UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

~~(Mark One)~~

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2022


~~For the Quarterly Period Ended June 30, 2021~~

OR

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

	~~For the transition period from __________ to __________~~

For the transition period from to

Commission File Number:000-11486

CONNECTONE BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

New Jersey

52-1273725

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

301 Sylvan Avenue

Englewood Cliffs, New Jersey 07632

(Address of Principal Executive Offices) (Zip Code)

201-816-8900

(Registrant’s Telephone Number, Including Area Code)

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 1/40^th 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

~~(Do not check if smaller~~

~~reporting company)~~

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:	~~39,794,815~~39,243,123 shares
(Title of Class)	(Outstanding as of August ~~6, 2021)~~5, 2022)

Table of Contents

Table of Contents

		Page

PART I – FINANCIAL INFORMATION

Item 1.
~~PART I – FINANCIAL INFORMATION~~Financial Statements	3
~~Item 1.Financial Statements~~	3
Consolidated Statements of Condition as of June 30, ~~2021~~2022 (unaudited) and December 31, ~~2020~~2021	3
	Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021 ~~and 2020~~(unaudited)	4
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021 ~~and 2020~~(unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021 ~~and~~ ~~2020~~ (unaudited)	6
	Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 ~~and 2020~~ (unaudited)	8
	Notes to Consolidated Financial Statements (unaudited)	10



Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4640

Item 3.	Qualitative and Quantitative Disclosures about Market Risks	6040

Item 4.	Controls and Procedures	6155

PART II – OTHER INFORMATION

Item 1.	62Legal Proceedings	56

Item 1.1a.~~Legal Proceedings~~	62Risk Factors	56
~~Item 1a.Risk Factors~~	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6256

Item 3.	Defaults Upon Senior Securities	6256

Item 4.	Mine Safety Disclosures	6256

Item 5.	Other Information	6256

Item 6.~~Exhibits~~	63Exhibits	57

SIGNATURES		6458

Table of Contents

Item 1. Financial Statements

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

(unaudited)

(in thousands, except for share data)							June 30,			December 31,
	June 30,			December 31,			2022			2021
(in thousands, except for share data)	2021			2020
	(unaudited)
ASSETS
Cash and due from banks	$	59,148		$	63,637		$	58,807		$	54,352
Interest-bearing deposits with banks		290,269			240,119			240,513			211,184
Cash and cash equivalents		349,417			303,756			299,320			265,536

Investment securities		458,933			487,955			675,941			534,507
Equity securities		13,223			13,387			15,993			13,794

Loans held-for-sale		6,159			4,710			3,182			250

Loans receivable		6,407,904			6,236,307			7,274,573			6,828,622
Less: Allowance for credit losses - loans		78,684			79,226			82,739			78,773
Net loans receivable		6,329,220			6,157,081			7,191,834			6,749,849

Investment in restricted stock, at cost		22,563			25,099			47,287			27,826
Bank premises and equipment, net		28,811			30,108			28,391			29,032
Accrued interest receivable		34,001			35,317			34,615			34,152
Bank owned life insurance		193,209			165,960			228,279			195,731
Right of use operating lease assets		12,504			16,159			10,809			11,017
Other real estate owned								316			0
Goodwill		208,372			208,372			208,372			208,372
Core deposit intangibles		9,963			10,977			8,130			8,997
Other assets		43,707			88,458			89,037			50,417
Total assets	$	7,710,082		$	7,547,339		$	8,841,506		$	8,129,480
LIABILITIES
Deposits:
Noninterest-bearing	$	1,485,952		$	1,339,108		$	1,712,875		$	1,617,049
Interest-bearing		4,706,561			4,620,116			4,904,724			4,715,904
Total deposits		6,192,513			5,959,224			6,617,599			6,332,953
Borrowings		353,462			425,954			874,964			468,193
Subordinated debentures, net		152,800			202,648			153,103			152,951
Operating lease liabilities		14,235			18,026			12,116			12,417
Other liabilities		32,112			26,177			40,577			38,754
Total liabilities		6,745,122			6,632,029			7,698,359			7,005,268

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Preferred Stock:
Authorized 5,000,000 shares		0-			0-
Common stock, no par value:
Authorized 50,000,000 shares; issued 42,547,077 shares as of June 30, 2021 and 42,444,031 shares as of December 31, 2020; outstanding 39,794,815 shares as of June 30, 2021 and 39,785,398 as of December 31, 2020		586,946			586,946
Preferred Stock, no par value; $1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of June 30, 2022 and as of December 31, 2021; outstanding 115,000 shares as of June 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 June 30, 2022 and 42,557,264 shares as of December 31, 2021; outstanding 39,243,123 shares as of June 30, 2022 and 39,568,090 as of December 31, 2021								586,946			586,946
Additional paid-in capital		24,606			23,887			27,536			27,246
Retained earnings		386,280			331,951			489,640			440,169
Treasury stock, at cost 2,752,262 common shares as of June 30, 2021 and 2,658,633 as of December 31, 2020		(32,682	)		(30,271	)
Accumulated other comprehensive (loss) income		(190	)		2,797
Treasury stock, at cost 3,436,282 common shares as of June 30, 2022 and 2,989,174 as of December 31, 2021								(52,799	)		(39,672	)
Accumulated other comprehensive loss								(19,103	)		(1,404	)
Total stockholders’ equity		964,960			915,310			1,143,147			1,124,212
Total liabilities and stockholders’ equity	$	7,710,082		$	7,547,339		$	8,841,506		$	8,129,480

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended						Six Months Ended
(in thousands, except for per share data)	2021			2020			2021			2020
													June 30,						June 30,
													2022			2021			2022			2021
(dollars in thousands, except for per share data)
Interest income
Interest and fees on loans	$	71,101		$	75,797		$	141,563		$	148,733		$	81,285		$	71,101		$	157,310		$	141,563
Interest and dividends on investment securities:
Taxable		995			1,712			2,083			3,778			2,551			995			4,424			2,083
Tax-exempt		608			647			1,374			1,460			916			608			1,625			1,374
Dividends		263			442			519			842			291			263			505			519
Interest on federal funds sold and other short-term investments		84			79			133			578			313			84			433			133
Total interest income		73,051			78,677			145,672			155,391			85,356			73,051			164,297			145,672
Interest expense
Deposits		6,424			13,597			14,009			30,809			5,709			6,424			10,719			14,009
Borrowings		3,618			4,290			7,491			8,511			4,056			3,618			7,629			7,491
Total interest expense		10,042			17,887			21,500			39,320			9,765			10,042			18,348			21,500
Net interest income		63,009			60,790			124,172			116,071			75,591			63,009			145,949			124,172
(Reversal of) provision for credit losses		(1,649	)		15,000			(7,415	)		31,000
Net interest income after (reversal of) provision for credit losses		64,658			45,790			131,587			85,071
Provision for (reversal of) credit losses														3,000			(1,649	)		4,450			(7,415	)
Net interest income after provision for (reversal of) credit losses														72,591			64,658			141,499			131,587
Noninterest income
Deposit, loan and other income		2,222			3,212			3,390			4,499			1,866			2,222			3,609			3,390
Income on bank owned life insurance		1,185			1,128			2,249			2,095			1,342			1,185			2,548			2,249
Net gains on sale of loans held-for-sale		847			237			1,554			630			556			847			1,257			1,554
Gain on sale of branches		0-			0-			674			0-			0			0			0			674
Net gains (losses) on equity securities		23			44			(164	)		222
Net gains on sales/redemption of securities available-for-sale		195			0-			195			29
Net (losses) gains on equity securities														(405	)		23			(1,001	)		(164	)
Net gain on sales/redemptions of securities available-for-sale														0			195			0			195
Total noninterest income		4,472			4,621			7,898			7,475			3,359			4,472			6,413			7,898
Noninterest expenses
Salaries and employee benefits		15,351			14,529			30,983			29,122			19,662			15,351			38,445			30,983
Occupancy and equipment		3,187			3,156			6,591			6,627			2,733			3,187			4,662			6,591
FDIC insurance		580			1,093			1,515			1,949			725			580			1,331			1,515
Professional and consulting		2,117			1,673			4,073			3,247			2,124			2,117			3,916			4,073
Marketing and advertising		278			426			519			730			426			278			777			519
Data processing		1,603			1,586			3,139			3,059
Merger and restructuring expenses		0-			5,146			0-			14,640
Information technology and communications														2,801			2,636			5,667			5,161
Amortization of core deposit intangibles		508			652			1,015			1,304			434			508			867			1,015
Other components of net periodic pension expense														(143	)		(67	)		(286	)		(134	)
Increase in value of acquisition price		0-			2,333			0-			2,333			833			0			1,516			0
Other components of net periodic pension expense		(67	)		(29	)		(134	)		(59	)
Other expenses		2,702			2,498			5,043			5,169			2,108			1,669			4,038			3,021
Total noninterest expenses		26,259			33,063			52,744			68,121			31,703			26,259			60,933			52,744
Income before income tax expense		42,871			17,348			86,741			24,425			44,247			42,871			86,979			86,741
Income tax expense		10,652			2,516			21,523			3,563			11,889			10,652			23,240			21,523
Net income	$	32,219		$	14,832		$	65,218		$	20,862			32,358			32,219			63,739			65,218
Earnings per common share:
Preferred dividends														1,509			0			3,018			0
Net income available to common stockholders													$	30,849		$	32,219		$	60,721		$	65,218
Earnings per common share
Basic	$	0.81		$	0.37		$	1.64		$	0.53		$	0.78		$	0.81		$	1.54		$	1.64
Diluted		0.81			0.37			1.63			0.52			0.78			0.81			1.53			1.63

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 30,						June 30,						June 30,						June 30,
(in thousands)	2021			2020			2021			2020
(dollars in thousands)													2022			2021			2022			2021
Net income	$	32,219		$	14,832		$	65,218		$	20,862		$	32,358		$	32,219		$	63,739		$	65,218

Other comprehensive income (loss):

Unrealized gains and losses:
Unrealized holding gains (losses) on available-for-sale securities arising during the period		271			(1,423	)		(5,169	)		4,829
Unrealized holding (losses) gains on available-for-sale securities arising during the period														(23,891	)		271			(54,516	)		(5,169	)
Tax effect		(68	)		392			1,364			(1,299	)		7,616			(68	)		15,755			1,364
Net of tax		203			(1,031	)		(3,805	)		3,530			(16,275	)		203			(38,761	)		(3,805	)

Reclassification adjustment for realized gains included in net income		(195	)		0-			(195	)		(29	)		0			(195	)		0			(195	)
Tax effect		48			0-			48			6			0			48			0			48
Net of tax		(147	)		0-			(147	)		(23	)		0			(147	)		0			(147	)

Unrealized losses on cash flow hedges		(42	)		(566	)		(18	)		(3,315	)
Unrealized gains (losses) on cash flow hedges														8,284			(42	)		27,284			(18	)
Tax effect		15			140			4			913			(2,946	)		15			(8,287	)		4
Net of tax		(27	)		(426	)		(14	)		(2,402	)		5,338			(27	)		18,997			(14	)

Reclassification adjustment for realized losses on cash flow hedges included in net income		584			318			1,215			311			129			584			654			1,215
Tax effect		(167	)		(71	)		(344	)		(69	)		(37	)		(167	)		(184	)		(344	)
Net of tax		417			247			871			242			92			417			470			871

Reclassification adjustment for pension plan amortization included in net income		75			76			150			151
Unrealized gains on pension plan														0			0			2,187			0
Tax effect														0			0			(615	)		0
Net of tax														0			0			1,572			0
Reclassification adjustment for realized losses on pension plan included in net income														16			75			32			150
Tax effect		(22	)		(21	)		(42	)		(42	)		(5	)		(22	)		(9	)		(42	)
Net of tax		53			55			108			109			11			53			23			108

Total other comprehensive income (loss)		499			(1,155	)		(2,987	)		1,456
Total other comprehensive (loss) income														(10,834	)		499			(17,699	)		(2,987	)

Total comprehensive income	$	32,718		$	13,677		$	62,231		$	22,318		$	21,524		$	32,718		$	46,040		$	62,231

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN ~~STOCKHOLDERS’~~STOCKHOLDERS’ EQUITY

(unaudited)

Six Months Ended June 30, 2021

(dollars in thousands, except for per share data)

Preferred
Stock

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Treasury
Stock

Accumulated
Other
Comprehensive
(Loss) Income

Total
Stockholders’
Equity

Balance as of December 31, 2020

$
0-

$
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

-

-

-

65,218

-

-

65,218

Other comprehensive loss, net of tax

-

-

-

-

-

(2,987
)

(2,987
)

Cash dividends declared on common stock ($0.20 per share)

-

-

-

(7,964
)

-

-

(7,964
)

Exercise of stock options (5,449 shares)

-

-

45

-

-

-

45

Restricted stock grants, net of forfeitures (47,982 shares)

-

-

-

-

-

-

0-

Stock grants (446 shares)

-

-

-

-

-

-

0-

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

-

-

-

-

-

-

0-

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

-

-

-

-

-

-

0-

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

-

-

(1,283
)

-

-

-

(1,283
)

Repurchase of treasury stock (93,629 shares)

-

-

-

-

(2,411
)

-

(2,411
)

Stock-based compensation expense

-

-

1,957

-

-

-

1,957

Balance as of June 30, 2021

$
0-

$
586,946

$
24,606

$
386,280

$
(32,682
)

$
(190
)

$
964,960

	*Six Months Ended June 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		0		0		0			63,739			0			0			63,739
Other comprehensive loss, net of tax		0		0		0			0			0			(17,699	)		(17,699	)
Cash dividend declared on preferred stock ($0.65625 per depositary share)		0		0		0			(3,018	)		0			0			(3,018	)
Cash dividends declared on common stock ($0.285 per share)		0		0		0			(11,250	)		0			0			(11,250	)
Exercise of stock options (15,086 shares)		0		0		124			0			0			0			124
Restricted stock grants, net of forfeitures (53,169 shares)		0		0		0			0			0			0			0
Stock grants (153 shares)		0		0		0			0			0			0			0
Net shares issued in satisfaction of restricted stock units earned (31,383 shares)		0		0		0			0			0			0			0
Net shares issued in satisfaction of performance units earned (22,350 shares)		0		0		0			0			0			0			0
Share redemption for tax withholdings on performance units and restricted stock units earned		0		0		(2,133	)		0			0			0			(2,133	)
Repurchase of treasury stock (447,108 shares)		0		0		0			0			(13,127	)		0			(13,127	)
Stock-based compensation expense		0		0		2,299			0			0			0			2,299

Balance as of June 30, 2022	$	110,927	$	586,946	$	27,536		$	489,640		$	(52,799	)	$	(19,103	)	$	1,143,147

Three Months Ended June 30, 2021

Total

(dollars in thousands, except for per share data)

Preferred
Stock

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Treasury
Stock

Accumulated
Other
(Loss) Income

Stockholders’ Comprehensive
Equity

Balance as of March 31, 2021

$
0-

$
586,946

$
23,621

$
358,441

$
(32,682
)

$
(689
)

$
935,637

Net income

-

-

-

32,219

-

-

32,219

Other comprehensive income, net of tax

-

-

-

-

-

499

499

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

-

-

-

(4,380
)

-

-

(4,380
)

Restricted stock grants, net of forfeitures (21,213 shares)

-

-

-

-

-

-

0-

Stock-based compensation expense

-

-

985

-

-

-

985

Balance as of June 30, 2021

$
0-

$
586,946

$
24,606

$
386,280

$
(32,682
)

$
(190
)

$
964,960

	*Three Months Ended June 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 March 31, 2022	$	110,927	$	586,946	$	28,484		$	464,889		$	(44,458	)	$	(8,269	)	$	1,138,519
Net income		0		0		0			32,358			0			0			32,358
Other comprehensive loss, net of tax		0		0		0			0			0			(10,834	)		(10,834	)
Cash dividends declared on preferred stock ($0.328125 per depositary share)		0		0		0			(1,509	)		0			0			(1,509	)
Cash dividends declared on common stock ($0.155 per share)		0		0		0			(6,098	)		0			0			(6,098	)
Exercise of stock options (6,312 shares)		0		0		33			0			0			0			33
Share redemption for tax withholdings on performance units and restricted stock units earned		0		0		(2,133	)		0			0			0			(2,133	)
Restricted stock grants, net of forfeitures (20,715 shares)		0		0		0			0			0			0			0
Repurchase of treasury stock (302,315 shares)		0		0		0			0			(8,341	)		0			(8,341	)
Stock-based compensation expense		0		0		1,152			0			0			0			1,152

Balance as of June 30, 2022	$	110,927	$	586,946	$	27,536		$	489,640		$	(52,799	)	$	(19,103	)	$	1,143,147

Table of Contents

(continued)

Six Months Ended June 30, 2020
(dollars in thousands, except for per share data)

Preferred
Stock

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Treasury
Stock

Accumulated
Other
Comprehensive
(Loss) Income

Total
Stockholders’
Equity
Balance as of December 31, 2019

$
0-

$
468,571

$
21,344

$
271,782

$
(29,360
)

$
(1,147
)

$
731,190

Net income

-

-

-

20,862

-

-

20,862

Other comprehensive income, net of tax

-

-

-

-

-

1,456

1,456

Cash dividends declared on common stock ($0.090 per share)

-

-

-

(3,956
)

-

-

(3,956
)
Exercise of stock options (25,413 shares)

-

-

163

-

-

-

163

Restricted stock grants (68,853 shares)

-

-

-

-

-

-

0-

Net shares issued in satisfaction of restricted stock units earned
(16,541 shares)

-

-

-

-

-

-

0-

Net shares issued in satisfaction of performance units earned (22,402 shares)

-

-

-

-

-

-

0-

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

-

-

(639
)

-

-

-

(639
)
Repurchase of treasury stock (54,693 shares)

-

-

-

-

(911
)

-

(911
)
Stock issued (4,602,450 shares) in acquisition of Bancorp of New Jersey

-

118,375

-

-

-

-

118,375

Stock-based compensation expense

-

-

1,201

-

-

-

1,201

Balance as of June 30, 2020

$
0-

$
586,946

$
22,069

$
288,688

$
(30,271
)

$
309

$
867,741

	*Six Months Ended June 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	$	0	$	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		0		0		0			(2,925	)		0			0			(2,925	)
Balance as of January 1, 2021 as adjusted for changes in accounting principle		0		586,946		23,887			329,026			(30,271	)		2,797			912,385
Net income		0		0		0			65,218			0			0			65,218
Other comprehensive loss, net of tax		0		0		0			0			0			(2,987	)		(2,987	)
Cash dividends declared on common stock ($0.20 per share)		0		0		0			(7,964	)		0			0			(7,964	)
Exercise of stock options (5,449 shares)		0		0		45			0			0			0			45
Restricted stock grants, net of forfeitures (47,982 shares)		0		0		0			0			0			0			0
Stock grants (446 shares)		0		0		0			0			0			0			0
Net shares issued in satisfaction of restricted stock units earned (14,711 shares)		0		0		0			0			0			0			0
Net shares issued in satisfaction of performance units earned (34,458 shares)		0		0		0			0			0			0			0
Share redemption for tax withholdings on performance units and restricted stock units earned		0		0		(1,283	)		0			0			0			(1,283	)
Repurchase of treasury stock (93,629 shares)		0		0		0			0			(2,411	)		0			(2,411	)
Stock-based compensation expense		0		0		1,957			0			0			0			1,957

Balance as of June 30, 2021	$	0	$	586,946	$	24,606		$	386,280		$	(32,682	)	$	(190	)	$	964,960

	*Three Months Ended June 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 March 31, 2021	$	0	$	586,946	$	23,621	$	358,441		$	(32,682	)	$	(689	)	$	935,637
Net income		0		0		0		32,219			0			0			32,219
Other comprehensive income, net of tax		0		0		0		0			0			499			499
Cash dividends declared on common stock ($0.11 per share)		0		0		0		(4,380	)		0			0			(4,380	)
Restricted stock grants, net of forfeitures (21,213 shares)		0		0		0		0			0			0			0
Stock-based compensation expense		0		0		985		0			0			0			985

Balance as of June 30, 2021	$	0	$	586,946	$	24,606	$	386,280		$	(32,682	)	$	(190	)	$	964,960

Three Months Ended June 30, 2020
(dollars in thousands, except for per share data)

Preferred
Stock

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Treasury
Stock

Accumulated
Other
Comprehensive
(Loss) Income

Total
Stockholders’ Comprehensive
Equity

Balance as of March 31, 2020

$
0-

$
586,946

$
21,746

$
273,825

$
(30,271
)

$
1,464

$
853,710

Net income

-

-

-

14,832

-

-

14,832

Other comprehensive loss, net of tax

-

-

-

-

-

(1,155
)

(1,155
)

Cash dividends adjustment

-

-

-

31

-

-

31

Restricted stock grants (48,169 shares)

-

-

-

-

-

-

0-

Share redemption for tax withholdings on performance units

-

-

(342
)

-

-

-

(342
)

Stock-based compensation expense

-

-

665

-

-

-

665

Balance as of June 30, 2020

$
0-

$
586,946

$
22,069

$
288,688

$
(30,271
)

$
309

$
867,741

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in thousands)	2021			2020			2022			2021
Cash flows from operating activities
Net income	$	65,218		$	20,862		$	63,739		$	65,218
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		1,746			1,860			1,942			1,746
(Reversal of) provision for credit losses		(7,415	)		31,000
Provision for (reversal of) credit losses								4,450			(7,415	)
Amortization of intangibles		1,015			1,304			867			1,015
Net accretion of loans		(2,803	)		(3,752	)		(1,689	)		(2,803	)
Accretion on bank premises		(45	)		(45	)		(24	)		(45	)
Accretion on deposits		(1,248	)		(2,673	)		(518	)		(1,248	)
Accretion on borrowings, net		(36	)		(104	)
Amortization (accretion) on borrowings, net								14			(36	)
Stock-based compensation		1,957			1,201			2,299			1,957
Gains on sales/redemptions of securities available-for-sale, net		(195	)		(29	)		0			(195	)
Losses (gains) on equity securities, net		164			(222	)
Losses on equity securities, net								1,001			164
Gain on sale of branches		(674	)		0-			0			(674	)
Net losses on disposition of fixed assets		27			0-
Gains on sales of loans held-for-sale, net		(1,554	)		(630	)
Net losses on disposition of other premises and equipment								0			27
Gains on sale of loans held-for-sale, net								(1,257	)		(1,554	)
Loans originated for resale		(30,600	)		(17,141	)		(14,795	)		(30,600	)
Proceeds from sale of loans held-for sale		40,043			30,894
Payments on loans held-for-sale		18			172
Proceeds from sale of loans held-for-sale								16,302			40,043
Gain on sale of other real estate owned		(18	)		0-			0			(18	)
Increase in cash surrender value of bank owned life insurance		(2,249	)		(2,095	)		(2,548	)		(2,249	)
Amortization of premiums and accretion of discounts on securities available-for-sale, net		3,152			2,512
Amortization of premiums and accretion of discounts on securities available-for-sale								1,481			3,152
Amortization of subordinated debentures issuance costs		152			170			152			152
Decrease (increase) in accrued interest receivable		1,316			(6,035	)
(Increase) decrease in accrued interest receivable								(463	)		1,316
Net change in operating leases		(439	)		2,051			(93	)		(439	)
Decrease in other assets		48,236			25,042
Increase (decrease) in other liabilities		3,705			(8,602	)
(Increase) decrease in other assets								(4,024	)		48,236
Increase in other liabilities								4,131			3,705
Net cash provided by operating activities		119,473			75,740			70,967			119,455

Cash flows from investing activities
Investment securities available-for-sale:
Purchases		(126,641	)		(108,584	)		(296,254	)		(126,641	)
Sales		0-			19,624
Maturities, calls and principal repayments		147,342			97,625			98,824			147,342
Purchases of equity securities		0-			(2,000	)		(3,200	)		0
Net redemptions of restricted investment in bank stocks		2,536			3,805
Net (purchases) redemptions of restricted investment in bank stocks								(19,461	)		2,536
Payments on loans held-for-sale								2,390			18
Net increase in loans		(173,384	)		(463,094	)		(450,723	)		(173,384	)
Purchases of bank owned life insurance		(25,000	)		(25,000	)		(30,000	)		(25,000	)
Purchases of premises and equipment		(541	)		(855	)		(1,276	)		(541	)
Proceeds from sale of branches		1,087			0-			0			1,087
Proceeds from sale of OREO		321			992
Cash and cash equivalents acquired in acquisition, net		0-			87,391
Proceeds from sale of other real estate owned								0			321
Net cash used in investing activities		(174,280	)		(390,096	)		(699,700	)		(174,262	)

Cash flows from financing activities
Net increase in deposits		234,537			276,614			285,164			234,537
(Repayment of) increase in subordinated debentures		(50,000	)		73,421
Increase in (repayment of) subordinated debentures								0			(50,000	)
Advances of borrowings		100,000			1,376,489			1,450,181			100,000
Repayments of borrowings		(172,456	)		(1,259,358	)		(1,043,424	)		(172,456	)
Cash dividends on preferred stock								(3,018	)		0
Repurchase of treasury stock		(2,411	)		(911	)		(13,127	)		(2,411	)
Cash dividends paid on common stock		(7,964	)		(3,545	)		(11,250	)		(7,964	)
Proceeds from exercise of stock options		45			163			124			45
Share redemption for tax withholdings on performance units and restricted stock units earned		(1,283	)		(639	)		(2,133	)		(1,283	)
Net cash provided by financing activities		100,468			462,234			662,517			100,468
Net change in cash and cash equivalents		45,661			147,878			33,784			45,661
Cash and cash equivalents at beginning of period		303,756			201,483			265,536			303,756

Cash and cash equivalents at end of period	$	349,417		$	349,361		$	299,320		$	349,417

Table of Contents

(continued)

Supplemental disclosures of cash flow information

Cash payments for:

Interest paid on deposits and borrowings

$
23,236

$
41,189

Income taxes

20,299

12,096

Supplemental disclosures of noncash activities

Investing:

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

$
304

$
0-

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

9,356

10,995

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

0-

19,738

Business combinations:

Fair value of assets acquired

$
0-

$
949,282
Fair value of liabilities assumed

0-

852,729

Supplemental disclosures of cash flow information
Cash payments for:
Interest paid on deposits and borrowings	$	18,117	$	23,236
Income taxes		20,832		20,299

Supplemental disclosures of noncash activities
Investing:
Transfer of loans from held-for-investment to other real estate owned	$	316	$	304
Transfer of loans from held-for-investment to held-for-sale		5,572		9,356

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1a.Nature of Operations, 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 New Jersey investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), NJCB ~~Spec-1,~~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 ~~twenty-five~~twenty-four other banking offices. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’ business, real estate rental and consumer wages.

The preceding unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form ~~10-Q~~10-Q and Rule ~~10-01~~10-01 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 and six months ended June 30, ~~2021~~2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, ~~2021,~~ 2022, or for any other interim period. The Company’s ~~2020~~2021 Annual Report on Form ~~10-K~~10-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.

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~~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~~ (CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the ~~COVID-19~~COVID-19 pandemic. The ~~COVID-19~~COVID-19 pandemic has adversely affected, and continues to adversely affect economic activity globally, nationally and locally. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. Although economic activity ~~has accelerated~~began to accelerate in 2021, and the United States continues to implement a ~~COVID-19~~COVID-19 vaccination program, ~~COVID-19,~~COVID-19, it’s variants and actions taken to mitigate the spread of it have had and may in the future have an adverse impact on the economies and financial markets 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 continue operations while taking steps to ensure the safety of employees and ~~customers, COVID-19~~clients, COVID-19 could impact the Company’s operations in the future. ~~Federal Reserve reductions in interest rates and other~~The effects of the ~~COVID-19~~COVID-19 pandemic may adversely affect the ~~Company's~~Company’s financial condition and results of operations in future periods. Although state and local governments have lifted many restrictions on conducting business, it is possible that restrictions could be reimposed. It

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 administration after 2021. The announcement also indicates that the continuation of LIBOR on the current basis 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 ~~therefore unknown how long COVID-19 may~~not possible to predict whether and to what extent banks will continue to ~~impact the economy and what the complete financial effect will be~~provide LIBOR submissions to the ~~Company. It is reasonably possible that estimates made~~LIBOR administrator or whether any additional reforms to LIBOR may be enacted in the ~~financial statements could be materially and adversely impacted~~United Kingdom or elsewhere. Similarly, banking regulators in the ~~near term~~United States have required insured depository institutions in the United states to cease originating loans using LIBOR as a ~~result~~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 Bank ceased using LIBOR as an index for loans it originates, it is unclear at this time what effect these ~~conditions, including~~changes may have on the ~~determination~~values of loans and liabilities held or owed by the ~~allowance for credit losses on loans, fair~~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, ~~financial instruments, impairment of goodwill~~ and ~~other intangible assets~~the return on our loans, and ~~income taxes.~~our investment securities.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

Note 1b. Authoritative Accounting Guidance

~~Adoption of New~~Newly Issued, But Not Yet Effective Accounting Standards ~~in 2021~~

~~Effective January 1, 2021,~~

In June 2022, the ~~Company adopted~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2016-13 “ASU 2016-13~~2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2022-03”). ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company is 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)~~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”~~, which replaced the prior incurred loss methodology with an expected loss methodology~~ (ASU 2016-13”). ASU 2022-02 also requires that is referred to as the current expected credit loss (“CECL” or the “CECL Standard”). The measurement of expected credit losses under the CECL Standard is applicable to financial assets measured at amortized cost, including portfolio loans and investment securities classified as held-to-maturity (“HTM”). It also applies to off-balance sheet credit exposures including loan commitments, standby letters of credit, financial guarantees and other similar instruments. In addition, the CECL Standard changes the accounting for investment securities classified as ("AFS"), including a requirement that estimated credit losses on AFS securities be presented as an allowance rather than as a direct write-down of the carrying balance of securities which we do not intend to sell, or believe that it is more likely than not, that we will be required to sell.

The Company adopted the CECL Standard using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. As discussed further below, purchased credit deteriorated assets were measured on a prospective basis in accordance with the CECL Standard and all purchase credit impaired loans as of December 31, 2020 were considered purchased credit deteriorated loans upon adoption. Results for reporting periods beginning after January 1, 2021 are presented under the CECL Standard while prior period amounts continue to be reported in accordance with previously applicable accounting guidance. The adoption of the CECL Standard resulted in the following adjustments to our financial statements as of January 1, 2021 (dollars in thousands):

Change in Consolidated
Change to Retained Earnings
Statement of Condition
Tax Effect
from Adoption of CECL
Allowance for credit losses (“ACL”) (loans)
$
1,350
$
406
$
944
Adjustment related to purchased credit-impaired loan marks⁽¹⁾
5,207
0-
0-
Total ACL - loans
6,557
406
944
ACL (unfunded credit commitments)
2,833
852
1,981

Total impact of CECL adoption
$
9,390
$
1,258
$
2,925

⁽¹⁾

~~This amounts represents a gross-up of the balance sheet related to nonaccretable credit marks of purchased credit-impaired loans resulting from adoption of CECL on January 1, 2021.~~

Loans designated as purchased credit impaired loans (“PCI”) and accounted for under Accounting Standards Codification (“ASC”) 310-30 were designated as purchased with credit deterioration loans (“PCD”). In accordance with the CECL Standard, the Company did not reassess whether PCI loans met the criteria of PCD loans as of the date of adoption and determined all PCI loans were PCD loans. The Company recorded an increase to the balance of PCD loans and an increase to the ACL for loans of $5.2 million, which represented the expected credit losses for PCD loans. The remaining non-credit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021 over the remaining estimated life of the loans. Also, in accordance with the CECL Standard, the Company did not reassess whether modifications to individual acquired financial assets were troubled debt restructurings (“TDRs”) as of the date of adoption.

~~ACL for loans~~: The ACL for loans is a valuation account that is deducted from the amortized cost basis of portfolio loans to present the net amount expected to be collected on portfolio loans over their contractual life. Loans are charged-off against the allowance when we believe the uncollectibility of a loan balance has been confirmed, and the expected recoveries do not exceed the aggregate of amounts previously charged-off or expected to be charged-off.

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 1b. Authoritative Accounting Guidance – (continued)~~

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company currently utilizes a one-year reasonable and supportable forecast period followedpublic business entities disclose current-period gross charge-offs by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan. The measurement of expected credit loss under the CECL methodology is applicable to financial assets measured at amortized cost, including loans and held to maturity investments and it also applies to certain off-balance sheet credit exposures.

The ACL for loans is measured on a collective (pool) basis when similar risk characteristics exist. Generally, for all other loan types, the estimated expected credit loss is also calculated at the loan level and pool assignments are only utilized for aggregating the allowance estimates of similar loan types for financial statement disclosure purposes. Loan segments have unique risk characteristics with respect to credit quality and are as follows:

●

The repayment of commercial loans is generally dependent on the creditworthiness and cash flow of borrowers, and if applicable, guarantors, which may be negatively impacted by adverse economic conditions. While the majority of these loans are secured, collateral type, marketing, coverage, valuation and monitoring is not as uniform as in other portfolio classes and recovery from liquidation of such collateral may be subject to greater variability.

●

Payment on commercial mortgages is driven principally by operating results of the managed properties or underlying business and secondarily by the sale or refinance of such properties. Both primary and secondary sources of repayment, and value of the properties in liquidation, may be affected to a greater extent by adverse conditions in the real estate market or the economy in general.

●

Properties underlying construction, land and land development loans often do not generate sufficient cash flows to service debt and thus repayment is subject to the ability of the borrower and, if applicable, guarantors, to complete development or construction of the property and carry the project, often for extended periods of time. As a result, the performance of these loans is contingent upon future events whose probability at the timeyear of origination ~~is uncertain.~~

●

~~The ability~~for financing receivables and net investments in leases within the scope of ~~borrowers to service debt in the residential and consumer loan portfolios~~Subtopic 326-20, “Financial Instruments—Credit Losses—Measured at Amortized Cost”. ASU 2022-02 is generally subject to personal income which may be impacted by general economic conditions, such as increased unemployment levels. These loans are predominately collateralized by first and/or second liens on single family properties. If a borrower cannot maintain the loan, the Company’s ability to recover against the collateral in sufficient amount and in a timely manner may be significantly influenced by market, legal and regulatory conditions.

●

~~The Company considers loan classes and loan segments to be one and the same.~~

~~Individually Analyzed Loans~~: The Company will evaluate individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. Loans will transition from defined segments for individual analysis when credit characteristics, or risk traits, change in a material manner. A loan is considered for individual analysis when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining individual analysis include payment status and the probability of collecting scheduled principal and interest payments when due. Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties are considered TDRs and are classified as individually analyzed. Loans considered to be TDRs can be categorized as nonaccrual or performing. All PCD loans will be considered as individual analyzed. Generally, individually analyzed loans consist of nonaccrual loans and performing troubled debt restructurings. Of this group of loans, loans of $250,000 and over are individually evaluated, while loans with balances less than $250,000 are collectively evaluated, and, accordingly, are not separately identified for analysis or disclosures. Instruments will not be included in both collective and individual analysis. Individual analysis will establish a specific reserve for instruments in scope.

For collateral dependent loans, when it is determined that a foreclosure is probable, the ACL will be determined on a loan level basis using the fair value of the collateral as of the reporting date, less estimated disposition costs (“net fair value”), which will ensure that the credit loss is not delayed until the time at which the actual foreclosure takes place. In the event that this fair value is less the then amortized cost basis of these specific loans, we will recognize the difference between the net fair value at the reporting date and the amortized cost basis in the ACL. If the fair value of the collateral has increased as of the ACL evaluation date, the increase in the fair value of the collateral is reflected through a reduction in the ACL. ACL adjustments for estimated disposition costs are not appropriate when the repayment of a collateral-dependent loan is expected from the operation of the collateral. If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as the allowance for credit losses. The effective interest rate used to discount expected cash flows is adjusted to incorporate expected prepayments, if applicable.

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 1b. Authoritative Accounting Guidance – (continued)~~

For charge-off and recoveries we will generally charge-off a loan balance after an analysis is completed which indicates that the collectability of the full principal is in doubt. Charge-offs are charged against the allowance in the period in which the loans are deemed to be uncollectible. Any expected future recoveries of amounts which were previously charged-off or expected to be charged-off will be included in the ACL, as the recoveries represent a component of the net amount expected to be collected. Expected recoveries in the ACL shall not exceed amounts previously charged-off or expected to be charged-off.

~~Investment Securities~~: Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in comprehensive income, net of tax. Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are generally amortized using the level-yield method without estimating prepayments, except for mortgage-backed securities, where prepayment rates are estimated. Premiums on callable investment securities are amortized to their earliest call date. Gains and losses on sales of securities are recorded on the trade date and determined using the specific identification method.

~~ACL - on investment securities classified as available-for-sale~~: For available-for-sale investment securities which are in an unrealized loss position, the Company first assess whether we intend to sell, or it is more likely than not, that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria is met, the amortized cost basis of the security is written down to fair value through income. For available-for-sale investment securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from an actual or estimated credit loss event or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, changes to the rating of the security, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss is likely, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, an ACL is recorded for the estimated credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.

Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when we believe the uncollectibility of an available-for-sale security has been confirmed or if either of the criteria regarding intent or requirement to sell is met.

~~ASU No. 2021-03,~~ ~~“Intangibles �� Goodwill and Other (Topic 350).”~~ ASU 2021-03 requires an entity to identify and evaluate goodwill impairment triggering events when they occur to determine whether it is more likely than not that the fair value of a reporting unit (or entity, if the entity has elected the accounting alternative for amortizing goodwill and chosen that option) is less than its carrying amount. If an entity determines that it is more likely than not that the goodwill is impaired. It must test goodwill for impairment using the triggering event date as the measurement date. An entity is required to disclose the amount assigned to goodwill in total and by major business combination, or by reorganization event resulting in fresh-start-start reporting. Also, the weighted average amortization period in total and the amortization period by major business combination, or by reorganization event resulting in fresh-start reporting. ASU 2021-03 was effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022-02 will have on ~~January 1, 2021 and did not have a significant impact on our consolidated financial statement.~~

~~ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.~~” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 was effective for the Company as of January 1, 2021 and did not have a significant impact on ourits consolidated financial statements.

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

Note 2.Earnings per Common Share

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

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

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended						Six Months Ended
	(in thousands, except for per share data)												June 30,						June 30,
	2021			2020			2021			2020
Net income	$	32,219		$	14,832		$	65,218		$	20,862
(dollars in thousands, except for per share data)													2022			2021			2022			2021
Net income available to common stockholders													$	30,849		$	32,219		$	60,721		$	65,218
Earnings allocated to participating securities		(81	)		(69	)		(176	)		(94	)		(70	)		(81	)		(150	)		(176	)
Income attributable to common stock	$	32,138		$	14,763		$	65,042		$	20,768		$	30,779		$	32,138		$	60,571		$	65,042

Weighted average common shares outstanding, including participating securities		39,781			39,640			39,786			39,603			39,379			39,781			39,469			39,786
Weighted average participating securities		(100	)		(104	)		(107	)		(123	)		(89	)		(100	)		(98	)		(107	)
Weighted average common shares outstanding		39,681			39,536			39,679			39,480			39,290			39,681			39,371			39,679
Incremental shares from assumed conversions of options,
performance units and non-participating restricted shares		192			76			214			112
Incremental shares from assumed conversions of options, performance units and restricted shares														176			192			225			214
Weighted average common and equivalent shares outstanding		39,873			39,612			39,893			39,592			39,466			39,873			39,596			39,893

Earnings per common share:
Basic	$	0.81		$	0.37		$	1.64		$	0.53		$	0.78		$	0.81		$	1.54		$	1.64
Diluted		0.81			0.37			1.63			0.52			0.78			0.81			1.53			1.63

There were no0 antidilutive share equivalents as of June 30, 2022 and June 30, 2021 ~~and June 30, 2020.~~.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

Note 3.Investment Securities ~~Available-for-Sale~~

The Company’s investment securities are ~~all~~ classified as available-for-sale as of June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. 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 June 30, ~~2021~~2022 and December 31, ~~2020.~~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 6 of the Notes to Consolidated Financial Statements for a further discussion.

The following tables present information related to the Company’s portfolio of securities available-for-sale as of June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

										Allowance
										for
			Gross		Gross					Investment
	Amortized		Unrealized		Unrealized			Fair		Credit
	Cost		Gains		Losses			Value		Losses
	(dollars in thousands)
June 30, 2022

Securities available-for-sale
Federal agency obligations	$	58,375	$	3	$	(5,708	)	$	52,670	$	0
Residential mortgage pass-through securities		480,445		718		(36,883	)		444,280		0
Commercial mortgage pass-through securities		25,627		0		(2,769	)		22,858		0
Obligations of U.S. states and political subdivisions		158,545		252		(10,766	)		148,031		0
Corporate bonds and notes		5,480		20		(9	)		5,491		0
Asset-backed securities		2,165		0		(48	)		2,117		0
Other securities		494		0		0			494		0
Total securities available-for-sale	$	731,131	$	993	$	(56,183	)	$	675,941	$	0

December 31, 2021
Securities available-for-sale
Federal agency obligations	$	50,336	$	649	$	(625	)	$	50,360	$	0
Residential mortgage pass-through securities		317,111		1,868		(2,884	)		316,095		0
Commercial mortgage pass-through securities		10,814		118		(463	)		10,469		0
Obligations of U.S. states and political subdivisions		145,045		1,562		(982	)		145,625		0
Corporate bonds and notes		8,968		81		0			9,049		0
Asset-backed securities		2,563		3		(2	)		2,564		0
Certificates of deposit		150		0		0			150		0
Other securities		195		0		0			195		0
Total securities available-for-sale	$	535,182	$	4,281	$	(4,956	)	$	534,507	$	0

Allowance
for
Gross
Gross
Investment
Amortized
Unrealized
Unrealized
Fair
Credit
Cost
Gains
Losses
Value
Losses
June 30, 2021
(dollars in thousands)
Securities available-for-sale
Federal agency obligations
$
34,649
$
1,197
$
(73
)
$
35,773
0-
Residential mortgage pass-through securities
261,761
2,655
(1,258
)
263,158
0-
Commercial mortgage pass-through securities
8,886
202
(293
)
8,795
0-
Obligations of U.S. states and political subdivisions
133,722
2,695
(29
)
136,388
0-
Corporate bonds and notes
11,459
162
0-
11,621
0-
Asset-backed securities
2,874
10
(4
)
2,880
0-
Certificates of deposit
150
1
0-

151
0-
Other securities
167
0-
0-
167
0-
Total securities available-for-sale
$
453,668
$
6,922
$
(1,657
)
$
458,933
$
0-

December 31, 2020
Securities available-for-sale
Federal agency obligations
$
37,015
$
1,508
$
(65
)
$
38,458
N/A
Residential mortgage pass-through securities
266,114
4,811
(41
)
270,884
N/A
Commercial mortgage pass-through securities
6,906
203
(187
)
6,922
N/A
Obligations of U.S. states and political subdivisions
138,539
4,269
0-
142,808
N/A
Corporate bonds and notes
24,925
222
(52
)
25,095
N/A
Asset-backed securities
3,521
0-
(41
)
3,480
N/A
Certificates of deposit
149
2
0-
151
N/A
Other securities

157

0-

0-

157
N/A
Total securities available-for-sale
$
477,326
$
11,015
$
(386
)
$
487,955
N/A

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3.Investment Securities – (continued)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 3. Securities Available-for-Sale – (continued)~~

Investment securities having a carrying value of approximately ~~$178.0~~$191.3 million and ~~$107.6~~$71.2 million as of June 30, ~~2021~~2022 and December 31, ~~2020,~~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 June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were no0 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 available-for-sale as of June 30, ~~2021,~~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.

	June 30, 2021				June 30, 2022
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(dollars in thousands)				(dollars in thousands)
Securities available-for-sale:
Due in one year or less	$	5,614	$	5,637	$	3,450	$	3,444
Due after one year through five years		11,193		11,353		4,876		4,880
Due after five years through ten years		10,915		11,226		3,765		3,788
Due after ten years		155,132		158,597		212,474		196,197
Residential mortgage pass-through securities		261,761		263,158		480,445		444,280
Commercial mortgage pass-through securities		8,886		8,795		25,627		22,858
Other securities		167		167		494		494
Total securities available-for-sale	$	453,668	$	458,933	$	731,131	$	675,941

Gross gains and losses from the sales and redemptions of securities for periods presented were as follows:


												Three Months Ended					Six Months Ended
	Three Months Ended June 30,					Six Months Ended June 30,						June 30,					June 30,
		(dollars in thousands)										2022		2021			2022		2021
	2021			2020		2021			2020			(dollars in thousands)
Proceeds	$	5,185		$	0-	$	05,185		$	19,624		$	0	$	5,185		$	0	$	5,185

Gross gains on sales/redemption of securities		195			0-		195			29
Gross gains on sales/redemptions of securities													0		195			0		195
Gross losses on sales/redemptions of securities		0-			0-		0-			0-			0		0			0		0
Net gain on sales/redemptions of securities		195			0-		195			29			0		195			0		195
Less: tax provision on net gain		(48	)		0-		(48	)		(6	)		0		(48	)		0		(48	)
Net gain on sales/redemptions of securities, after tax	$	147		$	0-	$	147		$	23
Net gain on sales/redemptions of securities, after taxes												$	0	$	147		$	0	$	147

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3.Investment Securities – (continued)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 3. Securities Available-for-Sale – (continued)~~

Impairment Analysis of ~~Available-for-sale~~Available--for-sale Debt Securities

The following tables indicate gross unrealized losses in an unrealized loss position for which an ~~ACL~~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 June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

	June 30, 2021															June 30, 2022
	Total					Less than 12 Months					12 Months or Longer					Total					Less than 12 Months					12 Months or Longer
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
	(dollars in thousands)															(dollars in thousands)
Investment Securities
Available-for-Sale:
Securities available-for-sale:
Federal agency obligations	$	1,565	$	(73	)	$	1,565	$	(73	)	$	0-	$	0-		$	52,432	$	(5,708	)	$	52,432	$	(5,708	)	$	0	$	0
Residential mortgage pass-through securities		142,615		(1,258	)		142,615		(1,258	)		0-		0-			379,001		(36,883	)		325,284		(28,304	)		53,717		(8,579	)
Commercial mortgage pass-through securities		4,542		(293	)		4,542		(293	)		0-		0-			22,858		(2,769	)		19,209		(1,731	)		3,649		(1,038	)
Obligations of U.S. states and political subdivisions		28,654		(29	)		28,654		(29	)		0-		0-			109,547		(10,766	)		99,802		(10,214	)		9,745		(552	)
Corporate bonds and notes		0-		0-			0-		0-			0-		0-			1,989		(9	)		1,989		(9	)		0		0
Asset-backed securities		567		(4	)		0-		0-			567		(4	)		2,117		(48	)		2,117		(48	)		0		0
Total temporarily impaired securities	$	177,943	$	(1,657	)	$	177,376	$	(1,653	)	$	567	$	(4	)	$	567,944	$	(56,183	)	$	500,833	$	(46,014	)	$	67,111	$	(10,169	)

	December 31, 2020															December 31, 2021
	Total					Less than 12 Months					12 Months or Longer					Total					Less than 12 Months					12 Months or Longer
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
	(dollars in thousands)															(dollars in thousands)
Investment Securities
Available-for-Sale:
Securities available-for-sale:
Federal agency obligations	$	8,978	$	(65	)	$	8,975	$	(65	)	$	3	$	0-		$	28,974	$	(625	)	$	28,974	$	(625	)	$	0	$	0
Residential mortgage pass-through securities		20,895		(41	)		20,886		(41	)		9		0-			246,396		(2,884	)		214,701		(2,111	)		31,695		(773	)
Commercial mortgage pass-through securities		3,954		(187	)		3,954		(187	)		0-		0-			8,370		(463	)		4,682		(75	)		3,688		(388	)
Corporate bonds and notes		3,928		(52	)		3,928		(52	)		0-		0-
Obligations of U.S. states and political subdivisions																	89,473		(982	)		89,473		(982	)		0		0
Asset-backed securities		3,083		(41	)		622		0-			2,461		(41	)		802		(2	)		802		(2	)		0		0
Total Temporarily Impaired Securities	$	40,838	$	(386	)	$	38,365	$	(345	)	$	2,473	$	(41	)	$	374,015	$	(4,956	)	$	338,632	$	(3,795	)	$	35,383	$	(1,161	)

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3.Investment Securities – (continued)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 3. Securities Available-for-Sale – (continued)~~

On January 1, 2021, the Company adopted ASU 2016-13 and implemented the CECL methodology for allowance for credit losses on its investment securities available-for-sale. The new CECL methodology replaces the other-than-temporary impairment model that previously existed. The Company did not have a CECL day 1 impact attributable to its investment securities portfolio and did not have an allowance for credit losses as of June 30, 2021. The Company 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 June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, totaled ~~$1.4~~$2.6 million and ~~$1.7~~$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 that we will be required to sell the security before recovery of its amortized cost basis. If one of the criteria 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 or other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash 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 an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Unrealized losses on asset backed securities and state and municipal securities have not been recognized into income because the issuers are of high credit quality, we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. NoNaN allowance for credit losses for available-for-sale securities was recorded as of June 30, 2022or as of December 31, 2021.

Federal agency obligations, residential mortgage backed pass-through securities and commercial mortgage ~~back~~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 full faith and credit of the federal government, and the current support they receive is subject to a cap 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~~zero-allowance approach for these investment securities is appropriate.

Note 4. Derivatives

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. ~~Interest~~The Company entered into 9 forward starting pay fixed-rate interest rate swaps, ~~were entered into on April 13, 2017, January 1, 2020 and March 3, 2020 each~~ with a ~~respective~~total notional amount of ~~$25.0~~$400 million, ~~and were~~eight of which have since commenced. These are designated as a cash flow ~~hedge~~hedges of acurrent, or future, Federal Home Loan Bank ~~advance. In addition, an~~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”). Payment dates on the 1 remaining forward starting swap ~~was entered into~~will commence in August 2022, with expiration dates on ~~August 6, 2019, with a notional amount of $50.0 million and was designated as a cash flow hedge of a Federal Home Loan Bank advance.~~ the 9 positions ranging from December 2025to March 2028. The swaps ~~were~~are determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the ~~swaps~~swap 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.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4. Derivatives – (continued)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 4. Derivatives – (continued)~~

~~Summary information about the interest rate swaps designated as cash flow hedges as of June 30, 2021, December 31, 2020 and June 30, 2020 are presented in the following table.~~

June 30,
December 31,
June 30,
2021
2020
2020
(dollars in thousands)
Notional amount
$
125,000
$
175,000
$
200,000
Weighted average pay rates
1.66
%
1.85
%
1.70
%
Weighted average receive rates
0.27
%
0.92
%
1.37
%
Weighted average maturity
0.5 years
0.8 years
1.2 years
Fair value
$
(922
)
$
(2,119
)
$
(3,277
)


Notional amount	$	125,000		$	175,000		$	200,000
Weighted average pay rates		1.66	%		1.85	%		1.70	%
Weighted average receive rates		0.27	%		0.92	%		1.37	%
Weighted average maturity		0.5 years			0.8 years			1.2 years
Fair value	$	(922	)	$	(2,119	)	$	(3,277	)

Interest expense recorded on these swap transactions totaled approximately ~~$584 thousand~~$0.1 million and $0.7 million during the three and six months ended June 30, 2022, respectively, compared to $0.6 million and $1.2 million during the three and six months ended June 30, 2021 ~~respectively, compared to $318 thousand and $311 thousand during the three and six months ended June 30, 2020,~~, respectively, and is reported as a component of interest expense on FHLB Advances.

Cash Flow Hedge

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

Three Months Ended June 30, 2021
Amount of (loss)
Amount of loss
Amount of gain
gain recognized
(gain) reclassified
recognized in other
in OCI (Effective
from OCI to
Noninterest income
Portion)
interest income
(Ineffective Portion)
(dollars in thousands)
Interest rate contracts
$
(42
)
$
584
$
0-

		Three Months Ended June 30, 2021
Interest rate contracts		$	(42	)		$	584			$	0-

	Three Months Ended June 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	$	8,284	$	129	$	0

Three Months Ended June 30, 2020
Amount of (loss)
Amount of loss
Amount of gain
gain recognized
(gain) reclassified
recognized in other
in OCI (Effective
from OCI to
Noninterest income
Portion)
interest income
(Ineffective Portion)
(dollars in thousands)
Interest rate contracts
$
(566
)
$
318
$
0-

		Three Months Ended June 30, 2020
Interest rate contracts		$	(566	)		$	318			$	0-

	Three Months Ended June 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	$	(42	)	$	584	$	0

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4. Derivatives – (continued)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

Six Months Ended June 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
$ 27,284 $ 654 $ 0

	Six Months Ended June 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	$	(18	)	$	1,215	$	0

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 4. Derivatives – (continued)~~

Six Months Ended June 30, 2021
Amount of (loss)
Amount of loss
Amount of gain
gain recognized
(gain) reclassified
recognized in other
in OCI (Effective
from OCI to
Noninterest income
Portion)
interest income
(Ineffective Portion)
(dollars in thousands)
Interest rate contracts
$
(18
)
$
1,215
$
0-

		Six Months Ended June 30, 2021
Interest rate contracts		$	(18	)		$	1,215			$	0-

Six Months Ended June 30, 2020
Amount of (loss)
Amount of loss
Amount of gain
gain recognized
(gain) reclassified
recognized in other
in OCI (Effective
from OCI to
Noninterest income
Portion)
interest income
(Ineffective Portion)
(dollars in thousands)
Interest rate contracts
$
(3,315
)
$
311
$
0-

The following table reflects the cash flow hedges included in the consolidated statements of condition as of June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

June 30, 2021
December 31, 2020
Notional
Notional
Amount
Fair Value
Amount
Fair Value
(dollars in thousands)
Interest rate swaps related to FHLB advances included in liabilities
$
125,000
$
(922
)
$
175,000
$
(2,119
)

	June 30, 2022				December 31, 2021
	Notional Amount		Fair Value		Notional Amount		Fair Value
			(dollars in thousands)
Interest rate swaps related to FHLB advances included in assets	$	400,000	$	31,285	$	475,000	$	3,347

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

Note 5. Loans and the Allowance for Credit Losses

Loans Receivable - As of and prior to December 31, 2020, loans receivable were accounted for under the incurred loss model. As of January 1, 2021, portfolio loans are accounted for under the expected loss model. Accordingly, some of the information presented is not comparable from period to period. See Note 1b. “Authoritative Accounting Guidance - Adoption of New Accounting Standards” for additional information.– The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

June 30,
December 31,
2021
2020
(dollars in thousands)
Commercial ⁽¹⁾
$
1,402,697
$
1,521,967
Commercial real estate
4,138,518
3,783,550
Commercial construction
587,121
617,747
Residential real estate
286,907
322,564
Consumer
6,355

1,853
Gross loans
6,421,598
6,247,681
Net deferred loan fees
(13,694
)

(11,374
)
Total loans receivable
$
6,407,904
$
6,236,307

	June 30, 2022			December 31, 2021
	(dollars in thousands)
Commercial ⁽¹⁾	$	1,354,625		$	1,299,428
Commercial real estate		5,107,382			4,741,590
Commercial construction		569,789			540,178
Residential real estate		249,379			255,269
Consumer		1,248			1,886
Gross loans		7,282,423			6,838,351
Net deferred loan fees		(7,850	)		(9,729	)
Total loans receivable	$	7,274,573		$	6,828,622

⁽¹⁾⁽¹⁾

Included in commercial loans as of June 30, ~~2021~~2022 and December 31, ~~2020 were~~2021 are PPP loans of ~~$326.8~~$18.0 million and ~~$397.5~~$93.1 million, respectively.

As of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, loan balances of approximately ~~$2.7,~~$2.5 billion, were pledged to secure borrowings from the FHLB of New York.

Loans held-for-sale - The following table sets forth the composition of the Company’s loans held-for-sale portfolio as of June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

	June 30,		December 31,
	2021		2020		June 30, 2022		December 31, 2021
	(dollars in thousands)				(dollars in thousands)
Commercial real estate	$	5,298	$	1,990	$	3,182	$	0
Residential real estate		861		2,720		0		250
Total carrying amount	$	6,159	$	4,710	$	3,182	$	250

Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL ~~as of June 30, 2021~~ and nonaccrual loans without an ACL as of June 30, ~~2021:~~2022 and December 31, 2021:

							June 30, 2022
	Nonaccrual Loans with an ACL		Nonaccrual loans without an ACL		Total		Nonaccrual loans with ACL		Nonaccrual loans without ACL		Total Nonaccrual loans
	(dollars in thousands)						(dollars in thousands)
Commercial	$	28,009	$	3,074	$	31,083	$	27,875	$	1,263	$	29,138
Commercial real estate		2,722		13,283		16,005		10,162		19,021		29,183
Commercial construction		2,934		1,831		4,765		0		0		0
Residential real estate		0-		4,360		4,360		895		1,540		2,435
Consumer		0-		0-				0		0		0
Total	$	33,665	$	22,548	$	56,213	$	38,932	$	21,824	$	60,756

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

~~The following tables present total nonaccrual loans included in loans receivable by loan class as of December 31, 2020 (dollars in thousands):~~

December 31,
2020
Commercial
$
33,019
Commercial real estate
10,111
Commercial construction
14,015
Residential real estate

4,551
Consumer

0-
Total nonaccrual loans
$
61,696

	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		0		3,150		3,150
Residential real estate		1,239		1,856		3,095
Consumer		0		0		0
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-party~~third-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.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

Note 5. Loans and the Allowance for Credit 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. ~~As of June 30, 2021, our~~The following table presents loans ~~based on year of~~by origination and risk designation is as ~~follows~~of June 30, 2022 (dollars in thousands):

	*Term loans amortized cost basis by origination year*												*Revolving*		*Total*
	*2022*		*2021*		*2020*		*2019*		*2018*		*Prior*		*Loans*		*Gross Loans*
Commercial
Pass	$	168,961	$	345,319	$	52,681	$	32,103	$	51,661	$	167,147	$	470,129	$	1,288,001
Special mention		0		0		0		0		0		9,618		3,317		12,935
Substandard		7,429		158		0		2,176		11,595		18,347		13,984		53,689
Doubtful		0		0		0		0		0		0		0		0
Total Commercial	$	176,390	$	345,477	$	52,681	$	34,279	$	63,256	$	195,112	$	487,430	$	1,354,625

Commercial Real Estate
Pass	$	885,508	$	1,619,792	$	426,907	$	373,166	$	404,284	$	1,099,266	$	165,421	$	4,974,344
Special mention		0		0		0		3,328		0		50,384		15,463		69,175
Substandard		0		1,949		4,500		10,520		20,274		18,411		8,209		63,863
Doubtful		0		0		0		0		0		0		0		0
Total Commercial Real Estate	$	885,508	$	1,621,741	$	431,407	$	387,014	$	424,558	$	1,168,061	$	189,093	$	5,107,382

Commercial Construction
Pass	$	2,454	$	7,914	$	5,246	$	6,508	$	2,600	$	0	$	537,890	$	562,612
Special mention		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		0		7,177		7,177
Doubtful		0		0		0		0		0		0		0		0
Total Commercial Construction	$	2,454	$	7,914	$	5,246	$	6,508	$	2,600	$	0	$	545,067	$	569,789

Residential Real Estate
Pass	$	20,431	$	25,646	$	26,598	$	21,895	$	20,702	$	84,422	$	42,760	$	242,454
Special mention		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		3,501		3,424		6,925
Doubtful		0		0		0		0		0		0		0		0
Total Residential Real Estate	$	20,431	$	25,646	$	26,598	$	21,895	$	20,702	$	87,923	$	46,184	$	249,379

Consumer
Pass	$	1,109	$	0	$	14	$	1	$	10	$	2	$	112	$	1,248
Special mention		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		0		0		0
Doubtful		0		0		0		0		0		0		0		0
Total Consumer	$	1,109	$	0	$	14	$	1	$	10	$	2	$	112	$	1,248

Total
Pass	$	1,078,463	$	1,998,671	$	511,446	$	433,673	$	479,257	$	1,350,837	$	1,216,312	$	7,068,659
Special mention		0		0		0		3,328		0		60,002		18,780		82,110
Substandard		7,429		2,107		4,500		12,696		31,869		40,259		32,794		131,654
Doubtful		0		0		0		0		0		0		0		0
Grand Total	$	1,085,892	$	2,000,778	$	515,946	$	449,697	$	511,126	$	1,451,098	$	1,267,886	$	7,282,423

Term loans amortized cost basis by origination year

Resolving

Total
Gross
2021

2020

2019

2018

2017

Prior
Loans
Loans
Commercial
Pass
$
324,543
$
185,027
$
64,057
$
69,430
$
99,833
$
123,799
$
466,262
$
1,332,951
Special mention
0-
0-
225
258
5,655
4,235
15,653
26,026
Substandard
182
0-
1,791
13,072
4,111
21,255
3,250
43,661
Doubtful
0-
0-
0-
59
0-
0-
0-
59
Total Commercial
$
324,725
$
185,027
$
66,073
$
82,819
$
109,599
$
149,289
$
485,165
$
1,402,697

Commercial Real Estate
Pass
$
741,267
$
601,375
$
460,081
$
529,053
$
541,823
$
1,012,888
$
141,776
$
4,028,263
Special mention
0-
0-
3,375
19,360
4,364
29,160
15,454
71,713
Substandard
1,969
0-
659
1,473
2,722
31,719
0-
38,542
Doubtful
0-
0-
0-
0-
0-
0-
0-
0-
Total Commercial Real Estate
$
743,236
$
601,375
$
464,115
$
549,886
$
548,909
$
1,073,767
$
157,230
$
4,138,518

Commercial Construction
Pass
$
1,405
$
7,506
$
37,715
$
3,678
$
3,981
$
490
$
510,227
$
565,002
Special mention
0-
0-
0-
0-
0-
0-
0-
0-
Substandard
0-
0-
0-
0-
0-
0-
22,119
22,119
Doubtful
0-
0-
0-
0-
0-
0-
0-
0-
Total Commercial Construction
$
1,405
$
7,506
$
37,715
$
3,678
$
3,981
$
490
$
532,346
$
587,121

Residential Real Estate
Pass
$
10,420
$
34,493
$
27,090
$
32,888
$
37,296
$
83,096
$
48,515
$
273,798
Special mention
0-
0-
0-
0-
0-
0-
0-
0-
Substandard
0-
0-
0-
203
0-
9,101
3,805
13,109
Doubtful
0-
0-
0-
0-
0-
0-
0-
0-
Total Residential Real Estate
$
10,420
$
34,493
$
27,090
$
33,091
$
37,296
$
92,197
$
52,320
$
286,907

Consumer
Pass
$
0-
$
107
$
54
$
32
$
41
$
5,989
$
132
$
6,355
Special mention
0-
0-
0-
0-
0-
0-
0-
0-
Substandard
0-
0-
0-
0-
0-
0-
0-
0-
Doubtful
0-
0-
0-
0-
0-
0-
0-
0-
Total Consumer
$
0-
$
107
$
54
$
32
$
41
$
5,989
$
132
$
6,355

Total
Pass
$
1,077,635
$
828,508
$
588,997
$
635,081
$
682,974
$
1,226,262
$
1,166,912
$
6,206,369
Special mention
0-
0-
3,600
19,618
10,019
33,395
31,107
97,739
Substandard
2,151
0-
2,450
14,748
6,833
62,075
29,174
117,431
Doubtful
0-
0-
0-
59
0-
0-
0-
59
Grand Total
$
1,079,786
$
828,508
$
595,047
$
669,506
$
699,826
$
1,321,732
$
1,227,193
$
6,421,598

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

The following table presents ~~information about the loan credit quality~~loans by ~~loan class of gross loans (which exclude net deferred fees)~~origination and risk designation as of December 31, ~~2020:~~2021 (dollars in thousands):

	*Term loans amortized cost basis by origination year*												*Revolving*		*Total*
	*2021*		*2020*		*2019*		*2018*		*8.5*		*Prior*		*Loans*		*Gross Loans*
Commercial
Pass	$	403,203	$	58,534	$	54,485	$	60,409	$	95,727	$	86,556	$	471,588	$	1,230,502
Special mention		0		0		0		0		1		4,045		4,266		8,312
Substandard		170		0		1,842		13,298		9,740		21,024		14,540		60,614
Doubtful		0		0		0		0		0		0		0		0
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		0		0		0		0		5,142		50,438		6,601		62,181
Substandard		1,968		9,039		4,006		20,624		0		26,108		8,964		70,709
Doubtful		0		0		0		0		0		0		0		0
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	$	0	$	490,119	$	523,071
Special mention		0		0		0		0		350		0		1,443		1,793
Substandard		0		0		0		0		0		0		15,314		15,314
Doubtful		0		0		0		0		0		0		0		0
Total Commercial Construction	$	8,018	$	7,370	$	12,625	$	2,600	$	2,689	$	0	$	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		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		7,262		3,535		10,797
Doubtful		0		0		0		0		0		0		0		0
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	$	0	$	123	$	1,886
Special mention		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		0		0		0
Doubtful		0		0		0		0		0		0		0		0
Total Consumer	$	1,590	$	85	$	39	$	21	$	28	$	0	$	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		0		0		0		0		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		0		0		0		0		0		0		0		0
Grand Total	$	2,134,128	$	637,882	$	517,603	$	574,284	$	639,093	$	1,103,926	$	1,231,435	$	6,838,351

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

December 31, 2020
Pass
Special Mention
Substandard
Doubtful
Total
(dollars in thousands)
Commercial
$
1,447,097
$
30,725
$
43,930
$
215
$
1,521,967
Commercial real estate
3,700,498
49,143
33,909
0-
3,783,550
Commercial construction
587,266
0-
30,481
0-
617,747
Residential real estate
311,174
0-
11,390
0-
322,564
Consumer
1,853
0-
0-
0-
1,853
Gross loans
$
6,047,888
$
79,868
$
119,710
$
215
$
6,247,681

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 June 30, ~~2021:~~

June 30, 2021
Real
Estate
Other
Total
(dollars in thousands)
Commercial
$
6,598
$
26,166
$
32,764
Commercial real estate
35,802
0-
35,802
Commercial construction
16,389
0-
16,389
Residential real estate
10,647
0-
10,647
Consumer
0-
0-
0-
Total
$
69,436
$
26,166
$
95,602

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 5. Loans~~2022 and ~~the Allowance for Credit Losses – (continued)~~

~~Impaired loans~~ ~~- Impaired loans disclosures presented below as of~~ December 31, ~~2020 and as of and for the three and six months ended June 30, 2020 represent requirements prior to the adoption of CECL on January 1, 2021.~~

~~The following table provides an analysis of the impaired loans by class as of the year ended December 31, 2020:~~

December 31, 2020
Unpaid
Recorded
Principal
Related
Investment
Balance
Allowance
No related allowance recorded
(dollars in thousands)
Commercial
$
11,325
$
11,835
Commercial real estate
13,105
13,449
Commercial construction
24,284
24,907
Residential real estate
5,378
5,723
Consumer
0-
0-
Total (no related allowance)
$
54,092
$
55,914

With an allowance recorded

Commercial
$
23,736
$
69,122
$
12,985
Commercial real estate
2,722
2,722
1,329
Total (with allowance)
$
26,458
$
71,844
$
14,314

Total
Commercial
$
35,061
$
80,957
$
12,985
Commercial real estate
15,827
16,171
1,329
Commercial construction
24,284
24,907
0-
Residential real estate
5,378
5,723
0-
Consumer
0-
0-
0-
Total
$
80,550
$
127,758
$
14,314

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by class as of and for the three months and six months ended June 30, 2020 (dollars in thousands)2021:

	Three Months Ended June 30,					Six Months Ended June 30,				June 30, 2022
		2020				2020				Real Estate		Other		Total
		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans (no allowance)
										(dollars in thousands)
Commercial		$	35,813	$	91	$	36,127	$	185	$	6,333	$	24,995	$	31,328
Commercial real estate			15,415		82		15,352		155		65,507		0		65,507
Commercial construction			17,719		87		17,545		171		7,176		0		7,176
Residential real estate			3,500		0-		3,308		0-		5,364		0		5,364

Consumer											0		0		0
Total		$	72,447	$	260	$	72,332	$	511	$	84,380	$	24,995	$	109,375

Impaired loans (allowance):

Commercial real estate		$	0-	$	0-	$	0-	$	0-
Commercial construction			6,463		0-		6,463		0-
Residential real estate			262		1		262		3

Total		$	6,725	$	1	$	6,725	$	3

Total impaired loans:
Commercial		$	35,813	$	91	$	36,127	$	185
Commercial real estate			15,415		82		15,352		155
Commercial construction			24,182		87		24,008		171
Residential real estate			3,762		1		3,570		3

Total		$	79,172	$	261	$	79,057	$	514

	December 31, 2021
	Real Estate		Other		Total
	(dollars in thousands)
Commercial	$	6,385	$	26,182	$	32,567
Commercial real estate		55,244		0		55,244
Commercial construction		13,196		0		13,196
Residential real estate		8,856		0		8,856
Consumer		0		0		0
Total	$	83,681	$	26,182	$	109,863

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

AgingAnalysis - The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due as of June 30, ~~2021~~2022 and December 31, ~~2020 (dollars in thousands)~~2021:

															June 30, 2022
	June 30, 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
	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	$	297	$	0-	$	4,588	$	31,083	$	35,968	$	1,366,729	$	1,402,697	$	16	$	358	$	4,403	$	29,138	$	33,915	$	1,320,710	$	1,354,625
Commercial real Estate		0-		0-		7,607		16,005		23,612		4,114,906		4,138,518
Commercial real estate																0		2,894		5,761		29,183		37,838		5,069,544		5,107,382
Commercial construction		0-		0-		3,221		4,765		7,986		579,135		587,121		0		0		0		0		0		569,789		569,789
Residential real Estate		210		99		4,238		4,360		8,907		278,000		286,907
Residential real estate																674		0		0		2,435		3,109		246,270		249,379
Consumer		2		0-		0-		0-		2		6,353		6,355		0		0		0		0		0		1,248		1,248
Total	$	509	$	99	$	19,654	$	56,213	$	76,475	$	6,345,123	$	6,421,598	$	690	$	3,252	$	10,164	$	60,756	$	74,862	$	7,207,561	$	7,282,423

Included in the 90 days or greater past due and still accruing category as of June 30, 2021 were $16.4 million in purchased credit-deteriorated loans, net of fair value marks, which accrete income per the valuation at date of acquisition.

	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		0		0		0		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		0		0		0		0		0		1,886		1,886
Total	$	7,364	$	2,030	$	13,531	$	61,700	$	84,625	$	6,753,726	$	6,838,351

December 31, 2020
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
Total Loans
Receivable
Commercial
$
1,445
$
558
$
3,182
$
33,019
$
38,204
$
1,483,763
$
1,521,967
Commercial real estate
13,258
4,140
5,555
10,111
33,064
3,750,486
3,783,550
Commercial construction
2,472
0-
0-
14,015
16,487
601,260
617,747
Residential real estate
1,367
241
4,084
4,551
10,243
312,321
322,564
Consumer

2

0-

0-

0-

2

1,851

1,853
Total
$
18,544
$
4,939
$
12,821
$
61,696
$
98,000
$
6,149,681
$
6,247,681

The 90 days or greater past due and still accruing category as of December 31, 2020 were purchased credit-impaired loans, net of fair value marks, which accrete income per the valuation at date of acquisition.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

Note 5. Loans and the Allowance for Credit 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 quality, and the related portion of the ~~ACL~~allowance for credit losses that are allocated to each loan portfolio segment:

	June 30, 2021												June 30, 2022
			Commercial		Commercial		Residential						Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Total
	Commercial		real estate		construction		real estate		Consumer		Total		(dollars in thousands)
	(dollars in thousands)
ACL
Individually evaluated for impairment	$	15,618	$	1,485	$	434	$	349	$	0-	$	17,886
Collectively evaluated for impairment		7,673		39,553		4,493		3,863		9		55,591
Allowance for credit losses - loans
Individually evaluated impairment													$	13,671	$	2,505	$	0	$	88	$	0	$	16,264
Collectively evaluated impairment														12,187		43,136		3,413		3,537		4		62,277
Acquired with deteriorated credit quality individually analyzed		2,276		2,777		0-		154		0-		5,207		2,277		1,921		0		0		0		4,198
Total	$	25,567	$	43,815	$	4,927	$	4,366	$	9	$	78,684	$	28,135	$	47,562	$	3,413	$	3,625	$	4	$	82,739

Gross loans
Individually evaluated for impairment	$	33,473	$	28,197	$	16,389	$	6,408	$	0-	$	84,467
Collectively evaluated for impairment		1,364,019		4,102,715		570,732		276,260		6,355		6,320,081
Individually evaluated impairment													$	32,163	$	59,746	$	7,177	$	5,364	$	0	$	104,450
Collectively evaluated impairment														1,317,400		5,041,875		562,612		244,015		1,248		7,167,150
Acquired with deteriorated credit quality individually analyzed		5,205		7,606		0-		4,239		0-		17,050		5,062		5,761		0		0		0		10,823
Total	$	1,402,697	$	4,138,518	$	587,121	$	286,907	$	6,355	$	6,421,598	$	1,354,625	$	5,107,382	$	569,789	$	249,379	$	1,248	$	7,282,423

December 31, 2020
Commercial
Commercial
Residential
Commercial
real estate
construction
real estate
Consumer
Unallocated
Total
(dollars in thousands)
Allowance for loan losses
Individually evaluated for impairment
$
12,985
$
1,329
$
0-
$
0-
$
0-
$
0-
$
14,314
Collectively evaluated for impairment

15,412

33,373

7,787

1,928

4
568

59,072
Acquired portfolio

46

4,628

407

759

00-
0-

5,840
Acquired with deteriorated credit quality
0-

0-

0-

0-

0-
0-

0-
Total
$
28,443
$
39,330
$
8,194
$
2,687
$
4
$
568
$
79,226

Gross loans
Individually evaluated for impairment
$
35,061
$
15,827
$
24,284
$
5,378
$
0-

$
80,550
Collectively evaluated for impairment

1,414,626

2,959,978

574,118

241,925

1,627

5,192,274
Acquired portfolio

68,402

802,190

19,345

71,177

226

961,340
Acquired with deteriorated credit quality

3,878

5,555

0-

4,084

0-

13,517
Total
$
1,521,967
$
3,783,550
$
617,747
$
322,564
$
1,853

$
6,247,681

	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	$	0	$	131	$	0	$	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		0		0		0		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	$	0	$	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		0		3,139		0		14,238
Total	$	1,299,428	$	4,741,590	$	540,178	$	255,269	$	1,886	$	6,838,351

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

(unaudited)

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

Activity in the Company’s ACL for loans for the three and six months ended ~~and~~ June 30, 2022 is summarized in the tables below.

	Three Months Ended June 30, 2022
	Commercial			Commercial real estate			Commercial construction		Residential real estate			Consumer			Unallocated		Total
	(dollars in thousands)
Balance as of March 31, 2022	$	25,459		$	47,868		$	3,281	$	3,455		$	7		$	0	$	80,070
Charge-offs		(292	)		(1	)		0		(9	)		0			0		(302	)
Recoveries		0			0			0		32			0			0		32
(Reversal of) provision for credit losses (loans)		2,968			(305	)		132		147			(3	)		0		2,939

Balance as of June 30, 2022	$	28,135		$	47,562		$	3,413	$	3,625		$	4		$	0	$	82,739

	Six Months Ended June 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		$	0	$	78,773
Charge-offs		(341	)		(226	)		0			(9	)		0			0		(576	)
Recoveries		1			0			0			63			0			0		64
(Reversal of) provision for credit losses (loans)		2,506			2,199			(167	)		(57	)		(3	)		0		4,478

Balance as of June 30, 2022	$	28,135		$	47,562		$	3,413		$	3,625		$	4		$	0	$	82,739

Activity in the Company’s ACL for loans for the six months ended June 30, 2021 is summarized in the table below. The CECL Day 1 row 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 PCI as of December 31, ~~2020.~~2020.

	Three Months Ended June 30, 2021
				Commercial			Commercial			Residential											Three Months Ended June 30, 2021
	Commercial			real estate			construction			real estate			Consumer			Unallocated		Total			Commercial			Commercial real estate			Commercial construction			Residential real estate			Consumer			Unallocated		Total
	(dollars in thousands)																				(dollars in thousands)
Balance as of March 31, 2021	$	26,435		$	43,897		$	5,521		$	4,704		$	11		$	0-	$	80,568		$	26,435		$	43,897		$	5,521		$	4,704		$	11		$	0	$	80,568
Charge-offs																						(50	)		(155	)		0			(7	)		0			0		(212	)
Recoveries																						13			0			0			0			1			0		14
(Reversal of) provision for credit losses - loans																						(831	)		73			(594	)		(331	)		(3	)		0		(1,686	)


Charge-offs		(50	)		(155	)		0-			(7	)		0-			0-		(212	)

Recoveries		13			0-			0-			0-			1			0-		14

(Reversal of) provision for credit losses - loans		(831	)		73			(594	)		(331	)		(3	)		0-		(1,686	)
Balance as of June 30, 2021	$	25,567		$	43,815		$	4,927		$	4,366		$	9		$	0-	$	78,684		$	25,567		$	43,815		$	4,927		$	4,366		$	9		$	0	$	78,684

Six Months Ended June 30, 2021
Commercial
Commercial
Residential

Commercial
real estate
construction
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
0-
85,783

Charge-offs
(50
)
(155
)
0-
(7
)
0-
0-
(212
)

Recoveries
73
0-
0-
0-
2
0-
75

Provision for (reversal of) credit losses - loans
1,326
(4,965
)
(2,306
)
(1,011
)
(6
)
0-
(6,962
)
Balance as of June 30, 2021
$
25,567
$
43,815
$
4,927
$
4,366
$
9
$
0-
$
78,684

On January 1, 2021, the Company adopted CECL, which replaced the incurred loss method we used in prior periods for determining the provision for credit losses and the ACL. Under CECL, we record an expected loss of all cash flows we do not expect to collect at the inception of the loan. The adoption of CECL resulted in an increase in our ACL for loans of $6.6 million, which did not impact our consolidated income statement. We recorded a reversal of credit losses for loans of $1.7 million and $7.0 million during the three and six months ended June 30, 2021, respectively, utilizing the CECL methodology, which was the result of an improved macroeconomic environment from January 1, 2021, the day of adoption.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Three Months Ended June 30, 2020
Commercial
Commercial
Residential

Commercial
real estate
construction
real estate
Consumer
Unallocated
Total
(dollars in thousands)
Balance as of March 31, 2020
$
9,058
$
22,036
$
7,819
$
1,681
$
3
$
13,572
$
54,169

Charge-offs
(380
)
0-
0-
(69
)
0-
0-
(449
)

Recoveries
2
2
0-
0-
0-
0-
4

Provision for credit losses - loans
665
617
207
78
2
13,431
15,000

Balance as of June 30, 2020
$
9,345
$
22,655
$
8,026
$
1,690
$
5
$
27,003
$
68,724

Six Months Ended June 30, 2020

Commercial

Commercial

Residential

Commercial

real estate

construction

real estate

Consumer

Unallocated

Total

(dollars in thousands)
Balance as of December 31, 2019

$
8,349

$
20,853

$
7,304

$
1,685

$
3

$
99

$
38,293

Charge-offs

(504
)

0-

0-

(69
)

(3
)

0-

(576
)

Recoveries

2

2

0-

3

0-

0-

7

Provision

1,498

1,800

722

71

5

26,904

31,000

Balance as of June 30, 2020

$
9,345

$
22,655

$
8,026

$
1,690

$
5

$
27,003

$
68,724

	Six Months Ended June 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			0			85,783

Charge-offs		(50	)		(155	)		0			(7	)		0			0			(212	)

Recoveries		73			0			0			0			2			0			75
(Reversal of) provision for credit losses - loans		1,326			(4,965	)		(2,306	)		(1,011	)		(6	)		0			(6,962	)

Balance as of June 30, 2021	$	25,567		$	43,815		$	4,927		$	4,366		$	9		$	0		$	78,684

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

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 six 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.

As of June 30, ~~2021,~~2022, there were no0 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.

As of June 30, ~~2021,~~2022, TDRs totaled ~~$62.4~~$73.9 million, of which ~~$29.4~~$27.5 million were on nonaccrual status and ~~$33.0~~$46.4 million were performing under their restructured terms. As of December 31, ~~2020,~~2021, TDRs totaled ~~$49.4~~$79.5 million, of which ~~$25.7~~$35.9 million were on nonaccrual status and ~~$23.7~~$43.6 million were performing under their restructured terms. The Company has allocated ~~$9.2~~$9.1 million and ~~$47 thousand~~$10.4 million of specific allowance related to TDRs ~~for the six months ended~~ as of June 30, ~~2021~~2022 and ~~June 30, 2020,~~December 31, 2021, respectively.

The following table presents loans by class modified as TDRs that occurred during the six months ended June 30, 2022:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Loans		Investment		Investment
	(dollars in thousands)
Troubled debt restructurings:
Commercial		1	$	98	$	98
Commercial real estate		1		8,751		8,251
Total		2	$	8,849	$	8,349

The commercial loan modified as a TDR during the six months ended June 30, 2022 was a maturity extension, while the commercial real estate loan modified as a TDR during the six months ended June 30, 2022 was an interest rate reduction, that was commensurate with a one-time $500,000 principal paydown.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

There were 0 TDRs for which there was a payment default within twelve months following the modification during the three and six months ended June 30, 2022 and June 30, 2021.

The following table presents loans by class modified as TDRs that occurred during the six months ended June 30, 2021:

									Pre-Modification		Post-Modification
									Outstanding		Outstanding
							Number of		Recorded		Recorded
			Pre-Modification Outstanding		Post-Modification Outstanding		Loans		Investment		Investment
	Number of Loans		Recorded Investment		Recorded Investment		(dollars in thousands)
Troubled debt restructurings:	(dollars in thousands)
Commercial		3	$	631	$	631		3	$	631	$	631
Commercial real estate		3		8,603		8,603		3		8,603		8,603
Commercial construction		1		1,641		1,641		1		1,641		1,641
Residential real estate		3		1,758		1,758		3		1,758		1,758
Total		10	$	12,633	$	12,633		10	$	12,633	$	12,633

The ten loans modified as TDRs during the six months ended June 30, 2021 included nine ~~(9)~~ maturity extensions and, ~~one~~1 commercial real estate loan which was a recast of a nonaccrual credit.

There were no loans modified as TDRs during the six months ended June 30, 2020. There were no TDRs for which there was a payment default within twelve months following the modification during the three months ended and six months ended June 30, 2021 and June 30, 2020.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., three to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Additionally, the statement allows for the Company to extend deferrals for an additional term at the option of the Company. Provisions of the CARES Act largely mirrored the provisions of the interagency statement, providing that modified loans would not be considered TDR’s if they were performing at year-end 2019, and the other conditions set forth in the interagency statement were met. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented or at year-end 2019. As of June 30, 2021, the Bank had 79 deferred loans totaling approximately $100 million, compared to 113 deferred loans totaling approximately $207 million as of December 31, 2020.

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

~~The following table sets forth the composition of these loans by loan segments as of June 30, 2021:~~

Unpaid
Number of Loans
Principal Balance
(dollars in thousands)
Commercial
59
$
17,260
Commercial real estate
20
82,760
Total
79
$
100,020

As of June 30, 2021, there were no deferred loans that were delinquent or on nonaccrual status. As of June 30, 2021, $62.0 million of deferred loans were risk rated “special mention” or worse. The Company evaluates its deferred loans after the initial deferral period and will either return the deferred loan to its original loan terms or the loan will be reassessed at that time to determine if a further deferment should be granted and if a downgrade in risk rating is appropriate.

~~ACL~~ 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 (reversal of) provision for credit losses on the Company’s income statement. The following table presents a rollforward of the ~~ACL~~allowance for credit losses for unfunded commitments for the three and six months ended June 30, 2022 and 2021 ~~(dollars in thousands)~~:

	Three Months Ended		Three Months Ended
	June 30,		June 30,
	2022		2021
	(dollars in thousands)
Balance at beginning of period	$	2,262	$	2,343
Provision for credit losses - unfunded commitments		61		37
Balance at end of period	$	2,323	$	2,380

	Six Months Ended			Six Months Ended
	June 30,			June 30,
	2022			2021
	(dollars in thousands)
Balance at beginning of period	$	2,351		$	0
Day 1 Effect of CECL		0			2,833
Reversal of credit losses - unfunded commitments		(28	)		(453	)
Balance at end of period	$	2,323		$	2,380

Three Months Ended
June 30, 2021

Balance as of beginning of period
$
2,343
Provision for credit losses - unfunded commitments
37
Balance as of end of period
$
2,380

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

Six Months Ended
June 30, 2021

Balance as of beginning of period
$
0-
Day 1 Effect of CECL
2,833
Reversal of credit losses - unfunded commitments
(453)
Balance as of end of period
$
2,380

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Components of (Reversal of) Provision for Credit Losses

The following table summarizes the (reversal of) provision for credit losses for the three and six months ended June 30, 2022 and 2021 ~~(dollars in thousands)~~:

	Three Months Ended		Three Months Ended
	June 30,		June 30,
	2022		2021
	(dollars in thousands)
Provision for (reversal of) credit losses (loans)	$	2,939	$	(1,686	)
(Reversal of) provision for credit losses - unfunded commitments		61		37
Provision for (Reversal of) credit losses	$	3,000	$	(1,649	)

	Six Months Ended			Six Months Ended
	June 30,			June 30,
	2022			2021
	(dollars in thousands)
Provision for (reversal of) credit losses (loans)	$	4,478		$	(6,962	)
Reversal of credit losses - unfunded commitments		(28	)		(453	)
Provision for (reversal of) credit losses	$	4,450		$	(7,415	)

Three Months Ended
June 30, 2021
Six Months Ended
June 30, 2021

(Reversal of) provision for credit losses - loans
$
(1,686)
$
(6,962)
(Reversal of) provision for credit losses - unfunded commitments
37
(453)
(Reversal of) provision for credit losses
$
(1,649)
$
(7,415)

~~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

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.

~~Level 1:~~ ~~Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.~~

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 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:~~

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.

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

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.

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-party~~third-party pricing services.

~~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)~~

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 as of June 30, ~~2021~~2022 and December 31, ~~2020~~2021 are as follows:

				June 30, 2021									June 30, 2022
				Fair Value Measurements at Reporting Date Using									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)		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:
Recurring fair value measurements: Assets
Investment securities:
Available-for-sale:
Federal agency obligations	$	35,773		$	0-	$	35,773		$	0-	$	52,670	$	0	$	52,670	$	0
Residential mortgage pass-through securities		263,158			0-		263,158			0-		444,280		0		444,280		0
Commercial mortgage pass-through securities		8,795			0-		8,795			0-		22,858		0		22,858		0
Obligations of U.S. states and political subdivision		136,388			0-		127,683			8,705		148,031		0		139,609		8,422
Corporate bonds and notes		11,621			0-		11,621			0-		5,491		0		5,491		0
Asset-backed securities		2,880			0-		2,880			0-		2,117		0		2,117		0
Certificates of deposit		151			0-		151			0-
Other securities		167			167		0-			0-		494		494		0		0
Total available-for-sale	$	458,933		$	167	$	450,061		$	8,705		675,941		494		667,025		8,422

Equity securities		13,223			11,243		1,980			0-		15,993		14,053		1,940		0
Derivatives												31,285		0		31,285		0
Total assets	$	472,156		$	11,410	$	452,041		$	8,705	$	723,219	$	14,547	$	700,250	$	8,422

Liabilities
Derivatives	$	(922	)	$	0-	$	(922	)	$	0-
Total liabilities	$	(922	)	$	0-	$	(922	)	$	0-

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

(unaudited)

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

December 31, 2020
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
$
38,458
$
0-
$
38,458
$
0-
Residential mortgage pass-through securities
270,884
0-
270,884
0-
Commercial mortgage pass-through securities
6,922
0-
6,922
0-
Obligations of U.S. states and political subdivision
142,808
0-
133,964
8,844
Corporate bonds and notes
25,095
0-
25,095
0-
Asset-backed securities
3,480
0-
3,480
0-
Certificates of deposit
151
0-
151
0-
Other securities

157

157

0-

0-
Total available-for-sale
$
487,955
$
157
$
478,954
$
8,844

Equity securities
13,387
13,387
0-
0-
Total assets
$
501,342
$
13,544
$
478,954
$
8,844

Liabilities
Derivatives
$
(2,119)
$
0-
$
(2,119)
$
0-
Total liabilities
$
(2,119)
$
0-
$
(2,119)
$
0-

			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	$	0	$	50,360	$	0
Residential mortgage pass- through securities		316,095		0		316,095		0
Commercial mortgage pass-through securities		10,469		0		10,469		0
Obligations of U.S. states and political subdivision		145,625		0		137,060		8,565
Corporate bonds and notes		9,049		0		9,049		0
Asset-backed securities		2,564		0		2,564		0
Certificates of deposit		150		0		150		0
Other securities		195		195		0		0
Total available-for-sale	$	534,507	$	195	$	525,747	$	8,565

Equity securities		13,794		11,081		2,713		0
Derivatives		3,347		0		3,347		0
Total assets	$	551,648	$	11,276	$	531,807	$	8,565

There were no transfers between Level 1 and Level 2 during the six months ended June 30, ~~2021~~2022 and during the year ended December 31, ~~2020.~~2021.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company may be required periodically to measure certain assets at fair value on a nonrecurring 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 nonrecurring basis as of June 30, ~~2021~~2022 and December 31, ~~2020.~~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 parts of these loans directly from the purchasing financial institutions (Level 2)2).

Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. Fair value of these loans is determined based on the terms of the loan, such as interest rate, maturity date, reset term, as well as sales of similar assets (Level 3)3).

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

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 marketplace and are also based on Level 3 inputs.

For assets measured at fair value on a nonrecurring basis, the fair value measurements as of June 30, ~~2021~~2022 and December 31, ~~2020~~2021 are as follows:

			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
Assets measured at fair value on a nonrecurring	June 30,		Assets		Inputs		Inputs
basis:	2021		(Level 1)		(Level 2)		(Level 3)
Collateral dependent loans:			(dollars in thousands)
Assets measured at fair value on a nonrecurring basis:									Carrying Value as of June 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	$	12,928	$	0-	$	0-	$	12,928	$	14,657	$	0	$	0	$	14,657
Commercial real estate		1,902		0-		0-		1,902		15,630		0		0		15,630
Commercial construction		2,500		0-		0-		2,500
Residential real estate		2,033		0-		0-		2,033		1,365		0		0		1,365

Fair Value Measurements at Reporting Date Using
Quoted
Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets measured at fair value on a nonrecurring
December 31,
Assets
Inputs
Inputs
basis:
2020
(Level 1)
(Level 2)
(Level 3)
Impaired loans:
(dollars in thousands)
Commercial
$
10,751
$
0-
$
0-
$
10,751
Commercial real estate
1,393
0-
0-
1,393

			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	$	0	$	0	$	13,399
Commercial real estate		20,185		0		0		20,185
Residential real estate		2,794		0		0		2,794

Collateral dependent loans –Collateral dependent loans as of June 30, ~~2021~~2022 that required a valuation allowance were ~~$40.0~~$48.6 million with a related valuation allowance of ~~$20.6~~$17.0 million compared to ~~$26.5~~$54.1 million with a related valuation allowance of ~~$14.3~~$17.8 million as of December 31, ~~2020.~~2021.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

Assets Measured ~~With~~with 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 six months ended June 30, ~~2021~~2022 and for the year ended December 31, ~~2020:~~2021:

Municipal
Securities
(dollars in thousands)
Balance as of December 31, 2020
$
8,844
Principal paydowns
(139
)
Balance as of June 30, 2021
$
8,705

	Municipal Securities
	(dollars in thousands)
Beginning balance, December 31, 2021	$	8,565
Principal paydowns		(143	)
Ending balance, June 30, 2022	$	8,422

Municipal
Securities
(dollars in thousands)
Balance as of December 31, 2019
$
9,114
Principal paydowns
(270)

Balance as of December 31, 2020
$
8,844

	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 as of June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.

June 30, 2021

Valuation

Unobservable

June 30, 2022

Fair Value

Techniques

Input

Rate

Fair Value

Valuation Techniques

Unobservable Input

Rate

Securities available-for-sale:

(dollars in thousands)

(dollars in thousands)

Municipal securities

8,705

Discounted cash flows

Discount rate

2.9

8,422

Discounted cash flows

Discount rate

2.9

December 31, 2020

Valuation

Unobservable

December 31, 2021

Fair Value

Techniques

Input

Rate

Fair Value

Valuation Techniques

Unobservable Input

Rate

Securities available-for-sale:

(dollars in thousands)

(dollars in thousands)

Municipal securities

8,844

Discounted cash flows

Discount rate

2.9

8,565

Discounted cash flows

Discount rate

2.9

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

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 nonrecurring 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.

~~June 30, 2021~~

June 30, 2022
(dollars in thousands)	Fair Value		Valuation Techniques	Unobservable Input	Range (weighted average)
Commercial	$	14,006	Market approach (100%)	Average transfer price as a price to unpaid principal balance		58% –88% (60%)
Commercial	$	651	Appraisals of collateral value	Comparable sales	-10% to +35% (+8%)
Commercial real estate	$	15,630	Appraisals of collateral value	Comparable sales		-25% to 10% (-14%)
Residential real estate	$	1,365	Appraisals of collateral value	Comparable sales	+21% to +39% (+22%)

Valuation

Unobservable

December 31, 2021

(dollars in thousands)

Fair Value

Techniques

Input

Range (weighted average)

Fair Value

Valuation Techniques

Unobservable Input

Range (weighted average)

Collateral dependent:

Commercial

750

Appraisals of collateral value

Comparable sales

0% - 5% (2%)

12,193

Market approach (100%)

Average transfer price as a price to unpaid principal balance

48% to 73% (49%)

Commercial

12,178

Market approach (100)

Average transfer price as a price to unpaid principal balance

48 – 53 (49)

1,206

Appraisals of collateral value

Adjustment for comparable sales

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

Commercial real estate

1,902

Appraisals of collateral value

Comparable sales

0% - 25% (8%)

20,185

Appraisals of collateral value

Adjustment for comparable sales

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

Construction

2,500

Appraisals of collateral value

Comparable sales

15%

Residential

2,033

Appraisals of collateral value

Comparable sales

1% - 15% (6%)

Residential real estate

2,794

Appraisals of collateral value

Adjustment for comparable sales

-15% to +39% (5%)

~~December 31, 2020~~

Valuation
Unobservable
(dollars in thousands)
Fair Value
Techniques
Input
Range (weighed average)
Impaired loans:
Commercial
$
10,524
Market approach (100%)
Average transfer price as a price to unpaid principal balance
48 - 53 (49)

Commercial
$
227
Appraisals of collateral value
Adjustment for comparable sales
1% to +5% (+2%)

Commercial real estate
$
1,393
Appraisals of collateral value
Adjustment for comparable sales
-25% to +20% (-8%)

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

(unaudited)

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

As of June 30, ~~2021~~2022 the fair value measurements presented are consistent with Topic 820,Fair Value Measurement, in which fair value represents exit price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

					Fair Value Measurements										Fair Value Measurements
					Quoted						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)
					Prices in						(dollars in thousands)
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
	Amount		Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
June 30, 2021
June 30, 2022
Financial assets:
Cash and due from banks	$	349,417	$	349,417	$	349,417	$	0-	$	0-	$	299,320	$	299,320	$	299,320	$	0	$	0
Securities available-for-sale		458,933		458,933		167		450,061		8,705		675,941		675,941		494		667,025		8,422
Investment in restricted stocks		22,563		0n/a		0n/a		0n/a		0n/a
Restricted investments in bank stocks												47,287		0		n/a		n/a		n/a
Equity securities		13,223		13,223		11,243		1,980		0-		15,993		15,993		14,053		1,940		0
Net loans		6,329,220		6,391,465		0-		0-		6,391,465		7,191,834		6,993,635		0		0		6,993,635
Derivatives												31,285		31,285		0		31,285		0
Accrued interest receivable		34,001		34,001		0-		1,444		32,557		34,615		34,615		0		2,649		31,966

Financial liabilities:
Noninterest-bearing deposits		1,485,952		1,485,952		1,485,952		0-		0-		1,712,875		1,712,875		1,712,875		0		0
Interest-bearing deposits		4,706,561		4,710,337		3,404,754		1,305,583		0-		4,904,724		4,871,665		3,619,315		1,252,350		0
Borrowings		353,462		355,783		0-		355,783		0-		874,964		872,176		0		872,176		0
Subordinated debentures		152,800		164,757		0-		164,757		0-		153,103		153,952		0		153,952		0
Derivatives		922		922		0-		922		0-
Accrued interest payable		3,083		3,083		0-		3,083		0-		3,120		3,120		0		3,120		0

December 31, 2020
December 31, 2021
Financial assets:
Cash and due from banks	$	303,756	$	303,756	$	303,756	$	0-	$	0-	$	265,536	$	265,536	$	265,536	$	0	$	0
Investment securities available-for-sale		487,955		487,955		157		478,954		8,844		534,507		534,507		195		525,747		8,565
Restricted investment in bank stocks		25,099		0n/a		0n/a		0n/a		0n/a		27,826		n/a		n/a		n/a		n/a
Equity securities		13,387		13,387		13,387		0-		0-		13,794		13,794		11,081		2,713		0
Net loans		6,157,081		6,244,037		0-		0-		6,244,037		6,749,849		6,800,287		0		0		6,800,287
Derivatives												3,347		3,347		0		3,347		0
Accrued interest receivable		35,317		35,317		0-		1,764		33,553		34,152		34,152		0		1,554		32,598

Financial liabilities:
Noninterest-bearing deposits		1,339,108		1,339,108		1,339,108		0-		0-		1,617,049		1,617,049		1,617,049		0		0
Interest-bearing deposits		4,620,116		4,633,961		3,155,983		1,477,978		0-		4,715,904		4,716,358		3,565,795		1,150,563		0
Borrowings		425,954		429,671		0-		429,671		0-		468,193		469,671		0		469,671		0
Subordinated debentures		202,648		214,113		0-		214,113		0-		152,951		163,995		0		163,995		0
Derivatives		2,119		2,119		0-		2,119		0-
Accrued interest payable		3,687		3,687		0-		3,687		0-		2,716		2,716		0		2,716		0

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

(unaudited)

Note 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, ~~considering~~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.

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 7. Comprehensive (Loss) Income

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 reclassification out of accumulated other comprehensive (loss) ~~income~~ for the periods ~~presented:~~presented (dollars in thousands):

Details about Accumulated Other
Comprehensive Loss Components
Amounts Reclassified from Accumulated
Other Comprehensive Income (Loss)
Amounts Reclassified from Accumulated
Other Comprehensive Income (Loss)
Affected Line item in the
Statement Where Net Income is Presented
Three Months Ended
Six Months Ended
June 30,
June 30,
2021
2020
2021
2020
(dollars in thousands)
Sale of investment securities
$
195
$
0-
$
195
$
29
Net gains on sale of securities available-for-saleavailable Income tax expense
available for sale
(48
)
0-
(48
)
(6
)
147
0-
147
23

Net interest income on swaps
$
(584
)
$
(318
)
$
(1,215
)
$
(311
)
Borrowings
165
71
342
69
Income tax expense
(419
)
(247
)
(873
)
(242
)

Amortization of pension plan net
(75
)
(76
)
(150
)
(151
)
Other components of net periodic pension expense
actuarial losses
22
21
42
42
Income tax benefit
(53
)
(55
)
(108
)
(109
)

Total reclassification
$
(325
)
$
(302
)
$
(834
)
$
(328
)

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 June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Sale of investment securities available-for-sale	$	0		$	195		$	0		$	195		Net gains on sale of securities available-for-sale
		0			(48	)		0			(48	)	Income tax expense
	$	0		$	147		$	0		$	147

Net interest expense on swaps	$	(129	)	$	(584	)	$	(654	)	$	(1,215	)	Borrowings
		37			167			184			344		Income tax benefit
	$	(92	)	$	(417	)	$	(470	)	$	(871	)

Amortization of pension plan net actuarial losses	$	(16	)	$	(75	)	$	(32	)	$	(150	)	Other components of net periodic pension expense
		5			22			9			42		Income tax benefit
	$	(11	)	$	(53	)	$	(23	)	$	(108	)
Total reclassification	$	(103	)	$	(323	)	$	(493	)	$	(832	)

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

Accumulated other comprehensive ~~income~~ (loss) as of June 30, ~~2021~~2022 and December 31, ~~2020~~2021 consisted of the following:

	June 30, 2022			December 31, 2021
	(dollars in thousands)
Investment securities available-for-sale, net of tax	$	(39,293	)	$	(484	)
Cash flow hedge, net of tax		21,873			2,406
Defined benefit pension and post-retirement plans, net of tax		(1,683	)		(3,326	)
Total	$	(19,103	)	$	(1,404	)

June 30,
December 31,
2021
2020
(dollars in thousands)
Investment securities available-for-sale, net of tax
$
3,907
$
7,859

Cash flow hedge, net of tax
(663
)
(1,520
)
Defined benefit pension and post-retirement plans, net of tax
(3,434
)
(3,542
)
Total
$
(190
)
$
2,797

Note 8. ~~Stock Based~~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 June 30, ~~2021.~~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 June 30, ~~2021 are~~2022 were approximately ~~332,628.~~222,593. The Company intends to issue all shares under the Plan in the form of newly issued shares.

Restricted stock, options and restricted stock units typically have a ~~three-year~~three-year vesting period starting one year after the date of grant with ~~one-third~~one-third vesting each ~~year or upon a change in control.~~year. The options generally expire ten years from the date of grant. Restricted stock and 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 inof control. All issuances are subject to forfeiture if the recipient ~~leaves or~~ is ~~terminated~~no longer employed prior to the ~~awards~~award's vesting. Restricted ~~shares~~stock have the same dividend and voting rights as common stock, while options, 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 recorded as incurred. Stock-based compensation expense for the three and six months ended June 30, 2022 was $1.2 million and $2.3 million, respectively. Stock-based compensation expense for the three and six months ended June 30, 2021 was $1.0 million and $2.0 million, respectively. ~~Stock-based compensation expense for the three and six months ended June 30, 2020 was $0.7 million and $1.2 million, respectively.~~

Activity inunder the Company’s options for the six months ended June 30, ~~2021~~2022 was as follows:

	Number of Stock Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value		Number of Stock Options			Weighted-Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding as of December 31, 2020	38,013		$	9.03
Outstanding as of December 31, 2021									23,766		$	9.94
Granted	0-			0-					0			0
Exercised	(5,449	)		8.34					(15,086	)		8.21
Forfeited/cancelled/expired	0-			0-					0			0
Outstanding as of June 30, 2021	32,564		$	9.15	1.0	$	554,374

Exercisable as of June 30, 2021	32,564		$	9.15	1.0	$	554,374
Outstanding as of June 30, 2022									8,680			12.95		0.79	$	99,756
Exercisable as of June 30, 2022									8,680		$	12.95		-	$	0

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 June 30, ~~2021~~2022 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 June 30, ~~2021.~~2022. This amount changes based on the fair market value of the Company’s stock.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

(unaudited)

Note 8. ~~Stock Based~~Stock-Based Compensation – (continued)

Activity inunder the Company’s restricted ~~shares~~stock for the six months ended June 30, ~~2021~~2022 was as follows:

			Weighted-		Nonvested Shares			Weighted Average Grant Date Fair Value
			Average
	Nonvested		Grant Date
	Shares		Fair Value
Nonvested as of December 31, 2020	113,114		$	18.15
Nonvested as of December 31, 2021						82,693		$	21.78
Granted	49,590			25.32		53,543			30.76
Vested	(64,149	)		16.95		(38,697	)		25.47
Forfeited/cancelled/expired	(1,608	)		24.11		(374	)		30.99
Nonvested June 30, 2021	96,947		$	22.51
Nonvested as of June 30, 2022						97,165		$	25.22

As of June 30, ~~2021,~~2022, there was approximately $1.8 million of total unrecognized compensation cost related to nonvested restricted ~~shares~~stock granted. The cost is expected to be recognized over a weighted average period of ~~1.4~~1.3 years.

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

Weighted
Average Grant
Units
Units
Date Fair
(expected)
(maximum)
Value
Unearned as of December 31, 2020
147,636
$
17.29
Awarded
37,543
25.24
Change in estimate
17,818
20.79
Vested shares
(29,421
)
31.35
Unearned as of June 30, 2021
173,576
233,638
$
16.99

	Units (expected)			Units (maximum)		Weighted Average Grant Date Fair Value
Unearned as of December 31, 2021		209,994				$	16.18
Awarded		34,874					32.80
Vested shares		(49,604	)				20.79
Unearned as of June 30, 2022		195,264			221,541	$	17.98

As of June 30, ~~2021,~~2022, the specific number of shares related to performance units that were expected to vest was ~~173,576,~~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. As of June 30, ~~2021~~2022, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is ~~233,638.~~221,541. During the six months ended June 30, ~~2021, 29,421~~2022, 49,604 shares vested. A total of ~~14,710~~27,254 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of performance units during the six months ended June 30, ~~2021~~2022 were ~~14,711~~22,350 shares. As of June 30, ~~2021,~~2022, compensation cost of approximately ~~$1.7~~$1.8 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of ~~1.8~~1.9 years.

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:

			Weighted		Units (expected)			Weighted Average Grant Date Fair Value
			Average Grant
	Units		Date Fair
	(expected)		Value
Unearned as of December 31, 2020	169,313		$	14.07
Unearned as of December 31, 2021						136,948		$	16.52
Awarded	45,027			25.24		52,312			32.80
Vested shares	(68,916	)		16.29		(69,225	)		16.13
Unearned as of June 30, 2021	145,424		$	16.48
Unearned as of June 30, 2022						120,035		$	23.84

Any forfeitures would result in previously recognized expense being reversed. A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient. During the six months ended June 30, ~~2021, 68,916~~2022, 69,225 shares vested. A total of ~~34,458~~38,201 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of restricted stock units during the six months ended June 30, ~~2021~~2022 were ~~34,458~~31,383 shares. As of June 30, ~~2021,~~2022, compensation cost of approximately $2.0 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of ~~2.1~~1.6 years.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

Note 9.Components of Net Periodic Pension Cost

The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until 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 Ended						Affected Line Item in the Consolidated
	Three Months Ended June 30,						Affected Line Item in the Consolidated Statements of Income	June 30,						Statements of Income
	2021			2020				2022			2021
	(dollars in thousands)							(dollars in thousands)
Service cost	$	0-		$	0-			$	0		$	0
Interest cost		71			91		Other components of net periodic pension expense		78			71		Other components of net periodic pension expense

Expected return on plan assets		(213	)		(196	)	Other components of net periodic pension expense		(237	)		(213	)	Other components of net periodic pension expense
Net amortization		75			76		Other components of net periodic pension expense		16			75		Other components of net periodic pension expense

Total periodic pension income	$	(67)		$	(29)			$	(143	)	$	(67	)

								Six Months Ended						Affected Line Item in the Consolidated
	Six Months Ended June 30,						Affected Line Item in the Consolidated Statements of Income	June 30,						Statements of Income
	2021			2020				2022			2021
	(dollars in thousands)							(dollars in thousands)
Service cost	$	0-		$	0-			$	0		$	0
Interest cost		142			182		Other components of net periodic pension expense		156			142		Other components of net periodic pension expense

Expected return on plan assets		(426	)		(392	)	Other components of net periodic pension expense		(474	)		(426	)	Other components of net periodic pension expense
Net amortization		150			151		Other components of net periodic pension expense		32			150		Other components of net periodic pension expense

Total periodic pension income	$	(134)		$	(59	)		$	(286	)	$	(134	)

Contributions

The Company did not contribute to the Pension Trust during the six months ended June 30, ~~2021.~~2022. The Company does not plan on contributing amounts to the Pension Trust for the remainder of ~~2021.~~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.

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~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

Note 10. FHLB Borrowings

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

	June 30, 2022						December 31, 2021
	Amount			Rate			Amount			Rate
	(dollars in thousands)
By remaining period to maturity:
Less than 1 year	$	847,337			1.86	%	$	390,549			0.56	%
1 year through less than 2 years		0			n/a			50,000			1.84	%
2 years through less than 3 years		25,000			1.00	%		0			n/a
3 years through less than 4 years		2,050			2.23	%		25,000			1.00	%
4 years through 5 years		0			n/a			2,050			2.23	%
After 5 years		683			2.91	%		714			2.91	%
FHLB borrowings - gross		875,070			1.84	%		468,313			0.73	%
Fair value (discount)		(106	)					(120	)
Total FHLB borrowings	$	874,964					$	468,193

June 30, 2021
December 31, 2020
Amount
Rate
Amount
Rate
(dollars in thousands)
Total FHLB borrowings
$
353,462
0.97
%
$
425,954
1.07
%

By remaining period to maturity:
Less than 1 year
$
268,420
0.93
%
$
297,570
0.84
%
1 year through less than 2 years
57,368
1.24
%
75,644
1.42
%
2 years through less than 3 years
0-
0-
50,000
1.84
%
3 years through less than 4 years
25,000
1.00
%
0-
0-
4 years through 5 years
2,050
2.23
%

0-
0-
After 5 years
744
2.41
%

2,824
2.42
%
Total FHLB borrowings
353,582
0.97
%
426,038
1.07
%
Fair value premium (discount)
(120
)
(84
)
FHLB borrowings, net
$
353,462
$
425,954

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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.

Advances are payable at stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances ~~are~~bear fixed rates. The advances as of June 30, ~~2021~~2022 were primarily collateralized by approximately $2.0 billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement. As of June 30, ~~2021~~2022 the Company had remaining borrowing capacity of approximately ~~$1.2~~$0.6 billion at FHLB.

Note 11. 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.~~ 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. The floating interest rate on the subordinated debentures is ~~three-month~~three-month LIBOR plus 2.85% and re-prices quarterly. The rate as of June 30, ~~2021~~2022 was ~~3.04%~~4.14%.

The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

~~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~~

~~01/23/2034~~

~~01/23/2009~~

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

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~~Note 11. Subordinated Debentures – (continued)~~

During June 2020, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the ~~“2020~~“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 February 1, 2028 and bear interest at a fixed rate of 5.20% per year, from and including January 17, 2018 to, but excluding February 1, ~~2023.~~2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current ~~three-month~~three-month LIBOR rate plus 284 basis points.

~~During June 2015,~~

Note 12. Preferred Stock

On August 19, 2021, the ~~Parent Corporation issued $50~~Company completed an underwritten public offering of 115,000 shares, or $115.0 million in aggregate ~~principal amount~~liquidation preference, of ~~fixed-to-floating rate subordinated notes (the “2015 Notes”). As~~its depositary shares, each representing a 1/40th interest in a share of ~~December 31, 2020,~~ the ~~2015 Notes have~~Company’s 5.25% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A, 0 par value, with a ~~stated maturity~~liquidation preference of ~~July 1, 2025, and bear interest until~~$1,000 per share. The net proceeds received from the ~~maturity date or early redemption date~~issuance of preferred stock at ~~a variable rate equal to~~ the ~~then current three-month LIBOR rate plus 393 basis points. As~~time of ~~December 31, 2020, the variable interest rate was 4.16% and all costs related to 2015 issuance have been amortized. The 2015 Notes~~closing were ~~redeemed in full on January 1, 2021.~~$110.9 million.

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Item 2. ~~Management’s~~Management’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 June 30, ~~2021~~2022 and December 31, ~~2020.~~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 ~~loan~~credit loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities such as the ongoing conflict 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; (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; (10) the outcome of regulatory and legal investigations and proceedings may not be anticipated, and (11) the impact of the COVID-19 pandemic on our employees and operations, and those of our customers. Further information on other factors that could affect the financial results 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 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 ~~ACL,~~allowance for credit losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies is provided below.

Allowance for Credit Losses and Related Provision: The ~~ACL~~allowance for credit losses (“ACL”) represents management’s estimate of current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial asset(s). Determining the amount of the ACL is considered a critical accounting estimate because it requires significant judgment and the use of estimates including reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

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

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The ACL is established through a provision for credit losses charged to expense. Management believes that the current ACL will be adequate to absorb ~~current expected~~ credit losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers’ ability to pay. The evaluation also details historical losses by loan segment and the resulting credit loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the ACL may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for credit losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 5 of the Notes to Consolidated Financial Statements.

~~Table of Contents~~

~~Business Combinations~~: We account for business combinations under the acquisition method of accounting. Using this method, assets acquired, liabilities assumed and consideration paid are recorded at their estimated fair values as of the acquisition date. The application of this method of accounting requires the use of significant estimates and assumptions. The application of the acquisition method of accounting usually results in the recognition of goodwill and a core deposit intangible (if the acquiree has deposits). The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired, including any identifiable intangibles, if applicable. Goodwill is not amortized for book purposes; however, it is reviewed at least annually for impairment and is usually not deductible for tax purposes.

The assets acquired and liabilities assumed and consideration paid in the acquisition are recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. Our estimates are based upon assumptions that we believe to be reasonable and the Company may use an outside service provider to assist with the valuations.

~~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. The Company performs an annual goodwill impairment test in the fourth quarter of each year, or more often if events or circumstances warrant. We will continue to monitor and evaluate the impact of COVID-19 and its impact on our market capitalization, overall economic conditions and any other potential triggering events that may indicate an impairment of goodwill in the future. In the event we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or our regulatory capital ratios.

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 1110 of the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, ~~2020~~2021 includes additional discussion on the accounting for income taxes.

Impact of COVID-19

COVID-19 continues to impact the Company’s operations and financial results, as well as those of our customers. In response to the COVID-19 pandemic, the Company continued to offer temporary relief to effected customers, deferring either their full loan payment, the principal component or the interest component of their loan payment for an initial period of time ranging from 30 to 120 days. As of June 30, ~~2021,~~2022, the Company has 79one deferred ~~loans~~loan with a total outstanding loan balance of ~~$100.0~~$0.5 million. As provided for under the CARES act, these short-term deferrals are not considered troubled debt restructurings, provided that the modification is related to COVID-19, executed on a loan that was not more than 30 days past due as 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~~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 June 30, ~~2021,~~2022, PPP loans were ~~$326.8~~$18.0 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 June 30, ~~2021.~~2022. Should those circumstances change, the Company could be required to establish additional provisions for credit loss expense charged to earnings.

As of June 30, 2022 remaining deferred and unrecognized PPP fees were $0.3 million. We currently anticipate recognizing a majority of this balance by December 31, 2022, reflecting the expected timing of PPP loan forgiveness granted by the Small Business Administration.

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Operating Results Overview

Net income available to common stockholders for the three months ended June 30, ~~2021~~2022 was ~~$32.2~~$30.8 million compared to ~~$14.8~~$32.2 million for the comparable three-month period ended June 30, ~~2020.~~2021. The Company’s diluted earnings per share were ~~$0.81~~$0.78 for the three months ended June 30, ~~2021,~~2022 as compared with diluted earnings per share of ~~$0.37~~$0.81 for the comparable three-month period ended June 30, ~~2020.~~2021. The ~~increase~~$1.4 million decrease in net income available to common stockholders and $0.03 decrease in diluted earnings per share ~~was attributable~~versus the second quarter of 2021 were due to a ~~decrease in~~$4.6 million increase to provision for credit losses, ~~of $16.6~~a $5.4 million increase in noninterest expenses, $1.5 million in preferred dividends, a $1.1 million decrease in noninterest income and a $1.2 million increase in income tax expenses, ~~of $6.8~~partially offset by a $12.6 million ~~and an~~ increase in net interest income of $2.2 million, offset by an increase in income tax expense of $8.1 million. The decrease in provision for credit losses was due to the impact of an improved economic outlook on the current expected credit losses (“CECL”) accounting standard, compared with a $15.0 million provision in the second quarter of 2020.income.

Net income available to common stockholders for the six months ended June 30, ~~2021~~2022 was ~~$65.2~~$60.7 million compared to ~~$20.9~~$65.2 million for the comparable six-month period ended June 30, ~~2020.~~2021. The Company’s diluted earnings per share were ~~$1.63~~$1.53 for the six months ended June 30, ~~2021,~~2022 as compared with diluted earnings per share of ~~$0.52~~$1.63 for the comparable six-month period ended June 30, ~~2020.~~2021. The ~~increase~~$4.5 million decrease in net income available to common stockholders and $0.10 decrease in diluted earnings per share ~~was primarily attributable~~versus the first half of 2021 were due to a ~~decrease in~~$11.9 million increase to provision for credit losses, ~~of $38.4~~a $8.2 million increase in noninterest expenses, $3.0 million in preferred dividends, a $1.5 million decrease in noninterest income and a $1.7 million increase in income tax expenses, ~~of $15.4~~partially offset by a $21.8 million ~~and an~~ increase in net interest income of $8.1 million, offset by an increase in income tax expense of $18.0 million. The decrease in provision for loan losses was due to the impact of an improved economic outlook on the CECL accounting standard, compared with a $31.0 million provision in the six months ended June 30, 2020.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 three months ended June 30, ~~2021~~2022 increased by ~~$2.2~~$12.7 million, or ~~3.5%~~20.1%, from the comparable three-month period ended June 30, ~~2020.~~2021. The increase from the second quarter of ~~2020~~2022 resulted primarily from a 1612.1% increase in average loans and a 31 basis-point widening of the net interest margin to ~~3.60%~~3.91% from ~~3.44%, offset by a 1.5% decrease in average interest-earning assets, largely due to higher levels of PPP originations during the second quarter of 2020.~~3.60%. The widening of the net interest margin resulted from a 5324 basis-point increase in interest-earning assets and by a 7 basis-point reduction in the cost of interest-bearing ~~liabilities, partially offset by a 27 basis-point reduction in the yield on average interest-earning assets.~~liabilities.

Fully taxable equivalent net interest income for the six months ended June 30, ~~2021~~2022 increased by ~~$8.0~~$22.0 million, or ~~6.8%~~17.6%, from the comparable six-month period ended June 30, ~~2020, resulting~~2021. The increase from anthe six months ended June 30, 2021 resulted primarily from a 11.0% increase in average ~~interest-earning assets of 2.4%, largely due to PPP originations,~~loans and a 1623 basis-point widening of the net interest margin to ~~3.58%~~3.81% from ~~3.42%~~3.58%. The widening of the net interest margin resulted from a 6417 basis-point reduction in the cost of interest-bearing liabilities ~~partially offset by a 37~~and 9 basis-point ~~reduction~~increase in ~~the~~ yield on ~~average~~ interest-earning assets.

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The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three ~~and six~~ months ended June 30, ~~2021~~2022 and ~~2020,~~2021, the Company’s average assets, liabilities and stockholders’ equity. The Company’s net interest income, net interest spread and net interest margin are also reflected.

Average Statements of Condition with Interest and Average Rates

															Three Months Ended June 30,
															2022									2021
	Three Months Ended June 30,																	Interest									Interest
	2021							2020							Average			Income/			Average			Average			Income/			Average
	Average Balance		Interest Income/ Expense		Average Rate ⁽⁷⁾			Average Balance		Interest Income/ Expense		Average Rate ⁽⁷⁾			Balance			Expense			Rate (7)			Balance			Expense			Rate (7)
	(dollars in thousands)														(dollars in thousands)
Interest-earning assets:
Investment securities ^{(1) (2)}	$	444,461	$	1,765		1.59	%	$	443,282	$	2,531		2.30	%
Securities ^{(1) (2)}															$	610,465		$	3,710			2.44	%	$	444,461		$	1,765			1.59	%
Total loans ^{(2) (3) (4)}		6,252,212		71,348		4.58			6,332,503		76,088		4.83			7,008,174			81,597			4.67			6,252,212			71,348			4.58
Federal funds sold and interest-bearing deposits with banks		341,885		84		0.10			357,758		79		0.09
Federal funds sold and interest-bearing with banks																157,201			312			0.80			341,885			84			0.10
Restricted investment in bank stocks		21,407		263		4.93			31,002		442		5.73			31,605			291			3.69			21,407			263			4.93
Total interest-earning assets		7,059,965		73,460		4.17			7,164,545		79,140		4.44			7,807,445			85,910			4.41			7,059,965			73,460			4.17
Noninterest-earning assets:
Allowance for credit losses		(80,548)							(53,502)							(81,012	)								(80,548	)
Other noninterest-earning assets		587,259							573,360							596,390									587,259
Total assets	$	7,566,676						$	7,684,403						$	8,322,823								$	7,566,676

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits	$	1,324,510	$	3,963		1.20		$	1,905,165	$	9,586		2.02		$	1,103,418			2,179			0.79		$	1,324,510			3,963			1.20
Other interest-bearing deposits		3,320,400		2,461		0.30			2,639,052		4,011		0.61			3,717,531			3,530			0.38			3,320,400			2,461			0.30
Total interest-bearing deposits		4,644,910		6,424		0.55			4,544,217		13,597		1.20			4,820,949			5,709			0.47			4,644,910			6,424			0.55

Borrowings		331,633		1,419		1.72			798,648		2,235		1.13			548,675			1,849			1.35			331,633			1,419			1.72
Subordinated debentures, net of capitalized costs		152,750		2,168		5.69			141,904		2,021		5.73
Capital lease obligation		2,066		31		6.02			2,257		34		6.06
Subordinated debentures																153,053			2,178			5.71			152,750			2,168			5.69
Finance lease																1,865			28			6.02			2,066			31			6.02
Total interest-bearing liabilities		5,131,359		10,042		0.78			5,487,026		17,887		1.31			5,524,542			9,764			0.71			5,131,359			10,042			0.78

Noninterest-bearing demand deposits		1,432,707							1,277,428
Demand deposits																1,607,465									1,432,707
Other liabilities		50,591							51,153							47,719									50,591
Total noninterest-bearing liabilities		1,483,298							1,328,581							1,655,184									1,483,298
Stockholders’ equity		952,019							868,796							1,143,097									952,019
Total liabilities and stockholders’ equity	$	7,566,676						$	7,684,403						$	8,322,823								$	7,566,676
Net interest income (tax-equivalent basis)				63,418							61,253								76,146									63,418
Net interest spread ⁽⁵⁾						3.39							3.13									3.70	%								3.39	%
Net interest margin ⁽⁶⁾						3.60							3.44									3.91	%								3.60	%
Tax-equivalent adjustment				(409)							(463)								(555	)								(409	)
Net interest income			$	63,009						$	60,790							$	75,591								$	63,009

⁽¹⁾	Average balances are based on amortized cost and include equity securities.
⁽²⁾	Interest income is presented on a tax-equivalent basis using 21%.
⁽³⁾	Includes loan fee income and accretion of purchase accounting adjustments.
⁽⁴⁾	Total loans include loans held-for-sale and nonaccrual loans.
⁽⁵⁾	Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis.
⁽⁶⁾	Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.
⁽⁷⁾	Rates are annualized.

Table of Contents

~~Average Statements of Condition with Interest and Average Rates~~

															Six Months Ended June 30,
															2022									2021
	Six Months Ended June 30,																	Interest								Interest
	2021							2020							Average			Income/			Average			Average		Income/			Average
	Average Balance		Interest Income/ Expense		Average Rate ⁽⁷⁾			Average Balance		Interest Income/ Expense		Average Rate ⁽⁷⁾			Balance			Expense			Rate (7)			Balance		Expense			Rate (7)
	(dollars in thousands)														(dollars in thousands)
Interest-earning assets:
Investment securities ^{(1) (2)}	$	458,741	$	3,823		1.68	%	$	447,764	$	5,626		2.53	%
Total loans ^{(2) (3) (4)}		6,249,630		142,031		4.58			6,144,486		149,308		4.89
Federal funds sold and interest-bearing deposits with banks		305,911		133		0.09			253,093		578		0.46
Securities ^{(1) (2)}															$	578,014		$	6,481			2.26	%	$	458,741	$	3,823			1.68	%
Total loans (2 ) ^{(3) (4)}																6,940,203			157,917			4.59			6,249,630		142,031			4.58
Federal funds sold and interest-bearing with banks																234,284			433			0.37			305,911		133			0.09
Restricted investment in bank stocks		22,111		519		4.73			29,159		842		5.81			28,310			505			3.60			22,111		519			4.73
Total interest-earning assets		7,036,393		146,506		4.20			6,874,502		156,354		4.57			7,780,811			165,336			4.29			7,036,393		146,506			4.20
Noninterest-earning assets:
Allowance for credit losses		(81,045)							(46,240)							(80,391	)								(81,045)
Other noninterest-earning assets		580,210							566,950							592,847									580,210
Total assets	$	7,535,558						$	7,395,212						$	8,293,267									$ 7,535,558

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits	$	1,373,133	$	9,113		1.34		$	1,933,939	$	19,957		2.08		$	1,113,958			4,333			0.78		$	1,373,133		9,113			1.34
Other interest-bearing deposits		3,273,337		4,896		0.30			2,649,903		10,852		0.82			3,784,173			6,386			0.34			3,273,337		4,896			0.30
Total interest-bearing deposits		4,646,470		14,009		0.61			4,583,842		30,809		1.35			4,898,131			10,719			0.44			4,646,470		14,009			0.61

Borrowings		353,451		3,093		1.77			637,885		4,587		1.45			477,188			3,226			1.36			353,451		3,093			1.77
Subordinated debentures, net of capitalized costs		153,541		4,335		5.69			135,409		3,855		5.73
Capital lease obligation		2,091		63		6.08			2,280		69		6.09
Subordinated debentures																153,016			4,346			5.73			153,541		4,335			5.69
Finance lease																1,891			57			6.08			2,091		63			6.08
Total interest-bearing liabilities		5,155,553		21,500		0.84			5,359,416		39,320		1.48			5,530,226			18,348			0.67			5,155,553		21,500			0.84

Noninterest-bearing demand deposits		1,390,878							1,116,393
Demand deposits																1,577,427									1,390,878
Other liabilities		49,031							52,887							48,052									49,031
Total noninterest-bearing liabilities		1,439,909							1,169,280							1,625,479									1,439,909
Stockholders’ equity		940,096							866,516							1,137,562									940,096
Total liabilities and stockholders’ equity	$	7,535,558						$	7,395,212						$	8,293,267								$	7,535,558
Net interest income (tax-equivalent basis)				125,006							117,034								146,988								125,006
Net interest spread ⁽⁵⁾						3.36							3.09									3.62	%							3.36	%
Net interest margin ⁽⁶⁾						3.58							3.42									3.81	%							3.58	%
Tax-equivalent adjustment				(834)							(963)								(1,039	)							(834	)
Net interest income			$	124,172						$	116,071							$	145,949							$	124,172

⁽¹⁾	Average balances are based on amortized cost and include equity securities.
⁽²⁾	Interest income is presented on a tax-equivalent basis using 21%.
⁽³⁾	Includes loan fee income and accretion of purchase accounting adjustments.
⁽⁴⁾	Total loans include loans held-for-sale and nonaccrual loans.
⁽⁵⁾	Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis.
⁽⁶⁾	Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.
⁽⁷⁾	Rates are annualized.

Table of Contents

Noninterest Income

Noninterest income totaled ~~$4.5~~$3.4 million for the three months ended June 30, ~~2021,~~2022, compared with ~~$4.6~~$4.5 million for the comparable three-month period ended June 30, ~~2020.~~2021. Included in noninterest income for the three months ended June 30, ~~2021~~2022 and June 30, ~~2020~~2021 were ~~$0.7~~net (losses) gains on equity securities of ($0.4) million and ~~$2.3 million, respectively, of PPP loan referral fee income generated by BoeFly.~~$23 thousand. Also included in noninterest income for the three months ended June 30, 2021 was a $0.2 million gain on sale/redemption of investment securities. Excluding these items, noninterest income ~~increased $1.2~~decreased $0.5 million when compared to the comparable three-month period ended June 30, ~~2020.~~2021. The ~~increase~~decrease was primarily attributable to ~~increases in net gains on loans held-for-sale of $0.6 million and increases in deposit, loan and other income of $0.6 million, which includes a $0.3 million increase in BoeFly core revenue.~~

Noninterest income totaled $7.9 million for the six months ended June 30, 2021, compared with $7.5 million for the comparable six-month period ended June 30, 2020. Included in noninterest income for the six months ended June 30, 2021 and June 30, 2020 were $0.7 million and $2.3 million, respectively, of PPP loan referral fee income generated by BoeFly. Also included in noninterest income for the six months ended June 30, 2021 was $0.7 million on a gain on sale of branches and a $0.2 million gain on sale/redemption of investment securities. Excluding these items, noninterest income increased $1.1 million when compared to the comparable six-month period ended June 30, 2020. The increase was primarily attributable to increases in net gains on loans held-for-sale of $0.9 million, increasesdecreases in deposit, loan and other income of $0.4 million and net gains on sale of loans held-for-sale of $0.3 million partially offset by an increase in income on bank owned life insurance of $0.2 million.

Noninterest income totaled $6.4 million for the six months ended June 30, 2022, compared with $7.9 million for the six months ended June 30, 2021. Included in noninterest income were net losses on equity securities of $1.0 million and $0.2 million for the six months ended June 30, 2022 and six months ended June 2021, respectively, $0.7 million gain on the sale of branches and $0.2 million gain on sale/redemption of investment securities in the six months ended 2021. Excluding the aforementioned items, noninterest income was $7.4 million and $7.2 million for the six months ended June 30, 2022 and 2021, respectively. The $0.2 million increase in noninterest income excluding the items discussed above for the six months ended June 30, 2022 versus the comparable six-month period ended June 30, 2021 was primarily due to increases in deposit, loan and other income of $0.2 million, and BOLI income of $0.3 million, partially offset by a decrease in net gains on ~~equity securities~~sale of ~~$0.4~~loans held-for-sale of $0.3 million.

Noninterest Expenses

Noninterest expenses totaled ~~$26.3~~$31.7 million for the three months ended June 30, ~~2021,~~2022, compared with ~~$33.1~~$26.3 million for the comparable three-month period ended June 30, ~~2020.~~2021. Included in noninterest expenses for the three months ended June 30, ~~2020 were $5.1 million~~2022 was an increase in ~~merger and restructuring expenses and $2.3 million in expenses~~acquisition price related to the BoeFly ~~acquisition.~~acquisition of $0.8 million. Excluding ~~these items,~~this item, noninterest expenses increased ~~$0.7~~$4.6 million when compared to the comparable three-month period ended June 30, ~~2020.~~2021. The increase was primarily attributable to increases in salaries and employee benefits of ~~$0.8~~$4.3 million attributable to new hires, increases in ~~professional~~information technology and ~~consulting~~communication expenses of ~~$0.4~~$0.2 million and ~~increases~~an increase in ~~other expenses~~FDIC insurance of ~~$0.2~~$0.1 million, partially offset by decreases in ~~FDIC insurance expense~~occupancy and equipment of $0.5 million, ~~decreases in marketing and advertising of $0.1 million and decreases in~~ amortization of core deposit intangibles of $0.1 million and other expenses of $0.4 million.

Noninterest expenses totaled $60.9 million for the six months ended June 30, 2022, compared to $52.7 million for the six months ended June 30, ~~2021, compared with $68.1 million for the comparable six-month period ended June 30, 2020.~~2021. Included in noninterest expenses for the six months ended June 30, ~~2020 were $14.6 million~~2022 was an increase in ~~merger and restructuring expenses and $2.3 million in expenses~~acquisition price related to the BoeFly ~~acquisition. Excluding these items,~~acquisition of $1.5 million .Excluding this item, noninterest expenses increased ~~$1.6~~$6.7 million when compared to the comparable six-month period ended June 30, ~~2020.~~2021. The increase was primarily attributable to increases in salaries and employee benefits of ~~$1.8~~$7.5 million attributable to new hires in both the revenue and back-office areas of the Bank, base-salary increases, and bonus accruals. Also, contributing to the increase were increases in information technology and communications of $0.5 million and ~~increases in professional~~marketing and ~~consulting expenses~~advertising of ~~$0.8~~$0.3 million, partially offset by decreases in occupancy of $1.9 million, FDIC insurance ~~expense~~ of ~~$0.4~~$0.2 million, ~~decreases in~~professional and consulting of $0.2 million and amortization of core deposit intangibles of ~~$0.3 million and decreases in marketing and advertising of $0.2~~$0.1 million.

Income Taxes

Income tax expense was ~~$10.7~~$11.9 million for the three months ended June 30, ~~2021,~~2022, compared to ~~$2.5~~$10.7 million for the comparable three-month period ended June 30, ~~2020.~~2021. The increase in income tax expense was the result of higher income before taxes. The effective tax rate for the three months ended June 30, ~~2021~~2022 and June 30, ~~2020~~2021 was ~~24.8%~~26.9% and ~~14.5%~~24.8%, respectively. The higher effective tax rate during the second quarter ~~2021~~2022 when compared to the second quarter of ~~2020~~2021 resulted from a lower proportion of income from non-taxable sources.

Income tax expense was $23.2 million for the six months ended June 30, 2022, compared to $21.5 million for the six months ended June 30, ~~2021, compared to $3.6 million~~2021. The effective tax rate for ~~comparable six-month period~~the three months ended June 30, ~~2020. The increase in income tax expense~~2022 and June 30, 2021 was ~~the result of higher income before taxes.~~26.7% and 24.8%, respectively. The effective tax rate for the six months ended of 2022 was higher compared to June 30, 2021 ~~was 24.8% versus 14.6% for the prior-year period. The higher effective tax rate during the first half of 2021 when compared~~due to ~~the first half of 2020 resulted from a lower proportion~~different proportions of income from non-taxable sources.

Table of Contents

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.

June 30, 2021 December 31, 2020 Amount
Increase/
Amount % Amount % (Decrease)
(dollars in thousands)
Commercial ⁽¹⁾ $ 1,402,697 21.8 % $ 1,521,967 24.4 % $ (119,270)
Commercial real estate 4,138,518 64.5 3,783,550 60.6 354,968
Commercial construction 587,121 9.1 617,747 9.8 (30,626)
Residential real estate 286,907 4.5 322,564 5.1 (35,657)
Consumer 6,355 0.1 1,853 0.1 4,502
Gross loans $ 6,421,598 100.0 % $ 6,247,681 100.0 % $ 173,917

	June 30, 2022					December 31, 2021					Amount Increase/
	Amount		%			Amount		%			(Decrease)
	(dollars in thousands)
Commercial ⁽¹⁾	$	1,354,625		18.6	%	$	1,299,428		19.0	%	$	55,197
Commercial real estate		5,107,382		70.1	%		4,741,590		69.3	%		365,792
Commercial construction		569,789		7.8	%		540,178		7.9	%		29,611
Residential real estate		249,379		3.4	%		255,269		3.7	%		(5,890	)
Consumer		1,248		0.1	%		1,886		0.1	%		(638	)
Gross loans	$	7,282,423		100.0	%	$	6,838,351		100.0	%	$	444,072

As of June 30, 2022, gross loans totaled $7.3 billion, an increase of $444.1 million, or 6.5%, as compared to December 31, 2021. Net loan growth was attributable to organic loan originations.

⁽¹⁾

^{Included in commercial loans as of June 30, 20212022 and December 31, 2020 were2021 are PPP loans of $326.8$18.0 million and $397.5$93.1 million, respectively.}

As of June 30, 2021, gross loans totaled $6.4 billion, an increase of $173.9 million, or 2.8%, as compared to December 31, 2020. Net loan growth was primarily attributable to increases in the commercial real estate segment of $355.0 million, offset by decreases in the commercial segment of $119.3 million, which primarily resulted from PPP loan forgiveness, decreases in commercial construction of $30.6 million and decreases in residential real estate of $35.7 million.

Allowance for Credit Losses and Related Provision

As of ~~January 1, 2021, the Company adopted the CECL accounting standard. As of~~ June 30, ~~2021,~~2022, the Company’s ~~ACL~~allowance for credit losses for loans was ~~$78.7~~$82.7 million, ~~a decrease~~an increase of ~~$0.5~~$3.9 million from ~~$79.2~~$78.8 million December 31, ~~2020.~~2021. The ~~decrease~~increase was primarily attributable to ~~a release of~~an increase in provision for credit losses for loans of ~~approximately $7.0~~$4.5 million partially offset by an increase of $0.5 million in ~~provision of $6.6 million resulting from the “Day 1” effect of the adoption of the CECL accounting.~~net charge-offs.

The provision for (reversal of) ~~provision for~~ credit losses, which includes provision for unfunded commitments, for the three and six months ended June 30, ~~2021~~2022 was $3.0 million and $4.5 million, respectively, compared to $(1.6) million and $(7.4) ~~million, respectively, compared to $15.0 million and $31.0~~ million, for the three and six months ended June 30, ~~2020,~~2021, respectively. The ~~decrease~~increase in provision for credit losses reflected strong organic loan growth and forecasted macroeconomic conditions, which remained fairly stable for the three and six months ended June 30, 2022. The prior year provision in the three and six months ended June 30, 2021, was primarily the result of an improved macro-economic ~~outlook~~forecast as of June 30, 2021 when compared to January 1, 2021, the day the Company adopted CECL. ~~The prior year provision~~

There were $0.3 million and $0.5 million in net charge-offs for the three months and six months ended June 30, ~~2020, was primarily due to the significant economic slowdown due to the COVID 19 pandemic.~~

~~There were~~2022, compared with $0.2 million and $0.1 million in net charge-offs for the three and six months ended June 30, 2021, ~~compared with $0.4 million and $0.6 million in net charge-offs for the three and six months ended June 30, 2020~~ respectively. The ACL as a percentage of loans receivable amounted to ~~1.23%~~1.14% as of June 30, ~~2021~~2022 compared to ~~1.27%~~1.15% as of December 31, ~~2020.~~2021. Excluding the impact of PPP loans in the calculation of the ACL as a percentage of loans receivable, the June 30, 2022 ratio ~~increases to 1.29%~~remains the same at 1.14% as of June 30, ~~2021,~~2022, compared to ~~1.36%~~1.17% as of December 31, ~~2020 allowance for loan losses.~~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 ~~ACL~~allowance for the respective periods of ~~2021~~2022 and ~~allowance for loan losses for 2020~~2021 reflects the credit quality within the loan portfolio, loan growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the ACL as of June 30, ~~2021~~2022 is adequate to cover ~~expected~~ 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.

Table of Contents

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

Three Months Ended
June 30,
2021 2020⁽¹⁾
(dollars in thousands)
Average loans receivable at end of period $ 6,248,516 $ 6,301,174
Analysis of the ACL:
Balance – beginning of period $ 80,568 $ 54,169
Charge-offs:
Commercial (50) (380)
Commercial real estate (155) -
Residential real estate (7) (69)
Total charge-offs (212) (449)
Recoveries:
Commercial 13 2
Commercial real estate - 2
Consumer 1 -
Total recoveries 14 4
Net recoveries (charge-offs) (198) (445)
(Reversal of) provision for credit losses (loans) (1,686) 15,000
Balance - end of period $ 78,684 $ 68,724
Ratio of annualized net charge-offs during the period to average loans receivable during the period 0.01 % 0.03 %
Loans receivable $ 6,407,904 $ 6,363,267
ACL as a percentage of loans receivable 1.23 % 1.08 %

	Three Months Ended
	June 30,
	2022			2021
	(dollars in thousands)
Average loans receivable	$	7,007,207		$	6,248,516
Analysis of the ACL:
Balance - beginning of quarter	$	80,070		$	80,568
Charge-offs:
Commercial		(292	)		(50	)
Commercial real estate		(1	)		(155	)
Residential real estate		(9	)		(7	)
Total charge-offs		(302	)		(212	)
Recoveries:
Commercial		-			13
Commercial real estate		-			-
Residential real estate		4			-
Consumer		28			1
Total recoveries		32			14
Net (charge-offs) recoveries		(270	)		(198	)
Provision for (reversal of) loan losses (loans)		2,939			(1,686	)
Balance - end of period	$	82,739		$	78,684

Ratio of annualized net charge-offs during the period to average loans receivable during the period		0.02	%		0.01	%
Loans receivable	$	7,274,573		$	6,407,904
ACL as a percentage of loans receivable		1.14	%		1.23	%

Six Months Ended
June 30,
2021 2020⁽¹⁾
(dollars in thousands)
Average loans receivable at end of period $ 6,245,665 $ 6,111,994
Analysis of the ACL:
Balance - beginning of quarter $ 79,226 $ 38,293
CECL Day 1 Adjustment 6,557 -
Balance – January 1, 2021 (as adjusted) 85,783 38,293
Charge-offs:
Commercial (50) (504)
Commercial real estate (155) -
Residential real estate (7) (69)
Consumer - (3)
Total charge-offs (212) (576)
Recoveries:
Commercial 73 2
Commercial real estate - 2
Residential real estate - 3
Consumer 2 -
Total recoveries 75 7
Net recoveries (charge-offs) (137) (569)
(Reversal of) provision for credit losses (loans) (6,962) 31,000
Balance - end of period $ 78,684 $ 68,724
Ratio of annualized net charge-offs during the period to average loans receivable during the period 0.01 % 0.02 %
Loans receivable $ 6,407,904 $ 6,363,267
ACL as a percentage of loans receivable 1.23 % 1.08 %

⁽¹⁾

~~The ACL for the prior periods was calculated based on the incurred loan loss model.~~

	Six Months Ended
	June 30,
	2022			2021
	(dollars in thousands)
Average loans receivable	$	6,939,527		$	6,245,665
Analysis of the ACL:
Balance - beginning of quarter	$	78,773		$	79,226
CECL Day 1 Adjustment		-			6,557
Balance – beginning of quarter (as adjusted)		78,773			85,783
Charge-offs:
Commercial		(341	)		(50	)
Commercial real estate		(226	)		(155	)
Residential real estate		(9	)		(7	)
Consumer		-			-
Total charge-offs		(576	)		(212	)
Recoveries:
Commercial		1			73
Commercial real estate		-			-
Residential real estate		63			-
Consumer		-			2
Total recoveries		64			75
Net (charge-offs) recoveries		(512	)		(137	)
Provision for (reversal of) credit losses (loans)		4,478			(6,962	)
Balance - end of period	$	82,739		$	78,684

Ratio of annualized net charge-offs during the period to average loans receivable during the period		0.01	%		0.01	%
Loans receivable	$	7,274,573		$	6,407,904
ACL as a percentage of loans receivable		1.14	%		1.23	%

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 ~~loan~~credit losses at all times.

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

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

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

June 30,
2021 December 31,
2020
(dollars in thousands)
Nonaccrual loans $ 56,213 $ 61,T696
OREO - -
Total nonperforming assets ⁽¹⁾ $ 56,213 $ 61,696
Performing TDRs $ 33,021 $ 23,655
Loans 90 days or greater past due and still accruing (non PCD) $ - $ -
Loans 90 days or greater past due and still accruing (PCD) $ 19,654 $ 12,821

	June 30, 2022		December 31, 2021
	(dollars in thousands)
Nonaccrual loans	$	60,756	$	61,700
OREO		316		-
Total nonperforming assets ⁽¹⁾	$	61,072	$	61,700

Performing TDRs	$	46,368	$	43,587
Loans 90 days or greater past due and still accruing (non PCD)	$	-	$	-
Loans 90 days or greater past due and still accruing (PCD)	$	10,164	$	13,531

⁽¹⁾

^{Nonperforming assets are defined as nonaccrual loans and OREO.}

Nonaccrual loans to total loans receivable 0.88 % 0.99 %
Nonperforming assets to total assets 0.73 0.82
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable 1.70 1.57

Nonaccrual loans to total loans receivable	0.84	%	0.90	%

Nonperforming assets to total assets	0.69	%	0.76	%
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable	1.62	%	1.74	%

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Investment Securities

As of June 30, ~~2021,~~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, asset-backed securities and equity securities. For the ~~three months~~quarter ended June 30, ~~2021,~~2022, average securities increased ~~by $1.2~~$166.0 million to approximately $610.5 million, or 7.8% of average total interest-earning assets, from approximately $444.5 million, or 6.3% of average ~~total~~ interest-earning assets, ~~from approximately $443.3 million, or 6.2% of average interest-earning assets, for the comparable period in 2020.~~ compared to June 30, 2021.

As of June 30, ~~2021,~~2022, net unrealized ~~gains~~losses on securities available-for-sale, which are carried as a component of accumulated other comprehensive ~~income~~loss and included in stockholders’ equity, net of tax, amounted to ~~$3.9~~$39.3 million as compared with net unrealized ~~gains~~losses of ~~$7.9~~$0.5 million as of December 31, ~~2020.~~2021. The ~~decrease~~increase in unrealized ~~gains~~losses is predominately attributable to changes in market conditions and interest rates. Unrealized losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. This also resulted in a $15.7 million increase in deferred tax assets, attributable to the decline in fair value on securities available-for-sale. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. The Company did not record an ~~ACL~~allowance for credit losses for available-for-sale as of June 30, ~~2021.~~2022.

Interest Rate Sensitivity Analysis

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

We currently utilize net interest income ~~(“NII”)~~ simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and the Bank’s management.

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

Based on our model, which was run as of June 30, 2022, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 2.30%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.65%. As of December 31, 2021, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by ~~2.94%~~3.35%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~6.04%~~5.64%. As

Based on our model, which was run as of ~~December 31, 2020,~~June 30, 2022, we estimated that over the next ~~one-year period~~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 ~~0.70%~~5.76%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~5.18%~~8.65%.

~~Based on our model, which was run as~~ As of ~~June 30,~~December 31, 2021, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by ~~8.60%~~9.77%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 10.90%. As of December 31, 2020, 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 3.89%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 8.56%10.41%.

An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of June 30, ~~2021,~~2022, would ~~decline~~decrease by ~~1.79%~~1.41% with an instantaneous rate shock of up 200 basis points, and ~~decrease~~decline by ~~1.13%~~6.86% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, ~~2020,~~2021, would ~~decline~~increase by ~~7.76%~~0.24% with an instantaneous rate shock of up 200 basis points, and ~~increase~~decline by ~~5.70%~~5.20% with an instantaneous rate shock of down 100 basis points.

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The following table illustrates the most recent results for EVE and one-year NII sensitivity as of June 30, ~~2021.~~2022.

Interest Rates Estimated Estimated Change in
EVE Interest Rates Estimated Estimated Change in NII
(basis points) EVE Amount % (basis points) NII Amount %
+300 $928,870 $(40,743) (4.20) +300 $259,628 $10,574 4.25
+200 953,271 (17,342) (1.79) +200 256,385 7,331 2.94
+100 964,554 (6,059) (0.62) +100 252,839 3,785 1.52
0 970,613 - 0.0 0 249,054 - 0.0
-100 959,676 (10,937) (1.13) -100 234,017 (15,037) (6.04)

Interest Rates	Estimated		Estimated Change in EVE					Interest Rates		Estimated		Estimated Change in NII
(basis points)	EVE		Amount				%	(basis points)		NII		Amount				%
300	$	1,357,671		(56,033	)	(3.96	)		300	$	315,272	$	8,942		2.92
200		1,393,815		(19,889	)	(1.41	)		200		313,381		7,051		2.30
100		1,419,841		6,137		0.43			100		311,264		4,934		1.61
0		1,413,704		-		-			0		306,330		-		-
-100		1,316,776		(96,928	)	(6.86	)		-100		289,023		(17,307	)	(5.65	)

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Estimates of Fair Value

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

Impact of Inflation and Changing Prices

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

Liquidity

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

As of June 30, ~~2021,~~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 June 30, ~~2021,~~2022, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were ~~$724.1~~$796.9 million, which represented ~~9.4% of total assets and 11.1% of total deposits and borrowings, compared to $697.4 million as of December 31, 2020, which represented 9.2%~~9.1% of total assets and 10.9% of total deposits and borrowings, compared to $742.1 million as of December 31, 2021, which represented 9.1% of total assets and 10.9% of total deposits and borrowings.

The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of June 30, ~~2021,~~2022, had the ability to borrow ~~$2.0~~$2.3 billion. In addition, as of June 30, ~~2021,~~2022, the Bank had in place borrowing capacity of ~~$25~~$325 million through correspondent ~~banks.~~banks and other unsecured borrowing lines. The Bank also has a credit facility established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral of ~~$3.2~~$1.8 million. As of June 30, ~~2021,~~2022, the Bank had aggregate available and unused credit of approximately ~~$1.2 billion,~~$880 million, which represents the aforementioned facilities totaling ~~$2.0~~$2.3 billion net of ~~$820.4 million~~$1.4 billion in outstanding borrowings and letters of credit. As of June 30, ~~2021,~~2022, outstanding commitments for the Bank to extend credit were approximately ~~$1.1~~$1.2 billion.

Cash and cash equivalents totaled ~~$349.4~~$299.3 million as of June 30, ~~2021,~~2022, increasing by ~~$45.7~~$33.8 million from ~~$303.8~~$265.5 million as of December 31, ~~2020.~~2021. Operating activities provided ~~$119.5~~$71.0 million in net cash. Investing activities used ~~$174.3~~$699.7 million in net cash, primarily reflecting an increase in loans and ~~securities purchases.~~investment securities. Financing activities provided ~~$100.5~~$662.5 million in net cash, primarily reflecting ~~a net~~an increase in deposits of ~~$234.5~~$285.2 million and ~~a decrease~~an increase in net borrowings of ~~$72.5~~$406.8 million.

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Deposits

Total deposits increased by $284.6 million, or 4.5%, to $6.6 billion as of June 30, 2022 from December 31, 2021. The increase was primarily due to increases in demand, noninterest bearing deposits, interest-bearing and NOW and time deposits, partially offset by a decrease in savings deposits. The following table sets forth the composition of our deposit base by the periods indicated.

													June 30, 2022					December 31, 2021
																							Amount
	June 30, 2021					December 31, 2020					Amount Increase/ (Decrease)												Increase/
	Amount		%			Amount		%			2021 vs. 2020		Amount		%			Amount		%			(Decrease)
	(dollars in thousands)												(dollars in thousands)
Demand, noninterest-bearing	$	1,485,952		24.0	%	$	1,339,108		22.5	%	$	146,844	$	1,712,875		25.9	%	$	1,617,049		25.5	%	$	95,826
Demand, interest-bearing		3,029,469		48.9			2,861,820		48.0			167,649
Demand, interest-bearing and NOW														3,200,709		48.4	%		3,127,350		49.4	%		73,359
Savings		375,285		6.1			294,163		4.9			81,122		418,606		6.3	%		438,445		6.9	%		(19,839	)
Time		1,301,807		21.0			1,464,133		24.6			(162,326)		1,285,409		19.4	%		1,150,109		18.2	%		135,300
Total deposits	$	6,192,513		100.0	%	$	5,959,224		100.0	%	$	233,289	$	6,617,599		100.0	%	$	6,332,953		100.0	%	$	284,646

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~~three month LIBOR plus 2.85% and re-prices quarterly. The rate as of June 30, ~~2021~~2022 was ~~3.04%~~4.14%.

During June 2020, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding, June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears 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 accredited investors. The net proceeds from the sale of the 2018 Notes were used 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 in the first quarter of 2018. The 2018 Notes are non-callable for five years, have a stated maturity of February 1, 2028 and bear interest at a fixed rate of 5.20% per year, from and including January 17, 2018 to, but excluding February 1, 2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points.

During June 2015, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2015 Notes”). As of December 31, 2020, the 2015 Notes had a stated maturity of July 1, 2025, and bore interest until the maturity date or early redemption date at a variable rate equal to the then current three-month LIBOR rate plus 393 basis points. As of December 31, 2020, the variable interest rate was 4.16% and all costs related to 2015 issuance have been amortized. The 2015 Notes were redeemed in full on January 1, 2021.

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~~Stockholders’~~Stockholders’ Equity

The Company’s stockholders’ equity was ~~$965.0 million~~$1.1 billion as of June 30, ~~2021,~~2022, an increase of ~~$49.7~~$18.9 million from December 31, ~~2020.~~2021. The increase in stockholders’ equity was primarily attributable to retained earnings, ~~during~~in addition to an increase in additional paid-in capital, partially offset by a decrease in accumulated other comprehensive income, reflecting the ~~period.~~after-tax decline in the fair value of investment securities net of unrealized hedge gains recorded in other assets, and an increase in treasury stock. As of June 30, ~~2021,~~2022, the Company’s tangible common equity ratio and tangible book value per share were ~~9.97%~~9.46% and ~~$18.76,~~$20.79, respectively. As of December 31, ~~2020,~~2021, the tangible common equity ratio and tangible book value per share were ~~9.50%~~10.06% and ~~$17.49,~~$20.12, respectively. Total goodwill and other intangible assets were approximately ~~$218.3~~$216.5 million and ~~$219.3~~$217.4 million, as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

June 30, December 31,
2021 2020
(dollars in thousands, except for
share and per share data)
Common equity $ 964,960 $ 915,310
Less: intangible assets (218,335) (219,349)
Tangible common stockholders’ equity $ 746,625 $ 695,961

Total assets $ 7,710,082 $ 7,547,339
Less: intangible assets (218,335) (219,349)
Tangible assets $ 7,491,747 $ 7,327,990

Common stock outstanding as of period end 39,794,815 39,785,398

Tangible common equity ratio ⁽¹⁾ 9.97 % 9.50 %

Book value per common share $ 24.25 $ 23.01
Less: intangible assets 5.49 5.52
Tangible book value per common share $ 18.76 $ 17.49

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

	June 30, 2022			December 31, 2021
	(dollars in thousands, except for share and per share data)
Common equity	$	1,032,220		$	1,013,285
Less: intangible assets		(216,502	)		(217,369	)
Tangible common stockholders’ equity	$	815,718		$	795,916

Total assets	$	8,841,506		$	8,129,480
Less: intangible assets		(216,502	)		(217,369	)
Tangible assets	$	8,625,004		$	7,912,111

Common stock outstanding at period end		39,243,123			39,568,090

Tangible common equity ratio ⁽¹⁾		9.46	%		10.06	%

Book value per common share	$	26.30		$	25.61
Less: intangible assets		5.51			5.49
Tangible book value per common share	$	20.79		$	20.12

(1)

~~(1)~~

Tangible common equity ratio is a non-GAAP measure.

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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 June 30, ~~2021~~2022 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository ~~institution.~~institution (for the Bank).

	ConnectOne Bancorp, Inc.					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions			ConnectOne Bancorp, Inc.					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
As of June 30, 2021	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(dollars in thousands)
The Company														Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2022														(dollars in thousands)
Tier 1 leverage capital	$	748,145		10.19	%	$	293,537		4.00	%		N/A	N/A	$	947,294		11.63	%	$	325,841		4.00	%		$ N/A		N/A
CET I risk-based ratio		742,990		11.09			301,514		4.50			N/A	N/A		831,212		10.63			351,981		4.50			N/A		N/A
Tier 1 risk-based capital		748,145		11.17			402,019		6.00			N/A	N/A		947,294		12.11			469,308		6.00			N/A		N/A
Total risk-based capital		976,829		14.58			536,026		8.00			N/A	N/A		1,180,033		15.09			625,744		8.00			N/A		N/A

ConnectOne Bank For Capital Adequacy
Purposes To Be Well-Capitalized Under
Prompt Corrective Action
Provisions
As of June 30, 2021 Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
Tier 1 leverage capital $ 832,047 11.34 % $ 293,526 4.00 % $ 366,907 5.00 %
CET I risk-based ratio 832,047 12.42 301,499 4.50 435,499 6.50
Tier 1 risk-based capital 832,047 12.42 401,999 6.00 535,999 8.00
Total risk-based capital 942,981 14.07 535,999 8.00 669,999 10.00

N/A - not applicable

	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 June 30, 2022						(dollars in thousands)
Tier 1 leverage capital	$	944,700		11.60	%	$	325,674		4.00	%		407,092		5.00	%
CET I risk-based ratio		944,700		12.08			351,973		4.50			508,405		6.50
Tier 1 risk-based capital		944,700		12.08			469,297		6.00			625,730		8.00
Total risk-based capital		1,059,689		13.55			625,730		8.00			782,162		10.00

As of June 30, ~~2021,~~2022, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the Tier 1I Risk Based Ratio which was ~~2.67%~~3.61% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was ~~3.57%~~3.05% 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's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity ~~Analysis"~~Analysis” herein for a discussion of our management of our interest rate risk.

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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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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 for the year ended December 31, ~~2020.~~

2021.

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

~~See “Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations – Shareholders’ Equity”~~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 June 30, 2022, the Company repurchased a total of 302,315 shares. As of June 30, 2022, shares remaining for repurchase under the program were 2,129,955.

The following table details share repurchases for the three months ended June 30, 2022:

							Cumulative Total
							Number of		Maximum Number
			Total				Shares Purchased		of Shares that May
			Number				as Part of Publicly		Yet Be Purchased
	Shares		of Shares		Average Price		Announced Plans		Under the Plans or
	Authorized		Purchased		Paid per Share		or Programs		Programs
April 1, 2022 - April 30, 2022		-		-	$	-		-		2,129,955
May 1, 2022 - May 31, 2022		-		242,315		27.74		242,315		1,887,640
June 1, 2022 - June 30, 2022		-		60,000		26.84		302,315		1,827,640

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5 Other Information

Not applicable

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Item 6. Exhibits

Exhibit No.		Description

10.1
		Form of Supplemental Executive Retirement Plan by and between the Bank and each of Frank Sorrentino III, William S. Burns, and Elizabeth Magennis.(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. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.~~Document
101.SCH		Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
(1)		Incorporated by reference from Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed April 8, 2022.

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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: August ~~6, 2021~~5, 2022		Date: August ~~6, 2021~~ 5, 2022

	Six Months Ended June 30, 2021
(dollars in thousands, except for per share data)	Preferred Stock		Common Stock		Additional Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive (Loss) Income			Total Stockholders’ Equity
Balance as of December 31, 2020	$	0-	$	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		-		-		-			65,218			-			-			65,218
Other comprehensive loss, net of tax		-		-		-			-			-			(2,987	)		(2,987	)
Cash dividends declared on common stock ($0.20 per share)		-		-		-			(7,964	)		-			-			(7,964	)
Exercise of stock options (5,449 shares)		-		-		45			-			-			-			45
Restricted stock grants, net of forfeitures (47,982 shares)		-		-		-			-			-			-			0-
Stock grants (446 shares)		-		-		-			-			-			-			0-
Net shares issued in satisfaction of restricted stock units earned (14,711 shares)		-		-		-			-			-			-			0-
Net shares issued in satisfaction of performance units earned (34,458 shares)		-		-		-			-			-			-			0-
Share redemption for tax withholdings on performance units and restricted stock units earned		-		-		(1,283	)		-			-			-			(1,283	)
Repurchase of treasury stock (93,629 shares)		-		-		-			-			(2,411	)		-			(2,411	)
Stock-based compensation expense		-		-		1,957			-			-			-			1,957

Balance as of June 30, 2021	$	0-	$	586,946	$	24,606		$	386,280		$	(32,682	)	$	(190	)	$	964,960

	Six Months Ended June 30, 2020
(dollars in thousands, except for per share data)	Preferred Stock		Common Stock		Additional Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive (Loss) Income			Total Stockholders’ Equity
Balance as of December 31, 2019	$	0-	$	468,571	$	21,344		$	271,782		$	(29,360	)	$	(1,147	)	$	731,190
Net income		-		-		-			20,862			-			-			20,862
Other comprehensive income, net of tax		-		-		-			-			-			1,456			1,456
Cash dividends declared on common stock ($0.090 per share)		-		-		-			(3,956	)		-			-			(3,956	)
Exercise of stock options (25,413 shares)		-		-		163			-			-			-			163
Restricted stock grants (68,853 shares)		-		-		-			-			-			-			0-
Net shares issued in satisfaction of restricted stock units earned (16,541 shares)		-		-		-			-			-			-			0-
Net shares issued in satisfaction of performance units earned (22,402 shares)		-		-		-			-			-			-			0-
Share redemption for tax withholdings on performance units and restricted stock units earned		-		-		(639	)		-			-			-			(639	)
Repurchase of treasury stock (54,693 shares)		-		-		-			-			(911	)		-			(911	)
Stock issued (4,602,450 shares) in acquisition of Bancorp of New Jersey		-		118,375		-			-			-			-			118,375
Stock-based compensation expense		-		-		1,201			-			-			-			1,201

Balance as of June 30, 2020	$	0-	$	586,946	$	22,069		$	288,688		$	(30,271	)	$	309		$	867,741


	Change in Consolidated				Change to Retained Earnings
	Statement of Condition		Tax Effect		from Adoption of CECL
Allowance for credit losses (“ACL”) (loans)	$	1,350	$	406	$	944
Adjustment related to purchased credit-impaired loan marks⁽¹⁾		5,207		0-		0-
Total ACL - loans		6,557		406		944
ACL (unfunded credit commitments)		2,833		852		1,981

Total impact of CECL adoption	$	9,390	$	1,258	$	2,925

											Allowance
											for
			Gross		Gross						Investment
	Amortized		Unrealized		Unrealized			Fair			Credit
	Cost		Gains		Losses			Value			Losses
June 30, 2021	(dollars in thousands)
Securities available-for-sale
Federal agency obligations	$	34,649	$	1,197	$	(73	)	$	35,773		0-
Residential mortgage pass-through securities		261,761		2,655		(1,258	)		263,158		0-
Commercial mortgage pass-through securities		8,886		202		(293	)		8,795		0-
Obligations of U.S. states and political subdivisions		133,722		2,695		(29	)		136,388		0-
Corporate bonds and notes		11,459		162		0-			11,621		0-
Asset-backed securities		2,874		10		(4	)		2,880		0-
Certificates of deposit		150		1		0-			151		0-
Other securities		167		0-		0-			167		0-
Total securities available-for-sale	$	453,668	$	6,922	$	(1,657	)	$	458,933	$	0-

December 31, 2020
Securities available-for-sale
Federal agency obligations	$	37,015	$	1,508	$	(65	)	$	38,458		N/A
Residential mortgage pass-through securities		266,114		4,811		(41	)		270,884		N/A
Commercial mortgage pass-through securities		6,906		203		(187	)		6,922		N/A
Obligations of U.S. states and political subdivisions		138,539		4,269		0-			142,808		N/A
Corporate bonds and notes		24,925		222		(52	)		25,095		N/A
Asset-backed securities		3,521		0-		(41	)		3,480		N/A
Certificates of deposit		149		2		0-			151		N/A
Other securities		157		0-		0-			157		N/A
Total securities available-for-sale	$	477,326	$	11,015	$	(386	)	$	487,955		N/A

	Three Months Ended June 30, 2021
	Amount of (loss)			Amount of loss		Amount of gain
	gain recognized			(gain) reclassified		recognized in other
	in OCI (Effective			from OCI to		Noninterest income
	Portion)			interest income		(Ineffective Portion)
	(dollars in thousands)
Interest rate contracts	$	(42	)	$	584	$	0-

	June 30, 2021					December 31, 2020
	Notional					Notional
	Amount		Fair Value			Amount		Fair Value
	(dollars in thousands)
Interest rate swaps related to FHLB advances included in liabilities	$	125,000	$	(922	)	$	175,000	$	(2,119	)

	Term loans amortized cost basis by origination year												Resolving		Total Gross
	2021		2020		2019		2018		2017		Prior		Loans		Loans
Commercial
Pass	$	324,543	$	185,027	$	64,057	$	69,430	$	99,833	$	123,799	$	466,262	$	1,332,951
Special mention		0-		0-		225		258		5,655		4,235		15,653		26,026
Substandard		182		0-		1,791		13,072		4,111		21,255		3,250		43,661
Doubtful		0-		0-		0-		59		0-		0-		0-		59
Total Commercial	$	324,725	$	185,027	$	66,073	$	82,819	$	109,599	$	149,289	$	485,165	$	1,402,697

Commercial Real Estate
Pass	$	741,267	$	601,375	$	460,081	$	529,053	$	541,823	$	1,012,888	$	141,776	$	4,028,263
Special mention		0-		0-		3,375		19,360		4,364		29,160		15,454		71,713
Substandard		1,969		0-		659		1,473		2,722		31,719		0-		38,542
Doubtful		0-		0-		0-		0-		0-		0-		0-		0-
Total Commercial Real Estate	$	743,236	$	601,375	$	464,115	$	549,886	$	548,909	$	1,073,767	$	157,230	$	4,138,518

Commercial Construction
Pass	$	1,405	$	7,506	$	37,715	$	3,678	$	3,981	$	490	$	510,227	$	565,002
Special mention		0-		0-		0-		0-		0-		0-		0-		0-
Substandard		0-		0-		0-		0-		0-		0-		22,119		22,119
Doubtful		0-		0-		0-		0-		0-		0-		0-		0-
Total Commercial Construction	$	1,405	$	7,506	$	37,715	$	3,678	$	3,981	$	490	$	532,346	$	587,121

Residential Real Estate
Pass	$	10,420	$	34,493	$	27,090	$	32,888	$	37,296	$	83,096	$	48,515	$	273,798
Special mention		0-		0-		0-		0-		0-		0-		0-		0-
Substandard		0-		0-		0-		203		0-		9,101		3,805		13,109
Doubtful		0-		0-		0-		0-		0-		0-		0-		0-
Total Residential Real Estate	$	10,420	$	34,493	$	27,090	$	33,091	$	37,296	$	92,197	$	52,320	$	286,907

Consumer
Pass	$	0-	$	107	$	54	$	32	$	41	$	5,989	$	132	$	6,355
Special mention		0-		0-		0-		0-		0-		0-		0-		0-
Substandard		0-		0-		0-		0-		0-		0-		0-		0-
Doubtful		0-		0-		0-		0-		0-		0-		0-		0-
Total Consumer	$	0-	$	107	$	54	$	32	$	41	$	5,989	$	132	$	6,355

Total
Pass	$	1,077,635	$	828,508	$	588,997	$	635,081	$	682,974	$	1,226,262	$	1,166,912	$	6,206,369
Special mention		0-		0-		3,600		19,618		10,019		33,395		31,107		97,739
Substandard		2,151		0-		2,450		14,748		6,833		62,075		29,174		117,431
Doubtful		0-		0-		0-		59		0-		0-		0-		59
Grand Total	$	1,079,786	$	828,508	$	595,047	$	669,506	$	699,826	$	1,321,732	$	1,227,193	$	6,421,598

	June 30, 2021

	Real
	Estate		Other		Total
	(dollars in thousands)
Commercial	$	6,598	$	26,166	$	32,764
Commercial real estate		35,802		0-		35,802
Commercial construction		16,389		0-		16,389
Residential real estate		10,647		0-		10,647
Consumer		0-		0-		0-
Total	$	69,436	$	26,166	$	95,602

	December 31, 2020
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
No related allowance recorded	(dollars in thousands)
Commercial	$	11,325	$	11,835
Commercial real estate		13,105		13,449
Commercial construction		24,284		24,907
Residential real estate		5,378		5,723
Consumer		0-		0-
Total (no related allowance)	$	54,092	$	55,914

With an allowance recorded

Commercial	$	23,736	$	69,122	$	12,985
Commercial real estate		2,722		2,722		1,329
Total (with allowance)	$	26,458	$	71,844	$	14,314

Total
Commercial	$	35,061	$	80,957	$	12,985
Commercial real estate		15,827		16,171		1,329
Commercial construction		24,284		24,907		0-
Residential real estate		5,378		5,723		0-
Consumer		0-		0-		0-
Total	$	80,550	$	127,758	$	14,314

	December 31, 2020
	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		Total Loans Receivable
Commercial	$	1,445	$	558	$	3,182	$	33,019	$	38,204	$	1,483,763	$	1,521,967
Commercial real estate		13,258		4,140		5,555		10,111		33,064		3,750,486		3,783,550
Commercial construction		2,472		0-		0-		14,015		16,487		601,260		617,747
Residential real estate		1,367		241		4,084		4,551		10,243		312,321		322,564
Consumer		2		0-		0-		0-		2		1,851		1,853
Total	$	18,544	$	4,939	$	12,821	$	61,696	$	98,000	$	6,149,681	$	6,247,681

	Three Months Ended
	June 30, 2021

Balance as of beginning of period	$	2,343
Provision for credit losses - unfunded commitments		37
Balance as of end of period	$	2,380

	Three Months Ended June 30, 2021		Six Months Ended June 30, 2021

(Reversal of) provision for credit losses - loans	$	(1,686)	$	(6,962)
(Reversal of) provision for credit losses - unfunded commitments		37		(453)
(Reversal of) provision for credit losses	$	(1,649)	$	(7,415)

	Municipal
	Securities
	(dollars in thousands)
Balance as of December 31, 2020	$	8,844
Principal paydowns		(139	)
Balance as of June 30, 2021	$	8,705

Details about Accumulated Other Comprehensive Loss Components	Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)						Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)						Affected Line item in the Statement Where Net Income is Presented
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2021			2020			2021			2020
	(dollars in thousands)
Sale of investment securities	$	195		$	0-		$	195		$	29		Net gains on sale of securities available-for-saleavailable Income tax expense
available for sale		(48	)		0-			(48	)		(6	)
		147			0-			147			23

Net interest income on swaps	$	(584	)	$	(318	)	$	(1,215	)	$	(311	)	Borrowings
		165			71			342			69		Income tax expense
		(419	)		(247	)		(873	)		(242	)

Amortization of pension plan net		(75	)		(76	)		(150	)		(151	)	Other components of net periodic pension expense
actuarial losses		22			21			42			42		Income tax benefit
		(53	)		(55	)		(108	)		(109	)

Total reclassification	$	(325	)	$	(302	)	$	(834	)	$	(328	)

	June 30, 2021					December 31, 2020					Amount Increase/
	Amount		%			Amount		%			(Decrease)
	(dollars in thousands)
Commercial ⁽¹⁾	$	1,402,697		21.8	%	$	1,521,967		24.4	%	$	(119,270)
Commercial real estate		4,138,518		64.5			3,783,550		60.6			354,968
Commercial construction		587,121		9.1			617,747		9.8			(30,626)
Residential real estate		286,907		4.5			322,564		5.1			(35,657)
Consumer		6,355		0.1			1,853		0.1			4,502
Gross loans	$	6,421,598		100.0	%	$	6,247,681		100.0	%	$	173,917

	Three Months Ended June 30,
	2021			2020⁽¹⁾
	(dollars in thousands)
Average loans receivable at end of period	$	6,248,516		$	6,301,174
Analysis of the ACL:
Balance – beginning of period	$	80,568		$	54,169
Charge-offs:
Commercial		(50)			(380)
Commercial real estate		(155)			-
Residential real estate		(7)			(69)
Total charge-offs		(212)			(449)
Recoveries:
Commercial		13			2
Commercial real estate		-			2
Consumer		1			-
Total recoveries		14			4
Net recoveries (charge-offs)		(198)			(445)
(Reversal of) provision for credit losses (loans)		(1,686)			15,000
Balance - end of period	$	78,684		$	68,724
Ratio of annualized net charge-offs during the period to average loans receivable during the period		0.01	%		0.03	%
Loans receivable	$	6,407,904		$	6,363,267
ACL as a percentage of loans receivable		1.23	%		1.08	%


	June 30, 2021		December 31, 2020
	(dollars in thousands)
Nonaccrual loans	$	56,213	$	61,T696
OREO		-		-
Total nonperforming assets ⁽¹⁾	$	56,213	$	61,696
Performing TDRs	$	33,021	$	23,655
Loans 90 days or greater past due and still accruing (non PCD)	$	-	$	-
Loans 90 days or greater past due and still accruing (PCD)	$	19,654	$	12,821

Nonaccrual loans to total loans receivable	0.88	%	0.99	%
Nonperforming assets to total assets	0.73		0.82
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable	1.70		1.57


Interest Rates	Estimated	Estimated Change in EVE		Interest Rates	Estimated	Estimated Change in NII
(basis points)	EVE	Amount	%	(basis points)	NII	Amount	%
+300	$928,870	$(40,743)	(4.20)	+300	$259,628	$10,574	4.25
+200	953,271	(17,342)	(1.79)	+200	256,385	7,331	2.94
+100	964,554	(6,059)	(0.62)	+100	252,839	3,785	1.52
0	970,613	-	0.0	0	249,054	-	0.0
-100	959,676	(10,937)	(1.13)	-100	234,017	(15,037)	(6.04)

Number of Loans

Principal Balance

(dollars in thousands)

Commercial

Commercial real estate