | - | ||||||||||||
Residential real estate | (209 | ) | (557 | ) | |||||||||||
Consumer | (20 | ) | (6 | ) | - | (20 | ) | ||||||||
Total charge-offs | (964 | ) | (6 | ) | (257 | ) | (964 | ) | |||||||
Recoveries: | |||||||||||||||
Commercial | 28 | 56 | - | 28 | |||||||||||
Residential real estate | - | 5 | |||||||||||||
Commercial real estate | 800 | - | |||||||||||||
Consumer | 9 | - | - | 9 | |||||||||||
Total recoveries | 37 | 61 | 800 | 37 | |||||||||||
Net (charge-offs) recoveries | (927) | 55 | |||||||||||||
Net recoveries (charge-offs) | 543 | (927 | ) | ||||||||||||
Provision for loan and losses | 2,000 | 1,100 | 5,000 | 2,000 | |||||||||||
Balance - end of period | $ | 38,771 | $ | 34,749 | $ | 74,267 | $ | 38,771 | |||||||
Ratio of annualized net charge-offs during the period to average loans during the period | 0.07 | % | (0.01 | )% | |||||||||||
Ratio of annualized net charge-offs during the period to average loans receivable during the period | (0.03 | )% | 0.07 | % | |||||||||||
|
|
| |||||||||||||
Loans receivable | $ | 5,110,471 | $ | 4,462,487 | $ | 6,251,051 | $ | 5,110,471 | |||||||
ALLL as a percentage of loans receivable | 0.76 | % | 0.78 | % | 1.19 | % | 0.76 | % |
Nine Months Ended | ||||||||
September 30, | ||||||||
2020 | 2019 | |||||||
(dollars in thousands) | ||||||||
Average loans at end of period | $ | 6,167,623 | $ | 5,013,874 | ||||
Average loans held-for-sale at end of period | 25,199 | 450 | ||||||
Average total loans at end of period | 6,192,822 | 5,014,324 | ||||||
Analysis of the ALLL: | ||||||||
Balance - beginning of quarter | $ | 38,293 | $ | 34,954 | ||||
Charge-offs: | ||||||||
Commercial | (552 | ) | - | |||||
Commercial real estate | - | (3,469 | ) | |||||
Residential real estate | (278 | ) | (557 | ) | ||||
Consumer | (3 | ) | (20 | ) | ||||
Total charge-offs | (833 | ) | (4,046 | ) | ||||
Recoveries: | ||||||||
Commercial | 2 | 214 | ||||||
Commercial real estate | 802 | 30 | ||||||
Residential real estate | - | 3 | ||||||
Consumer | 3 | 16 | ||||||
Total recoveries | 807 | 263 | ||||||
Net charge-offs | (26 | ) | (3,783 | ) | ||||
Provision for loan and losses | 36,000 | 7,600 | ||||||
Balance - end of period | $ | 74,267 | $ | 38,771 | ||||
Ratio of annualized net charge-offs during the period to average loans during the period | 0.00 | % | 0.10 | % | ||||
Loans receivable | $ | 6,251,051 | $ | 5,110,474 | ||||
ALLL as a percentage of loans receivable | 1.19 | % | 0.76 | % |
5354
Nine Months Ended September 30, | |||||||
2019 | 2018 | ||||||
(dollars in thousands) | |||||||
Average loans at end of period | $ | 5,014,324 | $ | 4,294,792 | |||
|
|
| |||||
Analysis of the ALLL: | |||||||
Balance - beginning of quarter | $ | 34,954 | $ | 31,748 | |||
Charge-offs: | |||||||
Commercial | - | (17,066 | ) | ||||
Commercial real estate | (3,469 | ) | - | ||||
Residential real estate | (557 | ) | (18 | ) | |||
Consumer | (20 | ) | (7 | ) | |||
Total charge-offs | (4,046 | ) | (17,091 | ) | |||
Recoveries: | |||||||
Commercial | 214 | 87 | |||||
Commercial real estate | 30 | - | |||||
Residential real estate | 3 | - | |||||
Consumer | 16 | 5 | |||||
Total recoveries | 263 | 92 | |||||
Net charge-offs | (3,783 | ) | (16,999 | ) | |||
Provision for loan and losses | 7,600 | 20,000 | |||||
Balance - end of period | $ | 38,771 | $ | 34,749 | |||
Ratio of annualized net charge-offs during the period to average loans during the period | 0.10 | % | 0.53 | % | |||
|
|
| |||||
Loans receivable | $ | 5,110,471 | $ | 4,462,487 | |||
ALLL as a percentage of loans receivable | 0.76 | % | 0.78 | % |
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 loan 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:
| |||||||
September 30, 2019 | December 31, 2018 | ||||||
(dollars in thousands) | |||||||
Nonaccrual loans | $ | 51,321 | $ | 51,855 | |||
OREO | 907 | - | |||||
Total nonperforming assets (1) | $ | 52,228 | $ | 51,855 | |||
| |||||||
Performing TDRs | $ | 19,681 | $ | 11,165 | |||
Loans 90 days or greater past due and still accruing (non-PCI) | $ | - | $ | - | |||
Loans 90 days or greater past due and still accruing (PCI) | $ | 3,098 | $ | 1,647 |
September 30, | December 31, | |||||||
2020 | 2019 | |||||||
(dollars in thousands) | ||||||||
Nonaccrual loans | $ | 65,494 | $ | 49,481 | ||||
OREO | - | - | ||||||
Total nonperforming assets (1) | $ | 65,494 | $ | 49,481 | ||||
| ||||||||
Performing TDRs | $ | 18,241 | $ | 21,410 | ||||
Loans 90 days or greater past due and still accruing (non-PCI) | $ | - | $ | - | ||||
Loans 90 days or greater past due and still accruing (PCI) | $ | 12,808 | $ | 3,107 |
| (1) | Nonperforming assets are defined as nonaccrual loans and OREO. |
Nonaccrual loans to total loans receivable |
| 1.00 | % |
|
| 1.14 | % |
Nonperforming assets to total assets | 0.85 | % | 0.95 | % | |||
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable |
| 1.47 | % |
| 1.42 | % |
Nonaccrual loans to loans receivable | 1.05 | % | 0.97 | % | ||||
Nonperforming assets to total assets | 0.88 | % | 0.80 | % | ||||
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable | 1.54 | % | 1.44 | % |
The above table does not include deferred loans, which totaled approximately $355.2 million as of September 30, 2020. These deferred loans could migrate to nonperforming loans sometime in the future but have not as of September 30, 2020.
Investment Securities Available-For-Sale
As of September 30, 2019,2020, 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, asset-backed securities and asset-backedequity securities. For the quarterthree months ended September 30, 2019,2020, average securities increased by $21.9decreased $25.1 million to approximately $445.5$420.4 million, or 7.9%6.0% of average total interest-earning assets, from approximately $423.6$445.5 million, or 8.7%7.9% of average interest-earning assets, for the comparable period in 2018.2019.
AtAs of September 30, 2019,2020, net unrealized gains on securities available-for-sale, which are carried as a component of accumulated other comprehensive lossincome and included in stockholders’ equity, net of tax, amounted to $3.1$6.8 million as compared with net unrealized lossesgains of $5.8$2.7 million atas of December 31, 2018.2019. The decreaseincrease in unrealized lossesgains is predominately attributable to changes in market conditions and interest rates. The gross unrealized losses associated with agency securities and federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other-than-temporary because their unrealized losses are related to changes in interest rates and credit spreads and do not affect the expected cash flows of the underlying collateral or issuer.
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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 (“NII”) 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, 20192020 and December 31, 2018,2019, 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, 2020, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 1.13%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 4.48%. As of December 31, 2019, 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 3.89%1.55%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 1.79%1.71%. As
Based on our model, which was run as of December 31, 2018,September 30, 2020, we estimated that over the next one-year period,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 0.40%3.60%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 1.21%7.37%.
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Based on our model, which was run as As of September 30,December 31, 2019, 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 4.60%2.86%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.96%. As of December 31, 2018, 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 1.59%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.17%4.86%
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, 2019,2020, would decline by 6.70%9.97% with an instantaneous rate shock of up 200 basis points, and increase by 3.17%7.50% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2018,2019, would decline by 12.01%7.2% with an instantaneous rate shock of up 200 basis points, and increase by 3.15%3.69% with an instantaneous rate shock of down 100 basis points.
The following table illustrates the most recent results for EVE and one yearone-year NII sensitivity as of September 30, 2019.2020.
Interest Rates (basis points) | Estimated EVE | Estimated Change in EVE | Interest Rates (basis points) | Estimated NII | Estimated Change in NII | |||||||||||||||||||||||||||||||||||||||
Amount | % | Amount | % | |||||||||||||||||||||||||||||||||||||||||
Interest Rates | Estimated | Estimated Change in EVE | Interest Rates | Estimated | Estimated Change in NII | |||||||||||||||||||||||||||||||||||||||
(basis points) | EVE | Amount | % | (basis points) | NII | Amount | % | |||||||||||||||||||||||||||||||||||||
+300 | $ | 624,686 | $ | (74,485 | ) | (10.65 | ) | +300 | $ | 197,222 | $ | 10,554 | 5.65 | $ | 805,210 | $ | (119,771 | ) | (12.95 | ) | +300 | $ | 236,413 | $ | 5,403 | 2.34 | ||||||||||||||||||
+200 | 652,328 | (46,843 | ) | (6.70 | ) | +200 | 193,921 | 7,253 | 3.89 | 832,798 | (92,183 | ) | (9.97 | ) | +200 | 233,628 | 2,618 | 1.13 | ||||||||||||||||||||||||||
+100 | 677,299 | (21,872 | ) | (3.13 | ) | +100 | 190,400 | 3,732 | 2.00 | 868,816 | (56,165 | ) | (6.07 | ) | +100 | 231,742 | 732 | 0.32 | ||||||||||||||||||||||||||
0 | 699,171 | - | 0.0 | 0 | 186,668 | - | 0.0 | 924,981 | - | 0.0 | 0 | 231,010 | - | 0.0 | ||||||||||||||||||||||||||||||
-100 | 721,322 | 22,151 | 3.17 | -100 | 183,329 | (3,339 | ) | (1.79 | ) | 994,391 | 69,410 | 7.50 | -100 | 220,656 | (10,354 | ) | (4.48) |
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 conditions,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.
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Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented elsewhere herein have been prepared in accordance with GAAP, which requires 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.
AtAs of September 30, 2019,2020, 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, 2019,2020, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $509.5$615.3 million, which represented 8.3% of total assets and 9.7%9.8% of total deposits and borrowings, compared to $441.4$506 million as of December 31, 2018,2019, which represented 8.1%8.2% of total assets and 9.4%9.6% of total deposits and borrowings.
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The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of September 30, 2019,2020, had the ability to borrow $1.9$2.0 billion. In addition, atas of September 30, 2019,2020, 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 $5.4$5.3 million. AtAs of September 30, 2019,2020, the Bank had aggregate available and unused credit of approximately $1.1$1.0 billion, which represents the aforementioned facilities totaling $1.9$2.0 billion net of $887.7 million$1.0 billion in outstanding borrowings and letters of credit. AtAs of September 30, 2019,2020, outstanding commitments for the Bank to extend credit were approximately $1.1$0.9 billion.
Cash and cash equivalents totaled $194.0$256.1 million atas of September 30, 2019,2020, increasing by $21.6$54.6 million from $172.4$201.5 million atas of December 31, 2018.2019. Operating activities provided $63.4$99.8 million in net cash. Investing activities used $118.8$312.2 million in net cash, primarily reflecting an increase in loans, securities purchases, cash flows acquired from BNJ, and net cash flow and sales fromconsideration for the securities portfolio.BNJ acquisition. Financing activities provided $77.1$267.0 million in net cash, primarily reflecting a net increase in deposits of $249.4 million and an increase in subordinated debentures of $73.4 million, partially offset by repayments in FHLB borrowings.net borrowings of $43.7 million.
Deposits
Total deposits increased by $659 million, or 16.1%, to $4.8 billion at September 30, 2019 from December 31, 2018. The increase was primarily attributable the acquisition of Greater Hudson Bank. The following table sets forth the composition of our deposit base by the periods indicated.
Amount | ||||||||||||||||||||||||||||||
Increase/ | ||||||||||||||||||||||||||||||
September 30, 2019 | December 31, 2018 | Amount Increase/ (Decrease) | September 30, 2020 | December 31, 2019 | (Decrease) | |||||||||||||||||||||||||
Amount | % | Amount | % | 2019 vs. 2018 | Amount | % | Amount | % | 2020 vs. 2019 | |||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||
Demand, noninterest-bearing | $ | 828,190 | 17.4 | % | $ | 768,584 | 18.8 | % | $ | 59,606 | $ | 1,270,021 | 21.9 | % | $ | 861,728 | 18.1 | % | $ | 408,293 | ||||||||||
Demand, interest-bearing | 1,045,615 | 22.0 | 845,424 | 20.7 | 200,191 | 1,345,847 | 23.2 | 1,079,621 | 22.6 | 266,226 | ||||||||||||||||||||
Money market | 1,143,540 | 24.1 | 951,276 | 23.2 | 192,264 | 1,328,907 | 22.9 | 1,108,983 | 23.3 | 219,924 | ||||||||||||||||||||
Savings | 160,153 | 3.4 | 160,755 | 3.9 | (602 | ) | 234,372 | 4.1 | 163,489 | 3.4 | 70,883 | |||||||||||||||||||
Time | 1,573,736 | 33.1 | 1,366,053 | 33.4 | 207,683 | 1,619,609 | 27.9 |
| 1,553,721 | 32.6 | 65,888 | |||||||||||||||||||
Total deposits | $ | 4,751,234 | 100.0 | % | $ | 4,092,092 | 100.0 | % | $ | 659,142 | $ | 5,798,756 | 100.0 | % | $ | 4,767,542 | 100.0 | % | $ | 1,031,214 |
Total deposits increased by $1.0 billion, or 21.6%, to $5.8 billion as of September 30, 2020 from December 31, 2019. The increase was primarily attributable the acquisition of BNJ.
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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 monththree-month LIBOR plus 2.85% and re-prices quarterly. The rate atas of September 30, 20192020 was 5.12%3.19%.
During June 2015, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain institutional accredited investors. The net proceeds from the sale of the Notes were used by the Parent Corporation to contribute $35.0 million of common equity to the Bank and to repay on March 11, 2016 $11.25 million of SBLF preferred stock issued to the U.S. Treasury.Treasury on March 11, 2016. Remaining funds were used for general corporate purposes. The Notes are non-callable for five years,may now be redeemed by the Company, have a stated maturity of July 1, 2025, and bear interest at a fixed rate of 5.75% per year, from and including June 30, 2015 to, but excluding July 1, 2020. From and including July 1, 2020 tountil the maturity date or early redemption date theat a variable rate of interest, ratewhich will reset quarterly, to a level equal to the then current three monththree-month LIBOR rate plus 393 basis points. As of September 30, 2020 the variable interest rate was 4.23% and all costs related to 2015 issuance have been amortized. Management currently anticipates that these notes will be redeemed, in full, during the first half of 2021.
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 accredited investors. The net proceeds from the sale of the 2018 Notes were used 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 in the first quarter of 2018. The 2018 Notes are non-callable for five years, have a stated maturity of February 1, 2028 and bear interest at a fixed rate of 5.20% per year, from and including January 17, 2018 to, but excluding February 1, 2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points.
During June 2020, the Parent Corporation issued $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.
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Stockholders’ Equity
The Company’s stockholders’ equity was $720$891 million atas of September 30, 2019,2020, an increase of $106$160 million from December 31, 2018.2019. The increase in stockholders’ equity was primarily attributable to the acquisition of Greater Hudson Bank.BNJ, which increased capital by $118 million and retained earnings, which increased capital $38 million. As of September 30, 2019,2020, the Company’s tangible common equity ratio and tangible book value per share were 9.21%9.28% and $15.60,$16.87, respectively. As of December 31, 2018,2019, the tangible common equity ratio and tangible book value per share were 8.77%9.38% and $14.42,$16.06, respectively. Total goodwill and other intangible assets were approximately $169$220 million as of September 30, 20192020 and $148$168 million atas of December 31, 2018.
September 30, 2019 | December 31, 2018 | ||||
(dollars in thousands, except for share and per share data) | |||||
Stockholders’ equity | $ | 720,160 | $ | 613,927 | |
Less: Goodwill and other intangible assets | 168,374 | 147,646 | |||
Tangible common stockholders’ equity | $ | 551,786 | $ | 466,281 | |
Common stock outstanding at period end | 35,364,845 | 32,328,542 | |||
Book value per common share | $ | 20.36 | $ | 18.99 | |
Less: Goodwill and other intangible assets | 4.76 | 4.57 | |||
Tangible book value per common share | $ | 15.60 | $ | 14.42 |
In March 2019,2019. The following table shows the Board of Directors of the Company approved a stock repurchase program for up to 1,200,000 shares. The Company may repurchase shares from time to time in the open market, in privately negotiated stock purchases or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission and applicable federal securities laws. The share repurchase plan does not obligate the Company to acquire any particular amountreconciliation of common stock,equity to tangible common equity and it may be modified or suspended at any time at the Company's discretion. During the nine months ended September 30, 2019, the Company repurchased a total of 240,018 shares, leaving 959,982 shares remaining for repurchase under the program. There were no stock repurchases during the three months ended September 30, 2019.tangible common equity ratio.
September 30, | December 31, | |||||
2020 | 2019 | |||||
(dollars in thousands, except for share and | ||||||
per share data) | ||||||
Common equity | $ | 890,736 | $ | 731,190 | ||
Less: intangible assets | (219,977) | (168,034) | ||||
Tangible common stockholders’ equity | $ | 670,759 | $ | 563,156 | ||
| ||||||
Total assets | $ | 7,449,559 | $ | 6,174,032 | ||
Less: intangible assets | (219,977) | (168,034) | ||||
Tangible assets | $ | 7,229,582 | $ | 6,005,998 | ||
| ||||||
Common stock outstanding at period end | 39,754,051 | 35,072,067 | ||||
Tangible common equity ratio (1) | 9.28% | 9.38% | ||||
| ||||||
Book value per common share | $ | 22.41 | $ | 20.85 | ||
Less: intangible assets | 5.54 | 4.79 | ||||
Tangible book value per common share | $ | 16.87 | $ | 16.06 |
(1) Tangible common equity is a non-GAAP measure.
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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 regulatorythe Bank’s and the Parent Corporation’s actual capital amounts and ratios as of September 30, 2019 for2020, compared to the CompanyFRB and the Bank, compared withFDIC minimum capital adequacy requirements and the regulatoryFDIC requirements for classification as a well-capitalized depository institution.
ConnectOne Bancorp, Inc. | For Capital Adequacy Purposes | To Be Well-Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||
At September 30, 2019 | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||
(dollars in thousands) | |||||||||||||||||
Tier 1 leverage capital | $ | 552,075 | 9.39 | % | $ | 235,277 | 4.00 | % | N/A | N/A | |||||||
CET I risk-based ratio | 546,920 | 9.78 | 251,722 | 4.50 | N/A | N/A | |||||||||||
Tier 1 risk-based capital | 552,075 | 9.87 | 335,630 | 6.00 | N/A | N/A | |||||||||||
Total risk-based capital | 715,846 | 12.80 | 447,506 | 8.00 | N/A | N/A |
ConnectOne Bank | For Capital Adequacy Purposes | To Be Well-Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||
At September 30, 2019 | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||
(dollars in thousands) | |||||||||||||||||
Tier 1 leverage capital | $ | 628,232 | 10.68 | % | $ | 235,281 | 4.00 | % | $ | 294,101 | 5.00 | % | |||||
CET I risk-based ratio | 628,232 | 11.23 | 251,715 | 4.50 | 363,589 | 6.50 | |||||||||||
Tier 1 risk-based capital | 628,232 | 11.23 | 335,620 | 6.00 | 447,494 | 8.00 | |||||||||||
Total risk-based capital | 699,253 | 12.50 | 447,494 | 8.00 | 559,367 | 10.00 |
N/A - not applicable
For Classification Under Corrective | ||||||||||||||||||
Minimum | Action Plan | |||||||||||||||||
Capital Adequacy | as Well Capitalized | |||||||||||||||||
The Bank | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
At September 30, 2020 | (dollars in thousands) | |||||||||||||||||
Leverage (Tier 1) capital | $ | 751,226 | 10.41 | % | $ | 288,731 | 4.00 | % | $ | 360,913 | 5.00 | % | ||||||
Risk-based Capital: | ||||||||||||||||||
Common Equity Tier 1 | $ | 751,226 | 12.00 | % | $ | 281,805 | 4.50 | % | $ | 407,052 | 6.50 | % | ||||||
Tier 1 | 751,226 | 12.00 | % | 375,740 | 6.00 | % | 500,987 | 8.00 | % | |||||||||
Total | 857,743 | 13.70 | % | 500,987 | 8.00 | % | 626,234 | 10.00 | % | |||||||||
| ||||||||||||||||||
The Company | ||||||||||||||||||
At September 30, 2020 | ||||||||||||||||||
Leverage (Tier 1) capital | $ | 671,188 | 9.30 | % | $ | 288,834 | 4.00 | % | $ | N/A | N/A | |||||||
Risk-based Capital: | ||||||||||||||||||
Common Equity Tier 1 | $ | 666,033 | 10.63 | % | $ | 281,827 | 4.50 | % | $ | N/A | N/A | |||||||
Tier 1 | 671,188 | 10.72 | % | 375,769 | 6.00 | % | N/A | N/A | ||||||||||
Total | 935,455 | 14.94 | % | 501,025 | 8.00 | % | N/A | N/A |
As of September 30, 2019,2020, 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. Beginning January 1, 2019, the Company and the Bank arewere required to maintain a 2.5% capital conservation buffer, above and beyond the capital levels otherwise required under applicable regulation. Under this guidance banking institutions with a CET1,Common Equity Tier 1 Capital Ratio, Tier 1 Capital Ratio and Total Risk BasedRisk-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, 20192020, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the Tier 1 Risk Based Ratio which was 1.37%2.22% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 2.00%3.20% above the minimum buffer ratio.
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Item 3. Qualitative and Quantitative Disclosures about Market Risks
Market Risk
Interest rate risk management is our primary market risk. See "Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity Analysis" herein for a discussion of our management of our interest rate risk.
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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.
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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. Information concerning additional risk factors related10-K for the year ended December 31, 2019, with the exception of:
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.
Global health concerns relating to the proposed mergerCOVID-19 outbreak and related government actions taken to reduce the spread of the Companyvirus, including the initial closure of non-essential business and BKJstay at home orders, and continuing restrictions on certain businesses, such as bars restaurants and gyms, have been weighing on the macroeconomic environment in our New Jersey/New York metropolitan market trade area, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures, even as certain of them have been eased, have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.
The outbreak has adversely impacted and is availablelikely to further adversely impact our workforce and operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:
•
credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the Company's registration statementhospitality, energy, retail and restaurant industries, but across other industries as well. As of June 30, 2020, we had agreed to short-term payment deferrals of approximately $937 million in outstanding loans for customers facing financial stress due to the COVID-19 pandemic;
•
declines in collateral values;
•
third party disruptions, including outages at network providers and other suppliers;
•
increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and
•
operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.
These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.
The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.
The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form S-4 which was filed with10-K for the SEC on September 27, 219 and amended on October 16,year ended December 31, 2019.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
See “Item 2 - Management's2- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Shareholders'– Shareholders’ Equity”
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Not applicable
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Item 6. Exhibits
(1) | Incorporated by reference |
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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 | Executive Vice President and Chief Financial Officer | |||
| ||||
Date: November 6, | Date: November 6, |
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