Table of Contents

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ 

☒

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

For the Quarterly Period Ended September 30, 20172022

OR

☐ 

☐

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

For the transition period from _______ to _______

Commission File Number:000-11486

cnoblogo.jpg

CONNECTONE BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

New Jersey

52-1273725

(State or Other Jurisdiction of

(IRS Employer

Incorporation or Organization)

(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)

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

Title of each class

Trading symbol

Name of each exchange on which registered

Common stock

CNOB

NASDAQ

Depositary Shares (each representing a 1/40th interest in a share of 5.25% Series A Non-Cumulative, perpetual preferred stock)

CNOBP

NASDAQ

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 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☒No☐

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

Large accelerated filer☐  ☒

Accelerated filer☒  ☐

Non-accelerated filer☐

Smaller reporting company☐

(Do not check if smaller
reporting company)

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 7(a)(2)(B) of the Securities Act.☐

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

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:

32,015,317

39,243,123 shares

(Title of Class)

(Outstanding as of November 3, 2017)4, 2022)


Table of Contents

Table of Contents

Page

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Item 1.

Financial Statements

3

Consolidated Statements of Condition at as of September 30, 20172022 (unaudited) and December 31, 20162021

3

Consolidated Statements of Income for the three and nine months ended September 30, 20172022 and 20162021 (unaudited)

4

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 20172022 and 20162021 (unaudited)

5

Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 20172022 and 20162021 (unaudited)

6

Consolidated Statements of Cash Flows for the nine months ended September 30, 20172022 and 20162021 (unaudited)

7

8

Notes to Consolidated Financial Statements
(unaudited)

8

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

44

41

Item 3.

Qualitative and Quantitative Disclosures about Market Risks

58

55

Item 4.

Controls and Procedures

59

56

PART II – OTHER INFORMATION

Item 1.Legal Proceedings
 		60

Item 1a.1.

Risk Factors

Legal Proceedings

60

57

Item 1a.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

57

Item 3.

Defaults Upon Senior Securities

61

57

Item 4.

Mine Safety Disclosures

61

57

Item 5.Other Information
 		61

Item 6.5.

Exhibits

Other Information

62

57

SIGNATURES

2

Item 6.

Exhibits

58

SIGNATURES

59


2
Table of Contents

Item 1. Financial Statements

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

     September 30,     December 31,
(in thousands, except for share data)20172016
(unaudited) 
ASSETS 
Cash and due from banks$       41,114$       37,150
Interest-bearing deposits with banks100,148163,249
Cash and cash equivalents141,262200,399
         
Securities available-for-sale400,516353,290
         
Loans held-for-sale (net of valuation allowance of $15,287 and $-0-, respectively)89,38678,005
         
Loans receivable3,889,2893,475,832
Less: Allowance for loan losses29,87025,744
Net loans receivable3,859,4193,450,088
         
Investment in restricted stock, at cost29,67224,310
Bank premises and equipment, net21,91722,075
Accrued interest receivable14,84112,965
Bank owned life insurance110,76298,359
Other real estate owned-626
Goodwill145,909145,909
Core deposit intangibles2,5333,088
Other assets28,53837,234
Total assets$4,844,755$4,426,348
LIABILITIES
Deposits:
Noninterest-bearing$719,582$694,977
Interest-bearing2,904,1872,649,294
Total deposits3,623,7693,344,271
Borrowings585,124476,280
Subordinated debentures (net of debt issuance costs of $498 and $621, respectively)54,65754,534
Other liabilities23,51420,231
Total liabilities4,287,0643,895,316
         
COMMITMENTS AND CONTINGENCIES
         
STOCKHOLDERS’ EQUITY
         
Common stock, no par value, authorized 50,000,000 shares; issued 34,079,239 shares at September 30, 2017 and 34,018,731 at December 31, 2016; outstanding 32,015,317 shares at September 30, 2017 and 31,948,307 at December 31, 2016412,546412,726
Additional paid-in capital12,84011,407
Retained earnings151,851126,462
Treasury stock, at cost (2,063,922 common shares at September 30, 2017 and December 31, 2016)(16,717)(16,717)
Accumulated other comprehensive loss(2,829)(2,846)
Total stockholders’ equity557,691531,032
Total liabilities and stockholders’ equity$4,844,755$4,426,348

(unaudited)

(in thousands, except for share data)

 

September 30,

  

December 31,

 
  

2022

  

2021

 
         

ASSETS

        

Cash and due from banks

 $58,852  $54,352 

Interest-bearing deposits with banks

  274,992   211,184 

Cash and cash equivalents

  333,844   265,536 
         

Investment securities

  623,629   534,507 

Equity securities

  15,563   13,794 
         

Loans held-for-sale

  8,080   250 
         

Loans receivable

  7,900,450   6,828,622 

Less: Allowance for credit losses - loans

  91,717   78,773 

Net loans receivable

  7,808,733   6,749,849 
         

Investment in restricted stock, at cost

  45,324   27,826 

Bank premises and equipment, net

  28,519   29,032 

Accrued interest receivable

  38,940   34,152 

Bank owned life insurance

  229,800   195,731 

Right of use operating lease assets

  10,196   11,017 

Other real estate owned

  264   - 

Goodwill

  208,372   208,372 

Core deposit intangibles

  7,721   8,997 

Other assets

  119,267   50,417 

Total assets

 $9,478,252  $8,129,480 

LIABILITIES

        

Deposits:

        

Noninterest-bearing

 $1,665,658  $1,617,049 

Interest-bearing

  5,644,852   4,715,904 

Total deposits

  7,310,510   6,332,953 

Borrowings

  829,953   468,193 

Subordinated debentures, net

  153,179   152,951 

Operating lease liabilities

  11,454   12,417 

Other liabilities

  24,861   38,754 

Total liabilities

  8,329,957   7,005,268 
         

COMMITMENTS AND CONTINGENCIES

          
         

STOCKHOLDERS’ EQUITY

        

Preferred Stock, no par value; $1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of September 30, 2022 and as of December 31, 2021; outstanding 115,000 shares as of September 30, 2022 and as of December 31, 2021

  110,927   110,927 

Common stock, no par value: Authorized 100,000,000 shares; issued 42,679,405 shares as of September 30, 2022 and 42,557,264 shares as of December 31, 2021; outstanding 39,243,123 shares as of September 30, 2022 and 39,568,090 as of December 31, 2021

  586,946   586,946 

Additional paid-in capital

  28,756   27,246 

Retained earnings

  510,957   440,169 

Treasury stock, at cost 3,436,282 common shares as of September 30, 2022 and 2,989,174 as of December 31, 2021

  (52,799)  (39,672)

Accumulated other comprehensive loss

  (36,492)  (1,404)

Total stockholders’ equity

  1,148,295   1,124,212 

Total liabilities and stockholders’ equity

 $9,478,252  $8,129,480 

See accompanying notes to unaudited consolidated financial statements.

3

3
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

     Three Months Ended     Nine Months Ended
September 30,September 30,
(in thousands, except for per share data)2017     20162017     2016
Interest income    
Interest and fees on loans$       43,241$       37,803$       121,879$       109,381
Interest and dividends on securities:
Taxable1,6951,7745,0425,879
Tax-exempt8709882,6552,867
Dividends3623529821,074
Interest on federal funds sold and other short-term investments170261555541
Total interest income46,33841,178131,113119,742
Interest expense
Deposits6,1135,15916,71713,532
Borrowings3,2062,9959,1359,472
Total interest expense9,3198,15425,85223,004
Net interest income37,01933,024105,26196,738
Provision for loan losses1,4506,7504,00013,500
Net interest income after provision for loan losses35,56926,274101,26183,238
Noninterest income
Annuities and insurance commissions-6839140
Income on bank owned life insurance9856152,4021,843
Net gains on sale of loans held-for-sale5056120147
Deposit, loan and other income7217062,0231,984
Net gains on sales of securities available-for-sale-4,1311,5964,234
Total noninterest income1,7565,5766,1808,348
Noninterest expenses
Salaries and employee benefits8,8727,79125,71023,143
Occupancy and equipment1,9692,0496,2156,450
FDIC insurance8407452,5501,955
Professional and consulting7406672,1922,078
Marketing and advertising225293770817
Data processing1,1761,0023,4743,036
Amortization of core deposit intangible169193555627
Increase in valuation allowance, loans held-for-sale3,000-15,325-
Other expenses1,6501,8115,4025,150
Total noninterest expenses18,64114,55162,19343,256
Income before income tax expense18,68417,29945,24848,330
Income tax expense5,6075,44312,60815,224
Net income13,07711,85632,64033,106
Less: Preferred stock dividends---22
Net income available to common stockholders$13,077$11,856$32,640$33,084
             
Earnings per common share:
Basic$0.41$0.39$1.02$1.10
Diluted0.410.391.011.09
             
Dividends per common share$0.075$0.075$0.225$0.225

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

(dollars in thousands, except for per share data)

                

Interest income

                

Interest and fees on loans

 $90,731  $75,092  $248,041  $216,655 

Interest and dividends on investment securities:

                

Taxable

  4,063   1,065   8,487   3,148 

Tax-exempt

  1,083   511   2,708   1,885 

Dividends

  438   245   943   764 

Interest on federal funds sold and other short-term investments

  665   113   1,098   246 

Total interest income

  96,980   77,026   261,277   222,698 

Interest expense

                

Deposits

  13,299   5,478   24,018   19,487 

Borrowings

  5,520   3,303   13,149   10,794 

Total interest expense

  18,819   8,781   37,167   30,281 

Net interest income

  78,161   68,245   224,110   192,417 

Provision for (reversal of) credit losses

  10,000   1,100   14,450   (6,315)

Net interest income after provision for (reversal of) credit losses

  68,161   67,145   209,660   198,732 

Noninterest income

                

Deposit, loan and other income

  1,969   1,702   5,578   5,092 

Income on bank owned life insurance

  1,521   1,278   4,069   3,527 

Net gains on sale of loans held-for-sale

  262   1,114   1,519   2,668 

Gain on sale of branches

  -   -   -   674 

Net losses on equity securities

  (430)  (78)  (1,431)  (242)

Net gain on sales/redemptions of securities available-for-sale

  -   -   -   195 

Total noninterest income

  3,322   4,016   9,735   11,914 

Noninterest expenses

                

Salaries and employee benefits

  21,025   16,807   59,470   47,790 

Occupancy and equipment

  2,600   2,656   7,262   8,876 

FDIC insurance

  720   525   2,051   2,040 

Professional and consulting

  1,980   2,217   5,896   6,290 

Marketing and advertising

  461   345   1,238   864 

Information technology and communications

  2,747   3,048   8,414   8,209 

Amortization of core deposit intangibles

  409   483   1,276   1,498 

Other components of net periodic pension expense

  (143)  (67)  (429)  (201)

Increase in value of acquisition price

  -   -   1,516   - 

Other expenses

  2,344   2,169   6,382   5,561 

Total noninterest expenses

  32,143   28,183   93,076   80,927 

Income before income tax expense

  39,340   42,978   126,319   129,719 

Income tax expense

  10,425   10,881   33,665   32,404 

Net income

  28,915   32,097   92,654   97,315 

Preferred dividends

  1,509   -   4,527   - 

Net income available to common stockholders

 $27,406  $32,097  $88,127  $97,315 

Earnings per common share

                

Basic

 $0.70  $0.81  $2.24  $2.45 

Diluted

  0.70   0.80   2.23   2.43 

See accompanying notes to unaudited consolidated financial statements.

4

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

     Three Months Ended     Nine Months Ended
September 30,September 30,
(in thousands)2017     20162017     2016
Net income$       13,077$       11,856$       32,640$       33,106
Other comprehensive income:    
Unrealized gains and losses:
Unrealized holding gains (losses) on available-for-sale securities arising during the period415(523)1,3321,551
Tax effect(165)187(525)(634)
Net of tax250(336)807917
Unrealized gains on securities transferred from held-to-maturity to available-for-sale the period-10,069-10,069
Tax effect-(3,815)-(3,815)
Net of tax-6,2546,254
Reclassification adjustment for realized gains included in net income-(4,131)(1,596)(4,234)
Tax effect-1,6405791,682
Net of tax-(2,491)(1,017)(2,552)
Amortization of unrealized net losses on held-to-maturity securities transferred from available-for-sale securities-1,890-1,986
Tax effect-(774)-(813)
Net of tax1,116-1,173
                 
Unrealized gains (losses) on cash flow hedges11964476(1,081)
Tax effect(48)(263)(31)441
Net of tax7138145(640)
Unrealized pension plan gains and losses:
Unrealized pension plan losses before reclassifications--(2)(1)
Tax effect--1-
Net of tax--(1)(1)
Reclassification adjustment for amortization included in net income103204309306
Tax effect(42)(83)(126)(124)
Net of tax61121183182
Total other comprehensive income3825,045175,333
Total comprehensive income$13,459$16,901$32,657$38,439

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

(dollars in thousands)

 

2022

  

2021

  

2022

  

2021

 

Net income

 $28,915  $32,097  $92,654  $97,315 

Other comprehensive income (loss):

                
                 

Unrealized holding losses on available-for-sale securities arising during the period

  (39,912)  (3,228)  (94,428)  (8,397)

Tax effect

  11,471   796   27,178   2,160 

Net of tax

  (28,441)  (2,432)  (67,250)  (6,237)
                 

Reclassification adjustment for realized gains included in net income

  -   -   -   (195)

Tax effect

  -   -   -   48 

Net of tax

  -   -   -   (147)
                 

Unrealized gains on cash flow hedges

  16,969   1,890   44,253   1,872 

Tax effect

  (5,094)  (533)  (13,381)  (529)

Net of tax

  11,875   1,357   30,872   1,343 
                 

Reclassification adjustment for realized (gains) losses on cash flow hedges

  (1,178)  328   (524)  1,543 

Tax effect

  343   (90)  159   (434)

Net of tax

  (835)  238   (365)  1,109 
                 

Unrealized gains on pension plan

  -   -   2,187   - 

Tax effect

  -   -   (567)  - 

Net of tax

  -   -   1,620   - 
                 

Reclassification adjustment for realized losses on pension plan included in net income

  17   75   49   225 

Tax effect

  (5)  (21)  (14)  (63)

Net of tax

  12   54   35   162 
                 

Total other comprehensive loss

  (17,389)  (783)  (35,088)  (3,770)
                 

Total comprehensive income

 $11,526  $31,314  $57,566  $93,545 

See accompanying notes to unaudited consolidated financial statements.

5

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’STOCKHOLDERS’ EQUITY
(unaudited)

            Accumulated  
AdditionalOtherTotal
(dollars in thousands, except for perPreferredCommonPaid-InRetainedTreasuryComprehensiveStockholders’
share data)StockStockCapitalEarningsStock(Loss) IncomeEquity
Balance as of December 31, 2015$    11,250$    374,287$    8,527$    104,606$    (16,717)$    (4,609)$    477,344
Net income---33,106--33,106
Other comprehensive income, net of tax-----5,3335,333
Dividend on series B preferred stock---(22)--(22)
Cash dividends declared on common stock ($0.225 per share)---(6,805)--(6,805)
                            
Redemption of preferred stock(11,250)-----(11,250)
Exercise of stock options (36,135 shares)--232---232
Restricted stock and performance units grants (75,520 shares)-------
Stock-based compensation expense--1,650---1,650
                            
Balance as of September 30, 2016$-$374,287$10,409$130,885$(16,717)$724$499,588
                            
Balance as of December 31, 2016$-$412,726$11,407$126,462$(16,717)$(2,846)$531,032
Net income---32,640--32,640
Other comprehensive income, net of tax-----1717
Cash dividends declared on common stock ($0.225 per share)---(7,251)--(7,251)
                            
Stock issuance costs-(180)----(180)
Exercise of stock options (10,846 shares)--118---118
Restricted stock grants (57,164 shares)-------
Stock-based compensation expense--1,315---1,315
                            
Balance as of September 30, 2017$-$412,546$12,840$151,851$(16,717)$(2,829)$557,691

(unaudited)

  

Nine Months Ended September 30, 2022

 
                      

Accumulated

     
          

Additional

          

Other

  

Total

 
  

Preferred

  

Common

  

Paid-In

  

Retained

  

Treasury

  

Comprehensive

  

Stockholders’

 

(in thousands, except share data)

 

Stock

  

Stock

  

Capital

  

Earnings

  

Stock

  

(Loss) Income

  

Equity

 

Balance as of December 31, 2021

 $110,927  $586,946  $27,246  $440,169  $(39,672) $(1,404) $1,124,212 

Net income

  -   -   -   92,654   -   -   92,654 

Other comprehensive loss, net of tax

  -   -   -   -   -   (35,088)  (35,088)

Cash dividend declared on preferred stock ($0.984375 per depositary share)

  -   -   -   (4,527)  -   -   (4,527)

Cash dividends declared on common stock ($0.44 per share)

  -   -   -   (17,339)  -   -   (17,339)

Exercise of stock options (15,086 shares)

  -   -   124   -   -   -   124 

Restricted stock grants, net of forfeitures (53,169 shares)

  -   -   -   -   -   -   - 

Stock grants (153 shares)

  -   -   -   -   -   -   - 

Net shares issued in satisfaction of restricted stock units earned (31,383 shares)

  -   -   -   -   -   -   - 

Net shares issued in satisfaction of performance units earned (22,350 shares)

  - �� -   -   -   -   -   - 

Share redemption for tax withholdings on performance units and restricted stock units earned

  -   -   (2,133)  -   -   -   (2,133)

Repurchase of treasury stock (447,108 shares)

  -   -   -   -   (13,127)  -   (13,127)

Stock-based compensation expense

  -   -   3,519   -   -   -   3,519 
                             

Balance as of September 30, 2022

 $110,927  $586,946  $28,756  $510,957  $(52,799) $(36,492) $1,148,295 

  

Three Months Ended September 30, 2022

 
                      

Accumulated

     
          

Additional

          

Other

  

Total

 
  

Preferred

  

Common

  

Paid-In

  

Retained

  

Treasury

  

Comprehensive

  

Stockholders’

 

(in thousands, except share data)

 

Stock

  

Stock

  

Capital

  

Earnings

  

Stock

  

(Loss) Income

  

Equity

 

Balance as of June 30, 2022

 $110,927  $586,946  $27,536  $489,640  $(52,799) $(19,103) $1,143,147 

Net income

  -   -   -   28,915   -   -   28,915 

Other comprehensive loss, net of tax

  -   -   -   -   -   (17,389)  (17,389)

Cash dividends declared on preferred stock ($0.328125 per depositary share)

  -   -   -   (1,509)  -   -   (1,509)

Cash dividends declared on common stock ($0.155 per share)

  -   -   -   (6,089)  -   -   (6,089)

Stock-based compensation expense

  -   -   1,220   -   -   -   1,220 
                             

Balance as of September 30, 2022

 $110,927  $586,946  $28,756  $510,957  $(52,799) $(36,492) $1,148,295 

6
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(continued)

  

Nine Months Ended September 30, 2021

 
                      

Accumulated

     
          

Additional

          

Other

  

Total

 
  

Preferred

  

Common

  

Paid-In

  

Retained

  

Treasury

  

Comprehensive

  

Stockholders’

 

(in thousands, except share data)

 

Stock

  

Stock

  

Capital

  

Earnings

  

Stock

  

(Loss) Income

  

Equity

 

Balance as of December 31, 2020

 $-  $586,946  $23,887  $331,951  $(30,271) $2,797  $915,310 

Cumulative effect of change in accounting principle (see note 1b. “Authoritative Accounting Guidance Presentation”), net of tax

  -   -   -   (2,925)  -   -   (2,925)

Balance as of January 1, 2021 as adjusted for changes in accounting principle

  -   586,946   23,887   329,026   (30,271)  2,797   912,385 

Net income

  -   -   -   97,315   -   -   97,315 

Other comprehensive loss, net of tax

  -   -   -   -   -   (3,770)  (3,770)

Cash dividends declared on common stock ($0.31 per share)

  -   -   -   (12,345)  -   -   (12,345)

Exercise of stock options (5,449 shares)

  -   -   45   -   -   -   45 

Restricted stock grants, net of forfeitures (46,900 shares)

  -   -   -   -   -   -   - 

Stock grants (4,981 shares)

  -   -   -   -   -   -   - 

Net shares issued in satisfaction of restricted stock units earned (14,711 shares)

  -   -   -   -   -   -   - 

Net shares issued in satisfaction of performance units earned (34,458 shares)

  -   -   -   -   -   -   - 

Share redemption for tax withholdings on performance units and restricted stock units earned

  -   -   (1,283)  -   -   -   (1,283)

Repurchase of treasury stock (289,698 shares)

  -   -   -   -   (8,043)  -   (8,043)

Proceeds from preferred stock issuance, net of costs (115,000 shares)

  110,927   -   -   -   -   -   110,927 

Stock-based compensation expense

  -   -   3,202   -   -   -   3,202 
                             

Balance as of September 30, 2021

 $110,927  $586,946  $25,851  $413,996  $(38,314) $(973) $1,098,433 

  

Three Months Ended September 30, 2021

 
                      

Accumulated

      
          

Additional

          

Other

   

Total

 
  

Preferred

  

Common

  

Paid-In

  

Retained

  

Treasury

  

Comprehensive

   

Stockholders’

 

(in thousands, except share data)

 

Stock

  

Stock

  

Capital

  

Earnings

  

Stock

  

(Loss) Income

   

Equity

 

Balance as of June 30, 2021

 $-  $586,946  $24,606  $386,280  $(32,682) $(190)

:

 $964,960 

Net income

  -   -   -   32,097   -   -    32,097 

Other comprehensive loss, net of tax

  -   -   -   -   -   (783)   (783)

Cash dividends declared on common stock ($0.11 per share)

  -   -   -   (4,381)  -   -    (4,381)

Restricted stock grants, net of forfeitures (1,082 shares)

  -   -   -   -   -   -    - 

Stock grants (4,535 shares)

  -   -   -   -   -   -    - 

Repurchase of treasury stock (196,069 shares)

  -   -   -   -   (5,632)  -    (5,632)

Proceeds from preferred stock issuance, net of costs (115,000 shares)

  110,927                   110,927 

Stock-based compensation expense

  -   -   1,245   -   -   -    1,245 
                              

Balance as of September 30, 2021

 $110,927  $586,946  $25,851  $413,996  $(38,314) $(973)  $1,098,433 

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

     Nine Months Ended
September 30,
(dollars in thousands)2017     2016
Cash flows from operating activities 
Net income$       32,640$       33,106
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment2,3642,084
Provision for loan losses4,00013,500
Increase in valuation allowance15,325-
Amortization of intangibles555627
Net accretion of loans(1,106)(3,381)
Accretion on bank premises(58)(94)
Accretion on deposits(19)(167)
Accretion on borrowings(156)(250)
Stock-based compensation1,3151,650
Gains on sales of investment securities, net(1,596)(4,234)
Gains on sales of loans held-for-sale, net(120)(147)
Gains on sales of fixed assets, net(8)-
Loans originated for resale(6,790)(6,399)
Proceeds from sale of loans held-for sale12,0154,948
Net loss (gain) on sale of other real estate owned82(182)
Increase in cash surrender value of bank owned life insurance(2,402)(1,843)
Amortization of premiums and accretion of discounts on investments securities, net1,8081,148
(Increase) decrease in accrued interest receivable(1,876)48
Decrease (increase) in other assets8,894(2,813)
Increase (decrease) in other liabilities3,444(981)
Net cash provided by operating activities68,31136,620
Cash flows from investing activities
Investment securities available-for-sale:
Purchases(138,945)(114,844)
Sales29,54385,253
Maturities, calls and principal repayments61,700109,452
Investment securities held-to-maturity:
Purchases-(1,000)
Maturities and principal repayments-14,758
Net (purchases) redemptions of restricted investment in bank stocks(5,362)8,077
Payments on loans held-for-sale2,841-
Net increase in loans(447,457)(359,945)
Proceeds from sales of fixed assets8-
Purchases of premises and equipment(2,148)(1,769)
Purchases of bank owned life insurance(10,000)(17,000)
Proceeds from sale of other real estate owned1,1242,992
Net cash used in investing activities(508,696)(274,026)
Cash flows from financing activities
Net increase in deposits279,517478,150
Advances of Federal Home Loan Bank (“FHLB”) borrowings780,000375,000
Repayments of FHLB borrowings(656,000)(565,000)
Repayment of repurchase agreement(15,000)-
Cash dividends paid on common stock(7,207)(6,805)
Cash dividends paid on preferred stock-(22)
Common stock issuance costs(180)-
Redemption of preferred stock-(11,250)
Proceeds from exercise of stock options118232
Net cash provided by financing activities381,248270,305
Net change in cash and cash equivalents(59,137)32,899
Cash and cash equivalents at beginning of period200,399200,895
Cash and cash equivalents at end of period$141,262$233,794
Supplemental disclosures of cash flow information
Cash payments for:
Interest paid on deposits and borrowings$25,807$22,791
Income taxes4,67018,195
Supplemental disclosures of noncash investing activities
Transfer of loans to other real estate owned$580$887
Transfer of loans from held-for-investment to held-for-sale34,65213,514
Transfer of investment securities from held-to-maturity to available-for-sale-209,855

  

Nine Months Ended

 
  

September 30,

 

(dollars in thousands)

 

2022

  

2021

 

Cash flows from operating activities

        

Net income

 $92,654  $97,315 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization of premises and equipment

  2,903   2,832 

Provision for (reversal of) credit losses

  14,450   (6,315)

Amortization of intangibles

  1,276   1,498 

Net accretion of loans

  (2,448)  (4,130)

Accretion on bank premises

  (37)  (61)

Accretion on deposits

  (657)  (1,762)

Amortization (accretion) on borrowings, net

  27   (43)

Stock-based compensation

  3,519   3,202 

Gains on sales/redemptions of securities available-for-sale, net

  -   (195)

Losses on equity securities, net

  1,431   242 

Gain on sale of branches

  -   (674)

Net losses on disposition of other premises and equipment

  -   65 

Gains on sale of loans held-for-sale, net

  (1,519)  (2,668)

Loans originated for resale

  (18,619)  (43,676)

Proceeds from sale of loans held-for-sale

  25,955   57,674 

Loss/(gain) on sale of other real estate owned

  6   (18)

Increase in cash surrender value of bank owned life insurance

  (4,069)  (3,527)

Amortization of premiums and accretion of discounts on securities available-for-sale

  1,848   4,677 

Amortization of subordinated debentures issuance costs

  228   227 

(Increase) decrease in accrued interest receivable

  (4,788)  1,707 

Net change in operating leases

  (142)  (734)

(Increase) decrease in other assets

  (4,781)  43,319 

(Decrease) increase in other liabilities

  (12,291)  5,689 

Net cash provided by operating activities

  94,946   154,644 
         

Cash flows from investing activities

        

Investment securities available-for-sale:

        

Purchases

  (320,946)  (203,534)

Maturities, calls and principal repayments

  135,548   215,531 

Purchases of equity securities

  (3,200)  (555)

Net (purchases) redemptions of restricted investment in bank stocks

  (17,498)  6,993 

Cash flow hedge premium payment

  (6,965)  - 

Payments on loans held-for-sale

  5   32 

Net increase in loans

  (1,084,483)  (345,098)

Purchases of bank owned life insurance

  (30,000)  (25,000)

Purchases of premises and equipment

  (2,353)  (2,473)

Proceeds from sale of branches

  -   1,087 

Proceeds from sale of other real estate owned

  309   321 

Net cash used in investing activities

  (1,329,583)  (352,696)
         

Cash flows from financing activities

        

Net increase in deposits

  978,214   440,876 

Repayment of subordinated debentures

  -   (50,000)

Advances of borrowings

  2,305,181   100,000 

Repayments of borrowings

  (1,943,448)  (272,686)

Cash dividends on preferred stock

  (4,528)  - 

Repurchase of treasury stock

  (13,127)  (8,043)

Cash dividends paid on common stock

  (17,338)  (12,345)

Proceeds from exercise of stock options

  124   45 

Net proceeds from the issuance of preferred stock

  -   110,927 

Share redemption for tax withholdings on performance units and restricted stock units earned

  (2,133)  (1,283)

Net cash provided by financing activities

  1,302,945   307,491 

Net change in cash and cash equivalents

  68,308   109,439 

Cash and cash equivalents at beginning of period

  265,536   303,756 
         

Cash and cash equivalents at end of period

 $333,844  $413,195 

8
Table of Contents

(continued)

Supplemental disclosures of cash flow information

        

Cash payments for:

        

Interest paid on deposits and borrowings

 $34,552  $32,664 

Income taxes

  31,426   35,809 

Supplemental disclosures of noncash activities

        

Investing:

        

Transfer of loans from held-for-investment to other real estate owned

 $579  $304 

Transfer of loans from held-for-investment to held-for-sale

  13,652   14,211 

Transfer of loans from held-for-sale to held-for-investment

  -   1,963 

See accompanying notes to unaudited consolidated financial statements.

7

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Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(unaudited)

Note 1. 1a.Nature of Operations, and Principles of Consolidation and Risk and Uncertainties

Nature of Operations

ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company.company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Parent Corporation’s business currently consists primarily of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”). The Bank’s subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a Delaware investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), and NJCB Spec-1,Spec-1, LLC (a New Jersey limited liability company), Port Jervis Holdings, LLC (a New Jersey limited liability company), BONJ Special Properties, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey financial technology company).

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 twentytwenty-four other banking offices.offices and two loan production/business development offices throughout New Jersey, New York and South Florida. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’ business, real estate rentalrentals and consumer wages.

The preceding unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q10-Q and Rule 10-0110-01 of Regulation S-X,S-X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 20172022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017, 2022, or for any other interim period. The Company’s 20162021 Annual Report on Form 10-K10-K should be read in conjunction with these consolidated financial statements.

Basis of Presentation

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

Use of Estimates

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.

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Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Risks and Uncertainties

As previously disclosed, on March 11, 2020 the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to impact the United States and the world. On March 27, 2020, the Coronavirus Aid, Relief, andEconomic Security Act (CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The consolidated financial statementsCOVID-19 pandemic has adversely affected, and continues to adversely affect economic activity globally, nationally and locally. Although economic activity began to accelerate in 2021, and the United States continues to implement a COVID-19 vaccination program, COVID-19, its variants and actions taken to mitigate the spread of it have been prepared in conformity with GAAP. Some items had and may in the prior year consolidatedfuture have an adverse impact on the economies and financial statements were reclassifiedmarkets of many countries and parts of the United States, including the New Jersey/New York metropolitan area in which the Company primarily operates. Although the Company has been able to conformmitigate the impact of the pandemic on its operations, COVID-19 could impact the Company’s operations in the future. The effects of the COVID-19 pandemic may adversely affect the Company’s financial condition and results of operations in future periods. Although state and local governments have lifted most restrictions on conducting business, it is possible that restrictions could be reimposed.

On July 27, 2017, the U.K. Financial Conduct Authority, which regulates London Interbank Offered Rate ("LIBOR"), announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the LIBOR administrator after 2021. The announcement also indicates that the continuation of LIBOR on the current presentation. Reclassifications had nobasis cannot and will not be guaranteed after 2021. Consequently, although banks have continued to submit rates for the calculation of LIBOR in 2022, at this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Similarly, banking regulators in the United States have required insured depository institutions in the United States to cease originating loans using LIBOR as a rate index as of December 31, 2021, and in March 2022 Congress adopted legislation providing for the replacement of LIBOR indexes in contracts without fall back language with the Secured Overnight Financing Rate ("SOFR"), and for the Federal Reserve to adopt regulation by September of 2022 implementing this change. Although the Federal Reserve has proposed regulations implementing this legislation, the regulations have not yet been finalized. Although the Bank ceased using LIBOR as an index for loans it originates, it is unclear at this time what effect these changes may have on prior year net incomethe values of loans and liabilities held or stockholders’ equity.owed by the Bank whose interest rates are tied to LIBOR. Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our loans, and our investment securities.

The United States economy is currently experiencing a level of price inflation not experienced since the late 1970’s and early 1980’s. It is therefore difficult to predict the response of consumers and businesses to this level of inflation, and its impact on the economy. In addition, in order to attempt to control and reduce the level of inflation, the Federal Reserve has embarked on a series of interest rate increases along with quantitative tightening to further constrict economic conditions. It is unclear whether the Federal Reserve’s efforts will be successful, and what impact they may have on the United States’ economy. It is possible that the combined effects of inflation and increases in market interest rates could cause the economy of the United States to enter a recession, which could negatively affect the businesses of our borrowers and their ability to repay their loans or need credit, which could negatively affect our results of operations.    

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Table of Contents

Note 2. New1b. Authoritative Accounting Guidance

Newly Issued, But Not Yet Effective Accounting Standards

In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU No. 2017-12 “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.”2022-03”). ASU No. 2017-12 refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both2022-03 clarifies that a contractual restriction on the facesale of an equity security is not considered part of the financial statementsunit of account of the equity security and, therefore, is not considered in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance.measuring fair value.  ASU 2017-12 will be2022-03 is effective for public business entitiesthe Company for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Although management continues to evaluate the potential impact of ASU 2017-12 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact to our consolidated financial statements.

ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” ASU No. 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 will be effective for us on January 1, 2019 and we are currently evaluating this ASU to determine the impact on our consolidated financial statements.

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

8

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

Note 2. New Authoritative Accounting Guidance – (continued)

ASU No. 2016-15, “Statement of Cash Flows (Topic 230):Classification of Certain Cash Receipts and Cash Payments” provides guidance on the following eight specific cash flow issues: (1) Debt prepayment or debt extinguishment costs; (2) Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) Contingent consideration payments made after a business combination; (4) Proceeds from the settlement of insurance claims; (5) Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) Distributions received from equity method investees; (7) Beneficial interests in securitization transactions; and (8) Separately identifiable cash flows and application of the predominance principle. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. Although management continues to evaluate the potential impact of ASU 2016-05 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact to our consolidated financial statements.

ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Assets Measured at Amortized Cost.” ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates and affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, 2023, including interim periods within those fiscal years. The Company has formed a CECL committee that will be assessing our data and system needs. The Company has also met with multiple third-party vendors who may provide assistance in implementation and model creation. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the ASU is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the ASU on our consolidated financial statements.

ASU No. 2016-02, “Leases (Topic 842)” requires the recognition of a right of use asset and related lease liability by lessees for leases classified as operating leases under current GAAP. Topic 842, which replaces the current guidance under Topic 840, retains a distinction between finance leases and operating leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee also will not significantly change from current GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities. Topic 842 will be effective for the Company for reporting periods beginning January 1, 2019,years, with early adoption permitted. The Company must apply a modified retrospective transition approachis evaluating the effect that ASU 2022-03 will have on its consolidated financial statements.

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings (“TDRs”) in ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors” for entities that have adopted the current expected credit loss (“CECL”) model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13”). ASU 2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, “Financial Instruments—Credit Losses—Measured at Amortized Cost”. ASU 2022-02 is effective for the applicable leases existing at, or entered intoCompany for fiscal years beginning after the beginning of the earliest comparative period presented in the consolidated financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is currently leasing seventeen properties as branch locations and is leasing certain office equipment. The adoption of ASU 2016-02 will result in increases to the Company's assets and liabilities. We are currently in the process of evaluating all of our leases for compliance with the new ASU.

ASU No. 2016-01,Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01, among other things; (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-01 will be effective for us on January 1, 2018 and we are currently evaluating the potential impact ofeffect that ASU No. 2016-012022-02 will have on ourits consolidated financial statements.

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Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 2. New Authoritative Accounting Guidance – (continued)(unaudited)

ASU No. 2014-09,“Revenue from Contracts with Customers (Topic 606).”ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective for us on January 1, 2017; however, the FASB recently issued ASU 2015-14,“Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date” which deferred the effective date of ASU 2014-09 by one year to January 1, 2018. Although management continues to evaluate the potential impact of ASU 2014-09 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact to our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-08,Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments relate to when another party, along with the entity, is involved in providing a good or service to a customer. The amendments in this update affect the guidance in ASU No. 2014-09 above, which is not yet effective. The effective date will be the same as the effective date of ASU No. 2014-09.

In April 2016, the FASB issued ASU No. 2016-10,Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: identifying performance obligations, and the licensing implementation guidance. The amendments in this update are intended to improve the operability and understandability of the licensing implementation guidance. The amendments in this update affect the guidance in ASU No. 2014-09 above, which is not yet effective. The effective date will be the same as the effective date of ASU No. 2014-09.

In May 2016, the FASB issued ASU No. 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients.

In December 2016, the FASB issued ASU No. 2016-20,Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements. The FASB board decided to issue a separate update for technical corrections and improvements to Topic 606 and other Topics amended by ASU No. 2014-09 to increase awareness of the proposals and to expedite improvements to ASU No. 2014-09. The amendment affects narrow aspects of the guidance issued in ASU No. 2014-09.

10

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

Note 3. 2.Earnings per Common Share

Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 260-10-45260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”).  The restricted stock awards previously granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities. The two-classtwo-class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities.

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

Three Months EndedNine Months Ended
September 30,September 30,
(in thousands, except for per share data)
   2017   2016   2017   2016
Net income available to common stockholders$       13,035$                11,812$       32,534$       33,084
Earnings allocated to participating securities424410622
Net income$13,077$11,856$32,640$33,106
Weighted average common shares outstanding, including participating securities32,01530,14331,99930,094
Weighted average participating securities(103)(113)(104)(98)
Weighted average common shares outstanding31,91230,03031,89529,996
Incremental shares from assumed conversions of options, performance units and restricted shares270329272351
Weighted average common and equivalent shares outstanding32,18230,35932,16730,347
 
Earnings per common share:
Basic$0.41$0.39$1.02$1.10
Diluted0.410.391.011.09

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

(dollars in thousands, except for per share data)

 

2022

  

2021

  

2022

  

2021

 

Net income available to common stockholders

 $27,406  $32,097  $88,127  $97,315 

Earnings allocated to participating securities

  (67)  (76)  (217)  (250)

Income attributable to common stock

 $27,339  $32,021  $87,910  $97,065 
                 

Weighted average common shares outstanding, including participating securities

  39,243   39,741   39,393   39,770 

Weighted average participating securities

  (96)  (95)  (97)  (102)

Weighted average common shares outstanding

  39,147   39,646   39,296   39,668 

Incremental shares from assumed conversions of options, performance units and restricted shares

  192   223   214   220 

Weighted average common and equivalent shares outstanding

  39,339   39,869   39,510   39,888 
                 

Earnings per common share:

                

Basic

 $0.70  $0.81  $2.24  $2.45 

Diluted

  0.70   0.80   2.23   2.43 

There were no antidilutive share equivalents as of  September 30, 2017 and 2022 or September 30, 2016.2021.

13
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4.3.Investment Securities Available-For-Sale

The Company’s investment securities are all classified as available-for-sale at as of September 30, 20172022 and December 31, 2016. Securities2021. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in stockholders’ equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value as of September 30, 20172022 and December 31, 2016.2021. 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 76 of the Notes to Consolidated Financial Statements for a further discussion.

During the quarter ended September 30, 2016, the Company transferred all securities previously categorized as held-to-maturity to available-for-sale classification. The transfer resulted in an increase of approximately $210 million in amortized cost basis of available-for-sale securities and resulted in a net increase to accumulated other comprehensive income of $7.4 million, net of tax. The transfer enhanced liquidity and increased flexibility with regard to asset-liability management and balance sheet composition. As a result of the transfer, the Company believes it has tainted its held-to-maturity classification and judgment will be required in the future in determining when circumstances have changed such that management can assert that it has the intent and ability to hold debt securities to maturity. Based on this guidance, the Company does not expect to classify any securities as held-to-maturity within the near future.

Transfers of debt securities from the held-to-maturity category to the available-for-sale category are made at fair value at the date of transfer. For transfers from the available-for-sale category to the held-to maturity category 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 security. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted out of other comprehensive income with an offsetting entry to interest income as a yield adjustment through earnings over the remaining terms of the securities. For transfers from the held-to-maturity category to the available-for-sale category unrealized holding gain or loss at the date of the transfer shall be recognized in accumulated other comprehensive income, net of applicable taxes.

11

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

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

The following tables present information related to the Company’s portfolio of securities at available-for-sale as of September 30, 20172022 and December 31, 2016:2021.

                  

Allowance

 
                  

for

 
      

Gross

  

Gross

      

Investment

 
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

  

Credit

 
  

Cost

  

Gains

  

Losses

  

Value

  

Losses

 
  

(dollars in thousands)

 

September 30, 2022

                    
                     

Securities available-for-sale

                    

Federal agency obligations

 $55,896  $-  $(10,276) $45,620  $- 

Residential mortgage pass-through securities

  468,783   -   (61,798)  406,985   - 

Commercial mortgage pass-through securities

  25,546   -   (4,651)  20,895   - 

Obligations of U.S. states and political subdivisions

  159,441   46   (18,380)  141,107   - 

Corporate bonds and notes

  6,998   -   (8)  6,990   - 

Asset-backed securities

  1,934   -   (36)  1,898    

Other securities

  134   -   -   134   - 

Total securities available-for-sale

 $718,732  $46  $(95,149) $623,629  $- 
                     

December 31, 2021

                    

Securities available-for-sale

                    

Federal agency obligations

 $50,336  $649  $(625) $50,360  $- 

Residential mortgage pass-through securities

  317,111   1,868   (2,884)  316,095   - 

Commercial mortgage pass-through securities

  10,814   118   (463)  10,469   - 

Obligations of U.S. states and political subdivisions

  145,045   1,562   (982)  145,625   - 

Corporate bonds and notes

  8,968   81   -   9,049   - 

Asset-backed securities

  2,563   3   (2)  2,564   - 

Certificates of deposit

  150   -   -   150   - 

Other securities

  195   -   -   195   - 

Total securities available-for-sale

 $535,182  $4,281  $(4,956) $534,507  $- 

GrossGross
AmortizedUnrealizedUnrealizedFair
September 30, 2017     Cost     Gains     Losses     Value
(dollars in thousands)
Federal agency obligations $       55,819 $       290 $       (171) $       55,938
Residential mortgage pass-through securities133,517668(1,021)133,164
Commercial mortgage pass-through securities  4,088  42  -   4,130
Obligations of U.S. states and political subdivisions143,7872,233(1,044)144,976
Trust preferred securities  4,576  122  (71)  4,627
Corporate bonds and notes30,052255(219)30,088
Asset-backed securities  12,605  66  (38)  12,633
Certificates of deposit6225-627
Equity securities  376  254  -   630
Other securities13,976-(273)13,703
Total securities available-for-sale $399,418 $3,935 $(2,837) $400,516
 
GrossGross
AmortizedUnrealizedUnrealizedFair
December 31, 2016CostGainsLossesValue
 (dollars in thousands)
Federal agency obligations $52,826 $282 $(271) $52,837
Residential mortgage pass-through securities72,922519(944)72,497
Commercial mortgage pass-through securities  4,186  23  -   4,209
Obligations of U.S. states and political subdivisions148,7472,789(931)150,605
Trust preferred securities  5,575  242  (151)  5,666
Corporate bonds and notes36,717586(375)36,928
Asset-backed securities  14,867  2  (286)  14,583
Certificates of deposit97310-983
Equity securities  376  192  -   568
Other securities14,739-(325)14,414
Total securities available-for-sale $351,928 $4,645 $(3,283) $353,290
14

12

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3.(unaudited)Investment Securities – (continued)

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

Investment securities having a carrying value of approximately $174.8 million and $71.2 million as of September 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits, borrowings, repurchase agreements, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law. As of September 30, 2022 and December 31, 2021, 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.

The following table presents information for investments in securities at available-for-sale as of September 30, 2017,2022, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer. Securities not due at a single maturity date are shown separately.

September 30, 2017
AmortizedFair
     Cost     Value
(dollars in thousands)
Securities available-for-sale:
Due in one year or less$       6,775$       6,801
Due after one year through five years30,82431,197
Due after five years through ten years39,48940,174
Due after ten years170,373170,717
Residential mortgage pass-through securities133,517133,164
Commercial mortgage pass-through securities4,0884,130
Equity securities376630
Other securities13,97613,703
Total$399,418$400,516

  

September 30, 2022

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(dollars in thousands)

 

Securities available-for-sale:

        

Due in one year or less

 $5,451  $5,444 

Due after one year through five years

  4,106   4,107 

Due after five years through ten years

  2,342   2,289 

Due after ten years

  212,370   183,775 

Residential mortgage pass-through securities

  468,783   406,985 

Commercial mortgage pass-through securities

  25,546   20,895 

Other securities

  134   134 

Total securities available-for-sale

 $718,732  $623,629 

Gross gains and losses from the sales calls and maturitiesredemptions of securities for periods presented were as follows (dollars in thousands):follows:

Three Months EndedNine Months Ended
September 30,September 30,
     2017     2016     2017     2016
Net gains on sales of securities, after tax$       -$       78,680$       29,543$       85,253
 
Gross gains on sales of securities-4,1311,5964,234
Gross losses on sales of securities----
Net gains on sales of securities-4,1311,5964,234
Less: tax provision on net gains-1,6405791,682
 
Net gains on sales of securities, after tax$-$2,491$1,017$2,552

The Company reviews all securities for potential recognition

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2022

  

2021

  

2022

  

2021

 
  

(dollars in thousands)

 

Proceeds

 $-  $-  $-  $5,185 
                 

Gross gains on sales/redemptions of securities

  -   -   -   195 

Gross losses on sales/redemptions of securities

  -   -   -   - 

Net gain on sales/redemptions of securities

  -   -   -   195 

Less: tax provision on net gain

  -   -   -   (48)

Net gain on sales/redemptions of securities, after taxes

 $-  $-  $-  $147 

15
Table 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.

13

Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3.(unaudited)Investment Securities – (continued)

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

Temporarily ImpairedImpairment Analysis of Available--for-sale Debt Securities

The following tables indicate securities in an unrealized loss position for which an allowance for credit losses (“ACL”) has not been recorded, aggregated by investment category and by the length of continuous time individual securities have been in an unrealized loss position as of September 30, 2022 and December 31, 2021.

  

September 30, 2022

 
  

Total

  

Less than 12 Months

  

12 Months or Longer

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
  

(dollars in thousands)

 

Securities available-for-sale:

                        

Federal agency obligations

 $45,620  $(10,276) $30,535  $(4,261) $15,085  $(6,015)

Residential mortgage pass-through securities

  406,984   (61,798)  293,070   (32,342)  113,914   (29,456)

Commercial mortgage pass-through securities

  20,895   (4,651)  15,961   (2,943)  4,934   (1,708)

Obligations of U.S. states and political subdivisions

  135,483   (18,380)  81,466   (11,098)  54,017   (7,282)

Corporate bonds and notes

  2,991   (8)  2,991   (8)  -   - 

Asset-backed securities

  1,898   (36)  1,242   (16)  656   (20)

Total temporarily impaired securities

 $613,871  $(95,149) $425,265  $(50,668) $188,606  $(44,481)

  

December 31, 2021

 
  

Total

  

Less than 12 Months

  

12 Months or Longer

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
  

(dollars in thousands)

 

Securities available-for-sale:

                        

Federal agency obligations

 $28,974  $(625) $28,974  $(625) $-  $- 

Residential mortgage pass-through securities

  246,396   (2,884)  214,701   (2,111)  31,695   (773)

Commercial mortgage pass-through securities

  8,370   (463)  4,682   (75)  3,688   (388)

Obligations of U.S. states and political subdivisions

  89,473   (982)  89,473   (982)  -   - 

Asset-backed securities

  802   (2)  802   (2)  -   - 

Total Temporarily Impaired Securities

 $374,015  $(4,956) $338,632  $(3,795) $35,383  $(1,161)

16
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3.Investment Securities – (continued)

The Company does has elected to exclude accrued interest from the amortized cost of its investment securities available-for-sale. Accrued interest receivable for investment securities available for sale as of September 30, 2022 and December 31, 2021, totaled $2.6 million and $1.6 million, respectively.

The Company evaluates securities in an unrealized loss position for impairment related to credit losses on at least a quarterly basis. Securities in unrealized loss positions are first assessed as to whether we intend to sell, or if it is more likely than not believe that anywe will be required to sell the security before recovery of its amortized cost basis. If one of the unrealizedcriteria is met, the security’s amortized cost basis is written down to fair value through current earnings. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value resulted from credit losses which were comprisedor other factors. If this assessment indicates that a credit loss exists, we compare the present value of 75cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and 84 securities asan allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. As of September 30, 20172022, the issuers of these securities continue to make timely principal and December 31, 2016, respectively, represent an other-than-temporary impairment (“OTTI”).interest payments. 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 relateddecline in fair value is primarily due to changes in interest rates and do market conditions, not affect changes in credit quality. No allowance for credit losses was recorded as of September 30, 2022. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. 

Federal agency obligations, residential mortgage backed pass-through securities and commercial mortgage backed pass-through securities are issued by U.S. Government agencies and U.S. Government sponsored enterprises. Although a government guarantee exists on these investments, these entities are not legally backed by the expected cash flowsfull faith and credit of the underlying collateral or issuer.

Factors which may contribute to unrealized losses include credit risk, market risk, changes in 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 the securities portfolio including limits on concentrations to any one issuer. The Company believes the securities portfolio is prudently diversified.

The unrealized losses included in the tables below are primarily related to changes in interest rates and credit spreads. All of the Company’s securities are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. These are largely intermediate duration holdings and, in certain cases, monthly principal payments can further reduce loss exposure resulting from an increase 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 OTTI at September 30, 2017.

In determining whether or not securities are OTTI, 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 OTTI charges that could have a material effect on the Company’s financial position and results of operations. In addition, the value of,federal government, and the realization of any loss on, a securitycurrent support they receive is subject to numerous risks as cited above.

14

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

Note 4. Securities Available-For-Sale – (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 September 30, 2017 and December 31, 2016:

September 30, 2017
TotalLess than 12 Months12 Months or Longer
FairUnrealizedFairUnrealizedFairUnrealized
   Value   Losses   Value   Losses   Value   Losses
(dollars in thousands)
Federal agency obligation$    21,451$     (171)$   17,679$     (116)$   3,772$     (55)
Residential mortgage pass-through securities77,391(1,021)49,079(457)28,312(564)
Obligations of U.S. states and political subdivisions54,073(1,044)47,016(829)7,057(215)
Trust preferred securities1,507(71)--1,507(71)
Corporate bonds and notes13,123(219)3,946(38)9,177(181)
Asset-backed securities7,929(38)--7,929(38)
Other securities11,193(273)5,911(56)5,282(217)
Total temporarily impaired securities$186,667$(2,837)$123,631$(1,496)$63,036$(1,341)

December 31, 2016
TotalLess than 12 Months12 Months or Longer
FairUnrealizedFairUnrealizedFairUnrealized
   Value   Losses   Value   Losses   Value   Losses
(dollars in thousands)
Federal agency obligation$   22,672$      (271)$   21,416$     (262)$   1,256$        (9)
Residential mortgage pass-through securities50,136(944)49,817(937)319(7)
Obligations of U.S. states and political subdivisions52,307(931)52,307(931)--
Trust preferred securities1,427(151)--1,427(151)
Corporate bonds and notes15,930(375)7,671(265)8,259(110)
Asset-backed securities13,404(286)3,743(88)9,661(198)
Other securities11,467(325)--11,467(325)
Total temporarily impaired securities$167,343$(3,283)$134,954$(2,483)$32,389$(800)

Securities having a carrying value of approximately $139.5 million and $121.9 million at September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits, Federal Reserve Bank discount window borrowings, Federal Home Loan Bank (“FHLB”) advances and for other purposes required or permitted by law.

As of September 30, 2017 and December 31, 2016, 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 agreementscap as part of the agreement entered into in 2008. Nonetheless, at this time we do not foresee any set of circumstances in which the government would not fund its commitments on these investments as the issuers are an integral part of the U.S. housing market in providing liquidity and stability. Therefore, we concluded that a zero-allowance approach for these investment securities is appropriate.

Note 4. Derivatives

As part of our overall asset liability management and strategy to help manage itsthe Company uses derivative instruments, which can include interest rate risk position.swaps, collars, caps, and floors.  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. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.

15

Derivatives Designated as Hedges

Subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship are accounted for in the following manner:

1) Cash flow hedges: changes in fair value are recognized as a component in other comprehensive income

2) Fair value hedges: changes in fair value are recognized concurrently in earnings

As long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100% of the periodic changes in fair value of the hedging instrument are accounted for as outlined above. This is the case whether or not economic mismatches exist in the hedging relationship. As a result, there is no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses is recognized in the period in which the hedged transactions impact earnings. The change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness is presented in the same income statement line item that is used to present the earnings effect of the hedged item.

17
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4. Derivatives –(unaudited) (continued)

Note 5. Derivatives – (continued)

Interest

Cash Flow Hedges

 The Company entered into nine forward starting pay fixed-rate interest rate swaps, were entered into on April 13, 2017, August 24, 2015, December 30, 2014 and October 15, 2014, each with a respectivetotal notional amount of $25$400 million, and wereall of which have since commenced. These are designated as cash flow hedges of an FHLB advance. current, Federal Home Loan Bank advances. We are required to pay fixed rates of interest ranging from 0.631% to 1.23% and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”). All swaps are currently on the books with expiration dates on the nine positions ranging from December 2025to March 2028. The swaps wereare determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income whileincome. Therefore, the aggregate fair value of the swapsswap 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.

Summary information about the interest rate swaps designated as cash flow hedges as of September 30, 2017, December 31, 2016 and September 30, 2016 are presented in the following table.

September 30,December 31,September 30,
     2017     2016     2016
(dollars in thousands)
Notional amount$       100,000$       75,000$       75,000
Weighted average pay rates1.52%1.59%1.58%
Weighted average receive rates1.07%0.69%0.70%
Weighted average maturity2.7 years2.8 years3.1 years
Fair value$164$88$(1,212)

Interest (income) expense recorded on these swap transactions totaled approximately $95,000($1.2) million and $326,000 for($0.5) million during the three and nine months ended September 30, 2017,2022, respectively, compared to $0.3 million and $1.5 million during the three and nine months ended September 30, 2021, respectively, and $167,000 is reported as a component of interest expense on FHLB Advances.

   The Company entered into one forward starting interest rate cap spread transaction, with a total notional amount of $150 million, which became effective on October 1, 2022 and $534,000 formatures in October of 2027. This is designated as a cash flow hedge of brokered certificates of deposit, and the three and nine months ended September 30, 2016, respectively.interest rate cap spread is indexed to a benchmark of fed funds with payment required on a monthly basis. The structure of these instruments is such that the Company entered into a $150 million notional amount of a sold interest rate cap agreement, in which we are required to pay the counterparty an incremental amount if the index rate exceeds a set cap rate. Simultaneously, the Company purchased $150 million notional amount of an interest rate cap agreement in which we receive an incremental amount if the index rate is above a set cap rate.  No payments are required if the index rate is at, or below, the cap rate on the sold or purchased interest rate cap agreements. 

Cash Flow Hedge

The following table presents the net lossesgains (losses) recorded in other comprehensive income and the Consolidated Statements of Income relating to the cash flow hedge derivative instruments for the following periods:periods indicated:

Nine Months Ended September 30, 2017
Amount of gainAmount of gainAmount of gain (loss)
(loss) recognized(loss) reclassifiedrecognized in other
in OCI (Effectivefrom OCI toNoninterest income
Portion)interest income(Ineffective Portion)
(dollars in thousands)
Interest rate contracts$                         45$                            -$                                         -

Nine Months Ended September 30, 2016
Amount of gainAmount of gainAmount of gain (loss)
(loss) recognized(loss) reclassifiedrecognized in other
in OCI (Effectivefrom OCI toNoninterest income
Portion)interest income(Ineffective Portion)
(dollars in thousands)
Interest rate contracts$                     (640)$                               -$                                      -

             
  

Three Months Ended September 30, 2022

 
  

Amount of gain (loss) recognized in OCI (Effective Portion)

  

Amount of (gain) loss reclassified from OCI to interest income

  

Amount of gain recognized in other Noninterest income (Ineffective Portion)

 
  

(dollars in thousands)

 

Interest rate contracts

 $16,969  $(1,178) $- 
             

  

Three Months Ended September 30, 2021

 
  

Amount of gain (loss) recognized in OCI (Effective Portion)

  

Amount of gain (loss) reclassified from OCI to interest income

  

Amount of gain recognized in other Noninterest income (Ineffective Portion)

 
  

(dollars in thousands)

 

Interest rate contracts

 $1,890  $328  $- 

18
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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4. Derivatives – (continued)

  

Nine Months Ended September 30, 2022

 
  

Amount of gain (loss) recognized in OCI (Effective Portion)

  

Amount of (gain) loss reclassified from OCI to interest income

  

Amount of gain recognized in other Noninterest income (Ineffective Portion)

 
  

(dollars in thousands)

 

Interest rate contracts

 $44,253  $(524) $- 

  

Nine Months Ended September 30, 2021

 
  

Amount of gain (loss) recognized in OCI (Effective Portion)

  

Amount of gain (loss) reclassified from OCI to interest income

  

Amount of gain recognized in other Noninterest income (Ineffective Portion)

 
  

(dollars in thousands)

 

Interest rate contracts

 $1,872  $1,543  $- 

The following table reflects the cash flow hedges included in the consolidated statements of condition as of September 30, 20172022 and December 31, 2016:2021:

September 30, 2017 December 31,2016
NotionalNotional
AmountFair ValueAmountFair Value
(dollars in thousands)
Interest rate swaps related to FHLB advances included in assets     $       100,000     $       164     $       75,000     $       88

16

  

September 30, 2022

  

December 31, 2021

 
  

Notional Amount

  

Fair Value

  

Notional Amount

  

Fair Value

 
      

(dollars in thousands)

     

Interest rate contracts

 $700,000  $54,041  $475,000  $3,347 
                 
                 

19
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(unaudited)

Note 6.5. Loans and the Allowance for LoanCredit Losses

Loans

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, premiums and discounts related to purchase accounting, and an allowance for loan 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, 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: commercial, commercial real estate, commercial construction, residential real estate (including home equity) and consumer.

The recognition of interest income on commercial, commercial real estate, commercial construction and residential loans is 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 is 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 residents and businesses within our 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 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.

Loans Held-for-Sale

Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan.

Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. A portion of these loans, taxi medallion loans, have no material observable trading in any market. Fair value is established with consideration of a range of market participant indications, for all or parts of these loans, and discounted cash flow analyses, which have significant unobservable inputs. See Note 7 for further discussion.

Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Allowance for Loan losses

The allowance for loan 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 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.

17

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

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

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.

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.

TDRs 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 TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan 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 and with the exogenous factor adjustments based on the risks present for each loan category. These exogenous factors 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 acquires 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 their estimated fair value, such that there is no carryover of the seller’s allowance for loan losses (“ALLL”). After acquisition, probable incurred credit losses are recognized by an increase in the ALLL.

Such purchased credit-impaired loans (“PCI”) are identified on an individual basis. 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).

A PCI loan may be resolved either through a sale of the loan, by working with the customer and obtaining partial or full repayment, by short sale of the collateral, or by foreclosure. A gain or loss on resolution would be recognized based on the difference between the proceeds received and the carrying amount of the loan.

PCI loans that met the criteria for nonaccrual may be considered performing, regardless of whether the customer is contractually delinquent, if management can reasonably estimate the timing and amount of the expected cash flows on such loans and if management expects to fully collect the new carrying value of the loans. As such, management may no longer consider the loans to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount.

18

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

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

Loans held-for-sale

The following table presents loans held-for-sale by loan segment:

September 30,     December 31,
20172016
(dollars in thousands)
Commercial$       47,430$       70,105
Commercial real estate41,811 7,712
Residential real estate 145 188
Total carrying amount$89,386$78,005

As of September 30, 2017 and December 31, 2016, the commercial loans held-for-sale segment included the Company’s entire taxi medallion portfolio, with a carrying value of $47.4 million and $65.6 million, net of $15.3 million and $-0- million valuation allowance, respectively. The commercial real estate segment reflects multifamily loans, with a carrying value of $41.8 million as of September 30, 2017. These loans were designated as loans held-for-sale during the quarter ended September 30, 2017. No portion of the valuation allowance has been designated toward the loans held-for-sale within the commercial real estate segment.

Activity in the valuation allowance was as follows for periods presented:

     Three Months     Three Months
EndedEnded
September 30,September 30,
20172016
(dollars in thousands)
Balance at beginning of period$       12,325 $       -
Reduction from loans paid off(38)  -
Increase in valuation allowance3,000-
Balance at end of period$15,287$-
 
 
Nine MonthsNine Months
EndedEnded
September 30,September 30,
20172016
(dollars in thousands)
Balance at beginning of period$-$-
Reduction from loans paid off(38)-
Increase in valuation allowance 15,325-
Balance at end of period$15,287$-

19

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

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

Loans receivable: The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred loan fees, at as of September 30, 20172022 and December 31, 2016:2021:

     September 30,     December 31,
20172016
(dollars in thousands)
Commercial$       641,613$       553,576
Commercial real estate2,585,2052,204,710
Commercial construction399,453 486,228 
Residential real estate264,244232,547
Consumer1,912 2,380
Gross loans 3,892,427 3,479,441
Net deferred loan fees(3,138)(3,609)
Total loans receivable$3,889,289$3,475,832

At

  September 30, 2022  December 31, 2021 
  

(dollars in thousands)

 

Commercial (1)

 $1,448,727  $1,299,428 

Commercial real estate

  5,666,848   4,741,590 

Commercial construction

  537,323   540,178 

Residential real estate

  256,085   255,269 

Consumer

  1,030   1,886 

Gross loans

  7,910,013   6,838,351 

Net deferred loan fees

  (9,563)  (9,729)

Total loans receivable

 $7,900,450  $6,828,622 

(1)

Includes PPP loans of $11.5 million and $93.1 million as of  September 30, 2022 and December 31, 2021 , respectively.

As of September 30, 20172022 and December 31, 2016, loan balances of2021, loans totaling approximately $1.9$2.6 billion and $1.8$2.5 billion respectively, were pledged to secure borrowings from the FHLB of New York.

Purchased Credit-Impaired Loans:Loans held-for-sale - The Company holds purchasedfollowing table sets forth the composition of the Company’s loans for which there was, at their acquisition date, evidenceheld-for-sale as of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investment of those loans is as follows at September 30, 20172022 and December 31, 2016.

     September 30,     December 31,
20172016
(dollars in thousands)
Commercial$       5,243 $       7,098
Commercial real estate 232 982
Total carrying amount$5,475$8,080

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during both the three and nine months ended September 30, 2017 and September 30, 2016. There were no reversals from the allowance for loan losses during the three and nine months ended September 30, 2017 and 2016.2021:

  September 30, 2022  December 31, 2021 
  

(dollars in thousands)

 

Commercial real estate

 $8,080  $- 

Residential real estate

  -   250 

Total carrying amount

 $8,080  $250 

Loans Receivable on Nonaccrual Status - The following tables presents the accretable yield, or income expected to be collected, on the purchased credit-impairedpresent nonaccrual loans for the following periods:with an ACL and nonaccrual loans without an ACL as of September 30, 2022 and December 31, 2021:

  

September 30, 2022

 
  

Nonaccrual loans with ACL

  

Nonaccrual loans without ACL

  

Total nonaccrual loans

 
  

(dollars in thousands)

 

Commercial

 $25,657  $1,201  $26,858 

Commercial real estate

  21,511   6,627   28,138 

Residential real estate

  623   1,828   2,451 

Total

 $47,791  $9,656  $57,447 

     Three Months     Three Months
EndedEnded
September 30,September 30,
20172016
(dollars in thousands)
Balance at beginning of period$       2,496$       3,233
Accretion of income(180)(185)
Balance at end of period$2,316$3,048
 
Nine MonthsNine Months
EndedEnded
September 30,September 30,
20172016
(dollars in thousands)
Balance at beginning of period$2,860 $3,599
Accretion of income (544) (551)
Balance at end of period$2,316 $3,048

20

20
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(unaudited)

Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)

Loans Receivable on Nonaccrual Status:The following tables presents nonaccrual loans included in loans receivable by loan segment as of the periods presented:

     September 30,     December 31,
20172016
(dollars in thousands)
Commercial $       951$       1,460
Commercial real estate 8,369 1,081
Residential real estate4,435 3,193
Total loans receivable on nonaccrual status$13,755$5,734

  

December 31, 2021

 
  Nonaccrual loans with ACL  Nonaccrual loans without ACL  Total nonaccrual loans 
  

(dollars in thousands)

 

Commercial

 $28,746  $1,316  $30,062 

Commercial real estate

  15,362   10,031   25,393 

Commercial construction

  -   3,150   3,150 

Residential real estate

  1,239   1,856   3,095 

Total

 $45,347  $16,353  $61,700 

Nonaccrual loans and loans 90 days or greater past due and still accruing include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.

Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third-partythird-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. 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. All loans past due 90 days or greater and all impaired loans are included in the appropriate category below.

Credit Quality Indicators:The following table presents information, excluding loans held-for-sale and net deferred loan fees, about the Company’s loan credit quality at September 30, 2017 and December 31, 2016:

September 30, 2017
          Special               
PassMentionSubstandardDoubtfulTotal
(dollars in thousands)
Commercial$       630,818$       3,882$       6,913$       -$       641,613
Commercial real estate2,535,00530,87519,325-2,585,205
Commercial construction393,6253,2392,589-399,453
Residential real estate264,244---264,244
Consumer1,912---1,912
Gross loans$3,825,604$37,996$28,827$-$3,892,427
 
December 31, 2016
Special
PassMentionSubstandardDoubtfulTotal
(dollars in thousands)
Commercial$539,961$3,255$10,360$-$553,576
Commercial real estate2,154,34331,17319,194-2,204,710
Commercial construction480,3193,3882,521-486,228
Residential real estate228,990-3,557-232,547
Consumer2,318-62-2,380
Gross loans$3,405,931$37,816$35,694$-$3,479,441

21

21
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(unaudited)

Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)

We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP. Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below. The following table provides an analysis of the impairedpresents loans by segmentorigination and risk designation as of September 30, 2017 and December 31, 2016:2022 (dollars in thousands):

  

Term loans amortized cost basis by origination year

       
  

2022

  

2021

  

2020

  

2019

  

2018

  

Prior

  

Revolving Loans

  

Total Gross Loans

 

Commercial

                                

Pass

 $248,673  $311,005  $50,801  $31,402  $54,872  $164,539  $532,643  $1,393,935 

Special mention

  -   -   -   588   -   3,556   3,301   7,445 

Substandard

  7,636   152   17   2,023   11,190   22,639   3,690   47,347 

Doubtful

  -   -   -   -   -   -   -   - 

Total Commercial

 $256,309  $311,157  $50,818  $34,013  $66,062  $190,734  $539,634  $1,448,727 
                                 

Commercial Real Estate

                                

Pass

 $1,386,412  $1,617,355  $387,135  $364,220  $384,288  $1,033,994  $370,982  $5,544,386 

Special mention

  -   -   -   1,317   -   41,841   8,883   52,041 

Substandard

  -   1,939   4,500   12,517   19,314   23,984   8,167   70,421 

Doubtful

  -   -   -   -   -   -   -   - 

Total Commercial Real Estate

 $1,386,412  $1,619,294  $391,635  $378,054  $403,602  $1,099,819  $388,032  $5,666,848 
                                 

Commercial Construction

                                

Pass

 $2,056  $7,605  $7,320  $508  $-  $-  $512,107  $529,596 

Special mention

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   7,727   7,727 

Doubtful

  -   -   -   -   -   -   -   - 

Total Commercial Construction

 $2,056  $7,605  $7,320  $508  $-  $-  $519,834  $537,323 
                                 

Residential

                                

Pass

 $34,852  $25,487  $25,292  $21,732  $20,493  $80,042  $41,104  $249,002 

Special mention

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   3,509   3,574   7,083 

Doubtful

  -   -   -   -   -   -   -   - 

Total Residential Real Estate

 $34,852  $25,487  $25,292  $21,732  $20,493  $83,551  $44,678  $256,085 
                                 

Consumer

                                

Pass

 $903  $-  $10  $-  $5  $1  $111  $1,030 

Special mention

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   - 

Total Consumer

 $903  $-  $10  $-  $5  $1  $111  $1,030 
                                 

Total

                                

Pass

 $1,672,896  $1,961,452  $470,558  $417,862  $459,658  $1,278,576  $1,456,947  $7,717,949 

Special mention

  -   -   -   1,905   -   45,397   12,184   59,486 

Substandard

  7,636   2,091   4,517   14,540   30,504   50,132   23,158   132,578 

Doubtful

  -   -   -   -   -   -   -   - 

Grand Total

 $1,680,532  $1,963,543  $475,075  $434,307  $490,162  $1,374,105  $1,492,289  $7,910,013 
                                 
                                 
                                 

     September 30, 2017
     Unpaid     
RecordedPrincipalRelated
InvestmentBalanceAllowance
No related allowance recorded(dollars in thousands)
Commercial$3,068$3,073
Commercial real estate19,22119,283
Commercial construction4,3404,340 
Residential real estate2,5202,749
Consumer4646
Total$29,195$29,491
 
With an allowance recorded
Commercial real estate$1,640$2,052$       110
 
Total
Commercial$3,068$3,073$-
Commercial real estate20,86121,335 110
Commercial construction4,3404,340 -
Residential real estate2,5202,749-
Consumer4646-
Total (including allowance)$30,835$31,543$110
  
December 31, 2016
Unpaid
RecordedPrincipalRelated
InvestmentBalanceAllowance
No related allowance recorded(dollars in thousands)
Commercial$       3,637$       4,063
Commercial real estate18,28818,288
Commercial construction5,9095,909
Residential real estate1,8512,055
Consumer6262
Total$29,747$30,377
 
With an allowance recorded
Commercial real estate$1,244$1,244$145
 
Total
Commercial$3,637$4,063$-
Commercial real estate 19,532 19,532145
Commercial construction 5,9095,909-
Residential real estate1,8512,055-
Consumer62 62-
Total (including allowance)$30,991$31,621$145

22

22
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(unaudited)

Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)

The following table provides an analysis related to the average recorded investment and interest income recognized on impairedpresents loans by segmentorigination and risk designation as of and for the three and nine months ended September 30, 2017 and 2016:

     Three Months Ended September 30,     Nine Months Ended September 30,
2017     20162017     2016
Average     InterestAverage     InterestAverage     InterestAverage     Interest
RecordedIncomeRecordedIncomeRecordedIncomeRecordedIncome
InvestmentRecognizedInvestmentRecognizedInvestmentRecognizedInvestmentRecognized
(dollars in thousands)
Impaired loans (no allowance) 
 
Commercial$       3,100$       34$       6,704$       66$       3,149$       115$       4,317$       86
Commercial real estate19,302221 9,129 6518,8134248,167118
Commercial construction 4,28563 1,224214,27321597954
Residential real estate2,52923,27152,55163,247  15
Consumer 48 1701542 743
Total$29,264$321$20,398 $158$28,840$762$16,784$276
 
Impaired loans (allowance):
 
Commercial$-$-$91,393$925$-$-$85,620$2,447
Commercial real estate1,6452153-1,65439153-
Total$1,645$2$91,546$925$1,654$39$85,773$2,447
 
Total impaired loans:
 
Commercial$3,100$34$98,097$991$3,149$115$89,937$2,533
Commercial real estate20,9472239,2826520,4674638,320118
Commercial construction4,285631,224214,27321597954
Residential mortgage2,25923,27152,55163,24715
Consumer481701542743
 
Total$30,909$323$111,944$1,083$30,494$801$102,557$2,723

Included in impaired loans at September 30, 2017 and December 31, 2016 are loans that are deemed troubled debt restructurings. The recorded investment2021 (dollars in loans include accrued interest receivable and other capitalized costs such as real estate taxes paid on behalfthousands):

  

Term loans amortized cost basis by origination year

       
  

2021

  

2020

  

2019

  

2018

  8.5  

Prior

  

Revolving Loans

  

Total Gross Loans

 

Commercial

                                

Pass

 $403,203  $58,534  $54,485  $60,409  $95,727  $86,556  $471,588  $1,230,502 

Special mention

  -   -   -   -   1   4,045   4,266   8,312 

Substandard

  170   -   1,842   13,298   9,740   21,024   14,540   60,614 

Doubtful

  -   -   -   -   -   -   -   - 

Total Commercial

 $403,373  $58,534  $56,327  $73,707  $105,468  $111,625  $490,394  $1,299,428 
                                 

Commercial Real Estate

                                

Pass

 $1,692,098  $533,315  $420,995  $452,262  $497,065  $842,244  $170,721  $4,608,700 

Special mention

  -   -   -   -   5,142   50,438   6,601   62,181 

Substandard

  1,968   9,039   4,006   20,624   -   26,108   8,964   70,709 

Doubtful

  -   -   -   -   -   -   -   - 

Total Commercial Real Estate

 $1,694,066  $542,354  $425,001  $472,886  $502,207  $918,790  $186,286  $4,741,590 
                                 

Commercial Construction

                                

Pass

 $8,018  $7,370  $12,625  $2,600  $2,339  $-  $490,119  $523,071 

Special mention

  -   -   -   -   350   -   1,443   1,793 

Substandard

  -   -   -   -   -   -   15,314   15,314 

Doubtful

  -   -   -   -   -   -   -   - 

Total Commercial Construction

 $8,018  $7,370  $12,625  $2,600  $2,689  $-  $506,876  $540,178 
                                 

Residential Real Estate

                                

Pass

 $27,081  $29,539  $23,611  $25,070  $28,701  $66,249  $44,221  $244,472 

Special mention

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   7,262   3,535   10,797 

Doubtful

  -   -   -   -   -   -   -   - 

Total Residential Real Estate

 $27,081  $29,539  $23,611  $25,070  $28,701  $73,511  $47,756  $255,269 
                                 

Consumer

                                

Pass

 $1,590  $85  $39  $21  $28  $-  $123  $1,886 

Special mention

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   - 

Total Consumer

 $1,590  $85  $39  $21  $28  $-  $123  $1,886 
                                 

Total

                                

Pass

 $2,131,990  $628,843  $511,755  $540,362  $623,860  $995,049  $1,176,772  $6,608,631 

Special mention

  -   -   -   -   5,493   54,483   12,310   72,286 

Substandard

  2,138   9,039   5,848   33,922   9,740   54,394   42,353   157,434 

Doubtful

  -   -   -   -   -   -   -   - 

Grand Total

 $2,134,128  $637,882  $517,603  $574,284  $639,093  $1,103,926  $1,231,435  $6,838,351 

23
Table of the borrower and loan origination fees, net, when applicable. Cash basis interest and interest income recognized on accrual basis approximate each other.

23

Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)

Collateral Dependent Loans: Loans which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses. The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date. The following table presents collateral dependent loans that were individually evaluated for impairment as of September 30, 2022 and December 31, 2021:

  

September 30, 2022

 
  Real Estate  

Other

  

Total

 
  

(dollars in thousands)

 

Commercial

 $5,446  $23,449  $28,895 

Commercial real estate

  64,718   -   64,718 

Commercial construction

  7,727   -   7,727 

Residential real estate

  5,634   -   5,634 

Consumer

  -   -   - 

Total

 $83,525  $23,449  $106,974 

  

December 31, 2021

 
  Real Estate  

Other

  

Total

 
  

(dollars in thousands)

 

Commercial

 $6,385  $26,182  $32,567 

Commercial real estate

  55,244   -   55,244 

Commercial construction

  13,196   -   13,196 

Residential real estate

  8,856   -   8,856 

Consumer

  -   -   - 

Total

 $83,681  $26,182  $109,863 

AgingAnalysis - The following table provides an analysis of the aging of grossthe loans (excluding loans held-for-sale)by class, excluding net deferred fees, that are past due at as of September 30, 20172022 and December 31, 2016 by segment:2021:

Aging Analysis

September 30, 2017
            90 Days or                
Greater PastTotal Past
30-59 Days60-89 DaysDue and StillDue and 

September 30, 2022

 
Past DuePast DueAccruingNonaccrualNonaccrualCurrentGross Loans 

30-59 Days Past Due

  

60-89 Days Past Due

  

90 Days or Greater Past Due and Still Accruing

  

Nonaccrual

  

Total Past Due and Nonaccrual

  

Current

  

Gross Loans

 
(dollars in thousands) 

(dollars in thousands)

 
Commercial$       199$       288$       4,209$       951$       5,647$       635,966$       641,613 $171  $13  $4,392  $26,858  $31,434  $1,417,293  $1,448,727 
Commercial real estate5868,057-8,36917,0122,568,1932,585,205 -  -  5,676  28,138  33,814  5,633,034  5,666,848 
Commercial construction - ----399,453399,453 -  -  -  -  -  537,323  537,323 
Residential real estate918 541 -4,4355,894258,350264,244 671  -  -  2,451  3,122  252,963  256,085 
Consumer-2--21,9101,912  -   -   -   -   -   1,030   1,030 
Total$1,703$8,888$4,209$13,755$28,555$3,863,872$3,892,427 $842  $13  $10,068  $57,447  $68,370  $7,841,643  $7,910,013 
December 31, 2016
90 Days or
Greater PastTotal Past
30-59 Days60-89 DaysDue and StillDue and
Past DuePast DueAccruingNonaccrualNonaccrualCurrentGross Loans
(dollars in thousands)
Commercial$475$18$4,630$1,460$6,583$546,993$553,576
Commercial real estate4,9281,5846631,0818,2562,196,4542,204,710
Commercial construction---- -486,228 486,228
Residential real estate2,131388 - 3,1935,712 223,835 232,547
Consumer-----2,3802.380
Total$7,534$1,990$5,293$5,734$20,551$3,458,890$3,479,441

Included in the 90 days or greater past due and still accruing/accreting category as

  

December 31, 2021

 
  

30-59 Days Past Due

  

60-89 Days Past Due

  

90 Days or Greater Past Due and Still Accruing

  

Nonaccrual

  

Total Past Due and Nonaccrual

  

Current

  

Gross Loans

 
  

(dollars in thousands)

 

Commercial

 $4,305  $729  $4,457  $30,062  $39,553  $1,259,875  $1,299,428 

Commercial real estate

  1,622   1,009   5,935   25,393   33,959   4,707,631   4,741,590 

Commercial construction

  -   -   -   3,150   3,150   537,028   540,178 

Residential real estate

  1,437   292   3,139   3,095   7,963   247,306   255,269 

Consumer

  -   -   -   -   -   1,886   1,886 

Total

 $7,364  $2,030  $13,531  $61,700  $84,625  $6,753,726  $6,838,351 

24
Table of both September 30, 2017 and December 31, 2016 are three purchased credit-impaired loans, net of their fair value marks, which are accreting income per their valuation at date of acquisition.

24

Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(unaudited)

Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)

The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated credit quality, and the related portion of the allowance for loancredit losses (“ALLL”) that are allocated to each loan portfolio segment:

     September 30, 2017
     Commercial     Commercial     Residential               
Commercialreal estateconstructionreal estateConsumerUnallocatedTotal
(dollars in thousands)
ALLL
Individually evaluated for impairment$       -$       110$       -$       -$       -$       -$       110
Collectively evaluated for impairment7,71615,2243,9401,052232628,260
Acquired portfolio-1,500----1,500
Acquired with deteriorated credit quality-------
Total ALLL$7,716$16,834$3,940$1,052$2$326$29,870
 
Gross loans 
Individually evaluated for impairment$3,068$20,861 $4,340 $2,520$46 $30,835
Collectively evaluated for impairment618,0122,142,385395,113199,902 1,410 3,356,822
Acquired portfolio 15,290  421,727 -61,822456 499,295
Acquired with deteriorated credit quality5,243232- -- 5,475
Total gross loans$641,613$2,585,205$399,453$264,244$1,912$3,892,427
 
December 31, 2016
CommercialCommercialResidential
Commercialreal estateconstructionreal estateConsumerUnallocatedTotal
(dollars in thousands)
ALLL
Individually evaluated for impairment$-$145$-$-$-$-$145
Collectively evaluated for impairment6,63212,4384,789958377925,599
Acquired portfolio-------
Acquired with deteriorated credit quality-------
Total ALLL$6,632$12,583$4,789$958$3$779$25,744
 
Gross loans
Individually evaluated for impairment$3,637$19,532$5,909$1,851$62$30,991
Collectively evaluated for impairment517,8691,621,745478,865163,6861,7572,783,922
Acquired portfolio24,972562,4511,45467,010561656,448
Acquired with deteriorated credit quality7,098982---8,080
Total gross loans$553,576$2,204,710$486,228$232,547$2,380$3,479,441

25

  

September 30, 2022

 
  

Commercial

  Commercial real estate  

Commercial construction

  Residential real estate  

Consumer

  

Total

 
  

(dollars in thousands)

 

Allowance for credit losses - loans

                        

Individually evaluated impairment

 $10,600  $3,235  $-  $76  $-  $13,911 

Collectively evaluated impairment

  16,812   49,370   3,444   3,977   5   73,608 

Acquired with deteriorated credit quality individually analyzed

  2,277   1,921   -   -   -   4,198 

Total

 $29,689  $54,526  $3,444  $4,053  $5  $91,717 
                         

Gross loans

                        

Individually evaluated impairment

 $29,482  $59,042  $7,727  $5,634  $-  $101,885 

Collectively evaluated impairment

  1,414,286   5,602,130   529,596   250,451   1,030   7,797,493 

Acquired with deteriorated credit quality individually analyzed

  4,959   5,676   -   -   -   10,635 

Total

 $1,448,727  $5,666,848  $537,323  $256,085  $1,030  $7,910,013 

  

December 31, 2021

 
  

Commercial

  

Commercial real estate

  

Commercial construction

  

Residential real estate

  

Consumer

  

Total

 
  

(dollars in thousands)

 

Allowance for credit losses - loans

                        

Individually evaluated impairment

 $15,131  $955  $-  $131  $-  $16,217 

Collectively evaluated impairment

  8,561   42,713   3,580   3,497   7   58,358 

Acquired with deteriorated credit quality individually analyzed

  2,277   1,921   -   -   -   4,198 

Total

 $25,969  $45,589  $3,580  $3,628  $7  $78,773 
                         

Gross loans

                        

Individually evaluated impairment

 $33,726  $49,310  $13,196  $5,717  $-  $101,949 

Collectively evaluated impairment

  1,260,537   4,686,346   526,982   246,413   1,886   6,722,164 

Acquired with deteriorated credit quality individually analyzed

  5,165   5,934   -   3,139   -   14,238 

Total

 $1,299,428  $4,741,590  $540,178  $255,269  $1,886  $6,838,351 

25
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)

The Company’s allowance for loan losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit. There have been no material changes to the allowance for loan losses (“ALLL”) methodology as disclosed

Activity in the Company’s Annual Report on Form 10-KACL for loans for the yearthree and nine months ended September 30, 2022 is summarized in the tables below.

  

Three Months Ended September 30, 2022

 
  

Commercial

  

Commercial real estate

  

Commercial construction

  

Residential real estate

  

Consumer

  

Unallocated

  

Total

 
  

(dollars in thousands)

 

Balance as of June 30, 2022

 $28,135  $47,562  $3,413  $3,625  $4  $-  $82,739 

Charge-offs

  (410)  -   -   -   (3)  -   (413)

Recoveries

  53   -   -   -   -   -   53 

Provision for credit losses - loans

  1,911   6,964   31   428   4   -   9,338 
                             

Balance as of September 30, 2022

 $29,689  $54,526  $3,444  $4,053  $5  $-  $91,717 

  

Nine Months Ended September 30, 2022

 
  

Commercial

  

Commercial real estate

  

Commercial construction

  

Residential real estate

  

Consumer

  

Unallocated

  

Total

 
  

(dollars in thousands)

 

Balance as of December 31, 2021

 $25,969  $45,589  $3,580  $3,628  $7  $-  $78,773 

Charge-offs

  (751)  (226)  -   (9)  (3)  -   (989)

Recoveries

  54   -   -   63   -   -   117 

Provision for credit losses - loans

  4,417   9,163   (136)  371   1   -   13,816 
                             

Balance as of September 30, 2022

 $29,689  $54,526  $3,444  $4,053  $5  $-  $91,717 

Activity in the Company’s ACL for loans for the three and nine months ended September 30, 2021 is summarized in the table below. The CECL Day 1 row in the table for the nine months ended September 30, 2021 presents adjustments recorded through retained earnings to adopt the CECL standard and the increase to the ACL for loans associated with nonaccretable purchase accounting marks on loans that were classified as purchased credit-impaired as of December 31, 2016.2020.

A summary

  

Three Months Ended September 30, 2021

 
  

Commercial

  

Commercial real estate

  

Commercial construction

  

Residential real estate

  

Consumer

  

Unallocated

  

Total

 
  

(dollars in thousands)

 

Balance as of June 30, 2021

 $25,567  $43,815  $4,927  $4,366  $9  $-  $78,684 

Charge-offs

  (254)  (1,473)  -   -   -   -   (1,727)

Recoveries

  1   85   -   20   7   -   113 

(Reversal of) provision for credit losses - loans

  2,022   915   (1,225)  (788)  (8)  -   916 
                             

Balance as of September 30, 2021

 $27,336  $43,342  $3,702  $3,598  $8  $-  $77,986 

26
Table of the activity in the ALLL is as follows:

     Three Months Ended September 30, 2017
     Commercial     Commercial     Residential               
Commercialreal estateconstructionreal estateConsumerUnallocatedTotal
(dollars in thousands)
Balance at June 30, 2017$       7,238$       15,389$       4,241$       985$       2$       546$       28,401
 
Charge-offs----(1)-(1)
 
Recoveries172--1-20
 
Provision for loan losses4611,443(301)67-(220)1,450
 
Balance at September 30,2017$7,716$16,834$3,940$1,052$2$326$29,870
 
Three Months Ended September 30, 2016
CommercialCommercialResidential
Commercialreal estateconstructionreal estate ConsumerUnallocatedTotal 
(dollars in thousands)
Balance at June 30, 2016$15,548 $11,371$4,040 $1,091 $4 $709 $32,763
 
Charge-offs (1,878)--(27) (5)-(1,910)
 
Recoveries110--1-12
 
Provision for loan losses6,725 (6)321104(115)6,750
  
Balance at September 30, 2016$20,396$11,375$4,072$1,174$4$594$37,615

26

Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)

     Nine Months Ended September 30, 2017
     Commercial     Commercial     Residential               
Commercialreal estateconstructionreal estateConsumerUnallocatedTotal
(dollars in thousands)
Balance at December 31, 2016$       6,632$       12,583$       4,789$       958$       3$       779$       25,744
 
Charge-offs-(71)--(12)-(83)
 
Recoveries15850--1-209
 
Provision for loan losses9264,272(849)9410(453)4,000
 
Balance at September 30, 2017$7,716$16,834$3,940 $1,052$2$326$29,870
  
Nine Months Ended September 30, 2016
CommercialCommercialResidential
Commercialreal estateconstructionreal estateConsumerUnallocatedTotal
(dollars in thousands)
Balance at December 31, 2015$10,949 $10,926 $3,253$976 $4 $464$26,572
 
Charge-offs(2,396)--(94) (10) - (2,500)
 
Recoveries235-33-43
 
Provision for loan losses11,841414819289713013,500
 
Balance at September 30, 2016$20,396$11,375$4,072$1,174$4$594$37,615

  

Nine Months Ended September 30, 2021

 
  

Commercial

  

Commercial real estate

  

Commercial construction

  

Residential real estate

  

Consumer

  

Unallocated

  

Total

 
  

(dollars in thousands)

 

Balance as of December 31, 2020

 $28,443  $39,330  $8,194  $2,687  $4  $568  $79,226 

Day 1 effect of CECL

  (4,225)  9,605   (961)  2,697   9   (568)  6,557 
                             

Balance as of January 1, 2021 as adjusted for changes in accounting principle

  24,218   48,935   7,233   5,384   13   -   85,783 
                             

Charge-offs

  (304)  (1,628)  -   (7)  -   -   (1,939)
                             

Recoveries

  74   85   -   20   9   -   188 

(Reversal of) provision for credit losses - loans

  3,348   (4,050)  (3,531)  (1,799)  (14)  -   (6,046)
                             

Balance as of September 30, 2021

 $27,336  $43,342  $3,702  $3,598  $8  $-  $77,986 

Troubled Debt Restructurings

Loans are considered to have been modified in a troubled debt restructuring (“TDRs”) when, except as discussed below, due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of ninesix months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status.

At

As of September 30, 2017,2022, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in troubled debt restructurings.

27

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

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

The following table presents a rollforwardAs of TDRs and the related changes to the allowance for loan losses (“ALLL”) that occurred for the periods presented:

Nine Months EndedYear Ended
September 30, 2017December 31, 2016
(dollars in thousands)
RecordedRecorded
     Investment     ALLL     Investment     ALLL
Troubled Debt Restructurings
  
Beginning balance$     13,818$     -$     86,629$     4,500
Additions5,668-26,3258,250
Payoffs/paydowns(1,309)-(2,616)-
Transfers(580)-(96,520)-
Other---(12,750)
Ending balance$17,597$-$13,818$-

September 30, 2022, TDRs totaled $17.6$74.5 million, at September 30, 2017, of which $4.8$27.5 million were on nonaccrual status and $12.8$47.0 million were performing under their restructured terms. At As of December 31, 2016,2021, TDRs totaled $13.8$79.5 million, of which $0.5$35.9 million were on nonaccrual status and $13.3$43.6 million were performing under their restructured terms. The Company has allocated $7.5 million and $10.4 million of specific allowance related to TDRs as of September 30, 2017 did not increase the ALLL2022 and December 31, 2021, respectively.

The following table presents loans by class modified as TDRs that occurred during the three and nine months ended September 30, 2017. There were no charge-offs in connection with2022:

      

Pre-Modification

  

Post-Modification

 
      

Outstanding

  

Outstanding

 
  

Number of

  

Recorded

  

Recorded

 
  

Loans

  

Investment

  

Investment

 
  

(dollars in thousands)

 

Troubled debt restructurings:

            

Commercial

  2  $633  $633 

Commercial real estate

  2   9,043   8,543 

Residential real estate

  2   399   399 

Total

  6  $10,075  $9,575 

27
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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 5. Loans and the Allowance for Credit Losses – (continued)

The loans modified as a loan modification at the time of modificationTDR during the three or nine months ended September 30, 2017. 2022 included five maturity extensions and one interest rate reduction.  The one loan that was an interest rate reduction was a commercial real estate loan that included a one-time $500,000 principal paydown. 

There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2017.

TDRs totaled $106.7 million at 2022 and September 30, 2016, of which $1.4 million were on nonaccrual status and $105.3 million were performing under restructured terms. The Company had allocated $12.5 in specific allocations with respect to loans whose loan terms had been modified in troubled debt restructurings as of September 30, 2016. TDRs as of September 30, 2016 increased the ALLL by $5.0 and $8.3 million during the three and nine months ended September 30, 2016, respectively.2021.

The $12.5 million in specific allocations referenced above were associated with New York City taxi medallion lending and were calculated based on the present value of estimated cash flows, including contractual debt interest service through maturity, and principal repayments based on the estimated fair value of the collateral excluding any consideration for personal guarantees of borrowers, which provide an additional source of repayment but cannot be relied upon.

The following table presents loans by class modified as troubled debt restructuringsTDRs that occurred during the nine months ended September 30, 2016 (dollars in thousands)2021:

Pre-ModificationPost-Modification
OutstandingOutstanding
Number ofRecordedRecorded
     Loans     Investment     Investment
Troubled debt restructurings:
Commercial16$19,311$19,311
Commercial real estate2581581
Commercial construction---
Residential real estate---
Consumer---
 
Total18$19,892$19,892

Included in

      

Pre-Modification

  

Post-Modification

 
      

Outstanding

  

Outstanding

 
  

Number of

  

Recorded

  

Recorded

 
  

Loans

  

Investment

  

Investment

 
  

(dollars in thousands)

 

Troubled debt restructurings:

            

Commercial

  4  $1,276  $1,276 

Commercial real estate

  10   35,595   35,595 

Commercial construction

  1   1,641   1,641 

Residential real estate

  3   1,758   1,758 

Total

  18  $40,270  $40,270 

The loans modified as TDRs during the above TDRs were 14 loans secured by 25 New York City taxi medallions totaling $17.3 million. These loan modificationsnine months ended September 30,2021 included maturity extensions and interest rate reductionsreductions. 

Allowance for Credit Losses for Unfunded Commitments

The Company has recorded an ACL for unfunded credit commitments, which was recorded in other liabilities. The provision is recorded within the provision for (reversal of) credit losses on the Company’s income statement. The following table presents a rollforward of the allowance for credit losses for unfunded commitments for the three and maturity extensions. All 14 loans were accruing prior to modification, while 13 remained in accrual status post-modification.nine months ended September 30, 2022 and 2021:

28

  

Three Months Ended

  

Three Months Ended

 
  

September 30,

  

September 30,

 
  

2022

  

2021

 
  

(dollars in thousands)

 

Balance at beginning of period

 $2,324  $2,380 

Provision for credit losses - unfunded commitments

  662   184 

Balance at end of period

 $2,986  $2,564 

  

Nine Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2022

  

2021

 
  

(dollars in thousands)

 

Balance at beginning of period

 $2,352  $- 

Day 1 Effect of CECL

  -   2,833 

Provision for (reversal of) credit losses - unfunded commitments

  634   (269)

Balance at end of period

 $2,986  $2,564 

28
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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6.5. Loans and the Allowance for LoanCredit Losses – (continued)

Components of (Reversal of) Provision for Credit Losses

The TDRs described above increasedfollowing table summarizes the allowanceprovision for loan(reversal of) credit losses by $8.3 million duringfor the three and nine months ended September 30, 2016. There were no charge-offs in connection with a loan modification at the time of modification during the three 2022 and nine months ended September 30, 2016. There were no TDRs for which there was a payment default within twelve months following the modification during the three or nine months ended September 30, 2016.2021 :

  

Three Months Ended

  

Three Months Ended

 
  

September 30,

  

September 30,

 
  

2022

  

2021

 
  

(dollars in thousands)

 

Provision for credit losses - loans

 $9,338  $916 

Provision for credit losses - unfunded commitments

  662   184 

Provision for credit losses

 $10,000  $1,100 

  

Nine Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2022

  

2021

 
  

(dollars in thousands)

 

Provision for (reversal of) credit losses - loans

 $13,816  $(6,046)

Provision for (reversal of) credit losses - unfunded commitments

  634   (269)

Provision for (reversal of) credit losses

 $14,450  $(6,315)

Note 7. -6. Fair Value Measurements and Fair Value of Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

FASB ASC 820-10-05 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurements and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

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).

FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly.

FASB ASC 820-10-05 establishes a fair value hierarchy that prioritizes the inputs to valuation methods 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 under FASB ASC 820-10-05 are as follows:

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.

29
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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 as of September 30, 20172022 and December 31, 2016:2021:

Securities Available-for-Sale

and Equity Securities: Where quoted prices are available in an active market, securities are classified within 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 the fair value of the instruments and these are classified as Level 3. 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.

29

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

Note 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Derivatives

: The fair value of derivatives is based on valuation models using observable market data as of the measurement date (level 2)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-partythird-party pricing services.

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 as of September 30, 20172022 and December 31, 20162021 are as follows:

September 30, 2017
Fair Value Measurements at Reporting Date Using
Quoted Prices
in ActiveSignificant
Markets forOtherSignificant
IdenticalObservableUnobservable
AssetsInputsInputs
          (Level 1)     (Level 2)     (Level 3)
(dollars in thousands)
Recurring fair value measurements:
Assets
Securities:
Federal agency obligations$     55,938$     -$     55,938$     -
Residential mortgage pass-through securities133,164-133,164-
Commercial mortgage pass-through securities4,130-4,130-
Obligations of U.S. states and political subdivisions144,976-127,11117,865
Trust preferred securities4,627-4,627-
Corporate bonds and notes30,088-30,088-
Asset-backed securities12,633-12,633-
Certificates of deposit627-627-
Equity securities630630--
Other securities13,70313,703--
Total available-for-sale400,51614,333368,31817,865
Derivatives164-164-
Total Assets$400,680$14,333$368,482$17,865

30

      

September 30, 2022

 
      

Fair Value Measurements at Reporting Date Using

 
  

Total Fair Value

  

Quoted Prices in Active Markets for Identical Assets (Level 1)

  

Significant Other Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

 

(dollars in thousands)

                

Recurring fair value measurements: Assets

                

Investment securities:

                

Available-for-sale:

                

Federal agency obligations

 $45,620  $-  $45,620  $- 

Residential mortgage pass-through securities

  406,985   -   406,985   - 

Commercial mortgage pass-through securities

  20,895   -   20,895   - 

Obligations of U.S. states and political subdivision

  141,107   -   133,730   7,377 

Corporate bonds and notes

  6,990   -   6,990   - 

Asset-backed securities

  1,898   -   1,898   - 

Other securities

  134   134   -   - 

Total available-for-sale

  623,629   134   616,118   7,377 
                 

Equity securities

  15,563   9,701   5,862   - 

Derivatives

  54,041   -   54,041   - 

Total assets

 $693,233  $9,835  $676,021  $7,377 

30
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 7. -6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

December 31, 2016
Fair Value Measurements at Reporting Date Using
Quoted Prices
in ActiveSignificant
Markets forOtherSignificant
IdenticalObservableUnobservable
AssetsInputsInputs
          (Level 1)     (Level 2)     (Level 3)
(dollars in thousands)
Recurring fair value measurements:
Assets
Securities:
Federal agency obligations$     52,837$     -$     52,837$     -
Residential mortgage pass-through securities72,497-72,497-
Commercial mortgage pass-through securities4,209-4,209-
Obligations of U.S. states and political subdivisions150,605-132,38718,218
Trust preferred securities5,666-5,666-
Corporate bonds and notes36,928-36,928-
Asset-backed securities14,583-14,583-
Certificates of deposit983-983-
Equity securities568568--
Other securities14,41414,414--
Total available-for-sale353,29014,982320,09018,218
Derivatives88-88-
Total assets$353,378$14,982$320,178$18,218

      

December 31, 2021

 
      

Fair Value Measurements at Reporting Date Using

 
  

Total Fair Value

  

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

  

Significant
Other
Observable
Inputs
(Level 2)

  

Significant
Unobservable
Inputs
(Level 3)

 

(dollars in thousands)

                

Recurring fair value measurements: Assets

                

Investment securities:

                

Available-for-sale:

                

Federal agency obligations

 $50,360  $-  $50,360  $- 

Residential mortgage pass- through securities

  316,095   -   316,095   - 

Commercial mortgage pass-through securities

  10,469   -   10,469   - 

Obligations of U.S. states and political subdivision

  145,625   -   137,060   8,565 

Corporate bonds and notes

  9,049   -   9,049   - 

Asset-backed securities

  2,564   -   2,564   - 

Certificates of deposit

  150   -   150   - 

Other securities

  195   195   -   - 

Total available-for-sale

 $534,507  $195  $525,747  $8,565 
                 

Equity securities

  13,794   11,081   2,713   - 

Derivatives

  3,347   -   3,347   - 

Total assets

 $551,648  $11,276  $531,807  $8,565 

There were no transfers between Level 1 and Level 2 during the quarternine months ended September 30, 20172022 and during the year ended December 31, 2016.2021.

Assets Measured at Fair Value on a Non-RecurringNonrecurring Basis

The Company may be required periodically to measure certain assets at fair value on a non-recurringnonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurringnonrecurring basis at as of September 30, 20172022 and December 31, 2016:2021.

Loans Held-for-Sale

: Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. Management obtains quotes or bids on all or partparts of these loans directly from the purchasing financial institutions (Level 2)2).

31

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

Note 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value.  A portionFair value of these loans taxi medallion loans, have no material observable trading in any market. The approach to determining fair value involved several steps, including a detailed collateral analysisis determined based on the terms of the underlying medallions, performance projections for individual loans, discounted cash flow modelingloan, such as interest rate, maturity date, reset term, as well as sales of similar assets (Level 3).

31
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Fair Value Measurements and considerationFair Value of indicative bids, which at September 30, 2017 did not necessarily contemplate whole loan sales (Level 3).Financial Instruments – (continued)

Impaired

Collateral Dependent Loans

: The Company may record adjustments to the carrying value of loans based on fair value measurements, generally as partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with GAAP. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the market placemarketplace and are also based on Level 3 inputs.

For assets measured at fair value on a non-recurringnonrecurring basis, the fair value measurements at as of September 30, 20172022 and December 31, 20162021 are as follows:

Fair Value Measurements at Reporting Date Using
Quoted
Prices
in ActiveSignificant
Markets forOtherSignificant
IdenticalObservableUnobservable
SeptemberAssetsInputsInputs
Assets measured at fair value on a nonrecurring basis:     30, 2017     (Level 1)     (Level 2)     (Level 3)
(dollars in thousands)
Impaired loans:
Commercial real estate$     1,198$     -$     -$     1,198
 
Loans held-for-sale:
Commercial47,430--47,430
 
Fair Value Measurements at Reporting Date Using
Quoted
Prices
in ActiveSignificant
Markets forOtherSignificant
IdenticalObservableUnobservable
December 31,AssetsInputsInputs
Assets measured at fair value on a nonrecurring basis:2016(Level 1)(Level 2)(Level 3)
(dollars in thousands)
Impaired loans:
Commercial real estate$1,099$-$-$1,099
 
Loans held-for-sale:
Commercial70,105-4,50965,596
Commercial real estate7,712-7,712-

Impaired loans –

      

Fair Value Measurements at Reporting Date Using

 

Assets measured at fair value on a nonrecurring basis:

 Carrying Value as of September 30, 2022  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3) 

Collateral dependent loans:

 

(dollars in thousands)

 

Commercial

 $14,443  $-  $-  $14,443 

Commercial real estate

  26,197   -   -   26,197 

Residential real estate

  1,372   -   -   1,372 

      

Fair Value Measurements at Reporting Date Using

 

Assets measured at fair value on a nonrecurring basis:

 December 31, 2021  Quoted Prices in Active Markets for Identical Assets (Level 1)  Significant Other Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3) 

Collateral dependent loans:

 

(dollars in thousands)

 

Commercial

 $13,399  $-  $-  $13,399 

Commercial real estate

  20,185   -   -   20,185 

Residential real estate

  2,794   -   -   2,794 

Collateral dependent impairedloans –Collateral dependent loans at as of September 30, 20172022 that required a valuation allowance were $1.3$42.0 million with a related valuation allowance of $0.1$15.9 million compared to $1.2$54.1 million with a related valuation allowance of $0.1$17.8 million at as of December 31, 2016.2021.

Loans held-for-sale –Loans held-for-sale at September 30, 2017 that required a valuation allowance were $62.7 million with a related valuation allowance

32
Table of $15.3 million compared to $65.6 million with no valuation allowance at December 31, 2016.

32

Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 7. -6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Assets Measured Withwith Significant Unobservable Level 3 Inputs

Recurring basis

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3)3) for the nine months ended September 30, 20172022 and for the year ended December 31, 2016:2021:

Municipal
     Securities
(dollars in thousands)
Beginning balance, January 1, 2017$                          18,218
Principal paydowns(353)
Ending balance, September 30, 2017$17,865
 
Municipal
Securities
(dollars in thousands)
Beginning balance, January 1, 2016$-
Other(1)18,335
Principal paydowns(117)
Ending balance, December 31, 2016$18,218

(1)Includes transfers from held-to-maturity to available-for-sale designation

  Municipal Securities 
  

(dollars in thousands)

 

Beginning balance, December 31, 2021

 $8,565 

Principal paydowns

  (214)

Change in unrealized gain (loss)

  (974)

Ending balance, September 30, 2022

 $7,377 

  Municipal Securities 
  

(dollars in thousands)

 

Beginning balance, December 31, 2020

 $8,844 

Principal paydowns

  (279)

Ending balance, December 31, 2021

 $8,565 

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 as of September 30, 20172022 and December 31, 2016.2021. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.

September 30, 2017
ValuationUnobservable
     Fair Value     Techniques     Input     Range
(dollars in thousands)
Securities available-for-sale:
Municipal securities$     17,865Discounted cash flowsDiscount rate2.8%
 
December 31, 2016
ValuationUnobservable
Fair ValueTechniquesInputRange
(dollars in thousands)
Securities available-for-sale:
Municipal securities$18,218Discounted cash flowsDiscount rate2.8%

33

September 30, 2022

           
  

Fair Value

 

Valuation Techniques

 

Unobservable Input

 

Rate

 

Securities available-for-sale:

    

(dollars in thousands)

      

Municipal securities

 $7,377 

Discounted cash flows

 

Discount rate

  4.3%

December 31, 2021

           
  

Fair Value

 

Valuation Techniques

 

Unobservable Input

 

Rate

 

Securities available-for-sale:

    

(dollars in thousands)

      

Municipal securities

 $8,565 

Discounted cash flows

 

Discount rate

  2.9%

33
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 7. -6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Non-recurring basis

Nonrecurring basis: The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurringnonrecurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy. hierarchy of collateral dependent loans.

September 30, 2017
Valuation
TechniquesUnobservable
Type     Fair Value     (weightings)     Input     Range (weighted average)
(dollars in thousands)
Impaired loans:
Commercial real estate$1,918Appraisals of
collateral value		Comparable sales0% - 15% (6%)
 
Loans held-for-sale:
Commercial taxi medallion loans$47,430Market approach
(70%)		Indications expressed as a
price to unpaid principal
balance		37 - 100 (46)
 
Discounted cash
flows (30%)		Discount rate14%
 
December 31, 2016
Valuation
TechniquesUnobservable
TypeFair Value(weightings)InputRange (weighted average)
(dollars in thousands)
Impaired loans:
Commercial real estate$1,099Appraisals of
collateral value		Comparable sales0% - 15% (6%)
 
Loans held-for-sale:
Commercial taxi medallion loans$65,596Market approach
(70%)		Indications under securitized
transactions expressed as a
price to unpaid principal
balance		40 - 100 (59)
 
Discounted cash
flows (30%)		Discount Rate14%

34

September 30, 2022

           

(dollars in thousands)

 

Fair Value

  

Valuation Techniques

Unobservable Input

 

Range (weighted average)

 

Commercial

 $13,960  

Market approach (100%)

Average transfer price as a price to unpaid principal balance

  61% –95% (64%) 

Commercial

  483  

Appraisals of collateral value

Comparable sales

 -5% to +35% (+17%) 

Commercial real estate

  26,197  

Appraisals of collateral value

Comparable sales

  -25% to +10% (-16%) 

Residential real estate

  1,372  

Appraisals of collateral value

Comparable sales

 +21% to +39% (+22%) 

December 31, 2021

           

(dollars in thousands)

 

Fair Value

  

Valuation Techniques

Unobservable Input

 

Range (weighted average)

 

Commercial

 $12,193  

Market approach (100%)

Average transfer price as a price to unpaid principal balance

  48% to 73% (49%) 

Commercial

  1,206  

Appraisals of collateral value

Adjustment for comparable sales

 

-10% to +35% (+6%)

 

Commercial real estate

  20,185  

Appraisals of collateral value

Adjustment for comparable sales

 

-20% to +15% (-6%)

 

Residential real estate

  2,794  

Appraisals of collateral value

Adjustment for comparable sales

 

-15% to +39% (5%)

 

34
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 7. -6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Fair Value

As of Financial Instruments

FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-sale and securities available-for-sale. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Company for the purposes of this disclosure.

Cash and Cash Equivalents. The carrying amounts of cash and short-term instruments approximate fair values.

FHLB Stock. It is not practical to determineSeptember 30, 2022 the fair value of FHLB stock due to restrictions placed on its transferability.

Loans. Themeasurements presented are consistent with Topic 820,Fair Value Measurement, in which fair value of the Company’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans were segregated by types such as commercial, residential and consumer loans. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. The methods utilized to estimate the fair value of loans do not necessarily represent anrepresents exit price and therefore, while permissible for presentation purposes under ASC 825-10, do not conform to ASC 820-10.

Deposits.The carrying amounts of deposits with no stated maturities (i.e., noninterest-bearing, savings, NOW, and money market deposits) are assigned fair values equal to the carrying amounts payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for alternative funding sources of similar remaining maturity.

Term Borrowings and Subordinated Debentures. The fair value of the Company’s long-term borrowings and subordinated debentures was calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities.

Accrued Interest Receivable/Payable. The carrying amounts of accrued interest approximate fair value resulting in a level 2 or level 3 classification based on the level of the asset or liability with which the accrual is associated.

35

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

Note 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 20172022 and December 31, 2016:2021: 

Fair Value Measurements
Quoted
Prices in
ActiveSignificant
Markets forOtherSignificant
IdenticalObservableUnobservable
CarryingFairAssetsInputsInputs
     Amount     Value     (Level 1)     (Level 2)     (Level 3)
(dollars in thousands)
September 30, 2017
Financial assets:
Cash and due from banks$     141,262$     141,262$     141,262$     -$     -
Securities available-for-sale400,516400,51614,333368,31817,865
Restricted investment in bank stocks29,672n/an/an/an/a
Loans held-for-sale89,38689,386-41,95647,430
Net loans3,859,4193,862,104--3,862,104
Derivatives164164-164-
Accrued interest receivable14,84114,841-2,01112,830
 
Financial liabilities:
Noninterest-bearing deposits719,582719,582719,582--
Interest-bearing deposits2,904,1872,904,2851,825,8461,078,439-
Borrowings585,124586,474-586,474-
Subordinated debentures54,65756,519-56,519-
Accrued interest payable4,3044,304-4,304-
 
December 31, 2016
Financial assets:
Cash and due from banks$200,399$200,399$200,399$-$-
Securities available-for-sale353,290353,29014,982320,09018,218
Restricted investment in bank stocks24,310n/an/an/an/a
Loans held-for-sale78,00578,005-12,40965,596
Net loans3,450,0883,462,138--3,462,138
Derivatives8888-88-
Accrued interest receivable12,96512,965-2,02610,939
 
Financial liabilities:
Noninterest-bearing deposits694,977694,977694,977--
Interest-bearing deposits2,649,2942,649,7171,681,044968,673-
Borrowings476,280478,286-478,286-
Subordinated debentures54,53455,901-55,901-
Accrued interest payable4,1424,142-4,142-

36

          

Fair Value Measurements

 
  

Carrying Amount

  

Fair Value

  

Quoted Prices in Active Markets for Identical Assets (Level 1)

  

Significant Other Observable Inputs (Level 2)

  

Significant Unobservable Inputs (Level 3)

 
  

(dollars in thousands)

 
                     

September 30, 2022

                    

Financial assets:

                    

Cash and due from banks

 $333,844  $333,844  $333,844  $-  $- 

Securities available-for-sale

  623,629   623,629   134   616,118   7,377 

Restricted investments in bank stocks

  45,324   n/a   n/a   n/a   n/a 

Equity securities

  15,563   15,563   9,701   5,862   - 

Net loans

  7,808,733   7,524,799   -   -   7,524,799 

Derivatives

  54,041   54,041   -   54,041   - 

Accrued interest receivable

  38,940   38,940   -   3,219   35,721 
                     

Financial liabilities:

                    

Noninterest-bearing deposits

  1,665,658   1,665,658   1,665,658   -   - 

Interest-bearing deposits

  5,644,852   5,599,170   3,723,617   1,875,553   - 

Borrowings

  829,953   826,280   -   826,280   - 

Subordinated debentures

  153,179   153,170   -   153,170   - 

Accrued interest payable

  5,733   5,733   -   5,733   - 
                     

December 31, 2021

                    

Financial assets:

                    

Cash and due from banks

 $265,536  $265,536  $265,536  $-  $- 

Investment securities available-for-sale

  534,507   534,507   195   525,747   8,565 

Restricted investment in bank stocks

  27,826   n/a   n/a   n/a   n/a 

Equity securities

  13,794   13,794   11,081   2,713   - 

Net loans

  6,749,849   6,800,287   -   -   6,800,287 

Derivatives

  3,347   3,347   -   3,347   - 

Accrued interest receivable

  34,152   34,152   -   1,554   32,598 
                     

Financial liabilities:

                    

Noninterest-bearing deposits

  1,617,049   1,617,049   1,617,049   -   - 

Interest-bearing deposits

  4,715,904   4,716,358   3,565,795   1,150,563   - 

Borrowings

  468,193   469,671   -   469,671   - 

Subordinated debentures

  152,951   163,995   -   163,995   - 

Accrued interest payable

  2,716   2,716   -   2,716   - 

35
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 7. -6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

The fair value of commitments to originate loans 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 rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company’s core deposit base is required by FASB ASC 825-10.

Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

Note 8. Other7. Comprehensive (Loss) Income (Loss)

Total comprehensive (loss) income includes all changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s other comprehensive income is comprised of unrealized holding gains and losses on securities available-for-sale, unrealized gains (losses) on cash flow hedges, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, each net of taxes.

The following table represents the reclassificationsreclassification out of accumulated other comprehensive (loss) income for the periods presented:presented (dollars in thousands):

Affected Line item in the
Details about Accumulated OtherAmounts Reclassified from AccumulatedAmounts Reclassified from AccumulatedStatement Where Net Income is
Comprehensive Income ComponentsOther Comprehensive Income/(Loss)Other Comprehensive Income/(Loss)Presented
(dollars in thousands)
Three Months Ended September 30,Nine Months Ended September 30,
   2017   2016   2017   2016   
Sale of securities available-for-sale$                -$                4,131$                1,596$                4,234Net gains on sales of securities available for sale
-(1,640)(579)(1,682)Income tax expense
-2,4911,0172,552
 
Amortization of pension plan net actuarial losses(103)(204)(309)(306)Salaries and employee benefits
4283126124Income tax benefit
(61)(121)(183)(182)
 
Total reclassification$(61)$2,370$834$2,370

37

Details about Accumulated Other Comprehensive Income Components

 Amounts Reclassified from Accumulated Other Comprehensive Income  Amounts Reclassified from Accumulated Other Comprehensive Income 

Affected Line item in the Consolidated Statements of Income

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

  
  

2022

  

2021

  

2022

  

2021

  

Sale of investment securities available-for-sale

 $-  $-  $-  $195 

Net gains on sale of securities available-for-sale

   -   -   -   (48)

Income tax expense

  $-  $-  $-  $147  
                  

Net interest expense on swaps

 $1,178  $(328) $524  $(1,543)

Borrowings

   (343)  90   (159)  434 

Income tax (expense) benefit

  $835  $(238) $365  $(1,109) 
                  

Amortization of pension plan net actuarial losses

 $(17) $(75) $(49) $(225)

Other components of net periodic pension expense

   5   21   14   63 

Income tax benefit

  $(12) $(54) $(35) $(162) 

Total reclassification

 $823  $(292) $330  $(1,124) 

36
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 8. Other 7.Comprehensive (Loss) Income – (continued)

Accumulated other comprehensive (loss) income (netloss as of tax) at September 30, 20172022 and December 31, 20162021 consisted of the following:

  

September 30, 2022

  

December 31, 2021

 
  

(dollars in thousands)

 

Investment securities available-for-sale, net of tax

 $(67,734) $(484)

Cash flow hedge, net of tax

  32,913   2,406 

Defined benefit pension and post-retirement plans, net of tax

  (1,671)  (3,326)

Total

 $(36,492) $(1,404)

September 30,December 31,
     2017     2016
(dollars in thousands)
Securities available-for-sale$            723$          933
Cash flow hedge9752
Defined benefit pension and post-retirement plans(3,649)(3,831)
Total accumulated other comprehensive loss$(2,829)$(2,846)

Note 9. Stock-Based8.Stock-based Compensation

The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017.2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of September 30, 2017.2022. The maximum number of shares of common stock or equivalents which may be issued under the Plan, is 750,000. Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, restricted share units or performance units. Shares available for grant and issuance under the Plan as of September 30, 2017 are 750,000.2022 were approximately 200,300. The Company intends to issue all shares under the Plan in the form of newly issued shares.

Restricted stock, options and option awardsrestricted stock units typically have a three-yearthree-year vesting period starting one year after the date of grant with one-thirdone-third vesting each year. The options generally expire ten years from the date of grant. Restricted stock awardsand restricted stock units granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control. All issuances are subject to forfeiture if the recipient leaves or is terminatedno longer employed prior to the awardsaward's vesting. Any forfeitures would result in previously recognized expense being reversed. Restricted sharesstock grants have the same dividend and voting rights as common stock, while options, and performance units and restricted stock units do not.

All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are handled on a case-by-case basis.

No options or performance units were granted duringrecorded as incurred. Stock-based compensation expense for the three and nine months ended September 30, 2017 or 2016.

38

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2022 was $1.2 million and $3.5 million, respectively.  Stock-based compensation expense for the three and nine months ended September 30, 2021 was $1.2 million and $3.2 million, respectively.

Note 9. Stock-Based Compensation – (continued)

Activity under the Company’s option plans as of andoptions for the nine months ended September 30, 2017 were2022 was as follows:

Weighted-
Average
Weighted-Remaining
AverageContractual
ExerciseTermAggregate
     Shares     Price     (In Years)     Intrinsic Value
Outstanding at December 31, 2016358,367$     6.26
Granted--
Exercised10,84610.89
Forfeited/cancelled/expired--
Outstanding at September 30, 2017347,521$6.111.90$     6,425,663
Exercisable at September 30, 2017343,991$6.031.86$6,387,912

  Number of Stock Options  Weighted-Average Exercise Price  Weighted Average Remaining Contractual Term (in years)  Aggregate Intrinsic Value 

Outstanding as of December 31, 2021

  23,766  $9.94         

Granted

  -   -         

Exercised

  (15,086)  8.21         

Forfeited/cancelled/expired

  -   -         

Outstanding as of September 30, 2022

  8,680   12.95   0.54  $87,691 

Exercisable as of September 30, 2022

  8,680  $12.95   -  $- 

The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on September 30, 20172022 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2017.2022. This amount changes based on the fair market value of the Parent Corporation’sCompany’s stock.

The below table represents information regarding

37
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 8.Stock-Based Compensation – (continued)

Activity under the Company’s restricted shares currently outstanding at stock for the nine months ended September 30, 2017:2022 was as follows:

Weighted-
Average
NonvestedGrant Date
     Shares     Fair Value
Nonvested at December 31, 2016       111,273$     16.81
Granted57,16423.82
Vested(65,359)16.49
Forfeited/cancelled/expired--
Nonvested at September 30, 2017103,078$20.41

  Nonvested Shares  Weighted Average Grant Date Fair Value 

Nonvested as of December 31, 2021

  82,693  $21.78 

Granted

  53,543   30.76 

Vested

  (42,815)  25.00 

Forfeited/cancelled/expired

  (374)  30.99 

Nonvested as of September 30, 2022

  93,047  $25.43 

As of September 30, 2017,2022, there was approximately $1,366,000$1.3 million of total unrecognized compensation cost related to nonvested restricted shares granted under the plans.stock granted. The cost is expected to be recognized over a weighted average period of one year.1.1 years.

At

A summary of the status of unearned performance unit awards and the change during the period is presented in the table below:

  Units (expected)  Units (maximum)  Weighted Average Grant Date Fair Value 

Unearned as of December 31, 2021

  209,995      $16.18 

Awarded

  34,874       32.80 

Vested shares

  (49,604)      20.79 

Unearned as of September 30, 2022

  195,265   221,541  $17.98 

As of September 30, 2017,2022, the specific number of shares related to performance unit awardsunits that were expected to vest was 151,194,195,264, determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed. At As of September 30, 20172022, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 226,791.

221,541. During the nine months ended September 30, 2022, 49,604 shares vested. A summarytotal of 27,254 shares were netted from the statusvested shares to satisfy employee tax obligations. The net shares issued from vesting of unearned performance unit awards and the changeunits during the period is presented in the table below:

Weighted
Average Grant
UnitsUnitsDate Fair
     (expected)     (maximum)     Value
Unearned at December 31, 2016      151,572189,455$18.47
Awarded24,89137,33622.75
Forfeited---
Adjustments(25,269)-18.47
Unearned at September 30, 2017151,194226,791$19.19

At nine months ended September 30, 2017,2022 were 22,350 shares. As of September 30, 2022, compensation cost of approximately $1,006,000$1.5 million related to non-vested performance unit awards units not yet recognized is expected to be recognized over a weighted-average period of 1.31.8 years.

39

A summary of the status of unearned restricted stock units and the changes in restricted stock units during the period is presented in the table below:

  Units (expected)  Weighted Average Grant Date Fair Value 

Unearned as of December 31, 2021

  136,948  $16.52 

Awarded

  52,312   32.80 

Vested shares

  (69,225)  16.13 

Unearned as of September 30, 2022

  120,035  $23.84 

A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient. During the nine months ended September 30, 2022, 69,225 shares vested. A total of 37,842 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of restricted stock units during the nine months ended September 30, 2022 were 31,383 shares. As of September 30, 2022, compensation cost of approximately $1.5 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.5 years.

38
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 9. Stock-Based Compensation – (continued)

Effective January 1, 2017, the Company implemented ASU 2016-09,Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment.Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Included in income tax expense for the three and nine months ended September 30, 2017 is a benefit of $-0- and $180 thousand, respectively, which resulted from the effect of implementing ASU 2016-09.

Note 10. Components of Net Periodic Pension Cost

The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until March 31,June 30, 2007, at which time the Company froze the plan. The following table sets forth the net periodic pension cost of the Company’s pension plan for the periods indicated.

Three Months EndedNine Months Ended
September 30,September 30,
     2017     2016     2017     2016
(dollars in thousands)
Interest cost$     119$     129$     358$     386
Expected return on plan assets(160)(166)(480)(457)
Net amortization103101309305
Recognized settlement loss--2-
Net periodic pension cost$62$64$189$234
 
Amortization of actuarial loss$(103)$(204)$(309)$(306)
 
Total recognized in other comprehensive income$(103)$(204)$(309)$(306)
 
Total recognized in net expense and OCI (before tax)$(41)$(140)$(120)$(72)

  

Three Months Ended

 

Affected Line Item in the Consolidated

  

September 30,

 

Statements of Income

  

2022

  

2021

  
  

(dollars in thousands)

  

Service cost

 $-  $-  

Interest cost

  78   71 

Other components of net periodic pension expense

Expected return on plan assets

  (237)  (213)

Other components of net periodic pension expense

Net amortization

  17   75 

Other components of net periodic pension expense

Total periodic pension income

 $(142) $(67) 

  

Nine Months Ended

 

Affected Line Item in the Consolidated

  

September 30,

 

Statements of Income

  

2022

  

2021

  
  

(dollars in thousands)

  

Service cost

 $-  $-  

Interest cost

  233   213 

Other components of net periodic pension expense

Expected return on plan assets

  (711)  (639)

Other components of net periodic pension expense

Net amortization

  49   225 

Other components of net periodic pension expense

Total periodic pension income

 $(429) $(201) 

Contributions

The Company did not make any contributions contribute to the Pension Trust during the nine months ended September 30, 2017.2022. The Company does not plan on contributing amounts to the Pension Trust for the remainder of 2017.2022. The trust is established to provide retirement and other benefits for eligible employees and their beneficiaries. No part of the trust assets may be applied to any purpose other than providing benefits under the plan and for defraying expenses of administering the plan and the trust.

Note 11 –10. FHLB Borrowings

The Company’s FHLB borrowings and weighted average interest rates are summarized below:

September 30, 2017December 31, 2016
     Amount     Rate     Amount     Rate
(dollars in thousands)
Total FHLB borrowings$     585,1241.61%$     461,2801.55%
 
By remaining period to maturity:
Less than 1 year$415,1241.41%$231,2801.02%
1  year through less than 2 years105,0001.69%130,0001.84%
2 years through less than 3 years25,0001.85%35,0001.60%
3 years through less than 4 years40,0003.43%65,0002.82%
4 years through 5 years----
Total FHLB borrowings$585,1241.61%$461,2801.55%

  

September 30, 2022

  

December 31, 2021

 
  

Amount

  

Rate

  

Amount

  

Rate

 
  

(dollars in thousands)

 

By remaining period to maturity:

                

Less than 1 year

 $802,329   2.99% $390,549   0.56%

1 year through less than 2 years

  -   n/a   50,000   1.84%

2 years through less than 3 years

  25,000   1.00%  -   n/a 

3 years through less than 4 years

  2,050   2.23%  25,000   1.00%

4 years through 5 years

  -   n/a   2,050   2.23%

After 5 years

  667   2.91%  714   2.91%

FHLB borrowings - gross

  830,046   2.93%  468,313   0.73%

Fair value discount

  (93)      (120)    

Total FHLB borrowings

 $829,953      $468,193     

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Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 10. FHLB Borrowings – (continued)

The FHLB borrowings are secured by pledges of certain collateral including, but not limited to, U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans.

40

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

Note 11 – FHLB Borrowings – (continued)

Three of the FHLB notes ($2.5 million and $7.5 million each due April 2, 2018, and $5.0 million due July 16, 2018) contain a convertible option which allows the FHLB, at quarterly intervals, to convert the fixed convertible advance into replacement funding for the same or lesser principal based on any advance then offered by the FHLB at its current market rate. The Company has the option to repay these advances, if converted, without penalty. The remaining advancesAdvances are payable at stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances arebear fixed rate.rates. The advances at as of September 30, 20172022 were primarily collateralized by approximately $1.4$1.9 billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement. At As of September 30, 20172022 the Company had remaining borrowing capacity of approximately $796 million$0.6 billion at FHLB.

Note 12 – Securities Sold Under Agreements to Repurchase11. Subordinated Debentures

Repurchase agreements are secured borrowings. The Company pledges securities to secure those borrowings. Information concerning repurchase agreements is summarized as follows for the periods presented:

September 30,December 31,September 30,
     2017     2016     2016
(dollars in thousands)
Average daily balance during the year-to-date$     9,065$     15,000$     15,000
Average interest rate during the year-to-date5.95%5.95%5.95%
Maximum month end balance during the year-to-date$15,000$15,000$15,000
Weighted average interest rate during the year-to-date5.95%5.95%5.95%

As of September 30, 2017, there were no repurchase agreements outstanding. The previous outstanding repurchase agreement of $15.0 million was repaid on June 15, 2017.

December 31, 2016
Remaining Contractual Maturity of the Agreements
Overnight andUp to 30Greater Than
     Continuous     Days     31-90 Days     90 Days     Total
(dollars in thousands)
Repurchase agreements & repurchase-to-maturity transaction
U.S. Treasury and agency securities$-$-$-$-$     -
Residential mortgage pass-through securities---16,82616,826
Total borrowings$-$-$-$16,826$16,826
 
Amounts related to agreements not included in offsetting disclosure in Note 14:$1,826

The fair value of securities pledged to secure repurchase agreements may decline. By contractual agreement, the fair value of securities pledged to secure repurchase agreements must meet or exceed the gross outstanding balance by 8%, or be subject to margin calls. Securities sold under agreements to repurchase are secured by securities with a carrying amount of $-0- and $16.8 million at September 30, 2017 and December 31, 2016, respectively.

41

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

Note 13 - Subordinated Debentures

During December 2003, the Company formed a statutory business trust, which 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 junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-ownedwholly owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier I capital. 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or in part prior to maturity.part. The floating interest rate on the subordinatesubordinated debentures is three month-month LIBOR plus 2.85% and repricesre-prices quarterly. The rate at as of September 30, 20172022 was 4.16%5.63%. 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 FASB ASC 810-10. Distributions on the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income.

The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II at as of September 30, 20172022 and December 31, 2016.2021.

SecuritiesRedeemable by
Issuance DateIssuedLiquidation ValueCoupon RateMaturityIssuer Beginning
12/19/2003$     5,000,000$1,000 per CapitalFloating 3-month01/23/203401/23/2009
SecurityLIBOR + 285 Basis
Points

Issuance Date

 

Securities Issued

 

Liquidation Value

 

Coupon Rate

 

Maturity

 

Redeemable by Issuer Beginning

12/19/2003

 $5,000,000 

$1,000 per Capital Security

 

Floating 3-month LIBOR + 285 Basis Points

 

1/23/2034

 

1/23/2009

During June 2015, 2020, the Parent Corporation issued $50$75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding, June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2020. From and including June 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.

During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”). to certain accredited investors. The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity. The Notes are non-callable for five years, have a stated maturity of JulyFebruary 1, 2025,2028 and bear interest at a fixed rate of 5.75%5.20% per year, from and including September 30, 2015January 17, 2018 to, but excluding JulyFebruary 1, 2020.2023. From and including JulyFebruary 1, 20202023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three month-month LIBOR rate plus 393284 basis points. As of September 30, 2017, unamortized costs related to the debt issuance was approximately $498,000.

42

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 12. Preferred Stock

Note 14 – Offsetting Assets and Liabilities

Certain financial instrument-related assets and liabilities may be eligible for offset on the consolidated statements of condition because they are subject to master netting agreements or similar agreements. However,On August 19, 2021, the Company does not elect to offset such arrangements on the consolidated financial statements. The Company enters intocompleted an underwritten public offering of 115,000 shares, or $115.0 million in aggregate liquidation preference, of its depositary shares, each representing a 1/40th interest rate swap agreements with financial institution counterparties. For additional detail regarding interest rate swap agreements refer to Note 5. In the eventin a share of default on, or termination of, any one contract, both parties have the right to net settle multiple contracts. Also, certain interest rate swap agreements may require the Company to receive or pledge cash or financial instrument collateral based on the contract provisions.

The Company also entered into an agreement to sell securities subject to an obligation to repurchase the same or similar securities, referred to as a repurchase agreement. Under this agreement, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. The obligation to repurchase the securities is reflected as a liability in the Company’s consolidated statement5.25% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A, no par value, with a liquidation preference of condition, while$1,000 per share. The net proceeds received from the securities underlying the repurchase agreements remain in the respective securities account, therefore there is no offsetting or nettingissuance of the securities assets with the repurchase agreement liability. The following table presents information about financial instruments that are eligible for offset as of September 30, 2017 and December 31, 2016:

Gross Amounts Not Offset
Gross AmountsNet Amounts ofCash or
Offset in the Assets Presented inFinancialFinancial
Gross AmountsStatement ofthe Statement ofInstrumentsInstrumentNet
    Recognized    Financial Position    Financial Position    Recognized    Collateral    Amount
(dollars in thousands)
September 30, 2017
Assets:
Interest rate swaps$     164$     -$     164$     -$     -$     164
Liabilities:
Repurchase agreements$-$-$-$-$-$-
December 31, 2016
Assets:
Interest rate swaps$88$-$88$-$-$88
Liabilities:
Repurchase agreements$15,000$-$15,000$-$15,000$-

Note 15 – Subsequent Event

On November 2, 2017, all of the Bank’s loans secured by New York City medallions, which had been classified as held-for-sale since December 31, 2016, were returned to the loans held-for-investment portfolio. As of September 30, 2017, the portfolio totaled $47.4 million, net of a $15.3 million valuation allowance. This transfer of the loans to held-for-investment will be recordedpreferred stock at the fair valuetime of the loans held-for-sale with any difference between the fair value determined asclosing were $110.9 million.

40
Table of the transfer date and the carrying value as of September 30, 2017 to be recognized in noninterest expense during the fourth quarter 2017. The Company currently estimates a pretax charge of approximately $0.5 million to reflect this transfer. Management’s decision is based on its current view that a strategy to work out the credits through cash flow generated by borrowers’ operations is now superior, from a financial perspective, to a disposition via a sale to a third-party. This decision reflects (i) a reduced level of interest on the part of institutional investors to purchase taxi medallion loans, especially for relatively smaller portfolios such as the Bank’s and (ii) the Company’s increasing success at restructuring loans in the portfolio to monthly payment terms that can be supported through borrowers’ operations, although the collectability of principal balloon payments at maturity remains uncertain.

43

Contents

Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of September 30, 20172022 and December 31, 2016.2021. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Cautionary Statement Concerning Forward-Looking Statements

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loancredit loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities such as the ongoing conflict between Ukraine and Russia, may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp is engaged, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and regulations issued thereunder;engaged; (7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; and (10) the outcome of regulatory and legal investigations and proceedings may not be anticipated.anticipated, and (11) the impact of the COVID-19 pandemic on our employees and operations, and those of our customers. Further information on other factors that could affect the financial results of ConnectOne Bancorp is included in Item 1a. of ConnectOne Bancorp’s Annual Report on Form 10-K as amended and updated in ConnectOne Bancorp’s other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission’s website at http://www.sec.gov and/or from ConnectOne Bancorp, Inc.

Critical Accounting Policies and Estimates

The accounting and reporting policies followed by ConnectOne Bancorp, Inc. and its subsidiaries (collectively, the “Company”) conform, in all material respects, to GAAP. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the consolidated statements of operations.income. Actual results could differ significantly from those estimates.

The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. The Company has identified the determination of the allowance for loancredit losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies is provided below.

Allowance for LoanCredit Losses and Related Provision

: The allowance for loancredit losses (“ALLL”ACL”) represents management’s estimate of probable incurredcurrent expected credit losses inherent inconsidering available information relevant to assessing collectability of cash flows over the loan portfolio.contractual term of the financial asset(s). Determining the amount of the ALLLACL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related toincluding reasonable and supportable forecasts that affect the amount and timingcollectability of expected futurethe remaining cash flows on impaired loans, estimated losses on poolsover the contractual term of homogeneous loans based on historical loss experience, individual credit situation and considerationthe financial assets.

41
Table of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated statements of condition.Contents

The evaluation of the adequacy of the ALLL includes, among other factors, an analysis of historical loss rates by loan category applied to current loan totals. However, actual loan losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.

44

The ALLLACL is established through a provision for loancredit losses charged to expense. Management believes that the current ALLLACL will be adequate to absorb loancredit losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers’ ability to pay. The evaluation also details historical losses by loan categorysegment and the resulting loancredit loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the ALLLACL may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loancredit losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 15 of the Notes to Consolidated Financial Statements.

Other-Than-Temporary Impairment of Securities Available-for-Sale

Securities available-for-sale are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FASB ASC 320-10-65 clarifies the interaction of the factors that should be considered when determining whether a debt security is other–than-temporarily impaired. For debt securities, management assesses whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery.

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Fair Value of Securities

FASB ASC 820-10-35 clarifies the application of the provisions of FASB ASC 820-10-05 in an inactive market and how an entity would determine fair value in an inactive market. The Company applies the guidance in FASB ASC 820-10-35 when determining fair value for the Company’s private label collateralized mortgage obligations, pooled trust preferred securities and single name corporate trust preferred securities. See Note 8 of the Notes to Consolidated Financial Statements for further discussion.

FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly.

Goodwill

The Company adopted the provisions of FASB ASC 350-10, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but rather tested for impairment annually or more frequently if impairment indicators arise.

Income Taxes

: The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns.

Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of operations.  Note 1210 of the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 20162021 includes additional discussion on the accounting for income taxes.

45

Impact of COVID-19

COVID-19 continues to impact the Company’s operations and financial results, as well as those of our customers. In response to the COVID-19 pandemic, the Company continued to offer temporary relief to effected customers, deferring either their full loan payment, the principal component or the interest component of their loan payment for an initial period of time ranging from 30 to 120 days. As provided for under the CARES act, these short-term deferrals are not considered troubled debt restructurings, provided that the modification is related to COVID-19, executed on a loan that was not more than 30 days past due as of December 31, 2019 or the date of the deferral, and executed between March 1, 2020 and January 1, 2022, or the date that is 60 days after the termination date of the national emergency declared by the president on March 13, 2020, under the National Emergencies Act related to the outbreak of COVID-19.

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company was an active participant in assisting its customers with applications for resources through the program. PPP loans originated prior to June 5, 2020 have a two-year term, which may be extended to five years with the consent of the Company, and those originated on or after June 5, 2020 have a five-year term, and the loans bear interest at 1%, along with an origination fee payable from the SBA to the Company. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of September 30, 2022, PPP loans were $11.5 million. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government and, as such, the Company has not included the PPP loans in calculation of the ACL as of September 30, 2022. Should those circumstances change, the Company could be required to establish additional provisions for credit loss expense charged to earnings. 

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Table of Contents

Operating Results Overview

Net income available to common stockholders for the three months ended September 30, 2017 amounted to $13.12022 was $27.4 million compared to $11.9$32.1 million for the comparable three-month period ended September 30, 2016.2021. The Company’s diluted earnings per share were $0.41$0.70 for the three months ended September 30, 20172022 as compared with diluted earnings per share of $0.39$0.80 for the comparable three-month period ended September 30, 2016.2021. The increase$4.7 million decrease in net income available to common stockholders and $0.10 decrease in diluted earnings per share wasversus the three months ended September 30  2021 were primarily attributabledue to an $8.9 million increase in the provision for credit losses, a $4.0 million increase in noninterest expenses, $1.5 million in preferred dividends, which were not paid in the 2021 period, and a $0.7 million decrease in noninterest income, partially offset by a $9.9 million increase in net interest income and a $0.5 million decrease in provision for loan losses, partially offset by a decrease in net gains on sale of investment securities and an increase in other expenses. The increase in other expenses was primarily the result of an increase in a valuation allowance related to loans held-for-sale.income tax expense.

Net income available to common stockholders for the nine months ended September 30, 2017 amounted to $32.62022 was $88.1 million compared to $33.1$97.3 million for the comparable nine-month period ended September 30, 2016.2021. The Company’s diluted earnings per share were $1.01$2.23 for the nine months ended September 30, 20172022 as compared with diluted earnings per share of $1.09$2.43 for the comparable nine-month period ended September 30, 2016.2021. The $9.2 million decrease in net income available to common stockholders and $0.20 decrease in diluted earnings per share was primarily attributableversus the nine months ended  September 30, 2021 were due to ana $20.8 million increase to provision for credit losses, a $12.1 million increase in noninterest expenses, $4.5 million in preferred dividends which was primarilywere not paid in the result of an2021 period, a $2.2 million decrease in noninterest income, and a $1.3 million increase in a valuation allowance related to loans held-for-sale and a decrease in net gains on sale of investment securities,income tax expense, partially offset by ana $31.7 million increase in net interest income, a decrease in provision for loan losses, and a decrease in income tax expense.income.

Net Interest Income and Margin

Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets. Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (primarily(including interest earned on tax-free loans and on obligations of state and local political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues.assets. Net interest margin is defined as net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.

Fully taxable equivalent net interest income for the third quarter of 2017three months ended September 30, 2022 increased by $4.2$10.1 million, or 12.3%14.7%, from the third quarter of 2016, resultingcomparable three-month period ended September 30, 2021. The increase from anthe three months ended September 30, 2021 resulted primarily from a 16.1% increase in average interest-earninginterest earning assets, of 8.4%primarily loans, and the wideningwas partially offset by a 5 basis-point contraction of the net interest margin by 12 basis-points to 3.44%3.68% from 3.32%3.73%. IncludedThe contraction in net interest income was accretion and amortization of purchase accounting adjustments of $0.3 million and $1.0 million during the third quarter of 2017 and 2016, respectively. Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.41% in the third quarter of 2017, widening by 19 basis-pointsresulted from the third quarter of 2016 adjusted net interest margin of 3.22%. Thea 56 basis-point increase in the adjusted net interest margin was primarily attributable to a higher volumecost of loans which reduced excess cash balances resulting in an improved asset-mix,average interest-bearing liabilities, partially offset by increased costa 36 basis-point increase in deposit fundingthe yield on average interest-earning assets and lower yields on securities.a 12.5% increase in average noninterest-bearing demand deposits.

Fully taxable equivalent net interest income for the nine months ended September 30, 2017 was $108.0 million, an increase of $9.12022 increased by $32.1 million, or 9.2%16.6%, from the comparable nine-month period ended September 30, 2021. The increase from the nine months ended September 30, 2016, resulting2021 resulted primarily from ana 12.5% increase in average interest-earninginterest earning assets, of 7.8%primarily loans, and thea 13 basis-point widening of the net interest margin by 5 basis-points to 3.44%3.76% from 3.39%3.63%. Included in net interest income was accretion and amortizationThe widening of purchase accounting adjustments of $1.3 million and $3.6 million during the nine months ended September 30, 2017 and 2016, respectively. Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.40% for the nine months ended September 30, 2017, widening by 14 basis-pointsresulted from the nine months ended September 30, 2016 adjusted net interest margin of 3.26%. Thean 18 basis-point increase in the adjusted net interest margin was primarily attributable to higher yieldsyield on loansinterest-earning assets and an improved asset-mix,a 13.1% increase in average noninterest-bearing demand deposits partially offset by lower yields on securities and an increaseda 9 basis-point increase in the cost in deposit funding.of interest-bearing liabilities.

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Table of Contents

The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three and nine months ended September 30, 20172022 and 2016,2021, the Company’s average assets, liabilities and stockholders’ equity. The Company’s net interest income, net interest spread and net interest margin are also reflected.

Average Statements of Condition with Interest and Average Rates

Three Months Ended September 30,
20172016
InterestInterest
AverageIncome/AverageAverageIncome/Average
  Balance  Expense  Rate(8)  Balance  Expense  Rate(8)
(dollars in thousands)
Interest-earning assets:
Securities(1) (2)$    397,077$    3,033      3.03%$    406,802$    3,293      3.22%
Total loans(2) (3) (4)3,898,40443,6834.453,407,27838,0104.44
Federal funds sold and interest-bearing with banks53,8201701.25202,1062610.51
Restricted investment in bank stocks29,2363624.9124,8343525.64
Total interest-earning assets4,378,53747,2484.284,041,02041,9164.13
Noninterest-earning assets:
Allowance for loan losses(28,999)(34,052)
Other noninterest-earning assets364,474337,828
Total assets$4,714,012$4,344,796
 
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits$1,005,9973,5931.42$1,007,5303,3231.31
Other interest-bearing deposits1,816,1622,5200.551,637,5001,8360.45
Total interest-bearing deposits2,822,1596,1130.862,645,0305,1590.78
 
Borrowings570,7112,3531.64488,0152,1391.74
Subordinated debentures(5)55,1558135.8555,1558145.87
Capital lease2,688405.902,814425.94
Total interest-bearing liabilities3,450,7139,3191.073,191,0148,1541.02
 
Demand deposits688,707640,323
Other liabilities17,97218,318
Total noninterest-bearing liabilities706,679658,641
Stockholders’ equity556,620495,141
Total liabilities and stockholders’ equity$4,714,012$4,344,796
Net interest income (tax-equivalent basis)37,92933,762
Net interest spread(6)3.21%3.11%
Net interest margin(7)3.44%3.32%
Tax-equivalent adjustment(910)(738)
Net interest income$37,019$33,024

 

Three Months Ended September 30,

 
 

2022

 

2021

 
    

Interest

       

Interest

    
 

Average

 

Income/

 

Average

 

Average

 

Income/

 

Average

 
 

Balance

 

Expense

 

Rate (7)

 

Balance

 

Expense

 

Rate (7)

 
 

(dollars in thousands)

 

Interest-earning assets:

                  

Securities (1) (2)

$740,394 $5,434  2.91%$459,559 $1,712  1.48%

Total loans (2) (3) (4)

 7,582,371  91,132  4.77  6,455,952  75,434  4.64 

Federal funds sold and interest-bearing with banks

 135,331  665  1.95  387,155  151  0.15 

Restricted investment in bank stocks

 42,220  438  4.12  19,105  245  5.09 

Total interest-earning assets

 8,500,316  97,669  4.56  7,321,771  77,542  4.20 

Noninterest-earning assets:

                  

Allowance for credit losses

 (84,307)       (78,327)      

Other noninterest-earning assets

 614,580        594,553       

Total assets

$9,030,589       $7,837,997       
                   

Interest-bearing liabilities:

                  

Interest-bearing deposits:

                  

Time deposits

$1,525,076  5,396  1.40 $1,252,818  2,983  0.94 

Other interest-bearing deposits

 3,686,520  7,903  0.85  3,582,261  2,495  0.28 

Total interest-bearing deposits

 5,211,596  13,299  1.01  4,835,079  5,478  0.45 
                   

Borrowings

 772,561  3,297  1.69  276,183  1,105  1.59 

Subordinated debentures

 153,129  2,196  5.91  152,825  2,168  5.63 

Finance lease

 1,813  27  6.02  2,018  30  5.90 

Total interest-bearing liabilities

 6,139,099  18,819  1.22  5,266,105  8,781  0.66 
                   

Demand deposits

 1,682,135        1,495,456       

Other liabilities

 48,907        44,245       

Total noninterest-bearing liabilities

 1,731,042        1,539,701       

Stockholders’ equity

 1,160,448        1,032,191       

Total liabilities and stockholders’ equity

$9,030,589       $7,837,997       

Net interest income (tax-equivalent basis)

    78,850        68,761    

Net interest spread (5)

       3.34%       3.54%

Net interest margin (6)

       3.68%       3.73%

Tax-equivalent adjustment

    (689)       (516)   

Net interest income

   $78,161       $68,245    

(1)

Average balances are based on amortized cost.cost and include equity securities.  

(2)

Interest income is presented on a tax-equivalent basis using 35% federal tax rate.21%.  

(3)

Includes loan fee income.income and accretion of purchase accounting adjustments.  

(4)

Loans

Total loans include loans held-for-sale and nonaccrual loans.

(5)

Does not reflect netting of debt issuance costs of $525 and $697 as of September 30, 2017 and 2016, respectively.
(6)

Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis.

(7)(6)

Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.

(8)(7)

Rates are annualized.


44
Table of Contents

  

Nine Months Ended September 30,

 
  

2022

  

2021

 
      

Interest

          

Interest

     
  

Average

  

Income/

  

Average

  

Average

  

Income/

  

Average

 
  

Balance

  

Expense

  

Rate (7)

  

Balance

  

Expense

  Rate (7) 
  

(dollars in thousands)

 

Interest-earning assets:

                        

Securities (1) (2)

 $632,736  $11,915   2.52% $459,017  $5,534   1.61%

Total loans (2) (3) (4)

  7,159,107   249,049   4.65   6,319,160   217,465   4.60 

Federal funds sold and interest-bearing with banks

  200,937   1,098   0.73   333,290   285   0.11 

Restricted investment in bank stocks

  32,997   943   3.82   21,098   764   4.84 

Total interest-earning assets

  8,025,777   263,005   4.38   7,132,565   224,048   4.20 

Noninterest-earning assets:

                        

Allowance for credit losses

  (81,711)          (80,129)        

Other noninterest-earning assets

  600,171           585,043         

Total assets

 $8,544,237          $7,637,479         
                         

Interest-bearing liabilities:

                        

Interest-bearing deposits:

                        

Time deposits

 $1,252,503   9,729   1.04  $1,332,587   12,096   1.21 

Other interest-bearing deposits

  3,751,266   14,289   0.51   3,377,443   7,391   0.29 

Total interest-bearing deposits

  5,003,769   24,018   0.64   4,710,030   19,487   0.55 
                         

Borrowings

  576,728   6,522   1.51   327,412   4,199   1.71 

Subordinated debentures

  153,054   6,543   5.72   153,300   6,502   5.67 

Finance lease

  1,865   84   6.02   2,066   93   6.02 

Total interest-bearing liabilities

  5,735,416   37,167   0.87   5,192,808   30,281   0.78 
                         

Demand deposits

  1,612,713           1,426,121         

Other liabilities

  50,834           47,417         

Total noninterest-bearing liabilities

  1,663,547           1,473,538         

Stockholders’ equity

  1,145,274           971,133         

Total liabilities and stockholders’ equity

 $8,544,237          $7,637,479         

Net interest income (tax-equivalent basis)

      225,838           193,767     

Net interest spread (5)

          3.51%          3.42%

Net interest margin (6)

          3.76%          3.63%

Tax-equivalent adjustment

      (1,728)          (1,350)    

Net interest income

     $224,110          $192,417     

47

Average Statements of Condition with Interest and Average Rates

Nine Months Ended September 30,
20172016
InterestInterest
AverageIncome/AverageAverageIncome/Average
  Balance  Expense  Rate(8)  Balance  Expense  Rate(8)
(dollars in thousands)
Interest-earning assets:
Securities(1) (2)$   384,782$   9,272     3.22%$   413,493$   10,290      3.32%
Total loans(2) (3) (4)3,716,876123,0094.423,310,788109,9594.44
Federal funds sold and interest-bearing with banks73,4245551.01143,5175410.50
Restricted investment in bank stocks26,1779825.0229,8181,0744.81
Total interest-earning assets4,201,259133,8184.263,897,616121,8644.18
Noninterest-earning assets:
Allowance for loan losses(27,533)(30,412)
Other noninterest-earning assets358,726331,544
Total assets$4,532,452$4,198,748
 
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits$982,1499,9961.36$902,0178,7141.29
Other interest-bearing deposits1,745,7426,7220.511,515,7854,8180.42
Total interest-bearing deposits2,727,89116,7180.822,417,80213,5320.75
 
Borrowings509,6256,5811.73603,4236,9081.53
Subordinated debentures(5)55,1552,4315.8955,1552,4365.90
Capital lease2,7201236.052,8441286.01
Total interest-bearing liabilities3,295,39125,8531.053,079,22423,0041.00
 
Demand deposits670,709610,568
Other liabilities17,65221,872
Total noninterest-bearing liabilities688,361632,440
Stockholders’ equity548,700487,084
Total liabilities and stockholders’ equity$4,532,452$4,198,748
Net interest income (tax-equivalent basis)107,96598,860
Net interest spread(6)3.21%3.18%
Net interest margin(7)3.44%3.39%
Tax-equivalent adjustment(2,704)(2,122)
Net interest income$105,261$96,738

(1)

Average balances are based on amortized cost.cost and include equity securities.  

(2)

Interest income is presented on a tax-equivalent basis using 35% federal tax rate.21%.  

(3)

Includes loan fee income.income and accretion of purchase accounting adjustments.  

(4)

Loans

Total loans include loans held-for-sale and nonaccrual loans.

(5)

Does not reflect netting of debt issuance costs of $565 and $697 as of September 30, 2017 and 2016, respectively.
(6)

Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis.

(7)(6)

Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.

(8)(7)Rates are annualized.

48


45
Table of Contents

Noninterest Income

Noninterest income totaled $1.8$3.3 million for the three months ended September 30, 2017,2022, compared with $5.6$4.0 million for the comparable three month period ended September 30, 2021. Included in noninterest income for the three months ended September 30, 2022 and September 30, 2021 were net losses on equity securities of $0.4 million and $0.1 million, respectively. Excluding net losses on equity securities, adjusted noninterest income was $3.8 million and $4.1 million for the three months ended September 30, 2016. There were no net securities gains/(losses)2022 and September 30, 2021, respectively. The $0.3 million decrease in adjusted noninterest income for the three months ended September 30, 2017 and $4.1 million in net securities gains for2022 versus the three months ended September 30, 2016. Excluding the securities gains, noninterest income increased by $0.3 million when compared to the prior year third quarter. The increase2021 was primarily due primarily to a bank owned life insurance death benefit recorded during the third quarterdecrease in net gains on loans held-for-sale of 2017. Noninterest income also includes bank owned life insurance and$0.8 million, partially offset by increases in deposit, loan and other income for the three month periods.of $0.3 million and bank owned life insurance ("BOLI") income of $0.2 million.

Noninterest income totaled $6.2$9.7 million for the nine months ended September 30, 2017,2022, compared with $8.3$11.9 million for the nine months ended September 30, 2016. For2021. Included in noninterest income were net losses on equity securities of $1.4 million and $0.2 million for the nine months ended September 30, 20172022 and 2016,2021, respectively. Additionally, there were $1.6was a $0.7 million gain on the sale of branches and $0.2 million gain on sale/redemption of investment securities during the nine months ended September 30, 2021. Excluding the aforementioned items, noninterest income was $11.2 million and $4.2$11.3 million of net securities gains,for the nine months ended September 30, 2022 and 2021, respectively. Excluding the securities gains,The $0.1 million decrease in noninterest income excluding the items discussed above for the nine months ended September 30, 2022 versus the nine months ended September 30, 2021 was primarily due to decreases of $1.1 million in gains on sale of loans held-for-sale, partially offset by increases in deposit, loan and other income of $0.5 million, and BOLI income of $0.5 million.

Noninterest Expenses

Noninterest expenses totaled $32.1 million for the three months ended September 30, 2022, compared with $28.2 million for the three months ended September 30, 2021.The increase in noninterest expenses of $4.0 million from the three months ended September 30, 2021 was primarily attributable to increases in salaries and employee benefits of $4.2 million. The increase in salaries and employee benefits was attributable to increased by $0.5staff in both the revenue and back-office of the Bank, base salary increases, and incentive compensation accruals.

Noninterest expenses totaled $93.1 million for the nine months ended September 30, 2022, compared to $80.9 million for the nine months ended September 30, 2021. Included in noninterest expenses for the nine months ended September 30, 2022 was an increase in acquisition price related to the BoeFly acquisition of $1.5 million. Excluding this item, noninterest expenses increased $10.6 million when compared to the nine months ended September 30, 2016.2021. The increase was due primarily attributable to a bank owned life insurance death benefit recorded duringincreases in salaries and employee benefits of $11.7 million attributable to new hires in both the third quarterrevenue and back-office areas, base-salary increases, and bonus accruals. Also, contributing to the increase were increases in other expenses of 2017. Noninterest income also includes annuities$0.8 million, information technology and insurance commissions, bank owned life insurancecommunications of $0.2 million and marketing and advertising of $0.4 million, partially offset by decreases in occupancy of $1.6 million, professional and consulting of $0.4 million and amortization of core deposit loan and other income for the nine month periods.intangibles of $0.2 million.

Noninterest Expenses

Noninterest expenses totaled $18.6Income Taxes

Income tax expense was $10.4 million for the three months ended September 30, 2017,2022, compared to $14.6$10.9 million for the three months ended September 30, 2016.2021. The increase fromdecrease in income tax expense was the prior year periodresult of lower income before taxes. The effective tax rate for the three months ended September 30, 2022 and September 30, 2021 was mainly attributable to an increase in26.5% and 25.3%, respectively. The higher effective tax rate during the taxi medallions loans held-for-sale valuation allowance of $3.0 million. In addition, increases in salaries and employee benefits ($1.1 million), FDIC insurance premiums ($0.1 million) and data processing ($0.2 million) were partially offset by decreases in occupancy and equipment expenses ($0.1 million) and other expense ($0.2 million), contributingthree months ended September 30, 2022 when compared to the overall increase in noninterest expensesthree months ended September 30, 2021 resulted from the prior year third quarter.a lower proportion of income from non-taxable sources. 

Noninterest expenses totaled $62.2

Income tax expense was $33.7 million for the nine months ended September 30, 2017,2022, compared to $43.3$32.4 million for the nine months ended September 30, 2016. The increase from the prior year period was mainly attributable to an increase in the taxi medallions loans held-for-sale valuation allowance of $15.3 million. In addition, increases in salaries and employee benefits ($2.6 million), FDIC insurance premiums ($0.6 million), data processing ($0.4 million) and other expense ($0.3 million) were partially offset by decreases in occupancy and equipment expenses ($0.2 million) contributing to the overall increase in noninterest expenses from the prior year nine month period.

On November 2, 2017, all of the Bank’s loans secured by New York City medallions, which had been classified as held-for-sale since December 31, 2016, were returned to the loans held-for-investment portfolio. As of September 30, 2017, the portfolio totaled $47.4 million, net of a $15.3 million valuation allowance. This transfer of the loans to held-for-investment will be recorded at the fair value of the loans held-for-sale with any difference between the fair value determined as of the transfer date and the carrying value as of September 30, 2017 to be recognized in noninterest expense during the fourth quarter 2017. The Company currently estimates a pretax charge of approximately $0.5 million to reflect this transfer. Management’s decision is based on its current view that a strategy to work out the credits through cash flow generated by borrowers’ operations is now superior, from a financial perspective, to a disposition via a sale to a third-party. This decision reflects (i) a reduced level of interest on the part of institutional investors to purchase taxi medallion loans, especially for relatively smaller portfolios such as the Bank’s and (ii) the Company’s increasing success at restructuring loans in the portfolio to monthly payment terms that can be supported through borrowers’ operations, although the collectability of principal balloon payments at maturity remains uncertain.

Income Taxes

Income tax expense was $5.6 million for the three months ended September 30, 2017, compared to $5.4 million for the three months ended September 30, 2016. The effective tax rate for the current quarter was 30.0% versus 31.5% for the prior-year quarter.

Income tax expense was $12.6 million for the nine months ended September 30, 2017, compared to $15.2 million for the nine months ended September 30, 2016. Included in income tax expense for the nine months ended September 30, 2017 is a benefit of $180 thousand which resulted from the effect of implementing ASU 2016-09, which relates to the recognition of excess tax benefits in the income statement (formerly through equity) that result from employee share-based payment awards.2021. The effective tax rate for the nine months ended September 30, 20172022 and September 30, 2021 was 27.9% versus 31.5% for the prior-year period. Excluding any changes to the taxi medallion valuation allowance, the26.7% and 25.0%, respectively. The effective tax rate for 2017 is expectedthe nine months ended of September 30, 2022 was higher compared to be maintained in the low 30% range.

Financial Condition

Loan Portfolio

Commercial lending is the Company’s primary business activity. The Company’s loan portfolio consists of commercial, residential and consumer loans, serving the diverse client base in the Company’s market area. The composition of the Company’s portfolio remains relatively constant but can changenine months ended September 30, 2021 due to factors such as the economic climate, the level and fluctuations in interest rates, real estate values and employment metrics. Organic growth (i.e., growth other than through mergers and acquisitions) is generated through business development, repeat client requests for new financings, penetration into existing markets and entry into new markets.a lower proportion of income from non-taxable sources.

The Company seeks to create growth in commercial lending by offering client-focused products, competitive pricing and by capitalizing on the positive trends in its market area. Products offered are designed to meet the financial requirements

46
Table of the Company’s clients. It is the objective of the Company’s credit policies to diversify the commercial loan portfolio to limit concentrations in any single segment.Contents

49

Financial Condition

Loan Portfolio


The following table sets forth the composition of our loan portfolio, excluding loans held-for-sale and unearned net origination fees and costs, by loan segment at the periods indicated.

September 30, 2017December 31, 2016Amount
Increase/
     Amount     %     Amount     %     (Decrease)
(dollars in thousands)
Commercial$     641,61316.5%$     553,57615.9%$     88,037
 
Commercial real estate2,585,20566.42,204,71063.3380,495
 
Commercial construction399,45310.2486,22814.0(86,775)
 
Residential real estate264,2446.8232,5476.731,697
 
Consumer1,9120.12,3800.1(468)
 
Gross loans$3,892,427      100.0%$3,479,441      100.0%$412,986

At

  

September 30, 2022

  

December 31, 2021

  

Amount Increase/

 
  

Amount

  

%

  

Amount

  

%

  

(Decrease)

 
  

(dollars in thousands)

 

Commercial (1)

 $1,448,727   18.3% $1,299,428   19.0% $149,299 

Commercial real estate

  5,666,848   71.6%  4,741,590   69.3%  925,258 

Commercial construction

  537,323   6.8%  540,178   7.9%  (2,855)

Residential real estate

  256,085   3.2%  255,269   3.7%  816 

Consumer

  1,030   0.1%  1,886   0.1%  (856)

Gross loans

 $7,910,013   100.0% $6,838,351   100.0% $1,071,662 

As of September 30, 2017,2022, gross loans totaled $3.9$7.9 billion, an increase of $0.4$1.1 billion or 11.9%15.7%, as compared to December 31, 2016.2021. Net loan growth was primarily attributable to commercial real estate ($380 million), commercial ($88 million) and residential real estate ($32 million), partially offset by a decrease in construction ($87 million).organic loan originations.

At September 30, 2017, acquired loans remaining in the loan portfolio totaled $0.5 billion, compared to $0.7 billion as of December 31, 2016.

(1)

Includes PPP loans of $11.5 million and $93.1 million as of September 30, 2022 and December 31, 2021 , respectively.

Allowance for LoanCredit Losses and Related Provision

The purpose

As of September 30, 2022, the Company’s allowance for loan losses (“ALLL”) is to establish a valuation allowance for probable incurred credit losses in the loan portfolio. Additions to the ALLL are made through provisions charged against current operations and through recoveries made onfor loans previously charged off. The ALLL is maintained atwas $91.7 million, an amount considered adequate by management to provide for probable incurred credit losses inherent in the loan portfolio based upon historical losses and a periodic evaluationincrease of external and portfolio risk factors. In establishing an appropriate ALLL, an assessment of the individual borrowers, a determination of the value of the underlying collateral, a review of historical loss experience and an analysis of the levels and trends of loan categories, delinquencies and problem loans are considered. Such factors as the level and trend of interest rates and current economic conditions and peer group statistics are also reviewed. The Company’s analysis of its ALLL also takes into consideration the potential impact that current trends may have on the Company’s borrower base.

Although management uses the best information available, the level of the ALLL remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ALLL. Such agencies may require the Company to increase the ALLL based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in the State of New Jersey. Future adjustments to the ALLL may be necessary due to economic factors impacting New Jersey real estate and the economy in general, as well as operating, regulatory and other conditions beyond the Company’s control.

At September 30, 2017, the ALLL was $29.9$12.9 million as compared to $25.7from $78.8 million at December 31, 2016. Provisions2021. The increase was primarily attributable to the ALLLprovision for credit losses for loans of $13.8 million partially related to organic loan originations, partially offset by $0.9 million in net charge-offs.

The provision for (reversal of) credit losses, which includes provision for unfunded commitments, for the three and nine months ended September 30, 2017 totaled $1.52022 was $10.0 million and  $4.0$14.5 million, respectively, compared to $6.8$1.1 million and $13.5$(6.3) million, for the same periods in 2016. The decrease from the prior year quarterthree and prior year nine month period was largely attributable to decreases in specific reserves, primarily related to the portfolio of taxi medallion loans.

There were $(19) thousand in net recoveries and $1.9 million in net charge-offs during the three months ended September 30, 2017 and 2016, respectively. There were $(126) thousand in net recoveries and $2.5 million in net charge-offs during the nine months ended September 30, 20172021, respectively. The increase in provision for credit losses when compared to the comparable prior-year periods, reflected strong organic loan growth and changes in forecasted macroeconomic conditions. The prior year provision in the three and nine months ended September 30, 2016,2021, was primarily the result of  an improved macro-economic forecast as of September 30, 2021 when compared to January 1, 2021, the day the Company adopted CECL.

There were $0.4 million  and $0.9 million in net charge-offs for the three and nine months ended September 30, 2022, respectively, compared with $1.6 million and $1.8 million in net charge-offs for the three and nine months ended September 30, 2021, respectively. The ALLLACL as a percentage of total loans receivable amounted to 0.77% at1.16% as of September 30, 20172022 compared to 0.74% at1.15% as of December 31, 2016 and 1.09 % at2021. Excluding the impact of PPP loans in the calculation of the ACL as a percentage of loans receivable, the September 30, 2016.2022 ratio was at 1.16%, compared to 1.17% as of December 31, 2021. PPP loans do not have allowance for credit losses attributable to them, as they are fully guaranteed by the SBA.

The level of the allowance for the respective periods of 20172022 and 20162021 reflects the credit quality within the loan portfolio, the loan volume recorded during the periods,growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the ALLL atACL as of September 30, 20172022 is adequate to cover credit losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.

47
Table of Contents

50 


Changes in the ALLLACL are presented in the following table for the periods indicated.

Nine Months Ended
September 30,
     2017     2016
(dollars in thousands)
Average loans receivable at end of period$3,847,396$3,406,800
 
Analysis of the ALLL:
Balance - beginning of quarter$      25,744$      26,572
Charge-offs:
Commercial-(2,396)
Commercial real estate(71)-
Residential real estate-(94)
Consumer(12)(10)
Total charge-offs(83)(2,500)
Recoveries:
Commercial1582
Commercial real estate5035
Residential real estate-3
Consumer13
Total recoveries20943
Net recoveries (charge-offs)126(2,457)
Provision for loan and losses4,00013,500
Balance - end of period$29,870$37,615
Ratio of annualized net charge-offs during the period to average loans receivable during the period-%0.06%
 
Loans receivable$3,889,289$3,445,476
ALLL as a percentage of loans receivable0.77%1.09%

  

Three Months Ended

 
  

September 30,

 
  

2022

  

2021

 
  

(dollars in thousands)

 

Average loans receivable

 $7,580,176  $6,449,726 

Analysis of the ACL:

        

Balance - beginning of quarter

 $82,739  $78,684 

Charge-offs:

        

Commercial

  (410)  (254)

Commercial real estate

  -   (1,473)

Consumer

  (3)  - 

Total charge-offs

  (413)  (1,727)

Recoveries:

        

Commercial

  53   1 

Commercial real estate

  -   85 

Residential real estate

  -   20 

Consumer

  -   7 

Total recoveries

  53   113 

Net charge-offs

  (360)  (1,614)

Provision for credit losses - loans

  9,338   916 

Balance - end of period

 $91,717  $77,986 
         

Ratio of annualized net charge-offs during the period to average loans receivable during the period

  0.02%  0.10%

Loans receivable

 $7,900,450  $6,576,439 

ACL as a percentage of loans receivable

  1.16%  1.19%

  

Nine Months Ended

 
  

September 30,

 
  

2022

  

2021

 
  

(dollars in thousands)

 

Average loans receivable

 $7,155,209  $6,314,433 

Analysis of the ACL:

        

Balance - beginning of quarter

 $78,773  $79,226 

CECL Day 1 Adjustment

  -   6,557 

Balance – beginning of quarter (as adjusted)

  78,773   85,783 

Charge-offs:

        

Commercial

  (751)  (304)

Commercial real estate

  (226)  (1,628)

Residential real estate

  (9)  (7)

Consumer

  (3)  - 

Total charge-offs

  (989)  (1,939)

Recoveries:

        

Commercial

  54   74 

Commercial real estate

  -   85 

Residential real estate

  35   20 

Consumer

  28   9 

Total recoveries

  117   188 

Net charge-offs

  (872)  (1,751)

Provision for (reversal of) credit losses - loans

  13,816   (6,046)

Balance - end of period

 $91,717  $77,986 
         

Ratio of annualized net charge-offs during the period to average loans receivable during the period

  0.02%  0.04%

Loans receivable

 $7,900,450  $6,576,439 

ACL as a percentage of loans receivable

  1.16%  1.19%

48
Table of Contents

Asset Quality

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems,on, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for loancredit losses at all times.

It is generally the Company’s policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of ninety days. When a loan is placed on nonaccrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on nonaccrual loans are generally applied against principal. A loan may be restored to an accruing basis when all past due amounts have been collected. Loans past due 90 days or more which are both well-secured and in the process of collection may remain on an accrual basis.

Nonperforming assets include nonaccrual loans and other real estate owned. Nonaccrual loans represent loans on which interest accruals have been suspended. In general, it is the policy of management to consider the charge-off of uncollectible amounts of loans at the point they become past due 90 days. Performing troubled debt restructured loans represent loans to borrowers experiencing financial difficulties on which a concession was granted, such as a reduction in interest rate below the current market rate for new debt with similar risks or modified repayment terms, and are performing under the restructured terms.

51 


The following table sets forth, as of the dates indicated, the amount of the Company’s nonaccrual loans, other real estate owned (“OREO”), performing troubled debt restructurings (“TDRs”) and loans past due 90 days or greater and still accruing/accreting:accruing:

September 30,December 31,
     2017     2016
(dollars in thousands)
Nonaccrual loans (held-for-investment)$13,755$5,734
Nonaccrual loans (held-for-sale)47,43063,044
OREO-626
Total nonperforming assets(1)$61,185$69,404
 
Performing TDRs$12,749$13,338
Loans 90 days or greater past due and still accruing (non-PCI)--
Loans 90 days or greater past due and still accruing/accreting (PCI)$4,209$5,293

  

September 30, 2022

  

December 31, 2021

 
  

(dollars in thousands)

 

Nonaccrual loans

 $57,447  $61,700 

OREO

  264   - 

Total nonperforming assets (1)

 $57,711  $61,700 
         

Performing TDRs

 $46,973  $43,587 

Loans 90 days or greater past due and still accruing (non PCD)

 $-  $- 

Loans 90 days or greater past due and still accruing (PCD)

 $10,068  $13,531 

(1)

Nonperforming assets are defined as nonaccrual loans (held-for-investment), nonaccrual loans (held-for-sale), and other real estate owned.OREO.


Nonaccrual loans to total loans receivable

  0.73%  0.90%

Nonperforming assets to total assets

  0.61%  0.76%

Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable

  1.45%  1.74%

Nonaccrual loans (held-for-investment) to total loans receivable            0.35%            0.16%
Nonperforming assets to total assets1.26%1.57%
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to total loans1.96%2.48%
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Table of Contents

Securities Portfolio

AtInvestment Securities

As of September 30, 2017,2022, the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations of U.S. states and political subdivisions, corporate bonds and notes, trust preferred securities, asset-backed securities and equity securities.

During For the quarterthree-months ended September 30, 2016, the Company transferred all securities previously categorized as held-to-maturity to available-for-sale classification. The transfer resulted in an increase of approximately $210 million in amortized cost basis of available-for-sale securities and resulted in a net increase to accumulated other comprehensive income of $7.4 million, net of tax. This transfer enhanced liquidity and increased flexibility with regard to asset-liability management and balance sheet composition. As a result of the transfer, the Company believes it has tainted its held-to-maturity classification and judgment will be required in the future in determining when circumstances have changed such that management can assert that it has the intent and ability to hold debt securities to maturity. Based on this guidance, the Company does not expect to classify any securities as held-to-maturity within the near future.

For the three months ended September 30, 2017,2022, average securities decreased $9.7increased $280.8 million to $397.1approximately $740.4 million, or 9.1%8.7% of average total interest-earning assets, from approximately $459.6 million, or 6.3% of average interest-earning assets, from $406.8 million, or 10.1% of average interest-earning assets, for the comparable period in 2016. For the nine months endedcompared to September 30, 2017, average securities decreased $28.7 million to $384.8 million, or 9.2%2021.

As of average interest-earning assets, from $413.5 million, or 10.6% of average interest-earning assets, for the comparable period in 2016.

At September 30, 2017,2022, net unrealized gainslosses on securities available-for-sale, which are carried as a component of accumulated other comprehensive incomeloss and included in stockholders’ equity, net of tax, amounted to $0.7$67.7 million as compared to $0.9with net unrealized losses of $0.5 million atas of December 31, 2016.2021. The decreaseincrease in net unrealized gainslosses is predominantlypredominately attributable to the sales of available-for-sale securities during 2017changes in market conditions and fluctuations in prevailing market interest rates. Unrealized losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely that we will not be required to sell the securities prior to their anticipated recovery.  The gross unrealized losses associated with agency securities and federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other-than-temporary because their unrealized losses are relateddecline in fair value is largely due to changes in interest rates and doother market conditions. This also resulted in a $27.2 million increase in deferred tax assets, attributable to the decline in fair value on securities available-for-sale since December 31, 2021. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not affect the expected cash flowsbeen recorded through an allowance for credit losses is recognized in other comprehensive income, net of the underlying collateral or issue.applicable taxes. The Company did not record an allowance for credit losses for available-for-sale as of September 30, 2022.

52


Interest Rate Sensitivity Analysis

The principal objective of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”). The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.

We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of September 30, 20172022 and December 31, 20162021, the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and the Bank’s management.

The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates.

Based on our model, which was run as of September 30, 2017,2022, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 1.65%0.28%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 1.84%1.51%. As of December 31, 2016,2021, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 5.79%3.35%, while a 100 basis-point instantaneous decrease in the general level of interest rates would decrease our net interest income by 2.93%5.64%.

Based on our model, which was run as of September 30, 2017,2022, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 2.43%1.87%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.75%3.27%. As of December 31, 2016,2021, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 6.65%9.77%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 4.43%10.41%.

An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of September 30, 2017,2022, would declinedecrease by 12.49%5.54% with an instantaneous rate shock of up 200 basis points, and increasedecline by 4.51%0.95% with an instantaneous rate shock of down 100 basis points.  Our EVE as of December 31, 2016,2021, would declineincrease by 7.97%0.24% with an instantaneous rate shock of up 200 basis points, and increasedecline by 2.96%5.20% with an instantaneous rate shock of down 100 basis points.

Estimated Change in
Interest RatesEstimatedEVE Interest RatesEstimatedEstimated Change in NII
(basis points)    EVE    Amount    %    (basis points)      NII    Amount    %
(dollars in thousands)
+300$443,173$(108,035)(19.6)+300$154,260$3,0802.0
 
+200482,343(68,865) (12.5) +200 153,6722,4911.7
+100 520,848 (30,360) (5.5)+100152,821 1,640 1.1
  
0551,208-0.00151,180-0.0
-100576,09024,8824.5-100148,406(2,775)(1.8)

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The following table illustrates the most recent results for EVE and one-year NII sensitivity as of September 30, 2022.

Interest Rates

  

Estimated

  

Estimated Change in EVE

  

Interest Rates

  

Estimated

  

Estimated Change in NII

 

(basis points)

  

EVE

  

Amount

  

%

  

(basis points)

  

NII

  

Amount

  

%

 
+300  $1,237,824   (135,382)  (9.86)  +300  $313,916  $(831)  (0.26)
+200   1,297,091   (76,115)  (5.54)  +200   315,615   868   0.28 
+100   1,353,613   (19,593)  (1.43)  +100   317,301   2,554   0.81 
0   1,373,206   -   -   0   314,747   -   - 
-100   1,360,103   (13,103)  (0.95)  -100   310,005   (4,742)  (1.51)
-200   1,285,872   (87,334)  (6.36)  -200   297,606   (17,141)  (5.45)

Estimates of Fair Value

The estimation of fair value is significant to a number of the Company’s assets, including loans held-for-sale and securities available-for-sale. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available-for-sale securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto presented elsewhere herein have been prepared in accordance with GAAP, which requirerequires the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations; unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Liquidity

Liquidity is a measure of a bank’s ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

At

As of September 30, 2017,2022, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of September 30, 2017,2022, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $399.2$796.9 million, which represented 8.2%8.4% of total assets and 9.5%9.8% of total deposits and borrowings, compared to $428.2$742.1 million atas of December 31, 2016,2021, which represented 9.7%9.1% of total assets and 11.2%10.9% of total deposits and borrowings on such date.borrowings.

The Bank is a member of the FHLBFederal Home Loan Bank of New York and, based on available qualified collateral as of September 30, 2017,2022, had the ability to borrow $1.4$2.0 billion. In addition, atas of September 30, 2017,2022, the Bank had in place borrowing capacity of $25$325 million through correspondent banks. The Bank also has a credit facility established with the Federal Reserve Bankbanks and other unsecured borrowing lines. As of New York for direct discount window borrowings with capacity based on pledged collateral of $10.9 million. At September 30, 2017,2022, the Bank had aggregate available and unused credit of approximately $796 million,$0.9 billion, which represents the aforementioned facilities totaling $1.4$2.3 billion net of $610 million$1.4 billion in outstanding borrowings and letters of credit. AtAs of September 30, 2017,2022, outstanding commitments for the Bank to extend credit were approximately $635 million.$1.2 billion.

Cash and cash equivalents totaled $141.3$333.8 million onas of September 30, 2017, decreasing2022, increasing by $59.1$68.3 million from $200.4$265.5 million atas of December 31, 2016.2021.  Operating activities provided $68.3$94.9 million in net cash.  Investing activities used $508.7 million$1.3 billion in net cash, primarily reflecting an increase in loans and investment securities.  Financing activities provided $381.2 million$1.3 billion in net cash, primarily reflecting a netan increase of $279.5 million in deposits of $978.2 million and aan increase in net increaseborrowings of $109 million in borrowings (consisting$361.7 million.

51
Table of $780.0 million in new FHLB borrowings offset by notional repayments of $656.0 million of FHLB borrowings and $15.0 million of repayments of repurchase agreements).

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Contents

Deposits

Total deposits increased by $279.5$977.6 million, or 8.4%15.4%, to $3.6$7.3 billion atas of September 30, 20172022 from December 31, 2016.2021. The increase was primarily attributabledue to increases in time deposits, money market, interest-bearing demand and noninterest-bearingnoninterest bearing demand deposits, interest-bearing and NOW and time deposits, partially offset by a slight decrease in savings deposits. The following table sets forth the composition of our deposit base by the periods indicated.

Amount
Increase/
September 30, 2017December 31, 2016(Decrease)
     Amount     %     Amount     %     2017 vs. 2016
(dollars in thousands)
Demand, noninterest-bearing$      719,582        19.8%$      694,977        20.8%$       24,605
 
Demand, interest-bearing623,02717.2563,74016.959,287
 
Money market1,024,97528.3911,86727.3113,108
 
Savings177,8264.9205,5516.1(27,725)
 
Time1,078,35929.8968,13628.9110,223
 
Total deposits$3,623,769100.0%$3,344,271100.0%$279,498

  

September 30, 2022

  

December 31, 2021

     
                  

Amount

 
                  

Increase/

 
  

Amount

  

%

  

Amount

  

%

  

(Decrease)

 
  

(dollars in thousands)

 

Demand, noninterest-bearing

 $1,665,658   22.8% $1,617,049   25.5% $48,609 

Demand, interest-bearing and NOW

  3,335,187   45.6   3,127,350   49.4   207,837 

Savings

  388,430   5.3   438,445   6.9   (50,015)

Time

  1,921,235   26.3   1,150,109   18.2   771,126 

Total deposits

 $7,310,510   100.0% $6,332,953   100.0% $977,557 

Subordinated Debentures

During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part prior to maturity. The floating interest rate on the subordinated debentures is three month LIBOR plus 2.85% and repricesre-prices quarterly. The rate atas of September 30, 20172022 was 4.16%5.63%.

During June 2015,2020, the Parent Corporation issued $50$75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”“2020 Notes”). The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding, June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2020. From and including June 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.

During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2018 Notes”) to certain institutional accredited investors. The net proceeds from the sale of the 2018 Notes were used by the Parent Corporation to contribute $35.0 million of common equity to the Bank on September 30, 2015, and to repay $11.25 million of SBLF preferred issued to the U.S. Treasury on March 11, 2016. Remaining funds were used for general corporate purposes.purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity in the first quarter of 2018. The 2018 Notes are non-callable for five years, have a stated maturity of JulyFebruary 1, 2025,2028 and bear interest at a fixed rate of 5.75%5.20% per year, from and including September 30, 2015January 17, 2018 to, but excluding JulyFebruary 1, 2020.2023. From and including JulyFebruary 1, 20202023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three monththree-month LIBOR rate plus 393284 basis points.

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Table of Contents

Stockholders’Stockholders’ Equity

The Company’s stockholders’ equity was $558 million at$1.1 billion as of September 30, 2017,2022, an increase of $26.7$24.1 million from December 31, 2016.2021. The increase in stockholders’ equity was primarily attributable to retained earnings, in addition to an increase in additional paid-in capital, partially offset by a decrease in accumulated other comprehensive income, reflecting the after-tax decline in the fair value of $25.4 millioninvestment securities net of unrealized hedge gains recorded in retained earningsother assets, and approximately $1.4 million of equity issuance related to stock-based compensation.an increase in treasury stock. As of September 30, 2017,2022, the Company’s tangible common equity ratio and tangible book value per share were 8.71%8.87% and $12.78,$20.93, respectively. As of December 31, 2016,2021, the tangible common equity ratio and tangible book value per share were 8.93%10.06% and $11.96,$20.12, respectively. Total goodwill and other intangible assets were approximately $148$216.1 million and $149$217.4 million, as of September 30, 20172022 and December 31, 2016,2021, respectively.

September 30,December 31,
     2017     2016
(dollars in thousands, except for share and
per share data)
Stockholders’ equity$        557,691$        531,032
 
Less: Goodwill and other intangible assets148,442148,997
Tangible common stockholders’ equity$409,249$382,035
 
Common stock outstanding at period end32,015,31731,948,307
 
Book value per common share$17.42$16.62
Less: Goodwill and other intangible assets4.644.66
Tangible book value per common share$12.78$11.96

The following table shows the reconciliation of common equity to tangible common equity and the tangible common equity ratio.

  

September 30, 2022

  

December 31, 2021

 
  

(dollars in thousands, except for share and per share data)

 

Common equity

 $1,037,368  $1,013,285 

Less: intangible assets

  (216,093)  (217,369)

Tangible common stockholders’ equity

 $821,275  $795,916 
         

Total assets

 $9,478,252  $8,129,480 

Less: intangible assets

  (216,093)  (217,369)

Tangible assets

 $9,262,159  $7,912,111 
         

Common stock outstanding at period end

  39,243,123   39,568,090 
         

Tangible common equity ratio (1)

  8.87%  10.06%
         

Book value per common share

 $26.43  $25.61 

Less: intangible assets

  5.50   5.49 

Tangible book value per common share

 $20.93  $20.12 

56(1)

Tangible common equity ratio is a non-GAAP measure.


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Table of Contents

Regulatory Capital and Capital Adequacy

The maintenance of a solid capital foundation is a primary goal for the Company. Accordingly, capital plans, stock repurchases and dividend policies are monitored on an ongoing basis. The Company’s objective with respect to the capital planning process is to effectively balance the retention of capital to support future growth with the goal of providing stockholders with an attractive long-term return on their investment.

The Company and the Bank are subject to regulatory guidelines establishing minimum capital standards that involve quantitative measures of assets, and certain off-balance sheet items, as risk-adjusted assets under regulatory accounting practices.

The following is a summary of regulatory capital amounts and ratios as of September 30, 20172022 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution (dollars in thousands)(for the Bank).

To Be Well-Capitalized Under
             For Capital Adequacy     Prompt Corrective Action
ConnectOne Bancorp, Inc.PurposesProvisions
At September 30, 2017AmountRatioAmount    RatioAmount    Ratio
 (dollars in thousands)
Tier 1 leverage capital$          416,7369.13%$          182,6034.00%N/AN/A
CET I risk-based ratio411,5829.40197,0424.50N/AN/A
Tier 1 risk-based capital416,7369.52262,7236.00N/AN/A
Total risk-based capital496,60611.34350,3978.00N/AN/A
 
To Be Well-Capitalized Under
For Capital AdequacyPrompt Corrective Action
ConnectOne BankPurposesProvisions
At September 30, 2017AmountRatioAmountRatioAmountRatio
(dollars in thousands)
Tier 1 leverage capital$461,300        10.11%$182,539        4.00%$          228,173       5.00%
CET I risk-based ratio461,30010.54197,0194.50284,5836.50
Tier 1 risk-based capital461,30010.54262,6926.00350,2558.00
Total risk-based capital491,17011.22350,2558.00437,81910.00

  

ConnectOne Bancorp, Inc.

  For Capital Adequacy Purposes  To Be Well-Capitalized Under Prompt Corrective Action Provisions 

The Company

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

As of September 30, 2022

 

(dollars in thousands)

 

Tier 1 leverage capital

 $970,240   10.95% $354,560   4.00%  NA   NA 

CET I risk-based ratio

  854,158   10.20   376,969   4.50   NA   NA 

Tier 1 risk-based capital

  970,240   11.58   502,626   6.00   NA   NA 

Total risk-based capital

  1,210,745   14.45   670,168   8.00   NA   NA 

N/A - not applicable

As of September 30, 2017, management believes that each of the Bank and the Company meet all capital adequacy requirements to which they are subject.

  

ConnectOne Bank

  For Capital Adequacy Purposes  To Be Well-Capitalized Under Prompt Corrective Action Provisions 

The Bank

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

As of September 30, 2022

         

(dollars in thousands)

         

Tier 1 leverage capital

 $966,014   10.91% $354,314   4.00%  442,892   5.00%

CET I risk-based ratio

  966,014   11.53   376,962   4.50   544,500   6.50 

Tier 1 risk-based capital

  966,014   11.53   502,616   6.00   670,154   8.00 

Total risk-based capital

  1,088,769   13.00   670,154   8.00   837,693   10.00 

Basel III rules require a “capital conservation buffer” for both the Company and the Bank. When fully phased in on January 1, 2019, each of the Company and the Bank will be required to maintain a 2.5% capital conservation buffer, above and beyond the capital levels otherwise required under applicable regulation. The implementation of this capital conservation buffer began on January 1, 2016 at a level of 0.625%, and will increase by 0.625% on each subsequent January 1 until it reaches 2.5% on January 1, 2019. Under this guidance banking institutions with a CET1, Tier 1 Capital Ratio and Total Risk Based Capital Ratio above the minimum regulatory adequate capital ratios 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.

As of September 30, 20172022, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the TotalTier I Risk Based Capital Ratio which was 2.09%3.08% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 1.97%2.50% above the minimum buffer ratio.

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Item 3. Qualitative and Quantitative Disclosures about Market Risks

Market Risk

Interest rate risk management is our primary market risk.  See "Item“Item 2- Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operation-Operations - Interest Rate Sensitivity Analysis"Analysis” herein for a discussion of our management of our interest rate risk.

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Table of Contents

Item 4. Controls and Procedures

a)Disclosure controls and procedures. As of the end of the Company’s most recently completed fiscal quarter covered by this report, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and are operating in an effective manner and that such information is accumulated and communicated to management, including the Company’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

b)Changes in internal controls over financial reporting. There have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Table of Contents

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not subject to any legal proceedings, which could have a materially adverse impact on its results of operations and financial condition.

Item 1a. Risk Factors

There have been no material changes to the risks inherent in our business from those described under Item 1A – Risk Factors of our Annual Report on Form 10-K.10-K for the year ended December 31, 2021.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

Share Repurchase Program

Historically, repurchases have been made from time to time as, in the opinion of management, market conditions warranted, in the open market or in privately negotiated transactions.

During the quarter ended September 30, 2022, the Company did not repurchase any shares. As of September 30, 2022, shares remaining for repurchase under the program were 1,827,640.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5.5 Other Information

Not applicable

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Item 6. Exhibits

Exhibit No.

 

Description

31.1

31.1

Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

Inline XBRL Instance Document

101.SCH

 

Inline XBRL Taxonomy Extension Schema DocumentDocument.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase DocumentDocument.

101.DEF

Definition

Inline XBRL Taxonomy Extension Definition Linkbase DocumentDocument.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase DocumentDocument.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase DocumentDocument.


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104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.

CONNECTONE BANCORP, INC.

(Registrant)

By:

/s/ Frank Sorrentino III

 

By:

/s/ William S. Burns

 

Frank Sorrentino III

  

William S. Burns

Chairman and Chief Executive Officer

Senior Executive Vice President and Chief Financial Officer

 

Date: November 3, 20174, 2022

Date: November 3, 20174, 2022


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