UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
S | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2014
OR
£ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-11486
CONNECTONE BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
New Jersey | 26-1998619 |
(State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) |
301 Sylvan Avenue
Englewood Cliffs, New Jersey 07632
(Address of Principal Executive Offices) (Zip Code)
201-816-8900
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer £ | Accelerated filer S | Non-accelerated
filer £ (Do not check if smaller reporting company) |
Smaller reporting company £ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, no par value: | 29,825,658, shares |
(Title of Class) | (Outstanding as of August 11, 2014) |
Table of Contents
2 |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, except for share and per share data) | June 30, 2014 | December 31, 2013 | ||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 92,617 | $ | 82,692 | ||||
Investment securities: | ||||||||
Available-for-sale | 266,959 | 323,070 | ||||||
Held-to-maturity (fair value of $222,503 and $210,958) | 218,159 | 215,286 | ||||||
Loans held for sale | 483 | — | ||||||
Loans | 1,006,256 | 960,943 | ||||||
Less: Allowance for loan losses | 10,825 | 10,333 | ||||||
Net loans | 995,431 | 950,610 | ||||||
Investment in restricted stock, at cost | 11,289 | 8,986 | ||||||
Premises and equipment, net | 14,013 | 13,681 | ||||||
Accrued interest receivable | 6,414 | 6,802 | ||||||
Bank-owned life insurance | 36,245 | 35,734 | ||||||
Goodwill and other intangible assets | 16,815 | 16,828 | ||||||
Other real estate owned | 220 | 220 | ||||||
Due from brokers for investment securities | — | 8,759 | ||||||
Other assets | 7,164 | 10,414 | ||||||
Total assets | $ | 1,665,809 | $ | 1,673,082 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Non-interest bearing | $ | 238,138 | $ | 227,370 | ||||
Interest-bearing: | ||||||||
Time deposits $100 and over | 112,616 | 99,444 | ||||||
Interest-bearing transaction, savings and time deposits less than $100 | 923,866 | 1,015,191 | ||||||
Total deposits | 1,274,620 | 1,342,005 | ||||||
Borrowings | 196,000 | 146,000 | ||||||
Subordinated debentures | 5,155 | 5,155 | ||||||
Accounts payable and accrued liabilities | 11,756 | 11,338 | ||||||
Total liabilities | 1,487,531 | 1,504,498 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $1,000 liquidation value per share, authorized 5,000,000 shares; issued and outstanding 11,250 shares of Series B preferred stock at June 30, 2014 and December 31, 2013; total liquidation value of $11,250,000 at June 30, 2014 and December 31, 2013 | 11,250 | 11,250 | ||||||
Common stock, no par value, authorized 50,000,000 shares; issued 18,477,412 shares at June 30, 2014 and December 31, 2013; outstanding 16,413,490 shares at June 30, 2014 and 16,369,012 at December 31, 2013 | 110,056 | 110,056 | ||||||
Additional paid-in capital | 5,380 | 4,986 | ||||||
Retained earnings | 67,108 | 61,914 | ||||||
Treasury stock, at cost (2,063,922 common shares at June 30, 2014 and 2,108,400 at December 31, 2013) | (16,717 | ) | (17,078 | ) | ||||
Accumulated other comprehensive income (loss) | 1,201 | (2,544 | ) | |||||
Total stockholders’ equity | 178,278 | 168,584 | ||||||
Total liabilities and stockholders’ equity | $ | 1,665,809 | $ | 1,673,082 |
See accompanying notes to unaudited consolidated financial statements.
3 |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands, except for share and per share data) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Interest income | ||||||||||||||||
Interest and fees on loans | $ | 10,461 | $ | 9,892 | $ | 20,572 | $ | 19,815 | ||||||||
Interest and dividends on investment securities: | ||||||||||||||||
Taxable | 2,909 | 2,885 | 5,925 | 5,857 | ||||||||||||
Tax-exempt | 895 | 1,081 | 1,951 | 2,157 | ||||||||||||
Dividends | 136 | 121 | 290 | 252 | ||||||||||||
Interest on federal funds sold and other short-term investments | — | — | — | 2 | ||||||||||||
Total interest income | 14,401 | 13,979 | 28,738 | 28,083 | ||||||||||||
Interest expense | ||||||||||||||||
Interest on certificates of deposit $100 or more | 203 | 220 | 410 | 459 | ||||||||||||
Interest on other deposits | 1,098 | 1,063 | 2,207 | 2,108 | ||||||||||||
Interest on borrowings | 1,432 | 1,468 | 2,843 | 2,918 | ||||||||||||
Total interest expense | 2,733 | 2,751 | 5,460 | 5,485 | ||||||||||||
Net interest income | 11,668 | 11,228 | 23,278 | 22,598 | ||||||||||||
Provision for loan losses | 284 | — | 909 | — | ||||||||||||
Net interest income after provision for loan losses | 11,384 | 11,228 | 22,369 | 22,598 | ||||||||||||
Other income | ||||||||||||||||
Service charges, commissions and fees | 469 | 451 | 966 | 857 | ||||||||||||
Annuities and insurance commissions | 105 | 146 | 205 | 246 | ||||||||||||
Bank-owned life insurance | 256 | 274 | 511 | 839 | ||||||||||||
Loan related fees | 214 | 114 | 395 | 253 | ||||||||||||
Net gains on sale of loans held for sale | 43 | 91 | 79 | 229 | ||||||||||||
Other | 63 | 31 | 100 | 209 | ||||||||||||
Other-than-temporary impairment losses on investment securities | — | — | — | (24 | ) | |||||||||||
Net gains on sales of investment securities | 574 | 600 | 1,989 | 943 | ||||||||||||
Total other income | 1,724 | 1,707 | 4,245 | 3,552 | ||||||||||||
Other expense | ||||||||||||||||
Salaries and employee benefits | 3,184 | 3,335 | 6,516 | 6,825 | ||||||||||||
Occupancy and equipment | 816 | 811 | 1,896 | 1,717 | ||||||||||||
FDIC insurance | 288 | 208 | 588 | 521 | ||||||||||||
Professional and consulting | 306 | 230 | 561 | 449 | ||||||||||||
Stationery and printing | 88 | 78 | 172 | 163 | ||||||||||||
Marketing and advertising | 27 | 62 | 67 | 163 | ||||||||||||
Computer expense | 373 | 343 | 718 | 696 | ||||||||||||
Other real estate owned, net | 1 | 107 | 3 | 126 | ||||||||||||
Merger expenses | 729 | — | 1,789 | — | ||||||||||||
All other | 932 | 902 | 1,930 | 1,954 | ||||||||||||
Total other expense | 6,744 | 6,076 | 14,240 | 12,614 | ||||||||||||
Income before income tax expense | 6,364 | 6,859 | 12,374 | 13,536 | ||||||||||||
Income tax expense | 1,986 | 1,936 | 3,598 | 3,689 | ||||||||||||
Net Income | 4,378 | 4,923 | 8,776 | 9,847 | ||||||||||||
Less: Preferred stock dividends | 28 | 28 | 56 | 84 | ||||||||||||
Net income available to common stockholders | $ | 4,350 | $ | 4,895 | $ | 8,720 | $ | 9,763 | ||||||||
Earnings per common share | ||||||||||||||||
Basic | $ | 0.27 | $ | 0.30 | $ | 0.53 | $ | 0.60 | ||||||||
Diluted | $ | 0.26 | $ | 0.30 | $ | 0.53 | $ | 0.60 | ||||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 16,372,885 | 16,348,915 | 16,361,596 | 16,348,567 | ||||||||||||
Diluted | 16,430,376 | 16,375,774 | 16,422,339 | 16,375,028 | ||||||||||||
Dividend per common share | $ | 0.075 | $ | 0.055 | $ | 0.150 | $ | 0.130 |
See accompanying notes to unaudited consolidated financial statements.
4 |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Net income | $ | 4,378 | $ | 4,923 | $ | 8,776 | $ | 9,847 | ||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Unrealized gains and losses on securities available-for-sale: | ||||||||||||||||
Unrealized holding (losses) gains on available-for-sale securities | 3,311 | (11,702 | ) | 6,827 | (11,154 | ) | ||||||||||
Tax effect | (1,276 | ) | 4,689 | (2,466 | ) | 4,489 | ||||||||||
Net of tax amount | 2,035 | (7,013 | ) | 4,361 | (6,665 | ) | ||||||||||
Reclassification adjustment of OTTI losses included in income | — | — | — | 24 | ||||||||||||
Tax effect | — | — | — | (6 | ) | |||||||||||
Net of tax amount | — | — | — | 18 | ||||||||||||
Reclassification adjustment for net gains arising during the period | (574 | ) | (600 | ) | (1,989 | ) | (943 | ) | ||||||||
Tax effect | 179 | 167 | 559 | 257 | ||||||||||||
Net of tax amount | (395 | ) | (433 | ) | (1,430 | ) | (686 | ) | ||||||||
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity | 54 | 88 | 99 | 74 | ||||||||||||
Tax effect | (23 | ) | (33 | ) | (43 | ) | (28 | ) | ||||||||
Net of tax amount | 31 | 55 | 56 | 46 | ||||||||||||
Pension plan: | ||||||||||||||||
Actuarial gains | — | — | 1,281 | — | ||||||||||||
Tax effect | — | — | (523 | ) | — | |||||||||||
Net of tax amount | — | — | 758 | — | ||||||||||||
Total other comprehensive (loss) income | 1,671 | (7,391 | ) | 3,745 | (7,287 | ) | ||||||||||
Total comprehensive (loss) income | $ | 6,049 | $ | (2,468 | ) | $ | 12,521 | $ | 2,560 |
See accompanying notes to unaudited consolidated financial statements.
5 |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands, except for share and per share data) | Preferred Stock | Common Stock | Additional Paid In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||
Balance as of January 1, 2013 | $ | 11,250 | $ | 110,056 | $ | 4,801 | $ | 46,753 | $ | (17,232 | ) | $ | 5,063 | $ | 160,691 | |||||||||||||
Net income | 9,847 | 9,847 | ||||||||||||||||||||||||||
Other comprehensive loss, net of tax | (7,287 | ) | (7,287 | ) | ||||||||||||||||||||||||
Dividend on series B preferred stock | (113 | ) | (113 | ) | ||||||||||||||||||||||||
Issuance cost of common stock | (6 | ) | (6 | ) | ||||||||||||||||||||||||
Cash dividends declared on common stock ($0.13 per share) | (2,125 | ) | (2,125 | ) | ||||||||||||||||||||||||
Issuance of restricted stock awards (18,829 shares) | 91 | 152 | 243 | |||||||||||||||||||||||||
Stock issued for options exercised (1,000 shares) | 8 | 2 | 10 | |||||||||||||||||||||||||
Stock-based compensation expense | 25 | 25 | ||||||||||||||||||||||||||
Balance as of June 30, 2013 | $ | 11,250 | $ | 110,056 | $ | 4,925 | $ | 54,356 | $ | (17,078 | ) | $ | (2,224 | ) | $ | 161,285 | ||||||||||||
Balance as of January 1, 2014 | $ | 11,250 | $ | 110,056 | $ | 4,986 | $ | 61,914 | $ | (17,078 | ) | $ | (2,544 | ) | $ | 168,584 | ||||||||||||
Net income | 8,776 | 8,776 | ||||||||||||||||||||||||||
Other comprehensive income, net of tax | 3,745 | 3,745 | ||||||||||||||||||||||||||
Dividend on series B preferred stock | (56 | ) | (56 | ) | ||||||||||||||||||||||||
Issuance cost of common stock | (7 | ) | (7 | ) | ||||||||||||||||||||||||
Cash dividends declared on common stock ($0.15 per share) | (3,519 | ) | (3,519 | ) | ||||||||||||||||||||||||
Stock issued for options exercised (44,478 shares) | 119 | 361 | 480 | |||||||||||||||||||||||||
Tax benefit of options exercised | 241 | 241 | ||||||||||||||||||||||||||
Stock-based compensation expense | 34 | 34 | ||||||||||||||||||||||||||
Balance as of June 30, 2014 | $ | 11,250 | $ | 110,056 | $ | 5,380 | $ | 67,108 | $ | (16,717 | ) | $ | 1,201 | $ | 178,278 |
See accompanying notes to unaudited consolidated financial statements.
6 |
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands) | Six Months Ended June 30, | |||||||
2014 | 2013 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 8,776 | $ | 9,847 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Amortization of premiums and accretion of discounts on investment securities, net | 941 | 1,841 | ||||||
Depreciation and amortization | 428 | 429 | ||||||
Provision for loan losses | 909 | — | ||||||
Stock-based compensation | 34 | 25 | ||||||
Other-than-temporary impairment losses on investment securities | — | 24 | ||||||
Gains on sales of investment securities, net | (1,989 | ) | (943 | ) | ||||
Net loss on sale of other real estate owned | — | 75 | ||||||
Loans originated for resale | (2,821 | ) | (12,351 | ) | ||||
Proceeds from sale of loans held for sale | 2,417 | 13,486 | ||||||
Gains on sale of loans held for sale | (79 | ) | (229 | ) | ||||
Decrease (increase) in accrued interest receivable | 388 | (1 | ) | |||||
Decrease in prepaid FDIC insurance assessments | — | 811 | ||||||
Increase in cash surrender value of bank-owned life insurance | (511 | ) | (548 | ) | ||||
Life insurance death benefit | — | (291 | ) | |||||
Decrease (increase) in other assets | 2,545 | (3,215 | ) | |||||
(Decrease) increase in other liabilities | (645 | ) | 1,185 | |||||
Net cash provided by operating activities | 10,393 | 10,145 | ||||||
Cash flows from investing activities: | ||||||||
Investment securities available-for-sale: | ||||||||
Purchases | (10,487 | ) | (119,749 | ) | ||||
Sales | 66,738 | 78,911 | ||||||
Maturities, calls and principal repayments | 14,486 | 29,583 | ||||||
Investment securities held-to-maturity: | ||||||||
Purchases | (8,310 | ) | (6,104 | ) | ||||
Maturities and principal repayments | 5,068 | 2,803 | ||||||
Net (purchases) redemption of restricted investment in bank stocks | (2,303 | ) | (22 | ) | ||||
Net increase in loans | (45,730 | ) | (13,421 | ) | ||||
Purchases of premises and equipment | (747 | ) | (304 | ) | ||||
Proceeds from bank-owned life insurance death benefits | — | 592 | ||||||
Proceeds from sale of other real estate owned | — | 1,230 | ||||||
Net cash provided by (used in) investing activities | 18,715 | (26,481 | ) | |||||
Cash flows from financing activities: | ||||||||
Net (decrease) increase in deposits | (67,385 | ) | (26,028 | ) | ||||
Net increase in borrowings | 50,000 | — | ||||||
Cash dividends on preferred stock | (56 | ) | (84 | ) | ||||
Cash dividends on common stock | (2,456 | ) | (1,978 | ) | ||||
Issuance of restricted stock awards | — | 243 | ||||||
Issuance cost of common stock | (7 | ) | (6 | ) | ||||
Tax benefit of options exercised | 241 | — | ||||||
Proceeds from exercise of stock options | 480 | 10 | ||||||
Net cash used in financing activities | (19,183 | ) | (27,843 | ) | ||||
Net change in cash and cash equivalents | 9,925 | (44,179 | ) | |||||
Cash and cash equivalents at beginning of period | 82,692 | 106,138 | ||||||
Cash and cash equivalents at end of period | $ | 92,617 | $ | 61,959 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash payments for: | ||||||||
Interest paid on deposits and borrowings | $ | 5,425 | $ | 5,548 | ||||
Income taxes | 2,553 | 1,630 | ||||||
Supplemental disclosures of non-cash investing activities: | ||||||||
Transfer of loans to other real estate owned | — | 236 | ||||||
Dividends declared, not paid | 1,063 | — | ||||||
Transfer of investment securities available-for-sale to investment securities held-to-maturity | — | 75,694 |
See accompanying notes to unaudited consolidated financial statements.
7 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Operations and Principles of Consolidation
The consolidated financial statements of ConnectOne Bancorp, Inc. (the “Parent Corporation”) are prepared on an accrual basis and include the accounts of 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 and indirect subsidiaries, the “Corporation”). All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements.
The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey, and following consummation of the merger on July 1, 2014, through its twenty-three other banking offices. 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 following unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014, or for any other interim period. The Company’s 2013 Annual Report on Form 10-K, should be read in conjunction with these financial statements.
In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”).
Note 2. Recent Accounting Pronouncements
FASB ASU 2014-04: Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. EITF Issue 13-E sought to define “in substance repossession or foreclosure” because of the diversity in practice regarding when entities were reclassifying loans receivable to other real estate owned instead of as a loan receivable. The timing of loan reclassifications to OREO may be qualitatively significant to regulators and other financial statement users. “In substance repossession or foreclosure” is clarified by the ASU. A creditor is considered to have received physical possession (resulting from an in substance repossession) of residential real estate property collateralizing a consumer mortgage loan only upon the occurrence of either of the following: a) The creditor obtains legal title to the residential real estate property upon completion of a foreclosure. A creditor may obtain legal title to the residential real estate property even if the borrower has redemption rights that provide the borrower with a legal right for a period of time after a foreclosure to reclaim the real estate property by paying certain amounts specified by law. b) The borrower conveys all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The deed in lieu of foreclosure or similar legal agreement is completed when agreed-upon terms and conditions have been satisfied by both the borrower and the creditor. The ASU is effective for fiscal years beginning after December 15, 2014, and interim periods therein. Early adoption is permitted. The Corporation will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
FASB ASU No. 2014-09: Revenue from Contracts with Customers. In May 2014, the FASB issued an update creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
8 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FASB ASC ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. In June 2014, the FASB issued an update impacting FASB ASC 860, Transfers and Servicing. The amendments in this update change the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require new disclosures. An entity is required to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. An entity must also provide additional information about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The amendments in this update become effective for the first interim or annual period beginning after December 15, 2014. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
FASB ASC ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In June 2014, the FASB issued an update impacting FASB ASC 860, Transfers and Servicing. Generally, an award with a performance target also requires an employee to render service until the performance target is achieved. In some cases, however, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. The amendments in this update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. An entity should apply guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the service has already been rendered. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
Note 3. Subsequent Event – Completion of Merger
On January 20, 2014, the Parent Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ConnectOne Bancorp, Inc., a New Jersey corporation (“ConnectOne Bancorp”). Effective July 1, 2014 (the “Effective Time”), the Parent Corporation completed the merger contemplated by the Merger Agreement (the “Merger”) with legacy ConnectOne Bancorp, Inc., a New Jersey corporation (“Legacy ConnectOne”). At closing, Legacy ConnectOne merged with and into the Parent Corporation, with the Parent Corporation as the surviving corporation. Also at closing, the Parent Corporation changed its name from “Center Bancorp, Inc.” to “ConnectOne Bancorp, Inc.” and changed its NASDAQ trading symbol to “CNOB” from “CNBC.”
Pursuant to the Merger Agreement, holders of Legacy ConnectOne common stock, no par value per share (the “Legacy ConnectOne Common Stock”), received 2.6 shares of common stock of the Parent Corporarion, no par value per share (the “Company Common Stock”), for each share of Legacy ConnectOne Common Stock held immediately prior to the effective time of the Merger, with cash to be paid in lieu of fractional shares. Each outstanding share of Company Common Stock remained outstanding and was unaffected by the Merger. Each option granted by Legacy ConnectOne to purchase shares of Legacy ConnectOne Common Stock was converted into an option to purchase Company Common Stock on the same terms and conditions as were applicable prior to the Merger (taking into account any acceleration or vesting by reason of the consummation of the Merger and its related transactions), subject to adjustment of the exercise price and the number of shares of Company Common Stock issuable upon exercise of such option based on the 2.6 exchange ratio.
Immediately following the Merger, Union Center National Bank, a bank organized pursuant to the laws of the United States, and a wholly owned subsidiary of the Parent Corporation (“UNCB”), merged (the “Bank Merger”) with and into ConnectOne Bank, a New Jersey state-chartered commercial bank and a wholly owned subsidiary of Legacy ConnectOne, with ConnectOne Bank as the surviving entity (the “Bank”). The Bank will now conduct business only in the name of and under the brand of ConnectOne.
Given the initial accounting for this business combination is incomplete, management is not yet able to disclose the preliminary fair value of the assets acquired and liabilities assumed.
9 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Earnings per Common Share
Basic earnings per common share (“EPS”) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g., stock options). The Corporation’s weighted average common shares outstanding for diluted EPS include the effect of stock options and restricted stock awards outstanding using the Treasury Stock Method, which are not included in the calculation of basic EPS. Anti-dilutive stock option and restricted stock award shares outstanding were 19,174 and 19,377, respectively, for the three and six months ended June 30, 2014, and anti-dilutive stock option shares outstanding were 67,451 for both the three and six months ended June 30, 2013.
Earnings per common share have been computed as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands, except per share amounts) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Net income | $ | 4,378 | $ | 4,923 | $ | 8,776 | $ | 9,847 | ||||||||
Preferred stock dividends | (28 | ) | (28 | ) | (56 | ) | (84 | ) | ||||||||
Net income available to common stockholders | $ | 4,350 | $ | 4,895 | 8,720 | $ | 9,763 | |||||||||
Basic weighted average common shares outstanding | 16,373 | 16,349 | 16,362 | 16,349 | ||||||||||||
Plus: effect of dilutive options | 57 | 27 | 61 | 26 | ||||||||||||
Diluted weighted average common shares outstanding | 16,430 | 16,376 | 16,423 | 16,375 | ||||||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.27 | $ | 0.30 | $ | 0.53 | $ | 0.60 | ||||||||
Diluted | $ | 0.26 | $ | 0.30 | $ | 0.53 | $ | 0.60 |
Note 5. Investment Securities
The Corporation’s investment securities are classified as available-for-sale and held-to-maturity at June 30, 2014 and December 31, 2013. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 8 of the Notes to Consolidated Financial Statements for a further discussion.
Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.
10 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present information related to the Corporation’s investment securities at June 30, 2014 and December 31, 2013.
June 30, 2014 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Investment Securities Available-for-Sale: | ||||||||||||||||
U.S. Treasury and agency securities | $ | 9,608 | $ | — | $ | (136 | ) | $ | 9,472 | |||||||
Federal agency obligations | 22,643 | 116 | (111 | ) | 22,648 | |||||||||||
Residential mortgage pass-through securities | 44,369 | 1,563 | (13 | ) | 45,919 | |||||||||||
Commercial mortgage pass-through securities | 3,072 | — | (51 | ) | 3,021 | |||||||||||
Obligations of U.S. states and political subdivisions | 6,303 | 200 | — | 6,503 | ||||||||||||
Trust preferred securities | 16,085 | 490 | (239 | ) | 16,336 | |||||||||||
Corporate bonds and notes | 132,401 | 6,969 | (43 | ) | 139,327 | |||||||||||
Asset-backed securities | 15,010 | 166 | — | 15,176 | ||||||||||||
Certificates of deposit | 2,099 | 38 | (5 | ) | 2,132 | |||||||||||
Equity securities | 376 | — | (83 | ) | 293 | |||||||||||
Mutual funds and money market funds | 6,232 | — | (100 | ) | 6,132 | |||||||||||
Total | $ | 258,198 | $ | 9,542 | $ | (781 | ) | $ | 266,959 | |||||||
Investment Securities Held-to-Maturity: | ||||||||||||||||
U.S. Treasury and agency securities | $ | 28,159 | $ | 257 | $ | — | $ | 28,416 | ||||||||
Federal agency obligations | 22,039 | 166 | (19 | ) | 22,186 | |||||||||||
Residential mortgage pass-through securities | 2,049 | 14 | — | 2,063 | ||||||||||||
Commercial mortgage pass-through securities | 4,341 | 77 | (18 | ) | 4,400 | |||||||||||
Obligations of U.S. states and political subdivisions | 123,646 | 3,327 | (410 | ) | 126,563 | |||||||||||
Corporate bonds and notes | 37,925 | 950 | — | 38,875 | ||||||||||||
Total | $ | 218,159 | $ | 4,791 | $ | (447 | ) | $ | 222,503 | |||||||
Total investment securities | $ | 476,357 | $ | 14,333 | $ | (1,228 | ) | $ | 489,462 |
11 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2013 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Investment Securities Available-for-Sale: | ||||||||||||||||
U.S. Treasury and agency securities | $ | 14,344 | $ | — | $ | (825 | ) | $ | 13,519 | |||||||
Federal agency obligations | 20,567 | 29 | (655 | ) | 19,941 | |||||||||||
Residential mortgage pass-through securities | 48,312 | 791 | (229 | ) | 48,874 | |||||||||||
Commercial mortgage pass-through securities | 7,145 | 3 | (157 | ) | 6,991 | |||||||||||
Obligations of U.S. states and political subdivisions | 30,804 | 711 | (55 | ) | 31,460 | |||||||||||
Trust preferred securities | 19,763 | 150 | (510 | ) | 19,403 | |||||||||||
Corporate bonds and notes | 154,182 | 4,930 | (482 | ) | 158,630 | |||||||||||
Asset-backed securities | 15,733 | 246 | — | 15,979 | ||||||||||||
Certificates of deposit | 2,250 | 32 | (20 | ) | 2,262 | |||||||||||
Equity securities | 376 | — | (89 | ) | 287 | |||||||||||
Mutual funds and money market funds | 5,671 | 68 | (15 | ) | 5,724 | |||||||||||
Total | $ | 319,147 | $ | 6,960 | $ | (3,037 | ) | $ | 323,070 | |||||||
Investment Securities Held-to-Maturity: | ||||||||||||||||
U.S. Treasury and agency securities | $ | 28,056 | $ | — | $ | (1,019 | ) | $ | 27,037 | |||||||
Federal agency obligations | 15,249 | 23 | (389 | ) | 14,883 | |||||||||||
Residential mortgage-backed securities | 2,246 | — | (64 | ) | 2,182 | |||||||||||
Commercial mortgage-backed securities | 4,417 | 41 | (62 | ) | 4,396 | |||||||||||
Obligations of U.S. states and political subdivisions | 127,418 | 1,303 | (3,688 | ) | 125,033 | |||||||||||
Corporate bonds and notes | 37,900 | 149 | (622 | ) | 37,427 | |||||||||||
Total | $ | 215,286 | $ | 1,516 | $ | (5,844 | ) | $ | 210,958 | |||||||
Total investment securities | $ | 534,433 | $ | 8,476 | $ | (8,881 | ) | $ | 534,028 |
The following table presents information for investment securities available-for-sale at June 30, 2014, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.
June 30, 2014 | ||||||||
Amortized Cost | Fair Value | |||||||
(in thousands) | ||||||||
Investment Securities Available-for-Sale: | ||||||||
Due in one year or less | $ | 9,384 | $ | 9,499 | ||||
Due after one year through five years | 45,331 | 46,591 | ||||||
Due after five years through ten years | 112,083 | 117,869 | ||||||
Due after ten years | 37,351 | 37,635 | ||||||
Residential mortgage pass-through securities | 44,369 | 45,919 | ||||||
Commercial mortgage pass-through securities | 3,072 | 3,021 | ||||||
Equity securities | 376 | 293 | ||||||
Mutual funds and money market funds | 6,232 | 6,132 | ||||||
Total | $ | 258,198 | $ | 266,959 | ||||
Investment Securities Held-to-Maturity: | ||||||||
Due in one year or less | $ | 2,052 | $ | 2,054 | ||||
Due after one year through five years | 12,932 | 13,203 | ||||||
Due after five years through ten years | 68,506 | 69,838 | ||||||
Due after ten years | 128,279 | 130,945 | ||||||
Residential mortgage-backed securities | 2,049 | 2,063 | ||||||
Commercial mortgage pass-through securities | 4,341 | 4,400 | ||||||
Total | $ | 218,159 | $ | 222,503 | ||||
Total investment securities | $ | 476,357 | $ | 489,462 |
12 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended June 30, 2014, proceeds of available-for-sale investment securities sold amounted to approximately $66.7 million.
All residential mortgage and commercial mortgage pass-through securities are issued by government sponsored agencies.
Gross gains and losses from the sales of investment securities for the three-month and six-month periods ended June 30, 2014 and 2013 were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Gross gains on sales of investment securities | $ | 579 | $ | 600 | $ | 2,011 | $ | 1,032 | ||||||||
Gross losses on sales of investment securities | 5 | — | 22 | 89 | ||||||||||||
Net gains on sales of investment securities | $ | 574 | $ | 600 | $ | 1,989 | $ | 943 |
The following summarizes OTTI charges for the periods indicated.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Other than temporary impairment charges | $ | — | $ | — | $ | — | $ | — | ||||||||
Principal losses on a variable rate CMO | — | — | — | 24 | ||||||||||||
Total other-than-temporary impairment charges | $ | — | $ | — | $ | — | $ | 24 |
The Corporation performs regular analysis on all its investment securities to determine whether a decline in fair value indicates that an investment is other-than-temporarily impaired in accordance with FASB ASC 320-10. FASB ASC 320-10 requires companies to record OTTI charges through earnings if they have the intent to sell, or if it is more likely than not that they will be required to sell an impaired debt security before recovery of its amortized cost basis. If the Corporation intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its estimated fair value at the balance sheet date. If the Corporation does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
The Corporation’s assessment of whether an impairment is other than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced a restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed a deteriorating financial condition or sustained significant losses. The Corporation maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review. This could result from credit rating downgrades.
13 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents detailed information for each trust preferred security held by the Corporation at June 30, 2014 which has at least one rating below investment grade.
Deal Name | Single Issuer or Pooled | Class/ Tranche | Amortized Cost | Fair Value | Gross Unrealized Gain (Loss) | Lowest Credit Rating Assigned | Number
of Banks Currently Performing | Deferrals and Defaults as % of Original Collateral | Expected Deferral/Defaults as % of Remaining Performing Collateral | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Countrywide Capital IV | Single | n/a | $ | 1,771 | $ | 1,819 | $ | 48 | BB+ | 1 | None | None | ||||||||||||||||
Countrywide Capital V | Single | n/a | 2,747 | 2,858 | 111 | BB+ | 1 | None | None | |||||||||||||||||||
Countrywide Capital V | Single | n/a | 250 | 260 | 10 | BB+ | 1 | None | None | |||||||||||||||||||
Nationsbank Cap Trust III | Single | n/a | 1,574 | 1,335 | (239 | ) | BB+ | 1 | None | None | ||||||||||||||||||
Morgan Stanley Cap Trust IV | Single | n/a | 2,500 | 2,515 | 15 | BB+ | 1 | None | None | |||||||||||||||||||
Morgan Stanley Cap Trust IV | Single | n/a | 1,743 | 1,759 | 16 | BB+ | 1 | None | None | |||||||||||||||||||
Goldman Sachs | Single | n/a | 1,000 | 1,139 | 139 | BB+ | 1 | None | None | |||||||||||||||||||
Stifel Financial | Single | n/a | 4,500 | 4,651 | 151 | BBB- | 1 | None | None | |||||||||||||||||||
Total | $ | 16,085 | $ | 16,336 | $ | 251 |
Credit Loss Portion of OTTI Recognized in Earnings on Debt Securities
Six Months Ended June 30, 2014 | Year Ended December 31, 2013 | |||||||
(in thousands) | ||||||||
Balance of credit-related OTTI at January 1, | $ | — | $ | 4,450 | ||||
Addition: | ||||||||
Credit losses on investment securities for which other-than-temporary impairment was not previously recognized | — | 652 | ||||||
Reduction: | ||||||||
Credit losses on investment securities sold during the period | — | (5,102 | ) | |||||
Balance of credit-related OTTI at period end | $ | — | $ | — |
14 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Temporarily Impaired Investments
For all securities, the Corporation does not believe that the unrealized losses, which were comprised of 81 investment securities as of June 30, 2014, represent an other-than-temporary impairment. The gross unrealized losses of $1.2 million associated with U.S. Treasury and agency securities, federal agency obligations, mortgage-backed securities, corporate bonds, tax-exempt securities, mutual funds and equity securities are not considered to be other than temporary because these unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.
Factors affecting the market price include credit risk, market risk, interest rates, economic cycles, and liquidity risk. The magnitude of any unrealized loss may be affected by the relative concentration of the Corporation’s investment in any one issuer or industry. The Corporation has established policies to reduce exposure through diversification of concentration of the investment portfolio including limits on concentrations to any one issuer. The Corporation believes the investment portfolio is prudently diversified.
The decline in value is related to a change in interest rates and subsequent change in credit spreads required for these issues affecting market price. All issues are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. Short to intermediate average durations and in certain cases monthly principal payments should reduce further market value exposure to increases in rates.
The Corporation evaluates all securities with unrealized losses quarterly to determine whether the loss is other than temporary. Unrealized losses in the corporate debt securities category consists primarily of senior unsecured corporate debt securities issued by large financial institutions, insurance companies and other corporate issuers and single issuer corporate trust preferred securities. None of the corporate issuers have defaulted on interest payments. The unrealized loss in equity securities consists of losses on other bank equities. The decline in fair value is due in large part to the lack of an active trading market for these securities, changes in market credit spreads and rating agency downgrades. Management concluded that these securities were not other-than-temporarily impaired at June 30, 2014. Future deterioration in the credit quality of these large financial institution issuers of TRUP debt securities could result in impairment charges in the future.
In determining that the securities giving rise to the previously mentioned unrealized losses were not other-than-temporary, the Corporation evaluated the factors cited above, which the Corporation considers when assessing whether a security is other-than-temporarily impaired. In making these evaluations the Corporation must exercise considerable judgment. Accordingly there can be no assurance that the actual results will not differ from the Corporation’s judgments and that such differences may not require the future recognition of other-than-temporary impairment charges that could have a material effect on the Corporation’s financial position and results of operations. In addition, the value of, and the realization of any loss on an investment security are subject to numerous risks as cited above.
15 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at June 30, 2014 and December 31, 2013:
June 30, 2014 | ||||||||||||||||||||||||
Total | Less than 12 Months | 12 Months or Longer | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Investment Securities Available-for-Sale: | ||||||||||||||||||||||||
U.S. Treasury and agency securities | $ | 9,472 | $ | (136 | ) | $ | — | $ | — | $ | 9,472 | $ | (136 | ) | ||||||||||
Federal agency obligations | 8,093 | (111 | ) | 3,949 | (37 | ) | 4,144 | (74 | ) | |||||||||||||||
Residential mortgage pass-through securities | 3,698 | (13 | ) | 448 | (1 | ) | 3,250 | (12 | ) | |||||||||||||||
Commercial mortgage pass-through securities | 3,021 | (51 | ) | — | — | 3,021 | (51 | ) | ||||||||||||||||
Trust preferred securities | 1,335 | (239 | ) | — | — | 1,335 | (239 | ) | ||||||||||||||||
Corporate bonds and notes | 7,410 | (43 | ) | 5,445 | (25 | ) | 1,965 | (18 | ) | |||||||||||||||
Certificates of deposit | 217 | (5 | ) | 217 | (5 | ) | — | — | ||||||||||||||||
Equity securities | 294 | (83 | ) | — | — | 294 | (83 | ) | ||||||||||||||||
Mutual funds and money market funds | 5,401 | (100 | ) | 4,413 | (89 | ) | 988 | (11 | ) | |||||||||||||||
Total | 38,941 | (781 | ) | 14,472 | (157 | ) | 24,469 | (624 | ) | |||||||||||||||
Investment Securities Held-to-Maturity: | ||||||||||||||||||||||||
U.S. Treasury and agency securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Federal agency obligations | 1,757 | (19 | ) | 1,757 | (19 | ) | — | — | ||||||||||||||||
Residential mortgage pass-through securities | — | — | — | — | — | — | ||||||||||||||||||
Commercial mortgage pass-through securities | 1,409 | (18 | ) | — | — | 1,409 | (18 | ) | ||||||||||||||||
Obligations of U.S. states and political subdivisions | 33,586 | (410 | ) | 13,955 | (48 | ) | 19,631 | (362 | ) | |||||||||||||||
Total | 36,752 | (447 | ) | 15,712 | (67 | ) | 21,040 | (380 | ) | |||||||||||||||
Total Temporarily Impaired Securities | $ | 75,693 | $ | (1,228 | ) | $ | 30,184 | $ | (224 | ) | $ | 45,509 | $ | (1,004 | ) |
16 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2013 | ||||||||||||||||||||||||
Total | Less than 12 Months | 12 Months or Longer | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Investment Securities Available-for-Sale: | ||||||||||||||||||||||||
U.S. Treasury and agency securities | $ | 13,519 | $ | (825 | ) | $ | 13,519 | $ | (825 | ) | $ | — | $ | — | ||||||||||
Federal agency obligation | 17,200 | (655 | ) | 17,200 | (655 | ) | — | — | ||||||||||||||||
Residential mortgage pass-through securities | 18,293 | (229 | ) | 18,293 | (229 | ) | — | — | ||||||||||||||||
Commercial mortgage pass-through securities | 2,924 | (157 | ) | 2,924 | (157 | ) | — | — | ||||||||||||||||
Obligations of U.S. states and political subdivisions | 4,199 | (55 | ) | 4,199 | (55 | ) | — | — | ||||||||||||||||
Trust preferred securities | 5,306 | (510 | ) | 4,031 | (211 | ) | 1,275 | (299 | ) | |||||||||||||||
Corporate bonds and notes | 32,498 | (482 | ) | 30,533 | (448 | ) | 1,965 | (34 | ) | |||||||||||||||
Certificates of deposit | 552 | (20 | ) | 552 | (20 | ) | — | — | ||||||||||||||||
Equity securities | 287 | (89 | ) | — | — | 287 | (89 | ) | ||||||||||||||||
Mutual funds and money market funds | 985 | (15 | ) | — | — | 985 | (15 | ) | ||||||||||||||||
Total | 95,763 | (3,037 | ) | 91,251 | (2,600 | ) | 4,512 | (437 | ) | |||||||||||||||
Investment Securities Held-to-Maturity: | ||||||||||||||||||||||||
U.S. Treasury and agency securities | $ | 27,037 | $ | (1,019 | ) | $ | 27,037 | $ | (1,019 | ) | $ | — | $ | — | ||||||||||
Federal agency obligation | 13,492 | (389 | ) | 13,197 | (388 | ) | 295 | (1 | ) | |||||||||||||||
Residential mortgage pass-through securities | 2,182 | (64 | ) | 2,182 | (64 | ) | — | — | ||||||||||||||||
Commercial mortgage pass-through securities | 1,395 | (62 | ) | 1,395 | (62 | ) | — | — | ||||||||||||||||
Obligations of U.S. states and political subdivisions | 66,034 | (3,688 | ) | 57,072 | (2,957 | ) | 8,962 | (731 | ) | |||||||||||||||
Corporate bonds and notes | 27,210 | (622 | ) | 27,210 | (622 | ) | — | — | ||||||||||||||||
Total | 137,350 | (5,844 | ) | 128,093 | (5,112 | ) | 9,257 | (732 | ) | |||||||||||||||
Total Temporarily Impaired Securities | $ | 233,113 | $ | (8,881 | ) | $ | 219,344 | $ | (7,712 | ) | $ | 13,769 | $ | (1,169 | ) |
Investment securities having a carrying value of approximately $140.0 million and $109.3 million at June 30, 2014 and December 31, 2013, respectively, were pledged to secure public deposits, borrowings, and Federal Home Loan Bank advances and for other purposes required or permitted by law.
Note 6. Loans and the Allowance for Loan Losses
Loans are stated at their principal amounts inclusive of net deferred loan origination fees. Interest income is credited as earned except when a loan becomes past due 90 days or more and doubt exists as to the ultimate collection of interest or principal. In those cases the recognition of income is discontinued. Past due status is based on the contractual terms of the loan. Loans that are past due 90 days or more that are both well secured and in the process of collection will remain on an accruing basis. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income.
Portfolio segments are defined as the level at which an entity develops and documents a systematic methodology to determine its allowance. Management has determined that the Corporation has two portfolio segments of loans and leases (commercial and consumer) in determining the allowance. Both quantitative and qualitative factors are used by management at the portfolio segment level in determining the adequacy of the allowance for the Corporation. Classes of loans and leases are a disaggregation of the Corporation’s portfolio segments. Classes are defined as a group of loans and leases which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Corporation has five classes of loans and leases: commercial and industrial (including lease financing), commercial – real estate, construction, residential mortgage (including home equity) and installment.
Generally, all classes of commercial and consumer loans and leases are placed on non-accrual status upon becoming contractually past due 90 days or more as to principal or interest (unless loans and leases are adequately secured by collateral and are in the process of collection), when terms are renegotiated below market levels, or where substantial doubt about full repayment of principal or interest is evident. For certain installment loans the entire outstanding balance on the loan is charged-off when the loan becomes 60 days past due.
17 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected and six months of payments have been received to demonstrate that the borrower can continue to meet the loan terms. Loan origination fees and certain direct loan origination costs are deferred and recognized over the life of the loan as an adjustment to the loan’s yield using the level yield method.
Impaired Loans
The Corporation accounts for impaired loans in accordance with FASB ASC 310-10-35. The value of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or at the fair value of the collateral if the loan is collateral dependent.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments. The Corporation has defined its population of impaired loans to include all classes of non-accrual and troubled debt restructuring (“TDR”) loans. As part of the evaluation of impaired loans, the Corporation individually reviews for impairment all non-homogeneous loans (in each instance, above an established dollar threshold of $200,000) internally classified as substandard or below. Generally, smaller impaired non-homogeneous loans and impaired homogeneous loans are collectively evaluated for impairment.
When a loan has been identified as being impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral-dependent. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net of deferred loan fees or costs and unamortized premiums or discounts), impairment is recognized by creating or adjusting an existing allocation of the allowance, or by recording a partial charge-off of the loan to its fair value. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest income may be accrued or recognized on a cash basis.
Loans Modified in a Troubled Debt Restructuring
Loans are considered to have been modified in a TDR when due to a borrower’s financial difficulties, the Corporation makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.
Reserve for Credit Losses
The Corporation’s reserve for credit losses is comprised of two components, the allowance for loan losses and the reserve for unfunded commitments (the “Unfunded Commitments”).
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance is increased by provisions charged to operations and reduced by loan charge-offs, net of recoveries. The allowance is based on management’s evaluation of the loan portfolio considering economic conditions, the volume and nature of the loan portfolio, historical loan loss experience and individual credit situations.
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.
The ultimate collectability of a substantial portion of the Corporation’s loan portfolio is susceptible to changes in the real estate market and economic conditions in the State of New Jersey and the impact of such conditions on the creditworthiness of the borrowers.
18 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other liabilities in the consolidated statements of condition. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, and credit risk. Net adjustments to the reserve for unfunded commitments are included in other expense.
Composition of Loan Portfolio
The following table sets forth the composition of the Corporation’s loan portfolio, including net deferred fees and costs, at June 30, 2014 and December 31, 2013:
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Commercial and industrial | $ | 245,930 | $ | 229,688 | ||||
Commercial real estate | 565,397 | 536,539 | ||||||
Construction | 46,705 | 42,722 | ||||||
Residential mortgage | 147,128 | 150,571 | ||||||
Installment | 617 | 1,084 | ||||||
Subtotal | 1,005,777 | 960,604 | ||||||
Net deferred loan costs | 479 | 339 | ||||||
Total loans | $ | 1,006,256 | $ | 960,943 |
At June 30, 2014 and December 31, 2013, loans to executive officers and directors aggregated approximately $19,949,000 and $20,365,000, respectively. During the six months ended June 30, 2014, the Corporation made new loans and advances to executive officers and directors in the amount of $1,319,000. Payments and payoffs by such persons during the six months ended June 30, 2014 aggregate $1,735,000.
19 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At June 30, 2014 and December 31, 2013, loan balances of approximately $503.3 million and $564.7 million, respectively, were pledged to secure borrowings from the Federal Home Loan Bank of New York.
The following table presents information about the recorded investment loan receivables on non-accrual status by class at June 30, 2014 and December 31, 2013:
Loans Receivable on Non-Accrual Status | ||||||||
June 30, 2014 | December 31, 2013 | |||||||
(in thousands) | ||||||||
Commercial and industrial | $ | 775 | $ | 753 | ||||
Commercial real estate | 1,427 | 744 | ||||||
Residential mortgage | 1,830 | 1,640 | ||||||
Total loans receivable on non-accrual status | $ | 4,032 | $ | 3,137 |
Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans.
The amount of interest income that would have been recorded on non-accrual loans during the six months ended June 30, 2014, the year ended December 31, 2013 and six months ended June 30, 2013, had payments remained in accordance with the original contractual terms, was $109,000, $104,000 and $58,000, respectively.
The Corporation continuously monitors the credit quality of its loans receivable. In addition to its internal staff, the Corporation utilizes the services of a third party loan review firm to rate the credit quality of its loans receivable. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Corporation’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. All loans past due 90 days or more and all impaired loans are included in the appropriate category below. The following table presents information, excluding net deferred costs, about the Corporation’s loan credit quality at June 30, 2014 and December 31, 2013:
Credit Quality Indicators | ||||||||||||||||||||
June 30, 2014 | ||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Commercial and industrial | $ | 242,914 | $ | 1,621 | $ | 1,080 | $ | 315 | $ | 245,930 | ||||||||||
Commercial real estate | 542,940 | 14,438 | 8,019 | — | 565,397 | |||||||||||||||
Construction | 45,316 | — | 1,389 | — | 46,705 | |||||||||||||||
Residential mortgage | 143,704 | 969 | 2,455 | — | 147,128 | |||||||||||||||
Installment | 506 | — | 111 | — | 617 | |||||||||||||||
Total loans | $ | 975,380 | $ | 17,028 | $ | 13,054 | $ | 315 | $ | 1,005,777 | ||||||||||
December 31, 2013 | ||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Commercial and industrial | $ | 226,013 | $ | 1,719 | $ | 1,284 | $ | 672 | $ | 229,688 | ||||||||||
Commercial real estate | 509,679 | 14,544 | 12,316 | — | 536,539 | |||||||||||||||
Construction | 41,492 | — | 1,230 | — | 42,722 | |||||||||||||||
Residential mortgage | 147,379 | 978 | 2,214 | — | 150,571 | |||||||||||||||
Installment | 964 | — | 120 | — | 1,084 | |||||||||||||||
Total loans | $ | 925,527 | $ | 17,241 | $ | 17,164 | $ | 672 | $ | 960,604 |
20 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides an analysis of the impaired loans, by class, at June 30, 2014 and December 31, 2013:
June 30, 2014 | |||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
|||||||
(in thousands) | |||||||||
No Related Allowance Recorded | |||||||||
Commercial and industrial | $ | 1,000 | $ | 1,301 | $ | — | |||
Commercial real estate | 3,083 | 3,384 | — | ||||||
Residential mortgage | 1,900 | 2,054 | — | ||||||
Installment | 111 | 111 | — | ||||||
Total | $ | 6,094 | $ | 6,850 | — | ||||
With An Allowance Recorded | |||||||||
Commercial real estate | $ | 3,600 | $ | 3,600 | $ | 335 | |||
Total | $ | 3,600 | $ | 3,600 | $ | 335 | |||
Total | |||||||||
Commercial and industrial | $ | 1,000 | $ | 1,301 | $ | — | |||
Commercial real estate | 6,683 | 6,984 | 335 | ||||||
Residential mortgage | 1,900 | 2,054 | — | ||||||
Installment | 111 | 111 | — | ||||||
Total (including related allowance) | $ | 9,694 | $ | 10,450 | $ | 335 |
December 31, 2013 | |||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||
(in thousands) | |||||||||
No Related Allowance Recorded | |||||||||
Commercial and industrial | $ | 449 | $ | 449 | $ | — | |||
Commercial real estate | 10,482 | 10,783 | — | ||||||
Residential mortgage | 1,858 | 2,000 | — | ||||||
Installment | 120 | 120 | — | ||||||
Total | $ | 12,909 | $ | 13,352 | $ | — | |||
With An Allowance Recorded | |||||||||
Commercial and industrial | $ | 672 | $ | 672 | $ | 300 | |||
Commercial real estate | 4,344 | 4,344 | 115 | ||||||
Total | $ | 5,016 | $ | 5,016 | $ | 415 | |||
Total | |||||||||
Commercial and industrial | $ | 1,121 | $ | 1,121 | $ | 300 | |||
Commercial real estate | 14,826 | 15,127 | 115 | ||||||
Residential mortgage | 1,858 | 2,000 | — | ||||||
Installment | 120 | 120 | — | ||||||
Total (including related allowance) | $ | 17,925 | $ | 18,368 | $ | 415 |
21 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by class as of and for the three and six months ended June 30, 2014 and 2013.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||||||||||||||
Impaired loans with no related allowance recorded: | ||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 1,357 | $ | 16 | $ | — | $ | — | $ | 1,370 | $ | 30 | $ | — | $ | — | ||||||||||||||||
Commercial real estate | 3,112 | 42 | 1,450 | 19 | 3,123 | 43 | 1,450 | 38 | ||||||||||||||||||||||||
Residential mortgage | 2,229 | 24 | — | — | 2,280 | 31 | — | — | ||||||||||||||||||||||||
Installment | 113 | 1 | — | — | 115 | 3 | — | — | ||||||||||||||||||||||||
Total | $ | 6,811 | 83 | $ | 1,450 | $ | 19 | $ | 6,888 | $ | 107 | $ | 1,450 | $ | 38 | |||||||||||||||||
Impaired loans with an allowance recorded: | ||||||||||||||||||||||||||||||||
Commercial real estate | $ | 3,600 | $ | 43 | $ | 3,908 | $ | 34 | $ | 3,600 | $ | 85 | $ | 4,087 | $ | 68 | ||||||||||||||||
Residential mortgage | — | — | 1,244 | 11 | — | — | 1,244 | 21 | ||||||||||||||||||||||||
Total | $ | 3,600 | $ | 43 | $ | 5,152 | $ | 45 | $ | 3,600 | $ | 85 | $ | 5,331 | $ | 89 | ||||||||||||||||
Total impaired loans: | ||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 1,357 | $ | 16 | $ | — | $ | — | $ | 1,370 | $ | 30 | $ | — | $ | — | ||||||||||||||||
Commercial real estate | 6,712 | 85 | 5,358 | 53 | 6,723 | 128 | 5,537 | 106 | ||||||||||||||||||||||||
Residential mortgage | 2,229 | 24 | 1,244 | 11 | 2,280 | 31 | 1,244 | 21 | ||||||||||||||||||||||||
Installment | 113 | 1 | — | — | 115 | 3 | — | — | ||||||||||||||||||||||||
Total | $ | 10,411 | $ | 126 | $ | 6,602 | $ | 64 | $ | 10,488 | $ | 192 | $ | 6,781 | $ | 127 |
Included in impaired loans at June 30, 2014 are loans that are deemed troubled debt restructurings. 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, when applicable.
Cash basis interest and interest income recognized on accrual basis approximate each other.
22 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides an analysis of the aging of the recorded investment of loans, excluding net deferred costs that are past due at June 30, 2014 and December 31, 2013 by class:
Aging Analysis
June 30, 2014 | ||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Loans Receivable | Loans Receivable > 90 Days Past Due and Accruing | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Commercial and Industrial | $ | 911 | $ | 1,831 | $ | 775 | $ | 3,517 | $ | 242,413 | $ | 245,930 | $ | — | ||||||||||||||
Commercial Real Estate | 990 | 1,647 | 1,427 | 4,064 | 561,333 | 565,397 | — | |||||||||||||||||||||
Construction | — | — | — | — | 46,705 | 46,705 | — | |||||||||||||||||||||
Residential Mortgage | 775 | 791 | 1,974 | 3,540 | 143,588 | 147,128 | 144 | |||||||||||||||||||||
Installment | 4 | — | — | 4 | 613 | 617 | — | |||||||||||||||||||||
Total | $ | 2,680 | $ | 4,269 | $ | 4,176 | $ | 11,125 | $ | 994,652 | $ | 1,005,777 | $ | 144 |
December 31, 2013 | ||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Loans Receivable | Loans Receivable > 90 Days Past Due and Accruing | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Commercial and Industrial | $ | 18 | $ | — | $ | 753 | $ | 771 | $ | 228,917 | $ | 229,688 | $ | — | ||||||||||||||
Commercial Real Estate | 221 | — | 744 | 965 | 535,574 | 536,539 | — | |||||||||||||||||||||
Construction | — | — | — | — | 42,722 | 42,722 | — | |||||||||||||||||||||
Residential Mortgage | 990 | 258 | 1,640 | 2,888 | 147,683 | 150,571 | — | |||||||||||||||||||||
Installment | 5 | — | — | 5 | 1,079 | 1,084 | — | |||||||||||||||||||||
Total | $ | 1,234 | $ | 258 | $ | 3,137 | $ | 4,629 | $ | 955,975 | $ | 960,604 | $ | — |
The following table details the amount of loans receivable that are evaluated individually, and collectively, for impairment (excluding net deferred costs), and the related portion of the allowance for loan loss that is allocated to each loan portfolio class:
23 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Allowance for loan and lease losses
June 30, 2014 | ||||||||||||||||||||||||||||
Commercial & Industrial | Commercial Real Estate | Construction | Residential Mortgage | Installment | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Allowance for loan and lease losses: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | 335 | $ | — | $ | — | $ | — | $ | — | $ | 335 | ||||||||||||||
Collectively evaluated for impairment | 2,142 | 5,406 | 504 | 1,011 | 63 | 1,364 | 10,490 | |||||||||||||||||||||
Total | $ | 2,142 | $ | 5,741 | $ | 504 | 1,011 | $ | 63 | $ | 1,364 | $ | 10,825 | |||||||||||||||
Loans Receivable | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,000 | $ | 6,683 | $ | — | $ | 1,900 | $ | 111 | $ | — | $ | 9,694 | ||||||||||||||
Collectively evaluated for impairment | 242,915 | 544,960 | 45,316 | 132,955 | 387 | — | 966,533 | |||||||||||||||||||||
Loans acquired with discounts related to credit quality | 2,015 | 13,754 | 1,389 | 12,273 | 119 | — | 29,550 | |||||||||||||||||||||
Total | $ | 245,930 | $ | 565,397 | $ | 46,705 | $ | 147,128 | $ | 617 | $ | — | $ | 1,005,777 |
Allowance for loan and lease losses
December 31, 2013 | ||||||||||||||||||||||||||||
Commercial & Industrial | Commercial Real Estate | Construction | Residential Mortgage | Installment | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Allowance for loan and lease losses: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 300 | $ | 115 | $ | — | $ | — | $ | — | $ | — | $ | 415 | ||||||||||||||
Collectively evaluated for impairment | 1,398 | 5,631 | 362 | 990 | 146 | 1,391 | 9,918 | |||||||||||||||||||||
Total | $ | 1,698 | $ | 5,746 | $ | 362 | $ | 990 | $ | 146 | $ | 1,391 | $ | 10,333 | ||||||||||||||
Loans Receivable | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,121 | $ | 14,826 | $ | — | $ | 1,858 | $ | 120 | $ | — | $ | 17,925 | ||||||||||||||
Collectively evaluated for impairment | 226,450 | 505,361 | 41,493 | 135,031 | 839 | — | 909,174 | |||||||||||||||||||||
Loans acquired with discounts related to credit quality | 2,117 | 16,352 | 1,229 | 13,682 | 125 | — | 33,505 | |||||||||||||||||||||
Total | $ | 229,688 | $ | 536,539 | $ | 42,722 | $ | 150,571 | $ | 1,084 | $ | — | $ | 960,604 |
The Corporation’s allowance for loan losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit. There have been no material changes to the allowance for loan loss methodology as disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.
A summary of the activity in the allowance for loan losses is as follows:
Three Months Ended June 30, 2014 | ||||||||||||||||||||||||||||
Commercial & Industrial | Commercial Real Estate | Construction | Residential Mortgage | Installment | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Balance at April 1, | $ | 2,225 | $ | 5,384 | $ | 434 | $ | 1,004 | $ | 79 | $ | 1,507 | $ | 10,633 | ||||||||||||||
Charge offs | — | — | — | (90 | ) | (4 | ) | — | (94 | ) | ||||||||||||||||||
Recoveries | — | — | — | 1 | 1 | — | 2 | |||||||||||||||||||||
Provision | (83 | ) | 357 | 70 | 96 | (13 | ) | (143 | ) | 284 | ||||||||||||||||||
Balance at June 30, | $ | 2,142 | $ | 5,741 | $ | 504 | $ | 1,011 | $ | 63 | $ | 1,364 | $ | 10,825 |
24 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 2014 | ||||||||||||||||||||||||||||
Commercial & Industrial | Commercial Real Estate | Construction | Residential Mortgage | Installment | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Balance at January 1, | $ | 1,698 | $ | 5,746 | $ | 362 | $ | 990 | $ | 146 | $ | 1,391 | $ | 10,333 | ||||||||||||||
Charge offs | (333 | ) | — | — | (90 | ) | (7 | ) | — | (430 | ) | |||||||||||||||||
Recoveries | — | — | — | 11 | 2 | — | 13 | |||||||||||||||||||||
Provision | 777 | (5 | ) | 142 | 100 | (78 | ) | (27 | ) | 909 | ||||||||||||||||||
Balance at June 30, | $ | 2,142 | $ | 5,741 | $ | 504 | $ | 1,011 | $ | 63 | $ | 1,364 | $ | 10,825 |
Three Months Ended June 30, 2013 | ||||||||||||||||||||||||||||
Commercial & Industrial | Commercial Real Estate | Construction | Residential Mortgage | Installment | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Balance at April 1, | $ | 2,083 | $ | 5,353 | $ | 284 | $ | 1,378 | $ | 103 | $ | 1,031 | $ | 10,232 | ||||||||||||||
Charge offs | — | (50 | ) | — | — | (11 | ) | — | (61 | ) | ||||||||||||||||||
Recoveries | 21 | 8 | — | — | 2 | — | 31 | |||||||||||||||||||||
Provision | 318 | 22 | 34 | (37 | ) | (65 | ) | (272 | ) | — | ||||||||||||||||||
Balance at June 30, | $ | 2,422 | $ | 5,333 | $ | 318 | $ | 1,341 | $ | 29 | $ | 759 | $ | 10,202 |
Six Months Ended June 30, 2013 | ||||||||||||||||||||||||||||
Commercial & Industrial | Commercial Real Estate | Construction | Residential Mortgage | Installment | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Balance at January 1, | $ | 2,424 | $ | 5,323 | $ | 313 | $ | 1,532 | $ | 113 | $ | 532 | $ | 10,237 | ||||||||||||||
Charge offs | — | (50 | ) | — | — | (16 | ) | — | (66 | ) | ||||||||||||||||||
Recoveries | 21 | 8 | — | — | 2 | — | 31 | |||||||||||||||||||||
Provision | (23 | ) | 52 | 5 | (191 | ) | (70 | ) | 227 | — | ||||||||||||||||||
Balance at June 30, | $ | 2,422 | $ | 5,333 | $ | 318 | $ | 1,341 | $ | 29 | $ | 759 | $ | 10,202 |
At June 30, 2014, there were no commitments to lend additional funds to borrowers whose loans were on non-accrual status or were contractually past due in excess of 90 days and still accruing interest, or whose terms have been modified in troubled debt restructurings.
25 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The policy of the Corporation generally is to grant commercial, mortgage and installment loans to residents and businesses within its market area. The borrowers’ abilities to repay their obligations are dependent upon various factors, including the borrowers’ income and net worth, cash flows generated by the borrowers’ underlying collateral, value of the underlying collateral, and priority of the lender’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the control of the Corporation. The Corporation is therefore subject to risk of loss. The Corporation believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for virtually all loans. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
Loans modified in a troubled debt restructuring totaled $2.7 million at June 30, 2014, of which $1.1 million were on non-accrual status. The remaining loans modified were current and have complied with the terms of their restructure agreement. At December 31, 2013, loans modified in a troubled debt restructuring totaled $6.6 million, of which $826,000 were on non-accrual status. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreement. The Corporation has allocated $0 of specific allocations with respect to loans whose loan terms had been modified in troubled debt restructurings as of June 30, 2014 and December 31, 2013.
The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2014 (dollars in thousands):
|
|
|
|
|
|
|
|||||||||||||||
|
Number of |
Pre-Modification |
Post-Modification |
||||||||||||||||||
Troubled debt restructurings: |
|
|
|
|
|
|
|||||||||||||||
Commercial and industrial |
|
|
1 |
|
|
$ |
|
672 |
|
|
$ |
|
315 |
||||||||
Commercial real estate |
|
|
|
|
|
|
|
|
|
||||||||||||
Construction |
|
|
|
|
|
|
|
|
|
||||||||||||
Residential real estate |
|
|
1 |
|
|
53 |
|
|
51 |
||||||||||||
Installment |
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
Total |
|
|
2 |
|
|
$ |
|
725 |
|
|
$ |
|
366 |
||||||||
|
|
|
|
|
|
|
The Corporation had a $333,000 charge-off in connection with a loan modification at the time of modification during the six months ended June 30, 2014. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the six months ended June 30, 2014.
On April 30, 2014, a $4.1 million performing troubled debt restructuring was upgraded to pass status.
There were no troubled debt restructurings that occurred during the year ended December 31, 2013. The Corporation had no loans charged-off in connection with a loan modification at the time of the modification during the year ended December 31, 2013. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the year ended December 31, 2013.
In an effort to proactively manage delinquent loans, the Corporation has selectively extended to certain borrowers concessions such as rate reductions, extension of maturity dates, principal or interest forgiveness, adjusted repayment terms, forbearance agreements, or combinations of two or more of these concessions. As of June 30, 2014, loans on which concessions were made with respect to adjusted repayment terms amounted to $1.4 million. Loans on which combinations of two or more concessions were made amounted to $1.3 million. The concessions granted included principal concessions, rate reduction, adjusted repayment, extended maturity and payment deferral.
Note 7. Fair Value Measurements and Fair Value of Financial Instruments
Fair Value Measurements
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. |
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.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Investment Securities Available-for-Sale
Where quoted prices are available in an active market, investment securities are classified in Level 1 of the valuation hierarchy. Level 1 inputs include investment securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy, include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine its fair value and it is classified as Level 3. Due to the inactive condition of the markets amidst the financial crisis, the Corporation treated certain investment securities as Level 3 assets in order to provide more appropriate valuations. For assets in an inactive market, the infrequent trades that do occur are not a true indication of fair value. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Corporation’s evaluations are based on market data and the Corporation employs combinations of these approaches for its valuation methods depending on the asset class. In certain cases where there were limited or less transparent information provided by the Corporation’s third-party pricing service, fair value was estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.
On a quarterly basis, management reviews the pricing information received from the Corporation’s third-party pricing service. This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the Corporation’s third-party pricing service.
Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the securities being valued. As of June 30, 2014 and December 31, 2013, management made no adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.
The Corporation determined that an income approach valuation technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at the prior measurement dates. As a result, the Corporation used the discount rate adjustment technique to determine fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2014 and December 31, 2013 are as follows:
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Assets Measured at Fair Value on a Recurring Basis | June 30, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
(in thousands) | ||||||||||||||||
U.S. Treasury & agency securities | $ | 9,472 | $ | 9,472 | $ | — | $ | — | ||||||||
Federal agency obligations | 22,648 | — | 22,648 | — | ||||||||||||
Residential mortgage pass-through securities | 45,919 | — | 45,919 | — | ||||||||||||
Commercial mortgage pass-through securities | 3,021 | — | 3,021 | — | ||||||||||||
Obligations of U.S. states and political subdivisions | 6,503 | — | 6,503 | — | ||||||||||||
Trust preferred securities | 16,336 | — | 16,336 | — | ||||||||||||
Corporate bonds and notes | 139,327 | — | 139,327 | — | ||||||||||||
Asset-backed securities | 15,176 | — | 15,176 | — | ||||||||||||
Certificates of deposit | 2,132 | — | 2,132 | — | ||||||||||||
Equity securities | 293 | 293 | — | — | ||||||||||||
Mutual funds and money market funds | 6,132 | 6,132 | — | — | ||||||||||||
Investment securities available-for-sale | $ | 266,959 | $ | 15,897 | $ | 251,062 | $ | — |
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Assets Measured at Fair Value on a Recurring Basis | December 31, 2013 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
(in thousands) | ||||||||||||||||
U.S. Treasury and agency securities | $ | 13,519 | $ | 13,519 | $ | — | $ | — | ||||||||
Federal agency obligations | 19,941 | — | 19,941 | — | ||||||||||||
Residential mortgage pass-through securities | 48,874 | — | 48,874 | — | ||||||||||||
Commercial mortgage pass-through securities | 6,991 | — | 6,991 | — | ||||||||||||
Obligations of U.S. states and political subdivisions | 31,460 | — | 31,460 | — | ||||||||||||
Trust preferred securities | 19,403 | — | 19,403 | — | ||||||||||||
Corporate bonds and notes | 158,630 | — | 158,630 | — | ||||||||||||
Asset-backed securities | 15,979 | — | 15,979 | — | ||||||||||||
Certificates of deposit | 2,262 | — | 2,262 | — | ||||||||||||
Equity securities | 287 | 287 | — | — | ||||||||||||
Mutual funds and money market funds | 5,724 | 5,724 | — | — | ||||||||||||
Securities available-for-sale | $ | 323,070 | $ | 19,530 | $ | 303,540 | $ | — |
The fair values used by the Corporation are obtained from an independent pricing service and represent either quoted market prices for the identical securities (Level 1 inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2).
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present the changes in investment securities available-for-sale with significant unobservable inputs (Level 3) for the three months ended June 30, 2014 and 2013.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in thousands) | ||||||||||||||||
Balance, beginning of the period | $ | — | $ | 44 | $ | — | $ | 36 | ||||||||
Interest payment deferrals | — | 15 | — | 29 | ||||||||||||
Principal repayments | — | — | — | — | ||||||||||||
Total net losses included in net income | — | — | — | — | ||||||||||||
Total net unrealized (losses) gains | — | 13 | — | 7 | ||||||||||||
Balance, end of the period | — | $ | 72 | — | $ | 72 |
For the six months ended June 30, 2014, there were no transfers of investment securities available-for-sale into or out of Level 1, Level 2, or Level 3 assets.
Assets Measured at Fair Value on a Non-Recurring Basis
For assets measured at fair value on a non-recurring basis, the unobservable inputs used to derive fair value measurements at June 30, 2014 and December 31, 2013 were as follows:
Impaired Loans | Valuation Techniques | Range of Unobservable Inputs | ||
Residential | Appraisals of collateral value | Adjustment for age of comparable sales, generally a decline of 0% to 25% | ||
Commercial | Discounted cash flow model | Discount rate from 0% to 6% | ||
Commercial real estate | Appraisals of collateral value | Market capitalization rates between 8% to 12%. Market rental rates for similar properties | ||
Construction | Appraisals of collateral value | Adjustment for age comparable sales. Generally a decline of 0% to 5% | ||
Other Real Estate Owned | ||||
Residential | Appraisals of collateral value | Adjustment for age of comparable sales, generally a decline of 0% to 25% | ||
Commercial | Appraisals of collateral value | Adjustment for age of comparable sales, generally a decline of 0% to 15% |
Fair Value Measurements at Reporting Date Using | |||||||||||||||||
Assets Measured at Fair Value on a Non-Recurring Basis |
June 30, 2014 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Impaired Loans |
(in thousands) | ||||||||||||||||
Commercial real estate | $ | 3,265 | $ | — | $ | — | $ | 3,265 | |||||||||
Other Real Estate Owned |
|||||||||||||||||
Residential | 220 | — | — | 220 | |||||||||||||
|
|||||||||||||||||
Fair Value Measurements at Reporting Date Using | |||||||||||||||||
Assets Measured at Fair Value on a Non-Recurring Basis | December 31, 2013 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Impaired Loans |
(in thousands) | ||||||||||||||||
Commercial and industrial | $ | 372 | $ | — | $ | — | $ | 372 | |||||||||
Commercial real estate | 4,229 | — | — | 4,229 | |||||||||||||
Other Real Estate Owned Residential |
220 | — | — | 220 | |||||||||||||
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following methods and assumptions were used to estimate the fair values of the Corporation’s assets measured at fair value on a non-recurring basis at June 30, 2014 and December 31, 2013.
Impaired Loans. The value of an impaired loan is measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and installment loans, are specifically excluded from the impaired loan portfolio. The Corporation’s impaired loans are primarily collateral dependent. Impaired loans are individually assessed to determine that each loan’s carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows. Impaired loans at June 30, 2014 that required a valuation allowance during 2014 were $3.6 million with a related valuation allowance of $335,000 compared to $5.0 million with a related valuation allowance of $415,000 at December 31, 2013. Additional provision for loan losses of $110,000 and $222,000 for the second quarter and first six months of 2014, respectively, were recorded.
Other Real Estate Owned. Other real estate owned (“OREO”) is measured at fair value less costs to sell, generally a decline of 0% to 25% for residential OREO and a decline of 0% to 15% for commercial OREO. The Corporation believes that the fair value component in its valuation follows the provisions of FASB ASC 820-10-05. The fair value of OREO is determined by sales agreements or appraisals by qualified licensed appraisers approved and hired by the Corporation. Costs to sell associated with OREO are based on estimation per the terms and conditions of the sales agreements or appraisals.
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.
Investment in Restricted Stock: It is not practical to determine the fair value of FHLB Stock due to restrictions placed on its transferability.
Fair Value of Financial Instruments
FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Corporation, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10. Many of the Corporation’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Corporation’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-sale and investment securities available-for-sale. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Corporation for the purposes of this disclosure.
Investment Securities Held-to-Maturity. The fair value of the Corporation’s investment securities held-to-maturity was primarily measured using information from a third-party pricing service. If quoted prices were not available, fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. In cases where there may be limited or less transparent information provided by the Corporation’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.
Loans Held-for-Sale. Fair value is estimated using the prices of the Corporation’s existing commitments to sell such loans and/or the quoted market price for commitments to sell similar loans.
Loans. The fair value of the Corporation’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans were segregated by types such as commercial, residential and consumer loans. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.
Non-Interest-Bearing Deposits. The fair value for non-interest-bearing deposits is equal to the amount payable on demand at the reporting date.
Interest-Bearing Deposits. The fair values of the Corporation’s interest-bearing deposits were estimated using discounted cash flow analyses. The discounted rates used were based on rates currently offered for deposits with similar remaining maturities. The fair values of the Corporation’s interest-bearing deposits do not take into consideration the value of the Corporation’s long-term relationships with depositors, which may have significant value.
Term Borrowings and Subordinated Debentures. The fair value of the Corporation’s long-term borrowings and subordinated debentures were calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities.
Accrued Interest Receivable/Payable. The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the accrual is associated.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation’s financial instruments as of June 30, 2014 and December 31, 2013.
Fair Value Measurements | ||||||||||||||||||||
Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
June 30, 2014 | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and due from banks | $ | 92,617 | $ | 92,617 | $ | 92,617 | $ | — | $ | — | ||||||||||
Investment securities available-for-sale | 266,959 | 266,959 | 15,897 | 251,062 | — | |||||||||||||||
Investment securities held-to-maturity | 218,159 | 222,503 | 28,416 | 175,210 | 18,877 | |||||||||||||||
Investment in restricted stock | 11,289 | n/a | n/a | n/a | n/a | |||||||||||||||
Net loans | 995,431 | 992,632 | — | — | 992,632 | |||||||||||||||
Accrued interest receivable | 6,414 | 6,414 | 89 | 3,568 | 2,757 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Non interest-bearing deposits | 238,138 | 238,138 | 238,138 | — | — | |||||||||||||||
Interest-bearing deposits | 1,036,482 | 1,043,230 | — | 1,043,230 | — | |||||||||||||||
Borrowings | 196,000 | 209,075 | — | 209,075 | — | |||||||||||||||
Subordinated debentures | 5,155 | 4,923 | — | 4,923 | — | |||||||||||||||
Accrued interest payable | 998 | 998 | — | 998 | — | |||||||||||||||
December 31, 2013 | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and due from banks | $ | 82,692 | $ | 82,692 | $ | 82,692 | $ | — | $ | — | ||||||||||
Investment securities available-for-sale | 323,070 | 323,070 | 19,530 | 303,540 | — | |||||||||||||||
Investment securities held-to-maturity | 215,286 | 210,958 | 27,037 | 164,940 | 18,981 | |||||||||||||||
Investment in restricted stock | 8,986 | n/a | n/a | n/a | n/a | |||||||||||||||
Net loans | 950,610 | 948,606 | — | — | 948,606 | |||||||||||||||
Accrued interest receivable | 6,802 | 6,802 | 102 | 4,034 | 2,666 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Non interest-bearing deposits | 227,370 | 227,370 | 227,370 | — | — | |||||||||||||||
Interest-bearing deposits | 1,114,635 | 1,115,781 | — | 1,115,781 | — | |||||||||||||||
Long-term borrowings | 146,000 | 157,440 | — | 157,440 | — | |||||||||||||||
Subordinated debentures | 5,155 | 5,143 | — | 5,143 | — | |||||||||||||||
Accrued interest payable | 963 | 963 | — | 963 | — |
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Accumulated Other Comprehensive Income
Accumulated other comprehensive income (loss) at June 30, 2014 and December 31, 2013 consisted of the following:
June 30, 2014 |
December 31, 2013 | ||||||||
(in thousands) | |||||||||
Net unrealized gain on investment securities available-for-sale, net of tax | $ | 5,304 | $ | 2,374 | |||||
Unamortized component of securities transferred from available-for-sale to held-to-maturity, net of tax | (1,368 | ) | (1,425 | ) | |||||
Defined benefit pension and post-retirement plans, net of tax | (2,735 | ) | (3,493 | ) | |||||
Total accumulated other comprehensive income (loss) | $ | 1,201 | $ | (2,544 | ) |
Note 9. Stock-Based Compensation
The Corporation maintains two stock-based compensation plans from which new grants could be issued. The Corporation’s stock-based compensation plans permit Parent Corporation common stock to be issued to key employees and directors of the Corporation and its subsidiaries. The options granted under the plans are intended to be either incentive stock options or non-qualified options. Under the 2009 Equity Incentive Plan, a total of 363,081 shares are available for grant and issuance as of June 30, 2014. Under the 2003 Non-Employee Director Stock Option Plan, a total of 380,644 shares remain available for grant and issuance under the plan as of June 30, 2014. Such shares may be treasury shares, newly issued shares or a combination thereof.
Options have been granted to purchase common stock principally at the fair market value of the stock at the date of grant. Options are exercisable over a three-year vesting period starting one year after the date of grant and generally expire ten years from the date of grant.
Stock-based compensation expense for share-based payment awards is based on the grant date fair value estimated on the date of grant. The Corporation recognizes compensation costs for those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of three years. The Corporation estimates the forfeiture rate based on its historical experience during the preceding seven fiscal years.
For the six months ended June 30, 2014, the Corporation’s income before income taxes and net income were reduced by $34,000 and $20,000, respectively; as a result of the compensation expense related to stock options and restricted stock awards. For the six months ended June 30, 2013, the Corporation’s income before income taxes and net income were reduced by $25,000 and $15,000, respectively, as a result of the compensation expense related to stock options.
Under the principal stock-based compensation plans, the Corporation may also grant stock awards to certain employees. Stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of any applicable restrictions. Unless fully vested at the time of grant, such awards generally vest within 30 days to five years from the date of grant. During that period, ownership of the shares cannot be transferred. Restricted stock and stock awards that are fully vested at the time of grant have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding. The Corporation expenses the cost of stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which any restrictions lapse.
There were 18,829 restricted stock awards outstanding at June 30, 2014 and June 30, 2013. These awards were issued with an award price equal to the market price of the Corporation’s common stock on the award date and with a five year vesting period. Forfeiture provisions exist for personnel that separate employment before the vesting period expires. During the first sixth months of 2014, none of the shares of restricted stock were vested. All shares of restricted stock were fully vested on July 1, 2014.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
There were 0 and 31,257 shares of common stock underlying options that were granted during the three and six months ended June 30, 2014 and 2013, respectively. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values at the time the grants were awarded:
Six
Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Weighted average fair value of grants | n/a | $ | 2.50 | |||||
Risk-free interest rate | n/a | 1.86 | % | |||||
Dividend yield | n/a | 1.76 | % | |||||
Expected volatility | n/a | 23.21 | % | |||||
Expected life in months | n/a | 69 |
Activity under the stock-based compensation plans as of June 30, 2014 and changes during the sixth months ended June 30, 2014 were as follows:
Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2013 | 214,263 | $ | 10.59 | |||||||||||||
Granted – options | — | |||||||||||||||
Exercised | 44,478 | $ | 10.78 | |||||||||||||
Canceled/expired | — | |||||||||||||||
Forfeited | — | |||||||||||||||
Outstanding at June 30, 2014 | 169,785 | $ | 10.54 | 5.96 | $ | 1,474,951 | ||||||||||
Exercisable at June 30, 2014 | 120,343 | $ | 10.05 | 5.01 | $ | 1,105,335 |
The aggregate intrinsic value of options above represents the total pre-tax intrinsic value (the difference between the Corporation’s closing stock price on the last trading day of the second quarter of 2014 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2014. This amount changes based on the fair value of the Corporation’s stock.
As of June 30, 2014, there was approximately $117,000 of total unrecognized compensation expense relating to unvested stock options. These costs are expected to be recognized over a weighted average period of 2.5 years. As of June 30, 2014, there was approximately $194,000 of total unrecognized compensation expense relating to unvested restricted stock awards. These costs are expected to be recognized over a weighted average period of 5.0 years.
Note 10. Components of Net Periodic Pension Cost
The Corporation maintained a non-contributory defined benefit pension plan for substantially all of its employees until September 30, 2007, at which time the Corporation froze the plan. The following table sets forth the net periodic pension cost of the Corporation’s pension plan for the periods indicated.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in thousands) | ||||||||||||||||
Interest cost | $ | 144 | $ | 132 | $ | 288 | $ | 264 | ||||||||
Expected return on plan assets | (149 | ) | (148 | ) | (298 | ) | (244 | ) | ||||||||
Net amortization and deferral | 56 | 94 | 112 | 188 | ||||||||||||
Net periodic pension cost | $ | 51 | $ | 78 | $ | 102 | $ | 208 |
Contributions
The Corporation presently estimates that it will contribute $400,000 to its Pension Trust for 2014. The trust is established to provide retirement and other benefits for eligible employees and their beneficiaries. No part of the trust assets may be applied to any purpose other than providing benefits under the plan and for defraying expenses of administering the plan and the trust.
33 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Corporation’s results of operations for the periods presented herein and financial condition as of June 30, 2014 and December 31, 2013. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.
Cautionary Statement Concerning Forward-Looking Statements
This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp is engaged, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; (7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; and (10) the outcome of regulatory and legal investigations and proceedings may not be anticipated. Further information on other factors that could affect the financial results of ConnectOne Bancorp is included in Item 1A. of ConnectOne Bancorp’s Annual Report on Form 10-K and in ConnectOne Bancorp’s other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission’s website at http://www.sec.gov and/or from ConnectOne Bancorp, Inc.
Critical Accounting Policies and Estimates
The accounting and reporting policies followed by ConnectOne Bancorp, Inc. and its subsidiaries (collectively, the “Corporation”) conform, in all material respects, to U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the consolidated statements of operations. Actual results could differ significantly from those estimates.
The Corporation’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. The Corporation has identified the determination of the allowance for loan losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies is provided below.
Allowance for Loan Losses and Related Provision
The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, individual credit situation and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated statements of condition.
The evaluation of the adequacy of the allowance for loan losses includes, among other factors, an analysis of historical loss rates by loan category applied to current loan totals. However, actual loan losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.
34 |
The allowance for loan losses is established through a provision for loan losses charged to expense. Management believes that the current allowance for loan losses will be adequate to absorb loan losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers’ ability to pay. The evaluation also details historical losses by loan category and the resulting loan loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the allowance for loan losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 1 of the Notes to Consolidated Financial Statements.
Other-Than-Temporary Impairment of Investment Securities
Investment securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FASB ASC 320-10-65 clarifies the interaction of the factors that should be considered when determining whether a debt security is other–than-temporarily impaired. For debt securities, management assesses whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery.
In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.
Fair Value of Investment Securities
FASB ASC 820-10-35 clarifies the application of the provisions of FASB ASC 820-10-05 in an inactive market and how an entity would determine fair value in an inactive market. The Corporation applies the guidance in FASB ASC 820-10-35 when determining fair value for the Corporation’s private label collateralized mortgage obligations, pooled trust preferred securities and single name corporate trust preferred securities. See Note 8 of the Notes to Consolidated Financial Statements for further discussion.
FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly.
Goodwill
The Corporation adopted the provisions of FASB ASC 350-10, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but rather tested for impairment annually or more frequently if impairment indicators arise. No impairment charge was deemed necessary for the three and six months ended June 30, 2014 and 2013.
Income Taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Corporation’s consolidated financial statements or tax returns.
Fluctuations in the actual outcome of these future tax consequences could impact the Corporation’s consolidated financial condition or results of operations. Note 12 of the 2013 Form 10-K of the Notes to Consolidated Financial Statements includes additional discussion on the accounting for income taxes.
35 |
Operating Results Overview
Net income available to common stockholders for the three months ended June 30, 2014 amounted to $4.4 million compared to $4.9 million for the comparable three-month period ended June 30, 2013. The Corporation recorded earnings per diluted common share of $0.26 for the three months ended June 30, 2014 as compared with earnings of $0.30 per diluted common share for the same three months in 2013. The annualized return on average assets was 1.06% for the three months ended June 30, 2014, compared to 1.22% for the three months ended June 30, 2013. The annualized return on average stockholders’ equity was 9.92% for the three-month period ended June 30, 2014, compared to 11.84% for the three months ended June 30, 2013.
Net income available to common stockholders for the six months ended June 30, 2014 amounted to $8.7 million compared to $9.8 million for the comparable six-month period ended June 30, 2013. The Corporation recorded earnings per diluted common share of $0.53 for the six months ended June 30, 2014 as compared with earnings of $0.60 per diluted common share for the same six months in 2013. The annualized return on average assets was 1.05% for the six months ended June 30, 2014, compared to 1.22% for six months ended June 30, 2013. The annualized return on average stockholders’ equity was 9.97% for the six-month period ended June 30, 2013, compared to 11.96% for the six months ended June 30, 2013.
Net Interest Income and Margin
Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets. Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (primarily interest earned on obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues. Net interest margin is defined as net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.
The following table presents the components of net interest income on a tax-equivalent basis for the periods indicated.
Net Interest Income
(tax-equivalent basis)
Three
Months Ended June 30, | Six
Months Ended June 30, | |||||||||||||||||||||||||||||||
(dollars in thousands) | 2014 | 2013 | Increase (Decrease) | Percent Change | 2014 | 2013 | Increase (Decrease) | Percent Change | ||||||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||||||||||
Investment securities AFS | $ | 2,288 | $ | 3,521 | $ | (1,233 | ) | (35.02 | )% | $ | 4,957 | $ | 7,410 | $ | (2,453 | ) | (33.10 | )% | ||||||||||||||
Investment securities HTM | 2,037 | 1,048 | 989 | 94.37 | 4,050 | 1,810 | 2,240 | 123.76 | ||||||||||||||||||||||||
Loans, including net costs | 10,563 | 9,892 | 671 | 6.78 | 20,750 | 19,815 | 935 | 4.72 | ||||||||||||||||||||||||
Restricted investment in bank stocks, at cost | 97 | 99 | (2 | ) | (2.02 | ) | 210 | 207 | 3 | 1.45 | ||||||||||||||||||||||
Other interest-bearing deposits | — | — | — | — | — | 2 | (2 | ) | (100.00 | ) | ||||||||||||||||||||||
Total interest income | 14,985 | 14,560 | 425 | 2.92 | 29,967 | 29,244 | 723 | 2.47 | ||||||||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||||||||||
Time deposits $100 or more | 203 | 220 | (17 | ) | (7.73 | ) | 410 | 459 | (49 | ) | (10.68 | ) | ||||||||||||||||||||
All other deposits | 1,098 | 1,063 | 35 | 3.29 | 2,207 | 2,108 | 99 | 4.70 | ||||||||||||||||||||||||
Borrowings | 1,432 | 1,468 | (36 | ) | (2.45 | ) | 2,843 | 2,918 | (75 | ) | (2.57 | ) | ||||||||||||||||||||
Total interest expense | 2,733 | 2,751 | (18 | ) | (0.65 | ) | 5,460 | 5,485 | (25 | ) | (0.46 | ) | ||||||||||||||||||||
Net interest income on a fully tax-equivalent basis | 12,252 | 11,809 | 443 | 3.75 | 24,507 | 23,759 | 748 | 3.15 | ||||||||||||||||||||||||
Tax-equivalent adjustment (1) | (584 | ) | (581 | ) | (3 | ) | (0.52 | ) | (1,229 | ) | (1,161 | ) | (68 | ) | (5.86 | ) | ||||||||||||||||
Net interest income | $ | 11,668 | $ | 11,228 | $ | 440 | 3.92 | % | $ | 23,278 | $ | 22,598 | $ | 680 | 3.01 | % |
(1) Computed using a federal income tax rate of 35 percent for 2014 and 2013.
36 |
Net interest income on a tax-equivalent basis increased $443,000, or 3.75%, to $12.3 million for the three months ended June 30, 2014 as compared to the same period in 2013. For the three months ended June 30, 2014, the net interest margin widened by 1 basis point to 3.29% from 3.28% during the three months ended June 30, 2013. For the three months ended June 30, 2014, a decrease in the average yield on interest-earning assets of 2 basis points was partially offset by a decrease in the average cost of interest-bearing liabilities of 3 basis points, resulting in a stabilization of the Corporation’s net interest spread for the periods. Net interest margin contracting during the second quarter period of 2014 occurred primarily as result of a higher liquidity pool carried during the quarter.
Net interest income on a fully tax-equivalent basis increased $748,000, or 3.1%, to $24.5 million for the six months ended June 30, 2014 as compared to the same period in 2013. For the six months ended June 30, 2014, the net interest margin contracted 1 basis point to 3.28% from 3.29% during the six months ended June 30, 2013. For the six months ended June 30, 2014, a decrease in the average yield on interest-earning assets of 4 basis points was partially offset by a decrease in the average cost of interest-bearing liabilities of 4 basis points, resulting in a flat net interest spread of 3.14% for the periods.
The yield on the Company’s loan portfolio continues to decline, reflecting the protracted low interest rate environment, a pronounced shift in the composition of interest earning assets, from securities to loans, has resulted in a stable net interest margin and an increase in net interest income. Management expects a continuation of this trend whereby investment securities will represent a declining percentage of interest earning assets.
The following table quantifies the impact on net interest income on a tax-equivalent basis resulting from changes in average balances and average rates during the three month periods presented. Any change in interest income or expense attributable to both changes in volume and changes in rate has been allocated in proportion to the relationship of the absolute dollar amount of change in each category.
Analysis of Variance in Net Interest Income Due to Changes in Volume and Rates
Three
Months Ended June 30, 2014 and 2013 Increase (Decrease) Due to Change in: | Six
Months Ended June 30, 2014 and 2013 Increase (Decrease) Due to Change in: | |||||||||||||||||||||||
(tax-equivalent basis, in thousands) | Average Volume | Average Rate | Net Change | Average Volume | Average Rate | Net Change | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||
Available-for-sale | ||||||||||||||||||||||||
Taxable | $ | (860 | ) | $ | 341 | $ | (519 | ) | $ | (1,732 | ) | $ | 710 | $ | (1,022 | ) | ||||||||
Tax-exempt | (871 | ) | 157 | (714 | ) | (1,790 | ) | 358 | (1,432 | ) | ||||||||||||||
Held-to-maturity | ||||||||||||||||||||||||
Taxable | 616 | (56 | ) | 560 | 1,217 | (92 | ) | 1,125 | ||||||||||||||||
Tax-exempt | 438 | (9 | ) | 429 | 1,203 | (88 | ) | 1,115 | ||||||||||||||||
Total investment securities | (677 | ) | 433 | (244 | ) | (1,102 | ) | 888 | (214 | ) | ||||||||||||||
Loans | 1,094 | (423 | ) | 671 | 2,093 | (1,157 | ) | 936 | ||||||||||||||||
Restricted investment in bank stocks | 2 | (4 | ) | (2 | ) | 2 | 1 | 3 | ||||||||||||||||
Other interest bearing deposits | — | — | — | (2 | ) | — | (2 | ) | ||||||||||||||||
Total interest-earning assets | $ | 419 | $ | 6 | $ | 425 | $ | 991 | $ | (268 | ) | $ | 723 | |||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Money market deposits | $ | (1 | ) | $ | 73 | $ | 72 | $ | 50 | $ | 143 | $ | 193 | |||||||||||
Savings deposits | (30 | ) | (13 | ) | (43 | ) | (58 | ) | (22 | ) | (80 | ) | ||||||||||||
Time deposits | (2 | ) | (18 | ) | (20 | ) | (16 | ) | (65 | ) | (81 | ) | ||||||||||||
Other interest-bearing deposits | 57 | (48 | ) | 9 | 99 | (81 | ) | 18 | ||||||||||||||||
Total interest-bearing deposits | 24 | (6 | ) | 18 | 75 | (25 | ) | 50 | ||||||||||||||||
Borrowings and subordinated debentures | 40 | (76 | ) | (36 | ) | 42 | (117 | ) | (75 | ) | ||||||||||||||
Total interest-bearing liabilities | 64 | (82 | ) | (18 | ) | 117 | (142 | ) | (25 | ) | ||||||||||||||
Change in net interest income | $ | 355 | $ | 88 | $ | 443 | $ | 874 | $ | (126 | ) | $ | 748 |
37
The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three and six months ended June 30, 2014 and 2013, the Corporation’s average assets, liabilities and stockholders’ equity. The Corporation’s net interest income, net interest spread and net interest margin are also reflected.
Average Statements of Condition with Interest and Average Rates
Three Months Ended June 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
(tax-equivalent basis) | Average Balance | Interest Income/ Expense | Average Rate | Average Balance | Interest Income/ Expense | Average Rate | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Investment securities (1) : | ||||||||||||||||||||||||
Available-for-sale | ||||||||||||||||||||||||
Taxable | $ | 267,114 | $ | 2,179 | 3.26 | % | $ | 376,944 | $ | 2,698 | 2.86 | % | ||||||||||||
Tax-exempt | 7,642 | 109 | 5.68 | 71,545 | 823 | 4.60 | ||||||||||||||||||
Held-to-maturity | ||||||||||||||||||||||||
Taxable | 107,210 | 769 | 2.87 | 22,712 | 209 | 3.68 | ||||||||||||||||||
Tax-exempt | 110,667 | 1,268 | 4.58 | 72,451 | 839 | 4.63 | ||||||||||||||||||
Total investment securities | 492,633 | 4,325 | 3.51 | 543,652 | 4,569 | 3.36 | ||||||||||||||||||
Loans (2) | 989,454 | 10,563 | 4.27 | 888,175 | 9,892 | 4.45 | ||||||||||||||||||
Restricted investment in bank stocks | 9,210 | 97 | 4.22 | 8,995 | 99 | 4.40 | ||||||||||||||||||
Other interest-bearing deposits | — | — | — | — | — | — | ||||||||||||||||||
Total interest-earning assets | 1,491,297 | 14,985 | 4.02 | 1,440,822 | 14,560 | 4.04 | ||||||||||||||||||
Non interest-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 92,230 | 100,807 | ||||||||||||||||||||||
Bank-owned life insurance | 36,096 | 35,049 | ||||||||||||||||||||||
Intangible assets | 16,819 | 16,845 | ||||||||||||||||||||||
Other assets | 31,754 | 31,193 | ||||||||||||||||||||||
Allowance for loan losses | (10,756 | ) | (10,214 | ) | ||||||||||||||||||||
Total non-interest-earning assets | 166,143 | 173,680 | ||||||||||||||||||||||
Total assets | $ | 1,657,440 | $ | 1,614,502 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Money market deposits | $ | 395,912 | $ | 491 | 0.50 | % | $ | 396,920 | $ | 420 | 0.42 | % | ||||||||||||
Savings deposits | 161,522 | 124 | 0.31 | 200,433 | 167 | 0.33 | ||||||||||||||||||
Time deposits | 173,544 | 383 | 0.88 | 172,865 | 402 | 0.93 | ||||||||||||||||||
Other interest-bearing deposits | 350,761 | 303 | 0.35 | 289,334 | 294 | 0.41 | ||||||||||||||||||
Total interest-bearing deposits | 1,081,739 | 1,301 | 0.48 | 1,059,552 | 1,283 | 0.48 | ||||||||||||||||||
Short-term and long-term borrowings | 150,934 | 1,393 | 3.69 | 146,769 | 1,428 | 3.89 | ||||||||||||||||||
Subordinated debentures | 5,155 | 39 | 3.02 | 5,155 | 40 | 3.10 | ||||||||||||||||||
Total interest-bearing liabilities | 1,237,828 | 2,733 | 0.88 | 1,211,476 | 2,751 | 0.91 | ||||||||||||||||||
Non interest-bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 228,873 | 219,965 | ||||||||||||||||||||||
Other liabilities | 14,188 | 16,676 | ||||||||||||||||||||||
Total non interest-bearing liabilities | 243,061 | 236,641 | ||||||||||||||||||||||
Stockholders’ equity | 176,551 | 166,385 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,657,440 | $ | 1,614,502 | ||||||||||||||||||||
Net interest income (tax-equivalent basis) | 11,809 | |||||||||||||||||||||||
Net interest spread | 12,252 | 3.14 | % | 3.13 | % | |||||||||||||||||||
Net interest margin (3) | 3.29 | % | 3.28 | % | ||||||||||||||||||||
Tax-equivalent adjustment (4) | (584 | ) | (581 | ) | ||||||||||||||||||||
Net interest income | $ | 11,668 | $ | 11,228 |
(1) | Average balances are based on amortized cost. |
(2) | Average balances include loans on non-accrual status. |
(3) | Represents net interest income as a percentage of total average interest-earning assets. |
(4) | Computed using a federal income tax rate of 35 percent for 2014 and 2013. |
38
Average Statements of Condition with Interest and Average Rates
Six Months Ended June 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
(tax-equivalent basis) | Average Balance | Interest Income/ Expense | Average Rate | Average Balance | Interest Income/ Expense | Average Rate | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Investment securities (1) : | ||||||||||||||||||||||||
Available-for-sale | ||||||||||||||||||||||||
Taxable | $ | 276,953 | $ | 4,503 | 3.25 | % | $ | 388,088 | $ | 5,525 | 2.85 | % | ||||||||||||
Tax-exempt | 16,246 | 454 | 5.58 | 83,159 | 1,885 | 4.53 | ||||||||||||||||||
Held-to-maturity | ||||||||||||||||||||||||
Taxable | 104,014 | 1,502 | 2.89 | 20,802 | 377 | 3.62 | ||||||||||||||||||
Tax-exempt | 112,274 | 2,548 | 4.54 | 59,551 | 1,433 | 4.81 | ||||||||||||||||||
Total investment securities | 509,487 | 9,007 | 3.54 | 551,600 | 9,220 | 3.34 | ||||||||||||||||||
Loans (2) | 976,349 | 20,750 | 4.25 | 881,085 | 19,815 | 4.50 | ||||||||||||||||||
Restricted investment in bank stocks | 9,099 | 210 | 4.62 | 8,980 | 207 | 4.61 | ||||||||||||||||||
Other interest-bearing deposits | — | — | — | 709 | 2 | 0.56 | ||||||||||||||||||
Total interest-earning assets | 1,494,935 | 29,967 | 4.01 | 1,442,374 | 29,244 | 4.05 | ||||||||||||||||||
Non interest-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 97,897 | 94,570 | ||||||||||||||||||||||
Bank-owned life insurance | 35,968 | 34,973 | ||||||||||||||||||||||
Intangible assets | 16,822 | 16,850 | ||||||||||||||||||||||
Other assets | 32,070 | 30,730 | ||||||||||||||||||||||
Allowance for loan losses | (10,558 | ) | (10,221 | ) | ||||||||||||||||||||
Total non-interest-earning assets | 172,199 | 166,902 | ||||||||||||||||||||||
Total assets | $ | 1,667,134 | $ | 1,609,276 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Money market deposits | $ | 412,905 | $ | 1,011 | 0.49 | % | $ | 390,086 | $ | 818 | 0.42 | % | ||||||||||||
Savings deposits | 162,069 | 250 | 0.31 | 198,628 | 330 | 0.33 | ||||||||||||||||||
Time deposits | 172,351 | 751 | 0.87 | 175,741 | 832 | 0.95 | ||||||||||||||||||
Other interest-bearing deposits | 350,065 | 605 | 0.35 | 295,946 | 587 | 0.40 | ||||||||||||||||||
Total interest-bearing deposits | 1,097,390 | 2,617 | 0.48 | 1,060,401 | 2,567 | 0.48 | ||||||||||||||||||
Short-term and long-term borrowings | 148,729 | 2,766 | 3.72 | 146,552 | 2,839 | 3.87 | ||||||||||||||||||
Subordinated debentures | 5,155 | 77 | 3.01 | 5,155 | 79 | 3.06 | ||||||||||||||||||
Total interest-bearing liabilities | 1,251,274 | 5,460 | 0.87 | 1,212,108 | 5,485 | 0.91 | ||||||||||||||||||
Non interest-bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 227,150 | 216,432 | ||||||||||||||||||||||
Other liabilities | 13,833 | 16,107 | ||||||||||||||||||||||
Total non interest-bearing liabilities | 240,983 | 232,539 | ||||||||||||||||||||||
Stockholders’ equity | 174,877 | 164,629 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,667,134 | $ | 1,609,276 | ||||||||||||||||||||
Net interest income (tax-equivalent basis) | 24,507 | 23,759 | ||||||||||||||||||||||
Net interest spread | 3.14 | % | 3.14 | % | ||||||||||||||||||||
Net interest margin (3) | 3.28 | % | 3.29 | % | ||||||||||||||||||||
Tax-equivalent adjustment (4) | (1,229 | ) | (1,161 | ) | ||||||||||||||||||||
Net interest income | $ | 23,278 | $ | 22,598 |
(1) | Average balances are based on amortized cost. |
(2) | Average balances include loans on non-accrual status. |
(3) | Represents net interest income as a percentage of total average interest-earning assets. |
(4) | Computed using a federal income tax rate of 35 percent for 2014 and 2013. |
39
Non-Interest Income
The following table presents the principal categories of other income for the periods indicated.
Three
Months Ended June 30, | Six
Months Ended June 30, | |||||||||||||||||||||||||||||||
(dollars in thousands) | 2014 | 2013 | Increase (Decrease) | % Change | 2014 | 2013 | Increase (Decrease) | % Change | ||||||||||||||||||||||||
Service charges, commissions and fees | $ | 469 | $ | 451 | $ | 18 | 3.99 | % | $ | 966 | $ | 857 | $ | 109 | 12.72 | % | ||||||||||||||||
Annuities and insurance commission | 105 | 146 | (41 | ) | (28.08 | ) | 205 | 246 | (41 | ) | (16.67 | ) | ||||||||||||||||||||
Bank-owned life insurance | 256 | 274 | (18 | ) | (6.57 | ) | 511 | 839 | (328 | ) | (39.09 | ) | ||||||||||||||||||||
Net investment securities gains | 574 | 600 | (26 | ) | (4.33 | ) | 1,989 | 919 | (1,070 | ) | 116.43 | |||||||||||||||||||||
Loan related fees | 214 | 114 | 100 | 87.72 | 395 | 253 | 142 | 56.13 | ||||||||||||||||||||||||
Net gains on sales of loans held for sale | 43 | 91 | (48 | ) | (52.75 | ) | 79 | 229 | (150 | ) | (65.50 | ) | ||||||||||||||||||||
All other | 63 | 31 | 32 | 103.23 | 100 | 209 | (109 | ) | (52.15 | ) | ||||||||||||||||||||||
Total other income | $ | 1,724 | $ | 1,707 | $ | 17 | 1.00 | % | $ | 4,245 | $ | 3,552 | $ | 693 | 19.51 | % |
Non-interest income totaled $1.7 million in each of the second quarters of 2014 and 2013. The largest component of non-interest income was net investment securities gains which totaled $0.6 million in each of the second quarters of 2014 and 2013. Non-interest income totaled $4.2 million for the first six months of 2014, a $0.6 million increase from $3.6 million for the first six months of 2013. Net investment securities gains increased, by $1.1 million to $2.0 million for the first six months of 2014, from $0.9 million in the prior-year period. Partially offsetting this increase was $0.3 million decline in bank-owned life insurance (“BOLI”) income. Other types of non-interest income for the Bank include deposit and loan fees, annuities and life insurance commissions, and gains on the sale of residential mortgages in the secondary market.
Non-Interest Expense
The following table presents the principal categories of other expense for the periods indicated.
Three
Months Ended June 30, | Six
Months Ended June 30, | |||||||||||||||||||||||||||||||
(dollars in thousands) | 2014 | 2013 | Increase (Decrease) | % Change | 2014 | 2013 | Increase (Decrease) | % Change | ||||||||||||||||||||||||
Salaries and employee benefits | $ | 3,184 | $ | 3,335 | $ | (151 | ) | (4.53 | )% | $ | 6,516 | $ | 6,825 | $ | (309 | ) | (4.53 | )% | ||||||||||||||
Occupancy and equipment | 816 | 811 | 5 | 0.62 | 1,896 | 1,717 | 179 | 10.43 | ||||||||||||||||||||||||
FDIC insurance | 288 | 208 | 80 | 38.46 | 588 | 521 | 67 | 12.86 | ||||||||||||||||||||||||
Professional and consulting | 306 | 230 | 76 | 33.04 | 561 | 449 | 112 | 24.94 | ||||||||||||||||||||||||
Stationery and printing | 88 | 78 | 10 | 12.82 | 172 | 163 | 9 | 5.52 | ||||||||||||||||||||||||
Marketing and advertising | 27 | 62 | (35 | ) | (56.45 | ) | 67 | 163 | (96 | ) | (58.90 | ) | ||||||||||||||||||||
Computer expense | 373 | 343 | 30 | 8.75 | 718 | 696 | 22 | 3.16 | ||||||||||||||||||||||||
Other real estate owned, net | 1 | 107 | (106 | ) | 99.07 | 3 | 126 | (123 | ) | (97.62 | ) | |||||||||||||||||||||
Merger expenses | 729 | — | 729 | 100.0 | 1,789 | — | 1,789 | 100.0 | ||||||||||||||||||||||||
All other | 932 | 902 | 30 | 3.33 | 1,930 | 1,954 | (24 | ) | (1.23 | ) | ||||||||||||||||||||||
Total other expense | $ | 6,744 | $ | 6,076 | $ | 668 | 10.99 | % | $ | 14,240 | $ | 12,614 | $ | 1,626 | 12.89 | % |
Non-interest expenses totaled $6.7 million, including merger expenses of $0.7 million, for the second quarter of 2014, and $14.2 million, including merger expenses of $1.8 million, for the six months ended June 30, 2014. Excluding merger expenses, total non-interest expense was $6.0 million for the second quarter 2014, a decline of $0.1 million from $6.1 million for the prior-year period. Excluding merger expenses, total non-interest expense was $12.5 million for the six months ended June 30, 2014, a decline of $0.1 million from $12.6 million for the prior-year period. The decline in expense levels from last year reflects continued successful efforts by management to leverage the Bank’s infrastructure as well as a decline in staff expenses in anticipation of the merger. In the latter half of 2014, management will be focusing on achieving merger expense synergies, which are ahead of schedule, while balancing investment in infrastructure with prudent and sustainable growth.
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Income Taxes
Income tax expense was $2.0 million and $3.6 million for the second quarter and first six months of 2014, respectively, compared with $1.9 million and $3.7 million, for the second quarter and first six months of 2013, respectively. The effective tax rates were 31.2% and 29.1% for the second quarter and first six months of 2014, respectively, compared with 28.2% and 27.2%, for the second quarter and first six months of 2013, respectively. The increase in effective tax rates for 2014 reflects non-deductibility of certain merger expenses. The Company’s effective tax rate is projected to trend upward in future periods as the proportion of tax-exempt income to taxable income is expected to decline.
Investment Portfolio
At June 30, 2014, the principal components of the investment securities portfolio were U.S. Treasury and agency obligations, federal agency obligations, mortgage-backed securities, obligations of U.S. states and political subdivisions, corporate bonds and notes, trust preferred securities, asset backed securities and equity securities.
During the six months ended June 30, 2014, approximately $66.7 million in investment securities were sold from the available-for-sale portfolio. The cash flow from the sale of investment securities was primarily used to either fund loan growth or purchase new securities.
For the three months ended June 30, 2014, average investment securities decreased $51.0 million to approximately $492.6 million, or 33.0% of average interest-earning assets, from $543.7 million on average, or 37.7% of average interest-earning assets, for the comparable period in 2013. For the six months ended June 30, 2014, average investment securities decreased $42.1 million to approximately $509.5 million, or 34.1% of average interest-earning assets, from $551.6 million on average, or 38.2% of average interest-earning assets, for the comparable period in 2013.
At June 30, 2014, net unrealized gains on investment securities available-for-sale, which are carried as a component of accumulated other comprehensive income and included in stockholders’ equity, net of tax, amounted to $5.3 million as compared with net unrealized gains of $2.4 million at December 31, 2013. At June 30, 2014, the net unrealized gains on investment securities held-to-maturity that were transferred from securities available-for-sale, are carried, net of tax, as a component of accumulated other comprehensive income and included in stockholders’ equity. The gross unrealized losses associated with agency securities and federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other-than-temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.
Loan Portfolio
Lending is one of the Corporation’s primary business activities. The Corporation’s loan portfolio consists of commercial, residential and retail loans, serving the diverse customer base in its market area. The composition of the Corporation’s portfolio continues to change due to the local economy. Factors such as the economic climate, interest rates, real estate values and employment all contribute to these changes. Growth is generated through business development efforts, repeat customer requests for new financings, penetration into existing markets and entry into new markets.
The Corporation seeks to create growth in commercial lending by offering customer-focused products and competitive pricing and by capitalizing on the positive trends in its market area. Products offered are designed to meet the financial requirements of the Corporation’s customers. It is the objective of the Corporation’s credit policies to diversify the commercial loan portfolio to limit concentrations in any single industry.
At June 30, 2014, total loans amounted to $1.0 billion, an increase of $45.3 million or 4.72% as compared to December 31, 2013. For the period ended June 30, 2014, growth of $40.2 million and $59.6 million in the commercial and industrial and commercial real estate portfolios, $8.1 million in the construction portfolio was partially offset by a decrease of $5.5 million in residential mortgage loans compared to June 30, 2013. Total gross loans recorded in the quarter included $81.0 million of new loans and advances, offset by payoffs and principal payments of $61.4 million.
At June 30, 2014, the Corporation had $87.2 million in outstanding loan commitments which are expected to fund over the next 90 days.
Allowance for Loan Losses and Related Provision
The purpose of the allowance for loan losses (the “allowance”) is to establish a valuation allowance for probable incurred losses in the loan portfolio. Additions to the allowance are made through provisions charged against current operations and through recoveries made on loans previously charged-off. The allowance for loan losses is maintained at an amount considered adequate by management to provide for probable credit losses inherent in the loan portfolio based upon a periodic evaluation of the portfolio’s risk characteristics. In establishing an appropriate allowance, an assessment of the individual borrowers, a determination of the value of the underlying collateral, a review of historical loss experience and an analysis of the levels and trends of loan categories, delinquencies and problem loans are considered. Such factors as the level and trend of interest rates and current economic conditions and peer group statistics are also reviewed. Given the extraordinary economic volatility impacting national, regional and local markets, the Corporation’s analysis of its allowance for loan losses takes into consideration the potential impact that current trends may have on the Corporation’s borrower base.
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Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to increase the allowance based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the Corporation’s loans are secured by real estate in the State of New Jersey. Future adjustments to the allowance may be necessary due to economic factors impacting New Jersey real estate and the economy in general, as well as operating, regulatory and other conditions beyond the Corporation’s control.
At June 30, 2014, the level of the allowance was $10.8 million as compared to $10.3 million at December 31, 2013. Provisions to the allowance for the six-month period ended June 30, 2014 totaled $909,000 compared to $0 for the same period in 2013. The net charge-offs were $417,000 for the six months ended June 30, 2014 compared to $35,000 in net charge-offs for the six months ended June 30, 2013. The allowance for loan losses as a % of total loans amounted to 1.08% at June 30, 2014 compared to 1.08% at December 31, 2013 and 1.13% at June 30, 2013.
The level of the allowance for the respective periods of 2014 and 2013 reflects the credit quality within the loan portfolio, the loan volume recorded during the periods, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the allowance at June 30, 2014 is adequate to cover losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.
Changes in the allowance for loan losses are presented in the following table for the periods indicated.
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Average loans for the period | $ | 976,349 | $ | 881,085 | ||||
Total loans at end of period | 1,006,256 | 902,822 | ||||||
Analysis of the Allowance for Loan Losses: | ||||||||
Balance — beginning of year | $ | 10,333 | $ | 10,237 | ||||
Charge-offs: | ||||||||
Commercial and industrial | (333 | ) | (50 | ) | ||||
Residential mortgage loans | (90 | ) | ||||||
Installment loans | (7 | ) | (16 | ) | ||||
Total charge-offs | (430 | ) | (66 | ) | ||||
Recoveries: | ||||||||
Commercial and industrial | — | 21 | ||||||
Commercial real estate | — | 8 | ||||||
Construction | — | — | ||||||
Residential mortgage loans | 11 | — | ||||||
Installment loans | 2 | 2 | ||||||
Total recoveries | 13 | 31 | ||||||
Net charge-offs | (417 | ) | (35 | ) | ||||
Provision for loan losses | 909 | — | ||||||
Balance — end of period | $ | 10,825 | $ | 10,202 | ||||
Ratio of net charge-offs during the period to average loans during the period (1) | 0.09 | % | 0.00 | % | ||||
Allowance for loan losses as a percent of total loans | 1.08 | % | 1.13 | % |
(1) | Annualized. |
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Asset Quality
The Corporation manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix. The Corporation strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for loan losses at all times.
It is generally the Corporation’s policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of ninety days. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may be restored to an accruing basis when it again becomes well-secured, all past due amounts have been collected and the borrower continues to make payments for the next six months on a timely basis. Accruing loans past due 90 days or more are generally well-secured and in the process of collection.
Non-Performing Assets and Troubled Debt Restructured Loans
Non-performing loans include non-accrual loans and accruing loans past due 90 days or more. Non-accrual loans represent loans on which interest accruals have been suspended. In general, it is the policy of management to consider the charge-off of loans at the point they become past due in excess of 90 days, with the exception of loans that are both well-secured and in the process of collection. Non-performing assets include non-performing loans and other real estate owned. Performing troubled debt restructured loans represent loans to borrowers experiencing financial difficulties on which a concession was granted, such as a reduction in interest rate below the current market rate for new debt with similar risks, or modified repayment terms, and are performing under the restructured terms. Such loans, as restructured, are not included within the Corporation’s non-performing loans.
The following table sets forth, as of the dates indicated, the amount of the Corporation’s non-accrual loans, accruing loans past due 90 days or more, other real estate owned and troubled debt restructured loans.
June
30, 2014 | December
31, 2013 | |||||||
(in thousands) | ||||||||
Non-accrual loans | $ | 4,032 | $ | 3,137 | ||||
Accruing loans past due 90 days or more | 144 | — | ||||||
Total non-performing loans | 4,176 | 3,137 | ||||||
Other real estate owned | 220 | 220 | ||||||
Total non-performing assets | $ | 4,396 | $ | 3,357 | ||||
Troubled debt restructured loans — performing | $ | 1,586 | $ | 5,746 |
At June 30, 2014, non-performing assets totaled $4.4 million, or 0.26% of total assets, as compared with $2.8 million, or 0.17% of total assets, at June 30, 2013 and $3.4 million, or 0.20%, at December 31, 2013. The increase from June 30, 2013 reflects an increase of $1.6 million in non-performing problem asset loans. The largest component of the non-accrual loans is comprised of one relationship totaling $676,000, or 15.4 % of the total non-performing assets, secured by a mixed use property, located in Ocean County, New Jersey.
The Corporation held $220,000 in other real estate owned at June 30, 2014 and December 31, 2013.
Troubled debt restructured loans totaled $2.6 million at June 30, 2014 and $6.6 million at December 31, 2013. A total of $1.6 million and $5.7 million of troubled debt restructured loans were performing pursuant to the terms of their respective modifications at June 30, 2014 and at December 31, 2013, respectively.
Overall credit quality in the Bank’s loan portfolio at June 30, 2014 remains sound. Other known “potential problem loans” (as defined by SEC regulations), some of which are non-performing loans and are included in the table above, as of June 30, 2014 have been identified and internally risk-rated as assets specially mentioned, substandard or doubtful. Such loans amounted to $30.4 million and $35.1 million at June 30, 2014 and December 31, 2013, respectively. The improvement in credit quality occurred as the commercial and industrial loans decreased $98,000 in special mention, decreased $204,000 in the substandard category and decreased $357,000 in doubtful due to charge-off of $333,000 and payments of $24,000. Commercial real estate loans decreased $106,000 in special mention and decreased $4.3 million in the substandard category. Residential mortgage loans decreased in special mention by $9,000 and increased in the substandard category by $241,000. Installment loans decreased $9,000 in the substandard category and construction loans increased $159,000 in the substandard category. These loans are considered potential problem loans due to a variety of changing conditions affecting the credits, including general economic conditions and/or conditions applicable to the specific borrowers.
At June 30, 2014, other than the loans set forth above, the Corporation is not aware of any loans which present serious doubts as to the ability of its borrowers to comply with present loan repayment terms and which are expected to fall into one of the categories set forth in the tables or descriptions above
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Recent Accounting Pronouncements
Note 2 of the Notes to Consolidated Financial Statements discusses the expected impact of accounting pronouncements recently issued or proposed and adopted or not yet required to be adopted.
Asset and Liability Management
Asset and liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. The composition of the Corporation’s statement of condition is planned and monitored by the Bank’s Asset and Liability Committee (“ALCO”). In general, management’s objective is to optimize net interest income and minimize market risk and interest rate risk by monitoring the components of the statement of condition and the interaction of interest rates.
Short-term interest rate exposure analysis is supplemented with an interest sensitivity gap model. The Corporation utilizes interest sensitivity analysis to measure the responsiveness of net interest income to changes in interest rate levels. Interest rate risk arises when an earning asset matures or when its interest rate changes in a time period different than that of a supporting interest-bearing liability, or when an interest-bearing liability matures or when its interest rate changes in a time period different than that of an earning asset that it supports. While the Corporation matches only a small portion of specific assets and liabilities, total earning assets and interest-bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames. The difference between interest-sensitive assets and interest-sensitive liabilities is referred to as the interest sensitivity gap. At any given point in time, the Corporation may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities, or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending in part on management’s judgment as to projected interest rate trends.
The Corporation’s interest rate sensitivity position in each time frame may be expressed as assets less liabilities, as liabilities less assets, or as the ratio between rate sensitive assets (“RSA”) and rate sensitive liabilities (“RSL”). For example, a short-funded position (liabilities repricing before assets) would be expressed as a net negative position, when period gaps are computed by subtracting repricing liabilities from repricing assets. When using the ratio method, a RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1 indicates an asset-sensitive position and a ratio less than 1 indicates a liability-sensitive position.
A negative gap and/or a rate sensitivity ratio less than 1 tends to expand net interest margins in a falling rate environment and reduce net interest margins in a rising rate environment. Conversely, when a positive gap occurs, generally margins expand in a rising rate environment and contract in a falling rate environment. From time to time, the Corporation may elect to deliberately mismatch liabilities and assets in a strategic gap position.
At June 30, 2014, the Corporation reflected a positive interest sensitivity gap with an interest sensitivity ratio of 1.55:1.00 at the cumulative one-year position. Based on management’s perception of interest rates remaining low through 2014, emphasis has been, and is expected to continue to be, placed on controlling liability costs while extending the maturities of liabilities in order to minimize the impact on the net interest spread of rising interest rates in the future. However, no assurance can be given that this objective will be met.
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Estimates of Fair Value
The estimation of fair value is significant to a number of the Corporation’s assets, including loans held for sale and investment securities available-for-sale. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations; unlike most industrial companies, nearly all of the Corporation’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Liquidity
The liquidity position of the Corporation is dependent primarily on successful management of the Bank’s assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise principally to accommodate possible deposit outflows and to meet customers’ requests for loans. Scheduled principal loan repayments, maturing investments, short-term liquid assets and deposit inflows, can satisfy such needs. The objective of liquidity management is to enable the Corporation to maintain sufficient liquidity to meet its obligations in a timely and cost-effective manner.
Management monitors current and projected cash flows, and adjusts positions as necessary to maintain adequate levels of liquidity. Under its liquidity risk management program, the Corporation regularly monitors correspondent bank funding exposure and credit exposure in accordance with guidelines issued by the banking regulatory authorities. Management uses a variety of potential funding sources and staggering maturities to reduce the risk of potential funding pressure. Management also maintains a detailed contingency funding plan designed to respond adequately to situations which could lead to stresses on liquidity. Management believes that the Corporation has the funding capacity to meet the liquidity needs arising from potential events. In addition to pledgeable investment securities, the Corporation also maintains borrowing capacity through the Federal Reserve Bank Discount Window and the Federal Home Loan Bank of New York secured with loans and marketable securities.
The Corporation’s primary sources of short-term liquidity consist of cash and cash equivalents and unpledged investment securities available-for-sale.
At June 30, 2014, the Parent Corporation had $482,000 in cash and short-term investments compared to $285,000 at December 31, 2013. Expenses at the Parent Corporation are moderate and management believes that the Parent Corporation presently has adequate liquidity to fund its obligations.
Certain provisions of long-term debt agreements, primarily subordinated debt, prevent the Corporation from creating liens on, disposing of or issuing voting stock of subsidiaries. As of June 30, 2014, the Corporation was in compliance with all covenants and provisions of these agreements.
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Deposits
Total deposits remained flat at $1.3 billion at June 30, 2014 and December 31, 2013. Total non interest-bearing deposits increased from $227.4 million at December 31, 2013 to $238.1 million at June 30, 2014, an increase of $10.8 million or 4.74 %. Interest-bearing demand, savings and time deposits under $100,000 decreased $91.3 million to a total of $923.9 million at June 30, 2014 as compared to $1.0 billion at December 31, 2013. Time deposits $100,000 and over increased $13.2 million as compared to year-end 2013, primarily due to an inflow of municipal certificates of deposit. Time deposits $100,000 and over represented 8.84 % of total deposits at June 30, 2014 compared to 7.41 % at December 31, 2013.
Core Deposits
The Corporation derives a significant proportion of its liquidity from its core deposit base. Total demand deposits, savings and money market accounts of $1.1 billion at June 30, 2014 decreased by $77.9 million, or 6.51%, from December 31, 2013. At June 30, 2014, total demand deposits, savings and money market accounts were 87.7% of total deposits compared to 89.1 % at year-end 2013. Alternatively, the Corporation uses a more stringent calculation for the management of its liquidity positions internally, which calculation consists of total demand, savings accounts and money market accounts (excluding money market accounts greater than $100,000 and time deposits) as a % of total deposits. This number decreased by $36.8 million, or 4.91 %, from $750.2 million at December 31, 2013 to $713.4 million at June 30, 2014 and represented 56.0% of total deposits at June 30, 2014 as compared with 55.9% at December 31, 2013.
The Corporation continues to place the main focus of its deposit gathering efforts in the maintenance, development, and expansion of its core deposit base. Management believes that the emphasis on serving the needs of our communities will provide a long term relationship base that will allow the Corporation to efficiently compete for business in its market.
The following table depicts the Corporation’s core deposit mix at June 30, 2014 and December 31, 2013 based on the Corporation’s alternative calculation:
June 30, 2014 | December 31, 2013 | Dollar
Change | ||||||||||||||||||
Amount | percent | Amount | percent | 2014 vs. 2013 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Non interest-bearing demand | $ | 238,138 | 33.4 | % | $ | 227,370 | 30.3 | % | $ | 10,768 | ||||||||||
Interest-bearing demand | 249,695 | 35.0 | 266,613 | 35.5 | (16,918 | ) | ||||||||||||||
Regular savings | 107,157 | 15.0 | 102,721 | 13.7 | 4,436 | |||||||||||||||
Money market deposits under $100 | 118,405 | 16.6 | 153,502 | 20.5 | (35,097 | ) | ||||||||||||||
Total core deposits | $ | 713,395 | 100.0 | % | $ | 750,206 | 100.0 | % | $ | (36,811 | ) | |||||||||
Total deposits | $ | 1,274,620 | $ | 1,342,005 | $ | (67,385 | ) | |||||||||||||
Core deposits to total deposits | 56.0 | % | 55.9 | % |
Borrowings
Short-Term Borrowings
Short-term borrowings, which consist primarily of securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances and federal funds purchased, generally have maturities of less than one year. The details of these short-term borrowings are presented in the following table.
June 30, 2014 | ||||
(dollars in thousands) | ||||
Interest rate: | ||||
At quarter end | 0.38 | % | ||
Average for the quarter | 0.28 | % | ||
Average amount outstanding during the quarter | $ | 4,934 | ||
Maximum amount outstanding at any month end in the quarter | $ | 50,000 | ||
Amount outstanding at quarter end | $ | 50,000 |
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Long-Term Borrowings
Long-term borrowings, which consist primarily of FHLB advances and securities sold under agreements to repurchase, totaled $146.0 million at June 30, 2014 and December 31, 2013, and mature within three to eight years. The FHLB advances are secured by pledges of certain collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans. At June 30, 2014, FHLB advances and securities sold under agreements to repurchase had weighted average interest rates of 3.26% and 5.90%, respectively.
Subordinated Debentures
On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Corporation and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85% and reprices quarterly. The rate at June 30, 2014 was 3.07%.
Cash Flows
The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents resulting from the Corporation’s operating, investing and financing activities. During the six months ended June 30, 2014, cash and cash equivalents increased by $9.9 million over the balance at December 31, 2013. Net cash of $10.4 million was provided by operating activities, primarily, net income as adjusted to net cash. Net cash provided by investing activities amounted to approximately $18.7 million, primarily reflecting a net increase in loans of $45.7 million offset by a net decrease in investment securities of $67.5 million. Net cash of $19.2 million was used in financing activities, primarily from the decrease in deposits of $67.4 million and the funding of dividends.
Stockholders’ Equity
Total stockholders’ equity amounted to $178.3 million, or 10.7% of total assets, at June 30, 2014, compared to $168.6 million or 10.1% of total assets at December 31, 2013. Book value per common share was $10.18 at June 30, 2014, compared to $9.61 at December 31, 2013. Tangible book value (i.e., total stockholders’ equity less preferred stock, goodwill and other intangible assets) per common share was $9.15 at June 30, 2014, compared to $8.58 at December 31, 2013.
Tangible book value per share is a non-GAAP financial measure and represents tangible stockholders’ equity (or tangible book value) calculated on a per common share basis. The Corporation believes that a disclosure of tangible book value per share may be helpful for those investors who seek to evaluate the Corporation’s book value per share without giving effect to goodwill and other intangible assets. The following table presents a reconciliation of total book value per share to tangible book value per share as of June 30, 2014 and December 31, 2013.
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
(in thousands, except for share data) | ||||||||
Stockholders’ equity | $ | 178,278 | $ | 168,584 | ||||
Less: Preferred stock | 11,250 | 11,250 | ||||||
Less: Goodwill and other intangible assets | 16,815 | 16,828 | ||||||
Tangible common stockholders’ equity | $ | 150,213 | $ | 140,506 | ||||
Book value per common share | $ | 10.18 | $ | 9.61 | ||||
Less: Goodwill and other intangible assets | 1.03 | 1.03 | ||||||
Tangible book value per common share | $ | 9.15 | $ | 8.58 |
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On September 15, 2011, the Corporation issued $11.25 million in nonvoting senior preferred stock to the Treasury under the SBLF Program. Under the Securities Purchase Agreement, the Corporation issued to the Treasury a total of 11,250 shares of the Corporation’s Senior non-cumulative perpetual preferred stock, Series B, having a liquidation value of $1,000 per share. Simultaneously, using the proceeds from the issuance of the SBLF Preferred Stock, the Corporation redeemed from the Treasury, all 10,000 outstanding shares of its fixed rate cumulative perpetual preferred stock, Series A, liquidation amount $1,000 per share, for a redemption price of $10,041,667, including accrued but unpaid dividends up to the date of redemption. The investment in the SBLF program provided the Corporation with approximately $1.25 million additional Tier 1 capital. The capital that the Corporation received under the program enabled it to continue to serve small business clients through the commercial lending program. On December 7, 2011, the Corporation repurchased the warrants issued on January 12, 2009 to the Treasury as part of its participation in the Treasury’s TARP Capital Purchase Program. In the repurchase, the Corporation paid the Treasury $245,000 for the warrants.
During the three and six months ended June 30, 2014, the Corporation had no purchases of common stock associated with its stock buyback programs. At June 30, 2014, there were 652,868 shares available for repurchase under the Corporation’s stock buyback programs.
Regulatory Capital and Capital Adequacy
The maintenance of a solid capital foundation is a primary goal for the Corporation. Accordingly, capital plans and dividend policies are monitored on an ongoing basis. The Corporation’s objective with respect to the capital planning process is to effectively balance the retention of capital to support future growth with the goal of providing stockholders with an attractive long-term return on their investment.
The Corporation and the Bank are subject to regulatory guidelines establishing minimum capital standards that involve quantitative measures of assets, and certain off-balance sheet items, as risk-adjusted assets under regulatory accounting practices.
The following is a summary of regulatory capital amounts and ratios as of June 30, 2014 for the Corporation and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution.
ConnectOne
Bancorp, Inc. | For
Capital Adequacy Purposes | To
Be Well-Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||
At June 30, 2014 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||
Tier 1 leverage capital | $ | 165,299 | 10.08 | % | $ | 65,595 | 4.00 | % | N/A | N/A | ||||||||||||
Tier 1 risk-based capital | 165,299 | 12.59 | % | 52,518 | 4.00 | % | N/A | N/A | ||||||||||||||
Total risk-based capital | 176,334 | 13.43 | % | 105,039 | 8.00 | % | N/A | N/A |
ConnectOne Bank | For
Capital Adequacy Purposes | To
Be Well-Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
At June 30, 2014 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Tier 1 leverage capital | $ | 163,749 | 9.99 | % | $ | 65,565 | 4.00 | % | $ | 81,956 | 5.00 | % | ||||||||||||
Tier 1 risk-based capital | 163,749 | 12.48 | % | 52,484 | 4.00 | % | 78,725 | 6.00 | % | |||||||||||||||
Total risk-based capital | 174,784 | 13.32 | % | 104,975 | 8.00 | % | 131,219 | 10.00 | % |
N/A - not applicable
As of June 30, 2014, management believes that each of the Bank and the Corporation meet all capital adequacy requirements to which they are subject.
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Basel III
The Basel Committee on Banking Supervision (the “Basel Committee”) provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. At times, the Committee uses this common understanding to develop guidelines and supervisory standards in areas where they are considered desirable. In this regard, the Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision.
The Basel Committee released a comprehensive list of proposals for changes to capital, leverage, and liquidity requirements for banks in December 2009 (commonly referred to as “Basel III”). In July 2010, the Basel Committee announced the design for its capital and liquidity reform proposals and in September 2010, the oversight body of the Basel Committee announced minimum capital ratios and transition periods.
In December 2010 and January 2011, the Basel Committee published the final texts of reforms on capital and liquidity generally referred to as “Basel III.” Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions have also been considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including Union Center National Bank.
On July 9, 2013, the Office of the Comptroller of the Currency approved a final rule revising regulatory capital rules applicable to national banks, implementing Basel III. This rule redefines Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity Tier 1 Risk-based Capital Ratio) and implements a capital conservation buffer. It also revises the prompt corrective action thresholds and makes changes to risk weighs for certain assets and off-balance-sheet exposures. Banks are required to transition into the new rule beginning on January 1, 2015, although, based on the Corporation’s capital levels and balance sheet composition at June 30, 2014, the Corporation does not believe implementation of the new rule will have a material impact on the Corporation’s capital needs; however, due to the complexity of the rules, the Corporation will continue to evaluate the impact of these changes to our regulatory capital. This statement regarding the impact of the new regulations constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from this statement as a result of various factors, including modifications to the new regulations that may be adopted prior to the effective dates of the new regulations.
Looking Forward
One of the Corporation’s primary objectives is to achieve balanced asset and revenue growth, and at the same time expand market presence and diversify its financial products. However, it is recognized that objectives, no matter how focused, are subject to factors beyond the control of the Corporation, which can impede its ability to achieve these goals. The following factors should be considered when evaluating the Corporation’s ability to achieve its objectives:
The financial marketplace is rapidly changing and currently is in flux. The United States Treasury and banking regulators have implemented, and may continue to implement, a number of programs under new legislation to address capital and liquidity issues in the banking system. In addition, new financial system reform legislation may affect banks’ abilities to compete in the marketplace. It is difficult to assess whether these programs and actions will have short-term and/or long-term positive effects.
Banks are not the only place to obtain loans, nor the only place to keep financial assets. The banking industry has lost market share to other financial service providers. The future is predicated on the Corporation’s ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace.
Net interest income, the primary source of earnings, is impacted favorably or unfavorably by changes in interest rates. Although the impact of interest rate fluctuations can be mitigated by appropriate asset/liability management strategies, significant changes in interest rates can have a material adverse impact on profitability.
The ability of customers to repay their obligations is often impacted by changes in the regional and local economy. Although the Corporation sets aside loan loss provisions toward the allowance for loan losses when the Board determines such action to be appropriate, significant unfavorable changes in the economy could impact the assumptions used in the determination of the adequacy of the allowance.
Technological changes will have a material impact on how financial service companies compete for and deliver services. It is recognized that these changes will have a direct impact on how the marketplace is approached and ultimately on profitability. The Corporation has taken steps to improve its traditional delivery channels. However, continued success will likely be measured by the ability to anticipate and react to future technological changes.
This “Looking Forward” description constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the Corporation’s forward-looking statements due to numerous known and unknown risks and uncertainties, including the factors referred to in this quarterly report and in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.
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Item 3. Qualitative and Quantitative Disclosures about Market Risks
Market Risk
The Corporation’s profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely affect the Corporation’s earnings to the extent that the interest rates borne by assets and liabilities do not similarly adjust. The Corporation’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Corporation’s net interest income and capital, while structuring the Corporation’s asset-liability structure to obtain the maximum yield-cost spread on that structure. The Corporation relies primarily on its asset-liability structure to control interest rate risk. The Corporation continually evaluates interest rate risk management opportunities and has been focusing its efforts on increasing the Corporation’s yield-cost spread through wholesale and retail growth opportunities.
The Corporation monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Corporation’s exposure to differential changes in interest rates between assets and liabilities is the Corporation’s analysis of its interest rate sensitivity. This test measures the impact on net interest income and on net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities and off-balance sheet contracts.
The primary tool used by management to measure and manage interest rate exposure is a simulation model. Use of the model to perform simulations reflecting changes in interest rates over multiple-year time horizons enables management to develop and initiate strategies for managing exposure to interest rate risk. In its simulations, management estimates the impact on net interest income of various changes in interest rates. Projected net interest income sensitivity to movements in interest rates is modeled based on a ramped rise and fall in interest rates based on a parallel yield curve shift over a twelve month time horizon and then maintained at those levels over the remainder of the model time horizon, which provides a rate shock to the two-year period and beyond. The model is based on the actual maturity and repricing characteristics of interest rate-sensitive assets and liabilities. The model incorporates assumptions regarding earning asset and deposit growth, prepayments, interest rates and other factors.
Management believes that both individually and taken together, these assumptions are reasonable, but the complexity of the simulation modeling process results in a sophisticated estimate, not an absolutely precise calculation of exposure. For example, estimates of future cash flows must be made for instruments without contractual maturities or payment schedules.
Based on the results of the interest simulation model as of June 30, 2014, and assuming that management does not take action to alter the outcome, the Corporation would expect a decrease of 0.17 % in net interest income if interest rates increased by 200 basis points from current rates in a gradual and parallel rate ramp over a twelve month period. These results and other analyses indicate to management that the Corporation’s net interest income is presently minimally sensitive to rising interest rates.
Based on management’s perception that financial markets will continue to be volatile, interest rates that are projected to continue at low levels will generate increased downward repricing of earning assets. Emphasis has been, and is expected to continue to be, placed on interest-sensitivity matching with an overall objective of improving the net interest spread and margin over the next twelve months. However, no assurance can be given that this objective will be met.
Equity Price Risk
The Corporation is exposed to equity price risk inherent in its portfolio of publicly traded equity securities, which had an estimated fair value of approximately $293,000 and $287,000 at June 30, 2014 and December 31, 2013, respectively. We monitor equity investment holdings for impairment on a quarterly basis. In the event that the carrying value of the equity investment exceeds its fair value, and the decline in value is determined to be to be other than temporary, the carrying value is reduced to its current fair value by recording a charge to current operations. For the three months ended June 30, 2014 and 2013, the Corporation recorded no other-than-temporary impairment charges on its equity security holdings.
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Item 4. Controls and Procedures
a) Disclosure controls and procedures. As of the end of the Corporation’s most recently completed fiscal quarter covered by this report, the Corporation carried out an evaluation, with the participation of the Corporation’s management, including the Corporation’s chief executive officer and chief financial officer, of the effectiveness of the Corporation’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Corporation’s chief executive officer and chief financial officer concluded that the Corporation’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and are operating in an effective manner and that such information is accumulated and communicated to management, including the Corporation’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
b) Changes in internal controls over financial reporting: There have been no changes in the Corporation’s internal controls over financial reporting that occurred during the Corporation’s last fiscal quarter to which this report relates that have materially affected, or are reasonable likely to materially affect, the Corporation’s internal control over financial reporting.
Complaints were filed against Legacy ConnectOne, the members of its Board of Directors and the Company in the Superior Court of New Jersey, seeking class action status and asserting that Legacy ConnectOne and the members of its Board violated their duties to Legacy ConnectOne’s shareholders in connection with the proposed merger. The asserted factual bases for the allegations of breach of duty included (i) that the exchange ratio undervalues Legacy ConnectOne, (ii) that the terms of the merger agreement and certain related documents impermissibly locked up the proposed transaction, inhibiting other offers for Legacy ConnectOne, and (iii) that the proposed transaction provides benefits to insiders of Legacy ConnectOne. In addition, in their amended complaint, the plaintiffs raised claims that this joint proxy statement and prospectus failed to disclose material information. Certain of the complaints also alleged that the Company has aided and abetted the individual defendants in their alleged breaches of fiduciary duties. On April 25, 2014, the plantiffs dismissed each of these legal proceedings. Other than as discussed as discussed above, the Company is not subject to any legal proceedings which could have a materially adverse impact on its results of operations and financial condition.
In addition to the risks described under Item 1A –Risk Factors of our Annual Report on Form 10-K, investors in our securities should consider the following additional information:
Risk Related to our Mortgage Banking Operations
The Bank sells residential mortgage loans in the secondary market, primarily to Fannie Mae but also to other investors. The agreements governing these loan sales include various representations and warranties regarding the origination and characteristics of the residential mortgage loans sold as well as its servicing by the Bank. In addition, the agreements require the Bank to deliver various documents to the purchaser or its agent. Although the Bank sells residential mortgage loans on a non-recourse basis, the Bank may be obligated to repurchase sold loans where required documents are not delivered or are defective or there is a breach of a representation or warranty made by the Bank. Investors may require the immediate repurchase of a mortgage loan when an early payment default occurs, even if the mortgage loan has subsequently been brought current. As of June 30, 2014, there were no pending repurchase requests related to representation and warranty provisions. However, we can give you no assurance that we will not be required to repurchase sold loans in the future, or that our mortgage banking operations will not expose us to potential future losses.
51 |
Exhibit No. | Description |
31.1 | Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1* | Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2* | Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Definition Taxonomy Extension Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* Furnished and not filed.
52 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.
CONNECTONE BANCORP, INC.
(Registrant)
By: | /s/ Frank Sorrentino III | By: | /s/ William S. Burns | |
Frank Sorrentino III | William S. Burns | |||
Chairman and Chief Executive Officer | Executive Vice President, and Chief Financial Officer | |||
Date: August 11, 2014 | Date: August 11, 2014 |
53 |
EXHIBIT 31.1
CERTIFICATION
I, Frank Sorrentino III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ConnectOne Bancorp, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: August 11, 2014 | /s/ Frank Sorrentino III |
Frank Sorrentino III | |
Chairman and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, William S. Burns, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ConnectOne Bancorp, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: August 11, 2014 | /s/ William S. Burns |
William S. Burns | |
Executive Vice President, Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of ConnectOne Bancorp, Inc. (the “Corporation”) on Form 10-Q for the quarter ended June 30, 2014 filed with the Securities and Exchange Commission (the “Report”), I, Frank Sorrentino III, Chairman and Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. The Report fully complies with the requirements of Section 13 (a) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Corporation as of the dates presented and the consolidated results of operations of the Corporation for the periods presented.
Date: August 11, 2014 | /s/ Frank Sorrentino III |
Frank Sorrentino III | |
Chairman and Chief Executive Officer |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of ConnectOne Bancorp, Inc. (the “Corporation”) on Form 10-Q for the quarter ended June 30, 2014 filed with the Securities and Exchange Commission (the “Report”), I, William S. Burns, Executive Vice President and Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. The Report fully complies with the requirements of Section 13 (a) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Corporation as of the dates presented and the consolidated results of operations of the Corporation for the periods presented.
Date: August 11, 2014 | /s/ William S. Burns |
William S. Burns | |
Executive Vice President and Chief Financial Officer |
Loans and the Allowance for Loan Losses (Details) - Schedule of Troubled Debt Restructuring by Class (USD $)
In Thousands, unless otherwise specified |
6 Months Ended | 12 Months Ended |
---|---|---|
Jun. 30, 2014
|
Dec. 31, 2013
|
|
Troubled debt restructurings: | ||
Number of Loans | 2 | 0 |
Pre-Modification Outstanding Recorded Investment | $ 725 | |
Post-Modification Outstanding Recorded Investment | 366 | |
Commercial Portfolio Segment [Member]
|
||
Troubled debt restructurings: | ||
Number of Loans | 1 | |
Pre-Modification Outstanding Recorded Investment | 672 | |
Post-Modification Outstanding Recorded Investment | 315 | |
Residential Portfolio Segment [Member]
|
||
Troubled debt restructurings: | ||
Number of Loans | 1 | |
Pre-Modification Outstanding Recorded Investment | 53 | |
Post-Modification Outstanding Recorded Investment | $ 51 |
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