ConnectOne Bancorp, Inc.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
For the Fiscal Year Ended December 31, 2021
OR
For the Transition Period from to
Commission File Number: 000-11486
ConnectOne Bancorp, Inc.
(Exact name of registrant as specified in its charter)
301 Sylvan Avenue
Englewood Cliffs, New Jersey07632
(Address of Principal Executive Offices) (Zip Code)
201-816-8900
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, no par value CNOB NASDAQ
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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 Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant has required to submit and post such files.) Yes ☒ No ☐
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated 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 Securities Exchange Act of 1934.
Emerging Growth 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 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared its audit report. Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐ No ☒
The aggregate market value of the voting and nonvoting common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold or the average bid and ask price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter - $968.8 million.
Shares Outstanding on February 25, 2022
Common Stock, no par value: 39,605,913 shares
DOCUMENTS INCORPORATED BY REFERENCE
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CONNECTONE
BANCORP, INC.
TABLE OF CONTENTS
Page
PART I
Item 1.Business 5
Item 1A.Risk Factors 16
Item 1B.Unresolved Staff Comments 24
Item 2.Properties 25
Item 3.Legal Proceedings 25
Item 4.Mine Safety Disclosures 25
PART II
Item 6.Selected Financial Data 27
Item 7A.Quantitative and Qualitative Disclosures About Market Risk 47
PART II
Item 8.Financial Statements and Supplementary Data: 48
Report of Independent Registered Public Accounting Firm 49
Consolidated Statements of Financial Condition 52
Consolidated Statements of Income 53
Consolidated Statements of Comprehensive Income 54
Consolidated Statements of Changes in Stockholders’ Equity 55
Consolidated Statements of Cash Flows 56
Notes to Consolidated Financial Statements 57
Item 9A.Controls and Procedures 110
Item 9B.Other Information 110
PART III
Item 10.Directors, Executive Officers and Corporate Governance 111
Item 11.Executive Compensation 111
Item 14.Principal Accounting Fees and Services 111
PART IV
Item 15.Exhibits, Financial Statements Schedules 112
Information included in or incorporated by reference in this Annual Report on Form 10-K, other filings with the Securities and Exchange Commission, the Company’s press releases or other public statements, contain or may contain forward looking statements. Please refer to a discussion of the Company’s forward-looking statements and associated risks in “Item 1 - Business – Forward Looking Statements” and “Item 1A - Risk Factors” in this Annual Report on Form 10-K.
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CONNECTONE BANCORP, INC.
FORM 10-K
PART I
Item 1. Business
Forward Looking Statements
This report, in Item 1, Item 7 and elsewhere, includes
forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange
Act of 1934, as amended, that involve inherent risks and uncertainties. These forward-looking statements concern the financial condition,
results of operations, plans, objectives, future performance and business of ConnectOne Bancorp, Inc. and its subsidiaries, including
statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,”
“plans,” “trend,” “objective,” “continue,” “remain,” “pattern”
or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,”
“might,” “can,” “may” or similar expressions. There are a number of important factors that could cause
future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a
difference include, but are not limited to: (1) the impact of the COVID-19 pandemic and the government’s response to the pandemic
on our operations as well as those of our clients and on the economy generally and in our market area specifically, (2) competitive pressures
among depository institutions may increase significantly; (3) changes in the interest rate environment may reduce interest margins; (4)
prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period;
(5) general economic conditions may be less favorable than expected; (6) political developments, wars or other hostilities may disrupt
or increase volatility in securities markets or other economic conditions; (7) legislative or regulatory changes or actions may adversely
affect the businesses in which ConnectOne Bancorp, Inc. is engaged; (8) changes and trends in the securities markets may adversely impact
ConnectOne Bancorp, Inc.; (9) a delayed or incomplete resolution of regulatory issues could adversely impact our planning; (10) difficulties
in integrating any businesses that we may acquire, which may increase our expenses and delay the achievement of any benefits that we may
expect from such acquisitions; (11) the impact of reputation risk created by the developments discussed above on such matters as business
generation and retention, funding and liquidity could be significant; and (12) the outcome of any future regulatory and legal investigations
and proceedings may not be anticipated. Further information on other factors that could affect the financial results of ConnectOne Bancorp,
Inc. are included in Item 1A of this Annual Report on Form 10-K and in ConnectOne Bancorp’s other filings with the Securities and
Exchange Commission. These documents are available free of charge at the Commission’s website at http://www.sec.gov and/or
from ConnectOne Bancorp, Inc. ConnectOne Bancorp, Inc. assumes no obligation to update forward-looking statements at any time.
Historical Development of Business
ConnectOne Bancorp, Inc., (the “Company”
and with ConnectOne Bank, “we” or “us”) a one-bank holding company, was incorporated in the State of New Jersey
on November 12, 1982 as Center Bancorp, Inc. and commenced operations on May 1, 1983 upon the acquisition of all outstanding shares
of capital stock of Union Center National Bank, its then principal subsidiary.
On January 20, 2014, the Company entered into an
Agreement and Plan of Merger (the “Merger Agreement”) with ConnectOne Bancorp, Inc., a New Jersey corporation (“Legacy
ConnectOne”). Effective July 1, 2014, the Company completed the merger contemplated by the Merger Agreement (the “Merger”)
with Legacy ConnectOne merging with and into the Company, with the Company as the surviving corporation. Also, at closing, the Company
changed its name to “ConnectOne Bancorp, Inc.” and changed its NASDAQ trading symbol to “CNOB”. Immediately following
the consummation of the Merger, Union Center National Bank merged with and into ConnectOne Bank, a New Jersey-chartered commercial bank
(“ConnectOne Bank” or the “Bank”) and a wholly-owned subsidiary of Legacy ConnectOne, with ConnectOne Bank continuing
as the surviving bank.
On July 11, 2018, the Company entered into an Agreement
and Plan of Merger with Greater Hudson Bank (“GHB”), under which GHB merged with and into ConnectOne Bank, with ConnectOne
Bank as the surviving bank. This transaction was consummated effective January 2, 2019. As part of this merger, the Company acquired approximately
$0.4 billion in loans, assumed approximately $0.4 billion in deposits and acquired seven branch offices located in Rockland, Orange and
Westchester, Counties, New York.
On May 31, 2019, the Company,
through the Bank, completed its purchase of New York/Boston-based BoeFly, LLC (“BoeFly”). BoeFly’s online business
lending marketplace helps connect small- to medium-size businesses, primarily franchisors and franchisees, with professional loan brokers
and lenders across the United States. BoeFly operates as an independent brand and subsidiary of the Bank.
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On January 2, 2020, the
Company completed its in-market merger with Bergen County, New Jersey based Bancorp of New Jersey, Inc. (“BNJ”), pursuant
to which BNJ merged with and into the Company, and BNJ’s bank subsidiary, Bank of New Jersey, merged with and into the Bank. All
of BNJ’s offices were located in Bergen County, New Jersey. As part of this merger, the Company acquired approximately $0.8 billion
in loans and assumed approximately $0.8 billion in deposits.
The Company’s primary
activity, at this time, is to act as a holding company for the Bank and its other subsidiaries. As used herein, the term “Parent
Corporation” shall refer to the Company on an unconsolidated basis.
The Company owns 100% of the voting shares of Center
Bancorp, Inc. Statutory Trust II, through which it issued trust preferred securities. The trust exists for the exclusive purpose of (i)
issuing trust securities representing undivided beneficial interests in the assets of the trust; (ii) investing the gross proceeds of
the trust securities in $5.2 million of junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and
(iii) engaging in only those activities necessary or incidental thereto. These subordinated debentures and the related income effects
are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with Financial
Accounting Standards Board (“FASB”) ASC 810-10 “Consolidation of Variable Interest Entities.” Distributions on
the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income.
See Note 9 of the Notes to Consolidated Financial Statements.
Except as described above, the Company’s
wholly-owned subsidiaries are all included in the Company’s consolidated financial statements. These subsidiaries include BoeFly,
an advertising subsidiary, an insurance subsidiary, and various investment subsidiaries which hold, maintain and manage investment assets
for the Company. The Company’s subsidiaries also include a Real Estate Investment trust (the “REIT”) which holds a portion
of the Company’s real estate loan portfolio. All subsidiaries mentioned above are directly or indirectly wholly owned by the Company,
except that the Company owns less than 100% of the preferred stock of the REIT. A REIT trust must have 100 or more shareholders. The REIT
has issued less than 20% of its outstanding non-voting preferred stock to individuals, primarily Bank personnel and directors.
SEC Reports and Corporate Governance
The Company makes its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto available on its website at https://www.connectonebank.com
without charge as soon as reasonably practicable after filing or furnishing them to the SEC. Also available on the website are the Company’s
corporate code of conduct that applies to all of the Company’s employees, including principal officers and directors, and charters
for the Audit/Risk Committee, Nominating and Corporate Governance Committee and Compensation Committee and the Company’s Corporate
Governance Guidelines..
Additionally, the Company will provide without
charge, a copy of its Annual Report on Form 10-K to any shareholder by mail. Requests should be sent to ConnectOne Bancorp, Inc., Attention:
Investor Relations, 301 Sylvan Avenue, Englewood Cliffs, New Jersey 07632.
Narrative Description of the Business
ConnectOne Bancorp, Inc.
is a modern financial services company with over $8.1 billion in assets. It operates through its bank subsidiary, ConnectOne Bank and
the Bank’s fintech subsidiary Boefly.
ConnectOne Bank is a high-performing
commercial bank offering a full suite of deposit and loan products and services to the general public primarily, to small and mid-sized
businesses, local professionals and individuals residing, working and conducting business in the Northern New Jersey the New York Metropolitan
area and the South Florida market served by our West Palm Beach Office. The bank's continuous investments in technology coupled with top
talent allow ConnectOne to operate a "branch-lite" model, making for a highly efficient operating environment.
BoeFly, a wholly owned
subsidiary of Connectone Bank, is a fintech marketplace that connects borrowers in the franchise space with funding solutions through
a network of partner banks.
Our Market Area
ConnectOne
Bank's offices are located primarily in the New York metro market and span New Jersey, New York City, Long Island, and
the Hudson Valley, including Rockland, Orange, and Westchester counties. Through high tech tools and service, ConnectOne
Bank is able to extend its reach supporting clients as they move into new markets, such as South Florida where we recently opened an office
in West Palm Beach. Our market area includes some of the most affluent markets in the United States. The Bank's goal is to continue
to expand and do business to support our clients as they grow. Advances in technology have created new delivery channels that allow us
to service clients and maintain business relationships with a reduced-branch model, establishing regional offices that serve as business
hubs. The Bank's experience has shown that the key to client acquisition and retention is attracting quality business relationship officers
who will frequently go to the client, rather than having the client come to us.
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BoeFly operates out of its main offices in Boston,
Massachusetts and New York, and has a nationwide presence through its digital business marketplace.
Products and Services
We derive a majority of our revenue from net interest
income (i.e., the difference between the interest we receive on our loans and securities and the interest we pay on deposits and borrowings).
We offer a broad range of deposit and loan products. In addition, to attract the business of consumer and business clients, we provide
a broad array of other banking services. Products and services provided include personal and business checking accounts, retirement accounts,
money market accounts, time and savings accounts, credit cards, wire transfers, access to automated teller services, internet banking,
Treasury Direct, Automated Clearing House (“ACH”) origination, and mobile banking by phone. In addition, we offer safe deposit
boxes. The Bank also offers remote deposit capture banking for business clients, providing the ability to electronically scan and transmit
checks for deposit, reducing time and cost.
Non-interest demand deposit products include “Totally
Free Checking” and “Simply Better Checking” for Consumer clients and “Small Business Checking” and “Analysis
Checking” for commercial clients. Interest-bearing checking accounts require minimum balances for both Consumer and commercial clients
and include “Consumer Interest Checking” and “Business Interest Checking”. Money market accounts consist of products
that provide a market rate of interest to depositors. Our savings accounts consist of statement type accounts. Time deposits consist of
certificates of deposit, including those held in IRA accounts, generally with initial maturities ranging from 31 days to 60 months and
brokered certificates of deposit, which we use for asset liability management purposes and to supplement other sources of funding. CDARS/ICS
Reciprocal deposits are offered based on the Bank’s participation in the IntraFi Network LLC network, formerly known as Promontory
Interfinancial Network. Clients, who are Federal Deposit Insurance Corporation (“FDIC”) insurance sensitive, are able to place
large dollar deposits with the Company and the Company utilizes CDARS to place those funds into certificates of deposit issued by other
banks in the Network. This occurs in increments of less than the FDIC insurance limits so that both the principal and interest are eligible
for FDIC insurance coverage in amounts larger than the insured dollar amount. Unless certain conditions are satisfied, the FDIC considers
these funds as brokered deposits.
Deposits serve as the primary source of funding
for our interest-earning assets, but also generate noninterest revenue through insufficient funds fees, stop payment fees, wire transfer
fees, safe deposit rental fees, debit card income, including foreign ATM fees and credit and debit card interchange, and other miscellaneous
fees. In addition, the Bank generates additional noninterest revenue associated with residential, commercial and Small Business Administration
(“SBA”) loan originations and sales, loan servicing, late fees and merchant services.
We offer consumer and commercial business loans
on a secured and unsecured basis, revolving lines of credit, commercial mortgage loans, and residential mortgages on both primary and
secondary residences, home equity loans, bridge loans and other personal purpose loans. However, we are not and have not historically
been a participant in the sub-prime lending market.
Commercial loans are loans made for business purposes
and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the
Bank, business assets including accounts receivable, inventory and equipment, and mortgages filed on commercial and residential real estate.
Commercial construction loans are loans to finance
the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include
loans secured by first liens on completed commercial properties, including multi-family properties, to purchase or refinance such properties.
Residential mortgages include loans secured by first liens on 1-4 family residential real estate and are generally made to existing clients
of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines of credit include loans secured by
first or second liens on residential real estate for primary or secondary residences. Consumer loans are made to individuals who qualify
for auto loans, cash reserve, credit cards and installment loans.
During 2020 and 2021, we participated in the Small
Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) created under the Coronavirus Aid,
Relief and Economic Security Act (the “CARES Act”). The PPP provided funds to guarantee forgivable loans originated by depository
institutions to eligible small businesses through the SBA’s 7(a) loan guaranty program. These loans are 100% federally
guaranteed (principal and interest) and currently not subject to any allocation of allowance for credit losses. An eligible business could apply under
the PPP during the applicable covered period and receive a loan up to 2.5 times its average monthly “payroll costs” limited
to a loan amount of $10.0 million. The proceeds of the loan could be used for payroll (excluding individual employee compensation
over $100,000 per year), mortgage, interest, rent, insurance, utilities and other qualifying expenses. PPP loans have: (a) an interest
rate of 1.0%, (b) a two-year loan term (or five-year loan term for loans made after June 5, 2020) to maturity; and (c) principal and interest
payments deferred until the date on which the SBA remits the loan forgiveness amount to the borrower’s lender or, alternatively,
notifies the lender no loan forgiveness is allowed. If the borrower did not submit a loan forgiveness application to the
lender within 10 months following the end of the 24-week loan forgiveness covered period (or the 8-week loan forgiveness covered period
with respect to loans made prior to June 5, 2020 if such covered period is elected by the borrower), the borrower would begin paying principal
and interest on the PPP loan immediately after the 10-month period.
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On December 27, 2020, the Economic
Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law. Among other things, the Economic
Aid Act extended the PPP through March 31, 2021 and allocated additional funds for new PPP loans, to be guaranteed by the SBA.
The extension included an authorization to make new PPP loans to existing PPP loan borrowers, and to make loans to parties that did not
previously obtain a PPP loan. The Company participated in the extended PPP. Loans originated under the extended PPP have substantially
the same terms as under the original PPP. As of December 31, 2021, the Company had $93.1 million in total PPP loans outstanding and not
yet forgiven.
The Board of Directors has approved a credit policy
granting designated lending authorities to specific officers of the Bank. Those officers are comprised of the Chief Executive Officer,
President, Chief Credit Officer, Senior Lending Officer, Team Leaders and the Consumer Loan Officers. All loan approvals require the signatures
of a minimum of two officers. The Senior Lending Group (Chief Executive Officer, President, Chief Credit Officer and Senior Lending Officer) can
approve loans up to $35 million in aggregate loan exposure with no policy exceptions and up to $30 million with policy exceptions. Furthermore,
the Senior Lending Group has authority to approve unsecured loan amounts without policy exceptions up to $10 million and up to $5 million
with an exception. Loans to insiders must be approved by the entire Board.
The Bank’s
lending policies generally provide for lending within our primary trade area. However, the Bank will make loans to persons outside of
our primary trade area when we deem it prudent to do so. To promote a high degree of asset quality, the Bank focuses primarily upon offering
secured loans. However, the Bank does make short-term unsecured loans to borrowers with higher net worth and income profiles. The Bank
generally requires loan clients to maintain deposit accounts with the Bank. In addition, the Bank generally provides for a minimum required
rate of interest in its variable rate loans.The Bank’s legal lending limit to any one
borrower is 15% of the Bank’s capital base (defined as tangible equity plus the allowance for credit losses) for most loans ($145.9
million) and 25% of the capital base for loans secured by readily marketable collateral ($243.2 million). As of December 31, 2021, the
Bank’s largest committed relationship (to several affiliated borrowers) was $103.2 million and single largest loan outstanding was
$70.5 million.
Our business model includes using industry best
practices for community banks, including personalized service, state-of-the-art technology and extended hours. We believe that this will
generate deposit accounts with somewhat larger average balances than are found at many other financial institutions. We also use pricing
techniques in our efforts to attract banking relationships having larger than average balances.
Competition
The banking business is highly competitive. We
face substantial immediate competition and potential future competition both in attracting deposits and in originating loans. We compete
with numerous commercial banks, savings banks and savings and loan associations, many of which have assets, capital and lending limits
larger than those that we have. Other competitors include money market mutual funds, mortgage bankers, insurance companies, stock brokerage
firms, regulated small loan companies, credit unions and issuers of commercial paper and other securities. In addition, the banking industry
in general faces competition for deposit, credit and money management products from non-bank technology firms, or fintech companies, which
may offer products independently or through relationships with insured depository institutions.
Our larger competitors have greater financial resources
to finance wide-ranging advertising campaigns. Additionally, we endeavor to compete for business by providing high quality, personal service
to clients, client access to our decision-makers and competitive interest rates and fees. We seek to hire and retain quality employees
who desire greater responsibility than may be available working for a larger employer.
Employees and Human Capital Resources
Our employees are one of our greatest assets and
we believe they provide us with an advantage over our competitors. We believe we have a talented, diverse team of financial experts and
relationship specialists who understand the demands of a successful business and are prepared to meet them.
As of December 31, 2021, we had 434 full-time employees,
and 4 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our
employees to be good.
We encourage and support
the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization.
Continual learning and career development are advanced through ongoing performance and development conversations with employees, internally
developed training programs, customized corporate training engagements and educational reimbursement programs. We leverage a combination
of customized content and external resources to address required banking compliance, skills training for new roles, and development of
people management skills. We continuously assess any skill gaps and are gearing learning for the banking positions of the future.
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The safety, health and
wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety
while continuing successful operations. Through our technology and teamwork, we were able to transition, over a short period of time,
substantially all of our non-branch employees to a remote working environment while still servicing the needs of our clients. Branch
locations have operated in a variety of ways: closed to lobby traffic, in person banking by appointment only, curbside banking and
always with COVID safety protocols at the forefront. When we were able to resume substantial in office employee participation, we took
a number of steps to protect the health and safety of our employees, including adhering to CDC and state guidelines for in office work
(limiting occupancy in the buildings, social distancing, mask requirements, limiting in person meetings) We also developed COVID-19 protocols
as a resources for all employees in the event someone was exposed. Currently, the Company is operating under a Company-wide “return-to-work”
policy, and remains in compliance with any and all government requirements related to the pandemic.
Employee retention helps us operate efficiently
and is key to our ability to compete against larger competitors. We focus on promoting employees from within and leveraging their
knowledge of the organization as we continue to grow our Bank. In 2021, 66 employees were promoted into new roles.
SUPERVISION AND REGULATION
The banking industry is highly regulated. Statutory
and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to deploy
assets and maximize income. The following discussion is not intended to be a complete list of all the activities regulated by the banking
laws or of the impact of such laws and regulations on the Company or the Bank. It is intended only to briefly summarize some material
provisions.
Bank Holding Company Regulation
The Company is a bank holding company within the
meaning of the Bank Holding Company Act of 1956 (the “Holding Company Act”). As a bank holding company, the Company is supervised
by the Board of Governors of the Federal Reserve System (“FRB”) and is required to file reports with the FRB and provide such
additional information as the FRB may require. The Company and its subsidiaries are subject to examination by the FRB.
The Holding Company Act prohibits the Company,
with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which
is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary
banks, except that it may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the FRB
to be so closely related to banking “as to be a proper incident thereto.” The Holding Company Act requires prior approval
by the FRB of the acquisition by the Company of more than 5% of the voting stock of any other bank. Satisfactory capital ratios and Community
Reinvestment Act ratings and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make
acquisitions. The policy of the FRB, embodied in FRB regulations, provides that a bank holding company is expected to act as a source
of financial and managerial strength to its subsidiary bank(s) and to commit resources to support the subsidiary bank(s) in circumstances
in which it might not do so absent that policy.
As a New Jersey-charted commercial bank and an
FDIC-insured institution, acquisitions by the Bank require approval of the New Jersey Department of Banking and Insurance (the “Banking
Department”) and the FDIC, an agency of the federal government. The Holding Company Act does not place territorial restrictions
on the activities of non-bank subsidiaries of bank holding companies. The Gramm-Leach-Bliley Act, discussed below, allows the Company
to expand into insurance, securities, merchant banking activities, and other activities that are financial in nature, in certain circumstances.
Regulation of Bank Subsidiary
The operations of the Bank are subject to requirements
and restrictions under federal law, including requirements to maintain reserves against deposits, restrictions on the types and amounts
of loans that may be granted, and limitations on the types of investments that may be made and the types of services which may be offered.
Various consumer laws and regulations also affect the operations of the Bank. There are various legal limitations, including Sections
23A and 23B of the Federal Reserve Act, which govern the extent to which a bank subsidiary may finance or otherwise supply funds to its
holding company or its holding company’s non-bank subsidiaries and affiliates. Under federal law, a bank subsidiary may only make
loans or extensions of credit to, or invest in the securities of, its parent or the non-bank subsidiaries of its parent (other than direct
subsidiaries of such bank which are not financial subsidiaries) or to any affiliate, or take their securities as collateral for loans
to any borrower, upon satisfaction of various regulatory criteria, including specific collateral loan to value requirements.
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The Dodd-Frank Act
The Dodd-Frank Act, adopted in 2010, will continue
to have a broad impact on the financial services industry, as a result of the significant regulatory and compliance changes made by the
Dodd-Frank Act, including, among other things, (i) enhanced resolution authority over troubled and failing banks and their holding companies;
(ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid
to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening
safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk
oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability
Oversight Council, the FRB, the Office of the Comptroller of the Currency and the FDIC. A summary of certain provisions of the Dodd-Frank
Act is set forth below:
Although a significant number of the rules and
regulations mandated by the Dodd-Frank Act have been finalized, many of the requirements called for have yet to be fully implemented and
will likely be subject to implementing regulations over the course of several years. In addition, some of the requirements of the Dodd-Frank
Act that were implemented have already been revised. See “Economic Growth, Regulatory Relief and Consumer Protection Act”
below. Given the uncertainty associated with the way the provisions of the Dodd-Frank Act will be implemented by the various regulatory
agencies, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes
resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business
practices, impose upon us more stringent capital, liquidity and leverage ratio requirements (which, in turn, could require the Company
and the Bank to seek additional capital) or otherwise adversely affect our business. These changes may also require us to invest significant
management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
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Economic Growth, Regulatory Relief and Consumer Protection Act.
The Economic Growth, Regulatory Relief and Consumer
Protection Act (“EGRRCPA”), adopted in May of 2018, was intended to provide regulatory relief to midsized and regional banks.
While many of its provisions are aimed at larger institutions, such as raising the threshold to be considered a systemically important
financial institution to $250 billion in assets from $50 billion in assets, many of its provisions will provide regulatory relief to those
institutions with $10 billion or more in assets, as well as to those institutions with less than $10 billion in assets. Among other things,
the EGRRCPA increased the asset threshold for depository institutions and holding companies to perform stress tests required under Dodd
Frank from $10 billion to $250 billion, exempted institutions with less than $10 billion in consolidated assets from the Volcker Rule,
raised the threshold for the requirement that publicly traded holding companies have a risk committee from $10 billion in consolidated
assets to $50 billion in consolidated assets, directed the federal banking agencies to adopt a “community bank leverage ratio”,
applicable to institutions and holding companies with less than $10 billion in assets, and to provide that compliance with the new ratio
would be deemed compliance with all capital requirements applicable to the institution or holding company (See “-Capital Adequacy
Guidelines”), and provided that residential mortgage loans meeting certain criteria and originated by institutions with less than
$10 billion in total assets will be deemed to meet the “ability to repay rule” under the Truth in Lending Act. In addition,
the EGRRCPA limited the definition of loans that would be subject to the higher risk weighting applicable to High Volatility Commercial
Real Estate.
Certain of the regulations
needed to implement the EGRRCPA have yet to be promulgated by the federal banking agencies, and others have not been fully implemented
or enforced and so it is still uncertain how full implementation of the EGRRCPA will affect the Company and the Bank.
Regulation W
Regulation W codifies prior regulations under Sections
23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions. Affiliates of a bank include,
among other entities, the bank’s holding company and companies that are under common control with the bank. The Company is considered
to be an affiliate of the Bank. In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability
to engage in “covered transactions” with affiliates:
In addition, a bank and its subsidiaries may engage
in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at
least as favorable to the bank or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies.
A “covered transaction” includes:
• a loan or extension of credit to an affiliate;
• a purchase of, or an investment in, securities issued by an affiliate;
• a purchase of assets from an affiliate, with some exceptions;
Further, under Regulation W:
Regulation W generally excludes all non-bank and
non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the FRB decides to treat these subsidiaries
as affiliates.
FDICIA
Pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 (“FDICIA”), each federal banking agency has promulgated regulations, specifying the levels at which
an insured depository institution such as the Bank would be considered “well capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” and to take
certain mandatory and discretionary supervisory actions based on the capital level of the institution. To qualify to engage in financial
activities under the Gramm-Leach-Bliley Act, all depository institutions must be “well capitalized.”
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The FDIC’s regulations implementing these
provisions of FDICIA provide that an institution will be classified as “well capitalized” if it (i) has a total risk-based
capital ratio of at least 10.0%, (ii) has a Tier 1 risk-based capital ratio of at least 8.0%, (iii) has a Tier 1 leverage ratio of at
least 5.0%, (iv) has a common equity Tier 1 capital ratio of at least 6.5%, and (v) meets certain other requirements. An institution will
be classified as “adequately capitalized” if it (i) has a total risk-based capital ratio of at least 8.0%, (ii) has a Tier
1 risk-based capital ratio of at least 6.0%, (iii) has a Tier 1 leverage ratio of at least 4.0%, has a common equity Tier 1 capital ratio
of at least 4.5%, and (v) does not meet the definition of “well capitalized.” An institution will be classified as “undercapitalized”
if it (i) has a total risk-based capital ratio of less than 8.0%, (ii) has a Tier 1 risk-based capital ratio of less than 6.0%, (iii)
has a Tier 1 leverage ratio of less than 4.0%, or (iv) has a common equity Tier 1 capital ratio of less than 4.5%. An institution will
be classified as “significantly undercapitalized” if it (i) has a total risk-based capital ratio of less than 6.0%, (ii) has
a Tier 1 risk-based capital ratio of less than 4.0%, (iii) has a Tier 1 leverage ratio of less than 3.0%, or (iv) has a common equity
Tier 1 capital ratio of less 3.0%. An institution will be classified as “critically undercapitalized” if it has a tangible
equity to total assets ratio that is equal to or less than 2.0%. An insured depository institution may be deemed to be in a lower capitalization
category if it receives an unsatisfactory examination rating.
In addition, significant provisions of FDICIA required
federal banking regulators to impose standards in a number of other important areas to assure bank safety and soundness, including internal
controls, information systems and internal audit systems, credit underwriting, asset growth, compensation, loan documentation and interest
rate exposure.
Capital Adequacy Guidelines
In December 2010 and January 2011, the Basel Committee
on Banking Supervision (the “Basel Committee”) published the final texts of reforms on capital and liquidity generally referred
to as “Basel III.” In July 2013, the FRB, the FDIC and the Comptroller of the Currency adopted final rules (the “New
Rules”), which implement certain provisions of Basel III and the Dodd-Frank Act. The New Rules replaced the existing general risk-based
capital rules of the various banking agencies with a single, integrated regulatory capital framework. The New Rules require higher capital
cushions and more stringent criteria for what qualifies as regulatory capital. The New Rules were effective for the Bank and the Company
on January 1, 2015.
Under the New Rules, the Company and the Bank are
required to maintain the following minimum capital ratios, expressed as a percentage of risk-weighted assets:
· Common Equity Tier 1 Capital Ratio of 4.5% (the “CET1”);
· Total Capital Ratio (Tier 1 capital plus Tier 2 capital) of 8.0%.
In addition, the Company and the Bank will be subject
to a leverage ratio of 4% (calculated as Tier 1 capital to average consolidated assets as reported on the consolidated financial statements).
The New Rules also require a “capital conservation
buffer.” Under this provision, the Company and the Bank are required to maintain a 2.5% capital conservation buffer, which is composed
entirely of CET1, on top of the minimum risk-weighted asset ratios described above, resulting in the following minimum capital ratios:
· CET1 of 7%;
· Tier 1 Capital Ratio of 8.5%; and
· Total Capital Ratio of 10.5%.
The purpose of the capital conservation buffer
is to absorb losses during periods of economic stress. Banking institutions with a CET1, Tier 1 Capital Ratio and Total Capital Ratio
above the minimum set forth above but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase
equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall.
The implementation of the capital conservation
buffer began on January 1, 2016 at the 0.625% level, and it increased by 0.625% on each subsequent January 1 until it was fully phased
in at 2.5% on January 1, 2019.
The New Rules provide for several deductions from
and adjustments to CET1. For example, mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant
investments in common equity issued by nonconsolidated financial entities must be deducted from CET1 to the extent that any one of those
categories exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
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Under the New Rules, banking organizations such
as the Company and the Bank may make a one-time permanent election regarding the treatment of accumulated other comprehensive income items
in determining regulatory capital ratios. Effective as of January 1, 2015, the Company and the Bank elected to exclude accumulated other
comprehensive income items for purposes of determining regulatory capital.
While the New Rules generally require the phase-out
of non-qualifying capital instruments such as trust preferred securities and cumulative perpetual preferred stock, holding companies with
less than $15 billion in total consolidated assets as of December 31, 2009, such as the Company, may permanently include non-qualifying
instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in Additional Tier 1 or Tier 2 capital until
they redeem such instruments or until the instruments mature.
The New Rules prescribe a standardized approach
for calculating risk-weighted assets. Depending on the nature of the assets, the risk categories generally range from 0% for U.S. Government
and agency securities, to 600% for certain equity exposures, and result in higher risk weights for a variety of asset categories. In addition,
the New Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central
counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.
Consistent with the Dodd-Frank Act, the New Rules
adopt alternatives to credit ratings for calculating the risk-weighting for certain assets.
In December 2018, the OCC, the Board of Governors
of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking
organizations’ implementation of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments (“CECL”). Under the CARES Act, the effective date for the implementation of
ASU No. 2016-13 was delayed until the earlier of the end of the health crises caused by the COVID-19 Pandemic or December 31, 2020. The
Economic Aid Act then further delayed implementation until the earlier of the end of the health crises caused by the COVID-19 Pandemic
or January 1, 2022. The final rule also provides banking organizations the option to phase in over a three-year period the day-one adverse
effects on regulatory capital that may result from the adoption of the new accounting standard. The Company adopted the CECL standard
effective January 1, 2021.
On September 17, 2019, the federal banking agencies
issued a final rule providing simplified capital requirements for certain community banking organizations (banks and holding companies)
with less than $10 billion in total consolidated assets, implementing provisions of EGRRCPA discussed above. Under the rule, a qualifying
community banking organization would be eligible to elect the community bank leverage ratio framework or continue to measure capital under
the existing Basel III requirements set forth in the New Rules. The new rule took effect January 1, 2020, and qualifying community banking
organizations could elect to opt into the new community bank leverage ratio (“CBLR”) in their call report for the first quarter
of 2020.
A qualifying community banking organization (“QCBO”)
is defined as a bank, a savings association, a bank holding company or a savings and loan holding company with:
· a leverage capital ratio of greater than 9.0%;
· total consolidated assets of less than $10.0 billion;
A QCBO opting into the CBLR must maintain a CBLR
of 9.0%, subject to a two-quarter grace period to come back into compliance, provided that the QCBO maintains a leverage ratio of more
than 8.0% during the grace period. A QCBO failing to satisfy these requirements must comply with the Basel III requirements as implemented
by the New Rules. The numerator of the CBLR is Tier 1 capital, as calculated under present rules. The denominator of the CBLR is the QCBO’s
average assets, calculated in accordance with the QCBO’s Call Report instructions and less assets deducted from Tier 1 capital.
The Company and the Bank have elected not to opt
into the CBLR.
Federal Deposit Insurance and Premiums
Substantially all the deposits of the Bank are
insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments
to maintain the DIF.
The assessment base for deposit insurance premiums
is an institution’s average consolidated total assets minus average tangible equity. In connection with adopting this assessment
base calculation, the FDIC lowered total base assessment rates to between 2.5 and 9 basis points for banks in the lowest risk category,
and 30 to 45 basis points for banks in the highest risk category. The Company paid $2.9 million and $4.0 million in total FDIC assessments
in 2021 and 2020, respectively.
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The FDIC has a designated reserve ratio (DRR),
that is, the ratio of the DIF to insured deposits, of 1.35%. The Dodd-Frank Act requires the FDIC to offset the effect on institutions
with assets less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%.
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999
The Gramm-Leach-Bliley Financial Services Modernization
Act of 1999 (the “Modernization Act”):
· allows insurers and other financial services companies to acquire banks;
The Modernization Act also modified other financial
laws, including laws related to financial privacy and community reinvestment. The Company has elected not to become a financial holding
company.
Community Reinvestment Act
Under the Community Reinvestment Act (“CRA”),
as implemented by FDIC regulations, an insured depository institution has a continuing and affirmative obligation consistent with its
safe and sound operation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion
to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The
CRA requires the FDIC, in connection with its examination of every bank, to assess the bank’s record of meeting the credit needs
of its community and to take such record into account in its evaluation of certain applications by such bank.
USA PATRIOT Act
The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) gives the federal government
powers to address terrorist threats through domestic security measures, surveillance powers, information sharing, and anti-money laundering
requirements. By way of amendments to the Bank Secrecy Act, the USA PATRIOT Act encourages information-sharing among bank regulatory agencies
and law enforcement bodies. Further, certain provisions of the USA PATRIOT Act impose affirmative obligations on a broad range of financial
institutions, including banks, thrift institutions, brokers, dealers, credit unions, money transfer agents and parties registered under
the Commodity Exchange Act.
Among other requirements, the USA PATRIOT Act
imposes the following requirements with respect to financial institutions:
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The United States Treasury Department has issued
a number of implementing regulations which address various requirements of the USA PATRIOT Act and are applicable to financial institutions
such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls
to detect, prevent and report money laundering and terrorist financing and to verify the identity of their clients.
Loans to Related Parties
The Company’s authority to extend credit
to its directors and executive officers, as well as to entities controlled by such persons, is currently governed by the requirements
of the Sarbanes-Oxley Act of 2002 and Regulation O promulgated by the FRB. Among other things, these provisions require that extensions
of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not
less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal
risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. In addition, the
Bank’s Board of Directors must approve all extensions of credit to insiders.
Dividend Restrictions
The Parent Corporation is a legal entity separate
and distinct from the Bank. Virtually all the revenue of the Parent Corporation available for payment of dividends on its capital stock
will result from amounts paid to the Parent Corporation by the Bank. All such dividends are subject to the laws of the State of New Jersey,
the Banking Act, the Federal Deposit Insurance Act (“FDIA”) and the regulation of the Banking Department and of the FDIC.
Under the New Jersey Corporation Act, the Parent
Corporation is permitted to pay cash dividends provided that the payment does not leave us insolvent. As a bank holding company under
the BHCA, we would be prohibited from paying cash dividends if we are not in compliance with any capital requirements applicable to us,
including our required capital conservation buffer. However, as a practical matter, for so long as our major operations consist of ownership
of the Bank, the Bank will remain our source of dividend payments, and our ability to pay dividends will be subject to any restrictions
applicable to the Bank.
The Parent Corporation has outstanding a series
of perpetual preferred stock, our 5.25% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series A. The rights of the preferred
stockholders to receive dividends are senior to the rights of our common holders, although the preferred dividend rights are non-cumulative.
Therefore, unless all dividends due on our outstanding preferred stock have been declared and paid for the most recent dividend period,
we may not pay a dividend on our common stock or repurchase shares of our common stock.
Under the New Jersey Banking Act of 1948, as amended,
dividends may be paid by the Bank only if, after the payment of the dividend, the capital stock of the Bank will be unimpaired and either
the Bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the Bank’s
surplus. The payment of dividends is also dependent upon the Bank’s ability to maintain adequate capital ratios pursuant to applicable
regulatory requirements.
The FRB has issued a policy statement regarding
the payment of dividends by bank holding companies. In general, the FRB’s policies provide that dividends should be paid only out
of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s
capital needs, asset quality and overall financial condition. FRB regulations also require that a bank holding company serve as a source
of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those
banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks where necessary. Under the prompt corrective action laws, the ability of a bank
holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized, and under regulations implementing the
Basel III accord, a bank holding company’s ability to pay cash dividends may be impaired if it fails to satisfy certain capital
buffer requirements. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital
distributions.
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Item 1A. Risk Factors
An investment in our securities involves risks.
Stockholders should carefully consider the risks described below, together with all other information contained in this Annual Report
on Form 10-K, before making any purchase or sale decisions regarding our securities. If any of the following risks actually occur, our
business, financial condition or operating results may be harmed. In that case, the trading price of our securities may decline, and stockholders