CONNECTONE BANCORP, INC. The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company's results of operations for the periods presented herein and financial condition as ofJune 30, 2022 andDecember 31, 2021 . 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 ofConnectOne 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 credit 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 such as the ongoing conflict betweenUkraine andRussia , 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 whichConnectOne Bancorp is engaged; (7) changes and trends in the securities markets may adversely impactConnectOne Bancorp ; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning byConnectOne Bancorp ; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; (10) the outcome of regulatory and legal investigations and proceedings may not be anticipated, and (11) the impact of the COVID-19 pandemic on our employees and operations, and those of our customers. Further information on other factors that could affect the financial results ofConnectOne Bancorp is included in Item 1a. ofConnectOne Bancorp's Annual Report on Form 10-K as amended and updated inConnectOne Bancorp's other filings with theSecurities and Exchange Commission . These documents are available free of charge at the Commission's website at http://www.sec.gov and/or fromConnectOne Bancorp, Inc.
Critical Accounting Policies and Estimates
The accounting and reporting policies followed byConnectOne Bancorp, Inc. and its subsidiaries (collectively, the "Company") conform, in all material respects, to GAAP. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the consolidated statements of income. Actual results could differ significantly from those estimates. The Company's accounting policies are fundamental to understanding Management's Discussion and Analysis ("MD&A") of financial condition and results of operations. The Company has identified the determination of the allowance for credit losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies is provided below. Allowance for Credit Losses and Related Provision: The allowance for credit losses ("ACL") represents management's estimate of current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial asset(s). Determining the amount of the ACL is considered a critical accounting estimate because it requires significant judgment and the use of estimates including reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. The evaluation of the adequacy of the ACL includes, among other factors, an analysis of historical loss rates by loan segment applied to current loan totals. However, actual credit losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications. 40
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The ACL is established through a provision for credit losses charged to expense. Management believes that the current ACL will be adequate to absorb credit losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers' ability to pay. The evaluation also details historical losses by loan segment and the resulting credit loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the ACL may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for credit losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 5 of the Notes to Consolidated Financial Statements. Income Taxes: The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact the Company's consolidated financial condition or results of operations. Note 10 of the Notes to Consolidated Financial Statements included in the Company's Form 10-K for the year endedDecember 31, 2021 includes additional discussion on the accounting for income taxes. Impact of COVID-19 COVID-19 continues to impact the Company's operations and financial results, as well as those of our customers. In response to the COVID-19 pandemic, the Company continued to offer temporary relief to effected customers, deferring either their full loan payment, the principal component or the interest component of their loan payment for an initial period of time ranging from 30 to 120 days. As ofJune 30, 2022 , the Company has one deferred loan with a total outstanding loan balance of$0.5 million . As provided for under the CARES act, these short-term deferrals are not considered troubled debt restructurings, provided that the modification is related to COVID-19, executed on a loan that was not more than 30 days past due as ofDecember 31, 2019 or the date of the deferral, and executed betweenMarch 1, 2020 andJanuary 1, 2022 , or the date that is 60 days after the termination date of the national emergency declared by the president onMarch 13, 2020 , under the National Emergencies Act related to the outbreak of COVID-19. With the passage of the Paycheck Protection Program ("PPP"), administered by theSmall Business Administration ("SBA"), the Company was an active participant in assisting its customers with applications for resources through the program. PPP loans originated prior toJune 5, 2020 have a two-year term, which may be extended to five years with the consent of the Company, and those originated on or afterJune 5, 2020 have a five-year term, and the loans bear interest at 1%, along with an origination fee payable from the SBA to the Company. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As ofJune 30, 2022 , PPP loans were$18.0 million . It is the Company's understanding that loans funded through the PPP program are fully guaranteed by theU.S. government and, as such, the Company has not included the PPP loans in calculation of the ACL as ofJune 30, 2022 . Should those circumstances change, the Company could be required to establish additional provisions for credit loss expense charged to earnings. As ofJune 30, 2022 remaining deferred and unrecognized PPP fees were$0.3 million . We currently anticipate recognizing a majority of this balance byDecember 31, 2022 , reflecting the expected timing of PPP loan forgiveness granted by theSmall Business Administration . 41
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Table of Contents Operating Results Overview Net income available to common stockholders for the three months endedJune 30, 2022 was$30.8 million compared to$32.2 million for the comparable three-month period endedJune 30, 2021 . The Company's diluted earnings per share were$0.78 for the three months endedJune 30, 2022 as compared with diluted earnings per share of$0.81 for the comparable three-month period endedJune 30, 2021 . The$1.4 million decrease in net income available to common stockholders and$0.03 decrease in diluted earnings per share versus the second quarter of 2021 were due to a$4.6 million increase to provision for credit losses, a$5.4 million increase in noninterest expenses,$1.5 million in preferred dividends, a$1.1 million decrease in noninterest income and a$1.2 million increase in income tax expenses, partially offset by a$12.6 million increase in net interest income. Net income available to common stockholders for the six months endedJune 30, 2022 was$60.7 million compared to$65.2 million for the comparable six-month period endedJune 30, 2021 . The Company's diluted earnings per share were$1.53 for the six months endedJune 30, 2022 as compared with diluted earnings per share of$1.63 for the comparable six-month period endedJune 30, 2021 . The$4.5 million decrease in net income available to common stockholders and$0.10 decrease in diluted earnings per share versus the first half of 2021 were due to a$11.9 million increase to provision for credit losses, a$8.2 million increase in noninterest expenses,$3.0 million in preferred dividends, a$1.5 million decrease in noninterest income and a$1.7 million increase in income tax expenses, partially offset by a$21.8 million increase in net interest income.
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 (including interest earned on tax-free loans and on obligations of state and local political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable assets. Net interest margin is defined as net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.
Fully taxable equivalent net interest income for the three months ended
resulted primarily from a 12.1% increase in average loans and a 31 basis-point widening of the net interest margin to 3.91% from 3.60%. The widening of the net interest margin resulted from a 24 basis-point increase in interest-earning assets and by a 7 basis-point reduction in the cost of interest-bearing liabilities. Fully taxable equivalent net interest income for the six months endedJune 30, 2022 increased by$22.0 million , or 17.6%, from the comparable six-month period endedJune 30, 2021 . The increase from the six months endedJune 30, 2021 resulted primarily from a 11.0% increase in average loans and a 23 basis-point widening of the net interest margin to 3.81% from 3.58%. The widening of the net interest margin resulted from a 17 basis-point reduction in the cost of interest-bearing liabilities and 9 basis-point increase in yield on interest-earning assets. 42
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The following tables, "Average Statements of Condition with Interest and Average Rates", present for the three months endedJune 30, 2022 and 2021, the Company's average assets, liabilities and stockholders' equity. The Company's net interest income, net interest spread and net interest margin are also reflected. Average Statements of Condition with Interest and Average Rates Three Months Ended June 30, 2022 2021 Interest Interest Average Income/ Average Average Income/ Average Balance Expense Rate (7) Balance Expense Rate (7) (dollars in thousands)
Interest-earning
assets:
Securities (1) (2)
$ 1,765 1.59 % Total loans (2) (3) (4) 7,008,174 81,597 4.67 6,252,212 71,348 4.58 Federal funds sold and interest-bearing with banks 157,201 312 0.80 341,885 84 0.10 Restricted investment in bank stocks 31,605 291 3.69 21,407 263 4.93 Total interest-earning assets 7,807,445 85,910 4.41 7,059,965 73,460 4.17 Noninterest-earning assets: Allowance for credit losses (81,012 ) (80,548 ) Other noninterest-earning assets 596,390 587,259 Total assets$ 8,322,823 $ 7,566,676 Interest-bearing liabilities: Interest-bearing deposits: Time deposits$ 1,103,418 2,179 0.79$ 1,324,510 3,963 1.20 Other interest-bearing deposits 3,717,531 3,530 0.38 3,320,400 2,461 0.30 Total interest-bearing deposits 4,820,949 5,709 0.47 4,644,910 6,424 0.55 Borrowings 548,675 1,849 1.35 331,633 1,419 1.72 Subordinated debentures 153,053 2,178 5.71 152,750 2,168 5.69 Finance lease 1,865 28 6.02 2,066 31 6.02 Total interest-bearing liabilities 5,524,542 9,764 0.71 5,131,359 10,042 0.78 Demand deposits 1,607,465 1,432,707 Other liabilities 47,719 50,591 Total
noninterest-bearing
liabilities 1,655,184 1,483,298 Stockholders' equity 1,143,097 952,019 Total liabilities and stockholders' equity$ 8,322,823 $ 7,566,676 Net interest income (tax-equivalent basis) 76,146 63,418 Net interest spread (5) 3.70 % 3.39 % Net interest margin (6) 3.91 % 3.60 % Tax-equivalent adjustment (555 ) (409 ) Net interest income$ 75,591 $ 63,009 (1) Average balances are based on amortized cost and include equity securities. (2) Interest income is presented on a tax-equivalent basis using 21%. (3) Includes loan fee income and accretion of purchase accounting adjustments. (4) Total loans include loans held-for-sale and nonaccrual loans. (5) Represents difference between the average yield on interest-earning assets
and the average cost of interest-bearing liabilities and is presented on a
tax- equivalent basis. (6) Represents net interest income on a tax-equivalent basis divided by average
total interest-earning assets.
(7) Rates are annualized.
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Six Months Ended June 30,
2022 2021
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate (7) Balance Expense Rate (7)
(dollars in thousands)
Interest-earning assets:
Securities (1) (2) $ 578,014 $ 6,481 2.26 % $ 458,741 $ 3,823 1.68 %
Total loans (2 ) (3) (4) 6,940,203 157,917 4.59 6,249,630 142,031 4.58
Federal funds sold and
interest-bearing with
banks 234,284 433 0.37 305,911 133 0.09
Restricted investment in
bank stocks 28,310 505 3.60 22,111 519 4.73
Total interest-earning
assets 7,780,811 165,336 4.29 7,036,393 146,506 4.20
Noninterest-earning
assets:
Allowance for credit
losses (80,391 ) (81,045)
Other noninterest-earning
assets 592,847 580,210
Total assets $ 8,293,267 $ 7,535,558
Interest-bearing
liabilities:
Interest-bearing deposits:
Time deposits $ 1,113,958 4,333 0.78 $ 1,373,133 9,113 1.34
Other interest-bearing
deposits 3,784,173 6,386 0.34 3,273,337 4,896 0.30
Total interest-bearing
deposits 4,898,131 10,719 0.44 4,646,470 14,009 0.61
Borrowings 477,188 3,226 1.36 353,451 3,093 1.77
Subordinated debentures 153,016 4,346 5.73 153,541 4,335 5.69
Finance lease 1,891 57 6.08 2,091 63 6.08
Total interest-bearing
liabilities 5,530,226 18,348 0.67 5,155,553 21,500 0.84
Demand deposits 1,577,427 1,390,878
Other liabilities 48,052 49,031
Total noninterest-bearing liabilities 1,625,479 1,439,909 Stockholders' equity 1,137,562 940,096 Total liabilities and stockholders' equity$ 8,293,267 $ 7,535,558 Net interest income (tax-equivalent basis) 146,988 125,006 Net interest spread (5) 3.62 % 3.36 % Net interest margin (6) 3.81 % 3.58 %
Tax-equivalent adjustment (1,039 ) (834 ) Net interest income$ 145,949 $ 124,172 (1) Average balances are based on amortized cost and include equity securities. (2) Interest income is presented on a tax-equivalent basis using 21%. (3) Includes loan fee income and accretion of purchase accounting adjustments. (4) Total loans include loans held-for-sale and nonaccrual loans. (5) Represents difference between the average yield on interest-earning assets
and the average cost of interest-bearing liabilities and is presented on a
tax- equivalent basis. (6) Represents net interest income on a tax-equivalent basis divided by average
total interest-earning assets.
(7) Rates are annualized.
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Table of Contents Noninterest Income Noninterest income totaled$3.4 million for the three months endedJune 30, 2022 , compared with$4.5 million for the comparable three-month period endedJune 30, 2021 . Included in noninterest income for the three months endedJune 30, 2022 andJune 30, 2021 were net (losses) gains on equity securities of($0.4) million and$23 thousand . Also included in noninterest income for the three months endedJune 30, 2021 was a$0.2 million gain on sale/redemption of investment securities. Excluding these items, noninterest income decreased$0.5 million when compared to the comparable three-month period endedJune 30, 2021 . The decrease was primarily attributable to decreases in deposit, loan and other income of$0.4 million and net gains on sale of loans held-for-sale of$0.3 million partially offset by an increase in income on bank owned life insurance of$0.2 million . Noninterest income totaled$6.4 million for the six months endedJune 30, 2022 , compared with$7.9 million for the six months endedJune 30, 2021 . Included in noninterest income were net losses on equity securities of$1.0 million and$0.2 million for the six months endedJune 30, 2022 and six months endedJune 2021 , respectively,$0.7 million gain on the sale of branches and$0.2 million gain on sale/redemption of investment securities in the six months ended 2021. Excluding the aforementioned items, noninterest income was$7.4 million and$7.2 million for the six months endedJune 30, 2022 and 2021, respectively. The$0.2 million increase in noninterest income excluding the items discussed above for the six months endedJune 30, 2022 versus the comparable six-month period endedJune 30, 2021 was primarily due to increases in deposit, loan and other income of$0.2 million , and BOLI income of$0.3 million , partially offset by a decrease in net gains on sale of loans held-for-sale of$0.3 million . Noninterest Expenses Noninterest expenses totaled$31.7 million for the three months endedJune 30, 2022 , compared with$26.3 million for the comparable three-month period endedJune 30, 2021 . Included in noninterest expenses for the three months endedJune 30, 2022 was an increase in acquisition price related to the BoeFly acquisition of$0.8 million . Excluding this item, noninterest expenses increased$4.6 million when compared to the comparable three-month period endedJune 30, 2021 . The increase was primarily attributable to increases in salaries and employee benefits of$4.3 million attributable to new hires, increases in information technology and communication expenses of$0.2 million and an increase inFDIC insurance of$0.1 million , partially offset by decreases in occupancy and equipment of$0.5 million , amortization of core deposit intangibles of$0.1 million and other expenses of$0.4 million . Noninterest expenses totaled$60.9 million for the six months endedJune 30, 2022 , compared to$52.7 million for the six months endedJune 30, 2021 . Included in noninterest expenses for the six months endedJune 30, 2022 was an increase in acquisition price related to the BoeFly acquisition of$1.5 million .Excluding this item, noninterest expenses increased$6.7 million when compared to the comparable six-month period endedJune 30, 2021 . The increase was primarily attributable to increases in salaries and employee benefits of$7.5 million attributable to new hires in both the revenue and back-office areas of the Bank, base-salary increases, and bonus accruals. Also, contributing to the increase were increases in information technology and communications of$0.5 million and marketing and advertising of$0.3 million , partially offset by decreases in occupancy of$1.9 million ,FDIC insurance of$0.2 million , professional and consulting of$0.2 million and amortization of core deposit intangibles of$0.1 million . Income Taxes Income tax expense was$11.9 million for the three months endedJune 30, 2022 , compared to$10.7 million for the comparable three-month period endedJune 30, 2021 . The increase in income tax expense was the result of higher income before taxes. The effective tax rate for the three months endedJune 30, 2022 andJune 30, 2021 was 26.9% and 24.8%, respectively. The higher effective tax rate during the second quarter 2022 when compared to the second quarter of 2021 resulted from a lower proportion of income from non-taxable sources. Income tax expense was$23.2 million for the six months endedJune 30, 2022 , compared to$21.5 million for the six months endedJune 30, 2021 . The effective tax rate for the three months endedJune 30, 2022 andJune 30, 2021 was 26.7% and 24.8%, respectively. The effective tax rate for the six months ended of 2022 was higher compared toJune 30, 2021 due to different proportions of income from non-taxable sources. 45
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Financial Condition
Loan Portfolio
The following table sets forth the composition of our loan portfolio, excluding
loans held-for-sale and unearned net origination fees and costs, by loan segment
at the periods indicated.
Amount
June 30, 2022 December 31, 2021 Increase/
Amount % Amount % (Decrease)
(dollars in thousands)
Commercial (1)$ 1,354,625 18.6 %$ 1,299,428 19.0 %$ 55,197 Commercial real estate 5,107,382 70.1 % 4,741,590 69.3 % 365,792 Commercial construction 569,789 7.8 % 540,178 7.9 % 29,611 Residential real estate 249,379 3.4 % 255,269 3.7 % (5,890 ) Consumer 1,248 0.1 % 1,886 0.1 % (638 ) Gross loans$ 7,282,423 100.0 %$ 6,838,351 100.0 %$ 444,072
As of
(1) Included in commercial loans as of
PPP loans of $18.0 million and $93.1 million , respectively.
Allowance for Credit Losses and Related Provision
As ofJune 30, 2022 , the Company's allowance for credit losses for loans was$82.7 million , an increase of$3.9 million from$78.8 million December 31, 2021 . The increase was primarily attributable to an increase in provision for credit losses for loans of$4.5 million partially offset by an increase of$0.5 million in net charge-offs. The provision for (reversal of) credit losses, which includes provision for unfunded commitments, for the three and six months endedJune 30, 2022 was$3.0 million and$4.5 million , respectively, compared to$(1.6) million and$(7.4) million , for the three and six months endedJune 30, 2021 , respectively. The increase in provision for credit losses reflected strong organic loan growth and forecasted macroeconomic conditions, which remained fairly stable for the three and six months endedJune 30, 2022 . The prior year provision in the three and six months endedJune 30, 2021 , was primarily the result of an improved macro-economic forecast as ofJune 30, 2021 when compared toJanuary 1, 2021 , the day the Company adopted CECL. There were$0.3 million and$0.5 million in net charge-offs for the three months and six months endedJune 30, 2022 , compared with$0.2 million and$0.1 million in net charge-offs for the three and six months endedJune 30, 2021 , respectively. The ACL as a percentage of loans receivable amounted to 1.14% as ofJune 30, 2022 compared to 1.15% as ofDecember 31, 2021 . Excluding the impact of PPP loans in the calculation of the ACL as a percentage of loans receivable, theJune 30, 2022 ratio remains the same at 1.14% as ofJune 30, 2022 , compared to 1.17% as ofDecember 31, 2021 . PPP loans do not have allowance for credit losses attributable to them, as they are fully guaranteed by the SBA. The level of the allowance for the respective periods of 2022 and 2021 reflects the credit quality within the loan portfolio, loan growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management's view, the level of the ACL as ofJune 30, 2022 is adequate to cover credit 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. 46
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Changes in the ACL are presented in the following table for the periods
indicated.
Three Months Ended
June 30,
2022 2021
(dollars in thousands)
Average loans receivable $ 7,007,207 $ 6,248,516
Analysis of the ACL:
Balance - beginning of quarter $ 80,070 $ 80,568
Charge-offs:
Commercial (292 ) (50 )
Commercial real estate (1 ) (155 )
Residential real estate (9 ) (7 )
Total charge-offs (302 ) (212 )
Recoveries:
Commercial - 13
Commercial real estate - -
Residential real estate 4 -
Consumer 28 1
Total recoveries 32 14
Net (charge-offs) recoveries (270 ) (198 )
Provision for (reversal of) loan losses (loans) 2,939 (1,686 )
Balance - end of period $ 82,739 Ratio of annualized net charge-offs during the period to average loans receivable during the period
0.02 % 0.01 %
Loans receivable $ 7,274,573 $ 6,407,904
ACL as a percentage of loans receivable 1.14 % 1.23 %
Six Months Ended
June 30,
2022 2021
(dollars in thousands)
Average loans receivable $ 6,939,527 $ 6,245,665
Analysis of the ACL:
Balance - beginning of quarter $ 78,773 $ 79,226
CECL Day 1 Adjustment - 6,557
Balance - beginning of quarter (as adjusted) 78,773 85,783 Charge-offs: Commercial (341 ) (50 ) Commercial real estate (226 ) (155 ) Residential real estate (9 ) (7 ) Consumer - - Total charge-offs (576 ) (212 ) Recoveries: Commercial 1 73 Commercial real estate - - Residential real estate 63 - Consumer - 2 Total recoveries 64 75 Net (charge-offs) recoveries (512 ) (137 ) Provision for (reversal of) credit losses (loans) 4,478 (6,962 ) Balance - end of period$ 82,739
Ratio of annualized net charge-offs during the period to average loans receivable during the period
0.01 % 0.01 %
Loans receivable $ 7,274,573 $ 6,407,904
ACL as a percentage of loans receivable 1.14 % 1.23 %
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Asset Quality
The Company manages asset quality and credit risk by maintaining diversification
in its loan portfolio and through review processes that include analysis of
credit requests and ongoing examination of outstanding loans, delinquencies, and
potential problem loans, with particular attention to portfolio dynamics and
mix. The Company strives to identify loans experiencing difficulty early on, to
record charge-offs promptly based on realistic assessments of current collateral
values and cash flows, and to maintain an adequate allowance for credit losses
at all times.
It is generally the Company's policy to discontinue interest accruals once a
loan is past due as to interest or principal payments for a period of ninety
days. When a loan is placed on nonaccrual status, interest accruals cease and
uncollected accrued interest is reversed and charged against current income.
Payments received on nonaccrual loans are generally applied against principal. A
loan may be restored to an accruing basis when all past due amounts have been
collected. Loans past due 90 days or more which are both well-secured and in the
process of collection may remain on an accrual basis.
Nonperforming assets include nonaccrual loans and other real estate owned.
Nonaccrual loans represent loans on which interest accruals have been suspended.
In general, it is the policy of management to consider the charge-off of
uncollectible amounts of loans at the point they become past due 90 days.
Performing troubled debt restructured loans represent loans to borrowers
experiencing financial difficulties on which a concession was granted, such as a
reduction in interest rate below the current market rate for new debt with
similar risks or modified repayment terms, and are performing under the
restructured terms.
The following table sets forth, as of the dates indicated, the amount of the
Company's nonaccrual loans, other real estate owned ("OREO"), performing
troubled debt restructurings ("TDRs") and loans past due 90 days or greater and
still accruing:
June 30, 2022 December 31, 2021
(dollars in thousands)
Nonaccrual loans $ 60,756 $ 61,700
OREO 316 -
Total nonperforming assets (1) $ 61,072 $ 61,700
Performing TDRs$ 46,368 $
43,587
Loans 90 days or greater past due and still accruing (non PCD) $ - $ - Loans 90 days or greater past due and still accruing (PCD)$ 10,164 $ 13,531
(1) Nonperforming assets are defined as nonaccrual loans and OREO.
Nonaccrual loans to total loans receivable 0.84 %
0.90 %
Nonperforming assets to total assets 0.69 % 0.76 %
Nonperforming assets, performing TDRs, and loans
90 days or greater past due and still accruing to
loans receivable 1.62 % 1.74 %
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Table of ContentsInvestment Securities As ofJune 30, 2022 , the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations ofU.S. states and political subdivisions, corporate bonds and notes, asset-backed securities and equity securities. For the quarter endedJune 30, 2022 , average securities increased$166.0 million to approximately$610.5 million , or 7.8% of average total interest-earning assets, from approximately$444.5 million , or 6.3% of average interest-earning assets, compared toJune 30, 2021 . As ofJune 30, 2022 , net unrealized losses on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included in stockholders' equity, net of tax, amounted to$39.3 million as compared with net unrealized losses of$0.5 million as ofDecember 31, 2021 . The increase in unrealized losses is predominately attributable to changes in market conditions and interest rates. Unrealized losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. This also resulted in a$15.7 million increase in deferred tax assets, attributable to the decline in fair value on securities available-for-sale. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. The Company did not record an allowance for credit losses for available-for-sale as ofJune 30, 2022 .
Interest Rate Sensitivity Analysis
The principal objective of our asset and liability management function is to
evaluate the interest-rate risk included in certain balance sheet accounts;
determine the level of risk appropriate given our business focus, operating
environment, and capital and liquidity requirements; establish prudent asset
concentration guidelines; and manage the risk consistent with Board approved
guidelines. We seek to reduce the vulnerability of our operations to changes in
interest rates, and actions in this regard are taken under the guidance of the
Bank's Asset Liability Committee (the "ALCO"). The ALCO generally reviews our
liquidity, cash flow needs, maturities of investments, deposits and borrowings,
and current market conditions and interest rates.
We currently utilize net interest income simulation and economic value of equity
("EVE") models to measure the potential impact to the Bank of future changes in
interest rates. As of June 30, 2022 and December 31, 2021 , the results of the
models were within guidelines prescribed by our Board of Directors. If model
results were to fall outside prescribed ranges, action, including additional
monitoring and reporting to the Board, would be required by the ALCO and the
Bank's management.
The net interest income simulation model attempts to measure the change in net
interest income over the next one-year period, and over the next three-year
period on a cumulative basis, assuming certain changes in the general level of
interest rates.
Based on our model, which was run as of June 30, 2022 , we estimated that over
the next one-year period a 200 basis-point instantaneous increase in the general
level of interest rates would increase our net interest income by 2.30%, while a
100 basis-point instantaneous decrease in interest rates would decrease net
interest income by 5.65%. As of December 31, 2021 , we estimated that over the
next one-year period a 200 basis-point instantaneous increase in the general
level of interest rates would increase our net interest income by 3.35%, while a
100 basis-point instantaneous decrease in interest rates would decrease net
interest income by 5.64%.
Based on our model, which was run as of June 30, 2022 , we estimated that over
the next three years, on a cumulative basis, a 200 basis-point instantaneous
increase in the general level of interest rates would increase our net interest
income by 5.76%, while a 100 basis-point instantaneous decrease in interest
rates would decrease net interest income by 8.65%. As of December 31, 2021 , we
estimated that over the next three years, on a cumulative basis, a 200
basis-point instantaneous increase in the general level of interest rates would
increase our net interest income by 9.77%, while a 100 basis-point instantaneous
decrease in interest rates would decrease net interest income by 10.41%.
An EVE analysis is also used to dynamically model the present value of asset and
liability cash flows with instantaneous rate shocks of up 200 basis points and
down 100 basis points. The economic value of equity is likely to be different as
interest rates change. Our EVE as of June 30, 2022 , would decrease by 1.41% with
an instantaneous rate shock of up 200 basis points, and decline by 6.86% with an
instantaneous rate shock of down 100 basis points. Our EVE as of December 31,
2021 , would increase by 0.24% with an instantaneous rate shock of up 200 basis
points, and decline by 5.20% with an instantaneous rate shock of down 100 basis
points.
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The following table illustrates the most recent results for EVE and one-year NII
sensitivity as of
Interest
Rates Estimated Estimated Change in EVE Interest Rates Estimated Estimated Change in NII
(basis points) EVE Amount % (basis points) NII Amount % 300$ 1,357,671 (56,033 ) (3.96 ) 300$ 315,272 $ 8,942 2.92 200 1,393,815 (19,889 ) (1.41 ) 200 313,381 7,051 2.30 100 1,419,841 6,137 0.43 100 311,264 4,934 1.61 0 1,413,704 - - 0 306,330 - - -100 1,316,776 (96,928 ) (6.86 ) -100 289,023 (17,307 ) (5.65 ) Estimates of Fair Value The estimation of fair value is significant to a number of the Company's assets, including loans held-for-sale and securities available-for-sale. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available-for-sale securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented elsewhere herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations; unlike most industrial companies, nearly all of the Company's assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Liquidity Liquidity is a measure of a bank's ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. As ofJune 30, 2022 , the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors' withdrawal requirements, and other operational and client credit needs could be satisfied. As ofJune 30, 2022 , liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were$796.9 million , which represented 9.1% of total assets and 10.9% of total deposits and borrowings, compared to$742.1 million as ofDecember 31, 2021 , which represented 9.1% of total assets and 10.9% of total deposits and borrowings. The Bank is a member of theFederal Home Loan Bank of New York and, based on available qualified collateral as ofJune 30, 2022 , had the ability to borrow$2.3 billion . In addition, as ofJune 30, 2022 , the Bank had in place borrowing capacity of$325 million through correspondent banks and other unsecured borrowing lines. The Bank also has a credit facility established with theFederal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral of$1.8 million . As ofJune 30, 2022 , the Bank had aggregate available and unused credit of approximately$880 million , which represents the aforementioned facilities totaling$2.3 billion net of$1.4 billion in outstanding borrowings and letters of credit. As ofJune 30, 2022 , outstanding commitments for the Bank to extend credit were approximately$1.2 billion .
Cash and cash equivalents totaled
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Table of Contents Deposits Total deposits increased by$284.6 million , or 4.5%, to$6.6 billion as ofJune 30, 2022 fromDecember 31, 2021 . The increase was primarily due to increases in demand, noninterest bearing deposits, interest-bearing and NOW and time deposits, partially offset by a decrease in savings deposits. The following table sets forth the composition of our deposit base by the periods indicated. June 30, 2022 December 31, 2021 Amount Increase/ Amount % Amount % (Decrease) (dollars in thousands) Demand, noninterest-bearing$ 1,712,875 25.9 %$ 1,617,049 25.5 %$ 95,826 Demand, interest-bearing and NOW 3,200,709 48.4 % 3,127,350 49.4 % 73,359 Savings 418,606 6.3 % 438,445 6.9 % (19,839 ) Time 1,285,409 19.4 % 1,150,109 18.2 % 135,300 Total deposits$ 6,617,599 100.0 %$ 6,332,953 100.0 %$ 284,646 Subordinated Debentures DuringDecember 2003 , Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of theParent Corporation issued$5.0 million of MMCapS capital securities to investors due onJanuary 23, 2034 . The trust loaned the proceeds of this offering to the Company and received in exchange$5.2 million of theParent Corporation's subordinated debentures. The subordinated debentures are redeemable in whole or part prior to maturity. The floating interest rate on the subordinated debentures is three month LIBOR plus 2.85% and re-prices quarterly. The rate as ofJune 30, 2022 was 4.14%. DuringJune 2020 , theParent Corporation issued$75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the "2020 Notes"). The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding,June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears onJune 15 andDecember 15 of each year, commencingDecember 15, 2020 . From and includingJune 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears onMarch 15 ,June 15 ,September 15 andDecember 15 of each year, commencing onSeptember 15, 2025 . Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero. DuringJanuary 2018 , theParent Corporation issued$75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the "2018 Notes") to certain accredited investors. The net proceeds from the sale of the 2018 Notes were used for general corporate purposes, which included theParent Corporation contributing$65 million of the net proceeds to the Bank in the form of debt and common equity in the first quarter of 2018. The 2018 Notes are non-callable for five years, have a stated maturity ofFebruary 1, 2028 and bear interest at a fixed rate of 5.20% per year, from and includingJanuary 17, 2018 to, but excludingFebruary 1, 2023 . From and includingFebruary 1, 2023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points. 51
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Table of Contents Stockholders' Equity The Company's stockholders' equity was$1.1 billion as ofJune 30, 2022 , an increase of$18.9 million fromDecember 31, 2021 . The increase in stockholders' equity was primarily attributable to retained earnings, in addition to an increase in additional paid-in capital, partially offset by a decrease in accumulated other comprehensive income, reflecting the after-tax decline in the fair value of investment securities net of unrealized hedge gains recorded in other assets, and an increase in treasury stock. As ofJune 30, 2022 , the Company's tangible common equity ratio and tangible book value per share were 9.46% and$20.79 , respectively. As ofDecember 31, 2021 , the tangible common equity ratio and tangible book value per share were 10.06% and$20.12 , respectively. Total goodwill and other intangible assets were approximately$216.5 million and$217.4 million , as ofJune 30, 2022 andDecember 31, 2021 , respectively.
The following table shows the reconciliation of common equity to tangible common equity and the tangible common equity ratio.
December 31,
June 30, 2022 2021
(dollars in thousands, except for
share and per share data)
Common equity $ 1,032,220 $ 1,013,285
Less: intangible assets (216,502 ) (217,369 )
Tangible common stockholders' equity $ 815,718 $ 795,916
Total assets $ 8,841,506 $ 8,129,480
Less: intangible assets (216,502 ) (217,369 )
Tangible assets $ 8,625,004 $ 7,912,111
Common stock outstanding at period end 39,243,123 39,568,090
Tangible common equity ratio (1) 9.46 % 10.06 % Book value per common share $ 26.30 $ 25.61 Less: intangible assets 5.51 5.49 Tangible book value per common share $ 20.79 $ 20.12
(1) Tangible common equity ratio is a non-GAAP measure.
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The maintenance of a solid capital foundation is a primary goal for the Company. Accordingly, capital plans, stock repurchases and dividend policies are monitored on an ongoing basis. The Company's objective with respect to the capital planning process is to effectively balance the retention of capital to support future growth with the goal of providing stockholders with an attractive long-term return on their investment.
The Company and the Bank are subject to regulatory guidelines establishing minimum capital standards that involve quantitative measures of assets, and certain off-balance sheet items, as risk-adjusted assets under regulatory accounting practices.
The following is a summary of regulatory capital amounts and ratios as ofJune 30, 2022 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution (for the Bank). For Capital Adequacy To Be Well-Capitalized Under Prompt ConnectOne Bancorp, Inc. Purposes Corrective Action Provisions The Company Amount Ratio Amount Ratio Amount Ratio As of June 30, 2022 (dollars in thousands) Tier 1 leverage capital$ 947,294 11.63 %$ 325,841 4.00 % $ N/A N/A CET I risk-based ratio 831,212 10.63 351,981 4.50 N/A N/A Tier 1 risk-based capital 947,294 12.11 469,308 6.00 N/A N/A Total risk-based capital 1,180,033 15.09 625,744 8.00 N/A N/A N/A - not applicable For Capital Adequacy To Be Well-Capitalized Under Prompt ConnectOne Bank Purposes Corrective Action Provisions The Bank Amount Ratio Amount Ratio Amount Ratio As of June 30, 2022 (dollars in thousands) Tier 1 leverage capital$ 944,700 11.60 %$ 325,674 4.00 % 407,092 5.00 %
CET I risk-based ratio 944,700 12.08 351,973
4.50 508,405 6.50
Tier 1 risk-based capital 944,700 12.08 469,297
6.00 625,730 8.00
Total risk-based capital 1,059,689 13.55 625,730
8.00 782,162 10.00
As of June 30, 2022 , both the Company and Bank satisfy the capital conservation
buffer requirements applicable to them. The lowest ratio at the Company is the
Tier I Risk Based Ratio which was 3.61% above the minimum buffer ratio and, at
the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was
3.05% above the minimum buffer ratio.
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