UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): June 18, 2014
CENTER BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
New Jersey | 000-11486 | 52-1273725 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) | (IRS Employer Identification No.) |
2455 Morris Avenue, Union, New Jersey | 07083 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (800) 862-3683
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
£ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
£ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
£ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
£ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 8.01. | Other Events. |
As disclosed in the Registrant’s joint proxy statement and prospectus dated May 9, 2014, concurrent with the execution of the Registrant’s Agreement and Plan of Merger (the “merger agreement”), dated as of January 20, 2014, by and between the Registrant and ConnectOne Bancorp, Inc. (“ConnectOne”), Lawrence B. Seidman entered into an agreement with ConnectOne that we refer to as the Voting and Sell Down Agreement. The Voting and Sell Down Agreement includes a covenant by Mr. Seidman to use commercially reasonable efforts to undertake bona fide sales of the Registrant’s common stock to third parties to reduce his percentage beneficial ownership in the surviving corporation to no more than 4.99% of the outstanding shares by the one-year anniversary of the closing of the merger described in the merger agreement. To enable Mr. Seidman to sell these shares, the registrant agreed to register the shares of the Registrant’s common stock beneficially owned by Mr. Seidman pursuant to a registration rights agreement, a copy of which was set forth in full as an annex to the above-mentioned join proxy statement and prospectus.
In accordance with the above-mentioned registration rights agreement, immediately after the filing of this Current Report on Form 8-K, the Registrant intends to file with the Securities and Exchange Commission a Registration Statement on Form S-3 (the “S-3”) pertaining to the resale of certain shares of its common stock beneficially owned by Lawrence B. Seidman. The purpose of this Current Report on Form 8-K is to file the financial statements and pro forma financial information described in Item 9.01 below, which financial statements and pro forma financial information will then be incorporated by reference into the S-3 upon the filing of the S-3.
Item 9.01. | Financial Statements, Pro Forma Financial Information and Exhibits. |
The following Exhibits are filed with this Current Report on Form 8-K:
(a) Financial statements of businesses acquired: | Page | |||
Year-End Consolidated Financial Statements of ConnectOne: | ||||
Report of Independent Registered Public Accounting Firm | S-1 | |||
Consolidated Balance Sheets as of December 31, 2013 and 2012 | S-2 | |||
Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011 | S-4 | |||
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011 | S-5 | |||
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011 | S-6 | |||
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 | S-7 | |||
Notes to Year-End Consolidated Financial Statements of ConnectOne | S-8 | |||
Interim Consolidated Financial Statements of ConnectOne (unaudited): | ||||
Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013 | S-39 | |||
Consolidated Statements of Income for the three months ended March 31, 2014 and 2013 | S-41 | |||
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013 | S-42 | |||
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2014 and 2013 | S-43 | |||
Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 | S-44 | |||
Notes to Interim Consolidated Financial Statements of ConnectOne | S-45 | |||
(b) Pro Forma Financial Information: | ||||
Introduction | S-63 | |||
Unaudited Pro Forma Condensed Combined Consolidated Balance Sheets as of March 31, 2104 | S-64 | |||
Unaudited Pro Forma Condensed Combined Consolidated Statements of Net Income for the year ended December 31, 2013 | S-65 | |||
Unaudited Pro Forma Condensed Combined Consolidated Statements of Net Income for the three months ended March 31, 2014 | S-66 | |||
Notes to Unaudited Pro Forma Condensed Combined Consolidated Balance Sheets and Statements of Income | S-67 | |||
(d) Exhibits: | ||||
23.1 Consent of Crowe Horwath LLP |
-2- |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
CENTER BANCORP, INC. | ||
By: /s/ Anthony C. Weagley | ||
Name: | Anthony C. Weagley | |
Title: | President and Chief Executive Officer | |
Dated: June 19, 2014 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
ConnectOne Bancorp, Inc.
Englewood Cliffs, New Jersey
We have audited the accompanying consolidated balance sheets of ConnectOne Bancorp, Inc. (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders equity and cash flows for each of the years in the three year period ended December 31, 2013. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ConnectOne Bancorp, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
/s/ Crowe Horwath LLP
Livingston, New Jersey
March 3, 2014
S-1
ConnectOne Bancorp, Inc.
2013
2012
(dollars in thousands) ASSETS Cash and due from banks
$
2,907
$
3,242 Interest-bearing deposits with banks
31,459
47,387 Cash and cash equivalents
34,366
50,629 Securities available for sale
27,589
19,252 Securities held to maturity, fair value of $1,077 at 2013 and $2,084 at 2012
1,027
1,985 Loans held for sale
575
405 Loans receivable
1,151,904
848,842 Less: Allowance for loan losses
(15,979
)
(13,246
) Net loans receivable
1,135,925
835,596 Investment in restricted stock, at cost
7,622
4,744 Bank premises and equipment, net
7,526
7,904 Accrued interest receivable
4,102
3,361 Other real estate owned
1,303
433 Goodwill
260
260 Bank owned life insurance
15,191
Deferred taxes
7,614
4,314 Other assets
128
1,043 Total assets
$
1,243,228
$
929,926 (Continued) S-2
CONSOLIDATED BALANCE SHEETS
December 31, 2013 and 2012
See accompanying notes to consolidated financial statements.
ConnectOne Bancorp, Inc.
2013
2012
(dollars in thousands LIABILITIES AND STOCKHOLDERS EQUITY Liabilities Deposits Noninterest-bearing
$
216,804
$
170,355 Interest-bearing
749,003
598,963 Total deposits
965,807
769,318 FHLB borrowings
137,558
79,568 Accrued interest payable
2,762
2,803 Capital lease obligation
3,107
3,185 Other liabilities
3,866
2,690 Total liabilities
1,113,100
857,564 Commitments and Contingencies Stockholders Equity Preferred stock (Series A), no par value; $20 liquidation value; authorized 125,000 shares; no shares issued and outstanding at December 31, 2013 and 2012
Preferred stock (Series B), no par value; $20 liquidation value; authorized no shares issued and outstanding at December 31, 2013 and 2012
Preferred stock (Series C), no par value; $1,000 liquidation value; authorized 7,500 shares; no shares issued and outstanding at December 31, 2013 and 2012
Common stock and Surplus, no par value; authorized 10,000,000 shares at December 31, 2013 and December 31, 2012; issued and outstanding 5,106,455 at December 31, 2013 and 3,166,217 at December 31, 2012
99,315
51,205 Retained earnings
30,931
20,661 Accumulated other comprehensive income (loss)
(118
)
496 Total stockholders equity
130,128
72,362 Total liabilities and stockholders equity
$
1,243,228
$
929,926 See accompanying notes to consolidated financial statements. S-3
CONSOLIDATED BALANCE SHEETS
December 31, 2013 and 2012
except per share data)
ConnectOne Bancorp, Inc.
2013
2012
2011
(dollars in thousands, Interest income Loans receivable, including fees
$
46,405
$
39,625
$
32,113 Securities
795
1,079
1,505 Other interest income
103
83
58 Total interest income
47,303
40,787
33,676 Interest expense Deposits
4,798
4,777
4,888 Borrowings
1,489
1,349
1,121 Capital lease
189
193
198 Total interest expense
6,476
6,319
6,207 Net interest income
40,827
34,468
27,469 Provision for loan losses
4,575
3,990
2,355 Net interest income after provision for loan losses
36,252
30,478
25,114 Non-interest income Service fees
436
393
396 Gains on sales of loans
239
470
458 Gains on sales of securities
96 Income on bank owned life insurance
191
Other income
336
279
163 Total non-interest income
1,202
1,142
1,113 Non-interest expenses Salaries and employee benefits
10,321
8,352
6,911 Occupancy and equipment
3,101
2,847
2,796 Professional fees
1,463
1,143
1,171 Advertising and promotion
477
489
356 Data processing
2,059
1,697
1,437 Other expenses
3,230
2,960
2,386 Total non-interest expenses
20,651
17,488
15,057 Income before income tax expense
16,803
14,132
11,170 Income tax expense
6,533
5,711
4,504 Net income
10,270
8,421
6,666 Dividends on preferred shares
354
600 Net income available to common stockholders
$
10,270
$
8,067
$
6,066 Earnings per common share: Basic
$
2.15
$
2.99
$
2.71 Diluted
2.09
2.63
2.18 Weighted average common shares outsanding: Basic
4,773,954
2,700,772
2,242,085 Diluted
4,919,384
3,196,558
3,063,076 See accompanying notes to consolidated financial statements. S-4
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2013, 2012 and 2011
except per share data)
ConnectOne Bancorp, Inc.
2013
2012
2011
(dollars in thousands) Net income
$
10,270
$
8,421
$
6,666 Unrealized losses on securities available for sale securities arising during the period
(1,026
)
(190
)
413 Reclassification adjustment for gains realized in income
(96
) Net unrealized gains/(losses)
(1,026
)
(190
)
317 Tax effect
(412
)
(76
)
126 Other comprehensive loss
(614
)
(114
)
191 Comprehensive income
$
9,656
$
8,307
$
6,857 See accompanying notes to consolidated financial statements. S-5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2013, 2012 and 2011
ConnectOne Bancorp, Inc.
Common
Preferred
Preferred
Preferred
Retained
Accumulated
Total
(dollars in thousands) Balance at January 1, 2011
$
27,028
$
2,500
$
12,824
$
$
6,528
$
419
$
49,299 Net Income
6,666
6,666 Other comprehensive loss, net of taxes
191
191 Issuance of preferred stock; Series B, 59,025 shares
1,180
1,180 Cash dividends paid on preferred stock
(600
)
(600
) Equity-based compensation
121
121 Balance at December 31, 2011
$
27,149
$
2,500
$
14,004
$
$
12,594
$
610
$
56,857 Net Income
8,421
8,421 Other comprehensive loss, net of taxes
(114
)
(114
) Issuance of convertible preferred stock; Series C, 7,500 shares
7,500
7,500 Conversion of convertible preferred stocks to common stock
24,004
(2,500
)
(14,004
)
(7,500
)
Cash dividends paid on preferred stock
(354
)
(354
) Equity-based compensation
52
52 Balance at December 31, 2012
51,205
20,661
496
72,362 Net Income
10,270
10,270 Other comprehensive loss, net of taxes
(614
)
(614
) Issuance of 1,840,000 shares, net of expenses
47,715
47,715 Grant of 100,238 restricted stock awards and performance units
Equity-based compensation
395
395 Balance at December 31, 2013
$
99,315
$
$
$
$
30,931
$
(118
)
$
130,128 See accompanying notes to consolidated financial statements. S-6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Years ended December 31, 2013, 2012 and 2011
Stock
and Surplus
Stock,
Series A
Stock,
Series B
Stock,
Series C
Earnings
OCI
ConnectOne Bancorp, Inc.
2013
2012
2011
(dollars in thousands) Cash flows from operating activities Net income
$
10,270
$
8,421
$
6,666 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses
4,575
3,990
2,355 Depreciation and amortization
1,294
1,288
1,219 Net amortization of securities discounts and premiums
58
66
50 Amortization of intangible assets
14
14 Equity-based compensation
395
52
121 Gain on sales of securities
(96
) Proceeds from sale of loans
11,255
20,612
23,925 Originations of loans held for sale
(11,186
)
(20,407
)
(22,875
) Gain on sales of loans
(239
)
(470
)
(458
) Increase in bank owned life insurance
(191
)
(Increase) decrease in provision for deferred income taxes
(2,888
)
(2,070
)
312 Increase in accrued interest receivable
(741
)
(614
)
(148
) Increase (decrease) in accrued interest payable
(41
)
853
731 Increase (decrease) in other liabilities
1,176
(10
)
563 Decrease in other assets
915
1,320
(877
) Net cash provided by operating activities
14,652
13,045
11,502 Cash flows from investing activities Net Increase in loans
(305,774
)
(220,265
)
(135,730
) Purchases of securities available for sale
(14,890
)
(20,984
) Purchases of securities held to maturity
(2,000
) Purchases of bank owned life insurance
(15,000
)
Maturities, calls and repayments of securities
6,427
9,636
31,542 Proceeds from sales of securities available for sale
4,779 Net increase in investments in restricted stock, at cost
(2,878
)
(1,366
)
(740
) Purchases of bank premises and equipment
(916
)
(580
)
(1,351
) Net cash used in investing activities
(333,031
)
(212,575
)
(124,484
) Cash Flows From Financing Activities: Net increase in deposits
196,489
159,897
126,736 Decrease in securities sold under agreements to repurchase
(17,189
) Net change in fed funds purchased
(5,000
) Proceeds from FHLB borrowings
86,000
60,000
20,000 Repayment of FHLB borrowings
(28,010
)
(35,988
)
(5,968
) Net proceeds from initial public offering
47,715
Proceeds from sale of preferred stock
7,500
1,180 Decrease in capital lease obligation
(78
)
(72
)
(67
) Preferred stock dividends
(354
)
(600
) Net cash provided by financing activities
302,116
190,983
119,092 Net decrease in cash and cash equivalents
(16,263
)
(8,547
)
6,110 Cash and cash equivalents, beginning of year
50,629
59,176
53,066 Cash and cash equivalents, end of year
$
34,366
$
50,629
$
59,176 Supplementary cash flows information: Interest paid
$
6,517
$
5,466
$
5,476 Income taxes paid
$
8,754
$
6,700
$
5,102 Supplementary information on noncash investing activities Loans transferred to other real estate owned
$
870
$
433
$
See accompanying notes to consolidated financial statements. S-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2013, 2012 and 2011
ConnectOne Bancorp, Inc. NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Principles of Consolidation: The consolidated financial statements include ConnectOne Bancorp, Inc. (The Parent Corporation) and its wholly owned subsidiary, ConnectOne Bank (the Bank and, collectively with the Parent Corporation and the Parent
Corporations other direct subsidiaries, the Company.) On October 1, 2013, the Bank formed, through a capital contribution, a real estate investment trust, ConnectOne Preferred Funding Corp. (Funding Corp.), to own and manage a portfolio of real estate backed loans. All significant intercompany
accounts and transactions have been eliminated in consolidation. The Company provides financial services through its offices in Bergen, Hudson, and Monmouth counties, New Jersey. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans.
Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from business operations. There are no significant concentrations of loans to any one industry
or customer. However, the customers ability to repay their loans is dependent on the cash flows, real estate and general economic conditions in the area. Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and
the disclosures provided, and actual results could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change. Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with maturities of less than 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and
federal funds purchased and repurchase agreements. Securities: Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with readily
determinable fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on
the trade date and determined using the specific identification method. Management evaluates securities for other-than-temporary impairment (OTTI) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the
unrealized loss, and the financial condition and near-term prospect of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria
regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to
credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For
equity securities, the entire amount of the impairment is recognized through earnings. S-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ConnectOne Bancorp, Inc. Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged
to earnings. Loans are sold servicing released. Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal
balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer and credit card loans are typically charged off no later than when the loan is 120 days past due. Past due status is based
on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively
evaluated for impairment and individually classified impaired loans. A loan is moved to non-accrual status in accordance with the Companys policy, typically after 90 days of non-payment. All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in managements judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial
difficulties, are considered troubled debt restructurings and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record,
and the amount of the shortfall in relation to the principal and interest owed. Commercial, commercial construction and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loans existing rate or at the
fair value of collateral if repayment is expected solely from the collateral. Large S-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ConnectOne Bancorp, Inc. groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loans effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at
the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent three years. This actual
loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume
and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and
effects of changes in credit concentrations. The following portfolio segments have been identified: commercial, commercial real estate, commercial construction, residential real estate, home equity and consumer loans. Restricted Stock: The Bank is a member of the Federal Home Loan Bank (FHLB) of New York. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as
a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends on the stock are reported as income. Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free
of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Foreclosed Assets: Assets acquired through deed in lieu or loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value
declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 4 to 39 years. Furniture, fixtures and equipment are depreciated using the
straight-line (or accelerated) method with useful lives ranging from 3 to 10 years. Goodwill and Other Intangible Assets: Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and
liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected December 31 as the date to perform the
annual impairment test. Intangible assets with definite useful lives are amortized over S-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ConnectOne Bancorp, Inc. their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet. Stock-Based Compensation: Compensation cost is recognized for stock option, restricted stock, and performance unit awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while
the fair value of the Companys common stock at the award date is used for restricted stock and performance unit awards. Compensation costs related to performance unit awards are also based upon Company performance in relation to pre-established targets. Compensation cost is recognized over the
required service period, generally defined as the vesting period. Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases
of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on
examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The company recognizes interest and/or penalties related to income tax matters in other expense. Retirement Plans: Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Earnings Per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under
stock option plans, convertible preferred stock, and performance unit awards. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity. Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure
to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any
such matters that will have a material effect on the financial statements. Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank is required to meet regulatory reserve and clearing requirements. Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to stockholders. Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, S-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ConnectOne Bancorp, Inc. credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Segment Reporting: FASB ASC 28, Segment Reporting, requires companies to report certain information about operating segments. The Company is managed as one segment; a community bank. All decisions including but not limited to loan growth, deposit funding, interest rate risk,
credit risk and pricing are determined after assessing the effect on the totality of the organization. For example, loan growth is dependent on the ability of the organization to fund this growth through deposits or other borrowings. As a result, the Company is managed as one operating segment. Bank Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other
charges or other amounts due that are probable at settlement. Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or stockholders equity. NOTE 2SECURITIES The amortized cost, gross unrealized gains and losses and fair value of securities available for sale at December 31, 2013 and 2012, are as follows (dollars in thousands):
Amortized
Gross
Gross
Fair December 31, 2013 Securities available for sale: U.S. Treasury securities
$
1,935
$
$
(132
)
$
1,803 States and political subdivisions
4,415
(80
)
4,335 Asset-backed securities: Residential mortgages
9,452
333
(128
)
9,657 Student loans
4,568
(20
)
4,548 Small business
1,414
(23
)
1,391 Equity securities
6,000
(145
)
5,855
$
27,784
$
333
$
(528
)
$
27,589 December 31, 2012 Securities available for sale: U.S. government sponsored agencies
$
1,000
$
5
$
$
1,005 Asset-backed securities: Residential mortgages
11,421
608
12,029 Equity securities
6,000
218
6,218
$
18,421
$
831
$
$
19,252 S-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Cost
Unrealized
Gains
Unrealized
Losses
Value
ConnectOne Bancorp, Inc. The amortized cost, gross unrecognized gains and losses and fair value of securities held to maturity at December 31, 2013 and 2012, are as follows (dollars in thousands):
Amortized
Gross
Gross
Fair December 31, 2013 Securities held-to-maturity: Asset-backed securitiesresidential mortgages
$
1,027
$
50
$
$
1,077 December 31, 2012 Securities held-to-maturity: Asset-backed securitiesresidential mortgages
$
1,985
$
99
$
$
2,084 The amortized cost and fair value of debt securities held to maturity and available for sale at December 31, 2013, by contractual maturity, are shown below (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
Available for Sale
Held to Maturity
Amortized
Fair
Amortized
Fair December 31, 2013 Available-for-Sale Due in under one year or less
$
1,003
$
1,003
$
1
$
1 Due after one year through five years
326
340 Due after five years through ten years
4,422
4,224
188
197 Due after ten years
6,907
6,852
512
539 Asset-backed securitiesresidential mortgages
9,452
9,655
$
21,784
$
21,734
$
1,027
$
1,077 For the years ended December 31, 2013 and 2012, there were no sales of available for sale securities. For the year ended December 31, 2011, there was one sale of an available for sale security which resulted in a pre-tax gain of $96,000. Securities with a carrying value of $215,000 and $322,000 at December 31, 2013 and 2012, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. S-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Cost
Unrealized
Gains
Unrealized
Losses
Value
Cost
Value
Cost
Value
ConnectOne Bancorp, Inc. The following table summarizes securities with unrealized losses at December 31, 2013, aggregated by major security type and length of time in a continuous unrealized loss position (dollars in thousands):
Less than 12 Months
12 Months or
Longer
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized December 31, 2013 Available for Sale U.S. Treasury securities
$
1,803
$
(132
)
$
$
$
1,803
$
(132
) States and political subdivisions
3,412
(80
)
3,412
(80
) Asset-backed securities Residential mortgages
4,284
(128
)
4,284
(128
) Student loans
4,548
(20
)
4,548
(20
) Small business
1,391
(23
)
1,391
(23
) Equity securities
5,855
(145
)
5,855
(145
)
$
21,293
$
(528
)
$
$
$
21,293
$
(528
) Unrealized losses on available for sale securities have not been recognized into income because the securities are of high credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in
fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach maturity. There were no held to maturity securities in an unrealized loss position at December 31, 2013 and 2012. There were no securities in an unrealized loss position at December 31, 2012. NOTE 3LOANS RECEIVABLE The composition of loans receivable (which excludes loans held for sale) at December 31, 2013 and 2012, is as follows (dollars in thousands):
2013
2012 Commercial
$
203,690
$
147,455 Commercial real estate
769,121
549,218 Commercial construction
59,877
36,872 Residential real estate
85,568
82,962 Home equity
32,504
30,961 Consumer
2,340
1,801 Gross loans
1,153,100
849,269 Unearned net origination fees and costs
(1,196
)
(427
) Loans receivable
1,151,904
848,842 Less: Allowance for loan losses
(15,979
)
(13,246
) Nets loans receivable
$
1,135,925
$
835,596 The portfolio classes in the above table have unique risk characteristics with respect to credit quality:
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. S-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Value
Losses
Value
Losses
Value
Losses
ConnectOne Bancorp, Inc.
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, home equity 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 Companys 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 following table represents the allocation of allowance for loan losses and the related loans by loan portfolio segment disaggregated based on the impairment methodology at December 31, 2013 and 2012 (dollars in thousands):
Commercial
Commercial
Commercial
Residential
Home
Consumer
Unallocated
Total December 31, 2013 Allowance for loan losses: Individually evaluated for impairment
$
1,440
$
122
$
$
$
$
$
$
1,562 Collectively evaluated for impairment
2,998
8,622
639
1,248
698
52
160
14,417 Total
$
4,438
$
8,744
$
639
$
1,248
$
698
$
52
$
160
$
15,979 Gross loans: Individually evaluated for impairment
$
5,813
$
6,137
$
$
3,029
$
767
$
$
$
15,746 Collectively evaluated for impairment
197,877
762,984
59,877
82,539
31,737
2,340
1,137,354 Total
$
203,690
$
769,121
$
59,877
$
85,568
$
32,504
$
2,340
$
$
1,153,100 December 31, 2012 Allowance for loan losses: Individually evaluated for impairment
$
165
$
1,033
$
$
$
$
$
$
1,198 Collectively evaluated for impairment
2,237
6,712
633
1,542
617
41
266
12,048 Total
$
2,402
$
7,745
$
633
$
1,542
$
617
$
41
$
266
$
13,246 Gross loans: Individually evaluated for impairment
$
3,124
$
4,697
$
395
$
2,995
$
119
$
$
$
11,330 Collectively evaluated for impairment
144,331
544,521
36,477
79,967
30,842
1,801
837,939 Total
$
147,455
$
549,218
$
36,872
$
82,962
$
30,961
$
1,801
$
$
849,269 S-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Real Estate
Construction
Real Estate
Equity
Lines of
Credit
ConnectOne Bancorp, Inc. The following table presents information related to impaired loans by class of loans as of and for the years ended December 31, 2013 and 2012 (dollars in thousands):
Unpaid
Recorded
Allowance for
Average
Interest
Cash Basis December 31, 2013 With no related allowance recorded: Commercial
$
934
$
809
$
$
830
$
15
$
Commercial real estate
4,712
4,348
4,479
63
Commercial construction
Residential real estate
3,643
3,055
3,510
36
Home equity lines of credit
771
768
567
7
Consumer
10,060
8,980
9,386
121
With an allowance recorded: Commercial
5,057
5,016
1,440
5,192
122
60 Commercial real estate
1,950
1,959
122
2,042
119
Commercial construction
Residential real estate
Home equity lines of credit
Consumer
7,007
6,975
1,562
7,234
241
60 Total
$
17,067
$
15,955
$
1,562
$
16,620
$
362
$
60 December 31, 2012 With no related allowance recorded: Commercial
$
273
$
291
$
$
285
$
$
Commercial real estate
1,705
1,738
1,354
46
Commercial construction
Residential real estate
2,995
3,196
3,047
119
Home equity lines of credit
119
125
121
7
Consumer
5,092
5,350
4,807
172
With an allowance recorded: Commercial
2,851
2,984
165
2,895
135
33 Commercial real estate
3,387
3,631
1,033
3,614
55
Commercial construction
Residential real estate
Home equity lines of credit
Consumer
6,238
6,615
1,198
6,509
190
33 Total
$
11,330
$
11,965
$
1,198
$
11,316
$
362
$
33 The recorded investment in loans includes accrued interest receivable and other capitalized costs such as real estate taxes paid on behalf of the borrower and loan origination fees, net. S-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Principal
Balance
Investment
Loan Losses
Allocated
Recorded
Investment
Income
Recognized
Interest
Recognized
ConnectOne Bancorp, Inc. The following tables present nonaccrual loans and loans past due over 90 days still on accrual by class of loans (dollars in thousands):
Nonaccrual
Loans Past Due
2013
2012
2013
2012 Commercial
$
3,582
$
3,124
$
$
Commercial real estate
2,445
2,446
Commercial construction
Residential real estate
2,381
2,369
Home equity lines of credit
767
Consumer
Total
$
9,175
$
7,939
$
$
The following table presents past due and current loans by the loan portfolio class as of December 31, 2013 and 2012 (dollars in thousands):
30-59
60-89
90 Days
Total
Current
Total December 31, 2013 Commercial
$
$
$
634
$
634
$
203,056
$
203,690 Commercial real estate
1,394
1,394
767,727
769,121 Commercial construction
59,877
59,877 Residential real estate
431
1,763
2,194
83,374
85,568 Home equity lines of credit
653
653
31,851
32,504 Consumer
19
19
2,321
2,340 Total
$
$
450
$
4,444
$
4,894
$
1,148,206
$
1,153,100 December 31, 2012 Commercial
$
$
$
273
$
273
$
147,182
$
147,455 Commercial real estate
142
2,446
2,588
546,630
549,218 Commercial construction
36,872
36,872 Residential real estate
1,769
2,369
4,138
78,824
82,962 Home equity lines of credit
35
35
30,926
30,961 Consumer
1,801
1,801 Total
$
1,804
$
142
$
5,088
$
7,034
$
842,235
$
849,269 Troubled Debt Restructurings During the years ending December 31, 2013 and 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity
date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. The balance of troubled debt restructurings at December 31, 2013, consists of four loans totaling $2,934,000 that were performing at such date under their restructured terms and for which the Bank had no commitment to lend additional funds and three credits that were classified as non-accrual. The
balance of troubled debt restructurings at December 31, 2012, consists of five loans totaling $2,996,000 that were performing at such date under their restructured terms and for which the Bank has no commitment to lend additional funds and three credits that were currently classified as non- S-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Over 90 Days
Still Accruing
Days
Past Due
Days
Past Due
or Greater
Past Due
Past Due
Gross
Loans
ConnectOne Bancorp, Inc. accrual loans. The Company has allocated $43,000 of specific allocations with respect to loans whose loan terms had been modified in troubled debt restructurings as of December 31, 2013. The Company allocated $211,000 of specific allocations with respect to loans whose terms have been modified in
troubled debt restructurings as of December 31, 2012. There were no trouble debt restructurings that occurred during the year ended December 31, 2013. The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2012 (dollars in thousands):
Number of
Pre-Modification
Post-Modification Trouble debt restructurings Commercial
2
$
3,901
$
3,901 Commercial real estate
Commercial construction
Residential real estate
Home equity lines of credit
Consumer
Total
2
$
3,901
$
3,901 There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the years ended December 31, 2013 or 2012. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. Credit Quality Indicators The Bank categorizes loans into risk categories based on relevant information about the quality and realizable value of collateral, if any, and the ability of borrowers to service their debts such as: current financial information, historical payment experience, credit documentation, public information,
and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis is performed whenever a credit is extended, renewed or modified, or when an observable event occurs indicating a potential decline in credit quality, and no less
than annually for large balance loss. The Bank used the following definitions for risk ratings: Special Mention: Loans classified as special mention have a potential weakness that deserves managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the Banks credit position at some future date. Substandard: Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment and liquidation of the debt. They
are characterized by distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Normal payment from the borrower is in jeopardy, although loss of principal, while still possible, is not imminent. Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in
full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. S-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Loans
Outstanding
Recorded
Investment
Outstanding
Recorded
Investment
ConnectOne Bancorp, Inc. The following table presents the risk category of loans by class of loans based on the most recent analysis performed as of December 31, 2013 and 2012 (dollars in thousands):
Credit Risk Profile by
Pass
Special Mention
Substandard
Doubtful
Total December 31, 2013 Commercial
$
184,340
$
14,377
$
4,973
$
$
203,690 Commercial real estate
755,533
1,947
11,641
769,121 Commercial construction
59,877
59,877 Total
$
999,750
$
16,324
$
16,614
$
$
1,032,688 December 31, 2012 Commercial
$
131,887
$
11,733
$
3,835
$
$
147,455 Commercial real estate
529,453
6,602
13,163
549,218 Commercial construction
35,985
887
36,872 Total
$
697,325
$
18,335
$
17,885
$
$
733,545 Residential real estate, home equity lines of credit, and consumer loans are not rated. The Company evaluates credit quality of those loans by aging status of the loan and by payment activity, which was previously presented. S-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Internally Assigned Grades
ConnectOne Bancorp, Inc. The following table presents the activity in the Companys allowance for loan losses by class of loans (dollars in thousands):
Commercial
Commercial
Commercial
Residential
Home Equity
Consumer
Unallocated
Total Allowance for loan losses: Beginning balance at January 1, 2013
$
2,402
$
7,745
$
633
$
1,542
$
617
$
41
$
266
$
13,246 Charge-offs
(1,058
)
(594
)
(188
)
(2
)
(1,842
) Recoveries
Provision for loan losses
2,036
2,057
6
300
269
13
(106
)
4,575 Total ending balance at December 31, 2013
$
4,438
$
8,744
$
639
$
1,248
$
698
$
52
$
160
$
15,979 Allowance for loan losses: Beginning balance at January 1, 2012
$
653
$
5,658
$
447
$
2,517
$
339
$
3
$
$
9,617 Charge-offs
(115
)
(109
)
(16
)
(153
)
(393
) Recoveries
32
32 Provision for loan losses
1,864
2,196
202
(822
)
278
6
266
3,990 Total ending balance at December 31, 2012
$
2,402
$
7,745
$
633
$
1,542
$
617
$
41
$
266
$
13,246 Allowance for loan losses: Beginning balance at January 1, 2011
$
634
$
2,902
$
808
$
2,773
$
292
$
5
$
$
7,414 Charge-offs
(90
)
(62
)
(152
) Recoveries
Provision for loan losses
19
2,756
(361
)
(166
)
47
60
2,355 Total ending balance at December 31, 2011
$
653
$
5,658
$
447
$
2,517
$
339
$
3
$
$
9,617 NOTE 4BANK PREMISES AND EQUIPMENT The components of premises and equipment at December 31, 2013 and 2012, are as follows (dollars in thousands):
2013
2012 Building
$
3,422
$
3,422 Leasehold improvements
6,356
5,933 Furniture, fixtures and equipment
3,279
2,897 Computer equipment and data processing software
2,069
1,970 Vehicles
164
152
15,290
14,374 Less: Accumulated depreciation and amortization
(7,764
)
(6,470
)
$
7,526
$
7,904 Depreciation expense amounted to $1,294,000, $1,288,000 and $1,219,000 for the years ended December 31, 2013, 2012 and 2011, respectively. Capital Leases: The Company has entered into a lease agreement for a building under a capital lease. The lease arrangement requires monthly payments through 2028. S-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Real Estate
Construction
Real Estate
Lines of Credit
ConnectOne Bancorp, Inc. The Company has included these leases in premises and equipment as follows (dollars in thousands):
2013
2012 Building
$
3,422
$
3,422 Accumulated depreciation
(856
)
(684
)
$
2,566
$
2,738 The following is a schedule by year of future minimum lease payments under the capitalized lease, together with the present value of net minimum lease payments at December 31, 2013 (dollars in thousands): 2014
$
291 2015
291 2016
292 2017
292 2018
294 Thereafter
3,340 Total minimum lease payments
4,800 Less amount representing interest
1,693 Present value of net minimum lease payments
$
3,107 Operating Leases: The Company leases certain branch properties under operating leases. Rent expense was $1,040,000, $1,031,000 and $899,000 for the years ended December 31, 2013, 2012 and 2011, respectively. Rent commitments, before considering renewal options that generally are present were
as follows at December 31, 2013 (dollars in thousands): 2014
$
992 2015
1,008 2016
885 2017
533 2018
467 Thereafter
494
$
4,379 NOTE 5DEPOSITS The components of deposits at December 31, 2013 and 2012 are as follows (dollars in thousands):
2013
2012 Demand, non-interest bearing
$
216,804
$
170,355 Demand, interest-bearing & NOW
71,421
57,198 Money market accounts
192,552
193,600 Savings
69,319
72,693 Time, $100 and over
219,302
195,088 Time, other
196,409
80,384
$
965,807
$
769,318 S-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ConnectOne Bancorp, Inc. At December 31, 2013, the scheduled maturities of time deposits are as follows (dollars in thousands): 2014
$
278,344 2015
35,221 2016
45,480 2017
29,141 2018
27,525
$
415,711 At December 31, 2013 and 2012, the Company had $103,573,000 and $29,298,000 of brokered certificates of deposit, respectively. NOTE 6FHLB BORROWINGS The components of FHLB borrowings are as follows (dollars in thousands): December 31, 2013
December 31, 2012 Maturity
Interest
Outstanding
Maturity
Interest
Outstanding 01/03/14
0.37
%
$
15,000
03/11/13
1.16
%
$ 5,000 05/12/14
2.44
10,000
07/22/13
1.47
2,000 08/05/14
1.08
3,000
05/12/14
2.44
10,000 09/08/14
0.28
5,000
08/05/14
1.08
3,000 02/23/15
0.88
10,000
02/23/15
0.88
10,000 05/07/15
0.81
15,000
05/07/15
0.81
15,000 05/11/15
2.17
1,558
05/11/15
2.91
5,000 05/11/15
2.91
5,000
05/11/15
2.17
2,568 08/05/15
1.49
2,000
08/05/15
1.49
2,000 08/03/16
1.93
10,000
08/03/16
1.93
10,000 08/26/16
1.04
5,000
04/02/18
2.51
2,500 10/11/16
1.15
5,000
04/02/18
1.98
7,500 07/18/17
1.29
5,000
07/16/18
2.99
5,000 09/25/17
1.41
11,000
04/02/18
2.51
2,500
$79,568 04/02/18
1.98
7,500 07/16/18
2.99
5,000 10/23/18
1.68
10,000 11/19/18
1.68
10,000
$
137,558 Except as noted in the following sentences, each advance is payable at its maturity date, with a prepayment penalty of fixed rate advances. Three of the FHLB notes ($2,500,000 and $7,500,000 each due April 2, 2018, and $5,000,000 due July 16, 2018) contain a convertible option which allows the FHLB, at quarterly intervals, to convert the fixed convertible advance into replacement funding for the same or lesser principal based on any
advance then offered by the FHLB at their current market rate. The Company has the option to repay these advances, if converted, at par. The advances were collateralized by and $330,100,000 and $341,412,000 and of commercial mortgage loans, net of required over-collateralization amounts, under a
blanket lien arrangement at December 31, 2013 and 2012, respectively. S-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Date
Rate
Date
Rate
ConnectOne Bancorp, Inc. NOTE 7STOCKHOLDERS EQUITY In September 2009, the Company completed its offering of Series A preferred stock and issued 125,000 shares of Series A preferred at $20 per share for net proceeds of $2,500,000. The Series A shares had no right to require the Company to redeem the shares. The Series A shares were entitled to
receive their liquidation preference before any distribution is made on common stock. The shares were convertible after the third anniversary of issuance by the holder or the Company to that number of common shares equal to the liquidation preference divided by the then current tangible book value
per common share of stock. The Series A shares voted together with the common stock and are entitled to noncumulative dividends at the Prime Rate, as reported in the Wall Street Journal, plus 1.5% reset quarterly, with a floor of 4.75%. Dividends were payable only when declared by the Board of
Directors. In December of 2009, the Company completed its first offering of Series B preferred stock and issued 400,000 shares at $20 per share for net proceeds of $8,000,000. The Series B shares had substantially the same rights as the Series A shares with a few differences. The Series B shares were
convertible after the third anniversary of issuance by the holder or the Company to the number of common shares equal to the stated value of the shares divided by one-and-a-half times the then book value per share of the Companys common stock upon 60 days notice. The Series B shares were non-
voting and entitled to a 4% non-cumulative dividend for the first year and non-cumulative dividends after the first year at the Prime Rate with a maximum dividend rate of 7%. The Series B shares ranked pari passu with the Series A shares. In January of 2010, the Company completed another offering of Series B preferred stock and issued 50,200 shares at $20 per share for net proceeds of $1,004,000. In December of 2010, the Company completed a third offering of Series B preferred stock and issued 190,975 shares at $20 per share for net proceeds of $3,820,000. In January of 2011, the Company completed another offering of Series B preferred stock and issued 59,025 shares at $20 per share for net proceeds of $1,180,000. In March of 2012 the Company completed its first offering of Series C preferred stock and issued 7,500 shares at $1,000 per share for net proceeds of $7,500,000. The Shares did not bear voting rights, except in certain circumstances required by law, and were entitled to non-cumulative dividends at a
variable rate equal to the prime rate as reported in the Wall Street Journal from time to time, with a maximum dividend rate of 7% per annum. In addition, the Shares were convertible into shares of our common stock at the election of the holder, and the Company could require conversion of the
Shares into shares of our common stock, any time, at a ratio equal to the purchase price ($1,000) divided by the product of 1.25 multiplied by the then current book value per share of our common stock. The series C shares ranked pari passu with Series A and B shares. During 2012, the Series A preferred shares were converted into 127,676 common shares at an average conversion price of $19.58, the Series B preferred shares were converted into 475,857 common shares at an average conversion price of $29.44, and the Series C preferred shares were converted into
306,388 common shares at an average price of $24.48. On February 11, 2013, the company completed its initial public offering and issued 1,840,000 shares of common stock at $28 per share for net proceeds, after expenses of $3.8 million, of approximately $47.7 million. NOTE 8STOCK OPTION PLANS AND EQUITY COMPENSATION PLAN In 2005, the Company adopted two stock option plans that were approved by stockholders on April 29, 2005. The 2005 A Stock Option Plan provides for granting of stock options to directors and employees to purchase up to 120,000 shares. The determination of the recipients of these S-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ConnectOne Bancorp, Inc. options and the vesting of these options is at the discretion of the Board of Directors. The shares granted under this plan may be either non-qualified options or incentive stock options, which are subject to the limitations under Section 422 of the Internal Revenue Code. Under this plan, incentive
stock options must have an exercise price of no less than 100% of the fair market value of the common stock on the date of grant, and non-qualified options may have an exercise price to be determined by the Board of Directors at grant, but no less than 85% of the fair market value of the common
stock on the date of grant. The 2005 B Stock Option plan permits grants of options to directors and employees to purchase up to 60,000 shares of common stock. The terms of this plan are substantially the same as the A Plan, with the exception that under the B Stock Option Plan, only non-qualified options may be granted. In 2006, the Company adopted the 2006 Equity Compensation Plan. This plan provides for granting of 45,300 stock options or restricted stock awards to directors and employees. The determination of the recipients of the equity compensation and the related vesting is at the discretion of the Board of
Directors. Stock options granted under this plan may be either non-qualified options or incentive stock options, which are subject to the limitations under Section 422 of the Internal Revenue Code. Under this plan, the non-qualified options and incentive stock options must have an exercise price of
no less than 100% of the fair market value of the common stock on the date of grant. In 2008, the Company adopted the 2008 Equity Compensation Plan. The plan provides for granting of 108,099 stock options or restricted awards to directors and employees. The determination of the recipients of the equity compensation and the related vesting is at the discretion of the Board of
Directors. Stock options granted under this plan may be either non-qualified options or incentive stock options, which are subject to the limitations under Section 422 of the Internal Revenue Code. Under this plan, the non-qualified options and incentive stock options must have an exercise price of
no less than 100% of the fair market value of the common stock on the date of grant. In 2009, the Company adopted the 2009 Equity Compensation Plan. The plan provides for granting of 111,113 stock options or restricted awards to directors and employees. The determination of the recipients of the equity compensation and the related vesting is at the discretion of the Board of
Directors. Stock options granted under this plan may be either non-qualified or incentive stock options, which are subject to the limitations under Section 422 of the Internal Revenue Code. Under this plan, the non-qualified options must have an exercise price of no less than 100% of the fair market
value of the common stock on the date of grant. In 2012, the Company adopted the 2012 Equity Compensation Plan. The plan provides for granting of 125,000 stock options, restricted awards or performance units, or any combination thereof, to directors, employees, members of any advisory committee or any other service provider to the Company.
The determination of the recipients of awards, the types of awards granted and the specific terms of each award is at the discretion of the Compensation Committee of the Board of Directors, subject to the terms of the Plan. Stock options granted under this plan may be either non-qualified or incentive
stock options, which are subject to the limitations under Section 422 of the Internal Revenue Code. Under this plan, the non-qualified options must have an exercise price of no less than 100% of the fair market value of the common stock on the date of grant. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. Expected volatilities are based on estimated historical volatilities of the Companys common stock. The expected term of options granted is based on historical data and
represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the S-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ConnectOne Bancorp, Inc. time of the grant. The fair value of stock options granted during 2012 was $4.94 on the date of grant using the Black-Scholes option pricing model with the following assumptions for 2012: stock price volatility of 27.63%, risk free interest rate of .84%, 0% dividend rate and expected life of 5.5 years. No
options were granted in 2011. At December 31, 2013, there were 106,985 options available for grants under the plans. A summary of the activity in the stock option plan for 2013 follows:
Shares
Weighted
Weighted
Aggregate Oustanding at beginning of year
300,438
$
12.32 Granted
Exercised
Forfeited
Expired
Oustanding at end of year
300,438
$
12.32
$
3.40
$
8,202,320 Fully vested and expected to vest
300,438
$
12.32
$
3.40
$
8,202,320 Exercisable at end of year
286,687
$
12.04
$
3.18
$
7,911,794 As of December 31, 2013 and 2012, there was zero unrecognized compensation cost related to nonvested stock options granted under the Plan. Aggregate intrinsic value is based on $39.63, which was the closing market price of our common stock at December 31, 2013. There were no stock options
granted in 2013 and 2012. There were no material expenses related to vesting of stock options in 2013 and 2012. In conjunction with the plans above, the Company granted restricted shares to certain executive officers. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date. The fair value of the stock granted prior to our IPO was based on the
book value of stock on the date of the grant. The fair value of the stock granted after our IPO was based on the closing market price of our common stock as of the grant date. Generally, grants of restricted shares vest one-third, each, on the first, second and third anniversaries of the grant date. A summary of changes in the Companys nonvested restricted shares for the year ended December 31, 2013 follows:
Nonvested Shares
Shares
Weighted- Nonvested at December 31, 2012
10,075
$
18.26 Granted
14,925
22.76 Vested
(5,725
)
17.73 Forfeited
Nonvested at December 31, 2013
19,275
$
21.90 As of December 31, 2013, there was $289,000 of total unrecognized compensation cost related to nonvested shares granted under the plans. The cost is expected to be recognized over a weighted average period of 12.1 months. The total fair value of shares vested during year ended December 31, 2013 and
2012, was $152,000 and 42,000, respectively. There were no material expenses related to vesting of restricted stock expense in 2013 or 2012. S-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Average
Exercise
Price
Average
Remaining
Contractual
Term (Years)
Intrinsic
Value
Average
Grant-Date
Fair Value
ConnectOne Bancorp, Inc. On August 7, 2013, the Company granted to various key employees performance unit awards, with each unit entitling the holder to one share of the Companys common stock contingent upon the Company meeting or exceeding certain return on asset targets over the course of a three-year period
commencing July 1, 2013. Under the agreement, and assuming the Company has met or exceeded the applicable targets, grants of performance unit awards will vest one-third, each, on the third, fourth and fifth anniversaries of the grant date. At December 31, 2013, the specific number of shares related to
performance unit awards that were expected to vest was 85,313, determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional
compensation expense could be recorded in future periods or previously recognized expense could be reversed. The maximum amount of performance unit awards is 102,375. A summary of the status of unearned performance unit awards and the change during the period is presented in the table below:
Shares
Weighted- Unearned at December 31, 2012
$
n/a Awarded
85,313
32.35 Forfeited
n/a Expired
n/a Unearned at December 31, 2013
85,313
32.35 The company recognized $253,000 in stock-based compensation expenses for services rendered for the year ended December 31, 2013. At December 31, 2013, compensation cost of $2,506,000 related to nonvested awards not yet recognized is expected to be recognized over a weighted-average period
of 3.5 years. NOTE 9INCOME TAXES The components of income tax expense for the years ended December 31, 2013, 2012 and 2011 are as follows (dollars in thousands):
2013
2012
2011 Current expense Federal
$
7,773
$
5,931
$
3,224 State
1,648
1,850
968 Deferred expense (benefit) Federal
(2,288
)
(1,558
)
231 State
(600
)
(512
)
81
$
6,533
$
5,711
$
4,504 S-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Average
Grant-Date
Fair Value
ConnectOne Bancorp, Inc. A reconciliation of the statutory federal income tax to the income tax expense included in the statements of income for the years ended December 31, 2013, 2012 and 2011 is as follows (dollars in thousands):
2013
2012
2011 Income before income tax expense
$
16,803
$
14,132
$
11,170 Federal statutory rate
35
%
34
%
34
% Federal income tax at statutory rate
$
5,881
$
4,805
$
3,798 State income taxes, net of federal benefit
681
883
693 Change in cash surrender value of bank-owned life insurance
67
Tax-exempt interest income, net
(6
)
Non-deductible expenses and other
(90
)
23
13
$
6,533
$
5,711
$
4,504 The components of the net deferred tax asset at the years ended December 31, 2013 and 2012 are as follows (dollars in thousands): Deferred tax assets: Allowance for loan losses
$
6,527
$
5,253 Equity based compensation
291
185 Deferred loan fees
488
171 Accrued compensation
433
Nonaccrual loan interest income
113
Unrealized loss on available for sale securities
77
Other
98
88 Total deferred tax assets
8,027
5,697 Deferred tax liabilities Premises and equipment
221
802 Section 481 adjustment
169
134 Unrealized gain on securities available for sale
335 Other
23
112
413
1,383 Net deferred tax asset
$
7,614
$
4,314 Based upon the level of historical taxable income, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. At December 31, 2013 and 2012, the Company had no unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. The Companys policy is to account for interest as a component of interest expense
and penalties as a component of other expense. There was no amount of interest and penalties recorded in the income statement for the years ended December 31, 2013, 2012 and 2011. The Company and its subsidiary are subject to U.S. federal income tax as well as income tax of the State of New Jersey. The Company is no longer subject to examination by taxing authorities for years before 2010. S-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ConnectOne Bancorp, Inc. NOTE 10TRANSACTIONS WITH EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS Loans to principal officers, directors, and their affiliates during the years ended December 31, 2013 and 2012, were as follows (dollars in thousands):
2013
2012 Beginning balance
$
22,185
$
22,984 New loans
2,560
8,162 Repayments
(1,423
)
(8,961
) Ending balance
$
23,322
$
22,185 Deposits from principal officers, directors, and their affiliates at December 31, 2013 and 2012, were $34,620,000 and $26,475,000, respectively. The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal stockholders, their immediate families and affiliated companies (commonly referred to as related parties). The company also leases
branch facilities from related party entities. Total expenses to these entities were $570,000, $538,000 and $436,000 for the years ended December 31, 2013, 2012 and 2011, respectively. The Company also utilizes an advertising and public relations agency at which one of the Companys directors is President
and CEO and a principal owner. Advertising expenses with this agency were $244,000, $526,000 and $259,000 for the years ended December 31, 2013, 2012 and 2011, respectively. Advertising expenses with this agency declined year over year primarily due to the Company being billed directly from third-
party media vendors in 2013 that were previously billed on a pass-through basis. In addition, 2012 expenses included costs affiliated with the re-branding of the Company. NOTE 11FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The contract or notional amount of financial instruments where contract amounts represent credit risk at December 31, 2013 and 2012, are as follows (dollars in thousands):
2013
2012 Commitments to grant loans
$
243,600
$
90,858 Unused lines of credit
35,073
38,365 Standby letters of credit
2,222
1,696 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on managements credit evaluation. Collateral held S-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ConnectOne Bancorp, Inc. varies but may include personal or commercial real estate, accounts receivable, inventory and equipment. Outstanding letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending other loan commitments. The Company requires collateral supporting these letters of credit as deemed necessary. The current amount of the liability as of December 31, 2013 and 2012, for guarantees under standby letters of credit issued was not material. NOTE 12REGULATORY MATTERS The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary-actions by regulators that, if undertaken, could have a
direct material effect on the Companys and Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Companys and Banks assets,
liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Companys and Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain minimum amounts and ratios (set forth below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted asset and of Tier 1 capital to average assets.
Management believes, as of December 31, 2013 and 2012, that the Company and the Bank meet all capital adequacy requirements to which they are subject. At year-end 2013 and 2012, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that notification that management believes have changed the institutions category. S-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ConnectOne Bancorp, Inc. Actual and required capital and ratios are presented below for December 31, 2013 and 2012 (dollars in thousands):
Actual
For Capital
To Be Well
Amount
Ratio
Amount
Ratio
Amount
Ratio December 31, 2013 Total capital to risk-weighted assets: Company
$
143,912
12.91
%
$
89,059
8.0
%
N/A
N/A Bank
143,574
12.88
89,059
8.0
$
111,323
10.0
% Tier 1 capital to risk-weighted assets: Company
129,986
11.68
44,529
4.0
N/A
N/A Bank
129,648
11.65
44,529
4.0
66,794
6.0 Tier 1 capital to total assets: Company
129,986
10.74
48,429
4.0
N/A
N/A Bank
129,648
10.71
48,429
4.0
60,537
5.0 December 31, 2012 Total capital to risk-weighted assets: Company
$
81,282
10.52
%
$
61,835
8.0
%
N/A
N/A Bank
81,262
10.51
61,835
8.0
$
77,294
10.0
% Tier 1 capital to risk-weighted assets: Company
71,576
9.26
30,918
4.0
N/A
N/A Bank
71,556
9.26
30,918
4.0
46,376
6.0 Tier 1 capital to total assets: Company
71,576
7.84
36,498
4.0
N/A
N/A Bank
71,556
7.84
36,498
4.0
45,623
5.0 The Bank is subject to certain regulatory restrictions on the amount of dividends that it may declare to the parent corporation without regulatory approval. NOTE 13FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS Management uses its best judgment in estimating the fair value of the Companys financial instruments; however, there are inherent weaknesses in any estimation technique. The estimated fair value amounts have been measured as of December 31, 2013 and 2012, and have not been re-evaluated or
updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end. 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. There are three levels of inputs that
may be used to measure fair values: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. S-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Adequacy
Requiremnts
Capitalized
Under
Prompt
Corrective
Action
Provisions
ConnectOne Bancorp, Inc. Level 3: Significant unobservable inputs that reflect a reporting entitys own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company used the following methods and significant assumptions to estimate fair value: An assets or liabilitys level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted
prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and
optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations. Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income
approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. S-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ConnectOne Bancorp, Inc. NOTE 13FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2013 and 2012 are as follows (dollars in thousands): Assets and Liabilities Measured on a Recurring Basis
Fair Value Measurements Using
Quoted Prices
Significant
Significant December 31, 2013 Securities: U.S. Treasury securities
$
1,803
$
$
States and political subdivisions
4,335
Asset-backed securities: Residential mortgages
9,657
Student loans
4,548
Small business
1,391 Equity securities
5,855
December 31, 2012 Securities: U.S. government sponsored agencies
$
$
1,005
$
Asset-backed securities: Residential mortgages
12,029
Equity securities
6,218
Assets and Liabilities Measured on a Non-recurring Basis Assets measured at fair value on a non-recurring basis are summarized below (dollars in thousands):
Fair Value Measurements Using
Quoted Prices
Significant
Significant December 31, 2013 Impaired loans: Commercial real estate
$
$
$
1,828 Commercial
1,865 December 31, 2012 Impaired loans: Commercial real estate
$
$
$
2,354 As of December 31, 2013, impaired loans, which have a specific reserve and are measured for impairment using the fair value of the collateral, had an unpaid principal balance of $4,725,000 with a valuation allowance of $1,032,000, resulting in an additional provision for loan losses of $794,000 for the
year ended December 31, 2013. S-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
in Active
Markets for
Identical Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
in Active
Markets for
Identical Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
ConnectOne Bancorp, Inc. As of December 31, 2012, impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had an unpaid principal balance of $3,387,000, with a valuation allowance of $1,033,000, resulting in an additional provision for loan losses of $558,000 for
the year ended December 31, 2012. The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013 (dollars in thousands): Fair Value Valuation Unobservable Input(s) Discount Weighted Impaired
loans: Commercial real
estate Income approach Adjustments for
differences in net
operating income
expectations. 4% Commercial $1,865 Sales comparison Adjustments for
differences between
the comparable sales. 39% The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2012 (dollars in thousands): Fair Value Valuation Unobservable Input(s) Discount Weighted Commercial real
estate Income approach Adjustments for
differences in net
operating income
expectations. 4% S-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Technique(s)
Range
Average
$1,828
Sales comparison
Adjustments for
differences between
the comparable sales.
5%-15%
8%
4%
39%
Technique(s)
Range
Average
$2,354
Sales comparison
Adjustments for
differences between
the comparable sales.
10%-25%
20%
4%
ConnectOne Bancorp, Inc. The carrying value and estimated fair value of financial instruments as of December 31, 2013 and December 31, 2012 are summarized below (dollars in thousands):
2013
Carrying Value
Fair Value Measurements at December 31 Using
Quoted Prices
Significant
Significant Financial assets: Cash and due from banks
$
2,907
$
2,907
$
$
Interest bearing deposits
31,459
31,459
Securities available for sale
27,589
1,803
25,786
Securities held to maturity
1,027
1,077
FHLB Stock
4,744
n/a
n/a
n/a Loans held for sale
575
583
Loans receivable, gross
1,151,904
1,151,870 Accrued interest receivable
4,102
99
4,003 Financial liabilities: Deposits: Demand, NOW, money market and savings
$
550,096
$
550,096
$
$
Certificates of deposit
415,711
419,467
Borrowings
137,558
141,902
Accrued interest payable
2,762
2,762
2012 Financial assets: Cash and due from banks
$
3,242
$
3,242
$
$
Interest bearing deposits
47,387
47,387
Securities available for sale
19,252
19,252
Securities held to maturity
1,985
2,084
FHLB Stock
7,622
n/a
n/a
n/a Loans held for sale
405
414
Loans receivable, gross
849,269
874,438 Accrued interest receivable
3,361
68
3,293 Financial liabilities: Deposits: Demand, NOW, money market and savings
$
505,264
$
505,264
$
$
Certificates of deposit
264,054
277,614
Borrowings
79,568
81,703
Accrued interest payable
2,803
2,803
The methods and assumptions, not previously presented, used to estimate fair values for the periods ended December 31, 2013 and December 31, 2012, are described as follows: Cash and due from banks and interest bearing deposits: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1. Loans: Fair value of loans, excluding loans held for sale, is estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated
using discounted cash flow analyses, using interest rates currently being offered for S-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
in Active
Markets for
Identical Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
ConnectOne Bancorp, Inc. loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification. FHLB Stock: It is not practical to determine the fair value of FHLB Stock due to restrictions placed on its transformatility. Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1
classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification. Borrowings: Borrowings consist of Federal Home Loan Bank of New York borrowings which are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly Federal Home Loan borrowings maturities. Accrued interest receivable/payable: The carrying amounts of accrued interest approximate the fair value resulting in a Level 1, Level 2 or Level 3 classification. NOTE 14PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION CONDENSED STATEMENTS OF FINANCIAL CONDITION
2013
2012
(in thousands) ASSETS Cash and cash equivalents
$
79
$
27 Other assets
259
Investment in banking subsidiary
129,790
72,342 Total assets
$
130,128
$
72,369 LIABILITIES AND EQUITY Accrued expenses and other liabilities
$
$
7 Stockholders equity
130,128
72,362 Total liabilities and stockholders equity
$
130,128
$
72,369 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
2013
2012
2011 Equity in undistributed subsidary income
$
10,270
$
8,421
$
6,666 Net Income
$
10,270
$
8,421
$
6,666 Comprehensive Income
$
9,656
$
8,307
$
6,857 S-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31,
Years Ended December 31,
ConnectOne Bancorp, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
2013
2012
2011
(in thousands) Cash Flows From Operating Activities: Net Income
$
10,270
$
8,421
$
6,666 Adjustments: Equity in undistributed subsidary income
(10,270
)
(8,421
)
(6,666
) Change in other liabilities
(7
)
(197
)
33 Net cash provided by (used in) operating activities
(7
)
(197
)
33 Cash Flows From Investing Activities: Investment in subsidiaries
(47,656
)
(7,094
)
(588
) Net cash used in investing activities
(47,656
)
(7,094
)
(588
) Cash Flows From Financing Activities: Proceeds from preffered stock issuance
47,715
7,500
1,180 Preferred stock dividends
(354
)
(600
) Net cash provided by financing activities
47,715
7,146
580 Net change in cash and cash equivalents
52
(145
)
25 Beginning cash and cash equivalents
27
172
147 Ending cash and cash equivalents
$
79
$
27
$
172 NOTE 15EARNINGS PER SHARE The factors used in the earnings per share computation follow (in thousands, except per share data):
2013
2012
2011 Basic: Net income available to common stockholders
$
10,270
$
8,067
$
6,066 Weighted average common shares outstanding
4,774
2,701
2,242 Basic earnings per common share
$
2.15
$
2.99
$
2.71 Diluted: Net income available to common stockholders
$
10,270
$
8,067
$
6,066 Add: Preferred dividends
354
600 Net Income
$
10,270
$
8,421
6,666 Weighted average common shares outstanding for basic earnings per common share
4,774
2,701
2,242 Add: Dilutive effects of assumed exercises of stock options and stock awards
145
83
55 Add: Dilutive effects of assumed vesting of performance units
413
766 Average shares and dilutive potential common shares
4,919
3,197
3,063 Diluted earnings per common share
$
2.09
$
2.63
$
2.18 There were no stock options that resulted in anti-dilution for the periods presented. S-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Years Ended December 31,
ConnectOne Bancorp, Inc. NOTE 16QUARTERLY FINANCIAL DATA (unaudited)
Selected Consolidated Quarterly Financial Data
March 31,
June 30,
September 30,
December 31,
(in thousands, except per share data) Total interest income
$
10,912
$
11,352
$
12,158
$
12,881 Total interest expense
1,528
1,526
1,608
1,814 Net interest income
9,384
9,826
10,550
11,067 Provision for loan losses
925
950
1,300
1,400 Net interest income after provision for loan losses
8,459
8,876
9,250
9,667 Non-interest income
259
301
293
349 Non-interest expense
4,741
4,925
5,220
5,765 Income before income taxes
3,977
4,252
4,323
4,251 Income tax expense
1,641
1,755
1,736
1,401 Net income
$
2,336
$
2,497
$
2,587
$
2,850 Earnings per share:(1) Basic
$
0.58
$
0.50
$
0.52
$
0.57 Diluted
$
0.56
$
0.49
$
0.50
$
0.55
Selected Consolidated Quarterly Financial Data
March 31,
June 30,
September 30,
December 31,
(in thousands, except per share data) Total interest income
$
9,304
$
10,369
$
10,289
$
10,825 Total interest expense
1,561
1,553
1,611
1,594 Net interest income
7,743
8,816
8,678
9,231 Provision for loan losses
750
1,140
950
1,150 Net interest income after provision for loan losses
6,993
7,676
7,728
8,081 Non-interest income
245
277
294
326 Non-interest expense
4,148
4,457
4,335
4,548 Income before income taxes
3,090
3,496
3,687
3,859 Income tax expense
1,248
1,418
1,488
1,557 Net income
1,842
2,078
2,199
2,302 Dividends on preferred stock
146
206
2
Net income available to common stockholders
$
1,696
$
1,872
$
2,197
$
2,302 Earnings per share:(1) Basic
$
0.76
$
0.83
$
0.70
$
0.73 Diluted
$
0.62
$
0.62
$
0.68
$
0.71
(1) S-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
2013 Quarter Ended,
2012 Quarter Ended,
Earnings per share (EPS) in each quarter is computed using the weighted-average number of shares outstanding during that quarter while EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters EPS will not
necessarily equal the full-year EPS.
ConnectOne Bancorp, Inc. NOTE 17SUBSEQUENT EVENTS On January 20, 2014, the Company, entered into an Agreement and Plan of Merger (the Merger Agreement) with Center Bancorp, Inc. (NASDAQ: CNBC) (Center Bancorp). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company
will merge with and into Center Bancorp, with Center Bancorp continuing as the surviving entity (the Merger). The Merger Agreement also provides that, immediately following the consummation of the Merger, Union Center National Bank, a commercial bank chartered pursuant to the laws of the
United States (Union Center) and a wholly-owned subsidiary of Center Bancorp, will merge with and into the Bank, with the Bank continuing as the surviving bank. Upon completion of the Merger, each share of common stock of the Company will be converted into and become the right to receive 2.6
shares of common stock, no par value per share, of Center Bancorp. Immediately after consummation of the transaction, the directors of the resulting corporation and the resulting bank shall consist of six individuals who previously served as Center Bancorp Directors and six Directors who previously
served as Directors of the Company, each to hold office in accordance with the Amended and Restated Certificate of Incorporation and the by-laws of the surviving corporation until their respective successors are duly elected or appointed and qualified. The officers of the surviving corporation shall
consist of (i) Frank S. Sorrentino III as Chairman, President and Chief Executive Officer; (ii) William S. Burns, Chief Financial Officer; and (iii) Anthony Weagley, current President and Chief Executive Officer of Center Bancorp, as Chief Operating Officer. Completion of the Merger is subject to various conditions, including, among others, (i) approval by shareholders of Center Bancorp and the Company of the Merger Agreement and the transactions contemplated thereby, (ii) the receipt of all necessary approvals and consents of governmental entities
required to consummate the transactions contemplated by the Merger Agreement, (iii) the absence of any order or proceeding which prohibits the Merger or the Bank Merger and (iv) the receipt by each of Center Bancorp and ConnectOne Bancorp of an opinion to the effect that the Merger will be
treated as a reorganization qualifying under Section 368(a) of the Internal Revenue Code of 1986, as amended. Each partys obligation to consummate the Merger is also subject to certain customary conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of
the other party, (ii) performance in all material respects of its agreements, covenants and obligations and (iii) the delivery of certain certificates and other documents. The Company expects the Merger to be completed in either the second or third quarter of 2014. On January 27, 2014, a complaint was filed against the Company and the members of its Board of Directors in the Superior Court of New Jersey, BergenCounty, seeking class action status and asserting that the Company and the members of its Board had violated their duties to the Companys
shareholders in connection with the proposed merger with Center Bancorp, Inc. Subsequently, several additional complaints also seeking class action status and raising substantially the same allegations, were filed in the Superior Court of New Jersey, Bergen County. The plaintiffs propose to consolidate
these cases. The litigation is in its very early stages, and the Companys time to answer has not yet run. The Company believes these complaints are without merit, and intends to vigorously defend these complaints. S-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ConnectOne Bancorp, Inc. (in thousands) (continued) See accompanying notes to unaudited consolidated financial statements. ConnectOne Bancorp, Inc. CONSOLIDATED BALANCE SHEETS (in thousands, except
share data) See accompanying notes to unaudited consolidated financial statements. ConnectOne Bancorp, Inc. CONSOLIDATED STATEMENTS OF
INCOME (unaudited) (in thousands, except for share
and per share data) See accompanying notes to unaudited consolidated financial statements. ConnectOne Bancorp, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (unaudited) (in thousands) See accompanying notes to unaudited consolidated financial statements. ConnectOne Bancorp, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (dollars in thousands) See accompanying notes to unaudited consolidated financial statements. ConnectOne Bancorp, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands) See accompanying notes to unaudited consolidated financial statements. ConnectOne Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Nature of Operations and Principles of Consolidation:
The consolidated financial statements include ConnectOne Bancorp, Inc. (“The Parent Corporation”) and its wholly owned
subsidiary, ConnectOne Bank (“the Bank” and, collectively with the Parent Corporation and the Parent Corporation’s
other direct subsidiaries, “the Company.”) The Company provides financial services through
its offices in Bergen, Hudson, Monmouth, and Essex counties, New Jersey. Its primary deposit products are checking, savings,
and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment
loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets,
and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from business
operations. There are no significant concentrations of loans to any one industry or customer. However, the customers’
ability to repay their loans is dependent on the cash flows, real estate and general economic conditions in the area. The consolidated financial information included herein as of
and for the periods ended March 31, 2014 and 2013 is unaudited. The accompanying unaudited consolidated financial statements included
herein have been prepared by the Company in accordance with U.S. generally accepted accounting principles and pursuant to the rules
and regulations of the Securities and Exchange Commission and reflect all adjustments which, in the opinion of management, are
considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. All
adjustments made were of a normal and recurring nature. Operating results for the three months ended March 31, 2014 are not necessarily
indicative of the results that may be expected for the year ended December 31, 2014. These unaudited interim consolidated financial
statements should be read in conjunction with the audited consolidated financial statements and notes thereto, included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2013. ConnectOne Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SECURITIES The amortized cost, gross unrealized gains and losses and fair
value of securities available for sale at March 31, 2014 and December 31, 2013, are as follows (dollars in thousands): The amortized cost, gross unrecognized gains and losses and
fair value of securities held to maturity at March 31, 2014 and December 31, 2013, are as follows (dollars in thousands): ConnectOne Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SECURITIES (continued) The amortized cost and fair value of debt securities available
for sale and held to maturity at March 31, 2014, by contractual maturity, are shown below (dollars in thousands). Expected maturities
may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Asset-backed securities do not have a specific maturity and are shown separately. There were no sales of available for sale securities for the
quarters ended March 31, 2014 and 2013. Securities with a carrying value of $204,000 and $215,000 at
March 31, 2014 and December 31, 2013, respectively, were pledged to secure public deposits, securities sold under agreements to
repurchase and for other purposes as required or permitted by law. The following table summarizes securities with unrealized losses
at March 31, 2014 and December 31, 2013, aggregated by major security type and length of time in a continuous unrealized loss position
(in thousands). ConnectOne Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SECURITIES (continued) Unrealized losses on available for sale securities have not
been recognized into income because the securities are of high credit quality, management does not intend to sell and it is likely
that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value
is largely due to changes in interest rates. The fair value is expected to recover as the securities approach maturity. NOTE 3 – LOANS RECEIVABLE The composition of loans receivable (which excludes loans held
for sale) at March 31, 2014 and December 31, 2013 are as follows (dollars in thousands): ConnectOne Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – LOANS RECEIVABLE (continued) The portfolio classes in the above table have unique risk characteristics
with respect to credit quality: ConnectOne Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – LOANS
RECEIVABLE (continued) The following table represents the allocation of allowance for
loan losses and the related loans by loan portfolio segment disaggregated based on the impairment methodology at March 31, 2014
and December 31, 2013 (dollars in thousands): ConnectOne Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – LOANS RECEIVABLE (continued) The following tables present information related
to impaired loans by class as of March 31, 2014, December 31, 2013 and March 31, 2013 and for the quarters ended March
31, 2014 and 2013 and for the year ended December 31, 2013 (dollars in thousands): ConnectOne Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – LOANS RECEIVABLE (continued) The following table presents nonaccrual loans and loans
past due 90 days or greater and still accruing by class of loans (dollars in thousands): The following tables present past due and current loans by the
loan portfolio class (dollars in thousands): ConnectOne Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – LOANS RECEIVABLE (continued) There were no troubled debt restructurings that occurred during
the quarters ended March 31, 2014 and 2013. There were no troubled debt restructurings for which there was a payment default
within twelve months following the modification during the quarters ended March 31, 2014 and 2013. A loan is considered to
be in payment default once it is 90 days contractually past due under the modified terms. Credit Quality Indicators The Bank categorizes loans into risk categories based on relevant
information about the quality and realizable value of collateral, if any, and the ability of borrowers to service their debts such
as: current financial information, historical payment experience, credit documentation, public information, and current economic
trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis
is performed whenever a credit is extended, renewed or modified, or when an observable event occurs indicating a potential decline
in credit quality, and no less than annually for large balance loss. The Bank used the following definitions for risk ratings: Special Mention: Loans classified as
special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the loan or the Bank’s credit position at some future
date. Substandard: Loans classified as
substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral
pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment and
liquidation of the debt. They are characterized by distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected. Normal payment from the borrower is in jeopardy, although loss of principal, while still
possible, is not imminent. Doubtful: Loans classified as doubtful
have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection
or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. The following table presents the risk category of loans by class
of loans based on the most recent analysis performed as of March 31, 2014 and December 31, 2013 (dollars in thousands): ConnectOne Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – LOANS RECEIVABLE (continued) Residential real estate, home equity lines of credit, and consumer
loans are not rated. The Company evaluates credit quality of those loans by aging status of the loan and by payment activity,
which was previously presented. The following table presents the activity in the Company’s
allowance for loan losses by class of loans (dollars in thousands): NOTE 4 - STOCK OPTION PLANS AND EQUITY
COMPENSATION PLAN At March 31, 2014, there were 91,393 shares available for awards
under the Company’s equity plans. Awards may be in the form of options, restricted stock or other equity awards.
A summary of the stock option activity in the Company’s equity plans for the three months ended March 31, 2014 are as follows: ConnectOne
Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - STOCK OPTION PLANS AND EQUITY COMPENSATION PLAN (continued) As of March 31, 2014 and December 31, 2013, there were no
material unrecognized compensation costs related to nonvested stock options granted under the Company’s plans.
Aggregate intrinsic value is based on a fair value share price of $48.96, which is derived from the closing price of our
common stock at March 31, 2014. There were no stock options granted during the first quarter of 2014. In conjunction with the Company’s equity plans , the Company
granted restricted shares to certain executive officers. Compensation expense is recognized over the vesting period of the awards
based on the fair value of the stock at issue date. The fair value of the stock granted was based on the closing market price of
our common stock as of the grant date. Generally, grants of restricted shares vest one-third, each, on the first, second and third
anniversaries of the grant date. A summary of changes in the Company’s nonvested restricted
shares for the quarter ended March 31, 2014 is as follows: As of March 31, 2014, there was $811,000 of total unrecognized compensation
cost related to nonvested shares granted under the plans. The cost is expected to be recognized over a weighted average period
of 26.3 months. The total fair value of shares vested during the quarter ended March 31, 2014 was $321,000. On August 7, 2013, the Company
granted to various key employees performance unit awards, with each unit entitling the holder to one share of the
Company’s common stock contingent upon the Company meeting or exceeding certain return on asset targets over the course
of a three-year period commencing July 1, 2013. Under the agreement, and assuming the Company has met or exceeded the
applicable targets, grants of performance unit awards will vest one-third, each, on the third, fourth and fifth anniversaries
of the grant date or an earlier date, in the event of a change in control, as defined in the agreement. At March 31, 2014, the
specific number of shares related to performance unit awards that were expected to vest was 85,313, determined by actual
performance in consideration of the established range of the performance targets, which is consistent with the level of
expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense
could be recorded in future periods or previously recognized expense could be reversed. The maximum amount of performance
unit awards is 102,375. ConnectOne
Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - STOCK OPTION PLANS AND EQUITY COMPENSATION PLAN (continued) A summary of the status of unearned performance
unit awards and the change during the period is presented in the table below: The company recognized $184,000 in stock-based compensation expenses
for services rendered for the quarter ended March 31, 2014. At March 31, 2014, compensation cost of $2,323,000 related to nonvested
awards not yet recognized is expected to be recognized over a weighted-average period of 3.2 years. NOTE 5 - FAIR VALUE MEASUREMENTS AND FAIR
VALUE OF FINANCIAL INSTRUMENTS Management uses its best judgment in estimating the fair value of
the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. The estimated fair
value amounts have been measured as of March 31, 2014 and December 31, 2013, and have not been re-evaluated or updated for purposes
of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end. 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. There are three levels of inputs that may be used to measure fair
values: Level 1: Quoted prices (unadjusted) for identical
assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other
than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect
a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. ConnectOne
Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - FAIR VALUE MEASUREMENTS AND FAIR
VALUE OF FINANCIAL INSTRUMENTS (continued) 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 Company used the following
methods and significant assumptions to estimate fair value: Investment Securities: The fair values for investment securities
are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values
are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar
securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted
cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit
spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model.
Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated
into the calculations. Impaired Loans: The fair value of impaired loans with specific
allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize
a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are
routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and
income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs
for determining fair value. For financial assets measured at fair value on a recurring basis,
the fair value measurements by level within the fair value hierarchy used at March 31, 2014 and December 31, 2013 are as follows
(dollars in thousands): Assets and Liabilities Measured on a Recurring Basis ConnectOne
Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - FAIR VALUE MEASUREMENTS AND FAIR
VALUE OF FINANCIAL INSTRUMENTS (continued) Assets and Liabilities Measured on a Non-recurring Basis Assets measured at fair value on a non-recurring basis are summarized
below (dollars in thousands): As of March 31, 2014, impaired loans, which have a specific reserve
and are measured for impairment using the fair value of the collateral, had an unpaid principal balance of $4,106,000 with a valuation
allowance of $977,000, resulting in an additional provision for loan losses of $39,000 for the quarter ended March 31, 2014. As of March 31, 2013, impaired loans, which have a specific reserve
and are measured for impairment using the fair value of the collateral, had an unpaid principal balance of $3,913,000 with a valuation
allowance of $657,000, resulting in an additional provision for loan losses of $76,000 for the quarter ended March 31, 2013. The following table presents quantitative information about Level
3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2014 (dollars
in thousands): ConnectOne
Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - FAIR VALUE MEASUREMENTS AND FAIR
VALUE OF FINANCIAL INSTRUMENTS (continued) The following table presents quantitative information about Level
3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013 (dollars
in thousands): The carrying value and estimated fair value of financial instruments
as of March 31, 2014 and December 31, 2013 are summarized below (dollars in thousands): ConnectOne
Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - FAIR VALUE MEASUREMENTS AND FAIR
VALUE OF FINANCIAL INSTRUMENTS (continued) The methods and assumptions, not previously presented, used to estimate
fair values for the periods ended March 31, 2014 and December 31, 2013, are described as follows: Cash and due from banks and interest bearing deposits:
The carrying amounts of cash and short-term instruments approximate fair values and care classified as Level 1. Loans: Fair value of loans, excluding loans
held for sale, is estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit
risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated
using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of
similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described
previously. The methods utilized to estimate the fair value of loans
do not necessarily represent an exit price. The fair value of loans held for sale is estimated based upon binding contracts and
quotes from third party investors resulting in a Level 2 classification. FHLB Stock: It is not practical to determine
the fair value of FHLB Stock due to restrictions placed on its transferrability. Deposits: The fair values disclosed for demand
deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification.
The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values
at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using
a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits resulting in a Level 2 classification. ConnectOne Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - FAIR VALUE MEASUREMENTS AND
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Long-term borrowings: Long-term borrowings
consist of Federal Home Loan Bank of New York borrowings which are estimated using a discounted cash flow calculation that applies
interest rates currently being offered to a schedule of aggregated expected monthly Federal Home Loan borrowings maturities. Accrued interest receivable/payable: The
carrying amounts of accrued interest approximate the fair value resulting in a Level 2 or Level 3 classification. NOTE 6 – EARNINGS PER SHARE The factors used in the earnings per share computation follow
(in thousands, except per share data): There were no stock options that resulted in anti-dilution for
the periods presented. NOTE 7 – PENDING MERGER On January 20, 2014, the Company, entered
into an Agreement and Plan of Merger (the “Merger Agreement”) with Center Bancorp, Inc. (NASDAQ: “CNBC”)
(“Center Bancorp”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth
therein, the Company will merge with and into Center Bancorp, with Center Bancorp continuing as the surviving entity (the “Merger”). The Merger Agreement also provides that, immediately following the consummation of the Merger, Union Center National Bank,
a commercial bank chartered pursuant to the laws of the United States (“Union Center”) and a wholly-owned subsidiary
of Center Bancorp, will merge with and into the Bank, with the Bank continuing as the surviving bank. Upon completion of the Merger,
each share of common stock of the Company will be converted into and become the right to receive 2.6 shares of common stock, no
par value per share, of Center Bancorp. Immediately after consummation of the transaction, the directors of the resulting corporation
and the resulting bank shall consist of six individuals who previously served as Center Bancorp Directors and six Directors who
previously served as Directors of the Company, each to hold office in accordance with the Amended and Restated Certificate of Incorporation
and the by-laws of the surviving corporation until their respective successors are duly elected or appointed and qualified. The
officers of the surviving corporation shall consist of (i) Frank S. Sorrentino III as Chairman, President and Chief Executive Officer;
(ii) William S. Burns, Chief Financial Officer; and (iii) Anthony Weagley, current President and Chief Executive Officer of Center
Bancorp, as Chief Operating Officer. ConnectOne Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 – PENDING MERGER (continued) Completion of the Merger is subject to various
conditions, including, among others, (i) approval by shareholders of Center Bancorp and the Company of the Merger Agreement and
the transactions contemplated thereby, (ii) the receipt of all necessary approvals and consents of governmental entities required
to consummate the transactions contemplated by the Merger Agreement, (iii) the absence of any order or proceeding which prohibits
the Merger or the Bank Merger and (iv) the receipt by each of Center Bancorp and ConnectOne Bancorp of an opinion to the effect
that the Merger will be treated as a reorganization qualifying under Section 368(a) of the Internal Revenue Code of 1986, as amended. Each party’s obligation to consummate the Merger is also subject to certain customary conditions, including (i) subject
to certain exceptions, the accuracy of the representations and warranties of the other party, (ii) performance in all material
respects of its agreements, covenants and obligations and (iii) the delivery of certain certificates and other documents. The Company expects the Merger to be completed
in either the second or third quarter of 2014. INTRODUCTION - UNAUDITED
PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited
pro forma condensed combined consolidated financial information and explanatory notes show the impact on the historical financial
positions and results of operations of Center Bancorp, Inc. (“Center”) and ConnectOne Bancorp, Inc. (“ConnectOne”)
under the acquisition method of accounting with Center treated as the acquirer. Under the acquisition method of accounting, the
assets and liabilities of ConnectOne, as of the effective date of the merger (the “merger”) described in the merger
agreement between Center and ConnectOne, dated as of January 20, 2014, will be recorded by Center at their respective fair values
and the excess of the merger consideration over the fair value of ConnectOne’s net assets will be allocated to goodwill and
other identifiable intangibles, as appropriate. The unaudited pro forma condensed combined consolidated balance sheet as of March
31, 2014 is presented as if the merger with ConnectOne had occurred on March 31, 2014. The unaudited pro forma condensed combined
consolidated statement of net income for the year ended December 31, 2013 and for the three months ended March 31, 2014 are presented
as if the merger had occurred on January 1, 2013 and January 1, 2014, respectively. The historical consolidated financial information has been adjusted to reflect
factually supportable items that are directly attributable to the merger and, with respect to the statement of net income only,
expected to have a continuing impact on consolidated results of operations. The unaudited pro
forma condensed combined consolidated financial information is presented for illustrative purposes only and does not necessarily
indicate the financial results of the combined companies had the companies actually been combined at the beginning of the periods
presented. The adjustments included in these unaudited pro forma condensed combined consolidated financial statements are preliminary
and may be revised. The unaudited pro forma condensed combined consolidated financial information also does not consider any potential
impacts of potential revenue enhancements, anticipated cost savings and expense efficiencies, among other factors. As explained in more
detail in the accompanying notes to the unaudited pro forma condensed combined consolidated financial information, the pro forma
allocation of purchase price reflected in the unaudited pro forma condensed combined consolidated financial information is subject
to adjustment and may vary from the actual purchase price allocation that will be recorded at the time the merger is completed.
Adjustments may include, but not be limited to, changes in (1) ConnectOne’s balance sheet through the effective time of the
merger; (2) the aggregate value of the merger consideration paid if the price of Center’s stock varies from the assumed $18.46
per share; (3) total merger-related expenses if consummation and/or implementation costs vary from currently estimated amounts;
and (4) the underlying values of assets and liabilities if market conditions differ from current assumptions. The unaudited pro
forma condensed combined consolidated financial information is provided for informational purposes only. The unaudited pro forma
condensed combined consolidated financial information is not necessarily, and should not be assumed to be, an indication of the
results that would have been achieved had the transaction been completed as of the dates indicated or that may be achieved in the
future. The preparation of the unaudited pro forma condensed combined consolidated financial information and related adjustments
required management to make certain assumptions and estimates. The unaudited pro forma condensed combined consolidated financial
statements should be read together with: Unaudited Pro Forma Condensed Combined
Consolidated Balance Sheet Unaudited Pro Forma Condensed Combined
Consolidated Statement of Net Income for the Year Unaudited Pro Forma Condensed Combined
Consolidated Statement of Net Income for the Three Note 1—Basis of Presentation The unaudited pro
forma condensed combined consolidated financial information has been prepared using the acquisition method of accounting giving
effect to the merger involving Center and ConnectOne, with Center as the accounting acquirer. The unaudited pro forma condensed
combined consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the
financial position had the merger been consummated at March 31, 2014 or the results of operations had the merger been consummated
at January 1, 2013, nor is it necessarily indicative of the results of operations in future periods or the future financial position
of the combined entities. The merger, which is currently expected to be completed on July 1, 2014, provides for the issuance of
13,276,783 shares of Center common stock, based on the number of outstanding shares of ConnectOne at January 17, 2014 and the 2.6:1
exchange ratio. Based on Center’s closing stock price on June 2, 2014, the value of the aggregate merger consideration would
be approximately $245.1 million. Under the acquisition
method of accounting, the assets and liabilities of ConnectOne will be recorded at the respective fair values on the merger date.
The fair value on the merger date represents management’s best estimates based on available information and facts and circumstances
in existence on the merger date. The pro forma allocation of purchase price reflected in the unaudited pro forma condensed combined
consolidated financial information is subject to adjustment and may vary from the actual purchase price allocation that will be
recorded at the time the merger is completed. Adjustments may include, but not be limited to, changes in (1) ConnectOne’s
balance sheet through the effective time of the merger; (2) the aggregate value of the merger consideration paid if the price of
Center common stock varies from the assumed $18.46 per share; (3) total merger-related expenses if consummation and/or implementation
costs vary from currently estimated amounts; and (4) the underlying values of assets and liabilities if market conditions differ
from current assumptions. The following table sets forth the impact on the purchase price, as well as on the goodwill generated,
if the market price increased or decreased by 10%, 20% or 30% from the assumed market price of $18.46 per share. The accounting policies
of both Center and ConnectOne are in the process of being reviewed in detail. Upon completion of such review, conforming adjustments
or financial statement reclassification may be determined. Note 2—Estimated Merger and Integration
Costs The plan to integrate
Center’s and ConnectOne’s operations is still being developed. Over the next several months, the specific details of
these plans will continue to be refined. Center and ConnectOne are currently in the process of assessing the two companies’
personnel, benefit plans, premises, equipment, computer systems, auditors, attorneys and service contracts to determine where they
may take advantage of redundancies or where it will be beneficial or necessary to convert to one system. Certain decisions arising
from these assessments may involve involuntary termination of Center’s and ConnectOne’s employees, vacating Center’s
and ConnectOne’s leased premises, changing information systems, canceling contracts between Center or ConnectOne and certain
service providers and selling or otherwise disposing of certain premises, furniture and equipment owned by Center or ConnectOne.
Center and ConnectOne expect to incur merger-related expenses including or related to system conversion costs, legal fees, accounting
fees, investment banking fees, employee retention and severance agreements, communications to customers, and others. To the extent
there are costs associated with these actions, the costs will be recorded based on the nature and timing of these integration actions.
Most acquisition and restructuring costs are recognized separately from a business combination and generally will be expensed as
incurred. We estimate merger-related costs to total approximately $11.1 million on an after-tax basis, comprised of financial and
legal advisory fees of $3.6 million, employment contract and severance charges of $3.0 million, termination fees related to redundant
systems of $2.6 million, and other, including accounting, proxy solicitation, due diligence and premises costs, of $1.9 million.
A significant portion of such costs are expected to be incurred in the years ending December 31, 2014 and 2015. Merger costs are
expected to have no material impact on the combined company’s liquidity, while merger costs specifically related to a reduction
in staff levels, termination of contracts, and a reduction in operating space requirements
are expected to lower operating expenses (see Note 3 below) and therefore improve earnings in future periods. Our statements regarding
our estimated merger and integration costs and any cost savings that may be achieved are forward-looking statements, should not
be relied upon, and are not reflected in the accompanying pro forma financial information. Note 3—Estimated Annual Cost Savings Center and ConnectOne
expect to realize approximately $7.0 million in annual pre-tax cost savings following the merger, which management expects to be
phased-in over a two-year period, but there is no assurance that the anticipated cost savings will be realized on the anticipated
time schedule or at all. These cost savings are not reflected in the accompanying pro forma financial information but are expected
to come from compensation and benefits, occupancy and equipment, data processing, legal, audit and professional and marketing expenses. Note 4—Pro Forma Merger Adjustments The following pro forma
adjustments have been reflected in the unaudited pro forma condensed combined consolidated financial information. All taxable adjustments
were calculated using a 35% tax rate to arrive at deferred tax asset or liability adjustments. All adjustments are based on current
assumptions and valuations, which are subject to change. Note 5—Preliminary Purchase Accounting
Allocation The unaudited pro forma
condensed combined consolidated financial information reflects the issuance of 13,276,783 shares of Center common stock totaling
approximately $245.1 million. The merger will be accounted for using the acquisition method of accounting. Center’s cost
to acquire ConnectOne will be allocated to the assets (including identifiable intangible assets) and liabilities of ConnectOne
at their respective estimated fair values as of the merger date. Accordingly, the pro forma purchase price was preliminarily allocated
to the assets acquired and the liabilities assumed based on their estimated fair values as summarized in the following table.
March
31,
2014
December
31,
2013
(unaudited)
Assets
Cash
and due from banks
$ 3,005
$ 2,907
Interest-bearing
deposits with banks
42,325
31,459
Cash
and cash equivalents
45,330
34,366
Securities
available for sale
27,199
27,589
Securities
held to maturity, fair value of $943 at 2014 and $1,077 at 2013
898
1,027
Loans
held for sale
792
575
Loans
receivable
1,245,363
1,151,904
Less:
Allowance for loan losses
(17,035 )
(15,979 )
Net
loans receivable
1,228,328
1,135,925
Investment
in restricted stock, at cost
9,411
7,622
Bank
premises and equipment, net
7,385
7,526
Accrued
interest receivable
4,235
4,102
Other
real estate owned
870
1,303
Goodwill
260
260
Bank-owned
life insurance
15,334
15,191
Deferred
taxes
7,539
7,614
Other
assets
142
128
Total
assets
$ 1,347,723
$ 1,243,228
S-39
March 31,
2014
December 31,
2013
(unaudited)
Liabilities
Deposits
Noninterest-bearing
$ 236,872
$ 216,804
Interest-bearing
790,884
749,003
Total deposits
1,027,756
965,807
FHLB Borrowings
177,301
137,558
Accrued interest payable
2,836
2,762
Capital lease obligation
3,081
3,107
Other liabilities
3,741
3,866
Total liabilities
1,214,715
1,113,100
Commitments and Contingencies
Stockholders’ Equity
Preferred stock (Series A), no par value; $20 liquidation value; authorized 125,000 shares; no shares issued and outstanding at March 31, 2014 and December 31, 2013
—
—
Preferred stock (Series B), no par value; $20 liquidation value; authorized 875,000 shares; no shares issued and outstanding at March 31, 2014 and December 31, 2013
—
—
Preferred stock (Series C), no par value; $1,000 liquidation value; authorized 7,500 shares; no shares issued and outstanding at March 31, 2014 and December 31, 2013
—
—
Common stock and surplus, no par value; authorized 10,000,000 shares at March 31, 2014 and December 31, 2013; issued and outstanding 5,122,047 at March 31, 2014 and 5,106,455 at December 31, 2013
99,466
99,315
Retained earnings
33,539
30,931
Accumulated other comprehensive income/(loss)
3
(118 )
Total stockholders’ equity
133,008
130,128
Total liabilities and stockholders’ equity
$ 1,347,723
$ 1,243,228 S-40
Three Months Ended March 31,
2014
2013
Interest income
Loans receivable, including fees
$ 13,455
$ 10,696
Securities
227
195
Other interest income
22
21
Total interest income
13,704
10,912
Interest expense
Deposits
1,401
1,146
FHLB borrowings
561
334
Capital lease
47
48
Total interest expense
2,009
1,528
Net interest income
11,695
9,384
Provision for loan losses
1,300
925
Net interest income after provision for loan losses
10,395
8,459
Non-interest income
Service fees
87
100
Gains on sales of loans
41
83
Income on bank owned life insurance
144
—
Other income
77
76
Total non-interest income
349
259
Non-interest expenses
Salaries and employee benefits
3,091
2,480
Occupancy and equipment
829
729
Professional fees
378
271
Advertising and promotion
99
103
Data processing
517
447
Merger related expenses
923
—
Other expenses
835
711
Total non-interest expenses
6,672
4,741
Income before income tax expense
4,072
3,977
Income tax expense
1,464
1,641
Net income
$ 2,608
$ 2,336
Earnings per common share:
Basic
$ 0.52
$ 0.58
Diluted
0.50
0.56
Weighted average common shares outstanding:
Basic
5,035,521
4,055,908
Diluted
5,216,599
4,178,214 S-41
Three Months Ended March 31,
2014
2013
Net income
$ 2,608
$ 2,336
Unrealized holding (losses)/gains on securities available for sale arising during the period
202
(122 )
Tax effect
81
(49 )
Other comprehensive loss
121
(73 )
Comprehensive income
$ 2,729
$ 2,263 S-42
Accumulated
Preferred
Preferred
Preferred
Other
Common Stock
Stock,
Stock,
Stock,
Retained
Comprehensive
and Surplus
Series A
Series B
Series C
Earnings
Income
Total
Balance at January 1, 2013
$ 51,205
$ —
$ —
$ —
$ 20,661
$ 496
$ 72,362
Net income
—
—
—
—
10,270
10,270
Other comprehensive loss, net of taxes
—
—
—
—
—
(614 )
(614 )
Issuance of 1,840,000 shares, net of expenses
47,715
—
—
—
—
—
47,715
Grant of 100,238 restricted stock awards and performance units
—
—
—
—
—
—
—
Equity-based compensation
395
—
—
—
—
—
395
Balance at December 31, 2013
99,315
—
—
—
30,931
(118 )
130,128
Net income
—
—
—
—
2,608
—
2,608
Other comprehensive income, net of taxes
—
—
—
—
—
121
121
Grant of 15,592 restricted stock awards
—
—
—
—
—
—
—
Equity-based compensation
151
—
—
—
—
—
151
Balance at March 31, 2014 (unaudited)
$ 99,466
$ —
$ —
$ —
$ 33,539
$ 3
$ 133,008 S-43
Three months ended March 31,
2014
2013
Cash flows from operating activities
Net income
$ 2,608
$ 2,336
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
1,300
925
Depreciation and amortization
305
297
Net amortization of securities discounts and premiums
4
20
Equity-based compensation
151
99
Proceeds from sale of loans
2,246
4,352
Originations of loans held for sale
(2,422 )
(4,149 )
Gain on sales of loans
(41 )
(83 )
Increase in bank-owned life insurance
(144 )
—
Increase in accrued interest receivable
(133 )
(157 )
Increase (decrease) in accrued interest payable
74
(126 )
Increase (decrease) in other liabilities
(125 )
1,314
(Increase) decrease in other assets
(13 )
205
Net cash provided by operating activities
3,810
5,033
Cash flows from investing activities
Net increase in loans
(93,703 )
(52,978 )
Maturities, calls and principal repayments of securities held to maturity and available for sale
711
1,851
Proceeds from sale of other real estate owned
433
—
Net (increase) decrease in investments in restricted stock, at cost
(1,789 )
228
Purchases of bank premises and equipment
(164 )
(701 )
Net cash used in investing activities
(94,512 )
(51,600 )
Cash flows from financing activities
Net increase in deposits
61,949
29,760
Proceeds from FHLB borrowings
40,000
5,000
Repayment of FHLB borrowings
(257 )
(10,162 )
Net proceeds from initial public offering
—
47,715
Decrease in capital lease obligation
(26 )
(18 )
Net cash provided by financing activities
101,666
72,295
Net increase in cash and cash equivalents
10,964
25,728
Cash and cash equivalents - beginning
34,366
50,629
Cash and cash equivalents - ending
$ 45,330
$ 76,357
Supplementary cash flows information:
Interest paid
$ 1,935
$ 1,654
Income taxes paid
$ 1,275
$ 900 S-44 S-45
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
March 31, 2014
Securities available for sale:
U.S. Treasury securities
$ 1,937
$ —
$ (84 )
$ 1,853
States and political subdivisions
4,412
2
(32 )
4,382
Asset-backed securities:
Residential mortgages
9,038
333
(87 )
9,284
Student loans
4,451
7
(11 )
4,447
Small business loans
1,356
—
(12 )
1,344
Equity securities
6,000
—
(111 )
5,889
$ 27,194
$ 342
$ (337 )
$ 27,199
December 31, 2013
Securities available for sale:
U.S. Treasury securities
$ 1,935
$ —
$ (132 )
$ 1,803
States and political subdivisions
4,415
—
(80 )
4,335
Asset-backed securities:
Residential mortgages
9,452
333
(128 )
9,657
Student loans
4,568
—
(20 )
4,548
Small business loans
1,414
—
(23 )
1,391
Equity securities
6,000
—
(145 )
5,855
$ 27,784
$ 333
$ (528 )
$ 27,589
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
March 31, 2014
Securities held to maturity:
Asset-backed securities:
Residential mortgages
$ 898
$ 45
$ —
$ 943
December 31, 2013
Securities held to maturity:
Asset-backed securities:
Residential mortgages
$ 1,985
$ 99
$ —
$ 2,084 S-46
Available for Sale
Held to Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
March 31, 2014
Due in one year or less
$ 1,001
$ 1,002
$ —
$ —
Due after one year through five years
—
—
—
—
Due after five years through ten years
3,849
3,733
—
—
Due after ten years
1,499
1,500
—
—
Asset-backed securities:
Residential mortgages
9,038
9,284
898
943
Student loans
4,451
4,447
—
—
Small business loans
1,356
1,344
—
—
$ 21,194
$ 21,310
$ 898
$ 943
Less
than 12 Months
12 Months
or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
March
31, 2014
Securities
available for sale:
U.S.
Treasury securities
$ 1,853
$ (84 )
$ —
$ —
$ 1,853
$ (84 )
States and
political subdivisions
1,880
(32 )
—
—
1,880
(32 )
Asset-backed securities:
Residential
mortgages
2,275
(87 )
—
—
2,275
(87 )
Student loans
2,495
(11 )
—
—
2,495
(11 )
Small business
loans
1,344
(12 )
—
—
1,344
(12 )
Equity
securities
5,889
(111 )
—
—
5,889
(111 )
$ 15,736
$ (337 )
$ —
$ —
$ 15,736
$ (337 ) S-47
Less than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
December 31, 2013
Securities available for sale:
U. S. Treasury securities
$ 1,803
$ (132 )
$ —
$ —
$ 1,803
$ (132 )
States and political subdivisions
3,412
(80 )
—
—
3,412
(80 )
Asset-backed securities:
Residential mortgages
4,284
(128 )
—
—
4,284
(128 )
Student loans
4,548
(20 )
—
—
4,548
(20 )
Small business loans
1,391
(23 )
—
—
1,391
(23 )
Equity securities
5,855
(145 )
—
—
5,855
(145 )
$ 21,293
$ (528 )
$ —
$ —
$ 21,293
$ (528 )
March 31,
2014
December 31,
2013
Commercial
$ 223,324
$ 203,690
Commercial real estate
835,169
769,121
Commercial construction
69,420
59,877
Residential real estate
83,243
85,568
Home equity
32,665
32,504
Consumer
2,348
2,340
Gross loans
1,246,169
1,153,100
Unearned net origination fees and costs
(806 )
(1,196 )
Loans receivable
1,245,363
1,151,904
Less: Allowance for loan losses
(17,035 )
(15,979 )
Net loans receivable
$ 1,228,328
$ 1,135,925 S-48
· 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 real estate loans
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 commercial construction 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
until the property can be sold. 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, home equity 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. S-49
Commercial
Commercial
Real Estate
Commercial
Construction
Residential
Real Estate
Home Equity
Lines of Credit
Consumer
Unallocated
Total
March 31, 2014
Allowance for loan losses:
Individually evaluated for
impairment
$ 1,456
$ 80
$ —
$ —
$ —
$ —
$ —
$ 1,536
Collectively evaluated
for impairment
3,267
9,259
740
1,217
701
52
263
15,499
Total
$ 4,723
$ 9,339
$ 740
$ 1,217
$ 701
$ 52
$ 263
$ 17,035
Gross loans:
Individually evaluated for impairment
$ 5,743
$ 6,106
$ —
$ 2,784
$ 765
$ —
$ —
$ 15,398
Collectively evaluated
for impairment
217,581
829,063
69,420
80,459
31,900
2,348
—
1,230,771
Total
$ 223,324
$ 835,169
$ 69,420
$ 83,243
$ 32,665
$ 2,348
$ —
$ 1,246,169
December 31, 2013
Allowance for loan losses:
Individually evaluated for impairment
$ 1,440
$ 122
$ —
$ —
$ —
$ —
$ —
$ 1,562
Collectively evaluated
for impairment
2,998
8,622
639
1,248
698
52
160
14,417
Total
$ 4,438
$ 8,744
$ 639
$ 1,248
$ 698
$ 52
$ 160
$ 15,979
Gross loans:
Individually evaluated for impairment
$ 5,813
$ 6,137
$ —
$ 3,029
$ 767
$ —
$ —
$ 15,746
Collectively evaluated
for impairment
197,877
762,984
59,877
82,539
31,737
2,340
—
1,137,354
Total
$ 203,690
$ 769,121
$ 59,877
$ 85,568
$ 32,504
$ 2,340
$ —
$ 1,153,100 S-50
Unpaid
Allowance for
Average
Interest
Cash Basis
Principal
Recorded
Loan Losses
Recorded
Income
Interest
Balance
Investment (1)
Allocated
Investment (1)
Recognized
Recognized
March 31, 2014
With no related allowance recorded:
Commercial
$ 929
$ 801
—
$ 819
$ —
$ —
Commercial real estate
5,244
4,870
—
4,955
22
—
Commercial construction
—
—
—
—
—
—
Residential real estate
3,641
2,817
—
3,202
8
—
Home equity lines of credit
770
765
—
771
—
—
Consumer
—
—
—
—
—
—
10,584
9,253
—
9,747
30
—
With an allowance recorded:
Commercial
5,018
4,949
1,456
5,077
17
—
Commercial real estate
1,394
1,403
80
1,447
21
—
Commercial construction
—
—
—
—
—
—
Residential real estate
—
—
—
—
—
—
Home equity lines of credit
—
—
—
—
—
—
Consumer
—
—
—
—
—
—
6,412
6,352
1,536
6,524
38
—
Total
$ 16,996
$ 15,605
$ 1,536
$ 16,271
$ 68
$ —
December 31, 2013
With no related allowance recorded:
Commercial
$
934
$
809
—
$
830
$
15
$
—
Commercial real estate
4,712
4,348
—
4,479
63
—
Commercial construction
—
—
—
—
—
—
Residential real estate
3,643
3,055
—
3,510
36
—
Home equity lines of credit
771
768
—
567
7
—
Consumer
—
—
—
—
—
—
10,060
8,980
—
9,386
121
—
With an allowance recorded:
Commercial
5,057
5,016
1,440
5,192
122
60
Commercial real estate
1,950
1,959
122
2,042
119
—
Commercial construction
—
—
—
—
—
—
Residential real estate
—
—
—
—
—
—
Home equity lines of credit
—
—
—
—
—
—
Consumer
—
—
—
—
—
—
7,007
6,975
1,562
7,234
241
60
Total
$
17,067
$
15,955
$
1,562
$
16,620
$
362
$
60
March 31, 2013
With no related allowance recorded:
Commercial
$ 273
$ 276
—
$ 286
$ —
$ —
Commercial real estate
2,392
2,434
—
1,666
16
—
Commercial construction
—
—
—
—
—
—
Residential real estate
3,023
3,068
—
3,058
—
—
Home equity lines of credit
119
121
—
121
1
—
Consumer
—
—
—
—
—
—
5,807
5,899
—
5,131
17
—
With an allowance recorded:
Commercial
2,862
2,862
648
2,895
32
32
Commercial real estate
3,274
3,326
612
3,442
35
—
Commercial construction
—
—
—
—
—
—
Residential real estate
639
647
45
660
8
—
Home equity lines of credit
—
—
—
—
—
—
Consumer
—
—
—
—
—
—
6,775
6,835
1,305
6,997
75
32
Total
$ 12,582
$ 12,734
$ 1,305
$ 12,128
$ 92
$ 32
(1) The recorded investment in loans include accrued interest receivable and other capitalized costs such as real estate taxes
paid on behalf of the borrower and loan origination fees, net. S-51
Nonaccrual Loans
Loans Past Due Over
90 Days Still Accruing
March 31,
2014
December 31
2013
March 31,
2014
December 31
2013
Commercial
$ 3,512
$ 3,582
$ —
$ —
Commercial real estate
2,434
2,445
—
—
Commercial construction
—
—
—
—
Residential real estate
2,137
2,381
—
—
Home equity lines of credit
765
767
—
—
Consumer
—
—
—
—
Total
$ 8,848
$ 9,175
$ —
$ —
30-59
60-89
90 Days
Total
Days
Days
or Greater
Total
Gross
Past Due
Past Due
Past Due
Past Due
Current
Loans
March 31, 2014
Commercial
$ —
$ —
$ 628
$ 628
$ 222,696
$ 223,324
Commercial real estate
1,928
—
1,394
3,322
831,847
835,169
Commercial construction
—
—
—
—
69,420
69,420
Residential real estate
647
321
1,524
2,492
80,751
83,243
Home equity lines of credit
—
—
651
651
32,014
32,665
Consumer
—
—
—
—
2,348
2,348
Total
$ 2,575
$ 321
$ 4,197
$ 7,093
$ 1,239,076
$ 1,246,169
December 31, 2013
Commercial
$ —
$ —
$ 634
$ 634
$ 203,056
$ 203,690
Commercial real estate
—
—
1,394
1,394
767,727
769,121
Commercial construction
—
—
—
—
59,877
59,877
Residential real estate
—
431
1,763
2,194
83,374
85,568
Home equity lines of credit
—
—
653
653
31,851
32,504
Consumer
—
19
—
19
2,321
2,340
Total
$ —
$ 450
$ 4,444
$ 4,894
$ 1,148,206
$ 1,153,100 S-52
Credit Risk Profile by
Internally Assigned Grades
Pass
Special
Mention
Substandard
Doubtful
Total
March
31, 2014
Commercial
$ 204,463
$ 13,969
$ 4,892
$ —
$ 223,324
Commercial
real estate
821,711
1,934
11,524
—
835,169
Commercial
construction
69,420
—
—
—
69,420
Total
$ 1,095,594
$ 15,903
$ 16,416
$ —
$ 1,127,913
December
31, 2013
Commercial
$ 184,340
$ 14,377
$ 4,973
$ —
$ 203,690
Commercial
real estate
755,533
1,947
11,641
—
769,121
Commercial
construction
59,877
—
—
—
59,877
Total
$ 999,750
$ 16,324
$ 16,614
$ —
$ 1,032,688 S-53
Commercial
Commercial
Real Estate
Commercial
Construction
Residential
Real Estate
Home Equity
Lines of Credit
Consumer
Unallocated
Total
Allowance for loan losses:
Beginning
balance at January 1, 2014
$ 4,438
$ 8,744
$ 639
$ 1,248
$ 698
$ 52
$ 160
$ 15,979
Charge-offs
—
—
—
(239 )
—
(5 )
—
(244 )
Recoveries
—
—
—
—
—
—
—
—
Provision
for loan losses
285
595
101
208
3
5
103
1,300
Total
ending balance at March 31, 2014
$ 4,723
$ 9,339
$ 740
$ 1,217
$ 701
$ 52
$ 263
$ 17,035
Allowance for loan losses:
Beginning balance
at January 1, 2013
$ 2,402
$ 7,745
$ 633
$ 1,542
$ 617
$ 41
$ 266
$ 13,246
Charge-offs
—
(452 )
—
—
(79 )
(3 )
—
(534 )
Recoveries
—
—
—
—
—
—
—
—
Provision
for loan losses
842
283
(290 )
22
87
(5
)
(14
)
925
Total
ending balance at March 31, 2013
$ 3,244
$ 7,576
$ 343
$ 1,564
$ 625
$ 33
$ 252
$ 13,637
Weighted
Weighted
Average
Average
Remaining
Aggregate
Exercised
Contractural
Intrinsic
Shares
Price
Term (Years)
Value
Outstanding at January 1, 2014
300,438
$ 12.32
Granted
—
—
Exercised
—
—
Forfeited
(606 )
18.18
Expired
—
—
Outstanding at March 31, 2014
299,832
$ 12.31
$ 3.16
$ 11,008,412
Fully vested and expected to vest
299,832
$ 12.31
$ 3.16
$ 11,008,412
Exercisable at March 31, 2014
298,416
$ 12.28
$ 3.12
$ 10,946,236 S-54
Weighted-
Average
Grant-Date
Nonvested Shares
Shares
Fair Value
Nonvested at December 31, 2013
19,275
$ 21.90
Awarded
15,592
38.81
Vested
(7,188 )
21.57
Expired
—
—
Nonvested at March 31, 2014
26,679
$ 31.51 S-55
Shares
Weighted-
Average
Grant-Date
Fair Value
Unearned at December 31, 2013
85,313
$ 32.35
Awarded
—
—
Forfeited
—
—
Expired
—
—
Unearned at March 31, 2014
85,313
$ 32.35 S-56
Fair Value Measurements Using
Quoted Prices
Significant
in Active
Other
Significant
Markets for
Observable
Unobservable
Identical Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
March 31, 2014
Securities:
U.S. Treasury securities
$ 1,853
$ —
$ —
States and political subdivisions
—
4,382
—
Asset-backed securities:
Residential mortgages
—
9,284
—
Student loans
—
4,447
—
Small business loans
—
1,344
Equity securities
—
5,889
—
December 31, 2013
Securities:
U.S. Treasury securities
$ 1,803
$ —
$ —
States and political subdivisions
—
4,335
—
Asset-backed securities:
Residential mortgages
—
9,657
—
Student loans
—
4,548
—
Small business loans
—
1,391
Equity securities
—
5,855
— S-57
Fair Value Measurements Using
Quoted Prices
Significant
in Active
Other
Significant
Markets for
Observable
Unobservable
Identical Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
March 31, 2014
Impaired loans:
Commercial real estate
$ —
$ —
$ 1,828
Commercial
—
—
1,865
December 31, 2013
Impaired loans:
Commercial real estate
$ —
$ —
$ 1,828
Commercial
—
—
1,865
Valuation
Discount
Weighted
Fair Value
Technique(s)
Unobservable Input(s)
Range
Average
Impaired loans:
Commercial real estate
$ 1,313
Sales comparison
Adjustments for differences between the comparable sales.
5% - 14 %
7 %
Commercial
$ 1,816
Sales comparison
Adjustments for differences between the comparable sales.
39 %
39 % S-58
Valuation
Discount
Weighted
Fair Value
Technique(s)
Unobservable Input(s)
Range
Average
Impaired loans:
Commercial real estate
$ 1,828
Sales comparison
Adjustments for differences between the comparable sales.
5% - 15 %
8 %
Income approach
Adjustments for differences in net operating income expectations.
4 %
4 %
Commercial
$ 1,865
Sales comparison
Adjustments for differences between the comparable sales.
39 %
39 %
Fair Value Measurements at March 31, 2014 Using
Quoted Prices
Significant
in Active
Other
Significant
Markets for
Observable
Unobservable
Identical Assets
Inputs
Inputs
Carrying Value
(Level 1)
(Level 2)
(Level 3)
Financial assets:
Cash and due from banks
$ 3,005
$ 3,005
$ —
$ —
Interest bearing deposits
42,325
42,325
—
—
Securities available for sale
27,199
1,853
25,346
—
Securities held to maturity
898
—
943
—
FHLB stock
9,411
n/a
n/a
n/a
Loans held for sale
792
—
792
—
Loans receivable
1,245,363
—
—
1,243,636
Accrued interest receivable
4,235
—
77
4,158
Financial liabilities:
Deposits
Demand, NOW, money market and savings
$ 578,045
$ 578,045
$ —
$ —
Certificates of deposit
449,711
—
452,129
—
FHLB Borrowings
177,301
—
181,851
—
Accrued interest payable
2,836
—
2,836
— S-59
Fair Value Measurements at December 31, 2013 Using
Quoted Prices
Significant
in Active
Other
Significant
Markets for
Observable
Unobservable
Identical Assets
Inputs
Inputs
Carrying Value
(Level 1)
(Level 2)
(Level 3)
Financial assets:
Cash and due from banks
$ 2,907
$ 2,907
$ —
$ —
Interest bearing deposits
31,459
31,459
—
—
Securities available for sale
27,589
1,803
25,786
—
Securities held to maturity
1,027
—
1,077
—
FHLB stock
4,744
n/a
n/a
n/a
Loans held for sale
575
—
583
—
Loans receivable, gross
1,151,904
—
—
1,151,870
Accrued interest receivable
4,102
—
99
4,003
Financial liabilities:
Deposits
Demand, NOW, money market and savings
$ 550,096
$ 550,096
$ —
$ —
Certificates of deposit
415,711
—
419,467
—
FHLB Borrowings
137,558
—
141,902
—
Accrued interest payable
2,762
—
2,762
— S-60
Three Months Ended March 31,
2014
2013
Basic
Net income available to common stockholders
$ 2,608
$ 2,336
Weighted average common shares outstanding
5,036
4,056
Basic earnings per common share
$ 0.52
$ 0.58
Diluted
Net income
$ 2,608
$ 2,336
Weighted average common shares outstanding for basic earnings per common share
5,036
4,056
Add: Dilutive effects of assumed exercises of stock options and stock awards
181
122
Average shares and dilutive potential common shares
5,217
4,178
Diluted earnings per common share
$ 0.50
$ 0.56 S-61 S-62
· the accompanying notes to the unaudited pro
forma condensed combined consolidated financial information;
· Center’s separate historical consolidated
financial statements and accompanying notes as of March 31, 2014, December 31, 2013 and December 31, 2012, for the years ended
December 31, 2013, 2012 and 2011 and for the three months ended March 31, 2014 and 2013 included in Center’s Annual Report
on Form 10-K for the year ended December 31, 2013 and Quarterly Report on Form 10-Q for the three months ended March 31, 2014;
and
· ConnectOne’s separate historical consolidated
financial statements and accompanying notes as of March 31, 2014, December 31, 2013 and December 31, 2012, for the years ended
December 31, 2013, 2012 and 2011 and for the three months ended March 31, 2014 and 2013 presented elsewhere in this Current Report. S-63
as of March 31, 2014
(in thousands)
Center
Bancorp, Inc.
ConnectOne
Bancorp, Inc.
Pro Forma
Merger
Adjustments
Pro Forma
Combined
ASSETS:
Cash and cash equivalents
$ 106,282
$ 45,330
$ —
$ 151,612
Securities
501,662
28,097
50
A
529,809
Loans held for sale
—
792
—
792
Loans receivable
987,529
1,245,363
(13,580 )
B
2,219,312
Allowance for loan losses
(10,633 )
(17,035 )
17,035
C
(10,633 )
Loans receivable, net
976,896
1,228,328
3,455
2,208,679
Federal Home Loan Bank stock
Investment in restricted stock, at cost
8,986
9,411
—
18,397
Accrued interest receivable
6,341
4,235
—
10,576
Deferred tax asset, net
4,746
7,539
(1,278 )
D
11,007
Premises and equipment, net
13,833
7,385
21,218
Goodwill
16,797
260
109,703
E
126,760
Core deposit intangible
24
—
8,251
F
8,275
Bank owned life insurance
35,989
15,334
—
51,323
Other real estate owned
220
870
—
1,090
Other assets
4,384
142
—
4,526
Total assets
$ 1,676,160
$ 1,347,723
$ 120,181
$ 3,144,064
LIABILITIES AND STOCKHOLDERS’ EQUITY:
LIABILITIES
Deposits
$ 1,339,885
$ 1,027,756
$ 3,756
G
$ 2,371,397
Federal Home Loan Bank advances and other borrowings
151,155
177,301
4,344
H
332,800
Accrued expenses and other liabilities
11,307
9,658
—
20,965
Total liabilities
1,502,347
1,214,715
8,100
2,725,062
STOCKHOLDERS’ EQUITY
Common stock and paid-in capital
115,058
99,466
145,623
I
360,147
Preferred stock
11,250
—
—
11,250
Treasury stock, at cost
(17,078 )
—
—
(17,078 )
Retained earnings
65,053
33,539
(33,539 )
I
65,053
Accumulated other comprehensive loss, net of tax
(470 )
3
(3 )
I
(470 )
Total stockholders’ equity
173,813
133,008
112,081
418,902
Total liabilities and stockholders’ equity
1,676,160
1,347,723
120,181
3,144,064 S-64
Ended December 31, 2013
(dollars in thousands, except per share data)
Center Bancorp,
Inc.
ConnectOne
Bancorp, Inc.
Merger
Adjustments
Pro Forma
Combined
Interest and dividend income:
Loans
$ 40,132
$ 46,405
$ (674 )
J
$ 85,863
Investments
17,136
795
29
O
17,960
Other earning assets
—
103
—
103
Total interest and dividend income
57,268
47,303
(645 )
103,926
Interest expense:
Deposits
5,219
4,798
(1,878 )
K
8,139
Borrowed funds
5,863
1,489
(1,448 )
L
5,904
Capital lease
—
189
189
Total interest expense
11,082
6,476
(3,326 )
14,232
Net interest income
46,186
40,827
2,681
89,694
Provision of loan losses
350
4,575
—
4,925
Net interest income after provision for loan losses
45,836
36,252
2,681
84,769
Non-interest income
Service charges and fees
1,873
436
—
2,309
Annuities and insurance commissions
489
—
—
489
Net gain (loss) from sale of securities
2,363
—
—
2,363
Loan related fees
839
—
—
839
Net gain from sales of loans
294
239
—
533
BOLI income
1,364
191
—
1,555
Other-than-temporary impairment losses on investment
(652 )
—
—
(652 )
Other income
281
336
—
617
Total non-interest income
6,851
1,202
—
8,053
Non-interest expenses
Salaries and employee benefits
13,465
10,321
—
23,786
Occupancy and equipment
3,518
3,101
—
6,619
Professional fees
1,415
1,463
—
2,878
Other expenses
6,880
5,766
1,500
M
14,146
Total non-interest expense
25,278
20,651
1,500
47,429
Income before income tax expense
27,409
16,803
1,181
45,393
Income tax expense
7,484
6,533
413
N
14,430
Net income
19,925
10,270
768
30,963
Dividends on preferred shares
141
—
—
141
Net income available to common stockholders
$ 19,784
$ 10,270
$ 768
$ 30,822
Earnings per common share:
Basic
$ 1.21
$ 2.15
$ 1.07
Diluted
1.21
2.09
1.06
Weighted average common shares outstanding:
Basic
16,349,204
4,773,954
28,761,484
Diluted
16,385,692
4,919,384
29,176,090 S-65
Months Ended March 31, 2014
(dollars in thousands, except per share data)
Center Bancorp,
Inc.
ConnectOne
Bancorp, Inc.
Merger
Adjustments
Pro Forma
Combined
Interest and dividend income:
Loans
$ 10,111
$ 13,455
$ (169 )
J
$ 23,397
Investments
4,226
227
2
O
4,655
Other earning assets
—
22
—
22
Total interest and dividend income
14,337
13,704
(167 )
27,874
Interest expense:
Deposits
1,316
1,401
(470 )
K
2,247
Borrowed funds
1,411
561
(362 )
L
1,610
Capital lease
—
47
—
47
Total interest expense
2,727
2,009
(832 )
3,904
Net interest income
11,610
11,695
665
23,970
Provision of loan losses
625
1,300
—
1,925
Net interest income after provision for loan losses
10,985
10,395
665
22,045
Non-interest income
Service charges and fees
497
87
—
584
Annuities and insurance commissions
100
—
—
100
Net gain (loss) from sale of securities
1,415
—
—
1,415
Loan related fees
181
—
—
181
Net gain from sales of loans
36
41
—
77
BOLI income
255
144
—
399
Other income
37
77
—
114
Total non-interest income
2,521
349
—
2,870
Non-interest expenses
Salaries and employee benefits
3,332
3,091
—
6,423
Occupancy and equipment
1,080
829
—
1,909
Professional fees
255
378
—
633
Other expenses
2,829
2,374
375
M
5,578
Total non-interest income
7,496
6,672
375
14,543
Income before income tax expense
6,010
4,072
290
10,372
Income tax expense
1,612
1,464
102
N
3,178
Net income
4,398
2,608
188
7,194
Dividends on preferred shares
28
—
—
28
Net income available to common stockholders
$ 4,370
$ 2,608
$
188
$
7,166
Earnings per common share:
Basic
$ 0.27
$ 0.52
$ 0.24
Diluted
0.27
0.50
0.24
Weighted average common shares outstanding:
Basic
16,350,183
5,035,521
29,442,538
Diluted
16,405,540
5,216,599
29,968,697 S-66
-30%
-20%
-10%
Base
10%
20%
30%
Assumed market price of Center common stock
$ 12.92
$ 14.77
$ 16.61
$ 18.46
$ 20.31
$ 22.15
$ 24.00
Purchase price (in millions)
$
171.56
$
196.07
$
220.58
$ 245.09
$
269.60
$
294.11
$
318.62
Goodwill (in millions)
$
36.18
$
60.69
$
85.19
$
109.70
$
134.21
$
158.72
$
183.23 S-67
Consolidated Balance Sheet
(In thousands)
(A)
Adjustments to investment portfolio
To reflect the mark-up on the fair value premium on securities held-to-maturity investment, which was based on broker quotes:
Amortized cost
$ 898
Fair value
948
Adjustment
$ 50
(B)
Adjustment to loans
Adjustments (B) and (C) reflect the elimination of ConnectOne’s historical allowance for loan losses of approximately $17.0 million and the recording of a fair value discount of $13.6 million on the loan portfolio. The fair value discount was calculated by forecasting cash flows over the expected remaining life of each loan and discounting those cash flows to present value using current market rates for similar loans. Forecasted cash flows include an estimate of lifetime credit losses on the loan portfolio, which resulted in a credit mark of approximately $17.0 million, and reflect the difference between contractual interest rates and current market rates for similar loans, which resulted in an interest rate mark of approximately $3.4 million.
$ (16,953 )
3,373
$ (13,580 )
(C)
Adjustment to allowance for loan losses
To remove ConnectOne’s allowance at the merger date as the credit risk is contemplated in the fair value adjustment in adjustment B above.
$ 17,035 S-68
Consolidated Balance Sheet
(In thousands)
(D)
Adjustments to deferred tax assets
Adjustments reflect the tax impact of pro forma acquisition accounting fair value adjustments using the federal statutory rate of 35%:
Adjustment to loans—expected credit losses
$ 16,953
Adjustment to loans—interest rate mark
(3,373 )
Adjustment to allowance for loan losses
(17,035 )
Adjustments to core deposit intangible, net
(8,251 )
Adjustments to investment securities
(50 )
Adjustment to deposits
3,756
Adjustment to borrowed funds
4,344
Subtotal for fair value adjustments
(3,656 )
Calculated deferred taxes at Center’s estimated federal statutory rate of 35%
$
(1,278 )
(E)
Adjustments to goodwill, net
Goodwill represents the excess of the purchase price over the fair value of acquired net assets. The purchase price will not be finalized until the merger is completed and will be based on the share price of Center common stock on that date.
Elimination of ConnectOne goodwill
$ (260 )
Goodwill
109,963
Net goodwill
$ 109,703
(F)
Adjustments to core deposit intangible, net
Adjustments reflect the fair value of the acquired core deposit intangible. The core deposit intangible is calculated as the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base. Deposit accounts that are evaluated as part of the core deposit intangible include demand deposit accounts, money market accounts and savings accounts.
$ 8,251
(G)
Adjustment to time deposits
Adjustment reflects the fair value premium on time deposits, which was calculated by discounting future contractual payments at a current market interest rate.
$ 3,756
(H)
Adjustment to borrowed funds
Adjustment reflects the fair value premium on FHLB advances, which was calculated by discounting future contractual payments at current market interest rates.
$ 4,344
(I)
Adjustments to stockholders equity
To eliminate ConnectOne equity accounts
(133,008 )
To replace ConnectOne common stock with Center common stock.
245,089
$ 112,081 S-69
Statements
of Net Income (In thousands)
Year
Ended 12/31/2013
Three Months
Ended March
31, 2014
(J)
Adjustment to loan interest income
To reflect the amortization of loan premium from interest rate fair value adjustment;
amortization on a level yield basis over the expected remaining average life of existing loans at period-end which is approximately
five years.
$ (674 )
(169 )
(K)
Adjustment to deposit interest expense
To reflect the amortization of time deposit premium from interest rate fair value adjustment;
amortization on a level yield basis over the remaining term of existing time deposits at period-end which is approximately
two years.
$ (1,878 )
(470 )
(L)
Adjustment to borrowing interest expense
To reflect the amortization of borrowing premium from interest rate fair value adjustment; amortization
on a level yield basis over the remaining term of borrowings existing at period-end which is approximately three years.
$ (1,448 )
(362 ) S-70
Statements
of Net Income (In thousands)
Year
Ended 12/31/2013
Three Months
Ended March
31, 2014
(M)
Adjustments to other non-interest
expense
To reflect the amortization
of acquired identifiable intangible assets using a 10-year amortization period and using the sum-of-the-years-digits method
of amortization
$ 1,500
375
(N)
Adjustment to income tax provision
To reflect the income tax effect
of pro forma adjustments at 35%
$ 413
102
(O)
Adjustment to Investments
Current unrealized loss on AFS securities portfolio
$
5
Current unrealized gain on HTM securities portfolio
$
45
$
50
S-71
To reflect amortization of discount on investments security portfolio using straight line method with an average life of 5.0 years
$
2
Preliminary Purchase Accounting Allocation
(In thousands)
March 31, 2014
Total pro forma purchase price
$ 245,089
Fair value of assets acquired:
Cash and cash equivalents
45,330
Securities
28,147
Loans held for sale
792
Loans receivable, net
1,231,783
Core deposit intangibles
8,251
Investment in restricted stock
9,411
Bank owned life insurance
15,334
Premises and equipment
7,385
Other real estate owned
870
Accrued interest receivable
4,235
Deferred tax asset
6,261
Other assets
142
Total
1,357,941
Fair value of liabilities assumed:
Deposits
1,031,512
Advances from Federal Home Loan Bank and other borrowings
181,645
Accrued expenses and other liabilities
9,658
Total
1,222,815
Fair value of net assets acquired
135,126
Goodwill
109,963
Elimination of ConnectOne goodwill
(260 )
Net goodwill
$ 109,703 S-72
Ex-23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-3 No. 333-100884, No. 333-110710, No. 333-157189, No. 333-165787, and No. 333-189210 and Form S-8 No. 333-37436, No. 333-37434, No. 333-116174, No. 333-125747, No. 333-148323 and No. 333-160111 of Center Bancorp, Inc. of our report dated March 3, 2014, relating to the consolidated financial statements of ConnectOne Bancorp, Inc. which appears in this Form 8-K of Center Bancorp, Inc.
/s/ Crowe Horwath LLP | ||
Crowe Horwath LLP | ||
Livingston, New Jersey
June 18, 2014