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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)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

     For the transition period from __________ to __________

Commission File Number: 000-11486

CONNECTONE BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

New Jersey

52-1273725

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

301 Sylvan Avenue

Englewood Cliffs, New Jersey 07632

(Address of Principal Executive Offices) (Zip Code)

201-816-8900

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 Title of each class

 Trading symbol

 Name of each exchange on  which registered

Common stock

CNOB

NASDAQ

 

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)


Table of Contents

Table of Contents

Page

PART I – FINANCIAL INFORMATION

3

Item 1.Financial Statements

3

Consolidated Statements of Condition as of March 31, 2021 (unaudited) and December 31, 2020

3

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

54

Item 1a.Risk Factors

54

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

54

Item 3.Defaults Upon Senior Securities

54

Item 4.Mine Safety Disclosures

54

Item 5.Other Information

54

Item 6.Exhibits

55

SIGNATURES

56


2


Table of Contents

 

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

 

 

(unaudited)

 

 

 

 

 

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

 

 

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

 

 

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

 

$

7,449,639

 

 

$

7,547,339

 

See accompanying notes to unaudited consolidated financial statements.


3


Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

 

Three Months Ended

 

 

March 31,

(dollars in thousands, except for per share data)

 

2021

 

2020

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

 

Borrowings

 

 

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

 

 

0.15

 

See accompanying notes to unaudited consolidated financial statements.


4


Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

Three Months Ended

 

 

March 31,

(dollars in thousands)

 

2021

 

2020

Net income

 

$

32,999

 

 

$

6,030

 

 

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

)

Tax effect

 

 

-

 

 

 

6

 

Net of tax

 

 

-

 

 

(23

)

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on cash flow hedge

 

 

24

 

 

(2,749

)

Tax effect

 

 

(11

)

 

 

773

 

Net of tax

 

 

13

 

 

(1,976

)

 

 

 

 

 

 

 

 

 

Reclassification adjustment for realized losses (gains) included in net income

 

 

631

 

 

(7

)

Tax effect

 

 

(177

)

 

 

2

 

Net of tax

 

 

454

 

 

(5

)

 

 

 

 

 

 

 

 

 

Reclassification adjustment for realized losses on pension plan included in net income

 

 

75

 

 

 

75

 

Tax effect

 

 

(20

)

 

 

(21

)

Net of tax

 

 

55

 

 

 

54

 

 

Total other comprehensive (loss) income

 

 

(3,486

)

 

 

2,611

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

29,513

 

 

$

8,641

 

See accompanying notes to unaudited consolidated financial statements.


5


Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Other

 

Total

(dollars in thousands, except

 

Preferred

 

Common

 

Paid-In

 

Retained

 

Treasury

 

Comprehensive

 

Stockholders’

for per share data)

 

Stock

 

Stock

 

Capital

 

Earnings

 

Stock

 

(Loss) Income

 

Equity

Balance as of December 31, 2019

 

$

-

 

$

468,571

 

$

21,344

 

 

$

271,782

 

 

$

(29,360

)

 

$

(1,147

)

 

$

731,190

 

Net income

 

 

-

 

 

-

 

 

-

 

 

 

6,030

 

 

 

-

 

 

 

-

 

 

 

6,030

 

Other comprehensive income, net of tax

 

 

-

 

 

-

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,611

 

 

 

2,611

 

Cash dividends declared on common stock ($0.090 per share)

 

 

-

 

 

-

 

 

-

 

 

 

(3,987

)

 

 

-

 

 

 

-

 

 

 

(3,987

)

Exercise of stock options (25,413 shares)

 

 

-

 

 

-

 

 

163

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

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

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(297

)

Repurchase of treasury stock (54,693 shares)

 

 

-

 

 

-

 

 

-

 

 

 

-

 

 

 

(911

)

 

 

-

 

 

 

(911

)

Stock issued (4,602,450 shares) in acquisition of Bancorp of New Jersey

 

 

-

 

 

118,375

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

118,375

 

Stock-based compensation

 

 

-

 

 

-

 

 

536

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

536

 

 

Balance as of March 31, 2020

 

$

-

 

$

586,946

 

$

21,746

 

 

$

273,825

 

 

$

(30,271

)

 

$

1,464

 

 

$

853,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2020

 

$

-

 

$

586,946

 

$

23,887

 

 

$

331,951

 

 

$

(30,271

)

 

$

2,797

 

 

$

915,310

 

Cumulative effect of change in accounting principle (see note 1b. “Authoritative Accounting Guidance Presentation”), net of tax

-

-

-

(2,925

)

-

-

(2,925

)

Balance as of January 1, 2021 as adjusted for changes in accounting principle

-

586,946

23,887

329,026

(30,271

)

2,797

912,385

Net income

 

 

-

 

 

-

 

 

-

 

 

 

32,999

 

 

 

-

 

 

 

-

 

 

 

32,999

 

Other comprehensive loss, net of tax

 

 

-

 

 

-

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,486

)

 

 

(3,486

)

Cash dividends declared on common stock ($0.11 per share)

 

 

-

 

 

-

 

 

-

 

 

 

(3,584

)

 

 

-

 

 

 

-

 

 

 

(3,584

)

Exercise of stock options (5,449 shares)

 

 

-

 

 

-

 

 

45

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

45

 

Restricted stock grants (26,769 shares)

 

 

-

 

 

-

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock grants (446 shares)

-

-

-

-

-

-

-

Net shares issued in satisfaction of restricted stock units earned (14,711 shares)

 

 

-

-

-

-

-

-

-

Net shares issued in satisfaction of performance units earned (34,458 shares)

-

-

-

-

-

-

-

Share redemption for tax withholdings on performance units and restricted stock units earned

 

 

-

 

 

-

 

 

(1,283

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,283

)

Repurchase of treasury stock (93,629 shares)

 

 

-

 

 

-

 

 

-

 

 

 

-

 

 

 

(2,411

)

 

 

-

 

 

 

(2,411

)

Stock-based compensation

 

 

-

 

 

-

 

 

972

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

972

 

 

Balance as of March 31, 2021

 

$

-

 

$

586,946

 

$

23,621

 

 

$

358,441

 

 

$

(32,682

)

 

$

(689

)

 

$

935,637

 

See accompanying notes to unaudited consolidated financial statements.


6


Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

Three Months Ended

 

 

March 31,

(dollars in thousands)

 

2021

 

2020

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

32,999

 

 

$

6,030

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of premises and equipment

 

 

880

 

 

 

949

 

(Reversal of) provision for credit losses

 

 

(5,766

)

 

 

16,000

 

Amortization of intangibles

 

 

507

 

 

 

652

 

Net accretion of loans

 

 

(1,406

)

 

 

(1,996

)

Accretion on bank premises

 

 

(23

)

 

 

(23

)

Accretion on deposits

 

 

(650

)

 

 

(1,503

)

(Accretion) amortization on borrowings, net

 

 

(17

)

 

 

43

 

Stock-based compensation

 

 

972

 

 

 

536

 

Gains on sales of securities available-for-sale, net

 

 

-

 

 

(29

)

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

 

Gain on sale of branches

(674

)

-

Net losses on disposition of other premises and equipment

22

-

Increase in cash surrender value of bank owned life insurance

 

 

(1,064

)

 

 

(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

 

 

9

 

 

 

75

 

Net increase in loans

 

 

(36,553

)

 

 

(130,187

)

Purchases of bank owned life insurance

 

 

-

 

 

(25,000

)

Purchases of premises and equipment

 

 

(67

)

 

 

(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

 

 

(3,584

)

 

 

(3,576

)

Repurchase of treasury stock

 

 

(2,411

)

 

 

(911

)

Proceeds from exercise of stock options

 

 

45

 

 

 

163

 

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

 

 

303,756

 

 

 

201,483

 

 

Cash and cash equivalents at end of period

 

$

260,092

 

 

$

282,809

 


7


Table of Contents

(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

 

See accompanying notes to unaudited consolidated financial statements.


8


Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 1a. Nature of Operations, Principles of Consolidation and Risk and Uncertainties

Nature of Operations

ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company. 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.


9


Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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

406

1,304

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


Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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.


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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 1b. Authoritative Accounting Guidance – (continued)

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.


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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 2. Earnings per Common Share

Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). The restricted stock awards granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities. The two-class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities.

Earnings per common share have been computed based on the following:

Three Months Ended

March 31,

(dollars in thousands, except for per share data)

2021

2020

Net income

$

32,999

$

6,030

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:

Basic

$

0.83

$

0.15

Diluted

0.82

0.15

There were no antidilutive share equivalents as of March 31, 2021 and March 31, 2020.


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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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

Gross

Investment

Amortized

Unrealized

Unrealized