NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1a. Nature of Operations, 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 under the Bank Holding Company Act
of 1956, as amended (the “BHCA”). The Parent Corporation’s business currently consists of the operation of its wholly-owned
subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries,
the “Company”). The Bank’s subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge
Investment Co. (a Delaware investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center
Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property
Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), NJCB Spec-1,
LLC (a New Jersey limited liability company), Port Jervis Holdings, LLC (a New Jersey limited liability company), BONJ Special Properties,
LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey financial technology company).
The Bank is a community-based, full-service New
Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the
Borough of Englewood Cliffs, Bergen County, New Jersey and through its twenty-three other banking offices. Substantially all loans are
secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s
ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’ business, real estate
rental and consumer wages.
The preceding unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for
interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include
all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for
the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the full year ending December
31, 2022, or for any other interim period. The Company’s 2021 Annual Report on Form 10-K should be read in conjunction with these
consolidated financial statements.
Basis of Presentation
The consolidated financial statements have been
prepared in conformity with GAAP. Some items in the prior year consolidated financial statements were reclassified to conform to current
presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.
Use of Estimates
In preparing the consolidated financial statements,
management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated
statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly
from those estimates.
Risks and Uncertainties
As previously disclosed, on March 11, 2020 the
World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to impact the United States and the
world. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to, among
other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The COVID-19 pandemic
has adversely affected, and continues to adversely affect economic activity globally, nationally and locally. Although economic activity
began to accelerate in 2021, and the United States continues to implement a COVID-19 vaccination program, COVID-19, it’s variants
and actions taken to mitigate the spread of it have had and may in the future have an adverse impact on the economies and financial markets
of many countries and parts of the United States, including the New Jersey/New York metropolitan area in which the Company primarily operates.
Although the Company has been able to continue operations while taking steps to ensure the safety of employees and clients, COVID-19 could
impact the Company’s operations in the future. The effects of the COVID-19 pandemic may adversely affect the Company’s financial
condition and results of operations in future periods. Although state and local governments have lifted many restrictions on conducting
business, it is possible that restrictions could be reimposed.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1b. Authoritative Accounting Guidance
Newly Issued, But Not Yet Effective Accounting Standards
In March 2022, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, “Financial Instruments – Credit Losses
(Topic 326), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting
guidance for troubled debt restructurings (“TDRs”) in ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors”
for entities that have adopted the current expected credit loss (“CECL”) model introduced by ASU 2016-13, “Financial Instruments
– Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13”). ASU 2022-02 also
requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and
net investments in leases within the scope of Subtopic 326-20, “Financial Instruments—Credit Losses—Measured at Amortized
Cost”. ASU 2022-02 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within
those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022-02 will have on its consolidated
financial statements.
Note 2. Earnings per Common Share
Financial Accounting Standards Board Accounting
Standards Codification (“FASB ASC”) No. 260-10-45 addresses whether instruments granted in share-based payment transactions
are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per
share (“EPS”). The restricted stock awards 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
March 31, | |
(dollars in thousands, except for per share data) | |
2022 | | |
2021 | |
Net income available to common stockholders | |
$ | 29,872 | | |
$ | 32,999 | |
Earnings allocated to participating securities | |
| (80 | ) | |
| (186 | ) |
Income attributable to common stock | |
$ | 29,792 | | |
$ | 32,813 | |
| |
| | | |
| | |
Weighted average common shares outstanding, including participating securities | |
| 39,560 | | |
| 39,738 | |
Weighted average participating securities | |
| (107 | ) | |
| (181 | ) |
Weighted average common shares outstanding | |
| 39,453 | | |
| 39,557 | |
Incremental shares from assumed conversions of options, performance units and restricted shares | |
| 274 | | |
| 232 | |
Weighted average common and equivalent shares outstanding | |
| 39,727 | | |
| 39,789 | |
| |
| | | |
| | |
Earnings per common share: | |
| | | |
| | |
Basic | |
$ | 0.76 | | |
$ | 0.83 | |
Diluted | |
| 0.75 | | |
| 0.82 | |
There were no antidilutive share equivalents for
the quarters ended March 31, 2022 and March 31, 2021.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 3. Investment Securities
The Company’s investment securities are classified
as available-for-sale as of March 31, 2022 and December 31, 2021. 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 March 31, 2022 and December 31, 2021. Fair value is based upon either quoted market prices, or in certain
cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See
Note 6 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 March 31, 2022 and December 31, 2021.
| |
Amortized
Cost | | |
Gross
Unrealized
Gains | | |
Gross
Unrealized
Losses | | |
Fair
Value | | |
Allowance
for
Investment
Credit
Losses | |
| |
(dollars in thousands) | |
March 31, 2022 | |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| |
Securities available-for-sale | |
| | |
| | |
| | |
| | |
| |
Federal agency obligations | |
$ | 51,506 | | |
$ | 46 | | |
$ | (3,003 | ) | |
$ | 48,549 | | |
$ | - | |
Residential mortgage pass-through securities | |
| 320,605 | | |
| 160 | | |
| (19,789 | ) | |
| 300,976 | | |
| - | |
Commercial mortgage pass-through securities | |
| 18,713 | | |
| 8 | | |
| (1,313 | ) | |
| 17,408 | | |
| - | |
Obligations of U.S. states and political subdivisions | |
| 144,474 | | |
| 446 | | |
| (7,869 | ) | |
| 137,051 | | |
| - | |
Corporate bonds and notes | |
| 5,477 | | |
| 35 | | |
| (11 | ) | |
| 5,501 | | |
| - | |
Asset-backed securities | |
| 2,364 | | |
| 7 | | |
| (17 | ) | |
| 2,354 | | |
| | |
Other securities | |
| 191 | | |
| - | | |
| - | | |
| 191 | | |
| - | |
Total securities available-for-sale | |
$ | 543,330 | | |
$ | 702 | | |
$ | (32,002 | ) | |
$ | 512,030 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2021 | |
| | | |
| | | |
| | | |
| | | |
| | |
Securities available-for-sale | |
| | | |
| | | |
| | | |
| | | |
| | |
Federal agency obligations | |
$ | 50,336 | | |
$ | 649 | | |
$ | (625 | ) | |
$ | 50,360 | | |
$ | - | |
Residential mortgage pass-through securities | |
| 317,111 | | |
| 1,868 | | |
| (2,884 | ) | |
| 316,095 | | |
| - | |
Commercial mortgage pass-through securities | |
| 10,814 | | |
| 118 | | |
| (463 | ) | |
| 10,469 | | |
| - | |
Obligations of U.S. states and political subdivisions | |
| 145,045 | | |
| 1,562 | | |
| (982 | ) | |
| 145,625 | | |
| - | |
Corporate bonds and notes | |
| 8,968 | | |
| 81 | | |
| - | | |
| 9,049 | | |
| - | |
Asset-backed securities | |
| 2,563 | | |
| 3 | | |
| (2 | ) | |
| 2,564 | | |
| - | |
Certificates of deposit | |
| 150 | | |
| - | | |
| - | | |
| 150 | | |
| - | |
Other securities | |
| 195 | | |
| - | | |
| - | | |
| 195 | | |
| - | |
Total securities available-for-sale | |
$ | 535,182 | | |
$ | 4,281 | | |
$ | (4,956 | ) | |
$ | 534,507 | | |
$ | - | |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 3. Investment Securities –
(continued)
Investment securities having a carrying value of
approximately $95.0 million and $71.2 million as of March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021, there were no holdings of securities of any one issuer,
other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
The following table presents information for
investments in securities available-for-sale as of March 31, 2022, based on scheduled maturities. Actual maturities can be expected to
differ from scheduled maturities due to prepayment or early call options of the issuer. Securities not due at a single maturity date are
shown separately.
| |
March 31, 2022 | |
| |
Amortized Cost | | |
Fair Value | |
| |
(dollars in thousands) | |
Securities available-for-sale: | |
| | |
| |
Due in one year or less | |
$ | 3,391 | | |
$ | 3,394 | |
Due after one year through five years | |
| 6,118 | | |
| 6,135 | |
Due after five years through ten years | |
| 4,694 | | |
| 4,774 | |
Due after ten years | |
| 189,618 | | |
| 179,152 | |
Residential mortgage pass-through securities | |
| 320,605 | | |
| 300,976 | |
Commercial mortgage pass-through securities | |
| 18,713 | | |
| 17,408 | |
Other securities | |
| 191 | | |
| 191 | |
Total securities available-for-sale | |
$ | 543,330 | | |
$ | 512,030 | |
We had no gross gains or losses from the sale of
securities for the three months ended March 31, 2022 and 2021.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 3. Investment Securities –
(continued)
Impairment Analysis of Available--for-sale Debt Securities
The following tables indicate gross unrealized
losses in an unrealized loss position for which an allowance for credit losses (“ACL”) has not been recorded, aggregated by
investment category and by the length of continuous time individual securities have been in an unrealized loss position as of March 31,
2022 and December 31, 2021.
| |
March 31, 2022 | |
| |
Total | | |
Less than 12 Months | | |
12 Months or Longer | |
| |
Fair
Value | | |
Unrealized
Losses | | |
Fair
Value | | |
Unrealized
Losses | | |
Fair
Value | | |
Unrealized
Losses | |
| |
(dollars in thousands) | |
Investment Securities Available-for-Sale: | |
| | |
| | |
| | |
| | |
| | |
| |
Federal agency obligations | |
$ | 43,257 | | |
$ | (3,003 | ) | |
$ | 43,257 | | |
$ | (3,003 | ) | |
$ | - | | |
$ | - | |
Residential mortgage pass-through securities | |
| 284,118 | | |
| (19,789 | ) | |
| 223,718 | | |
| (14,696 | ) | |
| 60,400 | | |
| (5,093 | ) |
Commercial mortgage pass-through securities | |
| 14,437 | | |
| (1,313 | ) | |
| 10,532 | | |
| (483 | ) | |
| 3,905 | | |
| (830 | ) |
Obligations of U.S. states and political subdivisions | |
| 111,635 | | |
| (7,869 | ) | |
| 111,635 | | |
| (7,869 | ) | |
| - | | |
| - | |
Corporate bonds and notes | |
| 1,988 | | |
| (11 | ) | |
| 1,988 | | |
| (11 | ) | |
| - | | |
| - | |
Asset-backed securities | |
| 1,837 | | |
| (17 | ) | |
| 1,837 | | |
| (17 | ) | |
| - | | |
| - | |
Total temporarily impaired securities | |
$ | 457,272 | | |
$ | (32,002 | ) | |
$ | 392,967 | | |
$ | (26,079 | ) | |
$ | 64,305 | | |
$ | (5,923 | ) |
| |
December 31, 2021 | |
| |
Total | | |
Less than 12 Months | | |
12 Months or Longer | |
| |
Fair
Value | | |
Unrealized
Losses | | |
Fair
Value | | |
Unrealized
Losses | | |
Fair
Value | | |
Unrealized
Losses | |
| |
(dollars in thousands) | |
Investment Securities Available-for-Sale: | |
| | |
| | |
| | |
| | |
| | |
| |
Federal agency obligations | |
$ | 28,974 | | |
$ | (625 | ) | |
$ | 28,974 | | |
$ | (625 | ) | |
$ | - | | |
$ | - | |
Residential mortgage pass-through securities | |
| 246,396 | | |
| (2,884 | ) | |
| 214,701 | | |
| (2,111 | ) | |
| 31,695 | | |
| (773 | ) |
Commercial mortgage pass-through securities | |
| 8,370 | | |
| (463 | ) | |
| 4,682 | | |
| (75 | ) | |
| 3,688 | | |
| (388 | ) |
Obligations of U.S. states and political subdivisions | |
| 89,473 | | |
| (982 | ) | |
| 89,473 | | |
| (982 | ) | |
| - | | |
| - | |
Asset-backed securities | |
| 802 | | |
| (2 | ) | |
| 802 | | |
| (2 | ) | |
| - | | |
| - | |
Total Temporarily Impaired Securities | |
$ | 374,015 | | |
$ | (4,956 | ) | |
$ | 338,632 | | |
$ | (3,795 | ) | |
$ | 35,383 | | |
$ | (1,161 | ) |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 3. Investment Securities –
(continued)
The Company has elected
to exclude accrued interest from the amortized cost of its investment securities available-for-sale. Accrued interest receivable
for investment securities available for sale as of March 31, 2022 and December 31, 2021, totaled $1.4 million and $1.6
million, respectively.
The Company evaluates
securities in unrealized loss position for impairment related to credit losses on at least a quarterly basis. Securities in unrealized
loss positions are first assessed as to whether we intend to sell, or if it is more likely than not that we will be required to sell the
security before recovery of its amortized cost basis. If one of the criteria is met, the security’s amortized cost basis is written
down to fair value through current earnings. For securities that do not meet these criteria, the Company evaluates whether the decline
in fair value resulted from credit losses or other factors. If this assessment indicates that a credit loss exists, we compare the present
value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of
cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for
credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Unrealized
losses on asset backed securities and state and municipal securities have not been recognized into income because the issuers are of high
credit quality, we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated
recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue
to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance
for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale
securities was recorded as of March 31, 2022.
Federal agency obligations,
residential mortgage backed pass-through securities and commercial mortgage back pass-through securities are issued by U.S. Government
agencies and U.S. Government sponsored enterprises. Although a government guarantee exists on these investments, these entities are not
legally backed by the full faith and credit of the federal government, and the current support they receive is subject to a cap as part
of the agreement entered into in 2008. Nonetheless, at this time we do not foresee any set of circumstances in which the government would
not fund its commitments on these investments as the issuers are an integral part of the U.S. housing market in providing liquidity and
stability. Therefore, we concluded that a zero-allowance approach for these investment securities is appropriate.
Note 4. Derivatives
The Company utilizes interest rate swap agreements
as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest
rate swap does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount
and the other terms of the individual interest rate swap agreements. An interest rate swap was entered into on April 13, 2017 with
a respective notional amount of $25.0 million and was designated as a cash flow hedge of a Federal Home Loan Bank advance. We are required
to pay a fixed-rate of interest of 1.93% and receive variable rates of interest that reset quarterly based on three-month LIBOR.
The expiration date for the swap is April 2022. The swap is determined to be fully effective during the period presented and therefore
no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap 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 swap.
In addition, during 2021, the Company entered into
9 forward starting pay fixed-rate interest rate swaps, 7 of which have since commenced, with a total notional amount of $400 million,
which are also designated as a cash flow hedges of current, or future, Federal Home Loan Bank advance. We are required to pay fixed rates
of interest ranging from 0.631% to 1.23% and receive variable rates of interest that reset quarterly based on the daily compounding secured
overnight financing rate (“SOFR”). The 2 remaining forward starting swaps have commencing payment dates in May 2022 and August
2022, with expiration dates on the 9 positions ranging from December 2025 to March 2028.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 4. Derivatives – (continued)
Interest expense recorded on these swap transactions
totaled approximately $0.5 million and $0.6 million during the three months ended March 31, 2022 and 2021, respectively, and is
reported as a component of interest expense on FHLB Advances.
Cash Flow Hedge
The following table presents the net losses
recorded in other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for
the following periods:
| |
Three Months Ended March 31, 2022 | |
| |
Amount of gain (loss) recognized
in OCI (Effective
Portion) | | |
Amount of (gain)
loss reclassified
from OCI to
interest income | | |
Amount of gain
recognized in other
Noninterest income
(Ineffective Portion) | |
| |
| | |
(dollars in thousands) | | |
| |
Interest rate contracts | |
$ | 19,000 | | |
$ | 525 | | |
$ | - | |
| |
Three Months Ended March 31, 2021 | |
| |
Amount of gain
(loss) recognized
in OCI (Effective
Portion) | | |
Amount of gain
(loss) reclassified
from OCI to
interest income | | |
Amount of gain
recognized in other
Noninterest income
(Ineffective Portion) | |
| |
| | |
(dollars in thousands) | | |
| |
Interest rate contracts | |
$ | 24 | | |
$ | 631 | | |
$ | - | |
The following table reflects the cash flow hedges
included in the consolidated statements of condition as of March 31, 2022 and December 31, 2021:
| |
March 31, 2022 | | |
December 31, 2021 | |
| |
Notional Amount | | |
Fair Value | | |
Notional Amount | | |
Fair Value | |
| |
| | |
(dollars in thousands) | | |
| |
Interest rate swaps related to FHLB advances included in assets | |
$ | 425,000 | | |
$ | 22,872 | | |
$ | 475,000 | | |
$ | 3,347 | |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5. Loans and the Allowance for Credit
Losses
Loans Receivable –
The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of March
31, 2022 and December 31, 2021:
| |
March 31,
2022 | | |
December 31,
2021 | |
| |
(dollars in thousands) | |
Commercial (1) | |
$ | 1,278,477 | | |
$ | 1,299,428 | |
Commercial real estate | |
| 4,919,093 | | |
| 4,741,590 | |
Commercial construction | |
| 539,058 | | |
| 540,178 | |
Residential real estate | |
| 250,205 | | |
| 255,269 | |
Consumer | |
| 1,140 | | |
| 1,886 | |
Gross loans | |
| 6,987,973 | | |
| 6,838,351 | |
Net deferred loan fees | |
| (8,378 | ) | |
| (9,729 | ) |
Total loans receivable | |
$ | 6,979,595 | | |
$ | 6,828,622 | |
| (1) | Included in commercial loans as of March 31, 2022 and December
31, 2021 are PPP loans of $54.3 million and $93.1 million, respectively. |
As of both March 31, 2022 and December
31, 2021, loan balances of approximately $2.5 billion 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’s loans held-for-sale portfolio as of March 31, 2022 and December 31,
2021:
| |
March 31,
2022 | | |
December 31,
2021 | |
| |
(dollars in thousands) | |
Commercial real estate | |
$ | 2,390 | | |
$ | - | |
Residential real estate | |
| 352 | | |
| 250 | |
Total carrying amount | |
$ | 2,742 | | |
$ | 250 | |
Loans Receivable on Nonaccrual
Status - The following tables present nonaccrual loans with an ACL and nonaccrual loans without an ACL as of March 31, 2022 and
December 31, 2021:
| |
March 31, 2022 | |
| |
Nonaccrual
loans with
ACL | | |
Nonaccrual
loans
without ACL | | |
Total
Nonaccrual
loans | |
| |
(dollars in thousands) | |
Commercial | |
$ | 29,148 | | |
$ | 1,193 | | |
$ | 30,341 | |
Commercial real estate | |
| 17,497 | | |
| 8,819 | | |
| 26,316 | |
Commercial construction | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 1,172 | | |
| 1,574 | | |
| 2,746 | |
Consumer | |
| - | | |
| - | | |
| - | |
Total | |
$ | 47,817 | | |
$ | 11,586 | | |
$ | 59,403 | |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5. Loans and the Allowance for Credit
Losses – (continued)
| |
December 31, 2021 | |
| |
Nonaccrual loans with ACL | | |
Nonaccrual loans without ACL | | |
Total Nonaccrual loans | |
| |
(dollars in thousands) | |
Commercial | |
$ | 28,746 | | |
$ | 1,316 | | |
$ | 30,062 | |
Commercial real estate | |
| 15,362 | | |
| 10,031 | | |
| 25,393 | |
Commercial construction | |
| - | | |
| 3,150 | | |
| 3,150 | |
Residential real estate | |
| 1,239 | | |
| 1,856 | | |
| 3,095 | |
Consumer | |
| - | | |
| - | | |
| - | |
Total | |
$ | 45,347 | | |
$ | 16,353 | | |
$ | 61,700 | |
Nonaccrual loans and loans 90 days or greater past
due and still accruing include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually
evaluated for impairment.
Credit Quality Indicators - The Company
continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services
of a third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality
is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior
credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable
credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity,
slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions,
if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date. Assets
are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater
degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability
of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by
the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful
include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5. Loans and the Allowance for Credit
Losses – (continued)
We evaluate whether a modification, extension or
renewal of a loan is a current period origination in accordance with GAAP. Generally, loans up for renewal are subject to a full credit
evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below. The
following table presents loans by origination and risk designation as of March 31, 2022 (dollars in thousands):
| |
Term loans amortized cost basis by origination year | | |
Revolving | | |
Total | |
| |
2022 | | |
2021 | | |
2020 | | |
2019 | | |
2018 | | |
Prior | | |
Loans | | |
Gross Loans | |
Commercial | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Pass | |
$ | 38,767 | | |
$ | 371,431 | | |
$ | 56,980 | | |
$ | 41,829 | | |
$ | 58,230 | | |
$ | 175,970 | | |
$ | 471,742 | | |
$ | 1,214,949 | |
Special mention | |
| - | | |
| - | | |
| - | | |
| - | | |
| 632 | | |
| 9,656 | | |
| 4,310 | | |
| 14,598 | |
Substandard | |
| 448 | | |
| 164 | | |
| - | | |
| 1,649 | | |
| 12,203 | | |
| 20,388 | | |
| 14,078 | | |
| 48,930 | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total Commercial | |
$ | 39,215 | | |
$ | 371,595 | | |
$ | 56,980 | | |
$ | 43,478 | | |
$ | 71,065 | | |
$ | 206,014 | | |
$ | 490,130 | | |
$ | 1,278,477 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial Real Estate | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 371,604 | | |
$ | 1,655,013 | | |
$ | 507,117 | | |
$ | 389,017 | | |
$ | 452,309 | | |
$ | 1,241,085 | | |
$ | 166,342 | | |
$ | 4,782,487 | |
Special mention | |
| - | | |
| - | | |
| - | | |
| 3,340 | | |
| - | | |
| 53,982 | | |
| 15,537 | | |
| 72,859 | |
Substandard | |
| - | | |
| 1,958 | | |
| 4,500 | | |
| 7,302 | | |
| 20,445 | | |
| 21,117 | | |
| 8,425 | | |
| 63,747 | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total Commercial Real Estate | |
$ | 371,604 | | |
$ | 1,656,971 | | |
$ | 511,617 | | |
$ | 399,659 | | |
$ | 472,754 | | |
$ | 1,316,184 | | |
$ | 190,304 | | |
$ | 4,919,093 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial Construction | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | - | | |
$ | 1,518 | | |
$ | 7,370 | | |
$ | 6,508 | | |
$ | 2,600 | | |
$ | - | | |
$ | 510,174 | | |
$ | 528,170 | |
Special mention | |
| - | | |
| - | | |
| - | | |
| - | | |
| 350 | | |
| - | | |
| 1,443 | | |
| 1,793 | |
Substandard | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 9,095 | | |
| 9,095 | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total Commercial Construction | |
$ | - | | |
$ | 1,518 | | |
$ | 7,370 | | |
$ | 6,508 | | |
$ | 2,950 | | |
$ | - | | |
$ | 520,712 | | |
$ | 539,058 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential Real Estate | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 9,604 | | |
$ | 25,905 | | |
$ | 27,697 | | |
$ | 23,056 | | |
$ | 23,589 | | |
$ | 88,610 | | |
$ | 42,361 | | |
$ | 240,822 | |
Special mention | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Substandard | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 5,919 | | |
| 3,464 | | |
| 9,383 | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total Residential Real Estate | |
$ | 9,604 | | |
$ | 25,905 | | |
$ | 27,697 | | |
$ | 23,056 | | |
$ | 23,589 | | |
$ | 94,529 | | |
$ | 45,825 | | |
$ | 250,205 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consumer | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 908 | | |
$ | - | | |
$ | 75 | | |
$ | 35 | | |
$ | 17 | | |
$ | 4 | | |
$ | 101 | | |
$ | 1,140 | |
Special mention | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Substandard | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total Consumer | |
$ | 908 | | |
$ | - | | |
$ | 75 | | |
$ | 35 | | |
$ | 17 | | |
$ | 4 | | |
$ | 101 | | |
$ | 1,140 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 420,883 | | |
$ | 2,053,867 | | |
$ | 599,239 | | |
$ | 460,445 | | |
$ | 536,745 | | |
$ | 1,505,669 | | |
$ | 1,190,720 | | |
$ | 6,767,568 | |
Special mention | |
| - | | |
| - | | |
| - | | |
| 3,340 | | |
| 982 | | |
| 63,638 | | |
| 21,290 | | |
| 89,250 | |
Substandard | |
| 448 | | |
| 2,122 | | |
| 4,500 | | |
| 8,951 | | |
| 32,648 | | |
| 47,424 | | |
| 35,062 | | |
| 131,155 | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Grand Total | |
$ | 421,331 | | |
$ | 2,055,989 | | |
$ | 603,739 | | |
$ | 472,736 | | |
$ | 570,375 | | |
$ | 1,616,731 | | |
$ | 1,247,072 | | |
$ | 6,987,973 | |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5. Loans and the Allowance for Credit
Losses – (continued)
The following table presents loans by origination
and risk designation as of December 31, 2021 (dollars in thousands):
| |
Term loans amortized cost basis by origination year | | |
Revolving | | |
Total | |
| |
2021 | | |
2020 | | |
2019 | | |
2018 | | |
8.5 | | |
Prior | | |
Loans | | |
Gross Loans | |
Commercial | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Pass | |
$ | 403,203 | | |
$ | 58,534 | | |
$ | 54,485 | | |
$ | 60,409 | | |
$ | 95,727 | | |
$ | 86,556 | | |
$ | 471,588 | | |
$ | 1,230,502 | |
Special mention | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1 | | |
| 4,045 | | |
| 4,266 | | |
| 8,312 | |
Substandard | |
| 170 | | |
| - | | |
| 1,842 | | |
| 13,298 | | |
| 9,740 | | |
| 21,024 | | |
| 14,540 | | |
| 60,614 | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total Commercial | |
$ | 403,373 | | |
$ | 58,534 | | |
$ | 56,327 | | |
$ | 73,707 | | |
$ | 105,468 | | |
$ | 111,625 | | |
$ | 490,394 | | |
$ | 1,299,428 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial Real Estate | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 1,692,098 | | |
$ | 533,315 | | |
$ | 420,995 | | |
$ | 452,262 | | |
$ | 497,065 | | |
$ | 842,244 | | |
$ | 170,721 | | |
$ | 4,608,700 | |
Special mention | |
| - | | |
| - | | |
| - | | |
| - | | |
| 5,142 | | |
| 50,438 | | |
| 6,601 | | |
| 62,181 | |
Substandard | |
| 1,968 | | |
| 9,039 | | |
| 4,006 | | |
| 20,624 | | |
| - | | |
| 26,108 | | |
| 8,964 | | |
| 70,709 | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total Commercial Real Estate | |
$ | 1,694,066 | | |
$ | 542,354 | | |
$ | 425,001 | | |
$ | 472,886 | | |
$ | 502,207 | | |
$ | 918,790 | | |
$ | 186,286 | | |
$ | 4,741,590 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial Construction | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 8,018 | | |
$ | 7,370 | | |
$ | 12,625 | | |
$ | 2,600 | | |
$ | 2,339 | | |
$ | - | | |
$ | 490,119 | | |
$ | 523,071 | |
Special mention | |
| - | | |
| - | | |
| - | | |
| - | | |
| 350 | | |
| - | | |
| 1,443 | | |
| 1,793 | |
Substandard | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 15,314 | | |
| 15,314 | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total Commercial Construction | |
$ | 8,018 | | |
$ | 7,370 | | |
$ | 12,625 | | |
$ | 2,600 | | |
$ | 2,689 | | |
$ | - | | |
$ | 506,876 | | |
$ | 540,178 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential Real Estate | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 27,081 | | |
$ | 29,539 | | |
$ | 23,611 | | |
$ | 25,070 | | |
$ | 28,701 | | |
$ | 66,249 | | |
$ | 44,221 | | |
$ | 244,472 | |
Special mention | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Substandard | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 7,262 | | |
| 3,535 | | |
| 10,797 | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total Residential Real Estate | |
$ | 27,081 | | |
$ | 29,539 | | |
$ | 23,611 | | |
$ | 25,070 | | |
$ | 28,701 | | |
$ | 73,511 | | |
$ | 47,756 | | |
$ | 255,269 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consumer | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 1,594 | | |
$ | 85 | | |
$ | 39 | | |
$ | 21 | | |
$ | 28 | | |
$ | (4 | ) | |
$ | 123 | | |
$ | 1,886 | |
Special mention | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Substandard | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total Consumer | |
$ | 1,594 | | |
$ | 85 | | |
$ | 39 | | |
$ | 21 | | |
$ | 28 | | |
$ | (4 | ) | |
$ | 123 | | |
$ | 1,886 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 2,131,994 | | |
$ | 628,843 | | |
$ | 511,755 | | |
$ | 540,362 | | |
$ | 623,860 | | |
$ | 995,045 | | |
$ | 1,176,772 | | |
$ | 6,608,631 | |
Special mention | |
| - | | |
| - | | |
| - | | |
| - | | |
| 5,493 | | |
| 54,483 | | |
| 12,310 | | |
| 72,286 | |
Substandard | |
| 2,138 | | |
| 9,039 | | |
| 5,848 | | |
| 33,922 | | |
| 9,740 | | |
| 54,394 | | |
| 42,353 | | |
| 157,434 | |
Doubtful | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Grand Total | |
$ | 2,134,132 | | |
$ | 637,882 | | |
$ | 517,603 | | |
$ | 574,284 | | |
$ | 639,093 | | |
$ | 1,103,922 | | |
$ | 1,231,435 | | |
$ | 6,838,351 | |
Collateral Dependent Loans: Loans
which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses. The evaluation
is determined on an individual basis using the fair value of the collateral as of the reporting date. The following table presents collateral
dependent loans that were individually evaluated for impairment as of March 31, 2022 and December 31, 2021:
| |
March 31, 2022 | |
| |
Real Estate | | |
Other | | |
Total | |
| |
(dollars in thousands) | |
Commercial | |
$ | 6,120 | | |
$ | 25,982 | | |
$ | 32,102 | |
Commercial real estate | |
| 62,753 | | |
| - | | |
| 62,753 | |
Commercial construction | |
| 7,042 | | |
| - | | |
| 7,042 | |
Residential real estate | |
| 7,528 | | |
| - | | |
| 7,528 | |
Consumer | |
| - | | |
| - | | |
| - | |
Total | |
$ | 83,443 | | |
$ | 25,982 | | |
$ | 109,425 | |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5. Loans and the Allowance for Credit
Losses – (continued)
| |
December 31, 2021 | |
| |
Real Estate | | |
Other | | |
Total | |
| |
(dollars in thousands) | |
Commercial | |
$ | 6,385 | | |
$ | 26,182 | | |
$ | 32,567 | |
Commercial real estate | |
| 55,244 | | |
| - | | |
| 55,244 | |
Commercial construction | |
| 13,196 | | |
| - | | |
| 13,196 | |
Residential real estate | |
| 8,856 | | |
| - | | |
| 8,856 | |
Consumer | |
| - | | |
| - | | |
| - | |
Total | |
$ | 83,681 | | |
$ | 26,182 | | |
$ | 109,863 | |
Aging Analysis - The
following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due as of March 31,
2022 and December 31, 2021:
| |
March 31, 2022 | |
| |
30-59 Days Past Due | | |
60-89 Days Past Due | | |
90 Days or
Greater Past
Due and Still
Accruing | | |
Nonaccrual | | |
Total Past
Due and
Nonaccrual | | |
Current | | |
Gross Loans | |
| |
(dollars in thousands) | |
Commercial | |
$ | 3,561 | | |
$ | - | | |
$ | 4,420 | | |
$ | 30,341 | | |
$ | 38,322 | | |
$ | 1,240,155 | | |
$ | 1,278,477 | |
Commercial real Estate | |
| 3,098 | | |
| - | | |
| 5,848 | | |
| 26,316 | | |
| 35,262 | | |
| 4,883,831 | | |
| 4,919,093 | |
Commercial construction | |
| 123 | | |
| - | | |
| - | | |
| - | | |
| 123 | | |
| 538,935 | | |
| 539,058 | |
Residential real Estate | |
| 1,970 | | |
| - | | |
| 1,487 | | |
| 2,746 | | |
| 6,203 | | |
| 244,002 | | |
| 250,205 | |
Consumer | |
| - | | |
| - | | |
| 625 | | |
| - | | |
| 625 | | |
| 515 | | |
| 1,140 | |
Total | |
$ | 8,752 | | |
$ | - | | |
$ | 12,380 | | |
$ | 59,403 | | |
$ | 80,535 | | |
$ | 6,907,438 | | |
$ | 6,987,973 | |
| |
December 31, 2021 | |
| |
30-59 Days Past Due | | |
60-89 Days Past Due | | |
90 Days or Greater Past Due and Still Accruing | | |
Nonaccrual | | |
Total Past Due and Nonaccrual | | |
Current | | |
Gross Loans | |
| |
(dollars in thousands) | |
Commercial | |
$ | 4,305 | | |
$ | 729 | | |
$ | 4,457 | | |
$ | 30,062 | | |
$ | 39,553 | | |
$ | 1,259,875 | | |
$ | 1,299,428 | |
Commercial real Estate | |
| 1,622 | | |
| 1,009 | | |
| 5,935 | | |
| 25,393 | | |
| 33,959 | | |
| 4,707,631 | | |
| 4,741,590 | |
Commercial construction | |
| - | | |
| - | | |
| - | | |
| 3,150 | | |
| 3,150 | | |
| 537,028 | | |
| 540,178 | |
Residential real Estate | |
| 1,437 | | |
| 292 | | |
| 3,139 | | |
| 3,095 | | |
| 7,963 | | |
| 247,306 | | |
| 255,269 | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,886 | | |
| 1,886 | |
Total | |
$ | 7,364 | | |
$ | 2,030 | | |
$ | 13,531 | | |
$ | 61,700 | | |
$ | 84,625 | | |
$ | 6,753,726 | | |
$ | 6,838,351 | |
CONNECTONE BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Note 5. Loans and the Allowance for Credit
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 credit losses that are allocated to each loan portfolio
segment:
| |
March 31, 2022 | |
| |
Commercial | | |
Commercial real estate | | |
Commercial construction | | |
Residential real estate | | |
Consumer | | |
Total | |
| |
(dollars in thousands) | |
Allowance for credit losses - loans | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated impairment | |
$ | 14,028 | | |
$ | 1,859 | | |
$ | - | | |
$ | 94 | | |
$ | - | | |
$ | 15,981 | |
Collectively evaluated impairment | |
| 9,154 | | |
| 44,088 | | |
| 3,281 | | |
| 3,361 | | |
| 7 | | |
| 59,891 | |
Acquired with deteriorated credit quality individually analyzed | |
| 2,277 | | |
| 1,921 | | |
| - | | |
| - | | |
| - | | |
| 4,198 | |
Total | |
$ | 25,459 | | |
$ | 47,868 | | |
$ | 3,281 | | |
$ | 3,455 | | |
$ | 7 | | |
$ | 80,070 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Gross loans | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated impairment | |
$ | 34,224 | | |
$ | 56,905 | | |
$ | 7,042 | | |
$ | 5,415 | | |
$ | - | | |
$ | 103,586 | |
Collectively evaluated impairment | |
| 1,239,157 | | |
| 4,856,340 | | |
| 532,016 | | |
| 242,678 | | |
| 1,140 | | |
| 6,871,331 | |
Acquired with deteriorated credit quality individually analyzed | |
| 5,096 | | |
| 5,848 | | |
| - | | |
| 2,112 | | |
| - | | |
| 13,056 | |
Total | |
$ | 1,278,477 | | |
$ | 4,919,093 | | |
$ | 539,058 | | |
$ | 250,205 | | |
$ | 1,140 | | |
$ | 6,987,973 | |
| |
December 31, 2021 | |
| |
Commercial | | |
Commercial real estate | | |
Commercial construction | | |
Residential real estate | | |
Consumer | | |
Total | |
| |
(dollars in thousands) | |
Allowance for credit losses - loans | |
| | |
| | |
| | |
| | |
| | |
| |
Individually evaluated impairment | |
$ | 15,131 | | |
$ | 955 | | |
$ | - | | |
$ | 131 | | |
$ | - | | |
$ | 16,217 | |
Collectively evaluated impairment | |
| 8,561 | | |
| 42,713 | | |
| 3,580 | | |
| 3,497 | | |
| 7 | | |
| 58,358 | |
Acquired with deteriorated credit quality individually analyzed | |
| 2,277 | | |
| 1,921 | | |
| - | | |
| - | | |
| - | | |
| 4,198 | |
Total | |
$ | 25,969 | | |
$ | 45,589 | | |
$ | 3,580 | | |
$ | 3,628 | | |
$ | 7 | | |
$ | 78,773 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Gross loans | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated impairment | |
$ | 33,726 | | |
$ | 49,310 | | |
$ | 13,196 | | |
$ | 5,717 | | |
$ | - | | |
$ | 101,949 | |
Collectively evaluated impairment | |
| 1,260,537 | | |
| 4,686,346 | | |
| 526,982 | | |
| 246,413 | | |
| 1,886 | | |
| 6,722,164 | |
Acquired with deteriorated credit quality individually analyzed | |
| 5,165 | | |
| 5,934 | | |
| - | | |
| 3,139 | | |
| - | | |
| 14,238 | |
Total | |
$ | 1,299,428 | | |
$ | 4,741,590 | | |
$ | 540,178 | | |
$ | 255,269 | | |
$ | 1,886 | | |
$ | 6,838,351 | |
CONNECTONE BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5. Loans and the Allowance for Credit
Losses – (continued)
Activity
in the Company’s ACL for loans for the three months ended March 31, 2022 is summarized in the table below.
| |
Three Months Ended March 31, 2022 | |
| |
Commercial | | |
Commercial real estate | | |
Commercial construction | | |
Residential real estate | | |
Consumer | | |
Unallocated | | |
Total | |
| |
(dollars in thousands) | |
Balance as of December 31, 2021 | |
$ | 25,969 | | |
$ | 45,589 | | |
$ | 3,580 | | |
$ | 3,628 | | |
$ | 7 | | |
$ | - | | |
$ | 78,773 | |
Charge-offs | |
| (49 | ) | |
| (225 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| (274 | ) |
Recoveries | |
| 1 | | |
| - | | |
| - | | |
| 31 | | |
| - | | |
| - | | |
| 32 | |
(Reversal of) provision for credit losses (loans) | |
| (462 | ) | |
| 2,504 | | |
| (299 | ) | |
| (204 | ) | |
| - | | |
| - | | |
| 1,539 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of March 31, 2022 | |
$ | 25,459 | | |
$ | 47,868 | | |
$ | 3,281 | | |
$ | 3,455 | | |
$ | 7 | | |
$ | - | | |
$ | 80,070 | |
Activity
in the Company’s ACL for loans for the three months ended March 31, 2021 is summarized in the table below. The CECL Day 1 row
presents adjustments recorded through retained earnings to adopt the CECL standard and the increase to the ACL for loans associated with
nonaccretable purchase accounting marks on loans that were classified as PCI as of December 31, 2020.
| |
Three Months Ended March 31, 2021 | |
| |
Commercial | | |
Commercial real estate | | |
Commercial construction | | |
Residential real estate | | |
Consumer | | |
Unallocated | | |
Total | |
| |
(dollars in thousands) | |
Balance as of December 31, 2020 | |
$ | 28,443 | | |
$ | 39,330 | | |
$ | 8,194 | | |
$ | 2,687 | | |
$ | 4 | | |
$ | 568 | | |
$ | 79,226 | |
Day 1 effect of CECL | |
| (4,225 | ) | |
| 9,605 | | |
| (961 | ) | |
| 2,697 | | |
| 9 | | |
| (568 | ) | |
| 6,557 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of January 1, 2021 as adjusted for changes in accounting principle | |
| 24,218 | | |
| 48,935 | | |
| 7,233 | | |
| 5,384 | | |
| 13 | | |
| - | | |
| 85,783 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Charge-offs | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recoveries | |
| 60 | | |
| - | | |
| - | | |
| - | | |
| 1 | | |
| - | | |
| 61 | |
(Reversal of) provision for credit losses (loans) | |
| 2,157 | | |
| (5,038 | ) | |
| (1,712 | ) | |
| (680 | ) | |
| (3 | ) | |
| - | | |
| (5,276 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance as of March 31, 2021 | |
$ | 26,435 | | |
$ | 43,897 | | |
$ | 5,521 | | |
$ | 4,704 | | |
$ | 11 | | |
$ | - | | |
$ | 80,568 | |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5. Loans and the Allowance for Credit
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, 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.
As of March 31, 2022, there
were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days
or greater and still accruing interest, or whose terms have been modified in troubled debt restructurings.
As of March 31, 2022, TDRs totaled $76.5 million,
of which $29.1 million were on nonaccrual status and $47.4 million were performing under their restructured terms. As of December 31,
2021, TDRs totaled $79.5 million, of which $35.9 million were on nonaccrual status and $43.6 million were performing under their restructured
terms. The Company has allocated $9.1 million and $10.4 million of specific allowance related to TDRs as of March 31, 2022 and December
31, 2021, respectively.
The following table presents loans by class modified
as TDRs that occurred during the three months ended March 31, 2022:
| |
| | |
Pre-Modification | | |
Post-Modification | |
| |
| | |
Outstanding | | |
Outstanding | |
| |
Number of | | |
Recorded | | |
Recorded | |
| |
Loans | | |
Investment | | |
Investment | |
| |
(dollars in thousands) | |
Troubled debt restructurings: | |
| | | |
| | | |
| | |
Commercial | |
| 1 | | |
$ | 98 | | |
$ | 98 | |
Commercial real estate | |
| 1 | | |
| 8,751 | | |
| 8,251 | |
Total | |
| 2 | | |
$ | 8,849 | | |
$ | 8,349 | |
The commercial loan modified as a TDR during the
three months ended March 31, 2022 was a maturity extension, while the commercial real estate loan modified as a TDR during the three months
ended March 31, 2022 was an interest rate reduction, that was commensurate with a one-time, $500,000, principal paydown.
The following table presents loans by class modified
as TDRs that occurred during the three months ended March 31, 2021:
| |
| | |
Pre-Modification | | |
Post-Modification | |
| |
| | |
Outstanding | | |
Outstanding | |
| |
Number of | | |
Recorded | | |
Recorded | |
| |
Loans | | |
Investment | | |
Investment | |
| |
(dollars in thousands) | |
Troubled debt restructurings: | |
| | |
| | |
| |
Commercial real estate | |
| 1 | | |
$ | 1,658 | | |
$ | 1,658 | |
Residential real estate | |
| 2 | | |
| 1,996 | | |
| 1,996 | |
Total | |
| 3 | | |
$ | 3,654 | | |
$ | 3,654 | |
The two residential real estate loans modified
as TDRs during the three months ended March 31, 2021 were maturity extensions, while the one commercial real estate loan was a recast
of a nonaccrual credit.
There were no TDRs for which there was a
payment default within twelve months following the modification during the three months ended March 31, 2022 and March 31, 2021.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5. Loans and the Allowance for Credit
Losses – (continued)
Allowance for Credit Losses for Unfunded
Commitments
The Company has recorded an ACL for unfunded
credit commitments, which was recorded in other liabilities. The provision is recorded within the (reversal of) provision for credit losses
on the Company’s income statement. The following table presents a rollforward of the allowance for credit losses for unfunded commitments
for the three months ended March 31, 2022 and March 31, 2021:
| |
Three Months Ended March 31,
2022 | | |
Three Months Ended March 31,
2021 | |
| |
(dollars in thousands) | |
Balance at beginning of period | |
$ | 2,351 | | |
$ | - | |
Day 1 Effect of CECL | |
| - | | |
| 2,833 | |
(Reversal of) provision for credit losses (unfunded commitments) | |
| (89 | ) | |
| (490 | ) |
Balance at end of period | |
$ | 2,262 | | |
$ | 2,343 | |
Components of (Reversal of) Provision for
Credit Losses
The following table summarizes the (reversal
of) provision for credit losses for the three months ended March 31, 2022 and March 31, 2021:
| |
Three Months Ended March 31,
2022 | | |
Three Months Ended March 31,
2021 | |
| |
(dollars in thousands) | |
Provision for (Reversal of) credit losses (loans) | |
$ | 1,539 | | |
$ | (5,276 | ) |
Reversal of credit losses (unfunded commitments) | |
| (89 | ) | |
| (490 | ) |
Provision for (Reversal of) credit losses | |
$ | 1,450 | | |
$ | (5,766 | ) |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial Instruments
Fair value is the exchange price that would be
received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date.
|
|
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 as of March 31, 2022 and December
31, 2021:
Securities Available-for-Sale and Equity Securities:
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs
include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair
values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples
of instruments which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency
collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions
must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation
techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based
on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.
Derivatives: The fair value of derivatives
is based on valuation models using observable market data as of the measurement date (level 2). Our derivatives are traded in an over-the-counter
market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative
models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices
and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to
value the position. The majority of market inputs are actively quoted
and can be validated through external sources, including brokers, market transactions and third-party pricing services.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial Instruments
– (continued)
For financial assets and liabilities measured at
fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of March 31, 2022 and December
31, 2021 are as follows:
| |
| | |
March 31, 2022 | |
| |
| | |
Fair Value Measurements at Reporting Date Using | |
| |
Total Fair Value | | |
Quoted Prices in Active Markets for Identical Assets (Level 1) | | |
Significant Other Observable Inputs (Level 2) | | |
Significant Unobservable Inputs (Level 3) | |
(dollars in thousands) | |
| |
Recurring fair value measurements: Assets | |
| |
Investment securities: | |
| | |
| | |
| | |
| |
Available-for-sale: | |
| | |
| | |
| | |
| |
Federal agency obligations | |
$ | 48,549 | | |
$ | - | | |
$ | 48,549 | | |
$ | - | |
Residential mortgage pass-through securities | |
| 300,976 | | |
| - | | |
| 300,976 | | |
| - | |
Commercial mortgage pass-through securities | |
| 17,408 | | |
| - | | |
| 17,408 | | |
| - | |
Obligations of U.S. states and political subdivision | |
| 137,051 | | |
| - | | |
| 128,558 | | |
| 8,493 | |
Corporate bonds and notes | |
| 5,501 | | |
| - | | |
| 5,501 | | |
| - | |
Asset-backed securities | |
| 2,354 | | |
| - | | |
| 2,354 | | |
| - | |
Certificates of deposit | |
| - | | |
| - | | |
| - | | |
| - | |
Other securities | |
| 191 | | |
| 191 | | |
| - | | |
| - | |
Total available-for-sale | |
| 512,030 | | |
| 191 | | |
| 503,346 | | |
| 8,493 | |
| |
| | | |
| | | |
| | | |
| | |
Equity securities | |
| 13,198 | | |
| 10,550 | | |
| 2,648 | | |
| - | |
Derivatives | |
| 22,872 | | |
| - | | |
| 22,872 | | |
| - | |
Total assets | |
$ | 548,100 | | |
$ | 10,741 | | |
$ | 528,866 | | |
$ | 8,493 | |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial
Instruments – (continued)
| |
| | |
December 31, 2021 | |
| |
| | |
Fair Value Measurements at Reporting Date Using | |
| |
Total Fair Value | | |
Quoted Prices in Active Markets for Identical Assets (Level 1) | | |
Significant Other Observable Inputs (Level 2) | | |
Significant Unobservable Inputs (Level 3) | |
(dollars in thousands) | |
| |
Recurring fair value measurements: Assets | |
| | |
| | |
| | |
| |
Investment securities: | |
| | |
| | |
| | |
| |
Available-for-sale: | |
| | |
| | |
| | |
| |
Federal agency obligations | |
$ | 50,360 | | |
$ | - | | |
$ | 50,360 | | |
$ | - | |
Residential mortgage pass- through securities | |
| 316,095 | | |
| - | | |
| 316,095 | | |
| - | |
Commercial mortgage pass-through securities | |
| 10,469 | | |
| - | | |
| 10,469 | | |
| - | |
Obligations of U.S. states and political subdivision | |
| 145,625 | | |
| - | | |
| 137,060 | | |
| 8,565 | |
Corporate bonds and notes | |
| 9,049 | | |
| - | | |
| 9,049 | | |
| - | |
Asset-backed securities | |
| 2,564 | | |
| - | | |
| 2,564 | | |
| - | |
Certificates of deposit | |
| 150 | | |
| - | | |
| 150 | | |
| - | |
Other securities | |
| 195 | | |
| 195 | | |
| - | | |
| - | |
Total available-for-sale | |
$ | 534,507 | | |
$ | 195 | | |
$ | 525,747 | | |
$ | 8,565 | |
Equity securities | |
| 13,794 | | |
| 11,081 | | |
| 2,713 | | |
| - | |
Derivatives | |
| 3,347 | | |
| - | | |
| 3,347 | | |
| - | |
Total assets | |
$ | 551,648 | | |
$ | 11,276 | | |
$ | 531,807 | | |
$ | 8,565 | |
There were no transfers between Level 1 and Level
2 during the three months ended March 31, 2022 and during the year ended December 31, 2021.
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 as of March 31, 2022
and December 31, 2021.
Loans Held-for-Sale: Residential mortgage
loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as
determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales
(sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination
of the loan and are recognized in other income upon sale of the loan. Management obtains quotes or bids on all or 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).
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial
Instruments – (continued)
Collateral Dependent Loans: The Company
may record adjustments to the carrying value of loans based on fair value measurements, generally as partial charge-offs of the uncollectible
portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance
with GAAP. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result,
the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value
of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales
of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and
limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral
supporting commercial loans generally are based on assumptions not observable in the marketplace and are also based on Level 3 inputs.
For assets measured at fair value on a nonrecurring
basis, the fair value measurements as of March 31, 2022 and December 31, 2021 are as follows:
| |
| | |
Fair Value Measurements at Reporting Date Using | |
Assets measured at fair value on a nonrecurring basis: | |
Carrying Value as of March 31, 2022 | | |
Quoted Prices in Active Markets for Identical Assets (Level 1) | | |
Significant Other Observable Inputs (Level 2) | | |
Significant Unobservable Inputs (Level 3) | |
Collateral dependent loans: | |
(dollars in thousands) | |
Commercial | |
$ | 14,698 | | |
$ | - | | |
$ | - | | |
$ | 14,698 | |
Commercial real estate | |
| 29,370 | | |
| - | | |
| - | | |
| 29,370 | |
Residential real estate | |
| 1,366 | | |
| - | | |
| - | | |
| 1,366 | |
| |
| | |
Fair Value Measurements at Reporting Date Using | |
Assets measured at fair value on a nonrecurring basis: | |
December 31,
2021 | | |
Quoted Prices in Active Markets for Identical Assets (Level 1) | | |
Significant Other Observable Inputs (Level 2) | | |
Significant Unobservable Inputs (Level 3) | |
Collateral dependent loans: | |
(dollars in thousands) | |
Commercial | |
$ | 13,399 | | |
$ | - | | |
$ | - | | |
$ | 13,399 | |
Commercial real estate | |
| 20,185 | | |
| - | | |
| - | | |
| 20,185 | |
Residential real estate | |
| 2,794 | | |
| - | | |
| - | | |
| 2,794 | |
Collateral dependent
loans – Collateral dependent loans as of March 31, 2022 that required a valuation allowance were $62.4 million with a
related valuation allowance of $16.9 million compared to $54.1 million with a related valuation allowance of $17.8 million as of December
31, 2021.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. 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 three months ended March 31,
2022 and for the year ended December 31, 2021:
| |
Municipal
Securities | |
| |
(dollars in thousands) | |
Beginning balance, December 31, 2021 | |
$ | 8,565 | |
Principal paydowns | |
| (72 | ) |
Ending balance, March 31, 2022 | |
$ | 8,493 | |
| |
Municipal
Securities | |
| |
(dollars in thousands) | |
Beginning balance, December 31, 2020 | |
$ | 8,844 | |
Principal paydowns | |
| (279 | ) |
Ending balance, December 31, 2021 | |
$ | 8,565 | |
The following methods and assumptions were used
to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of March 31, 2022 and December
31, 2021. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within
Level 3 hierarchy.
March 31, 2022 | |
| | |
| |
| |
| |
| |
Fair Value | | |
Valuation Techniques | |
Unobservable Input | |
Rate | |
Securities available-for-sale: | |
| | |
(dollars in thousands) | |
| |
| |
Municipal securities | |
$ | 8,493 | | |
Discounted cash flows | |
Discount rate | |
| 2.9 | % |
December 31, 2021 | |
| | |
| |
| |
| |
| |
Fair Value | | |
Valuation Techniques | |
Unobservable Input | |
Rate | |
Securities available-for-sale: | |
| | |
(dollars in thousands) | |
| |
| |
Municipal securities | |
$ | 8,565 | | |
Discounted cash flows | |
Discount rate | |
| 2.9 | % |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. 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 of collateral dependent loans.
March 31, 2022 | |
| | |
| |
| |
| |
(dollars in thousands) | |
Fair Value | | |
Valuation Techniques | |
Unobservable Input | |
Range (weighted average) | |
Commercial | |
$ | 13,993 | | |
Market approach (100%) | |
Average transfer price as a price to unpaid principal balance | |
56% – 85% (57%) | |
Commercial | |
$ | 705 | | |
Appraisals of collateral value | |
Comparable sales | |
-10% to +35% (+8%) | |
Commercial real estate | |
$ | 29,370 | | |
Appraisals of collateral value | |
Comparable sales | |
-25% to 10% (-14%) | |
Residential real estate | |
$ | 1,366 | | |
Appraisals of collateral value | |
Comparable sales | |
+21% to +39% (+22%) | |
December 31, 2021 | |
| | |
| |
| |
|
|
(dollars in thousands) | |
Fair Value | | |
Valuation Techniques | |
Unobservable Input | |
Range (weighed average) |
|
Commercial | |
$ | 12,193 | | |
Market approach (100%) | |
Average transfer price as a price to unpaid principal balance | |
48% to 73% (49%) |
|
Commercial | |
$ | 1,206 | | |
Appraisals of collateral value | |
Adjustment for comparable sales | |
-10% to +35% (+6%) |
|
Commercial real estate | |
$ | 20,185 | | |
Appraisals of collateral value | |
Adjustment for comparable sales | |
-20% to +15% (-6%) |
|
Residential real estate | |
$ | 2,794 | | |
Appraisals of collateral value | |
Adjustment for comparable sales | |
-15% to +39% (5%) |
|
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial
Instruments – (continued)
As of March 31, 2022 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 March 31,
2022 and December 31, 2021:
| |
| | |
| | |
Fair Value Measurements | |
| |
Carrying Amount | | |
Fair Value | | |
Quoted Prices in Active Markets for Identical Assets (Level 1) | | |
Significant Other Observable Inputs (Level 2) | | |
Significant Unobservable Inputs (Level 3) | |
| |
(dollars in thousands) | |
| |
| |
March 31, 2022 | |
| | |
| | |
| | |
| | |
| |
Financial assets: | |
| | |
| | |
| | |
| | |
| |
Cash and due from banks | |
$ | 311,544 | | |
$ | 311,544 | | |
$ | 311,544 | | |
$ | - | | |
$ | - | |
Securities available-for-sale | |
| 512,030 | | |
| 512,030 | | |
| 191 | | |
| 503,346 | | |
| 8,493 | |
Restricted investments in bank stocks | |
| 25,254 | | |
| n/a | | |
| n/a | | |
| n/a | | |
| n/a | |
Equity securities | |
| 13,198 | | |
| 13,198 | | |
| 10,550 | | |
| 2,648 | | |
| - | |
Net loans | |
| 6,899,525 | | |
| 6,874,974 | | |
| - | | |
| - | | |
| 6,874,974 | |
Derivatives | |
| 22,872 | | |
| 22,872 | | |
| - | | |
| 22,872 | | |
| - | |
Accrued interest receivable | |
| 34,081 | | |
| 34,081 | | |
| - | | |
| 1,472 | | |
| 32,609 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financial liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Noninterest-bearing deposits | |
| 1,631,292 | | |
| 1,631,292 | | |
| 1,631,292 | | |
| - | | |
| - | |
Interest-bearing deposits | |
| 4,929,113 | | |
| 4,909,128 | | |
| 3,863,299 | | |
| 1,045,829 | | |
| - | |
Borrowings | |
| 412,170 | | |
| 410,535 | | |
| - | | |
| 410,535 | | |
| - | |
Subordinated debentures | |
| 153,027 | | |
| 155,940 | | |
| - | | |
| 155,940 | | |
| - | |
Accrued interest payable | |
| 2,889 | | |
| 2,889 | | |
| - | | |
| 2,889 | | |
| - | |
December 31, 2021 | |
| | |
| | |
| | |
| | |
| |
Financial assets: | |
| | |
| | |
| | |
| | |
| |
Cash and due from banks | |
$ | 265,536 | | |
$ | 265,536 | | |
$ | 265,536 | | |
$ | - | | |
$ | - | |
Investment securities available-for-sale | |
| 534,507 | | |
| 534,507 | | |
| 195 | | |
| 525,747 | | |
| 8,565 | |
Restricted investment in bank stocks | |
| 27,826 | | |
| n/a | | |
| n/a | | |
| n/a | | |
| n/a | |
Equity securities | |
| 13,794 | | |
| 13,794 | | |
| 11,081 | | |
| 2,713 | | |
| - | |
Net loans | |
| 6,749,849 | | |
| 6,800,287 | | |
| - | | |
| - | | |
| 6,800,287 | |
Derivatives | |
| 3,347 | | |
| 3,347 | | |
| - | | |
| 3,347 | | |
| - | |
Accrued interest receivable | |
| 34,152 | | |
| 34,152 | | |
| - | | |
| 1,554 | | |
| 32,598 | |
Financial liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Noninterest-bearing deposits | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing deposits | |
| 1,617,049 | | |
| 1,617,049 | | |
| 1,617,049 | | |
| - | | |
| - | |
Borrowings | |
| 4,715,904 | | |
| 4,716,358 | | |
| 3,565,795 | | |
| 1,150,563 | | |
| - | |
Subordinated debentures | |
| 468,193 | | |
| 469,671 | | |
| - | | |
| 469,671 | | |
| - | |
Accrued interest payable | |
| 152,951 | | |
| 163,995 | | |
| - | | |
| 163,995 | | |
| - | |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Fair Value Measurements and Fair Value of Financial
Instruments – (continued)
The fair value of commitments to originate loans
is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently
charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the
reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above.
Changes in assumptions or estimation methodologies
may have a material effect on these estimated fair values.
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 7. Comprehensive (Loss) Income
Total comprehensive (loss) income includes all
changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s other
comprehensive income is comprised of unrealized holding gains and losses on securities available-for-sale, unrealized gains (losses) on
cash flow hedges, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Company’s defined
benefit pension plan, each net of taxes.
The following table represents the reclassification
out of accumulated other comprehensive (loss) for the periods presented (dollars in thousands):
Details about Accumulated Other Comprehensive Income Components | |
Amounts Reclassified from Accumulated
Other Comprehensive Income | | |
Affected Line item in the Consolidated Statements of Income |
| |
Three Months Ended March 31, | | |
|
| |
2022 | | |
2021 | | |
|
Net interest income on swaps | |
$ | (525 | ) | |
$ | (631 | ) | |
Interest expense |
| |
| 147 | | |
| 177 | | |
Income tax expense |
| |
$ | (378 | ) | |
$ | (454 | ) | |
|
| |
| | | |
| | | |
|
Amortization of pension plan net actuarial losses | |
$ | (16 | ) | |
$ | (75 | ) | |
Other components of net periodic pension expense |
| |
| 4 | | |
| 20 | | |
Income tax expense |
| |
$ | (12 | ) | |
$ | (55 | ) | |
|
Total reclassification | |
$ | (390 | ) | |
$ | (509 | ) | |
|
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. Comprehensive (Loss) Income – (continued)
Accumulated other comprehensive (loss) as of March
31, 2022 and December 31, 2021 consisted of the following:
| |
March 31, 2022 | | |
December 31, 2021 | |
| |
(dollars in thousands) | |
Investment securities available-for-sale, net of tax | |
$ | (22,970 | ) | |
$ | (484 | ) |
Cash flow hedge, net of tax | |
| 16,443 | | |
| 2,406 | |
Defined benefit pension and post-retirement plans, net of tax | |
| (1,742 | ) | |
| (3,326 | ) |
Total | |
$ | (8,269 | ) | |
$ | (1,404 | ) |
Note 8. 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 March 31, 2022. The maximum number of shares of common stock or equivalents which may be issued
under the Plan, is 750,000. Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares,
restricted share units or performance units. Shares available for grant and issuance under the Plan as of March 31, 2022 are approximately
222,593. 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 and units granted to new employees and board members may be granted
with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control.
All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the awards vesting. Restricted stock 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 for the three months ended March 31, 2022 and March 31, 2021 was $1.1 million and $1.0 million, respectively.
Activity under the Company’s options for
the three months ended March 31, 2022 was as follows:
| |
Number of Stock Options | | |
Weighted- Average Exercise Price | | |
Weighted- Average Remaining Contractual Term (in years) | | |
Aggregate Intrinsic Value | |
Outstanding as of December 31, 2021 | |
| 23,766 | | |
$ | 9.94 | | |
| | | |
| | |
Granted | |
| - | | |
| - | | |
| | | |
| | |
Exercised | |
| (8,774 | ) | |
| 9.09 | | |
| | | |
| | |
Forfeited/cancelled/expired | |
| | | |
| | | |
| | | |
| | |
Outstanding as of March 31, 2022 | |
| 14,992 | | |
| 10.44 | | |
| 0.63 | | |
$ | 323,303 | |
Exercisable as of March 31, 2022 | |
| 14,992 | | |
$ | 10.44 | | |
| 0.63 | | |
$ | 323,303 | |
The aggregate intrinsic value of outstanding and
exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price
on March 31, 2022 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option
holders had all option holders exercised their options on March 31, 2022. This amount changes based on the fair market value of the Company’s
stock.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 8. Stock-Based Compensation – (continued)
Activity under the Company’s restricted shares
for the three months ended March 31, 2022 was as follows:
| |
Nonvested Shares | | |
Weighted- Average Grant Date Fair Value | |
Nonvested as of December 31, 2021 | |
| 82,693 | | |
$ | 21.78 | |
Granted | |
| 32,522 | | |
| 32.71 | |
Vested | |
| (18,742 | ) | |
| 23.13 | |
Forfeited/cancelled/expired | |
| (68 | ) | |
| 23.23 | |
Nonvested March 31, 2022 | |
| 96,405 | | |
$ | 25.20 | |
As of March 31, 2022, there was approximately $1.4
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 1.6 years.
A summary of the status of unearned performance
unit awards and the change during the period is presented in the table below:
| |
Units (expected) | | |
Units (maximum) | | |
Weighted Average Grant Date Fair Value | |
Unearned as of December 31, 2021 | |
| 209,994 | | |
| | | |
$ | 16.18 | |
Awarded | |
| 34,874 | | |
| | | |
| 32.80 | |
Vested shares | |
| (49,604 | ) | |
| | | |
| 20.79 | |
Unearned as of March 31, 2022 | |
| 195,264 | | |
| 221,541 | | |
$ | 17.98 | |
As of March 31, 2022, the specific number of shares
related to performance units that were expected to vest was 195,264, determined by actual performance in consideration of the established
range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should
this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be
reversed. As of March 31, 2022, the maximum amount of performance units that ultimately could vest if performance targets were exceeded
is 221,541. During the three months ended March 31, 2022, 49,604 shares vested. A total of 27,254 shares were netted from the vested shares
to satisfy employee tax obligations. The net shares issued from vesting of performance units during the three months ended March 31, 2022
were 22,350 shares. As of March 31, 2022, compensation cost of approximately $2.1 million related to non-vested performance units not
yet recognized is expected to be recognized over a weighted-average period of 2.1 years.
A summary of the status of unearned restricted
stock units and the changes in restricted stock units during the period is presented in the table below:
| |
Units
(expected) | | |
Weighted
Average
Grant Date
Fair Value | |
Unearned as of December 31, 2021 | |
| 136,948 | | |
$ | 16.52 | |
Awarded | |
| 52,312 | | |
| 32.80 | |
Vested shares | |
| (69,584 | ) | |
| 16.13 | |
Unearned as of March 31, 2022 | |
| 119,676 | | |
$ | 23.86 | |
Any forfeitures would result in previously recognized
expense being reversed. A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient. During the
three months ended March 31, 2022, 69,584 shares vested. A total of 38,201 shares were netted from the vested shares to satisfy employee
tax obligations. The net shares issued from vesting of restricted stock units during the three months ended March 31, 2022 were 31,383
shares. As of March 31, 2022, compensation cost of approximately $2.4 million related to non-vested restricted stock units, not yet recognized,
is expected to be recognized over a weighted-average period of 1.8 years.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 9. 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 Ended | | |
Affected Line Item in the Consolidated |
| |
March 31, | | |
Statements of Income |
| |
2022 | | |
2021 | | |
|
| |
(dollars in thousands) | | |
|
Service cost | |
$ | - | | |
$ | - | | |
|
Interest cost | |
| 78 | | |
| 71 | | |
Other components of net periodic pension expense |
Expected return on plan assets | |
| (237 | ) | |
| (213 | ) | |
Other components of net periodic pension expense |
Net amortization | |
| 16 | | |
| 75 | | |
Other components of net periodic pension expense |
Total periodic pension income | |
$ | (143 | ) | |
$ | (67 | ) | |
|
Contributions
The Company did not contribute to the Pension Trust
during the three months ended March 31, 2022. The Company does not plan on contributing amounts to the Pension Trust for the remainder
of 2022. The trust is established to provide retirement and other benefits for eligible employees and their beneficiaries. No part of
the trust assets may be applied to any purpose other than providing benefits under the plan and for defraying expenses of administering
the plan and the trust.
Note 10. FHLB Borrowings
The Company’s FHLB borrowings and weighted
average interest rates are summarized below:
| |
March 31, 2022 | | |
December 31, 2021 | |
| |
Amount | | |
Rate | | |
Amount | | |
Rate | |
| |
(dollars in thousands) | |
By remaining period to maturity: | |
| | |
| | |
| | |
| |
Less than 1 year | |
$ | 359,526 | | |
| 0.79 | % | |
$ | 390,549 | | |
| 0.56 | % |
1 year through less than 2 years | |
| 25,000 | | |
| 2.92 | % | |
| 50,000 | | |
| 1.84 | % |
2 years through less than 3 years | |
| - | | |
| n/a | | |
| - | | |
| n/a | |
3 years through less than 4 years | |
| 25,000 | | |
| 1.00 | % | |
| 25,000 | | |
| 1.00 | % |
4 years through 5 years | |
| 2,050 | | |
| 2.23 | % | |
| 2,050 | | |
| 2.23 | % |
After 5 years | |
| 698 | | |
| 2.91 | % | |
| 714 | | |
| 2.91 | % |
FHLB borrowings - gross | |
| 412,274 | | |
| 0.94 | % | |
| 468,313 | | |
| 0.73 | % |
Fair value (discount) | |
| (104 | ) | |
| | | |
| (120 | ) | |
| | |
Total FHLB borrowings | |
$ | 412,170 | | |
| | | |
$ | 468,193 | | |
| | |
The FHLB borrowings are secured by pledges of certain
collateral including, but not limited to, U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying
first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans.
Advances are payable at stated maturity, with a
prepayment penalty for fixed rate advances. All FHLB advances are fixed rates. The advances as of March 31, 2022 were primarily collateralized
by approximately $1.9 billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement.
As of March 31, 2022 the Company had remaining borrowing capacity of approximately $1.0 billion at FHLB.
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 11. 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. The floating interest
rate on the subordinated debentures is three-month LIBOR plus 2.85% and re-prices quarterly. The
rate as of March 31, 2022 was 3.15%.
The following table summarizes the mandatory redeemable
trust preferred securities of the Company’s Statutory Trust II as of March 31, 2022 and December 31, 2021.
Issuance Date | |
Securities Issued | | |
Liquidation Value | |
Coupon Rate | |
Maturity | |
Redeemable by Issuer Beginning |
12/19/2003 | |
$ | 5,000,000 | | |
$1,000 per Capital Security | |
Floating 3-month LIBOR + 285 Basis Points | |
01/23/2034 | |
01/23/2009 |
During June 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.
During January 2018, the Parent Corporation issued
$75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain accredited
investors. The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included
the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity. The Notes are non-callable
for five years, have a stated maturity of February 1, 2028 and bear interest at a fixed rate of 5.20% per year, from and including January
17, 2018 to, but excluding February 1, 2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption
date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points.
Note 12. Preferred Stock
On August
19, 2021, the Company completed an underwritten public offering of 115,000 shares, or $115.0 million in aggregate liquidation
preference, of its depositary shares, each representing a 1/40th interest in a share of the Company’s 5.25%
Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A, no par value, with a liquidation preference of $1,000 per share.
The net proceeds received from the issuance of preferred stock at the time of closing were $110.9 million.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The purpose of this analysis is to provide the
reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein
and financial condition as of March 31, 2022 and December 31, 2021. In order to fully understand this analysis, the reader is encouraged
to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.
Cautionary Statement Concerning Forward-Looking Statements
This report includes forward-looking statements
within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended,
that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition,
results of operations, plans, objectives, future performance and business of ConnectOne Bancorp Inc. and its subsidiaries, including statements
preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,”
“plans,” “trend,” “objective,” “continue,” “remain,” “pattern”
or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,”
“might,” “can,” “may” or similar expressions. There are a number of important factors that could cause
future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a
difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes
in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and
credit loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected;
(5) political developments, sovereign debt problems, wars or other hostilities such as the ongoing conflict between Ukraine and Russia,
may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions
may adversely affect the businesses in which ConnectOne Bancorp is engaged; (7) changes and trends in the securities markets may adversely
impact ConnectOne Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp;
(9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding
and liquidity could be significant; (10) the outcome of regulatory and legal investigations and proceedings may not be anticipated, and
(11) the impact of the COVID-19 pandemic on our employees and operations, and those of our customers. Further information on other factors
that could affect the financial results of ConnectOne Bancorp is included in Item 1a. of ConnectOne Bancorp’s Annual Report on Form
10-K as amended and updated in ConnectOne Bancorp’s other filings with the Securities and Exchange Commission. These documents are
available free of charge at the Commission’s website at http://www.sec.gov and/or from ConnectOne Bancorp, Inc.
Critical Accounting Policies and Estimates
The accounting and reporting policies followed
by ConnectOne Bancorp, Inc. and its subsidiaries (collectively, the “Company”) conform, in all material respects, to GAAP.
In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the consolidated
statements of 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 credit 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 Credit Losses and Related
Provision: The allowance for credit losses (“ACL”) represents management’s estimate of current expected credit
losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial
asset(s). Determining the amount of the ACL is considered a critical accounting estimate because it requires significant judgment and
the use of estimates including reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the
contractual term of the financial assets.
The evaluation of the adequacy of the ACL includes,
among other factors, an analysis of historical loss rates by loan segment applied to current loan totals. However, actual credit 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 ACL is established through
a provision for credit losses charged to expense. Management believes that the current ACL will be adequate to absorb credit 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 credit loss rates which are projected for current loan total amounts. Loss estimates for specified problem
loans are also detailed. All of the factors considered in the analysis of the adequacy of the ACL may be subject to change. To the extent
actual outcomes differ from management estimates, additional provisions for credit losses may be required that could materially adversely
impact earnings in future periods. Additional information can be found in Note 5 of the Notes to Consolidated Financial Statements.
Income Taxes: The objectives of accounting
for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets
for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment
is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial
statements or tax returns.
Fluctuations in the actual outcome of these future
tax consequences could impact the Company’s consolidated financial condition or results of operations. Note 10 of the
Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2021 includes additional
discussion on the accounting for income taxes.
Impact of COVID-19
COVID-19 continues to impact the Company’s
operations and financial results, as well as those of our customers. In response to the COVID-19 pandemic, the Company continued to offer
temporary relief to effected customers, deferring either their full loan payment, the principal component or the interest component of
their loan payment for an initial period of time ranging from 30 to 120 days. As of March 31, 2022, the Company has one deferred loan
with a total outstanding loan balance of $0.5 million. As provided for under the CARES act, these short-term deferrals are not considered
troubled debt restructurings, provided that the modification is related to COVID-19, executed on a loan that was not more than 30 days
past due as of December 31, 2019 or the date of the deferral, and executed between March 1, 2020 and January 1, 2022, or the date that
is 60 days after the termination date of the national emergency declared by the president on March 13, 2020, under the National Emergencies
Act related to the outbreak of COVID-19.
With the passage of the Paycheck Protection Program
(“PPP”), administered by the Small Business Administration (“SBA”), the Company was an active participant in assisting
its customers with applications for resources through the program. PPP loans originated prior to June 5, 2020 have a two-year term, which
may be extended to five years with the consent of the Company, and those originated on or after June 5, 2020 have a five-year term, and
the loans bear interest at 1%, along with an origination fee payable from the SBA to the Company. The Company believes that the majority
of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of March 31, 2022, PPP loans were
$54.3 million. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S.
government and, as such, the Company has not included the PPP loans in calculation of the ACL as of March 31, 2022. Should those circumstances
change, the Company could be required to establish additional provisions for credit loss expense charged to earnings. As of March 31,
2022 remaining deferred and unrecognized PPP fees were $2.6 million. We currently anticipate recognizing a majority of this balance by
December 31, 2022, reflecting the expected timing of PPP loan forgiveness granted by the Small Business Administration.
Operating Results Overview
Net income available to common stockholders for
the three months ended March 31, 2022 was $29.9 million compared to $33.0 million for the comparable three-month period ended March 31,
2021. The Company’s diluted earnings per share were $0.75 for the three months ended March 31, 2022 as compared with diluted earnings
per share of $0.82 for the comparable three-month period ended March 31, 2021. The $3.1 million decrease in net income available to common
stockholders and $0.07 decrease in diluted earnings per share versus the first quarter of 2021 were due to a $7.2 million increase to
provision for credit losses, a $2.7 million increase in noninterest expenses, $1.5 million in preferred dividends, a $0.4 million decrease
in noninterest income and a $0.5 million increase in income tax expenses, partially offset by a $9.2 million increase in net interest
income.
Net Interest Income and Margin
Net interest income is the difference between the
interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings,
which support these assets. Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (including interest
earned tax-free loans and on obligations of state and local political subdivisions) by the amount of income tax which would have been
paid had the assets been invested in taxable issues. Net interest margin is defined as net interest income on a tax-equivalent basis as
a percentage of total average interest-earning assets.
Fully taxable equivalent net interest income for
the three months ended March 31, 2022 increased by $9.2 million, or 15.0%, from the comparable three-month period ended March 31, 2021.
The increase from the three months ended March 31, 2021 resulted primarily from a 10.1% increase in average loans and a 15 basis-point
widening of the net interest margin to 3.71% from 3.56%. The widening of the net interest margin resulted from a 27 basis-point reduction
in the cost of interest-bearing liabilities, partially offset by an 8 basis-point reduction in the yield on average interest-earning assets.
The following tables, “Average Statements
of Condition with Interest and Average Rates”, present for the three months ended March 31, 2022 and 2021, the Company’s average
assets, liabilities and stockholders’ equity. The Company’s net interest income, net interest spread and net interest margin
are also reflected.
Average Statements of Condition with Interest
and Average Rates
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
| |
Average Balance | | |
Interest Income/ Expense | | |
Average Rate (7) | | |
Average Balance | | |
Interest Income/ Expense | | |
Average Rate (7) | |
| |
(dollars in thousands) | |
Interest-earning assets: | |
| | |
| | |
| | |
| | |
| | |
| |
Securities (1) (2) | |
$ | 545,203 | | |
$ | 2,771 | | |
| 2.06 | % | |
$ | 473,181 | | |
$ | 2,058 | | |
| 1.76 | % |
Total loans (2) (3) (4) | |
| 6,871,477 | | |
| 76,320 | | |
| 4.50 | | |
| 6,242,960 | | |
| 70,676 | | |
| 4.59 | |
Federal funds sold and interest-bearing with banks | |
| 312,224 | | |
| 120 | | |
| 0.16 | | |
| 269,537 | | |
| 49 | | |
| 0.07 | |
Restricted investment in bank stocks | |
| 24,977 | | |
| 214 | | |
| 3.47 | | |
| 22,822 | | |
| 256 | | |
| 4.55 | |
Total interest-earning assets | |
| 7,753,881 | | |
| 79,425 | | |
| 4.15 | | |
| 7,008,500 | | |
| 73,039 | | |
| 4.23 | |
Noninterest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for credit losses | |
| (79,763 | ) | |
| | | |
| | | |
| (81,549 | ) | |
| | | |
| | |
Other noninterest-earning assets | |
| 589,264 | | |
| | | |
| | | |
| 573,083 | | |
| | | |
| | |
Total assets | |
$ | 8,263,382 | | |
| | | |
| | | |
$ | 7,500,034 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing deposits: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Time deposits | |
$ | 1,124,614 | | |
| 2,154 | | |
| 0.78 | | |
$ | 1,422,295 | | |
| 2,434 | | |
| 0.69 | |
Other interest-bearing deposits | |
| 3,851,558 | | |
| 2,856 | | |
| 0.30 | | |
| 3,225,751 | | |
| 5,151 | | |
| 0.65 | |
Total interest-bearing deposits | |
| 4,976,172 | | |
| 5,010 | | |
| 0.41 | | |
| 4,648,046 | | |
| 7,585 | | |
| 0.66 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Borrowings | |
| 404,907 | | |
| 1,377 | | |
| 1.38 | | |
| 375,511 | | |
| 1,674 | | |
| 1.81 | |
Subordinated debentures | |
| 152,977 | | |
| 2,168 | | |
| 5.75 | | |
| 154,341 | | |
| 2,167 | | |
| 5.70 | |
Finance lease | |
| 1,917 | | |
| 28 | | |
| 5.92 | | |
| 2,115 | | |
| 32 | | |
| 6.14 | |
Total interest-bearing liabilities | |
| 5,535,973 | | |
| 8,583 | | |
| 0.63 | | |
| 5,180,013 | | |
| 11,458 | | |
| 0.90 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Demand deposits | |
| 1,547,055 | | |
| | | |
| | | |
| 1,348,585 | | |
| | | |
| | |
Other liabilities | |
| 48,386 | | |
| | | |
| | | |
| 43,340 | | |
| | | |
| | |
Total noninterest-bearing liabilities | |
| 1,595,441 | | |
| | | |
| | | |
| 1,391,925 | | |
| | | |
| | |
Stockholders’ equity | |
| 1,131,968 | | |
| | | |
| | | |
| 928,096 | | |
| | | |
| | |
Total liabilities and stockholders’ equity | |
$ | 8,263,382 | | |
| | | |
| | | |
$ | 7,500,034 | | |
| | | |
| | |
Net interest income (tax-equivalent basis) | |
| | | |
| 70,842 | | |
| | | |
| | | |
| 61,581 | | |
| | |
Net interest spread (5) | |
| | | |
| | | |
| 3.53 | % | |
| | | |
| | | |
| 3.33 | % |
Net interest margin (6) | |
| | | |
| | | |
| 3.71 | % | |
| | | |
| | | |
| 3.56 | % |
Tax-equivalent adjustment | |
| | | |
| (484 | ) | |
| | | |
| | | |
| (418 | ) | |
| | |
Net interest income | |
| | | |
$ | 70,358 | | |
| | | |
| | | |
$ | 61,163 | | |
| | |
(1) |
Average balances are based on amortized cost and include equity securities. |
(2) |
Interest income is presented on a tax-equivalent basis using 21%. |
(3) |
Includes loan fee income and accretion of purchase accounting adjustments. |
(4) |
Total loans include 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. |
Noninterest Income
Noninterest income totaled $3.1 million for the
three months ended March 31, 2022, compared with $3.4 million for the three months ended March 31, 2021. Included in noninterest income
were net losses on equity securities of $0.6 million and $0.2 million for the three months ended March 31, 2022 and three months ended
2021, respectively, and a $0.7 million gain on the sale of branches in the first quarter 2021. Excluding the aforementioned items, noninterest
income was $3.7 million and $2.9 million for the three months ended March 31, 2022 and three-month period ended March 31, 2021, respectively.
The $0.7 million increase in noninterest income excluding the items discussed above for the three months ended March 31, 2022 versus the
comparable three-month period ended March 31, 2021 was primarily due to increases in deposit, loan and other income of $0.4 million, BoeFly
income of $0.2 million and BOLI income of $0.1 million.
Noninterest Expenses
Noninterest expenses totaled $29.2 million for
the three months ended March 31, 2022, compared to $26.5 million for the three months ended March 31, 2021. The increase in noninterest
expenses of $2.7 million from the comparable three-month period ended period March 31, 2021 was primarily attributable to increases in
salaries and employee benefits of $3.1 million, a $0.7 million increase acquisition expenses related to BoeFly and increases in other
expenses of $0.6 million, and information technology and communications of $0.3 million, partially offset by decreases in occupancy and
equipment expenses of $1.5 million, which included a $0.9 million favorable dissolution of a merger lease obligation, FDIC insurance of
$0.3 million and professional and consulting of $0.2 million. The increase in salaries and employee benefits from the prior year quarter
was attributable to new hires, a seasonal increase in payroll taxes, as well as higher incentive-based, stock compensation expense.
Income Taxes
Income tax expense was $11.4 million for the three
months ended March 31, 2022, compared to $10.9 million for the three months ended March 31, 2021. The effective tax rate for the three
months ended March 31, 2022 and March 31, 2021 was 26.6% and 24.8%, respectively. The effective tax rate for the first quarter of 2022
was higher compared to March 31, 2021 due to different proportions of income from non-taxable sources.
Financial Condition
Loan Portfolio
The following table sets forth the composition
of our loan portfolio, excluding loans held-for-sale and unearned net origination fees and costs, by loan segment at the periods indicated.
| |
March 31, 2022 | | |
December 31, 2021 | | |
Amount Increase/ | |
| |
Amount | | |
% | | |
Amount | | |
% | | |
(Decrease) | |
| |
(dollars in thousands) | |
Commercial (1) | |
$ | 1,278,477 | | |
| 18.3 | % | |
$ | 1,299,428 | | |
| 19.0 | % | |
$ | (20,951 | ) |
Commercial real estate | |
| 4,919,093 | | |
| 70.4 | | |
| 4,741,590 | | |
| 69.3 | | |
| 177,503 | |
Commercial construction | |
| 539,058 | | |
| 7.7 | | |
| 540,178 | | |
| 7.9 | | |
| (1,120 | ) |
Residential real estate | |
| 250,205 | | |
| 3.5 | | |
| 255,269 | | |
| 3.7 | | |
| (5,064 | ) |
Consumer | |
| 1,140 | | |
| 0.1 | | |
| 1,886 | | |
| 0.1 | | |
| (746 | ) |
Gross loans | |
$ | 6,987,973 | | |
| 100.0 | % | |
$ | 6,838,351 | | |
| 100.0 | % | |
$ | 149,622 | |
As of March 31, 2022, gross
loans totaled $7.0 billion, an increase of $149.6 million, or 2.2%, as compared to December 31, 2021. Net loan growth was attributable
to organic loan originations.
| (1) | Included
in commercial loans as of March 31, 2022 and December 31, 2021 are PPP loans of $54.3 million
and $93.1 million, respectively. |
Allowance for Credit Losses and Related Provision
As of March 31, 2022, the Company’s allowance
for credit losses for loans was $80.1 million, an increase of $1.3 million from $78.8 million December 31, 2021. The allowance for credit
losses for loans as of December 31, 2021 included a $6.6 million increase that was related to the “Day 1” CECL adjustment
resulting from adopting CECL as of January 1, 2021. Excluding that increase, the allowance for credit losses for loans increased by $7.8
million. The increase was primarily attributable to an increase in provision for credit losses for loans of $6.6 million and a decrease
of $2.1 million in charge-offs, partially offset by a decrease of $0.4 million in recoveries.
The provision for (reversal of) credit losses was
$1.5 million for the three months ended March 31, 2022 and $(5.8) million for the three months ended March 31, 2021. The provision for
credit losses during the three months ended March 31, 2022 reflected strong organic loan growth and stabilizing macroeconomic forecasts.
The reversal of provision for credit losses during the three months ended March 31, 2021 was the result of an improved macroeconomic forecast
when compared to January 1, 2021, the date of CECL implementation.
There were $0.2 million net charge-offs for the
three months ended March 31, 2022, compared with $0.1 million in net recoveries for the three months ended March 31, 2021. The ACL as
a percentage of loans receivable amounted to 1.15% as of both March 31, 2022 and December 31, 2021. Excluding the impact of PPP loans
in the calculation of the ACL as a percentage of loans receivable, the ratio increases to 1.16% as of March 31, 2022, compared to 1.17%
as of December 31, 2021. PPP loans do not have allowance for credit losses attributable to them, as they are fully guaranteed by the SBA.
The level of the allowance for the respective periods
of 2022 and 2021 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. In management’s view, the level of the ACL as of March 31, 2022 is adequate
to cover credit losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes
a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially
from management’s analysis, based principally upon the factors considered by management in establishing the allowance.
Changes in the ACL are presented in the following
table for the periods indicated.
| |
Three Months Ended
March 31, | |
| |
2022 | | |
2021 | |
| |
(dollars in thousands) | |
Average loans receivable at end of period | |
$ | 6,871,095 | | |
$ | 6,238,723 | |
Analysis of the ACL: | |
| | | |
| | |
Balance - beginning of quarter | |
$ | 78,773 | | |
$ | 79,226 | |
CECL Day 1 Adjustment | |
| - | | |
| 6,557 | |
Balance – beginning of quarter (as adjusted) | |
| 78,773 | | |
| 85,783 | |
Charge-offs: | |
| | | |
| | |
Commercial | |
| (274 | ) | |
| - | |
Total charge-offs | |
| (274 | ) | |
| - | |
Recoveries: | |
| | | |
| | |
Commercial | |
| 1 | | |
| 60 | |
Consumer | |
| 31 | | |
| 1 | |
Total recoveries | |
| 32 | | |
| 61 | |
Net (charge-offs) recoveries | |
| (242 | ) | |
| 61 | |
Provision for (reversal of) credit losses (loans) | |
| 1,539 | | |
| (5,276 | ) |
Balance - end of period | |
$ | 80,070 | | |
$ | 80,568 | |
| |
| | | |
| | |
Ratio of annualized net charge-offs during the period to average loans receivable during the period | |
| 0.01 | % | |
| 0.00 | % |
Loans receivable | |
$ | 6,979,595 | | |
$ | 6,277,191 | |
ACL as a percentage of loans receivable | |
| 1.15 | % | |
| 1.28 | % |
Asset Quality
The Company manages asset quality and credit risk
by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing
examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix.
The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based
on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for credit 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.
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:
| |
March 31, 2022 | |
December 31, 2021 |
| |
(dollars in thousands) |
Nonaccrual loans | |
$ | 59,403 | | |
$ | 61,700 | |
OREO | |
| 316 | | |
| - | |
Total nonperforming assets (1) | |
$ | 59,719 | | |
$ | 61,700 | |
| |
| | | |
| | |
Performing TDRs | |
$ | 47,441 | | |
$ | 43,587 | |
Loans 90 days or greater past due and still accruing (non PCD) | |
$ | - | | |
$ | - | |
Loans 90 days or greater past due and still accruing (PCD) | |
$ | 12,380 | | |
$ | 13,531 | |
| (1) | Nonperforming
assets are defined as nonaccrual loans and OREO. |
Nonaccrual loans to total loans receivable | |
| 0.85 | % | |
| 0.90 | % |
| |
| | | |
| | |
Nonperforming assets to total assets | |
| 0.72 | % | |
| 0.76 | % |
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable | |
| 1.71 | % | |
| 1.74 | % |
Investment Securities
As
of March 31, 2022, the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations
of U.S. states and political subdivisions, corporate bonds and notes, asset-backed securities and equity securities. For the quarter ended
March 31, 2022, average securities increased $65.1 million to approximately $545.2 million, or 7.0% of average total interest-earning
assets, from approximately $480.1 million, or 6.4% of average interest-earning assets, compared to December 31, 2021.
As of March 31, 2022,
net unrealized losses on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included
in stockholders’ equity, net of tax, amounted to $23.0 million as compared with net unrealized losses of $0.5 million as of December
31, 2021. The increase in unrealized losses is predominately attributable to changes in market conditions and interest rates. Unrealized
losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely
that we will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely
due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the
securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive
income, net of applicable taxes. The Company did not record an allowance for credit losses for available-for-sale as of March 31,
2022.
Interest Rate Sensitivity Analysis
The principal objective
of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine
the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements; establish prudent
asset concentration guidelines; and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of
our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability
Committee (the “ALCO”). The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and
borrowings, and current market conditions and interest rates.
We currently utilize
net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of
future changes in interest rates. As of March 31, 2022 and December 31, 2021, 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 March 31, 2022, we estimated that over the next one-year period a 200 basis-point instantaneous increase in
the general level of interest rates would increase our net interest income by 3.60%, while a 100 basis-point instantaneous decrease in
interest rates would decrease net interest income by 6.28%. As of December 31, 2021, we estimated that over the next one-year period
a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.35%, while
a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.64%.
Based on our model, which
was run as of March 31, 2022, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase
in the general level of interest rates would increase our net interest income by 9.20%, while a 100 basis-point instantaneous decrease
in interest rates would decrease net interest income by 10.89%. As of December 31, 2021, we estimated that over the next three years,
on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest
income by 9.77%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 10.41%.
An EVE analysis is also
used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and
down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of March 31, 2022,
would increase by 0.65% with an instantaneous rate shock of up 200 basis points, and decline by 6.89% with an instantaneous rate shock
of down 100 basis points. Our EVE as of December 31, 2021, would increase by 0.24% with an instantaneous rate shock of up 200
basis points, and decline by 5.20% with an instantaneous rate shock of down 100 basis points.
The following table illustrates
the most recent results for EVE and one-year NII sensitivity as of March 31, 2022.
Interest Rates | | |
Estimated | | |
Estimated Change in EVE | | |
Interest Rates | | |
Estimated | | |
Estimated Change in NII | |
(basis points) | | |
EVE | | |
Amount | | |
% | | |
(basis points) | | |
NII | | |
Amount | | |
% | |
+300 | | |
$ | 1,144,436 | | |
$ | (10,469 | ) | |
| (0.72 | ) | |
+300 | | |
$ | 305,198 | | |
$ | 15,172 | | |
| 5.23 | |
+200 | | |
| 1,464,299 | | |
| 9,394 | | |
| 0.65 | | |
+200 | | |
| 300,455 | | |
| 10,429 | | |
| 3.60 | |
+100 | | |
| 1,471,303 | | |
| 16,398 | | |
| 1.13 | | |
+100 | | |
| 295,712 | | |
| 5,686 | | |
| 1.96 | |
0 | | |
| 1,454,905 | | |
| - | | |
| - | | |
0 | | |
| 290,026 | | |
| - | | |
| - | |
-100 | | |
| 1,354,701 | | |
| (100,204 | ) | |
| (6.89 | ) | |
-100 | | |
| 271,825 | | |
| (18,201 | ) | |
| (6.28 | ) |
Estimates of Fair Value
The estimation of fair value is significant to
a number of the Company’s assets, including loans held-for-sale and securities available-for-sale. These are all recorded at either
fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that
could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates,
or market interest rates. Fair values for most available-for-sale securities are based on quoted market prices. If quoted market prices
are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics
of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes
thereto presented elsewhere herein have been prepared in accordance with GAAP, which 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.
As of March 31, 2022, the amount of liquid assets
remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’
withdrawal requirements, and other operational and client credit needs could be satisfied. As of March 31, 2022, liquid assets (cash and
due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $742.8 million, which represented 9.1%
of total assets and 10.9% of total deposits and borrowings, compared to $742.1 million as of December 31, 2021, which represented 9.1%
of total assets and 10.9% of total deposits and borrowings.
The Bank is a member of the Federal Home Loan Bank
of New York and, based on available qualified collateral as of March 31, 2022, had the ability to borrow $1.9 billion. In addition, as
of March 31, 2022, the Bank had in place borrowing capacity of $25 million through correspondent banks. The Bank also has a credit facility
established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral
of $1.8 million. As of March 31, 2022, the Bank had aggregate available and unused credit of approximately $1.0 billion, which represents
the aforementioned facilities totaling $1.9 billion net of $0.9 billion in outstanding borrowings and letters of credit. As of March 31,
2022, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.
Cash and cash equivalents totaled $311.5 million
as of March 31, 2022, increasing by $46.0 million from $265.5 million as of December 31, 2021. Operating activities provided
$45.8 million in net cash. Investing activities used $160.2 million in net cash, primarily reflecting an increase in loans.
Financing activities provided $160.4 million in net cash, primarily reflecting an increase in deposits, partially offset by net
repayment of FHLB borrowings of $56 million.
Deposits
Total deposits increased by $227.5 million, or
3.6%, to $6.6 billion as of March 31, 2022 from December 31, 2021. The increase was primarily due to increases in demand, interest-bearing
and NOW, savings, and demand, noninterest bearing deposits, partially offset by a decrease in time deposits. The following table sets
forth the composition of our deposit base by the periods indicated.
| |
March 31, 2022 | | |
December 31, 2021 | | |
Amount Increase/ | |
| |
Amount | | |
% | | |
Amount | | |
% | | |
(Decrease) | |
| |
(dollars in thousands) | |
Demand, noninterest-bearing | |
$ | 1,631,292 | | |
| 24.9 | % | |
$ | 1,617,049 | | |
| 25.5 | % | |
$ | 14,243 | |
Demand, interest-bearing and NOW | |
| 3,403,099 | | |
| 51.9 | | |
| 3,127,350 | | |
| 49.4 | % | |
| 275,749 | |
Savings | |
| 460,200 | | |
| 7.0 | | |
| 438,445 | | |
| 6.9 | % | |
| 21,755 | |
Time | |
| 1,065,814 | | |
| 16.2 | | |
| 1,150,109 | | |
| 18.2 | % | |
| (84,295 | ) |
Total deposits | |
$ | 6,560,405 | | |
| 100.0 | % | |
$ | 6,332,953 | | |
| 100.0 | % | |
$ | 227,452 | |
Subordinated Debentures
During December 2003, Center Bancorp Statutory
Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities
to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2
million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part prior to
maturity. The floating interest rate on the subordinated debentures is three month LIBOR plus 2.85% and re-prices quarterly. The rate
as of March 31, 2022 was 3.15%.
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.
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.
Stockholders’ Equity
The Company’s stockholders’ equity
was $1.1 billion as of March 31, 2022, an increase of $14.3 million from December 31, 2021. The increase in stockholders’ equity
was primarily attributable to retained earnings, in addition to an increase in additional paid-in capital, partially offset by a decrease
in accumulated other comprehensive income, reflecting the after-tax decline in the fair value of investment securities net of unrealized
hedge gains recorded in other assets, and an increase in treasury stock. As of March 31, 2022, the Company’s tangible common equity
ratio and tangible book value per share were 9.99% and $20.51, respectively. As of December 31, 2021, the tangible common equity ratio
and tangible book value per share were 10.06% and $20.12, respectively. Total goodwill and other intangible assets were approximately
$216.9 million and $217.4 million, as of March 31, 2022 and December 31, 2021, respectively.
The following table shows the reconciliation of
common equity to tangible common equity and the tangible common equity ratio.
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(dollars in thousands, except for share and per share data) | |
Common equity | |
$ | 1,027,592 | | |
$ | 1,013,285 | |
Less: intangible assets | |
| (216,936 | ) | |
| (217,369 | ) |
Tangible common stockholders’ equity | |
$ | 810,656 | | |
$ | 795,916 | |
| |
| | | |
| | |
Total assets | |
$ | 8,334,301 | | |
$ | 8,129,480 | |
Less: intangible assets | |
| (216,936 | ) | |
| (217,369 | ) |
Tangible assets | |
$ | 8,117,365 | | |
$ | 7,912,111 | |
| |
| | | |
| | |
Common stock outstanding at period end | |
| 39,518,411 | | |
| 39,568,090 | |
| |
| | | |
| | |
Tangible common equity ratio (1) | |
| 9.99 | % | |
| 10.06 | % |
| |
| | | |
| | |
Book value per common share | |
$ | 26.00 | | |
$ | 25.61 | |
Less: intangible assets | |
| 5.49 | | |
| 5.49 | |
Tangible book value per common share | |
$ | 20.51 | | |
$ | 20.12 | |
(1) | Tangible common equity ratio is a non-GAAP measure. |
Regulatory Capital and Capital Adequacy
The maintenance of a solid capital foundation is
a primary goal for the Company. Accordingly, capital plans, stock repurchases and dividend policies are monitored on an ongoing basis.
The Company’s objective with respect to the capital planning process is to effectively balance the retention of capital to support
future growth with the goal of providing stockholders with an attractive long-term return on their investment.
The Company and the Bank are subject to regulatory
guidelines establishing minimum capital standards that involve quantitative measures of assets, and certain off-balance sheet items, as
risk-adjusted assets under regulatory accounting practices.
The following is a summary of regulatory capital
amounts and ratios as of March 31, 2022 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory
requirements for classification as a well-capitalized depository institution (for the Bank).
| |
ConnectOne Bancorp, Inc. | | |
For Capital Adequacy Purposes | | |
To Be Well-Capitalized Under Prompt Corrective Action Provisions |
The Company | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | | |
Amount | |
Ratio | |
As of March 31, 2022 | |
(dollars in thousands) | |
Tier 1 leverage capital | |
$ | 931,398 | | |
| 11.57 | % | |
$ | 322,078 | | |
| 4.00 | % | $ |
N/A | |
| N/A | |
CET I risk-based ratio | |
| 815,316 | | |
| 10.69 | | |
| 343,288 | | |
| 4.50 | | |
N/A | |
| N/A | |
Tier 1 risk-based capital | |
| 931,398 | | |
| 12.21 | | |
| 457,717 | | |
| 6.00 | | |
N/A | |
| N/A | |
Total risk-based capital | |
| 1,161,468 | | |
| 15.23 | | |
| 610,289 | | |
| 8.00 | | |
N/A | |
| N/A | |
N/A - not applicable
| |
ConnectOne Bank | | |
For Capital Adequacy Purposes | | |
To Be Well-Capitalized Under Prompt Corrective Action Provisions | |
The Bank | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | |
As of March 31, 2022 | |
| | |
| | |
(dollars in thousands) | | |
| | |
| |
Tier 1 leverage capital | |
$ | 918,787 | | |
| 11.41 | % | |
$ | 322,041 | | |
| 4.00 | % | |
| 402,552 | | |
| 5.00 | % |
CET I risk-based ratio | |
| 918,787 | | |
| 12.04 | | |
| 343,279 | | |
| 4.50 | | |
| 495,847 | | |
| 6.50 | |
Tier 1 risk-based capital | |
| 918,787 | | |
| 12.04 | | |
| 457,705 | | |
| 6.00 | | |
| 610,273 | | |
| 8.00 | |
Total risk-based capital | |
| 1,031,107 | | |
| 13.52 | | |
| 610,273 | | |
| 8.00 | | |
| 762,841 | | |
| 10.00 | |
As
of March 31, 2022, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio
at the Company is the CET I Risk Based Ratio which was 3.69% above the minimum buffer ratio and, at the Bank, the lowest ratio was the
Total Risk Based Capital Ratio which was 3.02% above the minimum buffer ratio.