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Section 1: 10-Q (QUARTERLY REPORT)

ConnectOne Bancorp, Inc.
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UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the Quarterly Period Ended June 30, 2019

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

CNOB

CONNECTONE BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)

New Jersey 52-1273725
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See definition of “large accelerated filer”, “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐
    (Do not check if smaller Emerging growth company ☐
    reporting company)  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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

Title of each class Trading symbol Name of each exchange on which
registered
Common stock CNOB NASDAQ

 

Indicate 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: 35,352,866 shares
(Title of Class) (Outstanding as of August 6, 2019)

 



 

Table of Contents

                Page
PART I – FINANCIAL INFORMATION    
     
Item 1.   Financial Statements    
    Consolidated Statements of Condition at June 30, 2019 (unaudited) and December 31, 2018   3
    Consolidated Statements of Income for the three and six months ended June 30, 2019 and 2018 (unaudited)   4
    Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018 (unaudited)   5
    Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018 (unaudited)   6
    Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited)   8
    Notes to Consolidated Financial Statements (unaudited)   9
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   43
         
Item 3.   Qualitative and Quantitative Disclosures about Market Risks   56
         
Item 4.   Controls and Procedures   57
         
PART II – OTHER INFORMATION    
     
Item 1.   Legal Proceedings   58
         
Item 1a.   Risk Factors   58
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   59
         
Item 3.   Defaults Upon Senior Securities   59
         
Item 4.   Mine Safety Disclosures   59
         
Item 5.   Other Information   59
         
Item 6.   Exhibits   60
         
SIGNATURES    

2


 

Item 1. Financial Statements

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION

    June 30,   December 31,
(in thousands, except for share data)       2019       2018
    (unaudited)        
ASSETS                
Cash and due from banks   $     51,950     $      39,161  
Interest-bearing deposits with banks     133,700       133,205  
Cash and cash equivalents     185,650       172,366  
 
Securities available-for-sale     441,911       412,034  
Equity securities     11,152       11,460  
 
Loans receivable     5,090,492       4,541,092  
Less: Allowance for loan losses     37,698       34,954  
Net loans receivable     5,052,794       4,506,138  
 
Investment in restricted stock, at cost     31,767       31,136  
Bank premises and equipment, net     19,781       19,062  
Accrued interest receivable     21,272       18,214  
Bank owned life insurance     126,132       113,820  
Right of use operating lease assets     16,397       -  
Goodwill     162,574       145,909  
Core deposit intangibles     6,140       1,737  
Other assets     33,496       30,216  
Total assets   $ 6,109,066     $ 5,462,092  
LIABILITIES                
Deposits:                
Noninterest-bearing   $ 813,635     $ 768,584  
Interest-bearing     3,827,508       3,323,508  
Total deposits     4,641,143       4,092,092  
Borrowings     597,317       600,001  
Operating lease liabilities     17,787       -  
Subordinated debentures (net of debt issuance costs of $1,435 and $1,599, respectively)     128,720       128,556  
Other liabilities     24,875       27,516  
Total liabilities     5,409,842       4,848,165  
 
COMMITMENTS AND CONTINGENCIES                
 
STOCKHOLDERS’ EQUITY                
Preferred Stock:                
Authorized 5,000,000 shares     -       -  
Common stock, no par value:                
Authorized 50,000,000 shares; issued 37,656,806 shares at June 30, 2019 and 34,392,464 shares at December 31, 2018; outstanding 35,352,866 shares at June 30, 2019 and 32,328,542 at December 31, 2018     468,571       412,546  
Additional paid-in capital     19,777       15,542  
Retained earnings     235,649       211,345  
Treasury stock, at cost 2,303,940 common shares at June 30, 2019 and 2,063,922 at December 31, 2018)     (21,892 )     (16,717 )
Accumulated other comprehensive loss     (2,881 )     (8,789 )
Total stockholders’ equity     699,224       613,927  
Total liabilities and stockholders’ equity   $ 6,109,066     $ 5,462,092  

See accompanying notes to unaudited consolidated financial statements.
3


 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

Three Months Ended   Six Months Ended
June 30,   June 30,
(in thousands, except for per share data)       2019       2018       2019       2018
Interest income
Interest and fees on loans   $     63,524   $     49,494   $     123,850   $     96,519
Interest and dividends on investment securities:
Taxable 2,573 2,150 5,515 4,037
Tax-exempt 1,081 778 2,208 1,592
Dividends 410 502 867 987
Interest on federal funds sold and other short-term investments 290 160 647 424
Total interest income 67,878 53,084 133,087 103,559
Interest expense
Deposits 16,596 9,169 31,947 16,857
Borrowings 5,752 4,970 10,658 9,610
Total interest expense 22,348 14,139 42,605 26,467
Net interest income 45,530 38,945 90,482 77,092
Provision for loan losses 1,100 1,100 5,600 18,900
Net interest income after provision for loan losses 44,430 37,845 84,882 58,192
Noninterest income
Income on bank owned life insurance 833 775 1,655 1,549
Net gains on sale of loans held-for-sale 46 12 65 29
Deposit, loan and other income 914 601 1,700 1,217
Net gains (losses) on equity securities 158 (47 ) 261 (168 )
Net losses on sales of securities available-for-sale (9 ) - (1 ) -
Total noninterest income 1,942 1,341 3,680 2,627
Noninterest expenses
Salaries and employee benefits 11,793 9,729 23,748 19,401
Occupancy and equipment 2,357 2,031 4,852 4,174
FDIC insurance 825 765 1,580 1,615
Professional and consulting 1,370 825 2,579 1,548
Marketing and advertising 397 337 607 544
Data processing 1,139 1,091 2,294 2,239
Merger expenses 331 - 7,893 -
Loss on extinguishment of debt 1,047 - 1,047 -
Amortization of core deposit intangibles 364 169 728 338
Other components of net periodic pension expense 29 7 57 14
Other expenses 1,938 2,107 4,267 4,126
Total noninterest expenses 21,590 17,061 49,652 33,999
Income before income tax expense 24,782 22,125 38,910 26,820
Income tax expense 5,501 4,598 7,994 5,042
Net income   $ 19,281   $ 17,527   $ 30,916   $ 21,778
                         
Earnings per common share:
Basic   $ 0.54   $ 0.54   $ 0.87   $ 0.68
Diluted 0.54 0.54 0.87 0.67

See accompanying notes to unaudited consolidated financial statements.
4


 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

    Three Months Ended   Six Months Ended
    June 30,   June 30,
(in thousands)   2019   2018   2019   2018
Net income         $     19,281          $     17,527           $     30,916          $     21,778  
Other comprehensive income (loss):                                
Unrealized gains and losses:                                
Unrealized holding gains (losses) on available-for-sale securities arising during the period     4,027       (1,780 )     9,585       (6,799 )
Tax effect     (1,055 )     445       (2,477 )     1,737  
Net of tax     2,972       (1,335 )     7,108       (5,062 )
Reclassification adjustment for realized losses included in net income     9       -       1       -  
Tax effect     (2 )     -       -       -  
Net of tax     7       -       1       -  
Unrealized (losses) gains on cash flow hedges     (897 )     178       (1,287 )     1,094  
Tax effect     252       (49 )     361       (307 )
Net of tax     (645 )     129       (926 )     787  
Unrealized pension plan gains and losses:                                
Unrealized pension plan (losses) gains before reclassifications     -       -       (562 )     236  
Tax effect     -       -       158       (67 )
Net of tax     -       -       (404 )     169  
Reclassification adjustment for amortization included in net income     90       92       179       183  
Tax effect     (25 )     (26 )     (50 )     (51 )
Net of tax     65       66       129       132  
Total other comprehensive (loss) income     2,399       (1,140 )     5,908       (3,974 )
Total comprehensive income   $ 21,680     $ 16,387     $ 36,824     $ 17,804  

See accompanying notes to unaudited consolidated financial statements.
5


 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)

Six Months Ended June 30, 2019
  Accumulated
Additional   Other Total
(dollars in thousands, except for per   Preferred Common Paid-In Retained   Treasury   Comprehensive Stockholders’
share data)    Stock    Stock    Capital    Earnings    Stock     (Loss) Income    Equity
Balance as of December 31, 2018 $               -   $      412,546   $      15,542   $      211,345     $      (16,717 )   $               (8,789 )   $          613,927
Net income -     - - 30,916 - - 30,916
Other comprehensive income, net of tax -     - - - - 5,908 5,908
Cash dividends declared on common stock ($0.18 per share) -     - - (6,612 )     - - (6,612 )
Exercise of stock options (28,937 shares) -     - 265 - - - 265
Restricted stock grants (52,480 shares) -     - - - - - -
Net restricted stock units issued (4,904 shares) -     - - - - - -
Repurchase of treasury stock (240,018 shares) -     - - - (5,175 ) - (5,175 )
Net performance units issued (26,517 shares) -     - 196 - - - 196
Stock issued (3,032,496 shares) in acquisition of Greater Hudson Bank -     56,025 - - - - 56,025
Restricted stock issued (119,008 shares) in acquisition of BoeFly LLC -     - 2,500 - - - 2,500
Stock-based compensation expense -     - 1,274 - - - 1,274
Balance as of June 30, 2019   $ -   $ 468,571   $ 19,777   $ 235,649     $ (21,892 )   $ (2,881 )   $ 699,224
                                                  
Three Months Ended June 30, 2019
 
  Accumulated
Additional   Other Total
(dollars in thousands, except for per   Preferred Common Paid-In Retained Treasury Comprehensive Stockholders’
share data)   Stock Stock Capital Earnings Stock   (Loss) Income Equity
Balance as of March 31, 2019   $ -   $ 468,571   $ 16,513   $ 219,558     $ (16,967 )   $ (5,280 )   $ 682,395
Net income -     - - 19,281 - - 19,281
Other comprehensive income, net of tax -     - - - - 2,399 2,399
Cash dividends declared on common stock ($0.09 per share) -     - - (3,190 )     - - (3,190 )
Exercise of stock options (6,946) shares) -     - 122 - - - 122
Restricted stock grants (8,997 shares) -     - - - - - -
Repurchase of treasury stock (227,018 shares) -     - - - (4,925 ) - (4,925 )
Restricted stock issued (119,008 shares) in acquisition of BoeFly LLC -     - 2,500 - - - 2,500
Stock-based compensation expense -     - 642 - - - 642
Balance as of June 30, 2019   $ -   $ 468,571   $ 19,777   $ 235,649     $ (21,892 )   $ (2,881 )   $ 699,224

(continued)
6

 


 

    Six Months Ended June 30, 2018
     
                                        Accumulated        
                Additional                   Other   Total
(dollars in thousands, except for per   Preferred     Common   Paid-In   Retained   Treasury   Comprehensive   Stockholders’
share data)   Stock     Stock   Capital   Earnings   Stock   (Loss) Income   Equity
Balance as of December 31, 2017    $     -    $     412,546    $     13,602      $     160,025      $     (16,717 )    $     (4,019 )    $     565,437  
Reclassification of stranded tax effects (ASU 2018-02) (see Note 8)     -     -     -       709       -       (709 )     -  
Cumulative effect of adopting ASU 2016-01 (see Note 8)     -     -     -       (55 )     -       55       -  
Net income     -     -     -       21,778       -       -       21,778  
Other comprehensive loss, net of tax     -     -     -       -       -       (3,974 )     (3,974 )
Cash dividends declared on common stock ($0.15 per share)     -     -     -       (4,838 )     -       -       (4,838 )
Exercise of stock options (46,497) shares)     -     -     252       -       -       -       252  
Restricted stock grants (23,018 shares)     -     -     -       -       -       -       -  
Net performance units issued (42,672 shares)     -     -     (819 )     -       -       -       (819 )
Stock-based compensation expense     -     -     721       -       -       -       721  
Balance as of June 30, 2018   $ -   $ 412,546   $ 13,756     $     177,619     $     (16,717 )   $ (8,647 )   $ 578,557  
                                                     
    Three Months Ended June 30, 2018
     
                                        Accumulated        
                Additional                   Other   Total
(dollars in thousands, except for per   Preferred     Common     Paid-In   Retained   Treasury   Comprehensive   Stockholders’
share data)   Stock     Stock     Capital   Earnings   Stock   (Loss) Income   Equity
                                                     
Balance as of March 31, 2018   $ -   $ 412,546   $ 13,434     $     162,510     $ (16,717 )   $ (7,507 )   $ 564,266  
Net income     -     -     -       17,108       -       -       17,108  
Other comprehensive income, net of tax     -     -     -       -       -       (1,140 )     (1,140 )
Cash dividends declared on common stock ($0.075 per share)     -     -     -       (1,999 )     -       -       (1,999 )
Exercise of stock options (7,800 shares)     -     -     50       -       -       -       50  
Restricted stock grants (1,014 shares)     -     -     -       -       -       -       -  
Stock-based compensation expense     -     -     272       -       -       -       272  
Balance as of June 30, 2018   $ -   $ 412,546   $ 13,756     $     177,619     $ (16,717 )   $           (8,647 )   $      578,557  

See accompanying notes to unaudited consolidated financial statements.
7


 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

Six Months Ended
June 30,
(dollars in thousands)   2019 2018
Cash flows from operating activities  
Net income      $     30,916      $     21,778
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization of premises and equipment   1,597 1,536
Provision for loan losses   5,600 18,900
Amortization of intangibles   728 338
Net accretion of loans   (2,450 )   (806 )
Accretion on bank premises   (43 )   (33 )
Accretion on deposits   (639 )   (31 )
Amortization (accretion) on borrowings   114 (82 )
Stock-based compensation expense   1,470 (98 )
Losses on sales of investment securities, net   1 -
(Gains) losses on equity securities, net   (261 )   168
Gains on sales of loans held-for-sale, net   (65 )   (29 )
Loans originated for resale   (4,044 )   (1,498 )
Proceeds from sale of loans held-for sale   4,109 1,897
Loss on extinguishment of debt   1,047 -
Increase in cash surrender value of bank owned life insurance   (1,655 )   (964 )
Amortization of premiums and accretion of discounts on investments securities, net   1,759 1,832
Amortization of subordinated debt issuance costs   164 168
Increase in accrued interest receivable   (624 )   (1,284 )
Net change in operating leases   1,390 -
Decrease (increase) in other assets   4,231 (126 )
(Decrease) increase in other liabilities   (8,078 )   12,633
Net cash provided by operating activities   35,267 54,299
Cash flows from investing activities
Investment securities available-for-sale:  
Purchases   (141,739 )   (60,595 )
Sales   150,332 -
Maturities, calls and principal repayments   91,028 75,506
Sales of equity securities   569 -
Net (purchases) redemptions of restricted investment in bank stocks   (631 )   1,056
Payments on loans held-for-sale   - 159
Net increase in loans   (186,892 )   (181,868 )
Purchases of premises and equipment   (649 )   (233 )
Cash and cash equivalents acquired in acquisition   13,741 -
Cash consideration paid in acquisition   (2,530 )   -
Net cash used in investing activities   (76,771 )   (165,975 )
Cash flows from financing activities
Net increase in deposits   133,580 110,313
Increase in subordinated debentures   - 73,525
Advances of Federal Home Loan Bank (“FHLB”) borrowings   892,000 863,000
Repayments of FHLB borrowings   (960,031 )   (904,000 )
Repurchase of treasury stock (5,175 ) -
Cash dividends paid on common stock   (5,851 )   (4,827 )
Proceeds from exercise of stock options   265 252
Net cash provided by financing activities   54,788 138,263
Net change in cash and cash equivalents   13,284 26,587
Cash and cash equivalents at beginning of period   172,366 149,582
Cash and cash equivalents at end of period   $ 185,650 $ 176,169
Supplemental disclosures of cash flow information
Cash payments for:  
Interest paid on deposits and borrowings   $ 44,169 $ 25,055
Income taxes   7,816 1,497
Supplemental disclosures of noncash investing activities
Transfer of loans to other real estate owned   $ - $ 538
Transfer of loans held-for-investment to loans held-for-sale   - 21,236
Transfer of loans held-for-sale to held-for-investment   - 45,552
Business combinations:
Fair value of net assets acquired, net of cash and cash equivalents $ 534,146 $ -
Fair value of liabilities assumed   488,475   -

See accompanying notes to unaudited consolidated financial statements.
8


 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1. Nature of Operations and Principles of Consolidation

ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company. The Parent Corporation’s business currently consists of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”). The Bank’s subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a Delaware investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), NJCB Spec-1, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey online business lending place).

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

The preceding unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019, or for any other interim period. The Company’s 2018 Annual Report on Form 10-K should be read in conjunction with these consolidated 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.

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

Note 1a. Authoritative Accounting Guidance

Newly Issued, But Not Yet Effective Accounting Standards

ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Assets Measured at Amortized Cost.” (modified by ASU 2018-19, ASU 2019-04 and ASU 2019-05). ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates and affects loans, debt securities, trade receivables, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has formed a CECL committee which has assessed our data and system needs. The Company has engaged third-party vendors to assist in analyzing our data and developing a CECL model. The Company, in conjunction with these vendors, has researched and analyzed modeling standards, loan segmentation, as well as potential external inputs to supplement our loss history. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the ASU is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the ASU on our consolidated financial statements.

9


 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1a. Authoritative Accounting Guidance – (continued)

ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” ASU No. 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 will be effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. We are currently evaluating this ASU to determine the impact on our consolidated financial statements.

ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018-15 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update modify disclosure requirements on fair value measurements by removing, modifying and adding certain disclosure requirements. The amendments primarily pertain to Level 3 fair value measurements and depending on the amendment are applied either prospectively or retrospectively. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350).” ASU 2017-04 aims to simplify the subsequent measurement of goodwill. Under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets and still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019. Although management continues to evaluate the potential impact of ASU 2017-04 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

10


 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 2. Business Combination

Greater Hudson Bank

On July 11, 2018, the Company entered into an Agreement and Plan of Merger with Greater Hudson Bank (“GHB”), under which GHB would merge with and into ConnectOne Bank, with ConnectOne Bank as the surviving bank. This transaction was completed effective January 2, 2019 (“Merger date”). As part of this merger, the Company acquired seven branch offices located in Rockland, Orange and Westchester Counties, New York. Pursuant to the merger agreement, holders of GHB common stock received 0.245 shares of common stock of ConnectOne with cash paid in lieu of fractional shares.

The acquisition of GHB was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date. The application of the acquisition method of accounting resulted in the recognition of goodwill of $10.3 million and a core deposit intangible of $5.1 million. The assets acquired and liabilities assumed and consideration paid in the acquisition of GHB were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates, accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period, which runs through January 2, 2020, in the measurement period in which the adjustment amounts are determined. The acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition.

In connection with the acquisition, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table:

    Estimated Fair
    Value at
    January 2, 2019
    (in thousands)
Consideration paid:      
Common stock issued in acquisition      $     56,025
       
Assets acquired:      
Cash and cash equivalents     13,741
Securities available-for-sale     121,672
Loans, net     362,914
Premises and equipment, net     1,624
Accrued interest receivable     2,434
Core deposit intangibles     5,131
Other assets     26,650
Total assets acquired     534,166
       
Liabilities assumed:      
Deposits     416,110
Borrowings     64,186
Other liabilities     8,179
Total liabilities assumed     488,475
       
Net assets acquired     45,691
       
Goodwill recorded in acquisition   $ 10,334

The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired by ConnectOne and reflects the economies of scale, increased market share and lending capabilities, greater access to best-in-class banking technology, and related synergies that are expected to result from the acquisition.

Loans acquired in the GHB acquisition were recorded at fair value, and there was no carryover related allowance for loan losses. The fair values of loans acquired from GHB were estimated based on the value of the expected cash flows, which were projected based on the contractual terms of the loans, including both maturity and contractual amortization. The monthly principal and interest cash flows were adjusted for expected losses and prepayments, where appropriate. Projected cash flows were then discounted to present value using a discount rate developed based on the relative risk of the cash flows, considering the loan type, liquidity risk, the maturity of the loans, servicing costs and a required return on capital. As of June 30, 2019 there were no changes to the provisional fair value adjustments recorded on January 2, 2019.

11


 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 2. Business Combination – (continued)

The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the GHB acquisition as of the Merger date:

    Estimated Fair
    Value at
    January 2, 2019
    (in thousands)
Contractually required principal and interest acquisition      $     19,874  
Contractual cash flows not expected to be collected (non-accretable discount)               (12,167 )
Expected cash flows at acquisition     7,707  
Interest component of expected cash flows (accretable discount)     (1,286 )
Fair value of acquired loans   $ 6,421  

Goodwill related to GHB is not amortized for book purposes; however, it is reviewed at least annually for impairment and is not deductible for tax purposes.

The fair value of retail demand and interest-bearing deposit accounts was assumed to approximate the carrying value as those accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities. The fair value of borrowed funds was estimated by discounting the future cash flows using market rates for similar borrowings.

Direct acquisition and integration costs of the GHB acquisition were expensed as incurred. These items were recorded as merger-related expenses on the consolidated statement of income. During the three months and six months ended June 30, 2019, merger expenses related to the GHB acquisition were $-0- and $7.6 million, respectively.

BoeFly, LLC

On May 31, 2019, ConnectOne Bank completed the acquisition of New York/Boston-based BoeFly, LLC, which operates an online business lending marketplace connecting small- to medium-sized businesses with lenders and professional loan brokers across the United States. The business will operate as BoeFly, Inc., a wholly owned subsidiary of ConnectOne Bank, and is expected to generate fee income and small business lending opportunities for the Bank. The consideration exchanged was a combination of cash, restricted stock and a potential cash earn-out based on predefined business origination targets. The Company recorded $6.3 million as goodwill on its consolidated statement of condition as of the acquisition date. The acquisition of BoeFly, LLC was not material to the results of operations or financial condition of the Company.

Direct acquisition and integration costs of the BoeFly, LLC acquisition were expensed as incurred. These items were recorded as merger-related expenses on the consolidated statement of income. Merger expenses related to the BoeFly, LLC acquisition were $0.3 million for both the three and six months ended June 30, 2019.

Note 3. Earnings per Common Share

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

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

Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except for per share data)
2019 2018 2019 2018
Net income      $     19,281      $     17,527      $     30,916      $     21,778
Earnings allocated to participating securities   (58 )   (37 )   (140 )   (54 )
Income attributable to common stock   $ 19,223 $ 17,490 $ 30,776 $ 21,724
                   
Weighted average common shares outstanding, including participating securities   35,365 32,134 35,322 32,106
Weighted average participating securities   (49 )   (20 )   (26 )   (38 )
Weighted average common shares outstanding   35,316 32,114 35,296 32,068
Incremental shares from assumed conversions of options, performance units and non-participating restricted shares   79 207 74 208
Weighted average common and equivalent shares outstanding   35,395 32,321 35,370 32,276
           
Earnings per common share:  
Basic   $ 0.54 $ 0.54 $ 0.87 $ 0.68
Diluted   0.54 0.54 0.87 0.67

There were no antidilutive share equivalents as of June 30, 2019 and June 30, 2018.

12


 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 4. Securities Available-for-Sale

Securities available-for-sale are reported at fair value with unrealized gains or losses included in stockholders’ equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value as of June 30, 2019 and December 31, 2018. 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 7 of the Notes to Consolidated Financial Statements for a further discussion.

The following table summarizes the amortized cost and fair value of securities available-for-sale at June 30, 2019 and December 31, 2018 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss).

Gross Gross
Amortized Unrealized Unrealized Fair
      Cost       Gains       Losses       Value
June 30, 2019 (dollars in thousands)
Securities available-for-sale
Federal agency obligations   $      24,877   $      599   $      (15 )   $      25,461
Residential mortgage pass-through securities 230,064 881 (1,403 )     229,542
Commercial mortgage pass-through securities 5,748 78 - 5,826
Obligations of U.S. states and political subdivisions 142,521 2,417 (819 )     144,119
Corporate bonds and notes 28,128 267 (278 )     28,117
Asset-backed securities 7,802 2 (58 )     7,746
Certificates of deposit 148 2 - 150
Other securities 950 - - 950
Total securities available-for-sale   $ 440,238   $ 4,246   $ (2,573 )   $ 441,911
                           
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2018 (dollars in thousands)
Securities available-for-sale
Federal agency obligations   $ 45,509   $ 51   $ (605 )   $ 44,955
Residential mortgage pass-through securities 189,721 85 (4,602 )     185,204
Commercial mortgage pass-through securities 3,919 - (45 )     3,874
Obligations of U.S. states and political subdivisions 141,496 1,091 (3,402 )     139,185
Corporate bonds and notes 26,308 45 (540 )     25,813
Asset-backed securities 9,685 22 (16 )     9,691
Certificates of deposit 319 3 - 322
Other securities 2,990 - - 2,990
Total securities available-for-sale   $ 419,947   $ 1,297   $ (9,210 )   $ 412,034

Investment securities having a carrying value of approximately $125.4 million and $151.5 million at June 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits, borrowings, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law. As of June 30, 2019 and December 31, 2018, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

13


 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 4. Securities Available-for-Sale – (continued)

The following table presents information for investments in securities available-for-sale at June 30, 2019, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer. Securities not due at a single maturity date are shown separately.

    June 30, 2019
    Amortized   Fair