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EX-32.2 - ConnectOne Bancorp, Inc.c81309_ex32-2.htm
EX-31.2 - ConnectOne Bancorp, Inc.c81309_ex31-2.htm

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

(Mark One)

 

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

 

For the Quarterly Period Ended March 31, 2015

 

OR

 

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

 

For the transition period from                to               

 

Commission File Number:  000-11486

 

 

CONNECTONE BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter) 

 

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

301 Sylvan Avenue

Englewood Cliffs, New Jersey 07632

(Address of Principal Executive Offices) (Zip Code)

 

201-816-8900

(Registrant’s Telephone Number, Including Area Code)

 

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 x No o

 

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 x No o

 

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  o Accelerated filer  x Non-accelerated filer  o
(Do not check if smaller
reporting company)
Smaller reporting company  o

 

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

 

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: 29,896,501 shares
(Title of Class) (Outstanding as of May 8, 2015)
 

Table of Contents

 

    Page
     
PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
  Consolidated Statements of Condition at March 31, 2015 (unaudited) and December 31, 2014 3
  Consolidated Statements of Income for the three months ended March 31, 2015 and 2014 (unaudited) 4
  Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014 (unaudited) 5
  Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2015 (unaudited) and for the year ended December 31, 2014 6
  Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited) 7
  Notes to Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 39
     
Item 3. Qualitative and Quantitative Disclosures about Market Risks 51
     
Item 4. Controls and Procedures 52
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 53
     
Item 1a. Risk Factors 53
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 53
     
Item 3. Defaults Upon Senior Securities 53
     
Item 4. Mine Safety Disclosures 53
     
Item 5. Other Information 53
     
Item 6. Exhibits 54
   
SIGNATURES  

 

2

 

Item 1. Financial Statements

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

 

(in thousands, except for share data)  March 31,
2015
   December 31,
2014
 
    (unaudited)      
ASSETS          
Cash and due from banks  $30,127   $31,813 
Interest-bearing deposits with banks   58,416    95,034 
Cash and cash equivalents   88,543    126,847 
           
Investment securities:          
Available-for-sale   276,121    289,532 
Held-to-maturity (fair value of $240,263 and $231,445)   231,720    224,682 
Loans held for sale   1,392     
           
Loans receivable   2,640,739    2,538,641 
Less: Allowance for loan and lease losses   15,933    14,160 
Net loans receivable   2,624,806    2,524,481 
           
Investment in restricted stock, at cost   24,874    23,535 
Bank premises and equipment, net   20,358    20,653 
Accrued interest receivable   11,513    11,700 
Bank-owned life insurance   52,904    52,518 
Other real estate owned   870    1,108 
Goodwill   145,909    145,909 
Core deposit intangibles   4,584    4,825 
Other assets   22,297    22,782 
Total assets  $3,505,891   $3,448,572 
LIABILITIES          
Deposits:          
Noninterest-bearing  $479,652   $492,515 
Interest-bearing   2,016,359    1,983,092 
Total deposits   2,496,011    2,475,607 
Borrowings   525,148    495,553 
Subordinated debentures   5,155    5,155 
Other liabilities   23,383    26,038 
Total liabilities   3,049,697    3,002,353 
           
COMMITMENTS AND CONTINGENCIES          
           
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 March 31, 2015 and December 31, 2014; total liquidation value of $11,250 at March 31, 2015 and December 31, 2014   11,250    11,250 
Common stock, no par value, authorized 50,000,000 shares; issued 31,928,524 shares at March 31, 2015 and 31,758,558 at December 31, 2014; outstanding 29,864,602 shares at March 31, 2015 and 29,694,636 at December 31, 2014   374,287    374,287 
Additional paid-in capital   7,084    6,015 
Retained earnings   80,526    72,398 
Treasury stock, at cost (2,063,922 common shares at March 31, 2015 and December 31, 2014)   (16,717)   (16,717)
Accumulated other comprehensive loss   (236)   (1,014)
Total stockholders’ equity   456,194    446,219 
Total liabilities and stockholders’ equity  $3,505,891   $3,448,572 

 

See accompanying notes to unaudited consolidated financial statements.

 

3

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

   Three Months Ended
March 31,
 
(dollars in thousands, except for per share data)  2015   2014 
           
Interest income          
Interest and fees on loans  $29,314   $10,111 
Interest and dividends on investment securities:          
Taxable   2,910    3,057 
Tax-exempt   883    1,056 
Dividends   220    113 
Interest on federal funds sold and other short-term investments   43     
Total interest income   33,370    14,337 
Interest expense          
Deposits   3,025    1,316 
Borrowings   2,053    1,411 
Total interest expense   5,078    2,727 
Net interest income   28,292    11,610 
Provision for loan and lease losses   1,825    625 
Net interest income after provision for loan and lease losses   26,467    10,985 
Noninterest income          
Annuities and insurance commissions   86    100 
Bank-owned life insurance   386    255 
Net gains on sale of loans held for sale   114    36 
Deposit, loan and other income   463    715 
Net gains on sale of investment securities   506    1,415 
Total other income   1,555    2,521 
Noninterest expense          
Salaries and employee benefits   6,628    3,332 
Occupancy and equipment   2,082    1,080 
FDIC insurance   560    300 
Professional and consulting   494    255 
Marketing and advertising   194    40 
Data processing   900    345 
Merger expenses       1,060 
Amortization of core deposit intangible   241    6 
Other expenses   1,532    1,078 
Total other expense   12,631    7,496 
Income before income tax expense   15,391    6,010 
Income tax expense   5,012    1,612 
Net Income   10,379    4,398 
Less: Preferred stock dividends   28    28 
Net income available to common stockholders  $10,351   $4,370 
Earnings per common share          
Basic  $0.35   $0.27 
Diluted   0.34    0.27 
Weighted average common shares outstanding          
Basic   29,757,316    16,350,183 
Diluted   30,149,469    16,405,540 
Dividends per common share  $0.075   $0.075 

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

   Three Months Ended
March 31,
 
(in thousands)  2015   2014 
Net income  $10,379   $4,398 
Other comprehensive income (loss), net of tax:          
Unrealized gains and losses on securities available-for-sale:          
Unrealized holding gains on available-for-sale securities   1,509    3,516 
Tax effect   (595)   (1,190)
Net of tax amount   914    2,326 
Reclassification adjustment for realized gains arising during period   (506)   (1,415)
Tax effect   207    380 
Net of tax amount   (299)   (1,035)
Amortization of unrealized losses holding gains on held-to-maturity securities transferred from available-for-sale securities   65    45 
Tax effect   (25)   (20)
Net of tax amount   40    25 
Unrealized losses on cash flow hedge   (534)    
Tax effect   218     
Net of tax amount   (316)    
Unrealized pension plan gains   742    1,281 
Tax effect   (303)   (523)
Net of tax amount   439    758 
Total other comprehensive income   778    2,074 
Total comprehensive income  $11,157   $6,472 

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

(dollars in thousands, except for per share data)  Preferred
Stock
   Common
Stock
   Additional
Paid In
Capital
   Retained
Earnings
   Treasury
Stock
   Accumulated
Other
Comprehensive
Income (Loss)
   Total
Stockholders’
Equity
 
Balance as of January 1, 2014  $11,250   $110,056   $4,986   $61,914   $(17,078)  $(2,544)  $168,584 
Net income               18,565            18,565 
Other comprehensive income, net of tax                       1,530    1,530 
Dividend on series B preferred stock               (112)           (112)
Issuance cost of common stock               (7)           (7)
Cash dividends declared on common stock ($0.300 per share)               (7,962)           (7,962)
Exercise of 100,911 stock options (including tax benefits of $282)           806        361        1,167 
Stock issued (13,221,152 shares) and options acquired (783,732 shares) in acquisition of Legacy ConnectOne       264,231                    264,231 
Stock-based compensation expense             223                   223 
Balance as of December 31, 2014   11,250    374,287    6,015    72,398    (16,717)   (1,014)   446,219 
Net income               10,379            10,379 
Other comprehensive income, net of tax                       778    778 
Dividend on series B preferred stock               (28)           (28)
Cash dividends declared on common stock ($0.075 per share)               (2,223)           (2,223)
Exercise of 110,500 stock options (including tax benefits of $165)           590                590 
Granted 59,466 shares of restricted stock                            
Stock-based compensation expense           479                479 
Balance as of March 31, 2015  $11,250   $374,287   $7,084   $80,526   $(16,717)  $(236)  $456,194 

 

See accompanying notes to unaudited consolidated financial statements.

 

6

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Three Months Ended
March 31,
 
(in thousands)   2015   2014 
Cash flows from operating activities          
Net income  $10,379   $4,398 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   1,040    204 
Provision for loan and lease losses   1,825    625 
Stock-based compensation (excluding tax benefit)   479    16 
Gains on sales of investment securities, net   (506)   (1,415)
Gains on sale of loans held for sale   (114)   (36)
Loans originated for resale   (8,468)   (2,168)
Proceeds from sale of loans held for sale   7,190    2,204 
Net loss on sale of other real estate owned   112     
Increase in cash surrender value of bank-owned life insurance   (386)   (255)
Amortization of premiums and accretion of discounts on investments securities, net   518    536 
Decrease in accrued interest receivable   187    461 
(Increase) decrease in other assets   (49)   1,588 
Decrease in other liabilities   (2,388)   (31)
Net cash provided by operating activities   9,819    6,127 
           
Cash flows from investing activities          
Investment securities available-for-sale:          
Purchases   (1,543)   (10,397)
Sales   9,537    50,611 
Maturities, calls and principal repayments   6,673    6,999 
Investment securities held-to-maturity:          
Purchases   (9,986)    
Maturities and principal repayments   2,749    890 
Net purchases of restricted investment in bank stocks   (1,339)    
Net increase in loans   (102,150)   (26,911)
Purchases of premises and equipment   (504)   (350)
Proceeds from sale of other real estate owned   126     
Net cash (used in) provided by investing activities   (96,437)   20,842 
           
Cash flows from financing activities          
Net increase (decrease) in deposits   20,404    (2,120)
Net increase in borrowings   29,595     
Cash dividends paid on preferred stock   (28)   (28)
Cash dividends paid on common stock   (2,247)   (1,228)
Issuance cost of common stock       (3)
Proceeds from exercise of stock options   590     
Net cash provided by (used in) financing activities   48,314    (3,379)
Net change in cash and cash equivalents   (38,304)   23,590 
Cash and cash equivalents at beginning of period   126,847    82,692 
           
Cash and cash equivalents at end of period  $88,543   $106,282 
Supplemental disclosures of cash flow information          
Cash payments for:          
Interest paid on deposits and borrowings  $4,724   $2,723 
    Income taxes   5,500    500 

 

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 “Company”). 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 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 client. However, the clients’ 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 months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015, or for any other interim period. The Company’s 2014 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 and lease 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”). Some items in the prior year financial statements were reclassified to conform to current presentation. Reclassifications had no effect on prior year net income for stockholders’ equity.

 

Note 2. Business Combinations

 

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 Company (“Legacy ConnectOne”). Effective July 1, 2014 (the “Effective Time”), the Parent Corporation completed the merger contemplated by the Merger Agreement (the “Merger”) with Legacy ConnectOne. At closing, Legacy ConnectOne merged with and into the Parent Corporation, with the Parent Corporation as the surviving Company. 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 Corporation, 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 now conducts business only in the name of and under the brand of ConnectOne.

 

8

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 2. Business Combinations – (continued)

 

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of July 1, 2014 based on management’s best estimate using the information available as of the Merger date. The application of the acquisition method of accounting resulted in the recognition of goodwill of $129,105,000 and a core deposit intangible of $5,308,000. As of July 1, 2014, Legacy ConnectOne had assets with a carrying value of approximately $1.5 billion, including loans with a carrying value of approximately $1.2 billion, and deposits with a carrying value of approximately $1.1 billion. The table below summarizes the amounts recognized as of the Merger date for each major class of assets acquired and liabilities assumed, the estimated fair value adjustments and the amounts recorded in the Company’s financial statements at fair value at the Merger date (in thousands):

 

Consideration paid through Parent Corporation common stock issued to Legacy ConnectOne shareholders and fair value of stock options acceleration was: $ 264,231

 

   Legacy
ConnectOne
carrying value
   Fair value
adjustments
     As recorded
at
acquisition
 
Cash and cash equivalents  $70,318   $      $70,318 
Investment securities   28,436    16  (a)    28,452 
Restricted stock   13,646           13,646 
Loans held for sale   190           190 
Loans   1,304,600    (5,316 )(b)    1,299,284 
Bank owned life insurance   15,481           15,481 
Premises and equipment   7,380    (905 )(c)    6,475 
Accrued interest receivable   4,470           4,470 
Core deposit and other intangibles       5,308  (d)    5,308 
Other real estate owned   2,455           2,455 
Other assets   10,636    3,650  (e)    14,286 
Deposits   (1,049,666)   (1,676 )(f)    (1,051,342)
FHLB borrowings   (262,046)   (1,324 )(g)    (263,370)
Other liabilities   (10,527)          (10,527)
Total identifiable net assets  $135,373   $(247 )   $135,126 
                   
Goodwill recorded in the Merger  $129,105 

 

The following provides an explanation of certain fair value adjustments presented in the above table:

 

a)Represents the fair value adjustment on investment securities held to maturity.
b)Represents the elimination of Legacy ConnectOne’s allowance for loan and lease losses, deferred fees, deferred costs and an adjustment of the amortized cost of loans to estimated fair value, which includes an interest rate mark and credit mark.
c)Represent an adjustment to reflect the fair value of above-market rent on leased premises. The above-market rent adjustment will be amortized on a straight-line basis over the remaining term of the respective leases.
d)Represents intangible assets recorded to reflect the fair value of core deposits. The core deposit asset was recorded as an identifiable intangible asset and will be amortized on an accelerated basis over the estimated average life of the deposit base.
e)Consist primarily of adjustments in net deferred tax assets resulting from the fair value adjustments related to acquired assets, liabilities assumed and identifiable intangibles recorded.
f)Represents fair value adjustment on time deposits as the weighted average interest rates of time deposits assumed exceeded the costs of similar funding available in the market at the time of the Merger, as well as the elimination of fees paid on brokered time deposits.
g)Represents the fair value adjustment on FHLB borrowings as the weighted average interest rate of FHLB borrowings assumed exceeded the cost of similar funding available in the market at the time of the Merger.

 

The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired by the Company 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.

 

9

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 2. Business Combinations – (continued)

 

Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired from Legacy ConnectOne were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimated future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. For collateral dependent loans with deteriorated credit quality, fair value was estimated by analyzing the value of the underlying collateral, assuming the fair values of the loan were derived from the eventual sale of the collateral. These values were discounted using marked derived rates of returns, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of Legacy ConnectOne allowance for loan and lease losses associated with the loans that were acquired, as the loans were initially recorded at fair value on the date of the Merger.

 

The acquired loan portfolio subject to purchased credit impairment accounting guidance (ASC 310-30) as of July 1, 2014 was comprised of collateral dependent loans with deteriorated credit quality as follows (in thousands):

 

   ASC 310-30
Loans
 
Contractual principal and accrued interest at acquisition  $23,284 
Principal not expected to be collected (non-accretable discount)   (6,942)
Expected cash flows at acquisition   16,342 
Interest component of expected cash flows (accretable discount)   (5,013)
Fair value of acquired loans  $11,329 

 

The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years utilizing the accelerated method. Other intangibles consist of below market rents, which are amortized over the remaining life of each lease using the straight-line method.

 

Goodwill 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 these 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 Merger were expensed as incurred and totaled $10.6 million. These items were recorded as merger-related expenses on the statement of operations.

 

Note 3. 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 Company’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.

 

Earnings per common share have been computed as follows:

 

   Three Months Ended
March 31,
 
(in thousands, except for per share data)  2015   2014 
Net income  $10,379   $4,398 
Preferred stock dividends   (28)   (28)
Net income available to common stockholders  $10,351   $4,370 
Basic weighted average common shares outstanding   29,757    16,350 
Effect of dilutive options   392    56 
Diluted weighted average common shares outstanding   30,149    16,406 
Earnings per common share:          
Basic  $0.35   $0.27 
Diluted   0.34    0.27 

 

10

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 4. Investment Securities

 

The Company’s investment securities are classified as available-for-sale and held-to-maturity at March 31, 2015 and December 31, 2014. 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 as of March 31, 2015. 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.

 

The following tables present information related to the Company’s investment securities at March 31, 2015 and December 31, 2014.

 

   March 31, 2015 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
   March 31, 2015 
   (in thousands) 
Investment securities available-for-sale:                    
Federal agency obligations  $30,774   $463   $(4)  $31,233 
Residential mortgage pass-through securities   57,300    1,737    (9)   59,028 
Commercial mortgage pass-through securities   3,027    55        3,082 
Obligations of U.S. states and political subdivisions   8,197    238        8,435 
Trust preferred securities   16,086    648    (278)   16,456 
Corporate bonds and notes   110,671    6,190    (22)   116,839 
Asset-backed securities   26,045    127    (80)   26,092 
Certificates of deposit   2,097    31    (5)   2,123 
Equity securities   376        (56)   320 
Other securities   12,474    89    (50)   12,513 
Total  $267,047   $9,578   $(504)  $276,121 
Investment securities held-to-maturity:                    
U.S. Treasury and agency securities  $28,315   $1,507   $   $29,822 
Federal agency obligations   35,393    586    (30)   35,949 
Residential mortgage-backed securities   5,542    26    (13)   5,555 
Commercial mortgage-backed securities   4,124    86        4,210 
Obligations of U.S. states and political subdivisions   119,384    4,966    (46)   124,304 
Corporate bonds and notes   38,962    1,472    (11)   40,423 
Total  $231,720   $8,643   $(100)  $240,263 
                     
Total investment securities   $498,767   $18,221   $(604)  $516,384 

 

11

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 4. Investment Securities – (continued)

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
   December 31, 2014 
   (in thousands) 
Investment securities available-for-sale:                    
Federal agency obligations  $32,650   $217   $(50)  $32,817 
Residential mortgage pass-through securities   58,836    1,531    (11)   60,356 
Commercial mortgage pass-through securities   3,042    4        3,046 
Obligations of U.S. states and political subdivisions   8,201    205        8,406 
Trust preferred securities   16,086    489    (269)   16,306 
Corporate bonds and notes   119,838    5,950    (11)   125,777 
Asset-backed securities   27,393    140    (31)   27,502 
Certificates of deposit   2,098    27    (2)   2,123 
Equity securities   376        (69)   307 
Other securities   12,941    33    (82)   12,892 
Total  $281,461   $8,596   $(525)  $289,532 
Investment securities held-to-maturity:                    
U.S. Treasury and agency securities  $28,264   $920   $   $29,184 
Federal agency obligations   27,103    322    (28)   27,397 
Residential mortgage-backed securities   5,955    28        5,983 
Commercial mortgage-backed securities   4,266    50        4,316 
Obligations of U.S. states and political subdivisions   120,144    4,512    (60)   124,596 
Corporate bonds and notes   38,950    1,026    (7)   39,969 
Total  $224,682   $6,858   $(95)  $231,445 
                     
Total investment securities   $506,143   $15,454   $(620)  $520,977 

 

The following table presents information for investment securities available-for-sale at March 31, 2015, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

 

   March 31, 2015 
   Amortized
Cost
   Fair
Value
 
   (in thousands) 
Investment securities available-for-sale:          
Due in one year or less  $23,891   $24,248 
Due after one year through five years   32,274    33,611 
Due after five years through ten years   83,910    88,819 
Due after ten years   53,795    54,500 
Residential mortgage pass-through securities   57,300    59,028 
Commercial mortgage pass-through securities   3,027    3,082 
Equity securities   376    320 
Other securities   12,474    12,513 
Total  $267,047   $276,121 
Investment securities held-to-maturity:          
Due in one year or less  $4,991   $5,020 
Due after one year through five years   9,207    9,401 
Due after five years through ten years   71,916    75,354 
Due after ten years   135,940    140,723 
Residential mortgage-backed securities   5,542    5,555 
Commercial mortgage-backed securities   4,124    4,210 
Total  $231,720   $240,263 
Total investment securities  $498,767   $516,384 

 

12

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 4. Investment Securities – (continued)

 

Gross gains and losses from the sales, calls, and maturities of investment securities for the three months ended March 31, 2015 and 2014 were as follows:

 

   Three Months Ended
March 31,
 
(in thousands)  2015   2014 
Proceeds  $9,537   $50,611 
Gross gains on sales of investment securities   506    1,432 
Gross losses on sales of investment securities       (17)
Net gains on sales of investment securities   506    1,415 
Less: tax provision on net gains   207    380 
Total  $299   $1,035 

 

The Company performs regular analysis on the available-for-sale securities portfolio 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 other-than-temporary impairment (“OTTI”) charges, through earnings, if they have the intent to sell, or more likely than not be required to sell, an impaired debt security before recovery of its amortized cost basis. If the Company 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, less any current period credit loss, 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 Company does not intend to sell the security and it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, and as such, it determines that a decline in fair value is other than temporary, 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 Company reviews all securities for potential recognition of other-than-temporary impairment. The Company maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review. This could include credit rating downgrades.

 

The Company’s assessment of whether an impairment in the portfolio is other than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed deteriorating financial condition or sustained significant losses.

 

The following table presents detailed information for each single issuer trust preferred security held by the Company at March 31, 2015, of which all but one has at least one rating below investment grade (in thousands):

 

Issuer  Amortized
Cost
   Fair
Value
   Gross
Unrealized
Gain (Loss)
   Lowest
Credit
Rating
Assigned
Countrywide Capital IV  $1,771   $1,819   $48   BB
Countrywide Capital V   2,747    2,848    101   BB
Countrywide Capital V   250    259    9   BB
Nationsbank Cap Trust III   1,575    1,297    (278)  BB
Morgan Stanley Cap Trust IV   2,500    2,567    67   BB
Morgan Stanley Cap Trust IV   1,743    1,795    52   BB
Goldman Sachs   1,000    1,252    252   BB
Stifel Financial   4,500    4,619    119   BBB-
Total  $16,086   $16,456   $370    

 

13

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 4. Investment Securities – (continued)

 

Temporarily Impaired Investments

 

For all other securities, the Company does not believe that the unrealized losses, which were comprised of 39 and 54 investment securities as of March 31, 2015 and December 31, 2014, respectively, represent an other-than-temporary impairment. The gross unrealized losses associated with U.S. Treasury and agency securities, federal agency obligations, mortgage-backed securities, corporate bonds, tax-exempt securities, asset-backed securities, trust preferred 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 Company’s investment in any one issuer or industry. The Company has established policies to reduce exposure through diversification of concentration of the investment portfolio including limits on concentrations to any one issuer. The Company 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 Company evaluates all securities with unrealized losses quarterly to determine whether the loss is other than temporary. Unrealized losses in the corporate debt securities category consist primarily of senior unsecured corporate debt securities issued by large financial institutions, insurance companies and other corporate issuers. Single issuer corporate trust preferred securities are also included, and in the case of one holding the market valuation loss is largely based upon the floating rate coupon and corresponding market valuation. Neither that trust preferred issuer, nor any other 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 March 31, 2015.

 

In determining that the securities giving rise to the previously mentioned unrealized losses were not other than temporary, the Company evaluated the factors cited above, which the Company considers when assessing whether a security is other-than-temporarily impaired. In making these evaluations the Company must exercise considerable judgment. Accordingly, there can be no assurance that the actual results will not differ from the Company’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 Company’s financial position and results of operations. In addition, the value of, and the realization of any loss on, an investment security is subject to numerous risks as cited above.

 

14

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 4. Investment Securities – (continued)

 

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 March 31, 2015 and December 31, 2014:

 

   March 31, 2015 
   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:                              
                               
Federal agency obligation  $1,656   $(4)  $1,357   $(1)  $299   $(3)
Residential mortgage pass-through securities   1,026    (9)   1,026    (9)        
Trust preferred securities   1,297    (278)           1,297    (278)
Corporate bonds and notes   3,935    (22)   3,935    (22)        
Asset-backed securities   9,698    (80)   9,698    (80)        
Certificates of deposit   217    (5)   217    (5)        
Equity securities   320    (56)           320    (56)
Other securities   5,477    (50)           5,477    (50)
Total  $23,626   $(504)  $16,233   $(117)  $7,393   $(387)
                               
Investment securities held-to-maturity:                               
                               
Federal agency obligation  $6,422   $(30)  $6,422   $(30)  $   $ 
Residential mortgage pass-through securities   3,660    (13)   3,660    (13)        
Obligations of U.S. states and political subdivisions   7,336    (46)   7,336    (46)        
Corporate bonds and notes   3,720    (11)   3,720    (11)        
Total  $21,138   $(100)  $21,138   $(100)  $   $ 
                               
Total temporarily impaired securities   $44,764   $(604)  $37,371   $(217)  $7,393   $(387)

 

15

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 4. Investment Securities – (continued)

 

   December 31, 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:                              
Federal agency obligation  $6,755   $(50)  $2,770   $(9)  $3,985   $(41)
Residential mortgage pass-through securities   5,694    (11)   5,694    (11)        
Trust preferred securities   1,307    (269)           1,307    (269)
Corporate bonds and notes   1,961    (11)   1,961    (11)        
Asset-backed securities   9,773    (31)   9,773    (31)        
Certificates of deposit   369    (2)   369    (2)        
Equity securities   307    (69)           307    (69)
Other securities   5,417    (82)   1,978    (21)   3,439    (61)
Total  $31,583   $(525)  $22,545   $(85)  $9,038   $(440)
                               
Investment securities held-to-maturity:                              
Federal agency obligation  $3,228   $(28)  $3,228   $(28)  $   $ 
Obligations of U.S. states and political subdivisions   8,341    (60)   1,401    (3)   6,940    (57)
Corporate bonds and notes   993    (7)   993    (7)        
Total  $12,562   $(95)  $5,622   $(38)  $6,940   $(57)
Total temporarily impaired securities  $44,145   $(620)  $28,167   $(123)  $15,978   $(497)

 

Investment securities having a carrying value of approximately $215.9 million and $224.7 million at March 31, 2015 and December 31, 2014, respectively, were pledged to secure public deposits, borrowings, Federal Reserve Discount Window, and Federal Home Loan Bank advances and for other purposes required or permitted by law.

 

As of March 31, 2015 and December 31, 2014, 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.

 

Note 5 - Derivatives

 

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

 

Interest Rate Swaps Designated as Cash Flow Hedges: Interest rate swaps with a notional amount totaling $25.0 million and $25.0 million were entered into on October 15, 2014 and December 30, 2014, respectively, and were designated as cash flow hedges of certain Federal Home Loan Bank advances. The swaps were determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.

 

16

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 5 – Derivatives – (continued)

 

Summary information about the interest rate swaps designated as cash flow hedges as of period-end is as follows:

 

(dollars in thousands)  March 31,
2015
   March 31,
2014
   December 31,
2014
 
Notional amount  $50,000   $   $50,000 
Weighted average pay rates   1.58%   %   1.58%
Weighted average receive rates   0.25%   %   0.24%
Weighted average maturity   4.2 years        4.4 years 
Fair value  $(486)  $   $48 

 

Interest expense recorded on these swap transactions totaled approximately $166,000 for the three months ended March 31, 2015 and there are no related expenses for the three months ended March 31, 2014.

 

Cash Flow Hedge

 

The following table presents the net gains (losses), recorded in other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the three months ended March 31, 2015:

 

(in thousands)  Amount of gain
(loss) recognized
in OCI (Effective
Portion)
   Amount of gain
(loss) reclassified
from OCI to
interest income
   Amount of gain
(loss)

recognized in other
Non-interest income (Ineffective Portion)
 
Interest rate contracts  $(534)  $   $ 

 

There were no net gains (losses) recorded in accumulated other comprehensive income or in the Consolidated Statement of Income relating to cash flow derivative instruments for the three months ended March 31, 2014.

 

17

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Loans and the Allowance for Loan and Lease Losses

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan and lease losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

 

Loan segments 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 Company has five segments of loans and leases: commercial (including lease financing), commercial real estate, commercial construction, residential real estate (including home equity) and consumer.  

 

Interest income on commercial, commercial real estate, commercial construction and residential loans are discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to nonaccrual status in accordance with the Company’s policy, typically after 90 days of non-payment.

 

All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

The policy of the Company is to generally grant commercial, residential and consumer loans to New Jersey 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 Company. The Company is therefore subject to risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan and lease losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for a large majority of the Company’s loans.

 

Allowance for Loan and Lease Losses

 

The allowance for loan and lease losses is a valuation allowance for probable incurred credit losses. Losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan and lease loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

 

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired. As part of the evaluation of impaired loans, the Company individually reviews for impairment all non-homogeneous loans internally classified as substandard or below. Generally, smaller impaired non-homogeneous loans and impaired homogeneous loans are collectively evaluated for impairment.

 

The Bank has defined its population of impaired loans to include all loans on nonaccrual status; all troubled debt restructuring loans; and all loans (above an established dollar threshold of $250,000) internally classified as “Special Mention” or below that require a specific reserve.

 

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

18

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

 

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan and lease losses.

 

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience, the primary factor, is determined by loan class and is based on the actual loss history experienced by the Bank over an actual three year rolling calculation. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. This actual loss experience is supplemented with the exogenous factor adjustments based on the risks present for each loan category. These exogenous factors (nine total) include consideration of the following: concentrations of credit; delinquency & nonaccrual trends; economic & business conditions including evaluation of the national and regional economies and industries with significant loan concentrations; external factors including legal, regulatory or competitive pressures that may impact the loan portfolio; changes in the experience, ability, or size of the lending staff, management, or board of directors that may impact the loan portfolio; changes in underwriting standards, collection procedures, charge-off practices, or other changes in lending policies and procedures that may impact the loan portfolio; loss and recovery trends; changes in portfolio size and mix; and trends in problem loans.

 

Purchased Credit-Impaired Loans

 

The Company purchases groups of loans in conjunction with mergers, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan and lease losses.  After acquisition, losses are recognized by an increase in the allowance for loan and lease losses.

 

Such purchased credit impaired loans are accounted for individually.  The Company estimates the amount and timing of expected cash flows for each loan and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield).  The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). 

 

Over the life of the loan, expected cash flows continue to be estimated.  If the present value of expected cash flows is less than the carrying amount, a loss is recorded.  If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

 

Composition of Loan Portfolio

 

The following table sets forth the composition of the Company’s loan portfolio, including net deferred loan fees, at March 31, 2015 and December 31, 2014:

 

   March 31,
2015
   December 31,
2014
 
   (in thousands) 
Commercial  $562,931   $499,816 
Commercial real estate   1,668,310    1,634,510 
Commercial construction   181,056    167,359 
Residential real estate   226,645    234,967 
Consumer   3,581    2,879 
Gross loans   2,642,523    2,539,531 
Net deferred loan fees   (1,784)   (890)
Total loans receivable  $2,640,739   $2,538,641 

 

At March 31, 2015 and December 31, 2014, loan balances of approximately $1.1 billion and $1.0 billion, respectively, were pledged to secure borrowings from the Federal Home Loan Bank of New York.

 

19

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

 

Purchased Credit-Impaired Loans

 

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at March 31, 2015 and December 31, 2014.

 

   March 31,
2015
   December 31,
2014
 
   (in thousands) 
Commercial  $7,146   $7,199 
Commercial real estate   1,807    1,816 
Residential real estate   819    806 
Total carrying amount  $9,772   $9,821 

 

For those purchased loans disclosed above, the Company did not increase the allowance for loan and lease losses for the three months ended March 31, 2015, nor did it increase the allowance for loan and lease losses for purchased impaired loans during the three months ended March 31, 2015.

 

The accretable yield, or income expected to be collected, on the purchased loans for the three months ended March 31, 2015 is as follows (in thousands):

 

   March 31, 
   2015 
Balance at January 1, 2015  $4,805 
New loans purchased    
Accretion of income   (54)
Reclassifications from non-accretable difference    
Disposals    
Balance at March 31, 2015  $4,751 

 

The following table presents information about the recorded investment in loan receivables on nonaccrual status by class at March 31, 2015 and December 31, 2014:

 

Loans Receivable on Nonaccrual Status

 

   March 31,
2015
   December 31,
2014
 
   (in thousands) 
Commercial  $3,347   $616 
Commercial real estate   8,009    8,197 
Residential real estate   3,229    2,796 
Total loans receivable on nonaccrual status  $14,585   $11,609 

 

Nonaccrual 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.

 

20

 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

 

The Company continuously monitors the credit quality of its loans receivable. In addition to its internal staff, the Company 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 Company’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. The following table presents information, excluding net deferred loan fees, about the Company’s loan credit quality at March 31, 2015 and December 31, 2014: 

 

   March 31, 2015 
   Pass   Special
Mention
   Substandard   Doubtful   Total 
   (in thousands) 
Commercial  $528,431   $23,975   $10,249   $276   $562,931 
Commercial real estate   1,621,181    24,509    22,620        1,668,310 
Commercial construction   179,577    1,479            181,056 
Residential real estate   223,148        3,497        226,645 
Consumer   3,484        97        3,581 
                          
Total loans  $2,555,821   $49,963   $36,463   $276   $2,642,523 

 

   December 31, 2014 
   Pass   Special
Mention
   Substandard   Doubtful   Total 
   (in thousands) 
Commercial  $481,638   $3,686   $14,203   $289   $499,816 
Commercial real estate   1,596,606    14,140    23,764        1,634,510 
Commercial construction   165,880    1,479            167,359 
Residential real estate   230,772        4,195        234,967 
Consumer   2,778        101        2,879 
                          
Total loans  $2,477,674   $19,305   $42,263   $289   $2,539,531 

 

21

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

 

The following table provides an analysis of the impaired loans, by loan segment, at March 31, 2015 and December 31, 2014:

 

   March 31, 2015 
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
 
No related allowance recorded  (in thousands) 
Commercial  $314   $334   $ 
Commercial real estate   5,774    6,468     
Residential real estate   3,505    3,869     
Consumer   105    97     
Total  $9,698   $10,768   $ 
                
With an allowance recorded            
Commercial  $382   $390   $188 
Commercial real estate   6,341    6,341    518 
Total  $6,723   $6,731   $706 
                
Total               
Commercial  $696   $724   $188 
Commercial real estate   12,115    12,809    518 
Residential real estate   3,505    3,869     
Consumer   105    97     
Total  $16,421   $17,499   $706 

 

   December 31, 2014 
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
 
No related allowance recorded  (in thousands) 
Commercial  $481   $527   $ 
Commercial real estate   5,890    6,587     
Residential real estate   3,072    3,407     
Consumer   109    101     
Total  $9,552   $10,622   $ 
                
With an allowance recorded            
Commercial  $387   $390   $111 
Commercial real estate   3,520    3,520    151 
Total  $3,907   $3,910   $262 
                
Total               
Commercial  $868   $917   $111 
Commercial real estate   9,410    10,107    151 
Residential real estate   3,072    3,407     
Consumer   109    101     
Total  $13,459   $14,532   $262 

 

22

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

 

The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by segment as of and for the three months ended March 31, 2015 and 2014 (in thousands):

 

   Three Months Ended March 31, 
   2015   2014 
   Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 
Impaired loans with no related allowance recorded                    
                     
Commercial  $290   $   $   $ 
Commercial real estate   6,052    19    1,275    57 
Residential real estate   3,613    2         
Consumer   106    1         
                     
Total  $10,061   $22   $1,275   $57 
                     
Impaired loans with an allowance recorded                    
                     
Commercial  $387   $   $   $ 
Commercial real estate   6,335        2,302    68 
Residential real estate           1,226    31 
                     
Total  $6,722   $   $3,528   $99 
                     
Total impaired loans                    
                     
Commercial  $677   $   $   $ 
Commercial real estate   12,387    19    3,477    125 
Residential real estate   3,613    2    1,226    31 
Consumer   106    1         
                     
Total  $16,783  $22   $4,703   $156 

 

Included in impaired loans at March 31, 2015, December 31, 2014 and March 31, 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.

 

23

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

 

The following table provides an analysis of the aging of the recorded investment of loans, excluding net deferred loan fees that are past due at March 31, 2015 and December 31, 2014 by segment:

 

Aging Analysis

   March 31, 2015 
   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 or Greater
Past Due and
Accruing
 
   (in thousands) 
Commercial  $5,562   $554   $3,899   $10,015   $552,916   $562,931   $638 
Commercial real estate   2,567    5,092    4,180    11,839    1,656,471    1,668,310     
Commercial construction   375            375    180,681    181,056     
Residential real estate   1,925        2,937    4,862    221,783    226,645     
Consumer   2    1        3    3,578    3,581      
Total  $10,431   $5,647   $11,016   $27,094   $2,615,429   $2,642,523   $638 

 

Aging Analysis

 

   December 31, 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 or Greater
Past Due and
Accruing
 
   (in thousands) 
Commercial  $6,060   $   $662   $6,722   $493,094   $499,816   $45 
Commercial real estate   4,937    638    5,961    11,535    1,622,975    1,634,510    609 
Commercial construction                   167,359    167,359     
Residential real estate   1,821    210    3,200    5,231    229,736    234,967    557 
Consumer   30    1        31    2,848    2,879     
Total  $12,848   $849   $9,823   $23,519   $2,516,012   $2,539,531   $1,211 

 

24

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

 

The following table details the amount of loans receivable that are evaluated individually, and collectively, for impairment (excluding net deferred loan fees), acquired, and the related portion of the allowance for loan and lease losses that are allocated to each loan portfolio segment:

 

   March 31, 2015 
   Commercial   Commercial
real estate
   Commercial
construction
   Residential
real estate
   Consumer   Unallocated   Total 
    (in thousands)  
Allowance for loan and lease losses                                   
Individually evaluated for impairment  $188   $518   $   $   $   $   $706 
Collectively evaluated for impairment   3,739    8,328    1,518    981    4    657    15,227 
Acquired with deteriorated credit quality                            
Total  $3,927   $8,846   $1,518   $981   $4   $657   $15,933 
                                    
Loans receivable                                   
Individually evaluated for impairment  $696   $12,115   $   $3,905   $105   $   $16,421 
Collectively evaluated for impairment   555,089    1,654,388    181,056    222,321    3,476        2,616,330 
Acquired with deteriorated credit quality   7,146    1,807        819            9,772 
Total  $562,931   $1,668,310   $181,056   $226,645   $3,581   $   $2,642,523 

 

The tables above include approximately $1.1 billion of acquired loans for the period ended March 31, 2015 reported as collectively evaluated for impairment.

 

The following table details the amount of loans that are evaluated individually, and collectively, for impairment (excluding net deferred loan fees), acquired, and the related portion of the allowance for loan and lease losses that are allocated to each loan portfolio segment:

 

   December 31, 2014 
   Commercial   Commercial
real estate
   Commercial
construction
   Residential
real estate
   Consumer   Unallocated   Total 
   (in thousands) 
Allowance for loan and lease losses                                   
Individually evaluated for impairment  $111   $151   $   $   $   $   $262 
Collectively evaluated for impairment   2,972    7,648    1,239    1,113    7    919    13,898 
Acquired with deteriorated credit quality                            
Total  $3,083   $7,799   $1,239   $1,113   $7   $919   $14,160 
                                    
Loans receivable                                   
Individually evaluated for impairment  $452   $6,284   $   $2,180   $101   $   $9,017 
Collectively evaluated for impairment   492,165    1,626,410    167,359    231,981    2,778        2,520,693 
Acquired with deteriorated credit quality   7,199    1,816        806            9,821 
Total  $499,816   $1,634,510   $167,359   $234,967   $2,879   $   $2,539,531 

 

The tables above include approximately $1.2 billion of acquired loans for the period ended December 31, 2014 reported as collectively evaluated for impairment.

 

25

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

 

The Company’s allowance for loan and lease 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 and lease losses methodology as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

A summary of the activity in the allowance for loan and lease losses is as follows:

 

   Three Months Ended March 31, 2015 
   Commercial   Commercial
real estate
   Commercial
construction
   Residential
real estate
   Consumer   Unallocated   Total 
   (in thousands) 
Balance at January 1, 2015  $3,083   $7,799   $1,239   $1,113   $7   $919   $14,160 
                                    
Charge-offs   (45)   (4)           (11)       (60)
                                    
Recoveries   6            1    1        8 
                                    
Provision   883    1,051    279    (133)   7    (262)   1,825 
                                    
Balance at March 31, 2015  $3,927   $8,846   $1,518   $981   $4   $657   $15,933 

 

   Three Months Ended March 31, 2014 
   Commercial   Commercial
real estate
   Commercial
construction
   Residential
real estate
   Consumer   Unallocated   Total 
   (in thousands) 
Balance at January 1, 2014  $1,698   $5,746   $362   $990   $146   $1,391   $10,333 
                                    
Charge-offs   (333)               (3)       (336)
                                    
Recoveries               10    1        11 
                                    
Provision   860    (362)   72    4    (65)   116    625 
                                    
Balance at March 31, 2014  $2,225   $5,384   $434   $1,004   $79   $1,507   $10,663 

 

26

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

 

Trouble Debt Restructurings

 

At March 31, 2015, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual 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.

 

The policy of the Company generally is to grant commercial, mortgage and consumer 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 Company. The Company is therefore subject to risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan and lease 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 a recorded investment of $2.8 million at March 31, 2015, of which $1.1 million were on nonaccrual status. The remaining loans modified were current and have complied with the terms of their restructure agreement. At December 31, 2014, loans modified in a troubled debt restructuring totaled $2.8 million, of which $1.0 million were on nonaccrual status. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreement. The Company has allocated no specific allocations with respect to loans whose loan terms had been modified in troubled debt restructurings as of March 31, 2015 and December 31, 2014. The TDRs presented as of March 31, 2015 and December 31, 2014 did not increase the allowance for loan and lease losses.

 

There were no troubled debt restructurings occurring during the three months ended March 31, 2015.

 

There were no charge-offs in connection with a loan modification at the time of modification during the three months ended March 31, 2015. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, 2015.

 

The following table presents loans by segment modified as troubled debt restructurings that occurred during the year ended March 31, 2014 (dollars in thousands):

 

       Pre-Modification   Post-Modification 
       Outstanding   Outstanding 
   Number of   Recorded   Recorded 
   Loans   Investment   Investment 
Troubled debt restructurings:               
Commercial   1   $672   $337 
                

 

The Company had a $333,000 charge-off in connection with a loan modification at the time of modification during the three months ended March 31, 2014. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, 2014.

 

27

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 7. Fair Value Measurements and Fair Value of Financial Instruments

 

ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

    Level 1:   Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
     
    Level 2:   Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
     
    Level 3:   Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).

 

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014:

 

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

 

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

 

Loans held for sale - Loans held for sale are required to be measured at the lower of cost or fair value. Under FASB ASC 820-10-05, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions.

 

Loans receivable - The fair value of performing loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risks inherent in the loan. The estimate of maturity is based on the historical experience of the Bank with prepayments for each loan classification, modified as required by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs.

 

28

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 7. Fair Value Measurements and Fair Value of Financial Instruments

 

Off-balance sheet financial instruments - The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rate and the committed rates.

 

The fair value of financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties.

 

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 March 31, 2015 and December 31, 2014 are as follows: 

 

           March 31, 2015 
           Fair Value Measurements at Reporting Date Using 
     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)                
Recurring fair value measurements:                       
Assets                      
Investment securities:                      
Available-for-sale:                    
Federal agency obligations  $31,233   $   $31,233   $ 
Residential mortgage pass-through securities   59,028        59,028     
Commercial mortgage pass-through securities   3,082        3,082     
Obligations of U.S. states and political subdivision   8,435        8,435     
Trust preferred securities   16,456        16,456     
Corporate bonds and notes   116,839        116,839     
Asset-backed securities   26,092        26,092     
Certificates of deposit   2,123        2,123     
Equity securities   320    320         
Other securities   12,513    12,513         
Total available-for-sale   276,121    12,833    263,288     
Loans held for sale   1,392        1,392     
Total assets  $277,513   $12,833   $264,680   $ 
Liabilities                    
Derivatives  $486   $   $486   $ 
Total liabilities  $486   $   $486   $ 

 

29

 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 7. Fair Value Measurements and Fair Value of Financial Instruments

 

           December 31, 2014 
           Fair Value Measurements at Reporting Date Using 
      Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)                    
Recurring fair value measurements:                     
Assets                     
Investment securities:                    
Available-for-sale:                    
Federal agency obligations  $32,817   $   $32,817   $ 
Residential mortgage pass-through securities   60,356        60,356     
Commercial mortgage pass-through securities   3,046        3,046     
Obligations of U.S. states and political subdivision   8,406