10-Q 1 cnob4057011-10q.htm QUARTERLY REPORT

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, 2022

 

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to               

 

Commission File Number:  000-11486

 

 

 

CONNECTONE BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter) 

 

 New Jersey 52-1273725

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

 

301 Sylvan Avenue

Englewood Cliffs, New Jersey 07632

(Address of Principal Executive Offices) (Zip Code)

 

201-816-8900

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Title of each class Trading symbol Name of each exchange on which registered
Common stock CNOB NASDAQ
Depositary Shares (each representing a 1/40th interest in a share of 5.25% Series A Non-Cumulative, perpetual preferred stock) CNOBP NASDAQ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically 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: 39,524,417 shares
(Title of Class) (Outstanding as of May 6, 2022)

 

 

 

Table of Contents

 

    Page
     
PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
  Consolidated Statements of Condition as of March 31, 2022 (unaudited) and December 31, 2021 3
  Consolidated Statements of Income for the three months ended March 31, 2022 and 2021 (unaudited) 4
  Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021 (unaudited) 5
  Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2022 and 2021 (unaudited) 6
  Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (unaudited) 7
  Notes to Consolidated Financial Statements (unaudited) 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
     
Item 3. Qualitative and Quantitative Disclosures about Market Risks 48
     
Item 4. Controls and Procedures 49
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 50
     
Item 1a. Risk Factors 50
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 50
     
Item 3. Defaults Upon Senior Securities 50
     
Item 4. Mine Safety Disclosures 50
     
Item 5. Other Information 50
     
Item 6. Exhibits 51
   
SIGNATURES 52

 

2

 

Item 1. Financial Statements

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

(unaudited)

 

(in thousands, except for share data)  March 31,
2022
   December 31,
2021
 
     
ASSETS        
Cash and due from banks  $61,849   $54,352 
Interest-bearing deposits with banks   249,695    211,184 
Cash and cash equivalents   311,544    265,536 
           
Investment securities   512,030    534,507 
Equity securities   13,198    13,794 
           
Loans held-for-sale   2,742    250 
           
Loans receivable   6,979,595    6,828,622 
Less: Allowance for credit losses - loans   80,070    78,773 
Net loans receivable   6,899,525    6,749,849 
           
Investment in restricted stock, at cost   25,254    27,826 
Bank premises and equipment, net   28,779    29,032 
Accrued interest receivable   34,081    34,152 
Bank owned life insurance   196,937    195,731 
Right of use operating lease assets   10,400    11,017 
Other real estate owned   316    - 
Goodwill   208,372    208,372 
Core deposit intangibles   8,564    8,997 
Other assets   82,559    50,417 
Total assets  $8,334,301   $8,129,480 
LIABILITIES          
Deposits:          
Noninterest-bearing  $1,631,292   $1,617,049 
Interest-bearing   4,929,113    4,715,904 
Total deposits   6,560,405    6,332,953 
Borrowings   412,170    468,193 
Subordinated debentures, net   153,027    152,951 
Operating lease liabilities   11,773    12,417 
Other liabilities   58,407    38,754 
Total liabilities   7,195,782    7,005,268 
           
COMMITMENTS AND CONTINGENCIES   
 
    
 
 
           
STOCKHOLDERS’ EQUITY          
Preferred Stock, no par value;
$1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of March 31, 2022 and as of December 31, 2021; outstanding 115,000 shares as of March 31, 2022 and as of December 31, 2021
   110,927    110,927 
Common stock, no par value:
Authorized 100,000,000 shares; issued 42,652,378 shares as of March 31, 2022 and 42,557,264 shares as of December 31, 2021; outstanding 39,518,411 shares as of March 31, 2022 and 39,568,090 as of December 31, 2021
   586,946    586,946 
Additional paid-in capital   28,484    27,246 
Retained earnings   464,889    440,169 
Treasury stock, at cost 3,133,967 common shares as of March 31, 2022 and 2,989,174 as of December 31, 2021   (44,458)   (39,672)
Accumulated other comprehensive loss   (8,269)   (1,404)
Total stockholders’ equity   1,138,519    1,124,212 
Total liabilities and stockholders’ equity  $8,334,301   $8,129,480 

 

See accompanying notes to unaudited consolidated financial statements.

 

3

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

   Three Months Ended
March 31,
 
   2022   2021 
(dollars in thousands, except for per share data)        
Interest income          
Interest and fees on loans  $76,025   $70,462 
Interest and dividends on investment securities:          
Taxable   1,873    1,088 
Tax-exempt   709    766 
Dividends   214    256 
Interest on federal funds sold and other short-term investments   120    49 
Total interest income   78,941    72,621 
Interest expense          
Deposits   5,010    7,585 
Borrowings   3,573    3,873 
Total interest expense   8,583    11,458 
Net interest income   70,358    61,163 
Provision for (reversal of) credit losses   1,450    (5,766)
Net interest income after provision for (reversal of) credit losses   68,908    66,929 
Noninterest income          
Deposit, loan and other income   1,743    1,168 
Income on bank owned life insurance   1,206    1,064 
Net gains on sale of loans held-for-sale   701    707 
Gain on sale of branches   
-
    674 
Net losses on equity securities   (596)   (187)
Total noninterest income   3,054    3,426 
Noninterest expenses          
Salaries and employee benefits   18,783    15,632 
Occupancy and equipment   1,929    3,404 
FDIC insurance   606    935 
Professional and consulting   1,792    1,956 
Marketing and advertising   351    241 
Information technology and communications   2,866    2,525 
Amortization of core deposit intangibles   433    507 
Other components of net periodic pension expense   (143)   (67)
Increase in value of acquisition price   683    
-
 
Other expenses   1,930    1,352 
Total noninterest expenses   29,230    26,485 
Income before income tax expense   42,732    43,870 
Income tax expense   11,351    10,871 
Net income   31,381    32,999 
Preferred dividends   1,509    
-
 
Net income available to common stockholders  $29,872   $32,999 
Earnings per common share          
Basic  $0.76   $0.83 
Diluted   0.75    0.82 

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited) 

 

   Three Months Ended
March 31,
 
(dollars in thousands)  2022   2021 
Net income  $31,381   $32,999 
           
Other comprehensive income (loss):          
           
Unrealized holding losses on available-for-sale securities arising during the period   (30,625)   (5,440)
Tax effect   8,139    1,432 
Net of tax   (22,486)   (4,008)
           
Unrealized gains on cash flow hedges   19,000    24 
Tax effect   (5,341)   (11)
Net of tax   13,659    13 
           
Reclassification adjustment for realized losses on cash flow hedges included in net income   525    631 
Tax effect   (147)   (177)
Net of tax   378    454 
           
Unrealized gains on pension plan   2,187    
-
 
Tax effect   (615)   
-
 
Net of tax   1,572    
-
 
           
Reclassification adjustment for realized losses on pension plan included in net income   16    75 
Tax effect   (4)   (20)
Net of tax   12    55 
           
Total other comprehensive loss   (6,865)   (3,486)
           
Total comprehensive income  $24,516   $29,513 

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

(dollars in thousands, except for per share data)  Preferred
Stock
   Common
Stock
   Additional
Paid-In
Capital
   Retained
Earnings
   Treasury
Stock
   Accumulated
Other
Comprehensive
(Loss) Income
   Total
Stockholders’
Equity
 
                             
Balance as of December 31, 2020  $
-
   $586,946   $23,887   $331,951   $(30,271)  $2,797   $915,310 
Cumulative effect of change in accounting principle (see note 1b. “Authoritative Accounting Guidance Presentation”), net of tax   
-
    
-
    
-
    (2,925)   
-
    
-
    (2,925)
Balance as of January 1, 2021 as adjusted for changes in accounting principle   
-
    586,946    23,887    329,026    (30,271)   2,797    912,385 
Net income   
-
    
-
    
-
    32,999    
-
    
-
    32,999 
Other comprehensive loss, net of tax   
-
    
-
    
-
    
-
    
-
    (3,486)   (3,486)
Cash dividends declared on common stock ($0.11 per share)   
-
    
-
    
-
    (3,584)   
-
    
-
    (3,584)
Exercise of stock options (5,449 shares)   
-
    
-
    45    
-
    
-
    
-
    45 
Restricted stock grants (26,769 shares)   
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Stock grants (446 shares)   
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Net shares issued in satisfaction of restricted stock units earned (14,711 shares)   
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Net shares issued in satisfaction of performance units earned (34,458 shares)   
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Share redemption for tax withholdings on performance units and restricted stock units earned   
-
    
-
    (1,283)   
-
    
-
    
-
    (1,283)
Repurchase of treasury stock (93,629 shares)   
-
    
-
    
-
    
-
    (2,411)   
-
    (2,411)
Stock-based compensation   
-
    
-
    972    
-
    
-
    
-
    972 
                                    
Balance as of March 31, 2021  $
-
   $586,946   $23,621   $358,441   $(32,682)  $(689)  $935,637 
                                    
Balance as of December 31, 2021  $110,927   $586,946   $27,246   $440,169   $(39,672)  $(1,404)  $1,124,212 
Net income   
-
    
-
    
-
    31,381    
-
    
-
    31,381 
Other comprehensive loss, net of tax   
-
    
-
    
-
    
-
    
-
    (6,865)   (6,865)
Cash dividends declared on common stock ($0.13 per share)   
-
    
-
    
-
    (5,152)   
-
    
-
    (5,152)
Cash dividends declared on preferred stock ($0.328125 per depositary share)   
-
    
-
    
-
    (1,509)   
-
    
-
    (1,509)
Exercise of stock options (8,774 shares)   
-
    
-
    91    
-
    
-
    
-
    91 
Restricted stock grants, net of forfeitures (32,454 shares)   
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Stock grants (153 shares)   
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Net shares issued in satisfaction of restricted stock units earned (31,383 shares)   
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Net shares issued in satisfaction of performance units earned (22,350 shares)   
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Repurchase of treasury stock (144,793 shares)   
-
    
-
    
-
    
-
    (4,786)   
-
    (4,786)
Stock-based compensation   
-
    
-
    1,147    
-
    
-
    
-
    1,147 
                                    
Balance as of March 31, 2022  $110,927   $586,946   $28,484   $464,889   $(44,458)  $(8,269)  $1,138,519 

  

See accompanying notes to unaudited consolidated financial statements.

 

6

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Three Months Ended
March 31,
 
(dollars in thousands)  2022   2021 
Cash flows from operating activities        
Net income  $31,381   $32,999 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization of premises and equipment   983    880 
Provision for (reversal of) credit losses   1,450    (5,766)
Amortization of intangibles   433    507 
Net accretion of loans   (874)   (1,406)
Accretion on bank premises   (12)   (23)
Accretion on deposits   (321)   (650)
Amortization (accretion) on borrowings, net   16    (17)
Stock-based compensation   1,147    972 
Losses on equity securities, net   596    187 
Gains on sale of loans held-for-sale, net   (701)   (707)
Loans originated for resale   (8,872)   (23,348)
Proceeds from sale of loans held-for-sale   9,472    21,856 
Gain on sale of branches   -    (674)
Net losses on disposition of other premises and equipment   -    22 
Increase in cash surrender value of bank owned life insurance   (1,206)   (1,064)
Amortization of premiums and accretion of discounts on securities available-for-sale   872    1,605 
Amortization of subordinated debentures issuance costs   76    76 
Decrease in accrued interest receivable   71    68 
Net change in operating leases   (27)   (131)
(Increase) decrease in other assets   (10,585)   47,156 
Increase in other liabilities   21,945    7,589 
Net cash provided by operating activities   45,844    80,131 
           
Cash flows from investing activities          
Investment securities available-for-sale:          
Purchases   (52,970)   (33,305)
Maturities, calls and principal repayments   43,950    72,193 
Net redemptions of restricted investment in bank stocks   2,572    2,616 
Payments on loans held-for-sale   -    9 
Net increase in loans   (153,048)   (36,553)
Purchases of premises and equipment   (718)   (67)
Proceeds from sale of branches   -    729 
Net cash (used in) provided by investing activities   (160,214)   5,622 
           
Cash flows from financing activities          
Net increase (decrease) in deposits   227,773    (7,240)
Advances of Federal Home Loan Bank (“FHLB”) borrowings   150,000    - 
Repayments of FHLB borrowings   (206,039)   (66,227)
Decrease in subordinated debt   -    (50,000)
Cash dividends on preferred stock   (1,509)   - 
Cash dividends paid on common stock   (5,152)   (3,584)
Repurchase of treasury stock   (4,786)   (2,411)
Proceeds from exercise of stock options   91    45 
Net cash provided by (used in) financing activities   160,378    (129,417)
Net change in cash and cash equivalents   46,008    (43,664)
Cash and cash equivalents at beginning of period   265,536    303,756 
           
Cash and cash equivalents at end of period  $311,544   $260,092 

 

7

 

(continued)

 

Supplemental disclosures of cash flow information

Cash payments for:        
Interest paid on deposits and borrowings  $8,794   $11,690 
Income taxes   300    4,350 

  

Supplemental disclosures of noncash activities

Investing:        
Transfer of loans to other real estate owned  $316   $
-
 
Transfer of loans from held-for-investment to held-for-sale   2,391    - 

 

See accompanying notes to unaudited consolidated financial statements.

 

8

 

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 under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Parent Corporation’s business currently consists of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”). The Bank’s subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a Delaware investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), NJCB Spec-1, LLC (a New Jersey limited liability company), Port Jervis Holdings, LLC (a New Jersey limited liability company), BONJ Special Properties, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey financial technology company).

 

The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its twenty-three other banking offices. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’ business, real estate rental and consumer wages.

 

The preceding unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022, or for any other interim period. The Company’s 2021 Annual Report on Form 10-K should be read in conjunction with these consolidated financial statements.

 

Basis of Presentation

 

The consolidated financial statements have been prepared in conformity with GAAP. Some items in the prior year consolidated financial statements were reclassified to conform to current presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.

 

Use of Estimates

 

In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates.

 

Risks and Uncertainties

 

As previously disclosed, on March 11, 2020 the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to impact the United States and the world. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The COVID-19 pandemic has adversely affected, and continues to adversely affect economic activity globally, nationally and locally. Although economic activity began to accelerate in 2021, and the United States continues to implement a COVID-19 vaccination program, COVID-19, it’s variants and actions taken to mitigate the spread of it have had and may in the future have an adverse impact on the economies and financial markets of many countries and parts of the United States, including the New Jersey/New York metropolitan area in which the Company primarily operates. Although the Company has been able to continue operations while taking steps to ensure the safety of employees and clients, COVID-19 could impact the Company’s operations in the future. The effects of the COVID-19 pandemic may adversely affect the Company’s financial condition and results of operations in future periods. Although state and local governments have lifted many restrictions on conducting business, it is possible that restrictions could be reimposed.

 

9

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 1b. Authoritative Accounting Guidance

 

Newly Issued, But Not Yet Effective Accounting Standards

 

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings (“TDRs”) in ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors” for entities that have adopted the current expected credit loss (“CECL”) model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13”). ASU 2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, “Financial Instruments—Credit Losses—Measured at Amortized Cost”. ASU 2022-02 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022-02 will have on its consolidated financial statements.

 

Note 2.  Earnings per Common Share

 

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

 

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

 

   Three Months Ended
March 31,
 
(dollars in thousands, except for per share data)  2022   2021 
Net income available to common stockholders  $29,872   $32,999 
Earnings allocated to participating securities   (80)   (186)
Income attributable to common stock  $29,792   $32,813 
           
Weighted average common shares outstanding, including participating securities   39,560    39,738 
Weighted average participating securities   (107)   (181)
Weighted average common shares outstanding   39,453    39,557 
Incremental shares from assumed conversions of options, performance units and restricted shares   274    232 
Weighted average common and equivalent shares outstanding   39,727    39,789 
           
Earnings per common share:          
Basic  $0.76   $0.83 
Diluted   0.75    0.82 

 

There were no antidilutive share equivalents for the quarters ended March 31, 2022 and March 31, 2021.

 

10

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 3.  Investment Securities

 

The Company’s investment securities are classified as available-for-sale as of March 31, 2022 and December 31, 2021. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in stockholders’ equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value as of March 31, 2022 and December 31, 2021. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 6 of the Notes to Consolidated Financial Statements for a further discussion.

 

The following tables present information related to the Company’s portfolio of securities available-for-sale as of March 31, 2022 and December 31, 2021.

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
   Allowance
for
Investment
Credit
Losses
 
   (dollars in thousands) 
March 31, 2022                    
                     
Securities available-for-sale                    
Federal agency obligations  $51,506   $46   $(3,003)  $48,549   $
      -
 
Residential mortgage pass-through securities   320,605    160    (19,789)   300,976    
-
 
Commercial mortgage pass-through securities   18,713    8    (1,313)   17,408    
-
 
Obligations of U.S. states and political subdivisions   144,474    446    (7,869)   137,051    
-
 
Corporate bonds and notes   5,477    35    (11)   5,501    
-
 
Asset-backed securities   2,364    7    (17)   2,354    
 
 
Other securities   191    
-
    
-
    191    
-
 
Total securities available-for-sale  $543,330   $702   $(32,002)  $512,030   $
-
 
                          
December 31, 2021                         
Securities available-for-sale                         
Federal agency obligations  $50,336   $649   $(625)  $50,360   $
-
 
Residential mortgage pass-through securities   317,111    1,868    (2,884)   316,095    
-
 
Commercial mortgage pass-through securities   10,814    118    (463)   10,469    
-
 
Obligations of U.S. states and political subdivisions   145,045    1,562    (982)   145,625    
-
 
Corporate bonds and notes   8,968    81    
-
    9,049    
-
 
Asset-backed securities   2,563    3    (2)   2,564    
-
 
Certificates of deposit   150    
-
    
-
    150    
-
 
Other securities   195    
-
    
-
    195    
-
 
Total securities available-for-sale  $535,182   $4,281   $(4,956)  $534,507   $
-
 

 

11

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 3.  Investment Securities – (continued)

 

Investment securities having a carrying value of approximately $95.0 million and $71.2 million as of March 31, 2022 and December 31, 2021, respectively, were pledged to secure public deposits, borrowings, repurchase agreements, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law. As of March 31, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

The following table presents information for investments in securities available-for-sale as of March 31, 2022, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer. Securities not due at a single maturity date are shown separately.

 

   March 31, 2022 
   Amortized
Cost
   Fair
Value
 
   (dollars in thousands) 
Securities available-for-sale:        
Due in one year or less  $3,391   $3,394 
Due after one year through five years   6,118    6,135 
Due after five years through ten years   4,694    4,774 
Due after ten years   189,618    179,152 
Residential mortgage pass-through securities   320,605    300,976 
Commercial mortgage pass-through securities   18,713    17,408 
Other securities   191    191 
Total securities available-for-sale  $543,330   $512,030 

 

We had no gross gains or losses from the sale of securities for the three months ended March 31, 2022 and 2021.

 

12

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 3.  Investment Securities – (continued)

 

Impairment Analysis of Available--for-sale Debt Securities

 

The following tables indicate gross unrealized losses in an unrealized loss position for which an allowance for credit losses (“ACL”) has not been recorded, aggregated by investment category and by the length of continuous time individual securities have been in an unrealized loss position as of March 31, 2022 and December 31, 2021.

 

   March 31, 2022 
   Total   Less than 12 Months   12 Months or Longer 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 
   (dollars in thousands) 
Investment Securities Available-for-Sale:                        
Federal agency obligations  $43,257   $(3,003)  $43,257   $(3,003)  $
-
   $
-
 
Residential mortgage pass-through securities   284,118    (19,789)   223,718    (14,696)   60,400    (5,093)
Commercial mortgage pass-through securities   14,437    (1,313)   10,532    (483)   3,905    (830)
Obligations of U.S. states and political subdivisions   111,635    (7,869)   111,635    (7,869)   
-
    
-
 
Corporate bonds and notes   1,988    (11)   1,988    (11)   
-
    
-
 
Asset-backed securities   1,837    (17)   1,837    (17)   
-
    
-
 
Total temporarily impaired securities  $457,272   $(32,002)  $392,967   $(26,079)  $64,305   $(5,923)

 

   December 31, 2021 
   Total   Less than 12 Months   12 Months or Longer 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 
   (dollars in thousands) 
Investment Securities Available-for-Sale:                        
Federal agency obligations  $28,974   $(625)  $28,974   $(625)  $
-
   $
-
 
Residential mortgage pass-through securities   246,396    (2,884)   214,701    (2,111)   31,695    (773)
Commercial mortgage pass-through securities   8,370    (463)   4,682    (75)   3,688    (388)
Obligations of U.S. states and political subdivisions   89,473    (982)   89,473    (982)   
-
    
-
 
Asset-backed securities   802    (2)   802    (2)   
-
    
-
 
Total Temporarily Impaired Securities  $374,015   $(4,956)  $338,632   $(3,795)  $35,383   $(1,161)

 

13

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 3.  Investment Securities – (continued)

 

The Company has elected to exclude accrued interest from the amortized cost of its investment securities available-for-sale. Accrued interest receivable for investment securities available for sale as of March 31, 2022 and December 31, 2021, totaled $1.4 million and $1.6 million, respectively.

 

The Company evaluates securities in unrealized loss position for impairment related to credit losses on at least a quarterly basis. Securities in unrealized loss positions are first assessed as to whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If one of the criteria is met, the security’s amortized cost basis is written down to fair value through current earnings. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value resulted from credit losses or other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Unrealized losses on asset backed securities and state and municipal securities have not been recognized into income because the issuers are of high credit quality, we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery.  The decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale securities was recorded as of March 31, 2022.

 

Federal agency obligations, residential mortgage backed pass-through securities and commercial mortgage back pass-through securities are issued by U.S. Government agencies and U.S. Government sponsored enterprises. Although a government guarantee exists on these investments, these entities are not legally backed by the full faith and credit of the federal government, and the current support they receive is subject to a cap as part of the agreement entered into in 2008. Nonetheless, at this time we do not foresee any set of circumstances in which the government would not fund its commitments on these investments as the issuers are an integral part of the U.S. housing market in providing liquidity and stability. Therefore, we concluded that a zero-allowance approach for these investment securities is appropriate.

 

Note 4. Derivatives

 

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.  An interest rate swap was entered into on April 13, 2017 with a respective notional amount of $25.0 million and was designated as a cash flow hedge of a Federal Home Loan Bank advance. We are required to pay a fixed-rate of interest of 1.93% and receive variable rates of interest that reset quarterly based on three-month LIBOR. The expiration date for the swap is April 2022. The swap is determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swap.       

 

In addition, during 2021, the Company entered into 9 forward starting pay fixed-rate interest rate swaps, 7 of which have since commenced, with a total notional amount of $400 million, which are also designated as a cash flow hedges of current, or future, Federal Home Loan Bank advance. We are required to pay fixed rates of interest ranging from 0.631% to 1.23% and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”). The 2 remaining forward starting swaps have commencing payment dates in May 2022 and August 2022, with expiration dates on the 9 positions ranging from December 2025 to March 2028.

 

14

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 4. Derivatives – (continued)

 

Interest expense recorded on these swap transactions totaled approximately $0.5 million and $0.6 million during the three months ended March 31, 2022 and 2021, respectively, and is reported as a component of interest expense on FHLB Advances.

 

Cash Flow Hedge

 

The following table presents the net losses recorded in other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the following periods:

 

   Three Months Ended March 31, 2022 
   Amount of gain
(loss) recognized
in OCI (Effective
Portion)
   Amount of (gain)
loss reclassified
from OCI to
interest income
   Amount of gain
recognized in other
Noninterest income
(Ineffective Portion)
 
       (dollars in thousands)     
Interest rate contracts  $19,000   $525   $
-
 

 

   Three Months Ended March 31, 2021 
   Amount of gain
(loss) recognized
in OCI (Effective
Portion)
   Amount of gain
(loss) reclassified
from OCI to
interest income
   Amount of gain
recognized in other
Noninterest income
(Ineffective Portion)
 
       (dollars in thousands)     
Interest rate contracts  $24   $631   $
-
 

 

The following table reflects the cash flow hedges included in the consolidated statements of condition as of March 31, 2022 and December 31, 2021:

 

   March 31, 2022   December 31, 2021 
   Notional Amount   Fair Value   Notional Amount   Fair Value 
       (dollars in thousands)     
Interest rate swaps related to FHLB advances included in assets  $425,000   $22,872   $475,000   $3,347 

 

15

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 5. Loans and the Allowance for Credit Losses

 

Loans Receivable The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of March 31, 2022 and December 31, 2021:

 

   March 31,
2022
   December 31,
2021
 
   (dollars in thousands) 
Commercial  (1)  $1,278,477   $1,299,428 
Commercial real estate   4,919,093    4,741,590 
Commercial construction   539,058    540,178 
Residential real estate   250,205    255,269 
Consumer   1,140    1,886 
Gross loans   6,987,973    6,838,351 
Net deferred loan fees   (8,378)   (9,729)
Total loans receivable  $6,979,595   $6,828,622 

 

(1)Included in commercial loans as of March 31, 2022 and December 31, 2021 are PPP loans of $54.3 million and $93.1 million, respectively.

 

As of both March 31, 2022 and December 31, 2021, loan balances of approximately $2.5 billion were pledged to secure borrowings from the FHLB of New York.

 

Loans held-for-sale - The following table sets forth the composition of the Company’s loans held-for-sale portfolio as of March 31, 2022 and December 31, 2021:

 

   March 31,
2022
  

December 31,

2021

 
   (dollars in thousands) 
Commercial real estate  $2,390   $
-
 
Residential real estate   352    250 
   Total carrying amount  $2,742   $250 

 

Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL and nonaccrual loans without an ACL as of March 31, 2022 and December 31, 2021:

 

   March 31, 2022 
   Nonaccrual
loans with
ACL
   Nonaccrual
loans
without ACL
   Total
Nonaccrual
loans
 
   (dollars in thousands) 
Commercial  $29,148   $1,193   $30,341 
Commercial real estate   17,497    8,819    26,316 
Commercial construction   
-
    
-
    
-
 
Residential real estate   1,172    1,574    2,746 
Consumer   
-
    
-
    
-
 
Total  $47,817   $11,586   $59,403 

 

16

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 5. Loans and the Allowance for Credit Losses – (continued)

 

   December 31, 2021 
   Nonaccrual loans with ACL   Nonaccrual loans without ACL   Total Nonaccrual loans 
   (dollars in thousands) 
Commercial  $28,746   $1,316   $30,062 
Commercial real estate   15,362    10,031    25,393 
Commercial construction   
-
    3,150    3,150 
Residential real estate   1,239    1,856    3,095 
Consumer   
-
    
-
    
-
 
    Total  $45,347   $16,353   $61,700 

 

Nonaccrual loans and loans 90 days or greater past due and still accruing include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.

 

Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected.

 

17

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 5. Loans and the Allowance for Credit Losses – (continued)

 

We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP. Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below. The following table presents loans by origination and risk designation as of March 31, 2022 (dollars in thousands):

 

   Term loans amortized cost basis by origination year   Revolving   Total 
   2022   2021   2020   2019   2018   Prior   Loans   Gross Loans 
Commercial                                
Pass  $38,767   $371,431   $56,980   $41,829   $58,230   $175,970   $471,742   $1,214,949 
Special mention   
-
    
-
    
-
    
-
    632    9,656    4,310    14,598 
Substandard   448    164    
-
    1,649    12,203    20,388    14,078    48,930 
Doubtful   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Total Commercial  $39,215   $371,595   $56,980   $43,478   $71,065   $206,014   $490,130   $1,278,477 
                                         
Commercial Real Estate                                        
Pass  $371,604   $1,655,013   $507,117   $389,017   $452,309   $1,241,085   $166,342   $4,782,487 
Special mention   
-
    
-
    
-
    3,340    
-
    53,982    15,537    72,859 
Substandard   
-
    1,958    4,500    7,302    20,445    21,117    8,425    63,747 
Doubtful   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Total Commercial Real Estate  $371,604   $1,656,971   $511,617   $399,659   $472,754   $1,316,184   $190,304   $4,919,093 
                                         
Commercial Construction                                        
Pass  $
-
   $1,518   $7,370   $6,508   $2,600   $
-
   $510,174   $528,170 
Special mention   
-
    
-
    
-
    
-
    350    
-
    1,443    1,793 
Substandard   
-
    
-
    
-
    
-
    
-
    
-
    9,095    9,095 
Doubtful   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Total Commercial Construction  $
-
   $1,518   $7,370   $6,508   $2,950   $
-
   $520,712   $539,058 
                                         
Residential Real Estate                                        
Pass  $9,604   $25,905   $27,697   $23,056   $23,589   $88,610   $42,361   $240,822 
Special mention   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Substandard   
-
    
-
    
-
    
-
    
-
    5,919    3,464    9,383 
Doubtful   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Total Residential Real Estate  $9,604   $25,905   $27,697   $23,056   $23,589   $94,529   $45,825   $250,205 
                                         
Consumer                                        
Pass  $908   $
-
   $75   $35   $17   $4   $101   $1,140 
Special mention   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Substandard   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Doubtful   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Total Consumer  $908   $
-
   $75   $35   $17   $4   $101   $1,140 
                                         
Total                                        
Pass  $420,883   $2,053,867   $599,239   $460,445   $536,745   $1,505,669   $1,190,720   $6,767,568 
Special mention   
-
    
-
    
-
    3,340    982    63,638    21,290    89,250 
Substandard   448    2,122    4,500    8,951    32,648    47,424    35,062    131,155 
Doubtful   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Grand Total  $421,331   $2,055,989   $603,739   $472,736   $570,375   $1,616,731   $1,247,072   $6,987,973 

 

18

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (unaudited)

 

Note 5. Loans and the Allowance for Credit Losses – (continued)

 

The following table presents loans by origination and risk designation as of December 31, 2021 (dollars in thousands):

 

   Term loans amortized cost basis by origination year   Revolving   Total 
   2021   2020   2019   2018   8.5   Prior   Loans   Gross Loans 
Commercial                                
Pass  $403,203   $58,534   $54,485   $60,409   $95,727   $86,556   $471,588   $1,230,502 
Special mention   
-
    
-
    
-
    
-
    1    4,045    4,266    8,312 
Substandard   170    
-
    1,842    13,298    9,740    21,024    14,540    60,614 
Doubtful   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Total Commercial  $403,373   $58,534   $56,327   $73,707   $105,468   $111,625   $490,394   $1,299,428 
                                         
Commercial Real Estate                                        
Pass  $1,692,098   $533,315   $420,995   $452,262   $497,065   $842,244   $170,721   $4,608,700 
Special mention   
-
    
-
    
-
    
-
    5,142    50,438    6,601    62,181 
Substandard   1,968    9,039    4,006    20,624    
-
    26,108    8,964    70,709 
Doubtful   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Total Commercial Real Estate  $1,694,066   $542,354   $425,001   $472,886   $502,207   $918,790   $186,286   $4,741,590 
                                         
Commercial Construction                                        
Pass  $8,018   $7,370   $12,625   $2,600   $2,339   $
-
   $490,119   $523,071 
Special mention   
-
    
-
    
-
    
-
    350    
-
    1,443    1,793 
Substandard   
-
    
-
    
-
    
-
    
-
    
-
    15,314    15,314 
Doubtful   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Total Commercial Construction  $8,018   $7,370   $12,625   $2,600   $2,689   $
-
   $506,876   $540,178 
                                         
Residential Real Estate                                        
Pass  $27,081   $29,539   $23,611   $25,070   $28,701   $66,249   $44,221   $244,472 
Special mention   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Substandard   
-
    
-
    
-
    
-
    
-
    7,262    3,535    10,797 
Doubtful   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Total Residential Real Estate  $27,081   $29,539   $23,611   $25,070   $28,701   $73,511   $47,756   $255,269 
                                         
Consumer                                        
Pass  $1,594   $85   $39   $21   $28   $(4)  $123   $1,886 
Special mention   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Substandard   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Doubtful   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Total Consumer  $1,594   $85   $39   $21   $28   $(4)  $123   $1,886 
                                         
Total                                        
Pass  $2,131,994   $628,843   $511,755   $540,362   $623,860   $995,045   $1,176,772   $6,608,631 
Special mention   
-
    
-
    
-
    
-
    5,493    54,483    12,310    72,286 
Substandard   2,138    9,039    5,848    33,922    9,740    54,394    42,353    157,434 
Doubtful   
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
 
Grand Total  $2,134,132   $637,882   $517,603   $574,284   $639,093   $1,103,922   $1,231,435   $6,838,351 

  

Collateral Dependent Loans: Loans which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses. The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date. The following table presents collateral dependent loans that were individually evaluated for impairment as of March 31, 2022 and December 31, 2021:

 

   March 31, 2022 
   Real
Estate
   Other   Total 
   (dollars in thousands) 
Commercial  $6,120   $25,982   $32,102 
Commercial real estate   62,753    
-
    62,753 
Commercial construction   7,042    
-
    7,042 
Residential real estate   7,528    
-
    7,528 
Consumer   
-
    
-
    
-
 
Total  $83,443   $25,982   $109,425 

 

19

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 5. Loans and the Allowance for Credit Losses – (continued)

 

   December 31, 2021 
   Real
Estate
   Other   Total 
   (dollars in thousands) 
Commercial  $6,385   $26,182   $32,567 
Commercial real estate   55,244    
-
    55,244 
Commercial construction   13,196    
-
    13,196 
Residential real estate   8,856    
-
    8,856 
Consumer   
-
    
-
    
-
 
Total  $83,681   $26,182   $109,863 

 

Aging Analysis - The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due as of March 31, 2022 and December 31, 2021:

 

   March 31, 2022 
   30-59 Days
Past Due
   60-89 Days
Past Due
   90 Days or
Greater Past
Due and Still
Accruing
   Nonaccrual   Total Past
Due and
Nonaccrual
   Current   Gross Loans 
   (dollars in thousands) 
Commercial  $3,561   $
        -
   $4,420   $30,341   $38,322   $1,240,155   $1,278,477 
Commercial real Estate   3,098    
-
    5,848    26,316    35,262    4,883,831    4,919,093 
Commercial construction   123    
-
    
-
    
-
    123    538,935    539,058 
Residential real Estate   1,970    
-
    1,487    2,746    6,203    244,002    250,205 
Consumer   
-
    
-
    625    
-
    625    515    1,140 
Total  $8,752   $
-
   $12,380   $59,403   $80,535   $6,907,438   $6,987,973 

 

   December 31, 2021 
   30-59 Days
Past Due
   60-89 Days
Past Due
   90 Days or Greater Past Due and Still Accruing   Nonaccrual   Total Past Due and Nonaccrual   Current   Gross Loans 
   (dollars in thousands) 
Commercial  $4,305   $729   $4,457   $30,062   $39,553   $1,259,875   $1,299,428 
Commercial real Estate   1,622    1,009    5,935    25,393    33,959    4,707,631    4,741,590 
Commercial construction   
-
    
-
    
-
    3,150    3,150    537,028    540,178 
Residential real Estate   1,437    292    3,139    3,095    7,963    247,306    255,269 
Consumer   
-
    
-
    
-
    
-
    
-
    1,886    1,886 
Total  $7,364   $2,030   $13,531   $61,700   $84,625   $6,753,726   $6,838,351 

 

20

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 5. Loans and the Allowance for Credit Losses – (continued)

 

The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for credit losses that are allocated to each loan portfolio segment:

  

   March 31, 2022 
   Commercial   Commercial real estate   Commercial construction   Residential real estate   Consumer   Total 
   (dollars in thousands) 
Allowance for credit losses - loans                              
Individually evaluated impairment  $14,028   $1,859   $
-
   $94   $
-
   $15,981 
Collectively evaluated impairment   9,154    44,088    3,281    3,361    7    59,891 
Acquired with deteriorated credit quality individually analyzed   2,277    1,921    
-
    
-
    
-
    4,198 
Total  $25,459   $47,868   $3,281   $3,455   $7   $80,070 
                               
Gross loans                              
Individually evaluated impairment  $34,224   $56,905   $7,042   $5,415   $
-
   $103,586 
Collectively evaluated impairment   1,239,157    4,856,340    532,016    242,678    1,140    6,871,331 
Acquired with deteriorated credit quality individually analyzed   5,096    5,848    
-
    2,112    
-
    13,056 
Total  $1,278,477   $4,919,093   $539,058   $250,205   $1,140   $6,987,973 

 

  

December 31, 2021

 
   Commercial   Commercial real estate   Commercial construction   Residential real estate   Consumer   Total 
   (dollars in thousands) 
Allowance for credit losses - loans                        
Individually evaluated impairment  $15,131   $955   $
-
   $131   $
-
   $16,217 
Collectively evaluated impairment   8,561    42,713    3,580    3,497    7    58,358 
Acquired with deteriorated credit quality individually analyzed   2,277    1,921    
-
    
-
    
-
    4,198 
Total  $25,969   $45,589   $3,580   $3,628   $7   $78,773 
                               
Gross loans                              
Individually evaluated impairment  $33,726   $49,310   $13,196   $5,717   $
-
   $101,949 
Collectively evaluated impairment   1,260,537    4,686,346    526,982    246,413    1,886    6,722,164 
Acquired with deteriorated credit quality individually analyzed   5,165    5,934    
-
    3,139    
-
    14,238 
Total  $1,299,428   $4,741,590   $540,178   $255,269   $1,886   $6,838,351 

 

21

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 5. Loans and the Allowance for Credit Losses – (continued)

 

Activity in the Company’s ACL for loans for the three months ended March 31, 2022 is summarized in the table below.

 

   Three Months Ended March 31, 2022 
   Commercial   Commercial real estate   Commercial construction   Residential real estate   Consumer   Unallocated   Total 
   (dollars in thousands) 
Balance as of December 31, 2021  $25,969   $45,589   $3,580   $3,628   $7   $
-
   $78,773 
Charge-offs   (49)   (225)   
-
    
-
    
-
    
-
    (274)
Recoveries   1    
-
    
-
    31    
-
    
-
    32 
(Reversal of) provision for credit losses (loans)   (462)   2,504    (299)   (204)   
-
    
-
    1,539 
                                    
Balance as of March 31, 2022  $25,459   $47,868   $3,281   $3,455   $7   $
-
   $80,070 

 

Activity in the Company’s ACL for loans for the three months ended March 31, 2021 is summarized in the table below. The CECL Day 1 row presents adjustments recorded through retained earnings to adopt the CECL standard and the increase to the ACL for loans associated with nonaccretable purchase accounting marks on loans that were classified as PCI as of December 31, 2020.

 

   Three Months Ended March 31, 2021 
   Commercial   Commercial real estate   Commercial construction   Residential real estate   Consumer   Unallocated   Total 
   (dollars in thousands) 
Balance as of December 31, 2020  $28,443   $39,330   $8,194   $2,687   $4   $568   $79,226 
Day 1 effect of CECL   (4,225)   9,605    (961)   2,697    9    (568)   6,557 
                                    
Balance as of January 1, 2021 as adjusted for changes in accounting principle   24,218    48,935    7,233    5,384    13    
-
    85,783 
                                    
Charge-offs   
-
    
-
    
-
    
-
    
-
    
-
    
-
 
                                    
Recoveries   60    
-
    
-
    
-
    1    
-
    61 
(Reversal of) provision for credit losses (loans)   2,157    (5,038)   (1,712)   (680)   (3)   
-
    (5,276)
                                    
Balance as of March 31, 2021  $26,435   $43,897   $5,521   $4,704   $11   $
-
   $80,568 

 

22

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 5. Loans and the Allowance for Credit Losses – (continued)

 

Troubled Debt Restructurings

 

Loans are considered to have been modified in a troubled debt restructuring (“TDRs”) when, except as discussed below, due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status.

 

As of March 31, 2022, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in troubled debt restructurings.

 

As of March 31, 2022, TDRs totaled $76.5 million, of which $29.1 million were on nonaccrual status and $47.4 million were performing under their restructured terms. As of December 31, 2021, TDRs totaled $79.5 million, of which $35.9 million were on nonaccrual status and $43.6 million were performing under their restructured terms. The Company has allocated $9.1 million and $10.4 million of specific allowance related to TDRs as of March 31, 2022 and December 31, 2021, respectively.

 

The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2022:

 

       Pre-Modification   Post-Modification 
       Outstanding   Outstanding 
   Number of   Recorded   Recorded 
   Loans   Investment   Investment 
  (dollars in thousands) 
Troubled debt restructurings:               
Commercial   1   $98   $98 
Commercial real estate   1    8,751    8,251 
Total   2   $8,849   $8,349 

 

The commercial loan modified as a TDR during the three months ended March 31, 2022 was a maturity extension, while the commercial real estate loan modified as a TDR during the three months ended March 31, 2022 was an interest rate reduction, that was commensurate with a one-time, $500,000, principal paydown.

 

The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2021:

 

       Pre-Modification   Post-Modification 
       Outstanding   Outstanding 
   Number of   Recorded   Recorded 
   Loans   Investment   Investment 
   (dollars in thousands) 
Troubled debt restructurings:             
Commercial real estate   1   $1,658   $1,658 
Residential real estate   2    1,996    1,996 
Total   3   $3,654   $3,654 

 

The two residential real estate loans modified as TDRs during the three months ended March 31, 2021 were maturity extensions, while the one commercial real estate loan was a recast of a nonaccrual credit. 

 

There were no TDRs for which there was a payment default within twelve months following the modification during the three months ended March 31, 2022 and March 31, 2021.

 

23

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 5. Loans and the Allowance for Credit Losses – (continued)

 

Allowance for Credit Losses for Unfunded Commitments

 

The Company has recorded an ACL for unfunded credit commitments, which was recorded in other liabilities. The provision is recorded within the (reversal of) provision for credit losses on the Company’s income statement. The following table presents a rollforward of the allowance for credit losses for unfunded commitments for the three months ended March 31, 2022 and March 31, 2021:

 

   Three Months Ended
March 31,
2022
   Three Months Ended
March 31,
2021
 
   (dollars in thousands) 
Balance at beginning of period  $2,351   $
-
 
Day 1 Effect of CECL   
-
    2,833 
(Reversal of) provision for credit losses (unfunded commitments)   (89)   (490)
     Balance at end of period  $2,262   $2,343 

 

Components of (Reversal of) Provision for Credit Losses

 

The following table summarizes the (reversal of) provision for credit losses for the three months ended March 31, 2022 and March 31, 2021:

 

   Three Months Ended
March 31,
2022
   Three Months Ended
March 31,
2021
 
   (dollars in thousands) 
Provision for (Reversal of) credit losses (loans)  $1,539   $(5,276)
Reversal of credit losses (unfunded commitments)   (89)   (490)
     Provision for (Reversal of) credit losses  $1,450   $(5,766)

 

24

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Fair Value Measurements and Fair Value of Financial Instruments

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

    Level 1:   Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

   

Level 2:   Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

    Level 3:   Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).

 

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:

 

Securities Available-for-Sale and Equity Securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.

  

Derivatives: The fair value of derivatives is based on valuation models using observable market data as of the measurement date (level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to

value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

 

25

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

 

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of March 31, 2022 and December 31, 2021 are as follows:

 

       March 31, 2022 
       Fair Value Measurements at Reporting Date Using 
   Total Fair Value   Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
(dollars in thousands)    
Recurring fair value measurements: Assets    
Investment securities:                
Available-for-sale:                
Federal agency obligations  $48,549   $
-
   $48,549   $
-
 
Residential mortgage pass-through securities   300,976    
-
    300,976    
-
 
Commercial mortgage pass-through securities   17,408    
-
    17,408    
-
 
Obligations of U.S. states and political subdivision   137,051    
-
    128,558    8,493 
Corporate bonds and notes   5,501    
-
    5,501    
-
 
Asset-backed securities   2,354    
-
    2,354    
-
 
Certificates of deposit   
-
    
-
    
-
    
-
 
Other securities   191    191    
-
    
-
 
Total available-for-sale   512,030    191    503,346    8,493 
                     
Equity securities   13,198    10,550    2,648    
-
 
Derivatives   22,872    
-
    22,872    
-
 
Total assets  $548,100   $10,741   $528,866   $8,493 

 

26

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

 

       December 31, 2021 
       Fair Value Measurements at Reporting Date Using 
   Total Fair Value   Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
(dollars in thousands)    
Recurring fair value measurements: Assets                
Investment securities:                
Available-for-sale:                
Federal agency obligations  $50,360   $
-
   $50,360   $
-
 
Residential mortgage pass- through securities   316,095    
-
    316,095    
-
 
Commercial mortgage pass-through securities   10,469    
-
    10,469    
-
 
Obligations of U.S. states and political subdivision   145,625    
-
    137,060    8,565 
Corporate bonds and notes   9,049    
-
    9,049    
-
 
Asset-backed securities   2,564    
-
    2,564    
-
 
Certificates of deposit   150    
-
    150    
-
 
Other securities   195    195    
-
    
-
 
Total available-for-sale  $534,507   $195   $525,747   $8,565 
Equity securities   13,794    11,081    2,713    
-
 
Derivatives   3,347    
-
    3,347    
-
 
      Total assets  $551,648   $11,276   $531,807   $8,565 

 

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2022 and during the year ended December 31, 2021.

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis as of March 31, 2022 and December 31, 2021.

 

Loans Held-for-Sale: Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. Management obtains quotes or bids on all or parts of these loans directly from the purchasing financial institutions (Level 2).

 

Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value.  Fair value of these loans is determined based on the terms of the loan, such as interest rate, maturity date, reset term, as well as sales of similar assets (Level 3).

 

27

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

 

Collateral Dependent Loans: The Company may record adjustments to the carrying value of loans based on fair value measurements, generally as partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with GAAP. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and are also based on Level 3 inputs.

 

For assets measured at fair value on a nonrecurring basis, the fair value measurements as of March 31, 2022 and December 31, 2021 are as follows:

 

       Fair Value Measurements at Reporting Date Using 
Assets measured at fair value on a nonrecurring basis:  Carrying Value as of March 31, 2022   Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 

Collateral dependent loans:

  (dollars in thousands) 
Commercial  $14,698   $
        -
   $
        -
   $14,698 
Commercial real estate   29,370    
-
    
-
    29,370 
Residential real estate   1,366    
-
    
-
    1,366 

 

       Fair Value Measurements at Reporting Date Using 
Assets measured at fair value on a nonrecurring basis:  December 31,
2021
   Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 

Collateral dependent loans:

(dollars in thousands) 
    Commercial  $13,399   $
       -
   $
       -
   $13,399 
    Commercial real estate   20,185    
-
    
-
    20,185 
    Residential real estate   2,794    
-
    
-
    2,794 

 

Collateral dependent loans Collateral dependent loans as of March 31, 2022 that required a valuation allowance were $62.4 million with a related valuation allowance of $16.9 million compared to $54.1 million with a related valuation allowance of $17.8 million as of December 31, 2021.

 

28

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

 

Assets Measured with Significant Unobservable Level 3 Inputs

 

Recurring basis

 

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2022 and for the year ended December 31, 2021:

 

   Municipal
Securities
 
   (dollars in thousands) 
Beginning balance, December 31, 2021  $8,565 
Principal paydowns   (72)
Ending balance, March 31, 2022  $8,493

 

   Municipal
Securities
 
   (dollars in thousands) 
Beginning balance, December 31, 2020  $8,844 
Principal paydowns   (279)
Ending balance, December 31, 2021  $8,565 

 

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.

 

March 31, 2022              
   Fair Value   Valuation
Techniques
  Unobservable
Input
  Rate 
Securities available-for-sale:      (dollars in thousands)       
Municipal securities  $8,493   Discounted cash flows  Discount rate   2.9%

 

December 31, 2021              
   Fair Value   Valuation
Techniques
  Unobservable
Input
  Rate 
Securities available-for-sale:      (dollars in thousands)       
Municipal securities  $8,565   Discounted cash flows  Discount rate   2.9%

 

29

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

 

Nonrecurring basis: The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy of collateral dependent loans.

 

March 31, 2022              
(dollars in thousands)  Fair Value   Valuation
Techniques
  Unobservable
Input
  Range (weighted average) 
Commercial  $13,993   Market approach (100%)   Average transfer price as a price to unpaid principal balance   56% – 85% (57%) 
Commercial  $705   Appraisals of collateral value  Comparable sales   -10% to +35% (+8%) 
Commercial real estate  $29,370   Appraisals of collateral value  Comparable sales   -25% to 10% (-14%) 
Residential real estate  $1,366   Appraisals of collateral value  Comparable sales   +21% to +39% (+22%) 

 

December 31, 2021               
(dollars in thousands)  Fair Value   Valuation
Techniques
  Unobservable
Input
  Range (weighed average)  
Commercial  $12,193   Market approach (100%)   Average transfer price as a price to unpaid principal balance    48% to 73% (49%)  
Commercial  $1,206   Appraisals of collateral value   Adjustment for comparable sales  -10% to +35% (+6%)  
Commercial real estate  $20,185   Appraisals of collateral value   Adjustment for comparable sales   -20% to +15% (-6%)  
Residential real estate  $2,794   Appraisals of collateral value  Adjustment for comparable sales  -15% to +39% (5%)  

 

30

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

 

As of March 31, 2022 the fair value measurements presented are consistent with Topic 820, Fair Value Measurement, in which fair value represents exit price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2022 and December 31, 2021: 

 

           Fair Value Measurements 
   Carrying
Amount
   Fair
Value
   Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
 (Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
   (dollars in thousands) 
     
March 31, 2022                    
Financial assets:                    
Cash and due from banks  $311,544   $311,544   $311,544   $
-
   $
-
 
Securities available-for-sale   512,030    512,030    191    503,346    8,493 
Restricted investments in bank stocks   25,254    n/a    n/a    n/a    n/a 
Equity securities   13,198    13,198    10,550    2,648    - 
Net loans   6,899,525    6,874,974    
-
    
-
    6,874,974 
Derivatives   22,872    22,872    
-
    22,872    
-
 
Accrued interest receivable   34,081    34,081    
-
    1,472    32,609 
                          
Financial liabilities:                         
Noninterest-bearing deposits   1,631,292    1,631,292    1,631,292    
-
    
-
 
Interest-bearing deposits   4,929,113    4,909,128    3,863,299    1,045,829    - 
Borrowings   412,170    410,535    
-
    410,535    
-
 
Subordinated debentures   153,027    155,940    
-
    155,940    
-
 
Accrued interest payable   2,889    2,889    
-
    2,889    
-
 

 

December 31, 2021                    
Financial assets:                    
Cash and due from banks  $265,536   $265,536   $265,536   $
-
   $
-
 
Investment securities available-for-sale   534,507    534,507    195    525,747    8,565 
Restricted investment in bank stocks   27,826    n/a    n/a    n/a    n/a 
Equity securities   13,794    13,794    11,081    2,713    
-
 
Net loans   6,749,849    6,800,287    
-
    
-
    6,800,287 
Derivatives   3,347    3,347    
-
    3,347    
-
 
Accrued interest receivable   34,152    34,152    
-
    1,554    32,598 
Financial liabilities:                         
Noninterest-bearing deposits                         
Interest-bearing deposits   1,617,049    1,617,049    1,617,049    
-
    
-
 
Borrowings   4,715,904    4,716,358    3,565,795    1,150,563    
-
 
Subordinated debentures   468,193    469,671    
-
    469,671    
-
 
Accrued interest payable   152,951    163,995    
-
    163,995    
-
 

 

31

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

 

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above.

 

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

 

Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

 

Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

  

Note 7. Comprehensive (Loss) Income  

 

Total comprehensive (loss) income includes all changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s other comprehensive income is comprised of unrealized holding gains and losses on securities available-for-sale, unrealized gains (losses) on cash flow hedges, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, each net of taxes.

 

The following table represents the reclassification out of accumulated other comprehensive (loss) for the periods presented (dollars in thousands):

 

Details about Accumulated Other
Comprehensive Income Components
  Amounts Reclassified from Accumulated
Other Comprehensive Income
   Affected Line item in the
Consolidated Statements of Income
   Three Months Ended March 31,    
   2022   2021    
Net interest income on swaps  $(525)  $(631)  Interest expense
    147    177   Income tax expense
   $(378)  $(454)   
              
Amortization of pension plan net actuarial losses  $(16)  $(75)  Other components of net periodic pension expense
    4    20   Income tax expense
   $(12)  $(55)   
Total reclassification  $(390)  $(509)   

 

32

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 7.  Comprehensive (Loss) Income – (continued)  

 

Accumulated other comprehensive (loss) as of March 31, 2022 and December 31, 2021 consisted of the following:

 

   March 31,
2022
   December 31, 2021 
   (dollars in thousands) 
Investment securities available-for-sale, net of tax  $(22,970)  $(484)
Cash flow hedge, net of tax   16,443    2,406 
Defined benefit pension and post-retirement plans, net of tax   (1,742)   (3,326)
Total  $(8,269)  $(1,404)

 

Note 8.  Stock-based Compensation 

 

The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of March 31, 2022. The maximum number of shares of common stock or equivalents which may be issued under the Plan, is 750,000. Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, restricted share units or performance units. Shares available for grant and issuance under the Plan as of March 31, 2022 are approximately 222,593. The Company intends to issue all shares under the Plan in the form of newly issued shares.

 

Restricted stock, options and restricted stock units typically have a three-year vesting period starting one year after the date of grant with one-third vesting each year. The options generally expire ten years from the date of grant. Restricted stock and units granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control. All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the awards vesting. Restricted stock have the same dividend and voting rights as common stock, while options, performance units and restricted stock units do not.

 

All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are recorded as incurred. Stock-based compensation expense for the three months ended March 31, 2022 and March 31, 2021 was $1.1 million and $1.0 million, respectively.

 

Activity under the Company’s options for the three months ended March 31, 2022 was as follows:

 

   Number of Stock Options   Weighted-
Average
Exercise 
Price
   Weighted-
Average
Remaining 
Contractual 
Term
(in years)
   Aggregate
Intrinsic Value
 
Outstanding as of December 31, 2021   23,766   $9.94           
Granted   
-
    
-
           
Exercised   (8,774)   9.09           
Forfeited/cancelled/expired   
 
    
 
           
Outstanding as of March 31, 2022   14,992    10.44    0.63   $323,303 
Exercisable as of March 31, 2022   14,992   $10.44    0.63   $323,303 

 

The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on March 31, 2022 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2022. This amount changes based on the fair market value of the Company’s stock.

 

33

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 8.  Stock-Based Compensation – (continued)  

 

Activity under the Company’s restricted shares for the three months ended March 31, 2022 was as follows: