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 March 31, 2022


~~For the Quarterly Period Ended September 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

~~New Jersey~~(State or Other Jurisdiction of

Incorporation or Organization)

~~52-1273725~~(IRS Employer

Identification No.)

~~(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:	~~39,602,199~~39,524,417 shares
(Title of Class)	(Outstanding as of ~~November 5, 2021)~~ May 6, 2022)

Table of Contents

Table of Contents

		Page

PART I – FINANCIAL INFORMATION		3
~~Item 1.Financial Statements~~	3
Item 1.	Financial Statements	3
	Consolidated Statements of Condition as of ~~September 30, 2021~~March 31, 2022 (unaudited) and December 31, ~~2020~~2021	3
	Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~(unaudited)~~(unaudited)~~	4
	Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and~~ (unaudited)~~2020(unaudited)~~	5
	Consolidated Statements of Changes in Stockholders’ Equity for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 (unaudited)~~and 2020 (unaudited)~~	6
	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (unaudited)	87
	Notes to Consolidated Financial Statements (unaudited)	109

Table of Contents

Item 1. Financial Statements

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

September 30,

December 31,
(in thousands, except for share data)

2021

2020

(unaudited)

ASSETS

Cash and due from banks

$
49,626

$
63,637

Interest-bearing deposits with banks

363,569

240,119

Cash and cash equivalents

413,195

303,756

Investment securities

462,884

487,955

Equity securities

13,700

13,387

Loans held-for-sale

5,596

4,710

Loans receivable

6,576,439

6,236,307

Less: Allowance for credit losses – loans

77,986

79,226

Net loans receivable

6,498,453

6,157,081

Investment in restricted stock, at cost

18,106

25,099

Bank premises and equipment, net

29,635

30,108

Accrued interest receivable

33,610

35,317

Bank owned life insurance

194,487

165,960

Right of use operating lease assets

11,002

16,159

Goodwill

208,372

208,372

Core deposit intangibles

9,480

10,977

Other assets

50,994

88,458

Total assets

$
7,949,514

$
7,547,339

LIABILITIES

Deposits:

Noninterest-bearing

$
1,500,754

$
1,339,108

Interest-bearing

4,897,584

4,620,116

Total deposits

6,398,338

5,959,224

Borrowings

253,225

425,954

Subordinated debentures, net

152,875

202,648

Operating lease liabilities
12,437
18,026
Other liabilities

34,206

26,177

Total liabilities

6,851,081

6,632,029

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY

Preferred Stock, no par value;

$1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of September 30, 2021 and -0- shares as of December 31, 2020; outstanding 115,000 shares as of September 30, 2021 and -0- shares as of December 31, 2020

110,927

0-

Common stock, no par value:

Authorized 100,000,000 shares; issued 42,550,530 shares as of September 30, 2021 and 42,444,031 shares as of December 31, 2020; outstanding 39,602,199 shares as of September 30, 2021 and 39,785,398 as of December 31, 2020

586,946

586,946

Additional paid-in capital

25,851

23,887

Retained earnings

413,996

331,951

Treasury stock, at cost 2,948,331 common shares as of September 30, 2021 and 2,658,633 as of December 31, 2020

(38,314
)

(30,271
)
Accumulated other comprehensive (loss) income

(973
)

2,797
Total stockholders’ equity

1,098,433

915,310

Total liabilities and stockholders’ equity

$
7,949,514

$
7,547,339

(unaudited)

(in thousands, except for share data)	March 31, 2022			December 31, 2021

ASSETS
Cash and due from banks	$	61,849		$	54,352
Interest-bearing deposits with banks		249,695			211,184
Cash and cash equivalents		311,544			265,536

Investment securities		512,030			534,507
Equity securities		13,198			13,794

Loans held-for-sale		2,742			250

Loans receivable		6,979,595			6,828,622
Less: Allowance for credit losses - loans		80,070			78,773
Net loans receivable		6,899,525			6,749,849

Investment in restricted stock, at cost		25,254			27,826
Bank premises and equipment, net		28,779			29,032
Accrued interest receivable		34,081			34,152
Bank owned life insurance		196,937			195,731
Right of use operating lease assets		10,400			11,017
Other real estate owned		316			-
Goodwill		208,372			208,372
Core deposit intangibles		8,564			8,997
Other assets		82,559			50,417
Total assets	$	8,334,301		$	8,129,480
LIABILITIES
Deposits:
Noninterest-bearing	$	1,631,292		$	1,617,049
Interest-bearing		4,929,113			4,715,904
Total deposits		6,560,405			6,332,953
Borrowings		412,170			468,193
Subordinated debentures, net		153,027			152,951
Operating lease liabilities		11,773			12,417
Other liabilities		58,407			38,754
Total liabilities		7,195,782			7,005,268

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Preferred Stock, no par value; $1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of March 31, 2022 and as of December 31, 2021; outstanding 115,000 shares as of March 31, 2022 and as of December 31, 2021		110,927			110,927
Common stock, no par value: Authorized 100,000,000 shares; issued 42,652,378 shares as of March 31, 2022 and 42,557,264 shares as of December 31, 2021; outstanding 39,518,411 shares as of March 31, 2022 and 39,568,090 as of December 31, 2021		586,946			586,946
Additional paid-in capital		28,484			27,246
Retained earnings		464,889			440,169
Treasury stock, at cost 3,133,967 common shares as of March 31, 2022 and 2,989,174 as of December 31, 2021		(44,458	)		(39,672	)
Accumulated other comprehensive loss		(8,269	)		(1,404	)
Total stockholders’ equity		1,138,519			1,124,212
Total liabilities and stockholders’ equity	$	8,334,301		$	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
September 30,
Nine Months Ended
September 30,
(in thousands, except for per share data)
2021
2020
2021
2020
Interest income
Interest and fees on loans
$
75,092

$
74,755
$
216,655

$
223,488
Interest and dividends on investment securities:

Taxable

1,065

1,305

3,148

5,083
Tax-exempt

511

688

1,885

2,148
Dividends

245

426

764

1,268
Interest on federal funds sold and other short-term investments

113

47

246

625
Total interest income

77,026

77,221

222,698

232,612
Interest expense

Deposits

5,478

11,947

19,487

42,756
Borrowings

3,303

4,725

10,794

13,236
Total interest expense

8,781

16,672

30,281

55,992
Net interest income

68,245

60,549

192,417

176,620
Provision for (reversal of) credit losses

1,100

5,000

(6,315
)

36,000
Net interest income after provision for credit losses

67,145

55,549

198,732

140,620
Noninterest income

Deposit, loan and other income

1,702

1,278

5,092

5,777
Income on bank owned life insurance

1,278

1,598

3,527

3,693
Net gains on sale of loans held-for-sale

1,114

614

2,668

1,244
Gain on sale of branches

0-

0-

674

0-
Net (losses) gains on equity securities

(78
)
(7
)

(242
)
215
Net gains on sales/redemption of investment securities

0-

0-

195

29
Total noninterest income

4,016

3,483

11,914

10,958
Noninterest expenses

Salaries and employee benefits

16,807

15,144

47,790

44,266
Occupancy and equipment

2,656

3,566

8,876

10,193
FDIC insurance

525

1,105

2,040

3,054
Professional and consulting

2,217

1,926

6,290

5,173
Marketing and advertising

345

214

864

944
Data processing

1,541

1,470

4,680

4,529
Merger and restructuring expenses

0-

0-

0-

14,640
Amortization of core deposit intangibles

483

627

1,498

1,931
Increase in value of acquisition price

0-

0-

0-

2,333
Other components of net periodic pension expense

(67
)
(30
)

(201
)
(89
)
Other expenses

3,676

2,456

9,090

7,625
Total noninterest expenses

28,183

26,478

80,927

94,599
Income before income tax expense

42,978

32,554

129,719

56,979
Income tax expense

10,881

7,768

32,404

11,331
Net income
$
32,097

$
24,786
$
97,315

$
45,648
Earnings per common share:

Basic
$
0.81

$
0.62
$
2.45

$
1.15
Diluted

0.80

0.62

2.43

1.15

(unaudited)

	Three Months Ended March 31,
	2022			2021
(dollars in thousands, except for per share data)
Interest income
Interest and fees on loans	$	76,025		$	70,462
Interest and dividends on investment securities:
Taxable		1,873			1,088
Tax-exempt		709			766
Dividends		214			256
Interest on federal funds sold and other short-term investments		120			49
Total interest income		78,941			72,621
Interest expense
Deposits		5,010			7,585
Borrowings		3,573			3,873
Total interest expense		8,583			11,458
Net interest income		70,358			61,163
Provision for (reversal of) credit losses		1,450			(5,766	)
Net interest income after provision for (reversal of) credit losses		68,908			66,929
Noninterest income
Deposit, loan and other income		1,743			1,168
Income on bank owned life insurance		1,206			1,064
Net gains on sale of loans held-for-sale		701			707
Gain on sale of branches		-			674
Net losses on equity securities		(596	)		(187	)
Total noninterest income		3,054			3,426
Noninterest expenses
Salaries and employee benefits		18,783			15,632
Occupancy and equipment		1,929			3,404
FDIC insurance		606			935
Professional and consulting		1,792			1,956
Marketing and advertising		351			241
Information technology and communications		2,866			2,525
Amortization of core deposit intangibles		433			507
Other components of net periodic pension expense		(143	)		(67	)
Increase in value of acquisition price		683			-
Other expenses		1,930			1,352
Total noninterest expenses		29,230			26,485
Income before income tax expense		42,732			43,870
Income tax expense		11,351			10,871
Net income		31,381			32,999
Preferred dividends		1,509			-
Net income available to common stockholders	$	29,872		$	32,999
Earnings per common share
Basic	$	0.76		$	0.83
Diluted		0.75			0.82

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

Nine Months Ended

September 30,

September 30,
(in thousands)

2021

2020

2021

2020
Net income

$
32,097

$
24,786

$
97,315

$
45,648

Other comprehensive income (loss):

Unrealized gains and losses:

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

(3,228
)

703

(8,397
)

5,532
Tax effect

796

(160
)

2,160

(1,459
)
Net of tax

(2,432
)

543

(6,237
)

4,073

Reclassification adjustment for realized gains included in net income

0-

0-

(195
)

(29
)
Tax effect

0-

0-

48

6
Net of tax

0-

0-

(147
)

(23
)

Unrealized gains (losses) on cash flow hedges

1,890

(82
)

1,872

(3,397
)
Tax effect

(533
)

42

(529
)

955
Net of tax

1,357

(40
)

1,343

(2,442
)

Reclassification adjustment for realized losses on cash flow hedges included in net income

328

631

1,543

942
Tax effect

(90
)

(196
)

(434
)

(265
)
Net of tax

238

435

1,109

677

Reclassification adjustment for pension plan amortization included in net income

75

75

225

226
Tax effect

(21
)

(21
)

(63
)

(63
)
Net of tax

54

54

162

163

Total other comprehensive (loss) income

(783
)

992

(3,770
)

2,448

Total comprehensive income

$
31,314

$
25,778

$
93,545

$
48,096

(unaudited)

	Three Months Ended March 31,
(dollars in thousands)	2022			2021
Net income	$	31,381		$	32,999

Other comprehensive income (loss):

Unrealized holding losses on available-for-sale securities arising during the period		(30,625	)		(5,440	)
Tax effect		8,139			1,432
Net of tax		(22,486	)		(4,008	)

Unrealized gains on cash flow hedges		19,000			24
Tax effect		(5,341	)		(11	)
Net of tax		13,659			13

Reclassification adjustment for realized losses on cash flow hedges included in net income		525			631
Tax effect		(147	)		(177	)
Net of tax		378			454

Unrealized gains on pension plan		2,187			-
Tax effect		(615	)		-
Net of tax		1,572			-

Reclassification adjustment for realized losses on pension plan included in net income		16			75
Tax effect		(4	)		(20	)
Net of tax		12			55

Total other comprehensive loss		(6,865	)		(3,486	)

Total comprehensive income	$	24,516		$	29,513

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

Nine Months Ended September 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

0-

586,946

23,887

329,026

(30,271
)

2,797

912,385

Net income

-

-

-

97,315

-

-

97,315

Other comprehensive loss, net of tax

-

-

-

-

-

(3,770
)

(3,770
)

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

-

-

-

(12,345
)

-

-

(12,345
)

Exercise of stock options (5,449 shares)

-

-

45

-

-

-

45

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

-

-

-

-

-

-

0-

Stock grants (4,981 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 (289,698 shares)

-

-

-

-

(8,043
)

-
��

(8,043
)

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

110,927

-

-

-

-

-

110,927

Stock-based compensation expense

-

-

3,202

-

-

-

3,202

Balance as of September 30, 2021

$
110,927

$
586,946

$
25,851

$
413,996

$
(38,314
)

$
(973
)

$
1,098,433

Three Months Ended September 30, 2021

Accumulated

(dollars in thousands, except for per share data)

Preferred
Stock

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Treasury
Stock

Other
Comprehensive
(Loss) Income

Total
Stockholders’
Equity

Balance as of June 30, 2021

$
0-

$
586,946

$
24,606

$
386,280

$
(32,682
)

$
(190
)

$
964,960

Net income

-

-

-

32,097

-

-

32,097

Other comprehensive loss, net of tax

-

-

-

-

-

(783
)

(783
)

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

-

-

-

(4,381
)

-

-

(4,381
)

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

-

-

-

-

-

-

0-

Stock grants (4,535 shares)
-
-
-
-
-
-
0-
Repurchase of treasury stock (196,069 shares)
-
-
-
-
(5,632
)
-
(5,632
)
Proceeds from preferred stock issuance, net of costs (115,000 shares)
110,927
-
-
-
-
-
110,927
Stock-based compensation expense

-

-

1,245

-

-

-

1,245

Balance as of September 30, 2021

$
110,927

$
586,946

$
25,851

$
413,996

$
(38,314
)

$
(973
)

$
1,098,433

~~Table of Contents~~

~~(continued)~~

(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	$	-	$	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		-		-		-			32,999			-			-			32,999
Other comprehensive loss, net of tax		-		-		-			-			-			(3,486	)		(3,486	)
Cash dividends declared on common stock ($0.11 per share)		-		-		-			(3,584	)		-			-			(3,584	)
Exercise of stock options (5,449 shares)		-		-		45			-			-			-			45
Restricted stock grants (26,769 shares)		-		-		-			-			-			-			-
Stock grants (446 shares)		-		-		-			-			-			-			-
Net shares issued in satisfaction of restricted stock units earned (14,711 shares)		-		-		-			-			-			-			-
Net shares issued in satisfaction of performance units earned (34,458 shares)		-		-		-			-			-			-			-
Share redemption for tax withholdings on performance units and restricted stock units earned		-		-		(1,283	)		-			-			-			(1,283	)
Repurchase of treasury stock (93,629 shares)		-		-		-			-			(2,411	)		-			(2,411	)
Stock-based compensation		-		-		972			-			-			-			972

Balance as of March 31, 2021	$	-	$	586,946	$	23,621		$	358,441		$	(32,682	)	$	(689	)	$	935,637

Balance as of December 31, 2021	$	110,927	$	586,946	$	27,246		$	440,169		$	(39,672	)	$	(1,404	)	$	1,124,212
Net income		-		-		-			31,381			-			-			31,381
Other comprehensive loss, net of tax		-		-		-			-			-			(6,865	)		(6,865	)
Cash dividends declared on common stock ($0.13 per share)		-		-		-			(5,152	)		-			-			(5,152	)
Cash dividends declared on preferred stock ($0.328125 per depositary share)		-		-		-			(1,509	)		-			-			(1,509	)
Exercise of stock options (8,774 shares)		-		-		91			-			-			-			91
Restricted stock grants, net of forfeitures (32,454 shares)		-		-		-			-			-			-			-
Stock grants (153 shares)		-		-		-			-			-			-			-
Net shares issued in satisfaction of restricted stock units earned (31,383 shares)		-		-		-			-			-			-			-
Net shares issued in satisfaction of performance units earned (22,350 shares)		-		-		-			-			-			-			-
Repurchase of treasury stock (144,793 shares)		-		-		-			-			(4,786	)		-			(4,786	)
Stock-based compensation		-		-		1,147			-			-			-			1,147

Balance as of March 31, 2022	$	110,927	$	586,946	$	28,484		$	464,889		$	(44,458	)	$	(8,269	)	$	1,138,519

Nine Months Ended September 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

-

-

-

45,648

-

-

45,648

Other comprehensive income, net of tax

-

-

-

-

-

2,448

2,448

Cash dividends declared on common stock ($0.18 per share)

-

-

-

(7,537
)

-

-

(7,537
)
Exercise of stock options (25,413 shares)

-

-

163

-

-

-

163

Restricted stock grants, net of forfeitures (68,531 shares)

-

-

-

-

-

-

0-

Stock grants issued (1,340 shares)

-

-

-

-

-

-

0-

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

-

-

-

-

-

-

-

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

-

-

1,999

-

-

-

1,999

Balance as of September 30, 2020

$
0-

$
586,946

$
22,867

$
309,893

$
(30,271
)

$
1,301

$
890,736

Three Months Ended September 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 June 30, 2020

$
0-

$
586,946

$
22,069

$
288,688

$
(30,271
)

$
309

$
867,741

Net income

-

-

-

24,786

-

-

24,786

Other comprehensive income, net of tax

-

-

-

-

-

992

992

Cash dividends declared on common stock ($0.09 per share)

-

-

-

(3,581
)

-

-

(3,581
)

Restricted stock grants, net of forfeitures (1,018 shares)

-

-

-

-

-

-

0-

Stock-based compensation expense

-

-

798

-

-

-

798

Balance as of September 30, 2020

$
0-

$
586,946

$
22,867

$
309,893

$
(30,271
)

$
1,301

$
890,736

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~(unaudited)~~

Nine Months Ended

September 30,
(dollars in thousands)

2021

2020
Cash flows from operating activities

Net income

$
97,315

$
45,648

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

Depreciation and amortization of premises and equipment

2,832

3,102

(Reversal of) provision for credit losses

(6,315
)

36,000

Amortization of intangibles

1,498

1,931

Net accretion of loans

(4,130
)

(5,225
)
Accretion on bank premises

(61
)

(68
)
Accretion on deposits

(1,762
)

(3,568
)
Accretion on borrowings, net

(43
)

(139
)
Stock-based compensation

3,202

1,999

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

(195
)

(29
)
Losses (gains) on equity securities, net

242

(215
)
Gain on sale of branches

(674
)

0-
Net losses on disposition of fixed assets

65

0-
Gains on sales of loans held-for-sale, net

(2,668
)

(1,244
)
Loans originated for resale

(43,676
)

(34,328
)
Proceeds from sale of loans held-for sale

57,674

51,367

Gain on sale of other real estate owned

(18
)

0-

Increase in cash surrender value of bank owned life insurance

(3,527
)

(3,693
)
Amortization of premiums and accretion of discounts on securities available-for-sale, net

4,677

4,000

Amortization of subordinated debentures issuance costs

227

247

Decrease (increase) in accrued interest receivable

1,707

(10,467
)
Net change in operating leases

(734
)

2,071
Decrease in other assets

43,319

18,117

Increase (decrease) in other liabilities

5,689

(5,750
)
Net cash provided by operating activities

154,644

99,756

Cash flows from investing activities

Investment securities available-for-sale:

Purchases

(203,534
)

(222,062
)
Sales

0-

19,624
Maturities, calls and principal repayments

215,531

175,729
Purchases of equity securities

(555
)

(2,000
)
Net redemptions of restricted investment in bank stocks

6,993

1,748
Net increase in loans

(345,098
)

(348,861
)
Purchases of bank owned life insurance

(25,000
)

(25,000
)
Purchases of premises and equipment

(2,473
)

(894
)
Payments on loans held-for-sale
32
204
Proceeds from life insurance death benefits
0-
978
Proceeds from sale of branches

1,087

0-
Proceeds from sale of other real estate owned

321

992
Cash and cash equivalents acquired in acquisition, net

0-

87,391
Net cash used in investing activities

(352,696
)

(312,151
)

Cash flows from financing activities

Net increase in deposits

440,876

249,404
(Repayment of) increase in subordinated debentures

(50,000
)

73,420
Advances of borrowings

100,000

1,476,489
Repayments of borrowings

(272,686
)

(1,520,160
)
Repurchase of common stock to treasury

(8,043
)

(911
)
Net proceeds from the issuance of preferred stock
110,927
0-
Cash dividends paid on common stock

(12,345
)

(10,735
)
Proceeds from exercise of stock options

45

163
Share redemption for tax withholdings on performance units and restricted stock units earned

(1,283
)

(639
)
Net cash provided by financing activities

307,491

267,031
Net change in cash and cash equivalents

109,439

54,636
Cash and cash equivalents at beginning of period

303,756

201,483

Cash and cash equivalents at end of period

$
413,195

$
256,119

(unaudited)

	Three Months Ended March 31,
(dollars in thousands)	2022			2021
Cash flows from operating activities
Net income	$	31,381		$	32,999
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		983			880
Provision for (reversal of) credit losses		1,450			(5,766	)
Amortization of intangibles		433			507
Net accretion of loans		(874	)		(1,406	)
Accretion on bank premises		(12	)		(23	)
Accretion on deposits		(321	)		(650	)
Amortization (accretion) on borrowings, net		16			(17	)
Stock-based compensation		1,147			972
Losses on equity securities, net		596			187
Gains on sale of loans held-for-sale, net		(701	)		(707	)
Loans originated for resale		(8,872	)		(23,348	)
Proceeds from sale of loans held-for-sale		9,472			21,856
Gain on sale of branches		-			(674	)
Net losses on disposition of other premises and equipment		-			22
Increase in cash surrender value of bank owned life insurance		(1,206	)		(1,064	)
Amortization of premiums and accretion of discounts on securities available-for-sale		872			1,605
Amortization of subordinated debentures issuance costs		76			76
Decrease in accrued interest receivable		71			68
Net change in operating leases		(27	)		(131	)
(Increase) decrease in other assets		(10,585	)		47,156
Increase in other liabilities		21,945			7,589
Net cash provided by operating activities		45,844			80,131

Cash flows from investing activities
Investment securities available-for-sale:
Purchases		(52,970	)		(33,305	)
Maturities, calls and principal repayments		43,950			72,193
Net redemptions of restricted investment in bank stocks		2,572			2,616
Payments on loans held-for-sale		-			9
Net increase in loans		(153,048	)		(36,553	)
Purchases of premises and equipment		(718	)		(67	)
Proceeds from sale of branches		-			729
Net cash (used in) provided by investing activities		(160,214	)		5,622

Cash flows from financing activities
Net increase (decrease) in deposits		227,773			(7,240	)
Advances of Federal Home Loan Bank (“FHLB”) borrowings		150,000			-
Repayments of FHLB borrowings		(206,039	)		(66,227	)
Decrease in subordinated debt		-			(50,000	)
Cash dividends on preferred stock		(1,509	)		-
Cash dividends paid on common stock		(5,152	)		(3,584	)
Repurchase of treasury stock		(4,786	)		(2,411	)
Proceeds from exercise of stock options		91			45
Net cash provided by (used in) financing activities		160,378			(129,417	)
Net change in cash and cash equivalents		46,008			(43,664	)
Cash and cash equivalents at beginning of period		265,536			303,756

Cash and cash equivalents at end of period	$	311,544		$	260,092

Table of Contents

(continued)

Supplemental disclosures of cash flow information

Cash payments for:

Interest paid on deposits and borrowings

$
32,664

$
59,231

Income taxes

35,809

19,117

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

14,211

10,995

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

1,963

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	$	8,794	$	11,690
Income taxes		300		4,350

Supplemental disclosures of noncash activities

Investing:
Transfer of loans to other real estate owned	$	316	$	-
Transfer of loans from held-for-investment to held-for-sale		2,391		-

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 under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Parent Corporation’s business currently consists of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”). The Bank’s subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a ~~New Jersey~~Delaware investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), NJCB Spec-1, LLC (a New Jersey limited liability company), 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-three 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 and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 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 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.

Risks and Uncertainties

As previously disclosed, on March 11, 2020 the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to impact the United States and the world. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ~~(CARES~~(CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The 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 vaccination program, 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,~~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 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 is therefore unknown how long COVID-19 may continue to impact the economy and what the complete financial effect will be to the Company. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including the determination of the allowance for credit losses on loans, fair value of financial instruments, impairment of goodwill and other intangible assets and income taxes.

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 March 2022, the ~~Company adopted~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings (“TDRs”) in ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors” for entities that have adopted the current expected credit loss (“CECL”) model introduced by ASU 2016-13, ~~“ASU 2016-13 Financial~~“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 available-for-sale (“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 purchased 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 amount 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 are 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 individually analyzed. Generally, individually analyzed loans consist of nonaccrual loans and performing TDRs. 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 than the 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-offs 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 will 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 reporting. Also, the entity must disclose 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~~its consolidated financial statements.

~~ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.~~” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 was effective for the Company as of January 1, 2021 and did not have a significant impact on our 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 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 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
September 30,
Nine Months Ended
September 30,
(in thousands, except for per share data)
2021
2020
2021
2020
Net income
$
32,097
$
24,786
$
97,315
$
45,648
Earnings allocated to participating securities
(76
)
(133
)
(250
)
(218
)
Income attributable to common stock
$
32,021
$
24,653
$
97,065
$
45,430

Weighted average common shares outstanding, including participating securities
39,741
39,656
39,770
39,624
Weighted average participating securities
(95
)
(119
)
(102
)
(125
)
Weighted average common shares outstanding
39,646
39,537
39,668
39,499
Incremental shares from assumed conversions of options, performance units and non-participating restricted shares
223
117
220
111
Weighted average common and equivalent shares outstanding
39,869
39,654
39,888
39,610

Earnings per common share:
Basic
$
0.81
$
0.62
$
2.45
$
1.15
Diluted
0.80
0.62
2.43
1.15

	Three Months Ended March 31,
(dollars in thousands, except for per share data)	2022			2021
Net income available to common stockholders	$	29,872		$	32,999
Earnings allocated to participating securities		(80	)		(186	)
Income attributable to common stock	$	29,792		$	32,813

Weighted average common shares outstanding, including participating securities		39,560			39,738
Weighted average participating securities		(107	)		(181	)
Weighted average common shares outstanding		39,453			39,557
Incremental shares from assumed conversions of options, performance units and restricted shares		274			232
Weighted average common and equivalent shares outstanding		39,727			39,789

Earnings per common share:
Basic	$	0.76		$	0.83
Diluted		0.75			0.82

There were no antidilutive share equivalents ~~as of September 30, 2021~~for the quarters ended March 31, 2022 and ~~September 30, 2020.~~March 31, 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 3. Investment Securities

The Company’s investment securities are ~~all~~ classified as available-for-sale as of ~~September 30, 2021~~March 31, 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 ~~September 30, 2021~~March 31, 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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

Allowance
for
Gross
Gross
Investment
Amortized
Unrealized
Unrealized
Fair
Credit
Cost
Gains
Losses
Value
Losses
September 30, 2021
(dollars in thousands)
Securities available-for-sale
Federal agency obligations
$
50,016
$
1,032
$
0-
$
51,048
$
0-
Residential mortgage pass-through securities
255,488
2,640
(2,073
)
256,055
0-
Commercial mortgage pass-through securities
10,859
135
(468
)
10,526
0-
Obligations of U.S. states and political subdivisions
129,632
1,693
(1,051
)
130,274
0-
Corporate bonds and notes
10,965
124
0-
11,089
0-
Asset-backed securities
2,718
6
(2
)
2,722
0-
Certificates of deposit
149
1
0-

150
0-
Other securities
1,020
0-
0-
1,020
0-
Total securities available-for-sale
$
460,847
$
5,631
$
(3,594
)
$
462,884
$
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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Allowance for Investment Credit Losses
	(dollars in thousands)
March 31, 2022

Securities available-for-sale
Federal agency obligations	$	51,506	$	46	$	(3,003	)	$	48,549	$	-
Residential mortgage pass-through securities		320,605		160		(19,789	)		300,976		-
Commercial mortgage pass-through securities		18,713		8		(1,313	)		17,408		-
Obligations of U.S. states and political subdivisions		144,474		446		(7,869	)		137,051		-
Corporate bonds and notes		5,477		35		(11	)		5,501		-
Asset-backed securities		2,364		7		(17	)		2,354
Other securities		191		-		-			191		-
Total securities available-for-sale	$	543,330	$	702	$	(32,002	)	$	512,030	$	-

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

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 – (continued)

Investment securities having a carrying value of approximately ~~$88.1~~$95.0 million and ~~$107.6~~$71.2 million as of ~~September 30, 2021~~March 31, 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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

The following table presents information for investments in securities available-for-sale as of ~~September 30, 2021,~~March 31, 2022, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer. Securities not due at a single maturity date are shown separately.

September 30, 2021
Amortized
Fair
Cost
Value
(dollars in thousands)
Securities available-for-sale:
Due in one year or less
$
4,439
$
4,451
Due after one year through five years
9,911
10,024
Due after five years through ten years
7,777
8,029
Due after ten years
171,353
172,779
Residential mortgage pass-through securities
255,488
256,055
Commercial mortgage pass-through securities
10,859
10,526
Other securities
1,020
1,020
Total securities available-for-sale
$
460,847
$
462,884

	March 31, 2022
	Amortized Cost		Fair Value
	(dollars in thousands)
Securities available-for-sale:
Due in one year or less	$	3,391	$	3,394
Due after one year through five years		6,118		6,135
Due after five years through ten years		4,694		4,774
Due after ten years		189,618		179,152
Residential mortgage pass-through securities		320,605		300,976
Commercial mortgage pass-through securities		18,713		17,408
Other securities		191		191
Total securities available-for-sale	$	543,330	$	512,030

~~Gross~~We had no gross gains ~~and~~or losses from the ~~sales and redemptions~~sale of securities for ~~periods presented were as follows:~~the three months ended March 31, 2022 and 2021.

Three Months Ended
September 30,

Nine Months Ended
September 30,

(dollars in thousands)

2021

2020

2021

2020

Proceeds

$
0-

$
0-

$
05,185

$
19,624

Gross gains on sales/redemption of securities

0-

0-

195

29

Gross losses on sales/redemptions of securities

0-

0-

0-

0-

Net gains on sales/redemptions of securities

0-

0-

195

29

Less: tax provision on net gains

0-

0-

(48
)

(6
)
Net gains on sales/redemptions of securities, after tax

$
0-

$
0-

$
147

$
23

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 – (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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

September 30, 2021
Total
Less than 12 Months
12 Months or Longer
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
(dollars in thousands)
Investment Securities

Available-for-Sale:

Residential mortgage pass-through securities
$
171,592
$
(2,073
)
$
171,592
$
(2,073
)
$
0-
$
0-
Commercial mortgage pass-through securities
6,349
(468
)
2,658
(67
)
3,691
(401
)
Obligations of U.S. states and political subdivisions
71,938
(1,051
)
71,938
(1,051
)
0-
0-
Asset-backed securities
1,389
(2
)
840
0-
549
(2
)
Total temporarily impaired securities
$
251,268
$
(3,594
)
$
247,028
$
(3,191
)
$
4,240
$
(403
)

	March 31, 2022
	Total					Less than 12 Months					12 Months or Longer
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(dollars in thousands)
Investment Securities Available-for-Sale:
Federal agency obligations	$	43,257	$	(3,003	)	$	43,257	$	(3,003	)	$	-	$	-
Residential mortgage pass-through securities		284,118		(19,789	)		223,718		(14,696	)		60,400		(5,093	)
Commercial mortgage pass-through securities		14,437		(1,313	)		10,532		(483	)		3,905		(830	)
Obligations of U.S. states and political subdivisions		111,635		(7,869	)		111,635		(7,869	)		-		-
Corporate bonds and notes		1,988		(11	)		1,988		(11	)		-		-
Asset-backed securities		1,837		(17	)		1,837		(17	)		-		-
Total temporarily impaired securities	$	457,272	$	(32,002	)	$	392,967	$	(26,079	)	$	64,305	$	(5,923	)

	December 31, 2021
	Total					Less than 12 Months					12 Months or Longer
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(dollars in thousands)
Investment Securities Available-for-Sale:
Federal agency obligations	$	28,974	$	(625	)	$	28,974	$	(625	)	$	-	$	-
Residential mortgage pass-through securities		246,396		(2,884	)		214,701		(2,111	)		31,695		(773	)
Commercial mortgage pass-through securities		8,370		(463	)		4,682		(75	)		3,688		(388	)
Obligations of U.S. states and political subdivisions		89,473		(982	)		89,473		(982	)		-		-
Asset-backed securities		802		(2	)		802		(2	)		-		-
Total Temporarily Impaired Securities	$	374,015	$	(4,956	)	$	338,632	$	(3,795	)	$	35,383	$	(1,161	)

December 31, 2020
Total
Less than 12 Months
12 Months or Longer
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
(dollars in thousands)
Investment Securities

Available-for-Sale:

Federal agency obligations
$
8,978
$
(65
)
$
8,975
$
(65
)
$
3
$
0-

Residential mortgage pass-through securities
20,895
(41
)
20,886
(41
)
9
0-
Commercial mortgage pass-through securities
3,954
(187
)
3,954
(187
)
0-
0-

Corporate bonds and notes
3,928
(52
)
3,928
(52
)
0-
0-
Asset-backed securities
3,083
(41
)
622
0-
2,461
(41
)
Total Temporarily Impaired Securities
$
40,838
$
(386
)
$
38,365
$
(345
)
$
2,473
$
(41
)

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 – (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 September 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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, totaled $1.4 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. No allowance for credit losses for available-for-sale securities was recorded as of ~~September 30, 2021.~~March 31, 2022.

Federal agency obligations, residential ~~mortgage-backed~~mortgage backed pass-through securities and commercial ~~mortgage-backed~~mortgage back 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 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~~An interest rate ~~swaps were~~swap was entered into on April 13, 2017 ~~January 1, 2020 and March 3, 2020 each~~ with a respective notional amount of $25.0 million and ~~were~~was designated as a cash flow hedge of a Federal Home Loan Bank ~~advance~~advance. We are required to pay ~~fixed-rates~~a fixed-rate of interest ~~ranging from 0.88% to~~of 1.93% and receive variable rates of interest that reset quarterly based on three-month LIBOR. ~~Expiration dates~~The expiration date for the ~~swaps range from~~ ~~January 2022~~ to swap is April ~~2022~~.2022. The ~~swaps were~~swap is 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.~~swap.

In addition, during ~~the three months ended September 30,~~ 2021, the ~~company~~Company entered into 59 forward starting pay fixed-rate interest rate swaps, 7 of which have since commenced, with a total notional amount of ~~$200~~$400 million, which are also designated as a cash flow ~~hedge~~hedges of acurrent, or future, Federal Home Loan Bank advance. We are required to pay fixed rates of interest ranging from 0.631% to ~~0.955%~~1.23% and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”). The 2 remaining forward starting swaps have commencing payment dates ~~ranging from October 2021 to April~~in May 2022 and August 2022, with expiration dates on the 9 positions ranging from December 2025 to March ~~2026~~ to ~~January 2028~~.2028.

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 4. Derivatives – (continued)

Interest expense recorded on these swap transactions totaled approximately ~~$0.3~~$0.5 million and ~~$1.5~~$0.6 million during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~respectively, compared to $0.6 million and $0.9 million during the three and nine months ended September 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 September 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
$
1,890
$
328
$
0-

		Three Months Ended September 30, 2021
Interest rate contracts		$	1,890			$	328			$	0-

	Three Months Ended March 31, 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	$	19,000	$	525	$	-

Three Months Ended September 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
$
(82
)
$
631
$
0-

		Three Months Ended September 30, 2020
Interest rate contracts		$	(82	)		$	631			$	0-

	Three Months Ended March 31, 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	$	24	$	631	$	-

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 4. Derivatives – (continued)~~

Nine Months Ended September 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
$
1,872
$
1,543
$
0-

Nine Months Ended September 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
$
(3,397
)
$
942
$
0-

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

September 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
$
275,000
$
1,295
$
175,000
$
(2,119
)

	March 31, 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	$	425,000	$	22,872	$	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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

September 30,
December 31,
2021
2020
(dollars in thousands)
Commercial ⁽¹⁾
$
1,325,488
$
1,521,967
Commercial real estate
4,436,626
3,783,550
Commercial construction
552,896
617,747
Residential real estate
270,793
322,564
Consumer
2,093

1,853
Gross loans
6,587,896
6,247,681
Net deferred loan fees
(11,457
)

(11,374
)
Total loans receivable
$
6,576,439
$
6,236,307

	March 31, 2022			December 31, 2021
	(dollars in thousands)
Commercial ⁽¹⁾	$	1,278,477		$	1,299,428
Commercial real estate		4,919,093			4,741,590
Commercial construction		539,058			540,178
Residential real estate		250,205			255,269
Consumer		1,140			1,886
Gross loans		6,987,973			6,838,351
Net deferred loan fees		(8,378	)		(9,729	)
Total loans receivable	$	6,979,595		$	6,828,622

⁽¹⁾

^{Included in commercial loans as of September 30, 2021March 31, 2022 and December 31, 2020 were2021 are PPP loans of $177.8$54.3 million and $397.5$93.1 million, respectively.}

As of ~~each of September 30, 2021~~both March 31, 2022 and December 31, ~~2020,~~2021, loan balances of approximately ~~$2.6~~$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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

September 30,
December 31,
2021
2020
(dollars in thousands)
Commercial real estate
$
4,876
$
1,990
Residential real estate
720

2,720
Total carrying amount
$
5,596
$
4,710

	March 31, 2022		December 31, 2021
	(dollars in thousands)
Commercial real estate	$	2,390	$	-
Residential real estate		352		250
Total carrying amount	$	2,742	$	250

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

September 30, 2021
Nonaccrual
loans with
ACL
Nonaccrual
loans without
ACL
Total
Nonaccrual
loans
(dollars in thousands)
Commercial
$
27,993
$
2,486
$
30,479
Commercial real estate
11,668
16,910
28,578
Commercial construction
0-
3,336
3,336
Residential real estate
0-

3,566
3,566
Consumer
0-

0-
0-
Total
$
39,661
$
26,298
$
65,959

	March 31, 2022
	Nonaccrual loans with ACL		Nonaccrual loans without ACL		Total Nonaccrual loans
	(dollars in thousands)
Commercial	$	29,148	$	1,193	$	30,341
Commercial real estate		17,497		8,819		26,316
Commercial construction		-		-		-
Residential real estate		1,172		1,574		2,746
Consumer		-		-		-
Total	$	47,817	$	11,586	$	59,403

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		-		3,150		3,150
Residential real estate		1,239		1,856		3,095
Consumer		-		-		-
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 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 as “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 as “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified as 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 September 30, 2021, our~~The following table presents loans ~~based on year of~~by origination and risk designation ~~are~~ as ~~follows~~of March 31, 2022 (dollars in thousands):

Term loans amortized cost basis by origination year

Revolving

Total
Gross
2021

2020

2019

2018

2017

Prior
Loans
Loans
Commercial
Pass
$
362,839
$
78,941
$
73,202
$
60,881
$
98,178
$
118,326
$
465,494
$
1,257,861
Special mention
0-
0-
225
904
5,653
4,198
13,787
24,767
Substandard
176
0-
1,619
12,779
4,101
21,147
3,038
42,860
Doubtful
0-
0-
0-
0-
0-
0-
0-
0-
Total Commercial
$
363,015
$
78,941
$
75,046
$
74,564
$
107,932
$
143,671
$
482,319
$
1,325,488

Commercial Real Estate
Pass
$
1,178,056
$
587,923
$
446,299
$
479,741
$
514,973
$
944,052
$
171,963
$
4,323,007
Special mention
0-
0-
3,364
1,875
4,335
26,550
6,633
42,757
Substandard
1,942
4,500
657
18,861
0-
36,112
8,790
70,862
Doubtful
0-
0-
0-
0-
0-
0-
0-
0-
Total Commercial Real Estate
$
1,179,998
$
592,423
$
450,320
$
500,477
$
519,308
$
1,006,714
$
187,386
$
4,436,626

Commercial Construction
Pass
$
1,405
$
7,370
$
37,492
$
2,600
$
2,247
$
490
$
486,404
$
538,008
Special mention
0-
0-
0-
0-
0-
0-
0-
0-
Substandard
0-
0-
0-
0-
0-
0-
14,888
14,888
Doubtful
0-
0-
0-
0-
0-
0-
0-
0-
Total Commercial Construction
$
1,405
$
7,370
$
37,492
$
2,600
$
2,247
$
490
$
501,292
$
552,896

Residential Real Estate
Pass
$
18,387
$
30,704
$
25,544
$
29,503
$
30,577
$
77,427
$
46,227
$
258,369
Special mention
0-
0-
0-
0-
0-
0-
0-
0-
Substandard
0-
0-
0-
199
0-
8,492
3,733
12,424
Doubtful
0-
0-
0-
0-
0-
0-
0-
0-
Total Residential Real Estate
$
18,387
$
30,704
$
25,544
$
29,702
$
30,577
$
85,919
$
49,960
$
270,793

Consumer
Pass
$
0-
$
96
$
50
$
26
$
35
$
1,761
$
125
$
2,093
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-
$
96
$
50
$
26
$
35
$
1,761
$
125
$
2,093

Total
Pass
$
1,560,687
$
705,034
$
582,587
$
572,751
$
646,010
$
1,142,056
$
1,170,213
$
6,379,338
Special mention
0-
0-
3,589
2,779
9,988
30,748
20,420
67,524
Substandard
2,118
4,500
2,276
31,839
4,101
65,751
30,449
141,034
Doubtful
0-
0-
0-
0-
0-
0-
0-
0-
Grand Total
$
1,562,805
$
709,534
$
588,452
$
607,369
$
660,099
$
1,238,555
$
1,221,082
$
6,587,896

	Term loans amortized cost basis by origination year												Revolving		Total
	2022		2021		2020		2019		2018		Prior		Loans		Gross Loans
Commercial
Pass	$	38,767	$	371,431	$	56,980	$	41,829	$	58,230	$	175,970	$	471,742	$	1,214,949
Special mention		-		-		-		-		632		9,656		4,310		14,598
Substandard		448		164		-		1,649		12,203		20,388		14,078		48,930
Doubtful		-		-		-		-		-		-		-		-
Total Commercial	$	39,215	$	371,595	$	56,980	$	43,478	$	71,065	$	206,014	$	490,130	$	1,278,477

Commercial Real Estate
Pass	$	371,604	$	1,655,013	$	507,117	$	389,017	$	452,309	$	1,241,085	$	166,342	$	4,782,487
Special mention		-		-		-		3,340		-		53,982		15,537		72,859
Substandard		-		1,958		4,500		7,302		20,445		21,117		8,425		63,747
Doubtful		-		-		-		-		-		-		-		-
Total Commercial Real Estate	$	371,604	$	1,656,971	$	511,617	$	399,659	$	472,754	$	1,316,184	$	190,304	$	4,919,093

Commercial Construction
Pass	$	-	$	1,518	$	7,370	$	6,508	$	2,600	$	-	$	510,174	$	528,170
Special mention		-		-		-		-		350		-		1,443		1,793
Substandard		-		-		-		-		-		-		9,095		9,095
Doubtful		-		-		-		-		-		-		-		-
Total Commercial Construction	$	-	$	1,518	$	7,370	$	6,508	$	2,950	$	-	$	520,712	$	539,058

Residential Real Estate
Pass	$	9,604	$	25,905	$	27,697	$	23,056	$	23,589	$	88,610	$	42,361	$	240,822
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		5,919		3,464		9,383
Doubtful		-		-		-		-		-		-		-		-
Total Residential Real Estate	$	9,604	$	25,905	$	27,697	$	23,056	$	23,589	$	94,529	$	45,825	$	250,205

Consumer
Pass	$	908	$	-	$	75	$	35	$	17	$	4	$	101	$	1,140
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total Consumer	$	908	$	-	$	75	$	35	$	17	$	4	$	101	$	1,140

Total
Pass	$	420,883	$	2,053,867	$	599,239	$	460,445	$	536,745	$	1,505,669	$	1,190,720	$	6,767,568
Special mention		-		-		-		3,340		982		63,638		21,290		89,250
Substandard		448		2,122		4,500		8,951		32,648		47,424		35,062		131,155
Doubtful		-		-		-		-		-		-		-		-
Grand Total	$	421,331	$	2,055,989	$	603,739	$	472,736	$	570,375	$	1,616,731	$	1,247,072	$	6,987,973

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):

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

	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		-		-		-		-		1		4,045			4,266		8,312
Substandard		170		-		1,842		13,298		9,740		21,024			14,540		60,614
Doubtful		-		-		-		-		-		-			-		-
Total Commercial	$	403,373	$	58,534	$	56,327	$	73,707	$	105,468	$	111,625		$	490,394	$	1,299,428

Commercial Real Estate
Pass	$	1,692,098	$	533,315	$	420,995	$	452,262	$	497,065	$	842,244		$	170,721	$	4,608,700
Special mention		-		-		-		-		5,142		50,438			6,601		62,181
Substandard		1,968		9,039		4,006		20,624		-		26,108			8,964		70,709
Doubtful		-		-		-		-		-		-			-		-
Total Commercial Real Estate	$	1,694,066	$	542,354	$	425,001	$	472,886	$	502,207	$	918,790		$	186,286	$	4,741,590

Commercial Construction
Pass	$	8,018	$	7,370	$	12,625	$	2,600	$	2,339	$	-		$	490,119	$	523,071
Special mention		-		-		-		-		350		-			1,443		1,793
Substandard		-		-		-		-		-		-			15,314		15,314
Doubtful		-		-		-		-		-		-			-		-
Total Commercial Construction	$	8,018	$	7,370	$	12,625	$	2,600	$	2,689	$	-		$	506,876	$	540,178

Residential Real Estate
Pass	$	27,081	$	29,539	$	23,611	$	25,070	$	28,701	$	66,249		$	44,221	$	244,472
Special mention		-		-		-		-		-		-			-		-
Substandard		-		-		-		-		-		7,262			3,535		10,797
Doubtful		-		-		-		-		-		-			-		-
Total Residential Real Estate	$	27,081	$	29,539	$	23,611	$	25,070	$	28,701	$	73,511		$	47,756	$	255,269

Consumer
Pass	$	1,594	$	85	$	39	$	21	$	28	$	(4	)	$	123	$	1,886
Special mention		-		-		-		-		-		-			-		-
Substandard		-		-		-		-		-		-			-		-
Doubtful		-		-		-		-		-		-			-		-
Total Consumer	$	1,594	$	85	$	39	$	21	$	28	$	(4	)	$	123	$	1,886

Total
Pass	$	2,131,994	$	628,843	$	511,755	$	540,362	$	623,860	$	995,045		$	1,176,772	$	6,608,631
Special mention		-		-		-		-		5,493		54,483			12,310		72,286
Substandard		2,138		9,039		5,848		33,922		9,740		54,394			42,353		157,434
Doubtful		-		-		-		-		-		-			-		-
Grand Total	$	2,134,132	$	637,882	$	517,603	$	574,284	$	639,093	$	1,103,922		$	1,231,435	$	6,838,351

Collateral Dependent Loans: Loans which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses. The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date.

The following table presents collateral dependent loans that were individually evaluated for impairment as of ~~September 30,~~March 31, 2022 and December 31, 2021:

September 30, 2021
Real
Estate
Other
Total
(dollars in thousands)
Commercial
$
6,778
$
26,175
$
32,953
Commercial real estate
56,622
0-
56,622
Commercial construction
12,582
0-
12,582
Residential real estate
10,258
0-
10,258
Consumer
0-
0-
0-
Total
$
86,240
$
26,175
$
112,415

	March 31, 2022
	Real Estate		Other		Total
	(dollars in thousands)
Commercial	$	6,120	$	25,982	$	32,102
Commercial real estate		62,753		-		62,753
Commercial construction		7,042		-		7,042
Residential real estate		7,528		-		7,528
Consumer		-		-		-
Total	$	83,443	$	25,982	$	109,425

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)

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

~~Impaired loans~~Aging Analysis - Impaired loans disclosures presented below as of December 31, 2020 and as of and for the three and nine months ended September 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 nine months ended September 30, 2020 (dollars in thousands):

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020
2020
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Impaired loans (no allowance)

Commercial
$
12,266
$
50
$
12,100
$
150
Commercial real estate
12,460
74
12,415
229
Commercial construction
21,297
91
21,149
262
Residential real estate
4,011
16
3,761
16

Total
$
50,034
$
231
$
49,425
$
657

Impaired loans (allowance):

Commercial
$
23,024
$
0-
$
23,195
$
0-
Commercial real estate
2,722
0-
2,722
0-
Commercial construction
2,934
0-
2,934
0-
Residential real estate
261
5
262
5

Total
$
28,941
$
5
$
29,113
$
5

Total impaired loans:
Commercial
$
35,290
$
50
$
35,295
$
150
Commercial real estate
15,182
74
15,137
229
Commercial construction
24,231
91
24,083
262
Residential real estate
4,272
21
4,023
21

Total
$
78,975
$
236
$
78,538
$
662

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

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

	March 31, 2022
	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	$	3,561	$	-	$	4,420	$	30,341	$	38,322	$	1,240,155	$	1,278,477
Commercial real Estate		3,098		-		5,848		26,316		35,262		4,883,831		4,919,093
Commercial construction		123		-		-		-		123		538,935		539,058
Residential real Estate		1,970		-		1,487		2,746		6,203		244,002		250,205
Consumer		-		-		625		-		625		515		1,140
Total	$	8,752	$	-	$	12,380	$	59,403	$	80,535	$	6,907,438	$	6,987,973

	December 31, 2021
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Gross Loans
	(dollars in thousands)
Commercial	$	4,305	$	729	$	4,457	$	30,062	$	39,553	$	1,259,875	$	1,299,428
Commercial real Estate		1,622		1,009		5,935		25,393		33,959		4,707,631		4,741,590
Commercial construction		-		-		-		3,150		3,150		537,028		540,178
Residential real Estate		1,437		292		3,139		3,095		7,963		247,306		255,269
Consumer		-		-		-		-		-		1,886		1,886
Total	$	7,364	$	2,030	$	13,531	$	61,700	$	84,625	$	6,753,726	$	6,838,351

September 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
Commercial
$
391
$
417
$
4,463
$
30,479
$
35,750
$
1,289,738
$
1,325,488
Commercial real Estate
0-
1,694
1,860
28,578
32,132
4,404,494
4,436,626
Commercial construction
0-
0-
0-
3,336
3,336
549,560
552,896
Residential real Estate
338
0-
8,360
3,566
12,264
258,529
270,793
Consumer
0-
0-
0-
0-
0-
2,093
2,093
Total
$
729
$
2,111
$
14,683
$
65,959
$
83,482
$
6,504,414
$
6,587,896

~~90 days or greater past due and still accruing category reflects purchased credit-deteriorated loans, net of fair value marks, which accrete income per the valuation at date of acquisition.~~

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

~~90 days or greater past due and still accruing category reflects purchased credit-deteriorated 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:

September 30, 2021
Commercial
Commercial
Residential
Commercial
real estate
construction
real estate
Consumer
Total
(dollars in thousands)
ACL
Individually evaluated for impairment
$
14,630
$
1,199
$
0-
$
66
$
0-
$
15,895
Collectively evaluated for impairment
9,487
40,222
3,702
3,302
8
56,721
Acquired with deteriorated credit quality individually analyzed
3,219
1,921
0-
230
0-
5,370
Total
$
27,336
$
43,342
$
3,702
$
3,598
$
8
$
77,986

Gross loans
Individually evaluated for impairment
$
33,970
$
50,642
$
12,582
$
6,017
$
0-
$
103,211
Collectively evaluated for impairment
1,286,337
4,380,004
540,314
260,536
2,093
6,469,284
Acquired with deteriorated credit quality individually analyzed
5,181
5,980
0-
4,240
0-
15,401
Total
$
1,325,488
$
4,436,626
$
552,896
$
270,793
$
2,093
$
6,587,896

	March 31, 2022
	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Total
	(dollars in thousands)
Allowance for credit losses - loans
Individually evaluated impairment	$	14,028	$	1,859	$	-	$	94	$	-	$	15,981
Collectively evaluated impairment		9,154		44,088		3,281		3,361		7		59,891
Acquired with deteriorated credit quality individually analyzed		2,277		1,921		-		-		-		4,198
Total	$	25,459	$	47,868	$	3,281	$	3,455	$	7	$	80,070

Gross loans
Individually evaluated impairment	$	34,224	$	56,905	$	7,042	$	5,415	$	-	$	103,586
Collectively evaluated impairment		1,239,157		4,856,340		532,016		242,678		1,140		6,871,331
Acquired with deteriorated credit quality individually analyzed		5,096		5,848		-		2,112		-		13,056
Total	$	1,278,477	$	4,919,093	$	539,058	$	250,205	$	1,140	$	6,987,973

	December 31, 2021
	Commercial		Commercial real estate		Commercial construction			Residential real estate		Consumer		Total
	(dollars in thousands)
Allowance for credit losses - loans
Individually evaluated impairment	$	15,131	$	955	$	-		$	131	$	-	$	16,217
Collectively evaluated impairment		8,561		42,713		3,580			3,497		7		58,358
Acquired with deteriorated credit quality individually analyzed		2,277		1,921		-	��		-		-		4,198
Total	$	25,969	$	45,589	$	3,580		$	3,628	$	7	$	78,773

Gross loans
Individually evaluated impairment	$	33,726	$	49,310	$	13,196		$	5,717	$	-	$	101,949
Collectively evaluated impairment		1,260,537		4,686,346		526,982			246,413		1,886		6,722,164
Acquired with deteriorated credit quality individually analyzed		5,165		5,934		-			3,139		-		14,238
Total	$	1,299,428	$	4,741,590	$	540,178		$	255,269	$	1,886	$	6,838,351

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

0-
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

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)

Activity in the Company’s ACL for loans for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 is summarized in the table below.

	Three Months Ended March 31, 2022
	Commercial			Commercial real estate			Commercial construction			Residential real estate			Consumer		Unallocated		Total
	(dollars in thousands)
Balance as of December 31, 2021	$	25,969		$	45,589		$	3,580		$	3,628		$	7	$	-	$	78,773
Charge-offs		(49	)		(225	)		-			-			-		-		(274	)
Recoveries		1			-			-			31			-		-		32
(Reversal of) provision for credit losses (loans)		(462	)		2,504			(299	)		(204	)		-		-		1,539

Balance as of March 31, 2022	$	25,459		$	47,868		$	3,281		$	3,455		$	7	$	-	$	80,070

Activity in the Company’s ACL for loans for the three months ended March 31, 2021 is summarized in the table below. The CECL Day 1 ~~effect of CECL presented in the nine-months table below reflect~~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.

Three Months Ended September 30, 2021
Commercial
Commercial
Residential

Commercial
real estate
construction
real estate
Consumer
Unallocated
Total
(dollars in thousands)
Balance as of June 30, 2021
$
25,567
$
43,815
$
4,927
$
4,366
$
9
$
0-
$
78,684

Charge-offs
(254
)
(1,473
)
0-
0-
0-
0-
(1,727
)

Recoveries
1
85
0-
20
7
0-
113

(Reversal of) provision for credit losses - loans
2,022
915
(1,225
)
(788
)
(8
)
0-
916
Balance as of September 30, 2021
$
27,336
$
43,342
$
3,702
$
3,598
$
8
$
0-
$
77,986

	Three Months Ended March 31, 2021
	Commercial			Commercial real estate			Commercial construction			Residential real estate			Consumer			Unallocated			Total
	(dollars in thousands)
Balance as of December 31, 2020	$	28,443		$	39,330		$	8,194		$	2,687		$	4		$	568		$	79,226
Day 1 effect of CECL		(4,225	)		9,605			(961	)		2,697			9			(568	)		6,557

Balance as of January 1, 2021 as adjusted for changes in accounting principle		24,218			48,935			7,233			5,384			13			-			85,783

Charge-offs		-			-			-			-			-			-			-

Recoveries		60			-			-			-			1			-			61
(Reversal of) provision for credit losses (loans)		2,157			(5,038	)		(1,712	)		(680	)		(3	)		-			(5,276	)

Balance as of March 31, 2021	$	26,435		$	43,897		$	5,521		$	4,704		$	11		$	-		$	80,568

Nine Months Ended September 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
(304
)
(1,628
)
0-
(7
)
0-
0-
(1,939
)

Recoveries
74
85
0-
20
9
0-
188

Provision for (reversal of) credit losses - loans
3,348
(4,050
)
(3,531
)
(1,799
)
(14
)
0-
(6,046
)
Balance as of September 30, 2021
$
27,336
$
43,342
$
3,702
$
3,598
$
8
$
0-
$
77,986

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.

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)

Three Months Ended September 30, 2020
Commercial
Commercial
Residential

Commercial
real estate
construction
real estate
Consumer
Unallocated
Total
(dollars in thousands)
Balance as of June 30, 2020
$
9,345
$
22,655
$
8,026
$
1,690
$
5
$
27,003
$
68,724

Charge-offs
(48
)
0-
0-
(209
)
0-
0-
(257
)

Recoveries
0-
800
0-
0-
0-
0-
800

Provision for (reversal of) credit losses - loans
14,861
16,623
(1,044
)
1,019
(2
)
(26,457
)
5,000

Balance as of September 30, 2020
$
24,158
$
40,078
$
6,982
$
2,500
$
3
$
546
$
74,267

Nine Months Ended September 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

(552
)

0-

0-

(278
)

(3
)

0-

(833
)

Recoveries

2

802

0-

0-

3

0-

807

Provision for (reversal of) credit losses - loans

16,359

18,423

(322
)

1,093

0-

447

36,000

Balance as of September 30, 2020

$
24,158

$
40,078

$
6,982

$
2,500

$
3

$
546

$
74,267

~~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 (“~~TDR”~~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, ~~maturity extensions,~~ 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 ~~TDR~~troubled debt restructuring remains on nonaccrual status for a period of ~~nine~~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 ~~September 30, 2021,~~March 31, 2022, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in ~~a TDR.~~troubled debt restructurings.

As of ~~September 30, 2021,~~March 31, 2022, TDRs totaled ~~$79.7~~$76.5 million, of which ~~$38.5~~$29.1 million were on nonaccrual status and ~~$41.2~~$47.4 million ~~were classified as accruing and~~ 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 classified as accruing and~~ were performing under their restructured terms. The Company has allocated ~~$10.5~~$9.1 million and ~~$4.4~~$10.4 million of specific allowance related to TDRs as of ~~September 30,~~March 31, 2022 and December 31, 2021, ~~and September 30, 2020,~~ respectively.

The following table presents loans by class modified as TDRs that occurred during the ~~nine~~three months ended ~~September 30,~~March 31, 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 three months ended March 31, 2022 was a maturity extension, while the commercial real estate loan modified as a TDR during the three months ended March 31, 2022 was an interest rate reduction, that was commensurate with a one-time, $500,000, principal paydown.

The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2021:

Pre-Modification Outstanding
Post-Modification Outstanding
Number of Loans
Recorded Investment
Recorded Investment
Troubled debt restructurings:
(dollars in thousands)
Commercial
4
$
1,276
$
1,276
Commercial real estate
10
35,595
35,595
Commercial construction
1
1,641
1,641
Residential real estate
3
1,758
1,758
Total
18
$
40,270
$
40,270

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Loans		Investment		Investment
	(dollars in thousands)
Troubled debt restructurings:
Commercial real estate		1	$	1,658	$	1,658
Residential real estate		2		1,996		1,996
Total		3	$	3,654	$	3,654

The two residential real estate loans modified as TDRs during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 ~~included~~were maturity extensions, ~~and interest rate reductions.~~while the one commercial real estate loan was a recast of a nonaccrual credit.

~~There were no loans modified as TDRs during the nine months ended September 30, 2020.~~

There were no TDRs for which there was a payment default within twelve months following the modification during the three months ended March 31, 2022 and ~~nine months ended September 30, 2021 and September 30, 2020.~~March 31, 2021.

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 nine 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 September 30, 2021, the Bank had 10 deferred loans totaling $10.3 million, compared to 113 deferred loans totaling $207.0 million as of December 31, 2020 that are not considered TDRs.

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 sets forth the composition of these loans by loan segments as of September 30, 2021:~~

Unpaid
Number of Loans
Principal Balance
(dollars in thousands)
Commercial
4
$
309
Commercial real estate
6
9,988
Total
10
$
10,297

As of September 30, 2021, there were no deferred loans that were delinquent or on nonaccrual status. As of September 30, 2021, $5.5 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~~Allowance for Credit Losses for Unfunded Commitments

The Company has recorded an ACL for unfunded credit commitments, which was recorded in other liabilities. The provision is recorded within the (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 nine~~ months ended ~~September 30, 2021 (dollars in thousands):~~March 31, 2022 and March 31, 2021:

Three Months Ended
September 30, 2021

Balance as of beginning of period
$
2,380
Provision for (reversal of) credit losses - unfunded commitments
184
Balance as of end of period
$
2,564

	Three Months Ended March 31, 2022			Three Months Ended March 31, 2021
	(dollars in thousands)
Balance at beginning of period	$	2,351		$	-
Day 1 Effect of CECL		-			2,833
(Reversal of) provision for credit losses (unfunded commitments)		(89	)		(490	)
Balance at end of period	$	2,262		$	2,343

Nine Months Ended
September 30, 2021

Balance as of beginning of period
$
0-
Day 1 Effect of CECL
2,833
Provision for (reversal of) credit losses - unfunded commitments
(269)
Balance as of end of period
$
2,564

Components of (Reversal of) Provision for Credit Losses

The following table summarizes the ~~provision for~~ (reversal of) provision for credit losses for the three ~~and nine~~ months ended ~~September 30, 2021 (dollars in thousands):~~March 31, 2022 and March 31, 2021:

Three Months Ended
September 30, 2021
Nine Months Ended
September 30, 2021

Provision for (reversal of) credit losses - loans
$
916
$
(6,046)
Provision for (reversal of) credit losses - unfunded commitments
184
(269)
Provision for (reversal of) credit losses
$
1,100
$
(6,315)

	Three Months Ended March 31, 2022			Three Months Ended March 31, 2021
	(dollars in thousands)
Provision for (Reversal of) credit losses (loans)	$	1,539		$	(5,276	)
Reversal of credit losses (unfunded commitments)		(89	)		(490	)
Provision for (Reversal of) credit losses	$	1,450		$	(5,766	)

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

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. ~~The following sets forth the hierarchy of valuation techniques used to determine fair value:~~

~~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: 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).

~~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.

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). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to

value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

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)

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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 are as follows:

September 30, 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

$
51,048

$
0-

$
51,048

$
0-
Residential mortgage pass-through securities

256,055

0-

256,055

0-
Commercial mortgage pass-through securities

10,526

0-

10,526

0-
Obligations of U.S. states and political subdivision

130,274

0-

121,638

8,636
Corporate bonds and notes

11,089

0-

11,089

0-
Asset-backed securities

2,722

0-

2,722

0-
Certificates of deposit

150

0-

150

0-
Other securities

1,020

1,020

0-

0-
Total available-for-sale

$
462,884

$
1,020

$
453,228

$
8,636

Equity securities

13,700

11,709

1,991

0-
Derivatives

1,296

0-

1,296

0-
Total assets
$
477,880
$
12,729

$
456,515
$
8,636

			March 31, 2022
			Fair Value Measurements at Reporting Date Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(dollars in thousands)
Recurring fair value measurements: Assets
Investment securities:
Available-for-sale:
Federal agency obligations	$	48,549	$	-	$	48,549	$	-
Residential mortgage pass-through securities		300,976		-		300,976		-
Commercial mortgage pass-through securities		17,408		-		17,408		-
Obligations of U.S. states and political subdivision		137,051		-		128,558		8,493
Corporate bonds and notes		5,501		-		5,501		-
Asset-backed securities		2,354		-		2,354		-
Certificates of deposit		-		-		-		-
Other securities		191		191		-		-
Total available-for-sale		512,030		191		503,346		8,493

Equity securities		13,198		10,550		2,648		-
Derivatives		22,872		-		22,872		-
Total assets	$	548,100	$	10,741	$	528,866	$	8,493

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)

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	$	-	$	50,360	$	-
Residential mortgage pass- through securities		316,095		-		316,095		-
Commercial mortgage pass-through securities		10,469		-		10,469		-
Obligations of U.S. states and political subdivision		145,625		-		137,060		8,565
Corporate bonds and notes		9,049		-		9,049		-
Asset-backed securities		2,564		-		2,564		-
Certificates of deposit		150		-		150		-
Other securities		195		195		-		-
Total available-for-sale	$	534,507	$	195	$	525,747	$	8,565
Equity securities		13,794		11,081		2,713		-
Derivatives		3,347		-		3,347		-
Total assets	$	551,648	$	11,276	$	531,807	$	8,565

There were no transfers between Level 1 and Level 2 during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 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 ~~September 30, 2021~~March 31, 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).

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).

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, ~~either as specific reserves or~~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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 are as follows:

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
September 30,
Assets
Inputs
Inputs
basis:
2021
(Level 1)
(Level 2)
(Level 3)
Collateral dependent loans:
(dollars in thousands)
Commercial
$
12,966
$
0-
$
0-
$
12,966
Commercial real estate
16,407
0-
0-
16,407
Residential real estate
2,251
0-
0-
2,251

			Fair Value Measurements at Reporting Date Using
Assets measured at fair value on a nonrecurring basis:	Carrying Value as of March 31, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent loans:	(dollars in thousands)
Commercial	$	14,698	$	-	$	-	$	14,698
Commercial real estate		29,370		-		-		29,370
Residential real estate		1,366		-		-		1,366

			Fair Value Measurements at Reporting Date Using
Assets measured at fair value on a nonrecurring basis:	December 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent loans:	(dollars in thousands)
Commercial	$	13,399	$	-	$	-	$	13,399
Commercial real estate		20,185		-		-		20,185
Residential real estate		2,794		-		-		2,794

Collateral dependent loans – Collateral dependent loans as of ~~September 30, 2021~~March 31, 2022 that required a valuation allowance were ~~$48.2~~$62.4 million with a related valuation allowance of ~~$16.6 million.~~

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

~~Impaired loans~~ – ~~Impaired loans as of December 31, 2020 that required a valuation allowance were $26.5~~$16.9 million compared to $54.1 million with a related valuation allowance of ~~$14.3~~$17.8 million as of December 31, 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) for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and for the year ended December 31, ~~2020:~~2021:

	Municipal Securities
	(dollars in thousands)
Beginning balance, December 31, 2021	$	8,565
Principal paydowns		(72	)
Ending balance, March 31, 2022	$	8,493

	Municipal Securities
	(dollars in thousands)
Beginning balance, December 31, 2020	$	8,844
Principal paydowns		(279	)
Ending balance, December 31, 2021	$	8,565

Municipal
Securities
(dollars in thousands)
Balance as of December 31, 2020
$
8,844
Principal paydowns
(208
)
Balance as of September 30, 2021
$
8,636

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

Balance as of December 31, 2020
$
8,844

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 ~~September 30, 2021~~March 31, 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.

September 30, 2021
Valuation
Unobservable
Fair Value
Techniques
Input
Rate
Securities available-for-sale:
(dollars in thousands)
Municipal securities
$
8,636
Discounted cash flows
Discount rate
2.9
%

March 31, 2022

Fair Value

Valuation
Techniques

Unobservable
Input

Rate

Securities available-for-sale:

(dollars in thousands)

Municipal securities

8,493

Discounted cash flows

Discount rate

2.9

December 31, 2021

Fair Value

Valuation
Techniques

Unobservable
Input

Rate

Securities available-for-sale:

(dollars in thousands)

Municipal securities

8,565

Discounted cash flows

Discount rate

2.9

December 31, 2020
Valuation
Unobservable
Fair Value
Techniques
Input
Rate
Securities available-for-sale:
(dollars in thousands)
Municipal securities
$
8,844
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.

~~September 30, 2021~~

March 31, 2022
(dollars in thousands)	Fair Value		Valuation Techniques	Unobservable Input	Range (weighted average)
Commercial	$	13,993	Market approach (100%)	Average transfer price as a price to unpaid principal balance	56% – 85% (57%)
Commercial	$	705	Appraisals of collateral value	Comparable sales	-10% to +35% (+8%)
Commercial real estate	$	29,370	Appraisals of collateral value	Comparable sales	-25% to 10% (-14%)
Residential real estate	$	1,366	Appraisals of collateral value	Comparable sales	+21% to +39% (+22%)

Valuation
Unobservable
(dollars in thousands)
Fair Value
Techniques
Input
Range (weighted average)
Collateral dependent:
Commercial
$
780
Appraisals of collateral value
Comparable sales
0% - 5% (2%)

Commercial
$
12,186
Market approach (100)
Average transfer price as a price to unpaid principal balance
48 – 53 (49)

Commercial real estate
$
16,407
Appraisals of collateral value
Comparable sales
0% - 25% (8%)

Residential real estate
$
2,251
Appraisals of collateral value
Comparable sales
1% - 15% (6%)

~~December 31, 2020~~

Valuation

Unobservable

December 31, 2021

(dollars in thousands)

Fair Value

Techniques

Input

Range (weighed average)

Fair Value

Valuation
Techniques

Unobservable
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)

12,193

Market approach (100%)

Average transfer price as a price to unpaid principal balance

48% to 73% (49%)

Commercial

227

Appraisals of collateral value

Adjustment for comparable sales

1% to +5% (+2%)

1,206

Appraisals of collateral value

Adjustment for comparable sales

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

Commercial real estate

1,393

Appraisals of collateral value

Adjustment for comparable sales

-25% to +20% (-8%)

20,185

Appraisals of collateral value

Adjustment for comparable sales

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

Residential real estate

2,794

Appraisals of collateral value

Adjustment for comparable sales

-15% to +39% (5%)

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)

As of ~~September 30, 2021~~March 31, 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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

Fair Value Measurements
Quoted
Prices in
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)
September 30, 2021
Financial assets:
Cash and due from banks
$
413,195
$
413,195
$
413,195
$
0-
$
0-
Securities available-for-sale
462,884
462,884
1,020
453,228
8,636
Investment in restricted stocks
18,106
n/a
n/a
n/a
n/a
Equity securities
13,700
13,700
11,709
1,991
0-
Net loans
6,498,453
6,567,363
0-
0-
6,567,363
Derivatives
1,296
1,296
0-
1,296
0-
Accrued interest receivable
33,610
33,610
0-
1,356
32,254

Financial liabilities:
Noninterest-bearing deposits
1,500,754
1,500,754
1,500,754
0-
0-
Interest-bearing deposits
4,897,584
4,899,141
3,675,673
1,223,468
0-
Borrowings
253,225
255,099
0-
255,099
0-
Subordinated debentures
152,875
164,378
0-
164,378
0-
Accrued interest payable
2,879
2,879
0-
2,879
0-

December 31, 2020
Financial assets:
Cash and due from banks
$
303,756
$
303,756
$
303,756
$
0-
$
0-
Investment securities available-for-sale
487,955
487,955
157
478,954
8,844
Restricted investment in bank stocks
25,099
n/a
n/a
n/a
n/a
Equity securities
13,387
13,387
13,387
0-
0-
Net loans
6,157,081
6,244,037
0-
0-
6,244,037
Accrued interest receivable
35,317
35,317
0-
1,764
33,553

Financial liabilities:
Noninterest-bearing deposits
1,339,108
1,339,108
1,339,108
0-
0-
Interest-bearing deposits
4,620,116
4,633,961
3,155,983
1,477,978
0-
Borrowings
425,954
429,671
0-
429,671
0-
Subordinated debentures
202,648
214,113
0-
214,113
0-
Derivatives
2,119
2,119
0-
2,119
0-
Accrued interest payable
3,687
3,687
0-
3,687
0-

					Fair Value Measurements
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(dollars in thousands)

March 31, 2022
Financial assets:
Cash and due from banks	$	311,544	$	311,544	$	311,544	$	-	$	-
Securities available-for-sale		512,030		512,030		191		503,346		8,493
Restricted investments in bank stocks		25,254		n/a		n/a		n/a		n/a
Equity securities		13,198		13,198		10,550		2,648		-
Net loans		6,899,525		6,874,974		-		-		6,874,974
Derivatives		22,872		22,872		-		22,872		-
Accrued interest receivable		34,081		34,081		-		1,472		32,609

Financial liabilities:
Noninterest-bearing deposits		1,631,292		1,631,292		1,631,292		-		-
Interest-bearing deposits		4,929,113		4,909,128		3,863,299		1,045,829		-
Borrowings		412,170		410,535		-		410,535		-
Subordinated debentures		153,027		155,940		-		155,940		-
Accrued interest payable		2,889		2,889		-		2,889		-

December 31, 2021
Financial assets:
Cash and due from banks	$	265,536	$	265,536	$	265,536	$	-	$	-
Investment securities available-for-sale		534,507		534,507		195		525,747		8,565
Restricted investment in bank stocks		27,826		n/a		n/a		n/a		n/a
Equity securities		13,794		13,794		11,081		2,713		-
Net loans		6,749,849		6,800,287		-		-		6,800,287
Derivatives		3,347		3,347		-		3,347		-
Accrued interest receivable		34,152		34,152		-		1,554		32,598
Financial liabilities:
Noninterest-bearing deposits
Interest-bearing deposits		1,617,049		1,617,049		1,617,049		-		-
Borrowings		4,715,904		4,716,358		3,565,795		1,150,563		-
Subordinated debentures		468,193		469,671		-		469,671		-
Accrued interest payable		152,951		163,995		-		163,995		-

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)

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 Income Components
Amounts Reclassified from Accumulated
Other Comprehensive Income
Affected Line item in the
Statement Where Net Income is Presented
Three Months Ended
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
Sale of investment securities
$
0-
$
0-
$
195
$
29
Net (losses) gains on sales of securities available-for-sale Income tax expense
available-for-sale
0-
0-
(48
)
(6
)
$
0-
$
0-
$
147
$
23

Net interest income on swaps
$
(328
)
$
(631
)
$
(1,543
)
$
(942
)
Interest expense
90
196
434
265
Income tax expense
$
(238
)
$
(435
)
$
(1,109
)
$
(677
)

Amortization of pension plan net
$
(75
)
$
(75
)
$
(225
)
$
(226
)
Other components of net periodic pension expense
actuarial losses
21
21
63
63
Income tax benefit
$
(54
)
$
(54
)
$
(162
)
$
(163
)

Total reclassification
$
(292
)
$
(489
)
$
(1,124
)
$
(817
)

Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income						Affected Line item in the Consolidated Statements of Income
	Three Months Ended March 31,
	2022			2021
Net interest income on swaps	$	(525	)	$	(631	)	Interest expense
		147			177		Income tax expense
	$	(378	)	$	(454	)

Amortization of pension plan net actuarial losses	$	(16	)	$	(75	)	Other components of net periodic pension expense
		4			20		Income tax expense
	$	(12	)	$	(55	)
Total reclassification	$	(390	)	$	(509	)

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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 consisted of the following:

September 30,
December 31,
2021
2020
(dollars in thousands)
Investment securities available-for-sale, net of tax
$
1,475
$
7,859

Cash flow hedge, net of tax
932
(1,520
)
Defined benefit pension plan, net of tax
(3,380
)
(3,542
)
Total
$
(973
)
$
2,797

	March 31, 2022			December 31, 2021
	(dollars in thousands)
Investment securities available-for-sale, net of tax	$	(22,970	)	$	(484	)
Cash flow hedge, net of tax		16,443			2,406
Defined benefit pension and post-retirement plans, net of tax		(1,742	)		(3,326	)
Total	$	(8,269	)	$	(1,404	)

Note 8. ~~Stock Based~~Stock-based Compensation

The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of ~~September 30, 2021.~~March 31, 2022. The maximum number of shares of common stock or equivalents which may be issued under the Plan, is 750,000. Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, restricted share units or performance units. Shares available for grant and issuance under the Plan as of ~~September 30, 2021~~March 31, 2022 are approximately ~~329,175.~~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 vesting period starting one year after the date of grant with 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 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-in-control.~~change of control. All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the awards 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 nine~~ months ended ~~September 30,~~March 31, 2022 and March 31, 2021 was ~~$1.2~~$1.1 million and ~~$3.2 million, respectively. Stock-based compensation expense for the three and nine months ended September 30, 2020 was $0.8 million and $2.0~~$1.0 million, respectively.

Activity inunder the Company’s options for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 was as follows:

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
Granted
0-
0-
Exercised
(5,449
)
8.34
Forfeited/cancelled/expired
0-
0-
Outstanding as of September 30, 2021
32,564
$
9.15
1.0
$
554,374

Exercisable as of September 30, 2021
32,564
$
9.15
1.0
$
554,374

	Number of Stock Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding as of December 31, 2021		23,766		$	9.94
Granted		-			-
Exercised		(8,774	)		9.09
Forfeited/cancelled/expired
Outstanding as of March 31, 2022		14,992			10.44		0.63	$	323,303
Exercisable as of March 31, 2022		14,992		$	10.44		0.63	$	323,303

The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on ~~September 30, 2021~~March 31, 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 ~~September 30, 2021.~~March 31, 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~~

~~(unaudited)~~

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Activity inunder the Company’s restricted shares for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 was as follows:

Weighted-
Average
Nonvested
Grant Date
Shares
Fair Value
Nonvested as of December 31, 2020
113,114
$
18.17
Granted
49,971
25.33
Vested
(68,142
)
17.16
Forfeited/cancelled/expired
(3,071
)
23.76
Nonvested September 30, 2021
91,872
$
22.62

	Nonvested Shares			Weighted- Average Grant Date Fair Value
Nonvested as of December 31, 2021		82,693		$	21.78
Granted		32,522			32.71
Vested		(18,742	)		23.13
Forfeited/cancelled/expired		(68	)		23.23
Nonvested March 31, 2022		96,405		$	25.20

As of ~~September 30, 2021,~~March 31, 2022, there was approximately $1.4 million of total unrecognized compensation cost related to nonvested restricted shares granted. The cost is expected to be recognized over a weighted average period of ~~1.2~~1.6 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
37,184
15.57
Vested shares
(29,421
)
31.35
Forfeited/cancelled/expired
(11,153
)
17.06
Unearned as of September 30, 2021
181,789
233,638
$
16.32

	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 March 31, 2022		195,264			221,541	$	17.98

As of ~~September 30, 2021,~~March 31, 2022, the specific number of shares related to performance units that were expected to vest was ~~181,789,~~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 ~~September 30, 2021~~March 31, 2022, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is ~~233,638.~~221,541. During the ~~nine~~three months ended ~~September 30, 2021, 29,421~~March 31, 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 ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 were ~~14,711~~22,350 shares. As of ~~September 30, 2021,~~March 31, 2022, compensation cost of approximately ~~$1.4~~$2.1 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of ~~1.6~~2.1 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
Average Grant
(expected)
Date Fair Value
Unearned as of December 31, 2020
169,313
$
14.07
Awarded
45,027
25.24
Vested shares
(68,916
)
16.29
Forfeited/cancelled/expired
(8,476
)
15.83
Unearned as of September 30, 2021
136,948
$
16.52

	Units (expected)			Weighted Average Grant Date Fair Value
Unearned as of December 31, 2021		136,948		$	16.52
Awarded		52,312			32.80
Vested shares		(69,584	)		16.13
Unearned as of March 31, 2022		119,676		$	23.86

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 ~~nine~~three months ended ~~September 30, 2021, 68,916~~March 31, 2022, 69,584 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 ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 were ~~34,458~~31,383 shares. As of ~~September 30, 2021,~~March 31, 2022, compensation cost of approximately ~~$1.4~~$2.4 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of ~~1.3~~1.8 years.

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 9. Components of Net Periodic Pension Cost

The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until ~~September~~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
September 30,
Affected Line Item in the Consolidated
Statements of Income

2021

2020

(dollars in thousands)
Service cost

$
0-

$
0-

Interest cost

71

91

Other components of net periodic pension expense

Expected return on plan assets

(213
)

(196
)
Other components of net periodic pension expense
Net amortization

75

75

Other components of net periodic pension expense

Total periodic pension income

$
(67
)

$
(30
)

	Three Months Ended						Affected Line Item in the Consolidated
	March 31,						Statements of Income
	2022			2021
	(dollars in thousands)
Service cost	$	-		$	-
Interest cost		78			71		Other components of net periodic pension expense
Expected return on plan assets		(237	)		(213	)	Other components of net periodic pension expense
Net amortization		16			75		Other components of net periodic pension expense
Total periodic pension income	$	(143	)	$	(67	)

Contributions

Nine Months Ended
September 30,
Affected Line Item in the Consolidated
Statements of Income

2021

2020

(dollars in thousands)
Service cost

$
0-

$
0-

Interest cost

213

273

Other components of net periodic pension expense

Expected return on plan assets

(639
)

(588
)
Other components of net periodic pension expense
Net amortization

225

226

Other components of net periodic pension expense

Total periodic pension income

$
(201
)

$
(89
)

~~Contributions~~

The Company did not contribute to the Pension Trust during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 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.

~~Table of Contents~~

~~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:

September 30, 2021
December 31, 2020
Amount
Rate
Amount
Rate
(dollars in thousands)
Total FHLB borrowings
$
253,225
1.23
%
$
425,954
1.07
%

By remaining period to maturity:
Less than 1 year
$
168,213
1.00
%
$
297,570
0.84
%
1 year through less than 2 years
57,360
1.93
%
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
729
2.91
%

2,824
2.42
%
Total FHLB borrowings
253,352
1.23
%
426,038
1.07
%
Fair value discount
(127
)
(84
)
FHLB borrowings, net
$
253,225
$
425,954

	March 31, 2022						December 31, 2021
	Amount			Rate			Amount			Rate
	(dollars in thousands)
By remaining period to maturity:
Less than 1 year	$	359,526			0.79	%	$	390,549			0.56	%
1 year through less than 2 years		25,000			2.92	%		50,000			1.84	%
2 years through less than 3 years		-			n/a			-			n/a
3 years through less than 4 years		25,000			1.00	%		25,000			1.00	%
4 years through 5 years		2,050			2.23	%		2,050			2.23	%
After 5 years		698			2.91	%		714			2.91	%
FHLB borrowings - gross		412,274			0.94	%		468,313			0.73	%
Fair value (discount)		(104	)					(120	)
Total FHLB borrowings	$	412,170					$	468,193

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 fixed rates. The advances as of ~~September 30, 2021~~March 31, 2022 were primarily collateralized by approximately ~~$2.0~~$1.9 billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement. As of ~~September 30, 2021~~March 31, 2022 the Company had remaining borrowing capacity of approximately ~~$1.2~~$1.0 billion at ~~FHLB and $75 million~~FHLB.

Table of ~~the less than 1 year FHLB advances were hedged with interest rate swaps, see Note 4 for additional details.~~Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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. 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 LIBOR plus 2.85% and re-prices quarterly. The rate as of ~~September 30, 2021~~March 31, 2022 was ~~2.98%~~3.15%.

The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of ~~September 30, 2021~~March 31, 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

01/23/2034

01/23/2009

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

During ~~September~~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, ~~September~~June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on ~~September~~June 15 and December 15 of each year, commencing December 15, 2020. From and including ~~September~~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. 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 September 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 have a stated maturity of July 1, 2025, and bear 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.

Note 12. Preferred Stock

On August 19, 2021, the Company completed an underwritten public offering of 115,000 shares, or ~~$115~~$115.0 million in aggregate liquidation preference, of its depositary shares, each representing a 1/40th interest in a share of the Company’s 5.25% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A, no par value, with a liquidation preference of $1,000 per share. The net proceeds received from the issuance of preferred stock at the time of closing were $110.9 million.

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Item 2. 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 ~~September 30, 2021~~March 31, 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.

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.

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~~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 ~~September 30, 2021,~~March 31, 2022, the Company has 10one deferred ~~loans~~loan with a total outstanding loan balance of ~~$10.2~~$0.5 million. As provided for under the CARES ~~Act,~~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~~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 ~~September~~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 ~~September~~June 5, 2020 have a five-year term, and the loans bear interest at 1%, along with an origination fee payable from the SBA to the Company. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of ~~September 30, 2021,~~March 31, 2022, PPP loans were ~~$177.8~~$54.3 million. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government and, as such, the Company has not included the PPP loans in calculation of the ACL as of ~~September 30, 2021.~~March 31, 2022. Should those circumstances change, the Company could be required to establish additional provisions for credit loss expense charged to earnings. As of ~~September 30, 2021,~~March 31, 2022 remaining deferred and unrecognized PPP fees were ~~$6.0~~$2.6 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 ~~September 30, 2021~~March 31, 2022 was ~~$32.1~~$29.9 million compared to ~~$24.8~~$33.0 million for the comparable three-month period ended ~~September 30, 2020.~~March 31, 2021. The Company’s diluted earnings per share were ~~$0.80~~$0.75 for the three months ended ~~September 30, 2021,~~March 31, 2022 as compared with diluted earnings per share of ~~$0.62~~$0.82 for the comparable three-month period ended ~~September 30, 2020.~~March 31, 2021. The ~~increase~~$3.1 million decrease in net income available to common stockholders and $0.07 decrease in diluted earnings per share ~~was attributable~~versus the first quarter of 2021 were due to ana $7.2 million increase to provision for credit losses, a $2.7 million increase in noninterest expenses, $1.5 million in preferred dividends, a $0.4 million decrease in noninterest income and a $0.5 million increase in income tax expenses, partially offset by a $9.2 million increase in net interest income of $7.7 million, a decrease in provision for credit losses of $3.9 million, and an increase in noninterest income of $0.5 million, partially offset by an increase in noninterest expenses of $1.7 million and an increase in income tax expense of $3.1 million. The decrease in provision for credit losses, to $1.1 million, was due to the impact of an improved economic outlook on the current expected credit losses (“CECL”) accounting standard, compared with a $5.0 million provision in the third quarter of 2020. income.

Net income for the nine months ended September 30, 2021 was $97.3 million compared to $45.6 million for the comparable nine-month period ended September 30, 2020. The Company’s diluted earnings per share were $2.43 for the nine months ended September 30, 2021, compared with diluted earnings per share of $1.15 for the comparable nine-month period ended September 30, 2020. The increase in net income and diluted earnings per share were primarily attributable to an increase in net interest income of $15.8 million, a decrease in provision for credit losses of $42.3 million, a decrease in noninterest expenses of $13.7 million and an increase in noninterest income of $1.0 million, partially offset by an increase in income tax expense of $21.1 million. The $6.3 million reversal of provision for loan losses was due to the impact of an improved economic outlook on the CECL accounting standard, compared with a $36.0 million provision in the nine months ended September 30, 2020, which reflected the impact of the pandemic estimated under the incurred loss method.

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 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. 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 ~~September 30, 2021~~March 31, 2022 increased by ~~$7.8~~$9.2 million, or ~~12.7%~~15.0%, from the comparable three-month period ended ~~September 30, 2020.~~March 31, 2021. The increase from the ~~third quarter of 2020~~three months ended March 31, 2021 resulted primarily from a 2410.1% increase in average loans and a 15 basis-point widening of the net interest margin to ~~3.73%~~3.71% from ~~3.49%, and an increase of 5.2% in average interest-earning assets.~~3.56%. The widening of the net interest margin resulted from a 6027 basis-point reduction in the cost of interest-bearing liabilities, partially offset by ~~24 basis-points reduction in the yield on average interest-earning assets.~~

Fully taxable equivalent net interest income for the nine months ended September 30, 2021 increased by $15.8 million, or 8.8%, from the comparable nine-month period ended September 30, 2020, resulting from an increase in average interest-earning assets of 3.3%, largely due to PPP originations, and a 19 basis-point widening of the net interest margin to 3.63% from 3.44%. The widening of the net interest margin resulted from a 62 basis-point reduction in the cost of interest-bearing liabilities, partially offset by a 338 basis-point reduction 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 nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company’s average assets, liabilities and stockholders’ equity. The Company’s net interest income, net interest spread and net interest margin are also reflected.

Average Statements of Condition with Interest and Average Rates

Three Months Ended September 30,
2021 2020
Average
Balance Interest
Income/
Expense Average
Rate ⁽⁷⁾ Average
Balance Interest
Income/
Expense Average
Rate ⁽⁷⁾
(dollars in thousands)
Interest-earning assets:
Investment securities ^{(1) (2)} $ 459,559 $ 1,712 1.48 % $ 420,362 $ 2,176 2.06 %
Total loans ^{(2) (3) (4)} 6,455,952 75,434 4.64 6,288,443 75,028 4.75
Federal funds sold and interest-bearing deposits
with banks 387,155 151 0.15 227,617 47 0.08
Restricted investment in bank stocks 19,105 245 5.09 26,077 426 6.50
Total interest-earning assets 7,321,771 77,542 4.20 6,962,499 77,667 4.44
Allowance for credit losses (78,327) (69,381)
Other noninterest-earning assets 594,553 580,884
Total assets $ 7,837,997 $ 7,474,002

Interest-bearing liabilities:
Time deposits $ 1,252,818 $ 2,983 0.94 $ 1,728,129 $ 8,174 1.88
Other interest-bearing deposits 3,582,261 2,495 0.28 2,881,592 3,773 0.52
Total interest-bearing deposits 4,835,079 5,478 0.45 4,609,721 11,947 1.03

Borrowings 276,183 1,105 1.59 467,399 1,992 1.70
Subordinated debentures, net of capitalized costs 152,825 2,168 5.63 202,502 2,700 5.30
Capital lease obligation 2,018 30 5.90 2,211 33 5.94
Total interest-bearing liabilities 5,266,105 8,781 0.66 5,281,833 16,672 1.26

Noninterest-bearing demand deposits 1,495,456 1,253,235
Other liabilities 44,245 55,570
Total noninterest-bearing liabilities 1,539,701 1,308,805
Stockholders’ equity 1,032,191 883,364
Total liabilities and stockholders’ equity $ 7,837,997 $ 7,474,002
Net interest income (tax-equivalent basis) 68,761 61,005
Net interest spread ⁽⁵⁾ 3.54 % 3.18 %
Net interest margin ⁽⁶⁾ 3.73 % 3.49 %
Tax-equivalent adjustment (516) (456)
Net interest income $ 68,245 $ 60,549

	Three Months Ended March 31,
	2022									2021
	Average Balance			Interest Income/ Expense			Average Rate ⁽⁷⁾			Average Balance			Interest Income/ Expense			Average Rate ⁽⁷⁾
	(dollars in thousands)
Interest-earning assets:
Securities ^{(1) (2)}	$	545,203		$	2,771			2.06	%	$	473,181		$	2,058			1.76	%
Total loans ^{(2) (3) (4)}		6,871,477			76,320			4.50			6,242,960			70,676			4.59
Federal funds sold and interest-bearing with banks		312,224			120			0.16			269,537			49			0.07
Restricted investment in bank stocks		24,977			214			3.47			22,822			256			4.55
Total interest-earning assets		7,753,881			79,425			4.15			7,008,500			73,039			4.23
Noninterest-earning assets:
Allowance for credit losses		(79,763	)								(81,549	)
Other noninterest-earning assets		589,264									573,083
Total assets	$	8,263,382								$	7,500,034

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits	$	1,124,614			2,154			0.78		$	1,422,295			2,434			0.69
Other interest-bearing deposits		3,851,558			2,856		��	0.30			3,225,751			5,151			0.65
Total interest-bearing deposits		4,976,172			5,010			0.41			4,648,046			7,585			0.66

Borrowings		404,907			1,377			1.38			375,511			1,674			1.81
Subordinated debentures		152,977			2,168			5.75			154,341			2,167			5.70
Finance lease		1,917			28			5.92			2,115			32			6.14
Total interest-bearing liabilities		5,535,973			8,583			0.63			5,180,013			11,458			0.90

Demand deposits		1,547,055									1,348,585
Other liabilities		48,386									43,340
Total noninterest-bearing liabilities		1,595,441									1,391,925
Stockholders’ equity		1,131,968									928,096
Total liabilities and stockholders’ equity	$	8,263,382								$	7,500,034
Net interest income (tax-equivalent basis)					70,842									61,581
Net interest spread ⁽⁵⁾								3.53	%								3.33	%
Net interest margin ⁽⁶⁾								3.71	%								3.56	%
Tax-equivalent adjustment					(484	)								(418	)
Net interest income				$	70,358								$	61,163

⁽¹⁾	Average balances are based on amortized cost and include equity securities.
⁽²⁾	Interest income is presented on a tax-equivalent basis using ~~an assumed tax rate of~~ 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.~~

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

Nine Months Ended September 30,
2021 2020

Average
Balance

Interest
Income/
Expense

Average
Rate ⁽⁷⁾

Average
Balance

Interest
Income/
Expense

Average
Rate ⁽⁷⁾

(dollars in thousands)
Interest-earning assets:
Investment securities ^{(1) (2)} $ 459,017 $ 5,534 1.61 % $ 438,563 $ 7,802 2.38 %
Total loans ^{(2) (3) (4)} 6,319,160 217,465 4.60 6,192,822 224,336 4.84
Federal funds sold and interest-bearing deposits
with banks

332,290

285

0.11

244,539

625

0.34

Restricted investment in bank stocks 21,098 764 4.84 28,124 1,268 6.02
Total interest-earning assets 7,132,565 224,048 4.20 6,904,048 234,031 4.53
Allowance for credit losses (80,129) (54,009)
Other noninterest-earning assets         585,043 571,628
Total assets $ 7,637,479 $ 7,421,667

Interest-bearing liabilities:

  Time deposits $ 1,332,587 $ 12,096 1.21 $ 1,864,835 $ 28,130 2.01
  Other interest-bearing deposits 3,377,443 7,391 0.29 2,727,696 14,625 0.72
Total interest-bearing deposits 4,710,030 19,487 0.55 4,592,531 42,755 1.24

Borrowings 327,412 4,199 1.71 580,641 6,580 1.51
Subordinated debentures, net of capitalized costs 153,300 6,502 5.67 157,936 6,555 5.54
Capital lease obligation 2,066 93 6.02 2,257 101 5.98
Total interest-bearing liabilities 5,192,808 30,281 0.78 5,333,365 55,991 1.40

Noninterest-bearing demand deposits 1,426,121 1,162,340
Other liabilities 47,417 53,788
Total noninterest-bearing liabilities 1,473,538 1,216,129
Stockholders’ equity 971,133 872,173
Total liabilities and stockholders’ equity $ 7,637,479 $ 7,421,667
Net interest income (tax-equivalent basis) 193,767 178,040
Net interest spread ⁽⁵⁾ 3.42 % 3.13 %
Net interest margin ⁽⁶⁾ 3.63 % 3.44 %
Tax-equivalent adjustment (1,350) (1,419)
Net interest income $ 192,417 $ 176,621

⁽¹⁾	~~Average balances are based on amortized cost and include equity securities.~~
⁽²⁾	~~Interest income is presented on a tax-equivalent basis using an assumed tax rate of 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.

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Noninterest Income

Noninterest income totaled ~~$4.0~~$3.1 million for the three months ended ~~September 30, 2021,~~March 31, 2022, compared with ~~$3.5~~$3.4 million for the three months ended March 31, 2021. Included in noninterest income were net losses on equity securities of $0.6 million and $0.2 million for the three months ended March 31, 2022 and three months ended 2021, respectively, and a $0.7 million gain on the sale of branches in the first quarter 2021. Excluding the aforementioned items, noninterest income was $3.7 million and $2.9 million for the three months ended March 31, 2022 and three-month period ended March 31, 2021, respectively. The $0.7 million increase in noninterest income excluding the items discussed above for the three months ended March 31, 2022 versus the comparable three-month period ended ~~September 30, 2020. The increase of $0.5 million in noninterest income when compared to the third quarter of 2020~~March 31, 2021 was ~~attributable~~primarily due to increases in ~~sale of loans held-for-sale of $0.5 million and~~ deposit, loan and other income of $0.4 million, ~~partially offset by a decrease in BOLI of $0.3 million and a net loss on equity securities of $0.1 million.~~

Noninterest income totaled $11.9 million for the nine months ended September 30, 2021, compared with $11.0 million for the comparable nine-month period ended September 30, 2020. Included in noninterest income for the nine months ended September 30, 2021 and September 30, 2020 were $0.9 million and $2.3 million, respectively, of PPP loan referral fee income generated by BoeFly. Also included in noninterest income for the nine months ended September 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 by $1.8 million when compared to the comparable nine-month period ended September 30, 2020. The increase was primarily attributable to an increase in net gains on sale of loans held-for-sale of $1.4 million and an increase in deposit, loan and other income of $1.0 million, partially offset by decreases in BOLIBoeFly income of $0.2 million and ~~an increase in net losses on equity securities~~BOLI income of ~~$0.5~~$0.1 million.

Noninterest Expenses

Noninterest expenses totaled ~~$28.2~~$29.2 million for the three months ended ~~September 30, 2021,~~March 31, 2022, compared ~~with~~to $26.5 million for the three months ended March 31, 2021. The increase in noninterest expenses of $2.7 million from the comparable three-month period ended ~~September 30, 2020. Noninterest expenses increased $1.7 million when compared to the comparable three-month~~ period ~~ended September 30, 2020. The increase~~March 31, 2021 was primarily attributable to increases in salaries and employee benefits of ~~$1.6~~$3.1 million, a $0.7 million increase acquisition expenses related to BoeFly and increases in other expenses of ~~$1.2 million, professional and consulting expenses of $0.3 million, marketing and advertising $0.1~~$0.6 million, and ~~data processing expenses~~information technology and communications of ~~$0.1~~$0.3 million, partially offset by decreases in occupancy and equipment expenses of $1.5 million, which included a $0.9 million favorable dissolution of a merger lease obligation, FDIC insurance ~~expense~~ of ~~$0.6~~$0.3 million and ~~amortization~~professional and consulting of ~~core deposit intangibles of $0.1~~$0.2 million.

Noninterest expenses totaled $80.9 million for the nine months ended September 30, 2021, compared with $94.6 million for the comparable nine-month period ended September 30, 2020. Included in noninterest expenses for the nine months ended September 30, 2020 were $14.6 million in merger and restructuring expenses and $2.3 million in expenses related to the BoeFly acquisition. Excluding these items, noninterest expenses increased $3.3 million when compared to the comparable nine-month period ended September 30, 2020. The increase ~~was primarily attributable to increases~~ in salaries and employee benefits ~~of $3.5 million, other expenses of $1.5 million, professional and consulting expenses of $1.1 million and data processing expenses of $0.2 million, partially offset by decreases~~from the prior year quarter was attributable to new hires, a seasonal increase in ~~occupancy and equipment expense of $1.3 million, FDIC insurance expense of $1.0 million, amortization of core deposit intangibles of $0.4 million and marketing and advertising expense of $0.1 million.~~payroll taxes, as well as higher incentive-based, stock compensation expense.

Income Taxes

Income tax expense was $11.4 million for the three months ended March 31, 2022, compared to $10.9 million for the three months ended ~~September 30, 2021, compared to $7.8 million for the comparable three-month period ended September 30, 2020. The increase in income tax expense was the result of higher income before taxes.~~March 31, 2021. The effective tax rate for the three months ended ~~September 30,~~March 31, 2022 and March 31, 2021 was 26.6% and ~~September 30, 2020 was 25.3% and 23.9%~~24.8%, respectively.~~The higher effective tax rate during the third quarter 2021 when compared to the third quarter of 2020 resulted from a lower proportion of income from non-taxable sources.~~

Income tax expense was $32.4 million for the nine months ended September 30, 2021, compared to $11.3 million for comparable nine-month period ended September 30, 2020. The increase in income tax expense was the result of higher income before taxes. The effective tax rate for the ~~nine months ended September 30, 2021 was 25.0% versus 19.9% for the prior-year period.~~ ~~The higher effective tax rate during the third~~first quarter of ~~2021 when~~2022 was higher compared to ~~the third quarter of 2020 resulted from a lower proportion~~March 31, 2021 due to different proportions of income from non-taxable sources.

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Financial Condition

Loan Portfolio

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

September 30, 2021 December 31, 2020 Amount
Increase/
Amount % Amount % (Decrease)
(dollars in thousands)

Commercial ⁽¹⁾ $ 1,325,488 20.1 % $ 1,521,967 24.4 % $ (196,479)

Commercial real estate 4,436,626 67.3 3,783,550 60.6 653,076

Commercial construction 552,896 8.4 617,747 9.8 (64,851)

Residential real estate 270,793 4.1 322,564 5.1 (51,771)

Consumer 2,093 0.1 1,853 0.1 240

Gross loans $ 6,587,896 100.0 % $ 6,247,681 100.0 % $ 340,215

^{(1)       Included in commercial loans as of September 30, 2021 and December 31, 2020 were PPP loans of $177.8 million and $397.5 million, respectively.}

	March 31, 2022					December 31, 2021					Amount Increase/
	Amount		%			Amount		%			(Decrease)
	(dollars in thousands)
Commercial ⁽¹⁾	$	1,278,477		18.3	%	$	1,299,428		19.0	%	$	(20,951	)
Commercial real estate		4,919,093		70.4			4,741,590		69.3			177,503
Commercial construction		539,058		7.7			540,178		7.9			(1,120	)
Residential real estate		250,205		3.5			255,269		3.7			(5,064	)
Consumer		1,140		0.1			1,886		0.1			(746	)
Gross loans	$	6,987,973		100.0	%	$	6,838,351		100.0	%	$	149,622

As of ~~September 30, 2021,~~March 31, 2022, gross loans totaled ~~$6.6~~$7.0 billion, an increase of ~~$340.2~~$149.6 million, or ~~5.4%~~2.2%, as compared to December 31, ~~2020.~~2021. Net loan growth was ~~primarily~~ attributable to ~~increases in the commercial real estate segment~~organic loan originations.

(1)

Included in commercial loans as of March 31, 2022 and December 31, 2021 are PPP loans of $54.3 million and $93.1 million, respectively.

Table of $653.1 million, offset by decreases in the commercial segment of $196.5 million, which primarily resulted from PPP loan forgiveness, decreases in commercial construction of $64.9 million and decreases in residential real estate of $51.8 million.Contents

Allowance for Credit Losses and Related Provision

As of March 31, 2022, the Company’s allowance for credit losses for loans was $80.1 million, an increase of $1.3 million from $78.8 million December 31, 2021. The allowance for credit losses for loans as of December 31, 2021 included a $6.6 million increase that was related to the “Day 1” CECL adjustment resulting from adopting CECL as of January 1, ~~2021,~~2021. Excluding that increase, the ~~Company adopted the CECL accounting standard. As of September 30, 2021, the Company’s ACL~~allowance for credit losses for loans increased by $7.8 million. The increase was ~~$78.0~~primarily attributable to an increase in provision for credit losses for loans of $6.6 million and a decrease of ~~$1.2~~$2.1 million ~~from $79.2 million December 31, 2020. The decrease was attributable to a release of credit losses of approximately $6.0 million, net~~in charge-offs, ~~of $1.8 million,~~ partially offset by a ~~provision~~decrease of ~~$6.6~~$0.4 million ~~resulting from the “Day 1” effect of the adoption of the CECL accounting.~~in recoveries.

The provision for (reversal of) credit losses ~~which includes provision for unfunded commitments, for the three and nine months ended September 30, 2021~~ was ~~$1.1 million and $(6.3) million, respectively, compared to $5.0 million and $36.0~~$1.5 million for the three ~~and nine~~ months ended ~~September 30, 2020, respectively.~~March 31, 2022 and $(5.8) million for the three months ended March 31, 2021. The ~~decrease in~~ provision for credit losses during the three months ended March 31, 2022 reflected strong organic loan growth and stabilizing macroeconomic forecasts. The reversal of provision for credit losses during the three months ended March 31, 2021 was the result of an improved macroeconomic ~~outlook as of September 30, 2021~~forecast when compared to January 1, 2021, the ~~day the Company adopted CECL. The prior year provision in~~date of CECL implementation.

There were $0.2 million net charge-offs for the three ~~and nine~~ months ended ~~September 30, 2020, was primarily due to the significant economic slowdown due to the COVID-19 pandemic.~~

~~There were $1.6 million and $1.8~~March 31, 2022, compared with $0.1 million in net ~~loan charge-offs during~~recoveries for the three ~~and nine~~ months ended September 30, 2021, compared with $(0.5) million and $-0- in net loan recoveries during the three and nine months ended September 30, 2020, respectively. The current quarter included a $1.4 million charge-off of a commercial real estate loan that previously had a specific credit reserve.March 31, 2021. The ACL as a percentage of loans receivable ~~was~~amounted to ~~1.19%~~1.15% as of ~~September 30, 2021 compared to 1.27% as of~~both March 31, 2022 and December 31, ~~2020.~~2021. Excluding the impact of PPP loans in the calculation of the ACL as a percentage of loans receivable, the ratio ~~is 1.22%~~increases to 1.16% as of ~~September 30, 2021,~~March 31, 2022, compared to ~~1.36%~~1.17% as of December 31, ~~2020.~~2021. PPP loans do not have allowance for credit losses attributable to them, as they are ~~assumed to be~~ 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 ~~September 30, 2021~~March 31, 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.

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

Three Months Ended
September 30,
2021 2020⁽¹⁾
(dollars in thousands)
Average loans receivable at end of period $ 6,449,726 $ 6,277,671
Analysis of the ACL:
Balance – beginning of period $ 78,684 $ 68,724
Charge-offs:
Commercial (254) (48)
Commercial real estate (1,473) -
Residential real estate - (209)
Total charge-offs (1,727) (257)
Recoveries:
Commercial 1 -
Commercial real estate 85 800
Residential real estate 20
Consumer 7 -
Total recoveries 113 800
Net loan (charge-offs) recoveries (1,614) 543
Provision for credit losses (loans) 916 5,000
Balance - end of period $ 77,986 $ 74,267
Ratio of annualized net charge-offs during the period to average loans receivable during the period 0.10 % (0.03) %
Loans receivable $ 6,576,439 $ 6,251,051
ACL as a percentage of loans receivable 1.19 % 1.19 %

Nine Months Ended
September 30,
2021 2020⁽¹⁾
(dollars in thousands)
Average loans receivable at end of period $ 6,314,433 $ 6,192,822
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 (304) (552)
Commercial real estate (1,628) -
Residential real estate (7) (278)
Consumer - (3)
Total charge-offs (1,939) (833)
Recoveries:
Commercial 74 2
Commercial real estate 85 802
Residential real estate 20 -
Consumer 9 3
Total recoveries 188 807
Net loan charge-offs (1,751) (26)
(Reversal of) provision for credit losses (loans) (6,046) 36,000
Balance - end of period $ 77,986 $ 74,267
Ratio of annualized net charge-offs during the period to average loans receivable during the period 0.04 % 0.00 %
Loans receivable $ 6,576,439 $ 6,251,051
ACL as a percentage of loans receivable 1.19 % 1.19 %

	Three Months Ended March 31,
	2022			2021
	(dollars in thousands)
Average loans receivable at end of period	$	6,871,095		$	6,238,723
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		(274	)		-
Total charge-offs		(274	)		-
Recoveries:
Commercial		1			60
Consumer		31			1
Total recoveries		32			61
Net (charge-offs) recoveries		(242	)		61
Provision for (reversal of) credit losses (loans)		1,539			(5,276	)
Balance - end of period	$	80,070		$	80,568

Ratio of annualized net charge-offs during the period to average loans receivable during the period		0.01	%		0.00	%
Loans receivable	$	6,979,595		$	6,277,191
ACL as a percentage of loans receivable		1.15	%		1.28	%

~~(1) The ACL for the prior periods was calculated based on the incurred loan loss model.~~

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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, 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:

September 30,
2021
December 31, 2020
(dollars in thousands)
Nonaccrual loans $ 65,959 $ 61,696
OREO - -
Total nonperforming assets ⁽¹⁾ $ 65,959 $ 61,696

Performing TDRs $ 41,256 $ 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) $ 14,683 $ 12,821

	March 31, 2022		December 31, 2021
	(dollars in thousands)
Nonaccrual loans	$	59,403	$	61,700
OREO		316		-
Total nonperforming assets ⁽¹⁾	$	59,719	$	61,700

Performing TDRs	$	47,441	$	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)	$	12,380	$	13,531

⁽¹⁾

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

Nonaccrual loans to total loans receivable 1.00 % 0.99 %
Nonperforming assets to total assets 0.83 0.82
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable 1.85 1.57

Nonaccrual loans to total loans receivable	0.85	%	0.90	%

Nonperforming assets to total assets	0.72	%	0.76	%
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable	1.71	%	1.74	%

During the nine months ended September 30, 2021, the Bank designated approximately $40.7 million as TDRs. The increase in that designation was mainly attributable to maturity extensions and interest rate reductions in the commercial real estate segment. The majority of these loans were previously on deferment, and were subsequently designated TDRs once the deferral periods ended.

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Investment Securities

As of ~~September 30, 2021,~~March 31, 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 ~~September 30, 2021,~~March 31, 2022, average securities increased ~~by $39.2~~$65.1 million to approximately ~~$459.6~~$545.2 million, or ~~6.3%~~7.0% of average total interest-earning assets, from approximately ~~$420.4~~$480.1 million, or ~~6.0%~~6.4% of average interest-earning assets, ~~for the comparable period in 2020.~~compared to December 31, 2021.

As of ~~September 30, 2021,~~March 31, 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 ~~$1.5~~$23.0 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. 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 ~~September 30, 2021.~~March 31, 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 ~~September 30, 2021~~March 31, 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 ~~September 30,~~March 31, 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 3.60%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 6.28%. 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 ~~3.23%~~3.35%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~5.80%~~5.64%. As

Based on our model, which was run as of ~~December~~March 31, ~~2020,~~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%~~9.20%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~5.18%~~10.89%.

~~Based on our model, which was run as~~ As of ~~September 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 ~~9.39%~~9.77%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 10.72%. 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 ~~September 30, 2021,~~March 31, 2022, would ~~decline~~increase by ~~0.61%~~0.65% with an instantaneous rate shock of up 200 basis points, and ~~decrease~~decline by ~~1.30%~~6.89% 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.

The following table illustrates the most recent results for EVE and one-year NII sensitivity as of ~~September 30, 2021.~~March 31, 2022.

Interest Rates Estimated Estimated Change in EVE Interest Rates Estimated Estimated Change in NII
(basis points) EVE Amount % (basis points) NII Amount %
+300 $1,083,143 $(24,967) (2.25) +300 $264,965 $11,837 4.68
+200 1,101,319 (6,791) (0.61) +200 261,300 8,172 3.23

+100 1,107,326 (784) (0.07) +100 257,096 3,968 1.57
0 1,108,110 - - - 253,128 - -
-100 1,093,701 (14,409) (1.30) -100 238,450 (14,678) (5.80)

Interest Rates	Estimated		Estimated Change in EVE						Interest Rates	Estimated		Estimated Change in NII
(basis points)	EVE		Amount			%			(basis points)	NII		Amount			%
+300	$	1,144,436	$	(10,469	)		(0.72	)	+300	$	305,198	$	15,172			5.23
+200		1,464,299		9,394			0.65		+200		300,455		10,429			3.60
+100		1,471,303		16,398			1.13		+100		295,712		5,686			1.96
0		1,454,905		-			-		0		290,026		-			-
-100		1,354,701		(100,204	)		(6.89	)	-100		271,825		(18,201	)		(6.28	)

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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 ~~September 30, 2021,~~March 31, 2022, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of ~~September 30, 2021,~~March 31, 2022, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were ~~$800.4~~$742.8 million, which represented ~~10.1%~~9.1% of total assets and ~~12.0%~~10.9% of total deposits and borrowings, compared to ~~$697.4~~$742.1 million as of December 31, ~~2020,~~2021, which represented ~~9.2%~~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 ~~September 30, 2021,~~March 31, 2022, had the ability to borrow ~~$2.0~~$1.9 billion. In addition, as of ~~September 30, 2021,~~March 31, 2022, the Bank had in place borrowing capacity of ~~$25.0~~$25 million through correspondent banks. 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 ~~$3.1~~$1.8 million. As of ~~September 30, 2021,~~March 31, 2022, the Bank had aggregate available and unused credit of approximately ~~$1.2~~$1.0 billion, which represents the aforementioned facilities totaling ~~$2.0~~$1.9 billion net of ~~$760.3 million~~$0.9 billion in outstanding borrowings and letters of credit. As of ~~September 30, 2021,~~March 31, 2022, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.

Cash and cash equivalents totaled ~~$413.2~~$311.5 million as of ~~September 30, 2021,~~March 31, 2022, increasing by ~~$109.4~~$46.0 million from ~~$303.8~~$265.5 million as of December 31, ~~2020.~~2021. Operating activities provided ~~$154.6~~$45.8 million in net cash. Investing activities used ~~$352.7~~$160.2 million in net cash, primarily reflecting an increase in loans. Financing activities provided ~~$307.5~~$160.4 million in net cash, primarily reflecting ~~a net~~an increase in deposits, partially offset by net repayment of ~~$440.9~~FHLB borrowings of $56 million.

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Deposits

Total deposits increased by $227.5 million, ~~net proceeds raised~~or 3.6%, to $6.6 billion as of March 31, 2022 from ~~the issuance of preferred stock of $110.9 million~~December 31, 2021. The increase was primarily due to increases in demand, interest-bearing and NOW, savings, and demand, noninterest bearing deposits, partially offset by a decrease in ~~net borrowings of $172.7 million.~~

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~~Deposits~~

time deposits. The following table sets forth the composition of our deposit base by the periods indicated.

September 30, 2021 December 31, 2020 Amount
Increase/
(Decrease)
Amount % Amount % 2021 vs. 2020
(dollars in thousands)
Demand, noninterest-bearing $ 1,500,754 23.5 % $ 1,339,108 22.5 % $ 161,646
Demand, interest-bearing 3,264,966 51.0 2,861,820 48.0 403,146
Savings 410,707 6.4 294,163 4.9 116,544
Time 1,221,911 19.1 1,464,133 24.6 (242,222)
Total deposits $ 6,398,338 100.0 % $ 5,959,224 100.0 % $ 439,114

	March 31, 2022					December 31, 2021					Amount Increase/
	Amount		%			Amount		%			(Decrease)
	(dollars in thousands)
Demand, noninterest-bearing	$	1,631,292		24.9	%	$	1,617,049		25.5	%	$	14,243
Demand, interest-bearing and NOW		3,403,099		51.9			3,127,350		49.4	%		275,749
Savings		460,200		7.0			438,445		6.9	%		21,755
Time		1,065,814		16.2			1,150,109		18.2	%		(84,295	)
Total deposits	$	6,560,405		100.0	%	$	6,332,953		100.0	%	$	227,452

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 ~~September 30, 2021~~March 31, 2022 was ~~2.98%~~3.15%.

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 September 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’ Equity

The Company’s stockholders’ equity was $1.1 billion as of ~~September 30, 2021,~~March 31, 2022, an increase of ~~$183.1~~$14.3 million from December 31, 2020. In August 2021, the Company raised $110.9 million, net of estimated issuance expenses, from the issuance of $115 million in 5.25% fixed rate, non-cumulative, perpetual preferred stock. This issuance is primarily reason for the overall2021. The increase in stockholders’ equity ~~coupled with increases in~~was primarily attributable to retained earnings, ~~of $82.0 million and~~in addition to an increase in additional paid-in capital, ~~of $2.0 million,~~ partially offset by a decrease in accumulated other comprehensive income, reflecting the after-tax decline in the fair value of ~~$3.8 million~~investment securities net of unrealized hedge gains recorded in other assets, and an increase in treasury ~~stock of $8.0 million.~~stock. As of ~~September 30, 2021,~~March 31, 2022, the Company’s tangible common equity ratio and tangible book value per share were ~~9.95%~~9.99% and ~~$19.43,~~$20.51, 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 ~~$217.9~~$216.9 million and $217.4 million, as of ~~September 30, 2021~~March 31, 2022 and ~~$219.3 million as of~~ December 31, ~~2020.~~2021, respectively.

September 30, December 31,
2021 2020
(dollars in thousands, except for share and per share data)
Common equity $ 987,506 $ 915,310
Less: intangible assets 217,852 219,349
Tangible common stockholders’ equity $ 769,654 $ 695,961

Total assets
$ 7,949,514 $ 7,547,339
Less: intangible assets 217,852 219,349
Tangible assets $ 7,731,662 $ 7,327,990

Common stock outstanding as of period end
39,602,199 39,785,398
Tangible common equity ratio ⁽¹⁾ 9.95 % 9.50 %

Book value per common share
$ 24.94 $ 23.01
Less: intangible assets 5.51 5.52
Tangible book value per common share $ 19.43 $ 17.49

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

	March 31,			December 31,
	2022			2021
	(dollars in thousands, except for share and per share data)
Common equity	$	1,027,592		$	1,013,285
Less: intangible assets		(216,936	)		(217,369	)
Tangible common stockholders’ equity	$	810,656		$	795,916

Total assets	$	8,334,301		$	8,129,480
Less: intangible assets		(216,936	)		(217,369	)
Tangible assets	$	8,117,365		$	7,912,111

Common stock outstanding at period end		39,518,411			39,568,090

Tangible common equity ratio ⁽¹⁾		9.99	%		10.06	%

Book value per common share	$	26.00		$	25.61
Less: intangible assets		5.49			5.49
Tangible book value per common share	$	20.51		$	20.12

(1)

~~(1)~~

Tangible common equity ratio is a non-GAAP measure.

~~Table of Contents~~

Regulatory Capital and Capital Adequacy

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

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

Table of Contents

The following is a summary of regulatory capital amounts and ratios as of ~~September 30, 2021~~March 31, 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

As of September 30, 2021 Amount Ratio Amount Ratio Amount Ratio

(dollars in thousands)

Tier 1 leverage capital $ 882,884 11.60 % $ 304,431 4.00 % N/A N/A
CET I risk-based ratio 766,802 10.73 321,617 4.50 N/A N/A
Tier 1 risk-based capital 882,884 12.35 428,823 6.00 N/A N/A
Total risk-based capital 1,110,870 15.54 571,764 8.00 N/A N/A

	ConnectOne Bancorp, Inc.					For Capital Adequacy Purposes						To Be Well-Capitalized Under Prompt Corrective Action Provisions
The Company	Amount		Ratio			Amount		Ratio				Amount	Ratio
As of March 31, 2022	(dollars in thousands)
Tier 1 leverage capital	$	931,398		11.57	%	$	322,078		4.00	%	$	N/A		N/A
CET I risk-based ratio		815,316		10.69			343,288		4.50			N/A		N/A
Tier 1 risk-based capital		931,398		12.21			457,717		6.00			N/A		N/A
Total risk-based capital		1,161,468		15.23			610,289		8.00			N/A		N/A

ConnectOne Bank For Capital Adequacy
Purposes To Be Well-Capitalized Under
Prompt Corrective Action
Provisions
As of September 30, 2021 Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)

Tier 1 leverage capital $ 862,103 11.33 % $ 304,414 4.00 % $ 380,517 5.00 %
CET I risk-based ratio 862,103 12.06 321,610 4.50 464,548 6.50
Tier 1 risk-based capital 862,103 12.06 428,814 6.00 571,752 8.00
Total risk-based capital 972,339 13.61 571,752 8.00 714,689 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 March 31, 2022						(dollars in thousands)
Tier 1 leverage capital	$	918,787		11.41	%	$	322,041		4.00	%		402,552		5.00	%
CET I risk-based ratio		918,787		12.04			343,279		4.50			495,847		6.50
Tier 1 risk-based capital		918,787		12.04			457,705		6.00			610,273		8.00
Total risk-based capital		1,031,107		13.52			610,273		8.00			762,841		10.00

As of ~~September 30, 2021,~~March 31, 2022, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio ~~as measured against the capital conservation buffers,~~ at the Company ~~was~~is the ~~CET1~~CET I Risk Based Ratio which was ~~3.73%~~3.69% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was ~~3.11%~~3.02% above the minimum buffer ratio.

Table of Contents

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.

Table of Contents

PART II –- OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1a. Risk Factors

There have been no material changes to the risks inherent in our business from those described under Item 1A – Risk Factors of our Annual Report on Form 10-K 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~~Share Repurchase Program

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

During the quarter ended March 31, 2022, the Company repurchased a total of ~~Operations – Shareholders’ Equity”~~144,793 shares. As of March 31, 2022, shares remaining for repurchase under the program were 2,129,955.

The following table details share repurchases for the three months ended March 31, 2022:

	Shares Authorized		Total Number of Shares Purchased		Average Price Paid per Share		Cumulative Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2022 – January 31, 2022		-		-	$	-		-		2,274,748
February 1, 2022 – February 28, 2022		-		110,193		33.22		110,193		2,164,555
March 1, 2022 – March 31, 2022		-		34,600		32.42		34,600		2,129,955

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

~~3.1~~		Certificate of Amendment designating the 5.25% Fixed Rate Reset Non-Cumulative Perpetual Preferred Stock, Series A, of the Company, filed with the Department of the Treasury of the State of New Jersey and effective August 17, 2021(incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A, filed on August 19, 2021). (1)31.1
~~4.1~~		Specimen of the Company’s 5.25% Fixed Rate Reset Non-Cumulative Perpetual Preferred Stock, Series A Certificate (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A, filed on August 19, 2021). (1)
~~4.2~~		Deposit Agreement, dated as of August 19, 2021, among the Company, Broadridge Corporate Issuer Solutions, Inc., as depositary, and the holders from time to time of the depositary receipts described therein (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~~Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase ~~Document~~Document.
101.DEF		~~Definition~~Inline XBRL Taxonomy Extension Definition Linkbase ~~Document~~Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase ~~Document~~Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase ~~Document~~Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

~~(1)~~

~~Incorporated by reference to Exhibits 3.2, 4.1 and 4.2, respectively, to the Registrant’s Registration Statement on Form 8-A filed August 19, 2021.~~

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~~SIGNATURES~~

SIGNATURES

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

CONNECTONE BANCORP, INC.

(Registrant)

By:	/s/ Frank Sorrentino III	By:	/s/ William S. Burns
	Frank Sorrentino III		William S. Burns
	Chairman and Chief Executive Officer		Senior Executive Vice President and Chief Financial Officer

	Date: ~~November 5, 2021~~May 6, 2022		Date: ~~November 5, 2021~~May 6, 2022

6352

0000712771 cnob:ImpairedLoansMember us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2021-12-31 iso4217:USD xbrli:shares


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4637

Item 3.	Qualitative and Quantitative Disclosures about Market Risks	6048

Item 4.	Controls and Procedures	6049

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	50

Item 1.1a.	Risk Factors ~~Legal Proceedings~~	6150

~~Item 1a.Risk Factors~~	61

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

61Item 3.	Defaults Upon Senior Securities	50

Item 4.	Mine Safety Disclosures	50

Item 5.	Other Information	50

Item 6.	Exhibits	51

~~Item 3.~~SIGNATURES~~Defaults Upon Senior Securities~~		61

~~Item 4.Mine Safety Disclosures~~	61

~~Item 5.Other Information~~	61

~~Item 6.Exhibits~~	62

~~SIGNATURES~~	6352

	September 30,			December 31,
(in thousands, except for share data)	2021			2020
	(unaudited)
ASSETS
Cash and due from banks	$	49,626		$	63,637
Interest-bearing deposits with banks		363,569			240,119
Cash and cash equivalents		413,195			303,756

Investment securities		462,884			487,955
Equity securities		13,700			13,387

Loans held-for-sale		5,596			4,710

Loans receivable		6,576,439			6,236,307
Less: Allowance for credit losses – loans		77,986			79,226
Net loans receivable		6,498,453			6,157,081

Investment in restricted stock, at cost		18,106			25,099
Bank premises and equipment, net		29,635			30,108
Accrued interest receivable		33,610			35,317
Bank owned life insurance		194,487			165,960
Right of use operating lease assets		11,002			16,159
Goodwill		208,372			208,372
Core deposit intangibles		9,480			10,977
Other assets		50,994			88,458
Total assets	$	7,949,514		$	7,547,339
LIABILITIES
Deposits:
Noninterest-bearing	$	1,500,754		$	1,339,108
Interest-bearing		4,897,584			4,620,116
Total deposits		6,398,338			5,959,224
Borrowings		253,225			425,954
Subordinated debentures, net		152,875			202,648
Operating lease liabilities		12,437			18,026
Other liabilities		34,206			26,177
Total liabilities		6,851,081			6,632,029

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Preferred Stock, no par value;
$1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of September 30, 2021 and -0- shares as of December 31, 2020; outstanding 115,000 shares as of September 30, 2021 and -0- shares as of December 31, 2020		110,927			0-
Common stock, no par value:
Authorized 100,000,000 shares; issued 42,550,530 shares as of September 30, 2021 and 42,444,031 shares as of December 31, 2020; outstanding 39,602,199 shares as of September 30, 2021 and 39,785,398 as of December 31, 2020		586,946			586,946
Additional paid-in capital		25,851			23,887
Retained earnings		413,996			331,951
Treasury stock, at cost 2,948,331 common shares as of September 30, 2021 and 2,658,633 as of December 31, 2020		(38,314	)		(30,271	)
Accumulated other comprehensive (loss) income		(973	)		2,797
Total stockholders’ equity		1,098,433			915,310
Total liabilities and stockholders’ equity	$	7,949,514		$	7,547,339

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except for per share data)	2021			2020			2021			2020
Interest income
Interest and fees on loans	$	75,092		$	74,755		$	216,655		$	223,488
Interest and dividends on investment securities:
Taxable		1,065			1,305			3,148			5,083
Tax-exempt		511			688			1,885			2,148
Dividends		245			426			764			1,268
Interest on federal funds sold and other short-term investments		113			47			246			625
Total interest income		77,026			77,221			222,698			232,612
Interest expense
Deposits		5,478			11,947			19,487			42,756
Borrowings		3,303			4,725			10,794			13,236
Total interest expense		8,781			16,672			30,281			55,992
Net interest income		68,245			60,549			192,417			176,620
Provision for (reversal of) credit losses		1,100			5,000			(6,315	)		36,000
Net interest income after provision for credit losses		67,145			55,549			198,732			140,620
Noninterest income
Deposit, loan and other income		1,702			1,278			5,092			5,777
Income on bank owned life insurance		1,278			1,598			3,527			3,693
Net gains on sale of loans held-for-sale		1,114			614			2,668			1,244
Gain on sale of branches		0-			0-			674			0-
Net (losses) gains on equity securities		(78	)		(7	)		(242	)		215
Net gains on sales/redemption of investment securities		0-			0-			195			29
Total noninterest income		4,016			3,483			11,914			10,958
Noninterest expenses
Salaries and employee benefits		16,807			15,144			47,790			44,266
Occupancy and equipment		2,656			3,566			8,876			10,193
FDIC insurance		525			1,105			2,040			3,054
Professional and consulting		2,217			1,926			6,290			5,173
Marketing and advertising		345			214			864			944
Data processing		1,541			1,470			4,680			4,529
Merger and restructuring expenses		0-			0-			0-			14,640
Amortization of core deposit intangibles		483			627			1,498			1,931
Increase in value of acquisition price		0-			0-			0-			2,333
Other components of net periodic pension expense		(67	)		(30	)		(201	)		(89	)
Other expenses		3,676			2,456			9,090			7,625
Total noninterest expenses		28,183			26,478			80,927			94,599
Income before income tax expense		42,978			32,554			129,719			56,979
Income tax expense		10,881			7,768			32,404			11,331
Net income	$	32,097		$	24,786		$	97,315		$	45,648
Earnings per common share:
Basic	$	0.81		$	0.62		$	2.45		$	1.15
Diluted		0.80			0.62			2.43			1.15

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2021			2020			2021			2020
Net income	$	32,097		$	24,786		$	97,315		$	45,648

Other comprehensive income (loss):

Unrealized gains and losses:
Unrealized holding (losses) gains on available-for-sale securities arising during the period		(3,228	)		703			(8,397	)		5,532
Tax effect		796			(160	)		2,160			(1,459	)
Net of tax		(2,432	)		543			(6,237	)		4,073

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

Unrealized gains (losses) on cash flow hedges		1,890			(82	)		1,872			(3,397	)
Tax effect		(533	)		42			(529	)		955
Net of tax		1,357			(40	)		1,343			(2,442	)

Reclassification adjustment for realized losses on cash flow hedges included in net income		328			631			1,543			942
Tax effect		(90	)		(196	)		(434	)		(265	)
Net of tax		238			435			1,109			677

Reclassification adjustment for pension plan amortization included in net income		75			75			225			226
Tax effect		(21	)		(21	)		(63	)		(63	)
Net of tax		54			54			162			163

Total other comprehensive (loss) income		(783	)		992			(3,770	)		2,448

Total comprehensive income	$	31,314		$	25,778		$	93,545		$	48,096

	Nine Months Ended September 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		0-		586,946		23,887			329,026			(30,271	)		2,797			912,385
Net income		-		-		-			97,315			-			-			97,315
Other comprehensive loss, net of tax		-		-		-			-			-			(3,770	)		(3,770	)
Cash dividends declared on common stock ($0.31 per share)		-		-		-			(12,345	)		-			-			(12,345	)
Exercise of stock options (5,449 shares)		-		-		45			-			-			-			45
Restricted stock grants, net of forfeitures (46,900 shares)		-		-		-			-			-			-			0-
Stock grants (4,981 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 (289,698 shares)		-		-		-			-			(8,043	)		-	��		(8,043	)
Proceeds from preferred stock issuance, net of costs (115,000 shares)		110,927		-		-			-			-			-			110,927
Stock-based compensation expense		-		-		3,202			-			-			-			3,202

Balance as of September 30, 2021	$	110,927	$	586,946	$	25,851		$	413,996		$	(38,314	)	$	(973	)	$	1,098,433


	Three Months Ended September 30, 2021
													Accumulated
(dollars in thousands, except for per share data)	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings			Treasury Stock			Other Comprehensive (Loss) Income			Total Stockholders’ Equity
Balance as of June 30, 2021	$	0-	$	586,946	$	24,606	$	386,280		$	(32,682	)	$	(190	)	$	964,960
Net income		-		-		-		32,097			-			-			32,097
Other comprehensive loss, net of tax		-		-		-		-			-			(783	)		(783	)
Cash dividends declared on common stock ($0.11 per share)		-		-		-		(4,381	)		-			-			(4,381	)
Restricted stock grants, net of forfeitures (1,082 shares)		-		-		-		-			-			-			0-
Stock grants (4,535 shares)		-		-		-		-			-			-			0-
Repurchase of treasury stock (196,069 shares)		-		-		-		-			(5,632	)		-			(5,632	)
Proceeds from preferred stock issuance, net of costs (115,000 shares)		110,927		-		-		-			-			-			110,927
Stock-based compensation expense		-		-		1,245		-			-			-			1,245

Balance as of September 30, 2021	$	110,927	$	586,946	$	25,851	$	413,996		$	(38,314	)	$	(973	)	$	1,098,433

	Nine Months Ended September 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		-		-		-			45,648			-			-			45,648
Other comprehensive income, net of tax		-		-		-			-			-			2,448			2,448
Cash dividends declared on common stock ($0.18 per share)		-		-		-			(7,537	)		-			-			(7,537	)
Exercise of stock options (25,413 shares)		-		-		163			-			-			-			163
Restricted stock grants, net of forfeitures (68,531 shares)		-		-		-			-			-			-			0-
Stock grants issued (1,340 shares)		-		-		-			-			-			-			0-
Net shares issued in satisfaction of restricted stock units earned (16,541 shares)		-		-		-			-			-			-			-
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		-		-		1,999			-			-			-			1,999

Balance as of September 30, 2020	$	0-	$	586,946	$	22,867		$	309,893		$	(30,271	)	$	1,301		$	890,736


	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
September 30, 2021	(dollars in thousands)
Securities available-for-sale
Federal agency obligations	$	50,016	$	1,032	$	0-		$	51,048	$	0-
Residential mortgage pass-through securities		255,488		2,640		(2,073	)		256,055		0-
Commercial mortgage pass-through securities		10,859		135		(468	)		10,526		0-
Obligations of U.S. states and political subdivisions		129,632		1,693		(1,051	)		130,274		0-
Corporate bonds and notes		10,965		124		0-			11,089		0-
Asset-backed securities		2,718		6		(2	)		2,722		0-
Certificates of deposit		149		1		0-			150		0-
Other securities		1,020		0-		0-			1,020		0-
Total securities available-for-sale	$	460,847	$	5,631	$	(3,594	)	$	462,884	$	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 September 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	$	1,890	$	328	$	0-

	September 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	$	275,000	$	1,295	$	175,000	$	(2,119	)

	September 30, 2021
	Nonaccrual loans with ACL		Nonaccrual loans without ACL		Total Nonaccrual loans
	(dollars in thousands)
Commercial	$	27,993	$	2,486	$	30,479
Commercial real estate		11,668		16,910		28,578
Commercial construction		0-		3,336		3,336
Residential real estate		0-		3,566		3,566
Consumer		0-		0-		0-
Total	$	39,661	$	26,298	$	65,959

	Term loans amortized cost basis by origination year												Revolving		Total Gross
	2021		2020		2019		2018		2017		Prior		Loans		Loans
Commercial
Pass	$	362,839	$	78,941	$	73,202	$	60,881	$	98,178	$	118,326	$	465,494	$	1,257,861
Special mention		0-		0-		225		904		5,653		4,198		13,787		24,767
Substandard		176		0-		1,619		12,779		4,101		21,147		3,038		42,860
Doubtful		0-		0-		0-		0-		0-		0-		0-		0-
Total Commercial	$	363,015	$	78,941	$	75,046	$	74,564	$	107,932	$	143,671	$	482,319	$	1,325,488

Commercial Real Estate
Pass	$	1,178,056	$	587,923	$	446,299	$	479,741	$	514,973	$	944,052	$	171,963	$	4,323,007
Special mention		0-		0-		3,364		1,875		4,335		26,550		6,633		42,757
Substandard		1,942		4,500		657		18,861		0-		36,112		8,790		70,862
Doubtful		0-		0-		0-		0-		0-		0-		0-		0-
Total Commercial Real Estate	$	1,179,998	$	592,423	$	450,320	$	500,477	$	519,308	$	1,006,714	$	187,386	$	4,436,626

Commercial Construction
Pass	$	1,405	$	7,370	$	37,492	$	2,600	$	2,247	$	490	$	486,404	$	538,008
Special mention		0-		0-		0-		0-		0-		0-		0-		0-
Substandard		0-		0-		0-		0-		0-		0-		14,888		14,888
Doubtful		0-		0-		0-		0-		0-		0-		0-		0-
Total Commercial Construction	$	1,405	$	7,370	$	37,492	$	2,600	$	2,247	$	490	$	501,292	$	552,896

Residential Real Estate
Pass	$	18,387	$	30,704	$	25,544	$	29,503	$	30,577	$	77,427	$	46,227	$	258,369
Special mention		0-		0-		0-		0-		0-		0-		0-		0-
Substandard		0-		0-		0-		199		0-		8,492		3,733		12,424
Doubtful		0-		0-		0-		0-		0-		0-		0-		0-
Total Residential Real Estate	$	18,387	$	30,704	$	25,544	$	29,702	$	30,577	$	85,919	$	49,960	$	270,793

Consumer
Pass	$	0-	$	96	$	50	$	26	$	35	$	1,761	$	125	$	2,093
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-	$	96	$	50	$	26	$	35	$	1,761	$	125	$	2,093

Total
Pass	$	1,560,687	$	705,034	$	582,587	$	572,751	$	646,010	$	1,142,056	$	1,170,213	$	6,379,338
Special mention		0-		0-		3,589		2,779		9,988		30,748		20,420		67,524
Substandard		2,118		4,500		2,276		31,839		4,101		65,751		30,449		141,034
Doubtful		0-		0-		0-		0-		0-		0-		0-		0-
Grand Total	$	1,562,805	$	709,534	$	588,452	$	607,369	$	660,099	$	1,238,555	$	1,221,082	$	6,587,896

	September 30, 2021

	Real
	Estate		Other		Total
	(dollars in thousands)
Commercial	$	6,778	$	26,175	$	32,953
Commercial real estate		56,622		0-		56,622
Commercial construction		12,582		0-		12,582
Residential real estate		10,258		0-		10,258
Consumer		0-		0-		0-
Total	$	86,240	$	26,175	$	112,415

	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

	September 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
Commercial	$	391	$	417	$	4,463	$	30,479	$	35,750	$	1,289,738	$	1,325,488
Commercial real Estate		0-		1,694		1,860		28,578		32,132		4,404,494		4,436,626
Commercial construction		0-		0-		0-		3,336		3,336		549,560		552,896
Residential real Estate		338		0-		8,360		3,566		12,264		258,529		270,793
Consumer		0-		0-		0-		0-		0-		2,093		2,093
Total	$	729	$	2,111	$	14,683	$	65,959	$	83,482	$	6,504,414	$	6,587,896

			Pre-Modification Outstanding		Post-Modification Outstanding
	Number of Loans		Recorded Investment		Recorded Investment
Troubled debt restructurings:	(dollars in thousands)
Commercial		4	$	1,276	$	1,276
Commercial real estate		10		35,595		35,595
Commercial construction		1		1,641		1,641
Residential real estate		3		1,758		1,758
Total		18	$	40,270	$	40,270

	Three Months Ended
	September 30, 2021

Balance as of beginning of period	$	2,380
Provision for (reversal of) credit losses - unfunded commitments		184
Balance as of end of period	$	2,564

	Three Months Ended September 30, 2021		Nine Months Ended September 30, 2021

Provision for (reversal of) credit losses - loans	$	916	$	(6,046)
Provision for (reversal of) credit losses - unfunded commitments		184		(269)
Provision for (reversal of) credit losses	$	1,100	$	(6,315)

			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	September 30,		Assets		Inputs		Inputs
basis:	2021		(Level 1)		(Level 2)		(Level 3)
Collateral dependent loans:			(dollars in thousands)
Commercial	$	12,966	$	0-	$	0-	$	12,966
Commercial real estate		16,407		0-		0-		16,407
Residential real estate		2,251		0-		0-		2,251

	Municipal
	Securities
	(dollars in thousands)
Balance as of December 31, 2020	$	8,844
Principal paydowns		(208	)
Balance as of September 30, 2021	$	8,636

					Fair Value Measurements
					Quoted
					Prices in
					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)
September 30, 2021
Financial assets:
Cash and due from banks	$	413,195	$	413,195	$	413,195	$	0-	$	0-
Securities available-for-sale		462,884		462,884		1,020		453,228		8,636
Investment in restricted stocks		18,106		n/a		n/a		n/a		n/a
Equity securities		13,700		13,700		11,709		1,991		0-
Net loans		6,498,453		6,567,363		0-		0-		6,567,363
Derivatives		1,296		1,296		0-		1,296		0-
Accrued interest receivable		33,610		33,610		0-		1,356		32,254

Financial liabilities:
Noninterest-bearing deposits		1,500,754		1,500,754		1,500,754		0-		0-
Interest-bearing deposits		4,897,584		4,899,141		3,675,673		1,223,468		0-
Borrowings		253,225		255,099		0-		255,099		0-
Subordinated debentures		152,875		164,378		0-		164,378		0-
Accrued interest payable		2,879		2,879		0-		2,879		0-

December 31, 2020
Financial assets:
Cash and due from banks	$	303,756	$	303,756	$	303,756	$	0-	$	0-
Investment securities available-for-sale		487,955		487,955		157		478,954		8,844
Restricted investment in bank stocks		25,099		n/a		n/a		n/a		n/a
Equity securities		13,387		13,387		13,387		0-		0-
Net loans		6,157,081		6,244,037		0-		0-		6,244,037
Accrued interest receivable		35,317		35,317		0-		1,764		33,553

Financial liabilities:
Noninterest-bearing deposits		1,339,108		1,339,108		1,339,108		0-		0-
Interest-bearing deposits		4,620,116		4,633,961		3,155,983		1,477,978		0-
Borrowings		425,954		429,671		0-		429,671		0-
Subordinated debentures		202,648		214,113		0-		214,113		0-
Derivatives		2,119		2,119		0-		2,119		0-
Accrued interest payable		3,687		3,687		0-		3,687		0-

Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income												Affected Line item in the Statement Where Net Income is Presented
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020

Sale of investment securities	$	0-		$	0-		$	195		$	29		Net (losses) gains on sales of securities available-for-sale Income tax expense
available-for-sale		0-			0-			(48	)		(6	)
	$	0-		$	0-		$	147		$	23

Net interest income on swaps	$	(328	)	$	(631	)	$	(1,543	)	$	(942	)	Interest expense
		90			196			434			265		Income tax expense
	$	(238	)	$	(435	)	$	(1,109	)	$	(677	)

Amortization of pension plan net	$	(75	)	$	(75	)	$	(225	)	$	(226	)	Other components of net periodic pension expense
actuarial losses		21			21			63			63		Income tax benefit
	$	(54	)	$	(54	)	$	(162	)	$	(163	)

Total reclassification	$	(292	)	$	(489	)	$	(1,124	)	$	(817	)

	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
Granted	0-			0-
Exercised	(5,449	)		8.34
Forfeited/cancelled/expired	0-			0-
Outstanding as of September 30, 2021	32,564		$	9.15	1.0	$	554,374

Exercisable as of September 30, 2021	32,564		$	9.15	1.0	$	554,374

			Weighted-
			Average
	Nonvested		Grant Date
	Shares		Fair Value
Nonvested as of December 31, 2020	113,114		$	18.17
Granted	49,971			25.33
Vested	(68,142	)		17.16
Forfeited/cancelled/expired	(3,071	)		23.76
Nonvested September 30, 2021	91,872		$	22.62

				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	37,184				15.57
Vested shares	(29,421	)			31.35
Forfeited/cancelled/expired	(11,153	)			17.06
Unearned as of September 30, 2021	181,789		233,638	$	16.32

	Three Months Ended September 30,						Affected Line Item in the Consolidated Statements of Income
	2021			2020
	(dollars in thousands)
Service cost	$	0-		$	0-
Interest cost		71			91		Other components of net periodic pension expense

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

Total periodic pension income	$	(67	)	$	(30	)

	Three Months Ended September 30,
	2021							2020
	Average Balance		Interest Income/ Expense		Average Rate ⁽⁷⁾			Average Balance		Interest Income/ Expense		Average Rate ⁽⁷⁾
	(dollars in thousands)
Interest-earning assets:
Investment securities ^{(1) (2)}	$	459,559	$	1,712		1.48	%	$	420,362	$	2,176		2.06	%
Total loans ^{(2) (3) (4)}		6,455,952		75,434		4.64			6,288,443		75,028		4.75
Federal funds sold and interest-bearing deposits with banks		387,155		151		0.15			227,617		47		0.08
Restricted investment in bank stocks		19,105		245		5.09			26,077		426		6.50
Total interest-earning assets		7,321,771		77,542		4.20			6,962,499		77,667		4.44
Allowance for credit losses		(78,327)							(69,381)
Other noninterest-earning assets		594,553							580,884
Total assets	$	7,837,997						$	7,474,002

Interest-bearing liabilities:
Time deposits	$	1,252,818	$	2,983		0.94		$	1,728,129	$	8,174		1.88
Other interest-bearing deposits		3,582,261		2,495		0.28			2,881,592		3,773		0.52
Total interest-bearing deposits		4,835,079		5,478		0.45			4,609,721		11,947		1.03

Borrowings		276,183		1,105		1.59			467,399		1,992		1.70
Subordinated debentures, net of capitalized costs		152,825		2,168		5.63			202,502		2,700		5.30
Capital lease obligation		2,018		30		5.90			2,211		33		5.94
Total interest-bearing liabilities		5,266,105		8,781		0.66			5,281,833		16,672		1.26

Noninterest-bearing demand deposits		1,495,456							1,253,235
Other liabilities		44,245							55,570
Total noninterest-bearing liabilities		1,539,701							1,308,805
Stockholders’ equity		1,032,191							883,364
Total liabilities and stockholders’ equity	$	7,837,997						$	7,474,002
Net interest income (tax-equivalent basis)				68,761							61,005
Net interest spread ⁽⁵⁾						3.54	%						3.18	%
Net interest margin ⁽⁶⁾						3.73	%						3.49	%
Tax-equivalent adjustment				(516)							(456)
Net interest income			$	68,245						$	60,549

	Nine Months Ended September 30,
	2021							2020
	Average Balance		Interest Income/ Expense		Average Rate ⁽⁷⁾			Average Balance		Interest Income/ Expense		Average Rate ⁽⁷⁾
	(dollars in thousands)
Interest-earning assets:
Investment securities ^{(1) (2)}	$	459,017	$	5,534		1.61	%	$	438,563	$	7,802		2.38	%
Total loans ^{(2) (3) (4)}		6,319,160		217,465		4.60			6,192,822		224,336		4.84
Federal funds sold and interest-bearing deposits with banks		332,290		285		0.11			244,539		625		0.34
Restricted investment in bank stocks		21,098		764		4.84			28,124		1,268		6.02
Total interest-earning assets		7,132,565		224,048		4.20			6,904,048		234,031		4.53
Allowance for credit losses		(80,129)							(54,009)
Other noninterest-earning assets		585,043							571,628
Total assets	$	7,637,479						$	7,421,667
Interest-bearing liabilities:
Time deposits	$	1,332,587	$	12,096		1.21		$	1,864,835	$	28,130		2.01
Other interest-bearing deposits		3,377,443		7,391		0.29			2,727,696		14,625		0.72
Total interest-bearing deposits		4,710,030		19,487		0.55			4,592,531		42,755		1.24

Borrowings		327,412		4,199		1.71			580,641		6,580		1.51
Subordinated debentures, net of capitalized costs		153,300		6,502		5.67			157,936		6,555		5.54
Capital lease obligation		2,066		93		6.02			2,257		101		5.98
Total interest-bearing liabilities		5,192,808		30,281		0.78			5,333,365		55,991		1.40

Noninterest-bearing demand deposits		1,426,121							1,162,340
Other liabilities		47,417							53,788
Total noninterest-bearing liabilities		1,473,538							1,216,129
Stockholders’ equity		971,133							872,173
Total liabilities and stockholders’ equity	$	7,637,479						$	7,421,667
Net interest income (tax-equivalent basis)				193,767							178,040
Net interest spread ⁽⁵⁾						3.42	%						3.13	%
Net interest margin ⁽⁶⁾						3.63	%						3.44	%
Tax-equivalent adjustment				(1,350)							(1,419)
Net interest income			$	192,417						$	176,621

Number of Loans

Principal Balance

(dollars in thousands)

Commercial

Commercial real estate