Table of Contents
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
For the transition period from __________ to __________
Commission File Number: 000-11486
CONNECTONE BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
New Jersey
52-1273725
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
301 Sylvan Avenue
Englewood Cliffs, New Jersey 07632
(Address of Principal Executive Offices) (Zip Code)
201-816-8900
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common stock
CNOB
NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See definition of “large accelerated filer”, “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
(Do not check if smaller
reporting company)
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, no par value:
39,773,602 shares
(Title of Class)
(Outstanding as of May 7, 2021)
Page
PART I – FINANCIAL INFORMATION
3
Item 1.Financial Statements
Consolidated Statements of Condition as of March 31, 2021 (unaudited) and December 31, 2020
Consolidated Statements of Income for the three months ended March 31, 2021 and 2020 (unaudited)
4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020 (unaudited)
5
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2021 and 2020 (unaudited)
6
Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)
7
Notes to Consolidated Financial Statements (unaudited)
9
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
Item 3.Qualitative and Quantitative Disclosures about Market Risks
52
Item 4.Controls and Procedures
53
PART II – OTHER INFORMATION
54
Item 1.Legal Proceedings
Item 1a.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
55
SIGNATURES
56
2
Item 1. Financial Statements
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(unaudited)
March 31,
December 31,
(in thousands, except for share data)
2021
2020
ASSETS
Cash and due from banks
$
48,250
63,637
Interest-bearing deposits with banks
211,842
240,119
Cash and cash equivalents
260,092
303,756
Securities available-for-sale
442,023
487,955
Equity securities
13,200
13,387
Loans held-for-sale
6,900
4,710
Loans receivable
6,277,191
6,236,307
Less: Allowance for credit losses (loans)
80,568
79,226
Net loans receivable
6,196,623
6,157,081
Investment in restricted stock, at cost
22,483
25,099
Bank premises and equipment, net
29,296
30,108
Accrued interest receivable
35,249
35,317
Bank owned life insurance
167,024
165,960
Right of use operating lease assets
13,469
16,159
Goodwill
208,372
Core deposit intangibles
10,470
10,977
Other assets
44,438
88,458
Total assets
7,449,639
7,547,339
LIABILITIES
Deposits:
Noninterest-bearing
1,384,961
1,339,108
Interest-bearing
4,566,373
4,620,116
Total deposits
5,951,334
5,959,224
Borrowings
359,710
425,954
Subordinated debentures, net
152,724
202,648
Lease liabilities
15,260
18,026
Other liabilities
34,974
26,177
Total liabilities
6,514,002
6,632,029
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred Stock:
Authorized 5,000,000 shares
-
Common stock, no par value:
Authorized 50,000,000 shares; issued 42,525,864 shares as of March 31, 2021 and 42,444,031 shares as of December 31, 2020; outstanding 39,773,602 shares as of March 31, 2021 and 39,785,398 as of December 31, 2020
586,946
Additional paid-in capital
23,621
23,887
Retained earnings
358,441
331,951
Treasury stock, at cost 2,752,262 common shares as of March 31, 2021 and 2,658,633 as of December 31, 2020
(32,682
)
(30,271
Accumulated other comprehensive (loss) income
(689
2,797
Total stockholders’ equity
935,637
915,310
Total liabilities and stockholders’ equity
See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(dollars in thousands, except for per share data)
Interest income
Interest and fees on loans
70,462
72,936
Interest and dividends on investment securities:
Taxable
1,088
2,066
Tax-exempt
766
813
Dividends
256
400
Interest on federal funds sold and other short-term investments
49
499
Total interest income
72,621
76,714
Interest expense
Deposits
7,585
17,212
3,873
4,221
Total interest expense
11,458
21,433
Net interest income
61,163
55,281
(Reversal of) provision for credit losses
(5,766
16,000
Net interest income after provision for credit losses
66,929
39,281
Noninterest income
Deposit, loan and other income
1,168
1,287
Income on bank owned life insurance
1,064
967
Net gains on sale of loans held-for-sale
707
393
Net gains on sale of investment securities
29
Gain on sale of branches
674
Net (losses) gains on equity securities
(187
178
Total noninterest income
3,426
2,854
Noninterest expenses
Salaries and employee benefits
15,632
14,593
Occupancy and equipment
3,404
3,471
FDIC insurance
935
856
Professional and consulting
1,956
1,574
Marketing and advertising
241
304
Data processing
1,536
1,473
Merger expenses
9,494
Amortization of core deposit intangibles
507
652
Other components of net periodic pension expense
(67
(30
Other expenses
2,341
2,671
Total noninterest expenses
26,485
35,058
Income before income tax expense
43,870
7,077
Income tax expense
10,871
1,047
Net income
32,999
6,030
Earnings per common share
Basic
0.83
0.15
Diluted
0.82
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Other comprehensive income:
Unrealized holding (losses) gains on available-for-sale securities arising during the period
(5,440
6,252
Tax effect
1,432
(1,691
Net of tax
(4,008
4,561
Reclassification adjustment for realized gains on securities included in net income
(29
(23
Unrealized gains (losses) on cash flow hedge
24
(2,749
(11
773
13
(1,976
Reclassification adjustment for realized losses (gains) included in net income
631
(7
(177
454
(5
Reclassification adjustment for realized losses on pension plan included in net income
75
(20
(21
Total other comprehensive (loss) income
(3,486
2,611
Total comprehensive income
29,513
8,641
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Accumulated
Additional
Other
Total
(dollars in thousands, except
Preferred
Common
Paid-In
Retained
Treasury
Comprehensive
Stockholders’
for per share data)
Stock
Capital
Earnings
(Loss) Income
Equity
Balance as of December 31, 2019
468,571
21,344
271,782
(29,360
(1,147
731,190
Other comprehensive income, net of tax
Cash dividends declared on common stock ($0.090 per share)
(3,987
Exercise of stock options (25,413 shares)
163
Restricted stock grants (20,684 shares)
Net shares issued in satisfaction of restricted stock units earned (16,599 shares)
Net shares issued in satisfaction of performance units earned (22,402 shares)
Share redemption for tax withholdings on performance units and restricted stock units earned
(297
Repurchase of treasury stock (54,693 shares)
(911
Stock issued (4,602,450 shares) in acquisition of Bancorp of New Jersey
118,375
Stock-based compensation
536
Balance as of March 31, 2020
21,746
273,825
1,464
853,710
Balance as of December 31, 2020
Cumulative effect of change in accounting principle (see note 1b. “Authoritative Accounting Guidance Presentation”), net of tax
(2,925
Balance as of January 1, 2021 as adjusted for changes in accounting principle
329,026
912,385
Other comprehensive loss, net of tax
Cash dividends declared on common stock ($0.11 per share)
(3,584
Exercise of stock options (5,449 shares)
45
Restricted stock grants (26,769 shares)
Stock grants (446 shares)
Net shares issued in satisfaction of restricted stock units earned (14,711 shares)
Net shares issued in satisfaction of performance units earned (34,458 shares)
(1,283
Repurchase of treasury stock (93,629 shares)
(2,411
972
Balance as of March 31, 2021
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment
880
949
Amortization of intangibles
Net accretion of loans
(1,406
(1,996
Accretion on bank premises
Accretion on deposits
(650
(1,503
(Accretion) amortization on borrowings, net
(17
43
Gains on sales of securities available-for-sale, net
Losses (gains) on equity securities, net
187
(178
Gains on sale of loans held-for-sale, net
(707
(393
Loans originated for resale
(23,348
(5,186
Proceeds from sale of loans held-for-sale
21,856
17,324
(674
Net losses on disposition of other premises and equipment
22
Increase in cash surrender value of bank owned life insurance
(1,064
(968
Amortization of premiums and accretion of discounts on securities available-for-sale
1,605
1,101
Amortization of subordinated debentures issuance costs
76
82
Decrease increase in accrued interest receivable
68
(458
Net change in operating leases
(131
(19
Decrease in other assets
47,156
17,366
Increase (decrease) in other liabilities
7,589
(2,869
Net cash provided by operating activities
80,131
46,461
Cash flows from investing activities
Securities available-for-sale:
Purchases
(33,305
(86,731
Sales
19,624
Maturities, calls and principal repayments
72,193
50,294
Net purchases (redemptions) of restricted investment in bank stocks
2,616
(8,094
Purchases of equity securities
(2,000
Payments on loans held-for-sale
Net increase in loans
(36,553
(130,187
Purchases of bank owned life insurance
(25,000
Purchases of premises and equipment
(1,728
Proceeds from sale of branches
729
Proceeds from sale of OREO
992
Cash and cash equivalents acquired in acquisition, net
87,391
Net cash provided by (used) in investing activities
5,622
(95,364
Cash flows from financing activities
Net decrease in deposits
(7,240
(42,225
Advances of Federal Home Loan Bank (“FHLB”) borrowings
980,000
Repayments of FHLB borrowings
(66,227
(803,222
Decrease in subordinated debt
(50,000
Cash dividends paid on common stock
(3,576
Repurchase of treasury stock
Proceeds from exercise of stock options
Net cash (used in) provided by financing activities
(129,417
130,229
Net change in cash and cash equivalents
(43,664
81,326
Cash and cash equivalents at beginning of period
201,483
Cash and cash equivalents at end of period
282,809
(continued)
Supplemental disclosures of cash flow information
Cash payments for:
Interest paid on deposits and borrowings
11,690
24,627
Income taxes
4,350
7,476
Supplemental disclosures of noncash activities
Investing:
Transfer of loans from held-for-investment to held-for-sale
10,995
Business combinations:
Fair value of assets acquired
949,276
Fair value of liabilities assumed
852,729
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 New Jersey investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), NJCB Spec-1, LLC (a New Jersey limited liability company), 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 online business lending marketplace).
The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its twenty-five 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, 2021 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2021, or for any other interim period. The Company’s 2020 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. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. Although economic activity has accelerated in 2021, and the United States continues to implement a COVID-19 vaccination program, COVID-19 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 customers, COVID-19 could impact the Company’s operations in the future.
Federal Reserve reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company's financial condition and results of operations in future periods. Although state and local governments have lifted many restrictions on conducting business, it is possible that additional restrictions could be reimposed. It is therefore unknown how long COVID-19 may continue to impact the economy and what the complete financial effect will be to the Company. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including the determination of the allowance for loan losses, fair value of financial instruments, impairment of goodwill and other intangible assets and income taxes.
Note 1b. Authoritative Accounting Guidance
Adoption of New Accounting Standards in 2021
Effective January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) 2016-13 “ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaced the prior incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL” or the “CECL Standard”). The measurement of expected credit losses under the CECL Standard is applicable to financial assets measured at amortized cost, including portfolio loans and investment securities classified as held-to-maturity (“HTM”). It also applies to off-balance sheet credit exposures including loan commitments, standby letters of credit, financial guarantees and other similar instruments. In addition, the CECL Standard changes the accounting for investment securities classified as ("AFS"), including a requirement that estimated credit losses on AFS securities be presented as an allowance rather than as a direct write-down of the carrying balance of securities which we do not intend to sell, or believe that it is more likely than not, that we will be required to sell.
The Company adopted the CECL Standard using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. As discussed further below, purchase credit deteriorated assets were measured on a prospective basis in accordance with the CECL Standard and all purchase credit impaired loans as of December 31, 2020 were considered purchase credit deteriorated loans upon adoption. Results for reporting periods beginning after January 1, 2021 are presented under the CECL Standard while prior period amounts continue to be reported in accordance with previously applicable accounting guidance. The adoption of the CECL Standard resulted in the following adjustments to our financial statements as of January 1, 2021 (dollars in thousand):
Change in Consolidated
Change to Retained Earnings
Statement of Condition
Tax Effect
from Adoption of CECL
Allowance for credit losses (“ACL”) (loans)
1,350
406
1,304
Adjustment related to purchased credit-impaired loan marks(1)
5,207
Total ACL - loans
6,557
ACL – (unfunded credit commitments)
2,833
852
1,621
Total impact of CECL adoption
9,390
1,258
2,925
(1)
This amounts represents a gross-up of the balance sheet related to nonaccretable credit marks of purchased credit-impaired loans resulting from adoption of CECL on January 1, 2021.
Loans designated as purchased credit impaired loans (“PCI”) and accounted for under Accounting Standards Codification (“ASC”) 310-30 were designated as purchased with credit deterioration loans (“PCD”). In accordance with the CECL Standard, the Company did not reassess whether PCI loans met the criteria of PCD loans as of the date of adoption and determined all PCI loans were PCD loans. The Company recorded an increase to the balance of PCD loans and an increase to the ACL for loans of $5.2 million, which represented the expected credit losses for PCD loans. The remaining non-credit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021 over the remaining estimated life of the loans. Also, in accordance with the CECL Standard, the Company did not reassess whether modifications to individual acquired financial assets were troubled debt restructurings (“TDRs”) as of the date of adoption.
ACL for loans: The ACL for loans is a valuation account that is deducted from the amortized cost basis of portfolio loans to present the net amount expected to be collected on portfolio loans over their contractual life. Loans are charged-off against the allowance when we believe the uncollectibility of a loan balance has been confirmed, and the expected recoveries do not exceed the aggregate of amounts previously charged-off or expected to be charged-off.
10
Note 1b. Authoritative Accounting Guidance – (continued)
The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company currently utilizes a one-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan. The measurement of expected credit loss under the CECL methodology is applicable to financial assets measured at amortized cost, including loans, held to maturity investments and it also applies to certain off-balance sheet credit exposures.
The ACL for loans is measured on a collective (pool) basis when similar risk characteristics exist. Generally, for all other loan types, the estimated expected credit loss is also calculated at the loan level and pool assignments are only utilized for aggregating the allowance estimates of similar loan types for financial statement disclosure purposes. Loan segments have unique risk characteristics with respect to credit quality and are as follows:
●
The repayment of commercial loans is generally dependent on the creditworthiness and cash flow of borrowers, and if applicable, guarantors, which may be negatively impacted by adverse economic conditions. While the majority of these loans are secured, collateral type, marketing, coverage, valuation and monitoring is not as uniform as in other portfolio classes and recovery from liquidation of such collateral may be subject to greater variability.
Payment on commercial mortgages is driven principally by operating results of the managed properties or underlying business and secondarily by the sale or refinance of such properties. Both primary and secondary sources of repayment, and value of the properties in liquidation, may be affected to a greater extent by adverse conditions in the real estate market or the economy in general.
Properties underlying construction, land and land development loans often do not generate sufficient cash flows to service debt and thus repayment is subject to ability of the borrower and, if applicable, guarantors, to complete development or construction of the property and carry the project, often for extended periods of time. As a result, the performance of these loans is contingent upon future events whose probability at the time of origination is uncertain.
The ability of borrowers to service debt in the residential and consumer loan portfolios is generally subject to personal income which may be impacted by general economic conditions, such as increased unemployment levels. These loans are predominately collateralized by first and/or second liens on single family properties. If a borrower cannot maintain the loan, the Company’s ability to recover against the collateral in sufficient amount and in a timely manner may be significantly influenced by market, legal and regulatory conditions.
The Company considers loan classes and loan segments to be one and the same.
Individually Analyzed Loans: The Company will evaluate individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. Loans will transition from defined segments for individual analysis when credit characteristics, or risk traits, change in a material manner. A loan is considered for individual analysis when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining individual analysis include payment status and the probability of collecting scheduled principal and interest payments when due. Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties are considered TDRs and are classified as individually analyzed. Loans considered to be TDRs can be categorized as nonaccrual or performing. All PCD loans will be considered as individual analyzed. Generally, individually analyzed loans consist of nonaccrual loans and performing troubled debt restructurings. Of this group of loans, loans of $250,000 and over are individually evaluated, while loans with balances less than $250,000 are collectively evaluated, and, accordingly, are not separately identified for analysis or disclosures. Instruments will not be included in both collective and individual analysis. Individual analysis will establish a specific reserve for instruments in scope.
For collateral dependent loans, when it is determined that a foreclosure is probable, the ACL will be determined on a loan level basis using the fair value of the collateral as of the reporting date, less estimated disposition costs (“net fair value”), which will ensure that the credit loss is not delayed until the time at which the actual foreclosure takes place. In the event that this fair value is less the then amortized cost basis of these specific loans, we will recognize the difference between the net fair value at the reporting date and the amortized cost basis in the ACL. If the fair value of the collateral has increased as of the ACL evaluation date, the increase in the fair value of the collateral is reflected through a reduction in the ACL. ACL adjustments for estimated disposition costs are not appropriate when the repayment of a collateral-dependent loan is expected from the operation of the collateral. If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as the allowance for credit losses. The effective interest rate used to discount expected cash flows is adjusted to incorporate expected prepayments, if applicable.
For charge-off and recoveries we will generally charge-off a loan balance after an analysis is completed which indicates that the collectability of the full principal is in doubt. Charge-offs are charged against the allowance in the period in which the loans are deemed to be uncollectible. Any expected future recoveries of amounts which were previously charged-off or expected to be charged-off will be included in the ACL, as the recoveries represent a component of the net amount expected to be collected. Expected recoveries in the ACL shall not exceed amounts previously charged-off or expected to be charged-off.
Investment Securities: Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in comprehensive income, net of tax. Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are generally amortized using the level-yield method without estimating prepayments, except for mortgage-backed securities, where prepayment rates are estimated. Premiums on callable investment securities are amortized to their earliest call date. Gains and losses on sales of securities are recorded on the trade date and determined using the specific identification method.
11
ACL - on investment securities classified as available-for-sale: For available-for-sale investment securities which are in an unrealized loss position, the Company first assess whether we intend to sell, or it is more likely than not, that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria is met, the amortized cost basis of the security is written down to fair value through income. For available-for-sale investment securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from an actual or estimated credit loss event or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, changes to the rating of the security, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss is likely, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, an ACL is recorded for the estimated credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.
Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when we believe the uncollectibility of an available-for-sale security has been confirmed or if either of the criteria regarding intent or requirement to sell is met.
ASU No. 2021-03, “Intangibles – Goodwill and Other (Topic 350).” ASU 2021-03 requires an entity to identify and evaluate goodwill impairment triggering events when they occur to determine whether it is more likely than not that the fair value of a reporting unit (or entity, if the entity has elected the accounting alternative for amortizing goodwill and chosen that option) is less than its carrying amount. If an entity determines that it is more likely than not that the goodwill is impaired. It must test goodwill for impairment using the triggering event date as the measurement date. An entity is required to disclose the amount assigned to goodwill in total and by major business combination, or by reorganization event resulting in fresh-start-start reporting. Also, the weighted average amortization period in total and the amortization period by major business combination, or by reorganization event resulting in fresh-start reporting. ASU 2021-03 was effective for the Company on January 1, 2021 and did not have a significant impact on our consolidated financial statement.
ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 was effective for the Company as of January 1, 2021 and did not have a significant impact on our consolidated financial statements.
12
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:
Earnings allocated to participating securities
(186
(27
Income attributable to common stock
32,813
6,003
Weighted average common shares outstanding, including participating securities
39,738
39,559
Weighted average participating securities
(181
(135
Weighted average common shares outstanding
39,557
39,424
Incremental shares from assumed conversions of options,
performance units and restricted shares
232
92
Weighted average common and equivalent shares outstanding
39,789
39,516
Earnings per common share:
There were no antidilutive share equivalents as of March 31, 2021 and March 31, 2020.
Note 3. Securities Available-for-Sale
The Company’s investment securities are classified as available-for-sale as of March 31, 2021 and December 31, 2020. 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, 2021 and December 31, 2020. 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, 2021 and December 31, 2020.
Allowance
for
Gross
Investment
Amortized
Unrealized
Fair
Credit
Cost
Gains
Losses
Value
March 31, 2021
Federal agency obligations
40,507
1,141
(347
41,301
Residential mortgage pass-through securities
238,406
3,628
(1,680
240,354
Commercial mortgage pass-through securities
6,881
35
(502
6,414
Obligations of U.S. states and political subdivisions
127,809
(231
130,503
Corporate bonds and notes
17,444
221
17,665
Asset-backed securities
3,361
(10
3,359
Certificates of deposit
149
1
150
Other securities
2,277
Total securities available-for-sale
436,834
7,959
(2,770
December 31, 2020
37,015
1,508
(65
38,458
N/A
266,114
4,811
(41
270,884
6,906
203
6,922
138,539
4,269
142,808
24,925
222
(52
25,095
3,521
3,480
151
157
477,326
11,015
(386
14
Note 3. Securities Available-for-Sale – (continued)
Investment securities having a carrying value of approximately $112.2 million and $107.6 million as of March 31, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, 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, 2021, 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.
Due in one year or less
5,898
5,929
Due after one year through five years
16,369
16,625
Due after five years through ten years
14,172
14,527
Due after ten years
152,831
155,897
Total securities available-for-sale
We had no gross gains or losses from the sale of securities for three months ended March 31, 2021. Gross gains and losses for three months ended March 31, 2020 from the sales of securities for periods presented were as follows (dollars in thousands):
Proceeds
Gross gains on sales of securities
Gross losses on sales of securities
Net gains on sales of securities
Less: tax provision on net gains
(6
Net gains on sales of securities, after tax
23
15
Impairment Analysis of Available--for-sale Debt Securities
The following tables indicate gross unrealized losses in an unrealized loss position for which an 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, 2021 and December 31, 2020.
Less than 12 Months
12 Months or Longer
Investment Securities
Available-for-Sale:
Federal agency obligation
15,923
15,922
125,231
125,223
4,375
29,179
1,000
900
Total temporarily impaired securities
176,608
175,699
(2,760
909
8,978
8,975
20,895
20,886
3,954
3,928
3,083
622
2,461
Total Temporarily Impaired Securities
40,838
38,365
(345
2,473
16
On January 1, 2021, the Company adopted ASU 2016-13 and implemented the CECL methodology for allowance for credit losses on its investment securities available-for-sale. The new CECL methodology replaces the other-than-temporary impairment model that previously existed. The Company did not have a CECL day 1 impact attributable to its investment securities portfolio and did not have an allowance for credit losses as of March 31, 2021. The Company has elected to exclude accrued interest from the amortized cost of its investment securities available-for-sale. Accrued interest receivable for investment securities available for sale as of March 31, 2021 and December 31, 2020, totaled $1.6 million and $1.7 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, 2021.
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. Interest rate swaps were entered into on April 13, 2017, January 1, 2020 and March 3, 2020 each with a respective notional amount of $25.0 million and were designated as a cash flow hedge of a Federal Home Loan Bank advance. In addition, interest rate swaps were entered into on June 4, 2019 and August 6, 2019, each with a respective notional amount of $50.0 million and were designated as a cash flow hedge of a Federal Home Loan Bank advance. The swaps were determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.
17
Note 4. Derivatives – (continued)
Summary information about the interest rate swaps designated as cash flow hedges as of March 31, 2021, December 31, 2020 and March 31, 2020 are presented in the following table.
Notional amount
175,000
200,000
Weighted average pay rates
0.22
%
1.85
1.74
Weighted average receive rates
1.68
0.92
1.76
Weighted average maturity
0.6 years
0.8 years
1.4 years
Fair value
(1,464
(2,119
(3,029
Interest expense recorded on these swap transactions totaled approximately $631 thousand during the three months ended March 31, 2021 compared to $(7) thousand during the three months ended March 31, 2020 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, 2021
Amount of gain
Amount of (gain)
(loss) recognized
loss reclassified
recognized in other
in OCI (Effective
from OCI to
Portion)
interest income
(Ineffective Portion)
Interest rate contracts
Three Months Ended March 31, 2020
The following table reflects the cash flow hedges included in the consolidated statements of condition as of March 31, 2021 and December 31, 2020:
Notional
Amount
Fair Value
Interest rate swaps related to FHLB advances included in assets
18
Note 5. Loans and the Allowance for Credit Losses
Loans Receivable - As of and prior to December 31, 2020, loans receivable was accounted for under the incurred loss model. As of January 1, 2021, portfolio loans are accounted for under the expected loss model. Accordingly, some of the information presented is not comparable from period to period. See Note 1b. “Authoritative Accounting Guidance - Adoption of New Accounting Standards” for additional information. The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of March 31, 2021 and December 31, 2020:
Commercial (1)
1,622,652
1,521,967
Commercial real estate
3,797,244
3,783,550
Commercial construction
565,872
617,747
Residential real estate
306,376
322,564
Consumer
3,364
1,853
Gross loans
6,295,508
6,247,681
Net deferred loan fees
(18,317
(11,374
Total loans receivable
Included in commercial loans as of March 31, 2021 and December 31, 2020 are PPP loans of $522.3 million and $397.5 million, respectively.
As of March 31, 2021 and December 31, 2020, loan balances of approximately $2.6 billion and $2.7 billion, respectively, were pledged to secure borrowings from the FHLB of New York.
Loans held-for-sale - The following table sets forth the composition of the Company’s loans held-for-sale portfolio as of March 31, 2021 and December 31, 2020:
1,981
1,990
4,919
2,720
Total carrying amount
Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL as of March 31, 2021 and nonaccrual loans without an ACL as of March 31, 2021:
Nonaccrual
Loans with an
ACL
loans without
an ACL
Commercial
28,136
2,969
3,225
12,876
2,934
6,017
4,783
Total nonaccrual loans
34,295
26,645
The following tables present total nonaccrual loans included in loans receivable by loan class as of December 31, 2020 (dollars in thousands):
33,019
10,111
14,015
4,551
61,696
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.
19
Note 5. Loans and the Allowance for Credit Losses – (continued)
Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected.
20
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. As of March 31, 2021, our loans based on year of origination and risk designation is as follows (dollars in thousands):
Term loans amortized cost basis by origination year
Resolving
Loans
Gross Loans
2019
2018
2017
Prior
Pass
289,283
393,432
67,665
70,763
109,667
131,509
486,619
1,548,938
Special mention
225
258
292
15,646
12,948
29,369
Substandard
1,795
13,307
4,122
21,638
3,274
44,136
Doubtful
209
Total Commercial
69,685
84,537
114,081
168,793
502,841
Commercial Real Estate
241,516
608,263
477,620
570,798
592,738
1,097,118
120,252
3,708,305
1,379
10,892
4,393
23,511
8,790
48,965
1,996
836
1,288
3,394
32,460
39,974
Total Commercial Real Estate
243,512
479,835
582,978
600,525
1,153,089
129,042
Commercial Construction
1,405
7,506
39,832
8,730
3,981
490
478,478
540,422
216
25,234
25,450
Total Commercial Construction
706
503,712
Residential Real Estate
3,680
35,193
29,698
34,362
46,531
93,376
50,046
292,886
207
9,543
3,740
13,490
Total Residential Real Estate
34,569
102,919
53,786
117
58
42
2,961
131
Total Consumer
21
The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) as of December 31, 2020:
Special Mention
1,447,097
30,725
43,930
215
Commercial real Estate
3,700,498
49,143
33,909
587,266
30,481
Residential real Estate
311,174
11,390
6,047,888
79,868
119,710
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.
Real
Estate
6,330
26,171
32,501
29,441
19,402
11,024
Total (no related allowance)
66,197
92,368
Impaired loans - Impaired loans disclosures presented below as of December 31, 2020 and as of and for the three months ended March 31, 2020 represent requirements prior to the adoption of CECL on January 1, 2021.
Unpaid
Recorded
Principal
Balance
No related allowance recorded
11,325
11,835
13,105
13,449
24,284
24,907
5,378
5,723
54,092
55,914
With an allowance recorded
23,736
69,122
12,985
2,722
1,329
Total (with allowance)
26,458
71,844
14,314
35,061
80,957
15,827
16,171
80,550
127,758
The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by class as of and for the three months ended March 31, 2020 (dollars in thousands):
March 31,2020
Average
Interest
Income
Recognized
Impaired loans with no related allowance recorded
36,442
94
15,238
84
17,371
85
3,827
72,878
263
Impaired loans with an allowance recorded
6,463
262
6,725
Total impaired loans
23,834
4,089
79,603
266
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, 2021 and December 31, 2020:
30-59 Days Past Due
60-89 Days Past Due
90 Days or Greater Past Due and Still Accruing
Total Past Due and Nonaccrual
Current
1,293
4,475
31,105
36,873
1,585,779
11,292
664
7,679
16,101
35,736
3,761,508
4,400
8,951
13,351
552,521
202
4,238
9,223
297,153
3,360
17,191
16,392
60,940
95,187
6,200,321
30-59 Days
Past Due
60-89 Days
90 Days or
Greater Past
Due and Still
Accruing
Total Past
Due and
Total Loans
Receivable
1,445
558
3,182
38,204
1,483,763
13,258
4,140
5,555
33,064
3,750,486
2,472
16,487
601,260
1,367
4,084
10,243
312,321
1,851
18,544
4,939
12,821
98,000
6,149,681
Included in the 90 days or greater past due and still accruing category as of December 31, 2020 are purchased credit-impaired loans, net of fair value marks, which accrete income per the valuation at date of acquisition.
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:
Residential
real estate
construction
Individually evaluated for impairment
15,663
1,634
434
283
18,014
Collectively evaluated for impairment
8,496
39,486
5,087
4,267
57,347
Acquired with deteriorated credit quality individually analyzed
2,276
2,777
154
26,435
43,897
5,521
4,704
33,330
21,762
6,786
81,280
1,584,095
3,767,803
546,470
295,352
6,197,084
5,227
17,144
Unallocated
Allowance for loan losses
15,412
33,373
7,787
1,928
568
59,072
Acquired portfolio
46
4,628
407
759
5,840
Acquired with deteriorated credit quality
28,443
39,330
8,194
2,687
1,414,626
2,959,978
574,118
241,925
1,627
5,192,274
68,402
802,190
19,345
71,177
226
961,340
3,878
13,517
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.
Day 1 effect of CECL
(4,225
9,605
(961
2,697
(568
24,218
48,935
7,233
5,384
85,783
Charge-offs
Recoveries
60
61
(Reversal of) provision for credit losses (loans)
2,157
(5,038
(1,712
(680
(3
(5,276
On January 1, 2021, the Company adopted CECL, which replaced the incurred loss method we used in prior periods for determining the provision for credit losses and the ACL. Under CECL, we record an expected loss of all cash flows we do not expect to collect at the inception of the loan. The adoption of CECL resulted in an increase in our ACL for loans of $6.6 million, which did not impact our consolidated income statement. We recorded a reversal of credit losses for loans of $5.3 million during the three months ended March 31, 2021 utilizing the CECL methodology, which was the result of an improved macroeconomic environment from January 1, 2021, the day of adoption.
8,349
20,853
7,304
1,685
99
38,293
(124
(127
833
1,183
515
13,473
9,058
22,036
7,819
1,681
13,572
54,169
25
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, 2021, 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, 2021, TDRs totaled $53.0 million, of which $27.5 million were on nonaccrual status and $25.5 million were performing under their restructured terms. As of December 31, 2020, TDRs totaled $49.4 million, of which $25.7 million were on nonaccrual status and $23.7 million were performing under their restructured terms. The Company has allocated $10.0 million and $47 thousand of specific allowance related to TDRs for the three months ended March 31, 2021 and March 31, 2020, respectively.
The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2021:
Pre-Modification Outstanding
Post-Modification Outstanding
Number of Loans
Recorded Investment
Troubled debt restructurings:
1,658
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 loans modified as TDRs during the three months ended March 31, 2020. There were no TDRs for which there was a payment default within twelve months following the modification during the three months ended March 31, 2021 and March 31, 2020.
In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., three to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Provisions of the CARES Act largely mirrored the provisions of the interagency statement, providing that modified loans would not be considered TDR’s if they were performing at year-end 2019, and the other conditions set forth in the interagency statement were met. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented or at year-end 2019. As of March 31, 2021, the Bank had 102 deferred loans totaling approximately $204.2 million, compared to 113 deferred loans totaling approximately $207.1 million as of December 31, 2020.
26
The following table sets forth the composition of these loans by loan segments as of March 31, 2021:
Principal Balance
32
103,653
97,400
3,150
102
204,203
As of March 31, 2021, there were no deferred loans that were delinquent or on nonaccrual status. As of March 31, 2021, $44.1 million of deferred loans were risk rated “special mention” or worse. The Company evaluates its deferred loans after the initial deferral period and will either return the deferred loan to its original loan terms or the loan will be reassessed at that time to determine if a further deferment should be granted and if a downgrade in risk rating is appropriate.
ACL 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 the ACL for unfunded commitments for the three months ended March 31, 2021 (dollars in thousands):
Balance at beginning of period
Day 1 Effect of CECL
(Reversal of) provision for credit losses (unfunded commitments)
(490)
Balance at end of period
2,343
Components of (Reversal of) Provision for Credit Losses
The following table summarizes the (Reversal of) provision for credit losses as March 31, 2021 (dollars in thousands):
(5,276)
(5,766)
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, 2021 and December 31, 2020:
27
Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)
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.
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, 2021 and December 31, 2020 are as follows:
Fair Value Measurements at Reporting Date Using
Total Fair Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Unobservable
(Level 3)
Recurring fair value measurements:
Investment securities:
Available-for-sale:
Obligations of U.S. states and political subdivision
121,729
8,774
Total available-for-sale
430,972
455,223
15,477
Liabilities
Derivatives
28
133,964
8,844
478,954
501,342
13,544
(2,119)
There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2021 and during the year ended December 31, 2020.
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, 2021 and December 31, 2020.
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).
Collateral Dependent Loans: The Company may record adjustments to the carrying value of loans based on fair value measurements, generally as partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with GAAP. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the market place 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, 2021 and December 31, 2020 are as follows:
Quoted
Prices
Carrying
Value as of
Assets measured at fair value on a nonrecurring
basis:
Collateral dependent loans:
12,890
2,283
2,500
2,089
Impaired loans:
10,751
1,393
Collateral dependent loans – Collateral dependent loans as of March 31, 2021 that required a valuation allowance were $40.5 million with a related valuation allowance of $20.7 million compared to $24.4 million with a related valuation allowance of $14.3 million as of December 31, 2020.
30
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, 2021 and for the year ended December 31, 2020:
Municipal
Securities
Beginning balance, December 31, 2020
Principal paydowns
(70
Ending balance, March 31, 2021
Beginning balance, December 31, 2019
9,114
(270)
Ending balance, December 31, 2020
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, 2021 and December 31, 2020. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.
Valuation
Techniques
Input
Rate
Municipal securities
Discounted cash flows
Discount rate
2.9
31
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.
Range (weighted average)
Collateral dependent:
722
Appraisals of collateral value
Comparable sales
0% - 5% (2%)
12,168
Market approach (100)
Average transfer price as a price to unpaid principal balance
48 – 53 (49)
0% - 25% (8%)
Construction
15%
1% - 15% (6%)
10,524
Market approach (100%)
48 - 53 (49)
227
Adjustment for comparable sales
1% to + 5% (+2%)
-25% to +20% (-8%)
As of March 31, 2021 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, 2021 and December 31, 2020:
Fair Value Measurements
Prices in
Active
Financial assets:
Investment in restricted stocks
n/a
Net loans
6,267,519
1,598
33,651
Financial liabilities:
Noninterest-bearing deposits
Interest-bearing deposits
4,573,673
3,209,774
1,363,899
362,497
Subordinated debentures
163,868
Accrued interest payable
3,598
Investment securities available-for-sale
Restricted investment in bank stocks
6,244,037
1,764
33,553
4,633,961
3,155,983
1,477,978
429,671
214,113
2,119
3,687
33
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 Income
Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s other comprehensive income is comprised of unrealized holding gains and losses on securities available-for-sale, unrealized gains (losses) on cash flow hedges, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, each net of taxes.
The following table represents the reclassification out of accumulated other comprehensive (loss) income for the periods presented:
Details about Accumulated Other
Amounts Reclassified from Accumulated
Affected Line item in the
Comprehensive Loss Components
Other Comprehensive Income (Loss)
Statement Where Net Income is Presented
Sale of investment securities
Net losses on sale of securities available-for-
available for sale
sale Income tax benefit
Net interest income on swaps
(631
177
(2
(454
Amortization of pension plan net
(75
Other components of net periodic pension
actuarial losses
expense Income tax benefit
(55
(54
Total reclassification
(509
(26
34
Note 7. Comprehensive Income – (continued)
Accumulated other comprehensive (loss) income as of March 31, 2021 and December 31, 2020 consisted of the following:
Investment securities available-for-sale, net of tax
3,851
7,859
Cash flow hedge, net of tax
(1,053
(1,520
Defined benefit pension and post-retirement plans, net of tax
(3,487
(3,542
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, 2021. 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, 2021 are approximately 353,841. The Company intends to issue all shares under the Plan in the form of newly issued shares.
Restricted stock, options and restricted stock units typically have a three-year vesting period starting one year after the date of grant with one-third vesting each year. The options generally expire ten years from the date of grant. Restricted stock granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control. All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the awards vesting. Restricted shares have the same dividend and voting rights as common stock, while options, performance units and restricted stock units do not.
All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are recorded as incurred. Stock-based compensation expense for the three months ended March 31, 2021 and March 31, 2020 was $1.0 million and $0.5 million, respectively.
Activity under the Company’s options for the three months ended March 31, 2021 was as follows:
Number of
Options
Weighted-
Exercise
Price
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic Value
Outstanding as of December 31, 2020
38,013
9.03
Granted
Exercised
(5,449
8.34
Forfeited/cancelled/expired
Outstanding as of March 31, 2021
32,564
9.15
1.21
527,672
Exercisable as of March 31, 2021
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, 2021 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, 2021. This amount changes based on the fair market value of the Company’s stock.
Note 8. Stock Based Compensation – (continued)
Activity under the Company’s restricted shares for the three months ended March 31, 2021 was as follows:
Nonvested
Grant Date
Shares
Nonvested as of December 31, 2020
113,114
18.15
27,147
23.23
Vested
(15,157
24.36
(378
Nonvested March 31, 2021
124,726
18.49
As of March 31, 2021, there was approximately $1.5 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 1.5 years.
A summary of the status of unearned performance unit awards and the change during the period is presented in the table below:
Weighted
Average Grant
Units
Date Fair
(expected)
(maximum)
Unearned as of December 31, 2020
147,636
17.29
Awarded
35,593
25.24
Change in estimate
17,818
20.79
Vested shares
(29,421
31.35
Unearned as of March 31, 2021
171,626
230,712
16.89
As of March 31, 2021, the specific number of shares related to performance units that were expected to vest was 171,626, 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, 2021, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 230,713. During the three months ended March 31, 2021, 29,421 shares vested. A total of 14,711 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, 2021 were 14,711 shares. As of March 31, 2021, compensation cost of approximately $2.0 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.9 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:
169,313
14.07
43,077
(68,916
16.29
143,474
16.36
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, 2021, 68,916 shares vested. A total of 34,458 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of restricted stock units during the three months ended March 31, 2021 were 34,458 shares. As of March 31, 2021, compensation cost of approximately $2.3 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 2.3 years.
36
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.
Affected Line Item in the Consolidated
Statements of Income
Service cost
Interest cost
71
91
Expected return on plan assets
(213
(196
Net amortization
Total periodic pension income
Contributions
The Company did not make a contribution to the Pension Trust during the three months ended March 31, 2021. The Company does not plan on contributing amounts to the Pension Trust for the remainder of 2021. 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:
Total FHLB borrowings
1.11
1.07
By remaining period to maturity:
Less than 1 year
297,381
0.93
297,570
0.84
1 year through less than 2 years
34,621
1.24
75,644
1.42
2 years through less than 3 years
25,000
2.92
50,000
1.84
3 years through less than 4 years
4 years through 5 years
After 5 years
2,809
2.41
2,824
2.42
359,811
426,038
Fair value premium (discount)
(101
(84
FHLB borrowings, net
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, 2021 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, 2021 the Company had remaining borrowing capacity of approximately $1.1 billion at FHLB.
37
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, 2021 was 3.06%.
The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of March 31, 2021 and December 31, 2020.
Issuance Date
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.
During June 2015, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2015 Notes”). As of December 31, 2020, the 2015 Notes have a stated maturity of July 1, 2025, and bear interest until the maturity date or early redemption date at a variable rate equal to the then current three-month LIBOR rate plus 393 basis points. As of December 31, 2020, the variable interest rate was 4.16% and all costs related to 2015 issuance have been amortized. The 2015 Notes were redeemed in full on January 1, 2021.
38
Note 12. Offsetting Assets and Liabilities
Certain financial instrument-related assets and liabilities may, under GAAP, be offset on the consolidated statements of condition because they are subject to master netting agreements or similar agreements, although the Company has elected to disclose such arrangements on a gross basis on its consolidated financial statements. The Company enters into interest rate swap agreements with financial institution counterparties. For additional detail regarding interest rate swap agreements refer to Note 4 within this section. In the event of default on, or termination of, any one contract, both parties have the right to net settle multiple contracts. Also, certain interest rate swap agreements may require the Company to receive or pledge cash or financial instrument collateral based on the contract provisions. The following table presents information about financial instruments that are eligible for offset as of March 31, 2021 and December 31, 2020:
Gross Amounts Not Offset
Gross Amounts
Offset in the
Statement of
Financial
Condition
Net Amounts
of Assets
Presented in the
Instruments
Cash or
Instrument
Collateral
Net
Assets:
Interest rate swaps
Liabilities:
39
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, 2021 and December 31, 2020. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.
Cautionary Statement Concerning Forward-Looking Statements
This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp is engaged; (7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp; (9) the impact on reputation risk created by the developments discussed 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 6 of the Notes to Consolidated Financial Statements.
Business Combinations: We account for business combinations under the acquisition method of accounting. Using this method, assets acquired, liabilities assumed and consideration paid are recorded at their estimated fair values as of the acquisition date. The application of this method of accounting requires the use of significant estimates and assumptions. The application of the acquisition method of accounting usually results in the recognition of goodwill and a core deposit intangible (if the acquiree has deposits). The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired, including any identifiable intangibles, if applicable. Goodwill is not amortized for book purposes; however, it is reviewed at least annually for impairment and is usually not deductible for tax purposes.
The assets acquired and liabilities assumed and consideration paid in the acquisition are recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. Our estimates are based upon assumptions that we believe to be reasonable and the Company may use an outside service provider to assist with the valuations.
Goodwill: The Company adopted the provisions of FASB ASC 350-10, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but rather tested for impairment annually or more frequently if impairment indicators arise. The Company performs an annual goodwill impairment test in the fourth quarter of each year, or more often if events or circumstances warrant. We will continue to monitor and evaluate the impact of COVID-19 and its impact on our market capitalization, overall economic conditions and any other potential triggering events that may indicate an impairment of goodwill in the future. In the event we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or our regulatory capital ratios.
Income Taxes: The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns.
Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of operations. Note 11 of the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2020 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, 2021, the Company has 102 deferred loans with a total outstanding loan balance of $204.2 million. As provided for under the CARES act, these short-term deferrals are not considered troubled debt restructurings, provided that the modification is related to COVID-19, executed on a loan that was not more than 30 days past due as of December 31, 2019 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, 2021, PPP loans were $522.3 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, 2021. Should those circumstances change, the Company could be required to establish additional provisions for loan loss expense charged to earnings.
41
Operating Results Overview
Net income for the three months ended March 31, 2021 was $33.0 million compared to $6.0 million for the comparable three-month period ended March 31, 2020. The Company’s diluted earnings per share were $0.82 for the three months ended March 31, 2021 as compared with diluted earnings per share of $0.15 for the comparable three-month period ended March 31, 2020. The increase in net income and diluted earnings per share was primarily due to a $5.8 million recapture of credit loss reserves in the current quarter reflecting the impact of the improved economic outlook on the current expected credit losses (“CECL”) accounting standard, compared with a $16.0 million provision in the first quarter of 2020.
Net Interest Income and Margin
Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets. Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (primarily interest earned on obligations of state and 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, 2021 increased by $5.8 million, or 10.4%, from the comparable three-month period ended March 31, 2020. The increase from the first quarter of 2021 resulted primarily from a 6.4% increase in average interest-earning assets, largely due to PPP originations, and a 15 basis-point widening of the net interest margin to 3.56% from 3.41%. The widening of the net interest margin resulted from a 75 basis-points reduction in the cost of funding interest-earning assets, partially offset by a 49 basis-point reduction in the rate of average interest-earning assets.
The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three months ended March 31, 2021 and 2020, 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,
Income/
Expense
Rate (7)
Interest-earning assets:
Securities (1) (2)
473,181
2,058
452,294
3,095
2.75
Total loans (2) (3) (4)
6,242,960
70,676
4.59
5,956,469
73,220
4.94
Federal funds sold and interest-bearing with banks
269,537
0.07
148,429
1.35
22,822
4.55
27,316
5.89
Total interest-earning assets
7,008,500
73,039
4.23
6,584,508
77,214
4.72
Noninterest-earning assets:
Allowance for credit losses
(81,549
(38,970
Other noninterest-earning assets
573,083
560,489
7,500,034
7,106,027
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits
1,422,295
2,434
0.69
1,962,714
10,371
2.13
Other interest-bearing deposits
3,225,751
5,151
0.65
2,660,755
6,841
1.03
Total interest-bearing deposits
4,648,046
0.66
4,623,469
1.50
375,511
1,674
1.81
477,121
2,352
1.98
154,341
2,167
5.70
128,913
1,834
5.72
Finance lease
2,115
6.14
2,303
6.11
Total interest-bearing liabilities
5,180,013
0.90
5,231,806
1.65
Demand deposits
1,348,585
955,358
43,340
54,622
Total noninterest-bearing liabilities
1,391,925
1,009,980
Stockholders’ equity
928,096
864,241
Total liabilities and stockholders’ equity
Net interest income (tax-equivalent basis)
61,581
55,781
Net interest spread (5)
3.33
3.07
Net interest margin (6)
3.56
3.41
Tax-equivalent adjustment
(418
(500
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 $3.4 million for the three months ended March 31, 2021, compared with $2.9 million for the three months ended March 31, 2020. During the first quarter of 2021, the Bank completed the sale of two branches, resulting in a gain of $0.7 million, which was included in noninterest income. Total noninterest income, excluding the branch sales, decreased $0.1 million from the first quarter of 2020. The decrease was primarily attributable to a decrease in net gains on sale of securities of $0.4 million, partially offset by an increase in net gains on sale of loans held-for-sale of $0.3 million.
Noninterest Expenses
Noninterest expenses totaled $26.5 million for the three months ended March 31, 2021, compared to $35.1 million for the three months ended March 31, 2020. Noninterest expenses decreased by $8.6 million from the prior year first quarter due primarily to a decrease of $9.5 million in merger expenses resulting from the acquisition of Bancorp of New Jersey (“BNJ”)in 2020. Excluding merger-related expenses, noninterest expenses increased by $0.9 million from the first quarter of 2020 due primarily to increases in salaries and employee benefits of $1.0 million, and professional and consulting of $0.4 million, and was partially offset by decreases in other expenses of $0.3 million and amortization of core deposit intangible of $0.1 million.
Income Taxes
Income tax expense was $10.9 million for the three months ended March 31, 2021, compared to $1.0 million for the three months ended March 31, 2020. The effective tax rate for the three months ended March 31, 2021 and March 31, 2020 was 24.8% and 14.8%, respectively. The effective tax rate for the first quarter of 2020 was lower 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.
Increase/
(Decrease)
25.8
24.4
100,685
60.3
60.6
13,694
9.0
9.8
(51,875)
4.8
5.1
(16,188)
0.1
1,511
100.0
47,827
As of March 31, 2021, gross loans totaled $6.3 billion, an increase of $47.8 million, or 0.8%, as compared to December 31, 2020. Net loan growth was primarily attributable to the PPP loans.
44
Allowance for Credit Losses and Related Provision
As of January 1, 2021, the Company adopted the CECL accounting standard. As of March 31, 2021, the Company’s allowance for credit losses for loans was $80.6 million, an increase of $1.4 million from $79.2 million as of December 31, 2020. The increase was attributable to the “Day 1” effect of the adoption of the CECL accounting standard, which was $6.6 million, offset by a $5.8 million recapture of credit loss reserves during the first quarter of 2021.
The (reversal of) provision for credit losses was $(5.8) million for the first quarter of 2021, and $16.0 million for the first quarter of 2020. The decrease in provision for credit losses during the first quarter of 2021 when compared to the first quarter of 2020 was the result of an improved macro-economic outlook when compared to January 1, 2021, the day the Company adopted CECL.
As of March 31, 2021, the ACL was $80.6 million as compared to $79.2 million as of December 31, 2020. The level of the allowance for the respective periods of 2021 and 2020 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.
There were $0.1 million net recoveries for the three months ended March 31, 2021, compared with $0.1 million net charge-offs for the three months ended March 31, 2020. The ACL as a percentage of loans receivable amounted to 1.28% as of March 31, 2021 compared to 1.27% as of December 31, 2020. Excluding the impact of PPP loans in the calculation of the ACL as a percentage of loans receivable, the ratio increases to 1.40% as of March 31, 2021, compared to 1.36% as of December 31, 2020. PPP loans do not have allowance for loan losses attributable to them, as they are fully guaranteed by the SBA.
The level of the allowance for the respective periods of 2021 and 2020 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, 2021 is adequate to cover losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.
Changes in the ACL are presented in the following table for the periods indicated.
Average loans receivable at end of period
6,238,723
5,922,814
Analysis of the ACL:
Balance - beginning of quarter
CECL Day 1 Adjustment
Balance – beginning of quarter (as adjusted)
Charge-offs:
Total charge-offs
Recoveries:
Total recoveries
Net recoveries (charge-offs)
Balance - end of period
Ratio of annualized net charge-offs during the period to average loans receivable during the period
0.00
0.01
6,009,310
ACL as a percentage of loans receivable
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:
Nonaccrual loans
OREO
Total nonperforming assets (1)
Performing TDRs
25,505
23,655
Loans 90 days or greater past due and still accruing (non-PCD)
Loans 90 days or greater past due and still accruing (PCD)
Nonperforming assets are defined as nonaccrual loans and OREO.
Nonaccrual loans to total loans receivable
0.97
0.99
Nonperforming assets to total assets
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable
1.64
1.57
Securities Available-For-Sale
As of March 31, 2021, 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, 2021, average securities increased $12.7 million to approximately $473.2 million, or 6.8% of average total interest-earning assets, from approximately $460.5 million, or 6.5% of average interest-earning assets, compared to December 31, 2020.
As of March 31, 2021, 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 $3.9 million as compared with net unrealized gains of $7.9 million as of December 31, 2020. 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, 2021.
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, 2021 and December 31, 2020, the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and 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, 2021, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 1.89%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.91%. As of December 31, 2020, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 0.70%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.18%.
Based on our model, which was run as of March 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 6.97%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 10.57%. As of December 31, 2020, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.89%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 8.56%.
47
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, 2021, would decline by 8.01% with an instantaneous rate shock of up 200 basis points, and increase by 5.59% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2020, would decline by 7.76% with an instantaneous rate shock of up 200 basis points, and increase by 5.70% 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, 2021.
Interest Rates
Estimated
Estimated Change in
EVE
Estimated Change in NII
(basis points)
NII
+300
864,494
(61,707
(6.66
245,424
6,555
2.74
+200
894,027
(32,174
(3.47
243,387
4,518
1.89
+100
911,905
(14,296
(1.54
241,178
2,309
0
926,201
238,869
-100
929,010
0.30
224,749
(14,120
(5.91
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.
48
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, 2021, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of March 31, 2021, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $601.1 million, which represented 8.1% of total assets and 9.5% of total deposits and borrowings, compared to $697.4 million as of December 31, 2020, which represented 9.2% 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, 2021, had the ability to borrow $1.9 billion. In addition, as of March 31, 2021, the Bank had in place borrowing capacity of $25 million through correspondent banks. The Bank also has a credit facility established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral of $3.2 million. As of March 31, 2021, the Bank had aggregate available and unused credit of approximately $1.1 billion, which represents the aforementioned facilities totaling $1.9 billion net of $0.8 billion in outstanding borrowings and letters of credit. As of March 31, 2021, outstanding commitments for the Bank to extend credit were approximately $970 million.
Cash and cash equivalents totaled $260.1 million as of March 31, 2021, decreasing by $43.7 million from $303.8 million as of December 31, 2020. Operating activities provided $80.1 million in net cash. Investing activities provided $5.6 million in net cash, primarily reflecting an increase in securities partially offset by an increase in loans. Financing activities used $129.4 million in net cash, primarily reflecting a repayment of FHLB borrowings and subordinated debentures of approximately $66.2 million and $50.0 million, respectively.
Total deposits decreased by $7.9 million, or 0.1%, to $6.0 billion as of March 31, 2021 from December 31, 2020. The decrease was primarily due to decreases in time deposits partially offset by increases in demand, interest bearing, non-interest bearing and savings. The following table sets forth the composition of our deposit base by the periods indicated.
2021 vs. 2020
Demand, noninterest-bearing
23.3
22.5
45,853
Demand, interest-bearing
1,488,943
25.0
1,462,675
24.5
26,268
Money Market
1,394,491
23.4
1,399,145
23.5
(4,654)
Savings
326,340
5.5
294,163
4.9
32,177
Time
1,356,599
22.8
1,464,133
24.6
(107,534)
(7,890)
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, 2021 was 3.06%.
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 $935.6 million as of March 31, 2021, an increase of $20.3 million from December 31, 2020. The increase in stockholders’ equity was primarily attributable retained earnings. As of March 31, 2021, the Company’s tangible common equity ratio and tangible book value per share were 9.91% and $18.02, respectively. As of December 31, 2020, the tangible common equity ratio and tangible book value per share were 9.50% and $17.49, respectively. Total goodwill and other intangible assets were approximately $219 million as of March 31, 2021 and December 31, 2020. The following table shows the reconciliation of common equity to tangible common equity and the tangible common equity ratio.
(dollars in thousands, except for share and per
share data)
Common equity
Less: intangible assets
(218,842)
(219,349)
Tangible common stockholders’ equity
716,795
695,961
Tangible assets
7,230,797
7,327,990
Common stock outstanding at period end
39,773,602
39,785,398
Tangible common equity ratio (1)
9.91
9.50
Book value per common share
23.52
23.01
5.50
5.52
Tangible book value per common share
18.02
17.49
Tangible common equity ratio is a non-GAAP measure.
50
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, 2021 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution.
To Be Well-Capitalized Under
For Capital Adequacy
Prompt Corrective Action
ConnectOne Bancorp, Inc.
Purposes
Provisions
The Company
Ratio
As of March 31, 2021
Leverage (Tier 1) capital
718,814
9.89
290,750
4.00
Risk-based Capital:
Common Equity Tier 1
713,659
11.36
282,800
4.50
Tier 1
11.44
377,067
6.00
947,395
15.08
502,756
8.00
N/A - not applicable
ConnectOne Bank
The Bank
803,446
11.06
290,566
363,208
5.00
12.78
282,794
408,480
6.50
377,058
502,744
914,275
14.55
628,430
10.00
As of March 31, 2021, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the Tier 1 Risk Based Ratio which was 2.94% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 4.05% above the minimum buffer ratio.
51
Item 3. Qualitative and Quantitative Disclosures about Market Risks
Market Risk
Interest rate risk management is our primary market risk. See “Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity Analysis” herein for a discussion of our management of our interest rate risk.
Item 4. Controls and Procedures
a) Disclosure controls and procedures. As of the end of the Company’s most recently completed fiscal quarter covered by this report, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and are operating in an effective manner and that such information is accumulated and communicated to management, including the Company’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
b) Changes in internal controls over financial reporting. There have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not subject to any legal proceedings, which could have a materially adverse impact on its results of operations and financial condition.
Item 1a. Risk Factors
There have been no material changes to the risks inherent in our business from those described under Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
See “Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations – Shareholders’ Equity”
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibit No.
Description
31.1
Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Definition Taxonomy Extension Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.
(Registrant)
By:
/s/ Frank Sorrentino III
/s/ William S. Burns
Frank Sorrentino III
William S. Burns
Chairman and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Date: May 7, 2021