UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

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

For the Quarterly Period Ended March 31, ~~2022~~2023

☐

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

For the transition period from to

Commission File Number: ~~000-11486~~

001-40751

CONNECTONE BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

New Jersey

~~52-1273725~~

~~(State or Other Jurisdiction of~~

~~Incorporation or Organization)~~

~~(IRS Employer~~

~~Identification No.)~~52-1273725

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

301 Sylvan Avenue

Englewood Cliffs, New Jersey 07632

(Address of Principal Executive Offices) (Zip Code)

201-816-8900

~~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 by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to 240.10D-1(b) ☐

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:	~~39,524,417~~ 39,179,051 shares
(Title of Class)	(Outstanding as of May ~~6, 2022)~~5, 2023)

Table of Contents

Table of Contents

~~Table of Contents~~

		Page

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Statements of Condition as of March 31, ~~2022~~2023 (unaudited) and December 31, ~~2021~~2022	3
	Consolidated Statements of Income for the three months ended March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	4
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37 40

Item 3.	Qualitative and Quantitative Disclosures about Market Risks	48 53

Item 4.	Controls and Procedures	49 54

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	50 55

Item 1a.	Risk Factors	50 55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50 55

Item 3.	Defaults Upon Senior Securities	50 56

Item 4.	Mine Safety Disclosures	50 56

Item 5.	Other Information	50 56

Item 6.	Exhibits	51 57

SIGNATURES		52 58

Table of Contents

Item 1. Financial Statements

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

(unaudited)

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

December 31,

2023

2022

ASSETS

Cash and due from banks
$ 58,063 $ 61,629
Interest-bearing deposits with banks
504,353 206,686
Cash and cash equivalents
562,416 268,315

Investment securities
629,001 634,884
Equity securities
18,025 15,811

Loans held-for-sale
11,197 13,772

Loans receivable
8,132,119 8,099,689
Less: Allowance for credit losses - loans
87,002 90,513
Net loans receivable
8,045,117 8,009,176

Investment in restricted stock, at cost
46,379 46,604
Bank premises and equipment, net
29,603 27,800
Accrued interest receivable
46,301 46,062
Bank owned life insurance
232,859 231,328
Right of use operating lease assets
9,541 10,179
Other real estate owned
- 264
Goodwill
208,372 208,372
Core deposit intangibles
6,940 7,312
Other assets
114,716 125,069
Total assets
$ 9,960,467 $ 9,644,948
LIABILITIES

Deposits:

Noninterest-bearing
$ 1,345,265 $ 1,501,614
Interest-bearing
6,407,911 5,855,008
Total deposits
7,753,176 7,356,622
Borrowings
852,611 857,622
Subordinated debentures, net
79,060 153,255
Operating lease liabilities
10,717 11,397
Other liabilities
73,933 87,301
Total liabilities
8,769,497 8,466,197

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, 2023 and as of December 31, 2022; outstanding 115,000 shares as of March 31, 2023 and as of December 31, 2022
110,927 110,927
Common stock, no par value: Authorized 100,000,000 shares; issued 42,083,240 shares as of March 31, 2023 and 41,942,149 shares as of December 31, 2022; outstanding 39,179,051 shares as of March 31, 2023 and 39,243,123 as of December 31, 2022
586,946 586,946
Additional paid-in capital
31,350 30,126
Retained earnings
553,261 535,915
Treasury stock, at cost 2,904,189 common shares as of March 31, 2023 and 2,699,026 as of December 31, 2022
(57,652 ) (52,799 )
Accumulated other comprehensive loss
(33,862 ) (32,364 )
Total stockholders’ equity
1,190,970 1,178,751
Total liabilities and stockholders’ equity
$ 9,960,467 $ 9,644,948

(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.
3
Table of Contents

~~Table of Contents~~

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended
	March 31,
	2023			2022
(dollars in thousands, except for per share data)
Interest income
Interest and fees on loans	$	106,903		$	76,025
Interest and dividends on investment securities:
Taxable		4,229			1,873
Tax-exempt		1,092			709
Dividends		898			214
Interest on federal funds sold and other short-term investments		2,975			120
Total interest income		116,097			78,941
Interest expense
Deposits		40,087			5,010
Borrowings		8,926			3,573
Total interest expense		49,013			8,583
Net interest income		67,084			70,358
Provision for credit losses		1,000			1,450
Net interest income after provision for credit losses		66,084			68,908
Noninterest income
Deposit, loan and other income		1,403			1,743
Income on bank owned life insurance		1,531			1,206
Net gains on sale of loans held-for-sale		49			701
Net losses on equity securities		(191	)		(596	)
Total noninterest income		2,792			3,054
Noninterest expenses
Salaries and employee benefits		22,261			18,783
Occupancy and equipment		2,761			1,929
FDIC insurance		950			606
Professional and consulting		2,194			1,792
Marketing and advertising		532			351
Information technology and communications		3,061			2,866
Amortization of core deposit intangibles		372			433
Other components of net periodic pension expense		(25	)		(143	)
Increase in value of acquisition price		-			683
Other expenses		2,764			1,930
Total noninterest expenses		34,870			29,230
Income before income tax expense		34,006			42,732
Income tax expense		9,077			11,351
Net income		24,929			31,381
Preferred dividends		1,509			1,509
Net income available to common stockholders	$	23,420		$	29,872
Earnings per common share
Basic	$	0.60		$	0.76
Diluted		0.59			0.75

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
	March 31,
(dollars in thousands)	2023			2022
Net income	$	24,929		$	31,381
Other comprehensive income (loss):

Unrealized holding gains (losses) on available-for-sale securities arising during the period		6,528			(30,625	)
Tax effect		(2,045	)		8,139
Net of tax		4,483			(22,486	)

Reclassification adjustment for realized gains included in net income		-			-
Tax effect		-			-
Net of tax		-			-

Unrealized (losses) gains on cash flow hedges		(4,361	)		19,000
Tax effect		1,312			(5,341	)
Net of tax		(3,049	)		13,659

Reclassification adjustment for realized (gains) losses on cash flow hedges		(4,267	)		525
Tax effect		1,284			(147	)
Net of tax		(2,983	)		378

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		74			16
Tax effect		(23	)		(4	)
Net of tax		51			12

Total other comprehensive loss		(1,498	)		(6,865	)

Total comprehensive income	$	23,431		$	24,516

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

~~Table of Contents~~

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

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

(unaudited)

	*Three Months Ended March 31, 2023*
													Accumulated
					Additional								Other			Total
	Preferred		Common		Paid-In		Retained			Treasury			Comprehensive			Stockholders’
(in thousands, except share data)	Stock		Stock		Capital		Earnings			Stock			(Loss) Income			Equity
Balance as of December 31, 2022	$	110,927	$	586,946	$	30,126	$	535,915		$	(52,799	)	$	(32,364	)	$	1,178,751
Net income		-		-		-		24,929			-			-			24,929
Other comprehensive loss, net of tax		-		-		-		-			-			(1,498	)		(1,498	)
Cash dividends declared on preferred stock ($0.328125 per depositary share)		-		-		-		(1,509	)		-			-			(1,509	)
Cash dividends declared on common stock ($0.17 per share)		-		-		-		(6,074	)		-			-			(6,074	)
Exercise of stock options (6,473 shares)		-		-		81		-			-			-			81
Restricted stock grants, net of forfeitures (49,202 shares)		-		-		-		-			-			-			-
Stock grants (995 shares)		-		-		-		-			-			-			-
Net shares issued in satisfaction of deferred stock units earned (32,068 shares)		-		-		-		-			-			-			-
Net shares issued in satisfaction performance units earned (52,353 shares)		-		-		-		-			-			-			-
Stock-based compensation expense		-		-		1,143		-			-			-			1,143
Repurchase of treasury stock (205,163 shares)		-		-		-		-			(4,853	)		-			(4,853	)

Balance as of March 31, 2023	$	110,927	$	586,946	$	31,350	$	553,261		$	(57,652	)	$	(33,862	)	$	1,190,970

(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

	*Three Months Ended March 31, 2022*
													Accumulated
					Additional								Other			Total
	Preferred		Common		Paid-In		Retained			Treasury			Comprehensive			Stockholders’
(in thousands, except share data)	Stock		Stock		Capital		Earnings			Stock			(Loss) Income			Equity
Balance as of December 31, 2021	$	110,927	$	586,946	$	27,246	$	440,169		$	(39,672	)	$	(1,404	)	$	1,124,212
Net income		-		-		-		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 deferred 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 expense		-		-		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

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

~~Table of Contents~~

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended
	March 31,
(dollars in thousands)	2023			2022
Cash flows from operating activities
Net income	$	24,929		$	31,381
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		1,076			983
Provision for credit losses		1,000			1,450
Amortization of intangibles		372			433
Net accretion of loans		(743	)		(874	)
Accretion on bank premises		(12	)		(12	)
Accretion on deposits		(101	)		(321	)
Amortization on borrowings, net		5			16
Stock-based compensation		1,143			1,147
Losses on equity securities, net		191			596
Gains on sale of loans held-for-sale, net		(49	)		(701	)
Loans originated for resale		(854	)		(8,872	)
Proceeds from sale of loans held-for-sale		1,202			9,472
Loss on sale of other real estate owned		22			-
Increase in cash surrender value of bank owned life insurance		(1,531	)		(1,206	)
Amortization of premium and accretion of discounts on securities available-for-sale		268			872
Amortization of subordinated debentures issuance costs		805			76
(Increase) decrease in accrued interest receivable		(239	)		71
Net change in operating leases		(42	)		(27	)
Increase in other assets		(13,321	)		(10,585	)
Increase in other liabilities		2,253			21,945
Net cash provided by operating activities		16,374			45,844

Cash flows from investing activities
Investment securities available-for-sale:
Purchases		(4,763	)		(52,970	)
Maturities, calls and principal repayments		16,906			43,950
Purchase of equity securities		(2,405	)		-
Net redemptions of restricted investment in bank stocks		225			2,572
Payments on loans held-for-sale		17			-
Net increase in loans		(33,911	)		(153,048	)
Purchases of premises and equipment		(2,867	)		(718	)
Proceeds from sale of OREO		242			-
Net cash used in investing activities		(26,556	)		(160,214	)

Cash flows from financing activities
Net increase in deposits		396,654			227,773
Advances of Federal Home Loan Bank (“FHLB”) borrowings		750,000			150,000
Repayments of FHLB borrowings		(755,016	)		(206,039	)
Repayment of subordinated debt		(75,000	)		-
Cash dividends on preferred stock		(1,509	)		(1,509	)
Cash dividends paid on common stock		(6,074	)		(5,152	)
Repurchase of treasury stock		(4,853	)		(4,786	)
Proceeds from exercise of stock options		81			91
Net cash provided by financing activities		304,283			160,378
Net change in cash and cash equivalents		294,101			46,008
Cash and cash equivalents at beginning of period		268,315			265,536

Cash and cash equivalents at end of period	$	562,416		$	311,544

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	$	46,590	$	8,794
Income taxes		1,257		300

~~Table of Contents~~

~~(continued)~~

~~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 -

Supplemental disclosures of noncash activities
Investing:
Transfer of loans to other real estate owned	$	-	$	316
Transfer of loans from held-for-sale to held-for-investment		13,456		-
Transfer of loans from held-for-investment to held-for-sale		11,197		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 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,~~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-three~~twenty-four other banking offices. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’ business, real estate rental and consumer wages.

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

Basis of Presentation and Principals of Consolidation

The consolidated financial statements have been prepared in conformity with ~~GAAP. Some items in the prior year~~U.S. generally accepted accounting principles. The consolidated financial statements ~~were reclassified to conform to current presentation. Reclassifications had no effect~~of the Parent Corporation are prepared on ~~prior year net income or stockholders’ equity.~~an accrual basis and include the accounts of the Parent Corporation and the Company. All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements.

~~Use of Estimates~~Segments

FASB ASC 28, “Segment Reporting,” requires companies to report certain information about operating segments. The Company is managed as one segment: a community bank. All decisions including but not limited to loan growth, deposit funding, interest rate risk, credit risk and pricing are determined after assessing the effect on the totality of the organization. For example, loan growth is dependent on the ability of the organization to fund this growth through deposits or other borrowings. As a result, the Company is managed as one operating segment.

Use of Estimates

In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Risks and Uncertainties

~~As previously disclosed, on March 11, 2020 the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to impact the~~The United States economy is currently experiencing a level of price inflation not experienced since the late 1970’sand early 1980’s. It is therefore difficult to predict the ~~world. On March 27, 2020, the~~ ~~Coronavirus Aid, Relief, and Economic Security Act~~ ~~(CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families~~response of consumers and businesses ~~affected by the COVID-19 pandemic. The COVID-19 pandemic has adversely affected,~~to this level of inflation, and continues to adversely affect economic activity globally, nationally and locally. Although economic activity began to accelerate in 2021, and the United States continues to implement a COVID-19 vaccination program, COVID-19, it’s variants and actions taken to mitigate the spread of it have had and may in the future have an adverseits impact on the ~~economies~~economy. In addition, in order to attempt to control and ~~financial markets~~reduce the level of ~~many countries~~inflation, the Federal Reserve has embarked on a series of interest rate increases along with quantitative tightening to further constrict economic conditions. It is unclear whether the Federal Reserve’s efforts will be successful, and ~~parts~~what impact they may have on the United States’ economy. It is possible that the combined effects of inflation and increases in market interest rates could cause the economy of the United States ~~including the New Jersey/New York metropolitan area in~~to enter a recession, which ~~the Company primarily operates. Although the Company has been able to continue operations while taking steps to ensure the safety of employees and clients, COVID-19~~ could ~~impact the Company’s operations in the future. The effects of the COVID-19 pandemic may adversely~~negatively affect the ~~Company’s financial condition~~businesses of our borrowers and their ability to repay their loans or need credit, which could negatively affect our 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.~~operations.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1b. Authoritative Accounting Guidance

~~Newly Issued, But Not Yet Effective~~Adoption of New Accounting Standards in 2023

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2022-02,~~2022-02, “Financial Instruments – Credit Losses (Topic ~~326)~~326), Troubled Debt Restructurings and Vintage Disclosures” (“ASU ~~2022-02”~~2022-02”). ASU ~~2022-02~~2022-02 eliminates the accounting guidance for troubled debt restructurings (“TDRs”) in ASC ~~310-40,~~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,~~2016-13, “Financial Instruments – Credit Losses (Topic ~~326)~~326): Measurement of Credit Losses on Financial Instruments” (ASU ~~2016-13”~~2016-13”). ASU ~~2022-02~~2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic ~~326-20,~~326-20, “Financial Instruments—Credit Losses—Measured at Amortized Cost”. ASU ~~2022-02~~2022-02 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2022-02 on January 1, 2023 and it did not have a material effect on the Company’s consolidated financial statements.

Newly Issued, But Not Yet Effective Accounting Standards

In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2022-03”). ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU ~~2022-02~~2022-03 will have on its consolidated financial statements.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 2.Earnings per Common Share

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

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

							Three Months Ended
	Three Months Ended March 31,						March 31,
(dollars in thousands, except for per share data)	2022			2021			2023			2022
Net income available to common stockholders	$	29,872		$	32,999		$	23,420		$	29,872
Earnings allocated to participating securities		(80	)		(186	)		(44	)		(80	)
Income attributable to common stock	$	29,792		$	32,813		$	23,376		$	29,792

Weighted average common shares outstanding, including participating securities		39,560			39,738			39,178			39,560
Weighted average participating securities		(107	)		(181	)		(74	)		(107	)
Weighted average common shares outstanding		39,453			39,557			39,104			39,453
Incremental shares from assumed conversions of options, performance units and restricted shares		274			232			197			274
Weighted average common and equivalent shares outstanding		39,727			39,789			39,301			39,727

Earnings per common share:
Basic	$	0.76		$	0.83		$	0.60		$	0.76
Diluted		0.75			0.82			0.59			0.75

There were no antidilutive share equivalents for the quarters ended March 31, 2023 and March 31, 2022 ~~and March 31, 2021.~~.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~Note 3. Investment Securities~~

Note 3.Investment Securities

The Company’s investment securities are classified as available-for-sale as of March 31, ~~2022~~2023 and December 31, ~~2021.~~2022. 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 March 31, ~~2022~~2023 and December 31, ~~2021.~~2022. 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 March 31, ~~2022~~2023 and December 31, ~~2021.~~2022.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Allowance for Investment Credit Losses											Allowance
	(dollars in thousands)																				for
March 31, 2022
														Gross		Gross					Investment
Securities available-for-sale
												Amortized		Unrealized		Unrealized			Fair		Credit
												Cost		Gains		Losses			Value		Losses
												(dollars in thousands)
March 31, 2023
Investment securities available-for-sale:
Federal agency obligations	$	51,506	$	46	$	(3,003	)	$	48,549	$	-	$	53,301	$	1	$	(9,787	)	$	43,515	$	-
Residential mortgage pass-through securities		320,605		160		(19,789	)		300,976		-		469,925		322		(50,580	)		419,667		-
Commercial mortgage pass-through securities		18,713		8		(1,313	)		17,408		-		25,424		-		(3,464	)		21,960		-
Obligations of U.S. states and political subdivisions		144,474		446		(7,869	)		137,051		-		155,101		255		(17,060	)		138,296		-
Corporate bonds and notes		5,477		35		(11	)		5,501		-		4,000		-		(23	)		3,977		-
Asset-backed securities		2,364		7		(17	)		2,354				1,505		-		(51	)		1,454		-
Other securities		191		-		-			191		-		132		-		-			132		-
Total securities available-for-sale	$	543,330	$	702	$	(32,002	)	$	512,030	$	-	$	709,388	$	578	$	(80,965	)	$	629,001	$	-

December 31, 2021
Securities available-for-sale
December 31, 2022
Investment securities available-for-sale:
Federal agency obligations	$	50,336	$	649	$	(625	)	$	50,360	$	-	$	54,889	$	-	$	(10,439	)	$	44,450	$	-
Residential mortgage pass-through securities		317,111		1,868		(2,884	)		316,095		-		475,263		178		(57,863	)		417,578		-
Commercial mortgage pass-through securities		10,814		118		(463	)		10,469		-		25,485		-		(4,381	)		21,104		-
Obligations of U.S. states and political subdivisions		145,045		1,562		(982	)		145,625		-		157,247		111		(14,462	)		142,896		-
Corporate bonds and notes		8,968		81		-			9,049		-		7,000		-		(26	)		6,974		-
Asset-backed securities		2,563		3		(2	)		2,564		-		1,673		-		(33	)		1,640		-
Certificates of deposit		150		-		-			150		-
Other securities		195		-		-			195		-		242		-		-			242		-
Total securities available-for-sale	$	535,182	$	4,281	$	(4,956	)	$	534,507	$	-	$	721,799	$	289	$	(87,204	)	$	634,884	$	-

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3.Investment Securities – (continued)

Investment securities having a carrying value of approximately ~~$95.0~~$377.5 million and ~~$71.2~~$157.0 million as of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, were pledged to secure public deposits, borrowings, repurchase agreements, access to unutilized Federal Reserve Discount Window, Bank Term Funding ("BTF") program borrowings, and access to unutilized Federal Home Loan Bank advances and for other purposes required or permitted by law. As of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, 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 March 31, ~~2022,~~2023, 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.

	March 31, 2022				March 31, 2023
	Amortized Cost		Fair Value		Amortized		Fair
	(dollars in thousands)				Cost		Value
Securities available-for-sale:
					(dollars in thousands)
Investment securities available-for-sale:
Due in one year or less	$	3,391	$	3,394	$	2,453	$	2,453
Due after one year through five years		6,118		6,135		4,079		4,057
Due after five years through ten years		4,694		4,774		2,626		2,620
Due after ten years		189,618		179,152		204,749		178,112
Residential mortgage pass-through securities		320,605		300,976		469,925		419,667
Commercial mortgage pass-through securities		18,713		17,408		25,424		21,960
Other securities		191		191		132		132
Total securities available-for-sale	$	543,330	$	512,030	$	709,388	$	629,001

~~We had~~There were no ~~gross~~realized gains or losses ~~from the sale of~~on securities for the three months ended March 31, ~~2022~~ 2023 and ~~2021.~~December 31,2022.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3.Investment Securities – (continued)

Impairment Analysis of Available--for-sale Debt Securities

The following tables indicate ~~gross unrealized losses~~securities in an unrealized loss position for which an allowance for credit losses (“ACL”) has not been recorded, aggregated by investment category and by the length of continuous time individual securities have been in an unrealized loss position as of March 31, ~~2022~~2023 and December 31, ~~2021.~~2022.

	March 31, 2022															March 31, 2023
	Total					Less than 12 Months					12 Months or Longer					Total					Less than 12 Months					12 Months or Longer
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	(dollars in thousands)															Value		Losses			Value		Losses			Value		Losses
Investment Securities Available-for-Sale:
																(dollars in thousands)
Investment securities available-for-sale:
Federal agency obligations	$	43,257	$	(3,003	)	$	43,257	$	(3,003	)	$	-	$	-		$	43,301	$	(9,787	)	$	2,798	$	(209	)	$	40,503	$	(9,578	)
Residential mortgage pass-through securities		284,118		(19,789	)		223,718		(14,696	)		60,400		(5,093	)		404,073		(50,580	)		153,706		(4,627	)		250,367		(45,953	)
Commercial mortgage pass-through securities		14,437		(1,313	)		10,532		(483	)		3,905		(830	)		21,960		(3,464	)		6,540		(460	)		15,420		(3,004	)
Obligations of U.S. states and political subdivisions		111,635		(7,869	)		111,635		(7,869	)		-		-			118,428		(17,060	)		26,397		(1,194	)		92,031		(15,866	)
Corporate bonds and notes		1,988		(11	)		1,988		(11	)		-		-			1,977		(23	)		1,977		(23	)		-		-
Asset-backed securities		1,837		(17	)		1,837		(17	)		-		-			1,454		(51	)		390		(21	)		1,064		(30	)
Total temporarily impaired securities	$	457,272	$	(32,002	)	$	392,967	$	(26,079	)	$	64,305	$	(5,923	)	$	591,193	$	(80,965	)	$	191,808	$	(6,534	)	$	399,385	$	(74,431	)

	December 31, 2022
	Total					Less than 12 Months					12 Months or Longer
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(dollars in thousands)
Investment securities available-for-sale:
Federal agency obligations	$	44,451	$	(10,439	)	$	20,517	$	(1,831	)	$	23,934	$	(8,608	)
Residential mortgage pass-through securities		403,039		(57,863	)		218,918		(13,869	)		184,121		(43,994	)
Commercial mortgage pass-through securities		21,105		(4,381	)		14,523		(2,304	)		6,582		(2,077	)
Obligations of U.S. states and political subdivisions		133,265		(14,462	)		47,446		(3,404	)		85,819		(11,058	)
Corporate bonds and notes		4,973		(26	)		4,973		(26	)		-		-
Asset-backed securities		1,640		(33	)		1,048		(16	)		592		(17	)
Total temporarily impaired securities	$	608,473	$	(87,204	)	$	307,425	$	(21,450	)	$	301,048	$	(65,754	)

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 )

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3.Investment Securities – (continued)

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~~available-for-sale as of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, totaled ~~$1.4~~$2.2 million and ~~$1.6~~$2.4 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 March 31, ~~2022.~~2023.

Federal agency obligations, residential ~~mortgage backed~~mortgage-backed pass-through securities and commercial ~~mortgage back~~mortgage-backed pass-through securities are issued by U.S. Government agencies and U.S. Government sponsored enterprises. Although a government guarantee exists on these investments, these entities are not legally backed by the full faith and credit of the federal government, and the current support they receive is subject to a cap as part of the agreement entered into in 2008. Nonetheless, at this time we do not foresee any set of circumstances in which the government would not fund its commitments on these investments as the issuers are an integral part of the U.S. housing market in providing liquidity and stability. Therefore, we concluded that a ~~zero-allowance~~zero-allowance approach for these investment securities is appropriate.

Note 4. Derivatives

~~The Company utilizes interest rate swap agreements as~~As part of ~~its~~our overall asset liability management and strategy ~~to help manage its~~the Company uses derivative instruments, which can include interest rate ~~risk position.~~swaps, collars, caps, and floors. The notional amount ~~of the interest rate swap~~ does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.

Derivatives Designated as Hedges

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

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

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

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

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4. Derivatives – (continued)

Cash Flow Hedges

The Company entered into eleven pay fixed-rate interest rate ~~swap agreements. An interest rate swap was entered into on April 13, 2017~~swaps, with a ~~respective~~total notional amount of ~~$25.0~~$500 million, all of which were entered into in 2021and ~~was~~2022. These are designated as a cash flow ~~hedge~~hedges of acurrent, Federal Home Loan Bank ~~advance.~~advances. We are required to pay ~~a fixed-rate~~fixed rates of interest ~~of 1.93%~~ranging from 0.63% to 3.41% and receive variable rates of interest that reset quarterly based on ~~three-month LIBOR.~~the daily compounding secured overnight financing rate (“SOFR”). The eleven swaps carry expiration ~~date for the swap is April 2022.~~ dates ranging from December 2025to March 2028. The ~~swap is~~swaps are determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the 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 ~~swap.~~swaps.

~~In addition, during 2021, the~~The Company previously entered into 9one forward starting ~~pay fixed-rate~~ interest rate ~~swaps, 7 of which have since commenced,~~cap spread transaction, with a total notional amount of ~~$400~~$150 million, which became effective on October 1, 2022 and matures in October of 2027 and one additional interest rate cap spread transaction, with a total notional amount of $75 million, which became effective in November 2022 and matures in November of 2027. These are ~~also~~ designated as a cash flow hedges of ~~current, or future, Federal Home Loan Bank advance. We~~brokered certificates of deposits, and the interest rate cap spread is indexed to a benchmark of fed funds with payment required on a monthly basis. The structure of these instruments is such that the Company entered into a total of $225 million in notional amount of sold interest rate cap agreements, in which we are required to pay ~~fixed rates~~the counterparty an incremental amount if the index rate exceeds a set cap rate. Simultaneously, the Company purchased a total of $225 million notional amount of interest ~~ranging from 0.631% to 1.23% and~~rate cap agreements in which we receive ~~variable rates of interest that reset quarterly based~~an incremental amount if the index rate is above a set cap rate. No payments are required if the index rate is at, or below, the cap rate on the ~~daily compounding secured overnight financing~~sold or purchased interest rate ~~(“SOFR”). The 2 remaining forward starting swaps have commencing payment dates in May 2022 and August 2022, with expiration dates on the 9 positions ranging from December 2025 to March 2028.~~cap agreements.

Net interest (income) expense recorded on these swap and interest rate cap transactions totaled approximately ($4.3) million and $0.5 million during the three months ended March 31, 2023 and March 31, 2022, respectively, and is recorded as a component of either interest expense on FHLB Advances or brokered certificates of deposits.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4. Derivatives – (continued)

Interest expense recorded on these swap transactions totaled approximately $0.5 million and $0.6 million during the three months ended March 31, 2022 and 2021, respectively, and is reported as a component of interest expense on FHLB Advances.

~~Cash Flow Hedge~~

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

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 March 31, 2023
	Amount of gain (loss) recognized in OCI (Effective Portion)			Amount of (gain) loss reclassified from OCI to interest expense			Amount of gain recognized in other Noninterest income (Ineffective Portion)
	(dollars in thousands)
Interest rate contracts	$	(4,361	)	$	(4,267	)	$	-

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 $ -

	Three Months Ended March 31, 2022
	Amount of gain (loss) recognized in OCI (Effective Portion)		Amount of (gain) loss reclassified from OCI to interest expense		Amount of gain recognized in other Noninterest income (Ineffective Portion)
	(dollars in thousands)
Interest rate contracts	$	19,000	$	525	$	-

The following table reflects the cash flow hedges included in the consolidated statements of condition as of March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:

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

	March 31, 2023				December 31, 2022
	Notional Amount		Fair Value		Notional Amount		Fair Value
			(dollars in thousands)
Interest rate contracts	$	950,000	$	47,620	$	950,000	$	56,797

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 5. Loans and the Allowance for Credit Losses

Loans Receivable– The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred loan fees, as of March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:

	March 31, 2022			December 31, 2021			March 31, 2023			December 31, 2022
	(dollars in thousands)						(dollars in thousands)
Commercial ⁽¹⁾	$	1,278,477		$	1,299,428		$	1,414,226		$	1,472,734
Commercial real estate		4,919,093			4,741,590			5,835,880			5,795,228
Commercial construction		539,058			540,178			630,469			574,139
Residential real estate		250,205			255,269			259,166			264,748
Consumer		1,140			1,886			1,435			2,312
Gross loans		6,987,973			6,838,351			8,141,176			8,109,161
Net deferred loan fees		(8,378	)		(9,729	)		(9,057	)		(9,472	)
Total loans receivable	$	6,979,595		$	6,828,622		$	8,132,119		$	8,099,689

⁽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.}

As of both March 31, ~~2022~~2023 and December 31, ~~2021, loan balances of~~2022, loans totaling approximately ~~$2.5~~$2.7 billion were pledged to secure borrowings from the FHLB of New York. During April 2023 the Bank increased its unpaid principal balances of loans pledged to $5.4 billion, as a result of increasing unutilized borrowing capacity at both the Federal Reserve Bank of New York and 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 March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:

	March 31, 2022		December 31, 2021		March 31, 2023		December 31, 2022
	(dollars in thousands)				(dollars in thousands)
Commercial real estate	$	2,390	$	-	$	11,197	$	13,473
Residential real estate		352		250		-		299
Total carrying amount	$	2,742	$	250	$	11,197	$	13,772

Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL and nonaccrual loans without an ACL as of March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:

	March 31, 2022						March 31, 2023
	Nonaccrual loans with ACL		Nonaccrual loans without ACL		Total Nonaccrual loans		Nonaccrual loans with ACL		Nonaccrual loans without ACL		Total nonaccrual loans
	(dollars in thousands)						(dollars in thousands)
Commercial	$	29,148	$	1,193	$	30,341	$	18,766	$	555	$	19,321
Commercial real estate		17,497		8,819		26,316		3,348		22,138		25,486
Commercial construction		-		-		-
Residential real estate		1,172		1,574		2,746		815		2,045		2,860
Consumer		-		-		-
Total	$	47,817	$	11,586	$	59,403	$	22,929	$	24,738	$	47,667

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

	December 31, 2021						December 31, 2022
	Nonaccrual loans with ACL		Nonaccrual loans without ACL		Total Nonaccrual loans		Nonaccrual loans with ACL		Nonaccrual loans without ACL		Total nonaccrual loans
	(dollars in thousands)						(dollars in thousands)
Commercial	$	28,746	$	1,316	$	30,062	$	23,512	$	1,745	$	25,257
Commercial real estate		15,362		10,031		25,393		10,220		6,597		16,817
Commercial construction		-		3,150		3,150
Residential real estate		1,239		1,856		3,095		604		1,776		2,380
Consumer		-		-		-
Total	$	45,347	$	16,353	$	61,700	$	34,336	$	10,118	$	44,454

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.~~evaluated.

Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a ~~third-party~~third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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. The following table presents loans by origination and risk designation as of March 31, ~~2022~~2023 (dollars in thousands):

	Term loans amortized cost basis by origination year												Revolving		Total		*Term loans amortized cost basis by origination year*
	2022		2021		2020		2019		2018		Prior		Loans		Gross Loans		*2023*		*2022*		*2021*		*2020*		*2019*		*Prior*		*Revolving Loans*		*Total Gross Loans*
Commercial
Pass	$	38,767	$	371,431	$	56,980	$	41,829	$	58,230	$	175,970	$	471,742	$	1,214,949	$	88,764	$	287,784	$	275,151	$	44,118	$	18,468	$	135,355	$	525,263	$	1,374,903
Special mention		-		-		-		-		632		9,656		4,310		14,598		-		-		-		-		578		8,468		3,312		12,358
Substandard		448		164		-		1,649		12,203		20,388		14,078		48,930		-		802		140		12		1,748		21,867		2,396		26,965
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Commercial	$	39,215	$	371,595	$	56,980	$	43,478	$	71,065	$	206,014	$	490,130	$	1,278,477	$	88,764	$	288,586	$	275,291	$	44,130	$	20,794	$	165,690	$	530,971	$	1,414,226

Commercial Real Estate
Pass	$	371,604	$	1,655,013	$	507,117	$	389,017	$	452,309	$	1,241,085	$	166,342	$	4,782,487	$	58,920	$	1,586,883	$	1,593,747	$	374,873	$	364,428	$	1,335,482	$	434,426	$	5,748,759
Special mention		-		-		-		3,340		-		53,982		15,537		72,859		-		-		-		-		-		37,007		-		37,007
Substandard		-		1,958		4,500		7,302		20,445		21,117		8,425		63,747		-		-		1,919		-		5,013		26,265		16,917		50,114
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Commercial Real Estate	$	371,604	$	1,656,971	$	511,617	$	399,659	$	472,754	$	1,316,184	$	190,304	$	4,919,093	$	58,920	$	1,586,883	$	1,595,666	$	374,873	$	369,441	$	1,398,754	$	451,343	$	5,835,880

Commercial Construction
Pass	$	-	$	1,518	$	7,370	$	6,508	$	2,600	$	-	$	510,174	$	528,170	$	-	$	4,263	$	7,340	$	6,721	$	-	$	-	$	603,779	$	622,103
Special mention		-		-		-		-		350		-		1,443		1,793		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		9,095		9,095		-		-		-		-		-		-		8,366		8,366
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Commercial Construction	$	-	$	1,518	$	7,370	$	6,508	$	2,950	$	-	$	520,712	$	539,058	$	-	$	4,263	$	7,340	$	6,721	$	-	$	-	$	612,145	$	630,469

Residential Real Estate
Residential
Pass	$	9,604	$	25,905	$	27,697	$	23,056	$	23,589	$	88,610	$	42,361	$	240,822	$	2,768	$	44,461	$	25,141	$	24,036	$	21,394	$	96,458	$	37,979	$	252,237
Special mention		-		-		-		-		-		-		-		-		-		-		-		-		-		662		3,407		4,069
Substandard		-		-		-		-		-		5,919		3,464		9,383		-		-		-		-		-		2,635		225		2,860
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Residential Real Estate	$	9,604	$	25,905	$	27,697	$	23,056	$	23,589	$	94,529	$	45,825	$	250,205	$	2,768	$	44,461	$	25,141	$	24,036	$	21,394	$	99,755	$	41,611	$	259,166

Consumer
Pass	$	908	$	-	$	75	$	35	$	17	$	4	$	101	$	1,140	$	1,182	$	157	$	-	$	7	$	-	$	1	$	88	$	1,435
Special mention		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Consumer	$	908	$	-	$	75	$	35	$	17	$	4	$	101	$	1,140	$	1,182	$	157	$	-	$	7	$	-	$	1	$	88	$	1,435

Total
Pass	$	420,883	$	2,053,867	$	599,239	$	460,445	$	536,745	$	1,505,669	$	1,190,720	$	6,767,568	$	151,634	$	1,923,548	$	1,901,379	$	449,755	$	404,290	$	1,567,296	$	1,601,535	$	7,999,437
Special mention		-		-		-		3,340		982		63,638		21,290		89,250		-		-		-		-		578		46,137		6,719		53,434
Substandard		448		2,122		4,500		8,951		32,648		47,424		35,062		131,155		-		802		2,059		12		6,761		50,767		27,904		88,305
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Grand Total	$	421,331	$	2,055,989	$	603,739	$	472,736	$	570,375	$	1,616,731	$	1,247,072	$	6,987,973	$	151,634	$	1,924,350	$	1,903,438	$	449,767	$	411,629	$	1,664,200	$	1,636,158	$	8,141,176

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 presents loans by origination and risk designation as of December 31, ~~2021~~2022 (dollars in thousands):

	Term loans amortized cost basis by origination year													Revolving		Total		*Term loans amortized cost basis by origination year*
	2021		2020		2019		2018		8.5		Prior			Loans		Gross Loans		*2022*		*2021*		*2020*		*2019*		*2018*		*Prior*		*Revolving Loans*		*Total Gross Loans*
Commercial
Pass	$	403,203	$	58,534	$	54,485	$	60,409	$	95,727	$	86,556		$	471,588	$	1,230,502	$	301,636	$	305,721	$	47,952	$	28,177	$	52,950	$	127,739	$	550,483	$	1,414,658
Special mention		-		-		-		-		1		4,045			4,266		8,312		-		-		-		583		26		8,551		3,292		12,452
Substandard		170		-		1,842		13,298		9,740		21,024			14,540		60,614		7,615		146		15		1,769		11,214		22,596		2,269		45,624
Doubtful		-		-		-		-		-		-			-		-		-		-		-		-		-		-		-		-
Total Commercial	$	403,373	$	58,534	$	56,327	$	73,707	$	105,468	$	111,625		$	490,394	$	1,299,428	$	309,251	$	305,867	$	47,967	$	30,529	$	64,190	$	158,886	$	556,044	$	1,472,734

Commercial Real Estate
Pass	$	1,692,098	$	533,315	$	420,995	$	452,262	$	497,065	$	842,244		$	170,721	$	4,608,700	$	1,571,751	$	1,608,023	$	382,987	$	358,578	$	375,886	$	987,982	$	401,365	$	5,686,572
Special mention		-		-		-		-		5,142		50,438			6,601		62,181		3,040		-		-		-		-		37,774		8,839		49,653
Substandard		1,968		9,039		4,006		20,624		-		26,108			8,964		70,709		-		1,929		-		6,526		19,138		23,287		8,123		59,003
Doubtful		-		-		-		-		-		-			-		-		-		-		-		-		-		-		-		-
Total Commercial Real Estate	$	1,694,066	$	542,354	$	425,001	$	472,886	$	502,207	$	918,790		$	186,286	$	4,741,590	$	1,574,791	$	1,609,952	$	382,987	$	365,104	$	395,024	$	1,049,043	$	418,327	$	5,795,228

Commercial Construction
Pass	$	8,018	$	7,370	$	12,625	$	2,600	$	2,339	$	-		$	490,119	$	523,071	$	8,615	$	7,605	$	6,720	$	508	$	-	$	-	$	542,460	$	565,908
Special mention		-		-		-		-		350		-			1,443		1,793		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-			15,314		15,314		-		-		-		-		-		-		8,231		8,231
Doubtful		-		-		-		-		-		-			-		-		-		-		-		-		-		-		-		-
Total Commercial Construction	$	8,018	$	7,370	$	12,625	$	2,600	$	2,689	$	-		$	506,876	$	540,178	$	8,615	$	7,605	$	6,720	$	508	$	-	$	-	$	550,691	$	574,139

Residential Real Estate
Pass	$	27,081	$	29,539	$	23,611	$	25,070	$	28,701	$	66,249		$	44,221	$	244,472	$	45,926	$	25,318	$	24,409	$	21,557	$	20,284	$	78,314	$	41,468	$	257,276
Special mention		-		-		-		-		-		-			-		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		7,262			3,535		10,797		-		-		-		-		-		3,379		4,093		7,472
Doubtful		-		-		-		-		-		-			-		-		-		-		-		-		-		-		-		-
Total Residential Real Estate	$	27,081	$	29,539	$	23,611	$	25,070	$	28,701	$	73,511		$	47,756	$	255,269	$	45,926	$	25,318	$	24,409	$	21,557	$	20,284	$	81,693	$	45,561	$	264,748

Consumer
Pass	$	1,594	$	85	$	39	$	21	$	28	$	(4	)	$	123	$	1,886	$	2,219	$	-	$	9	$	-	$	-	$	2	$	82	$	2,312
Special mention		-		-		-		-		-		-			-		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-			-		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-			-		-		-		-		-		-		-		-		-		-
Total Consumer	$	1,594	$	85	$	39	$	21	$	28	$	(4	)	$	123	$	1,886	$	2,219	$	-	$	9	$	-	$	-	$	2	$	82	$	2,312

Total
Pass	$	2,131,994	$	628,843	$	511,755	$	540,362	$	623,860	$	995,045		$	1,176,772	$	6,608,631	$	1,930,147	$	1,946,667	$	462,077	$	408,820	$	449,120	$	1,194,037	$	1,535,858	$	7,926,726
Special mention		-		-		-		-		5,493		54,483			12,310		72,286		3,040		-		-		583		26		46,325		12,131		62,105
Substandard		2,138		9,039		5,848		33,922		9,740		54,394			42,353		157,434		7,615		2,075		15		8,295		30,352		49,262		22,716		120,330
Doubtful		-		-		-		-		-		-			-		-		-		-		-		-		-		-		-		-
Grand Total	$	2,134,132	$	637,882	$	517,603	$	574,284	$	639,093	$	1,103,922		$	1,231,435	$	6,838,351	$	1,940,802	$	1,948,742	$	462,092	$	417,698	$	479,498	$	1,289,624	$	1,570,705	$	8,109,161

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Collateral Dependent Loans: Loans which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses. The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date. The following table presents collateral dependent loans that were individually evaluated for impairment as of March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:

	March 31, 2022						March 31, 2023
	Real Estate		Other		Total		Real Estate		Other		Total
	(dollars in thousands)						(dollars in thousands)
Commercial	$	6,120	$	25,982	$	32,102	$	4,950	$	16,650	$	21,600
Commercial real estate		62,753		-		62,753		49,529		-		49,529
Commercial construction		7,042		-		7,042		8,366		-		8,366
Residential real estate		7,528		-		7,528		6,114		-		6,114
Consumer		-		-		-
Total	$	83,443	$	25,982	$	109,425	$	68,959	$	16,650	$	85,609

~~Table of Contents~~

	December 31, 2022
	Real Estate		Other		Total
	(dollars in thousands)
Commercial	$	5,352	$	22,517	$	27,869
Commercial real estate		52,477		-		52,477
Commercial construction		8,232		-		8,232
Residential real estate		5,864		-		5,864
Total	$	71,925	$	22,517	$	94,442

~~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

AgingAnalysis - The following table provides an analysis of the aging of the loans by class, excluding the effect of net deferred fees, ~~that~~which are past due as of March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:

	March 31, 2022														March 31, 2023
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Gross Loans		30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Gross Loans
	(dollars in thousands)														(dollars in thousands)
Commercial	$	3,561	$	-	$	4,420	$	30,341	$	38,322	$	1,240,155	$	1,278,477	$	1,929	$	-	$	-	$	19,321	$	21,250	$	1,392,976	$	1,414,226
Commercial real Estate		3,098		-		5,848		26,316		35,262		4,883,831		4,919,093
Commercial real estate																5,740		810		-		25,486		32,036		5,803,844		5,835,880
Commercial construction		123		-		-		-		123		538,935		539,058		4,707		-		-		-		4,707		625,762		630,469
Residential real Estate		1,970		-		1,487		2,746		6,203		244,002		250,205
Residential real estate																703		-		-		2,860		3,563		255,603		259,166
Consumer		-		-		625		-		625		515		1,140		-		-		-		-		-		1,435		1,435
Total	$	8,752	$	-	$	12,380	$	59,403	$	80,535	$	6,907,438	$	6,987,973	$	13,079	$	810	$	-	$	47,667	$	61,556	$	8,079,620	$	8,141,176

	December 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	$	306	$	-	$	-	$	25,257	$	25,563	$	1,447,171	$	1,472,734
Commercial real estate		90		-		5,591		16,817		22,498		5,772,730		5,795,228
Commercial construction		-		-		-		-		-		574,139		574,139
Residential real estate		1,569		-		-		2,380		3,949		260,799		264,748
Consumer		-		-		-		-		-		2,312		2,312
Total	$	1,965	$	-	$	5,591	$	44,454	$	52,010	$	8,057,151	$	8,109,161

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

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 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 allowance for credit losses that are allocated to each loan portfolio segment:

	March 31, 2022												March 31, 2023
	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Total		Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Total
	(dollars in thousands)												(dollars in thousands)
Allowance for credit losses - loans
Individually evaluated impairment	$	14,028	$	1,859	$	-	$	94	$	-	$	15,981	$	5,861	$	924	$	-	$	72	$	-	$	6,857
Collectively evaluated impairment		9,154		44,088		3,281		3,361		7		59,891		19,568		52,076		3,966		3,796		6		79,412
Acquired with deteriorated credit quality individually analyzed		2,277		1,921		-		-		-		4,198		733		-		-		-		-		733
Total	$	25,459	$	47,868	$	3,281	$	3,455	$	7	$	80,070	$	26,162	$	53,000	$	3,966	$	3,868	$	6	$	87,002

Gross loans
Individually evaluated impairment	$	34,224	$	56,905	$	7,042	$	5,415	$	-	$	103,586	$	24,204	$	49,529	$	8,366	$	6,115	$	-	$	88,214
Collectively evaluated impairment		1,239,157		4,856,340		532,016		242,678		1,140		6,871,331		1,387,738		5,786,351		622,103		253,051		1,435		8,050,678
Acquired with deteriorated credit quality individually analyzed		5,096		5,848		-		2,112		-		13,056		2,284		-		-		-		-		2,284
Total	$	1,278,477	$	4,919,093	$	539,058	$	250,205	$	1,140	$	6,987,973	$	1,414,226	$	5,835,880	$	630,469	$	259,166	$	1,435	$	8,141,176

	December 31, 2022
	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Total
	(dollars in thousands)
Allowance for credit losses - loans
Individually evaluated impairment	$	7,426	$	1,003	$	-	$	50	$	-	$	8,479
Collectively evaluated impairment		19,319		50,818		3,718		4,093		7		77,955
Acquired with deteriorated credit quality individually analyzed		2,158		1,921		-		-		-		4,079
Total	$	28,903	$	53,742	$	3,718	$	4,143	$	7	$	90,513

Gross loans
Individually evaluated impairment	$	30,994	$	46,886	$	8,232	$	5,864	$	-	$	91,976
Collectively evaluated impairment		1,436,866		5,742,751		565,907		258,884		2,312		8,006,720
Acquired with deteriorated credit quality individually analyzed		4,874		5,591		-		-		-		10,465
Total	$	1,472,734	$	5,795,228	$	574,139	$	264,748	$	2,312	$	8,109,161

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

Table of Contents

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 months ended March 31, ~~2022~~2023 is summarized in the ~~table~~tables 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

	Three Months Ended March 31, 2023
	Commercial			Commercial real estate			Commercial construction		Residential real estate			Consumer			Total
	(dollars in thousands)
Balance as of December 31, 2022	$	28,903		$	53,742		$	3,718	$	4,143		$	7		$	90,513
Charge-offs		(2,767	)		(1,717	)		-		-			-			(4,484	)
Recoveries		-			-			-		1			-			1
Provision for (reversal of) credit losses - loans		26			975			248		(276	)		(1	)		972

Balance as of March 31, 2023	$	26,162		$	53,000		$	3,966	$	3,868		$	6		$	87,002

Activity in the Company’s ACL for loans for the three months ended March 31, ~~2021~~2022 is summarized in the table below. The CECL Day 1 row presents adjustments recorded through retained earnings to adopt the CECL standard and the increase to the ACL for loans associated with nonaccretable purchase accounting marks on loans that were classified as PCI as of December 31, 2020.

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

	Three Months Ended March 31, 2022
	Commercial			Commercial real estate			Commercial construction			Residential real estate			Consumer		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

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~~Loan Modifications to Borrowers Experiencing Financial Difficulty:

~~Loans are considered~~The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

The following table presents the amortized cost basis at the end of the reporting period of the loan modifications to borrowers experiencing financial difficulty:

	Three Months Ended
	March 31, 2023
	Term Extension		% of Portfolio
	(dollars in thousands)
Commercial	$	63		0.01	%

The above table consists of one commercial loan on which 3.0 years was added to the life of the modified loan, which did not have a material effect on the cash flows.

The following table presents the performance of loans that have been modified in the last twelve months:



	March 31, 2023
	Current		Past Due 30-89 Days		Past Due 90 Days or More
	(dollars in thousands)
Commercial	$	63	$	-	$	-

There were no loans to borrowers experiencing financial difficulty that had a payment default during the three months ended March 31, 2023 and which were modified in the twelve months prior to that default. Default is determined at 90 or more days past due, upon charge-off, or upon foreclosure. Modified loans in default are individually evaluated for the allowance for credit losses or if the modified loan is deemed uncollectible, the loan, or a portion of the loan, is written off and the allowance for credit losses is adjusted accordingly.

Troubled debt restructurings:

Information on loan modifications prior to the adoption of ASU 2022-02 on January 1, 2023 is presented in accordance with the applicable accounting standards in effect at that time. During the three months ended March 31, 2022, the Company modified two loans that were determined to be troubled debt restructuring, ~~(“TDRs”) when, except as discussed below, due to~~ a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance,commercial loan and ~~other actions intended to minimize economic loss~~a commercial real estate loan, with outstanding balances of $98 thousand and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status.

As of 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 troubled debt restructurings.

~~As of March 31, 2022, TDRs totaled $76.5~~$8.3 million, of which $29.1 million were on nonaccrual status and $47.4 million were performing under their restructured terms. As of December 31, 2021, TDRs totaled $79.5 million, of which $35.9 million were on nonaccrual status and $43.6 million were performing under their restructured terms. The Company has allocated $9.1 million and $10.4 million of specific allowance related to TDRs as of March 31, 2022 and December 31, 2021, respectively.

~~The following table presents loans by class modified as TDRs that occurred during the three months ended 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,~~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 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 three months ended March 31, 2021 were maturity extensions, while the one commercial real estate loan was a recast of a nonaccrual credit.

~~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 March 31, 2021.~~

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Allowance for Credit Losses for Unfunded Commitments

The Company has recorded an ACL for unfunded credit commitments, which was recorded in other liabilities. The provision is recorded within the provision for (reversal of) ~~provision for~~ credit losses on the Company’s income statement. The following table presents a ~~rollforward~~roll forward of the allowance for credit losses for unfunded commitments for the three months ended March 31, ~~2022~~ 2023 and ~~March 31, 2021:~~2022:

							Three Months Ended		Three Months Ended
							March 31,		March 31,
	Three Months Ended March 31, 2022			Three Months Ended March 31, 2021			2023		2022
	(dollars in thousands)						(dollars in thousands)
Balance at beginning of period	$	2,351		$	-		$	3,036	$	2,351
Day 1 Effect of CECL		-			2,833
(Reversal of) provision for credit losses (unfunded commitments)		(89	)		(490	)
Provision for (reversal of) credit losses - unfunded commitments								28		(89	)
Balance at end of period	$	2,262		$	2,343		$	3,064	$	2,262

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Components of (Reversal of) Provision for Credit Losses

The following table summarizes the provision for (reversal of) ~~provision for~~ credit losses for the three months ended March 31, ~~2022~~ 2023 and ~~March 31, 2021:~~2022 :

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 )

	Three Months Ended		Three Months Ended
	March 31,		March 31,
	2023		2022
	(dollars in thousands)
Provision for credit losses - loans	$	972	$	1,539
Provision for (reversal of) credit losses - unfunded commitments		28		(89	)
Provision for credit losses	$	1,000	$	1,450

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

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

Level 1:

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

Level 2:

~~Level 2:~~Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3:

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

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

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

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

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

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows:

			March 31, 2022								March 31, 2023
			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(dollars in thousands)
Recurring fair value measurements: Assets
Investment securities:
Available-for-sale:
Investment securities:
Available-for-sale:
Federal agency obligations	$	48,549	$	-	$	48,549	$	-	$	43,515	$	-	$	43,515	$	-
Residential mortgage pass-through securities		300,976		-		300,976		-		419,667		-		419,667		-
Commercial mortgage pass-through securities		17,408		-		17,408		-		21,960		-		21,960		-
Obligations of U.S. states and political subdivision		137,051		-		128,558		8,493		138,296		-		130,808		7,488
Corporate bonds and notes		5,501		-		5,501		-		3,977		-		3,977		-
Asset-backed securities		2,354		-		2,354		-		1,454		-		1,454		-
Certificates of deposit		-		-		-		-
Other securities		191		191		-		-		132		132		-		-
Total available-for-sale		512,030		191		503,346		8,493		629,001		132		621,381		7,488

Equity securities		13,198		10,550		2,648		-		18,025		9,892		8,133		-
Derivatives		22,872		-		22,872		-		47,620		-		47,620		-
Total assets	$	548,100	$	10,741	$	528,866	$	8,493	$	694,646	$	10,024	$	677,134	$	7,488

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

			December 31, 2021								December 31, 2022
			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(dollars in thousands)
Recurring fair value measurements: Assets
Investment securities:
Available-for-sale:
Investment securities:
Available-for-sale:
Federal agency obligations	$	50,360	$	-	$	50,360	$	-	$	44,450	$	-	$	44,450	$	-
Residential mortgage pass- through securities		316,095		-		316,095		-		417,578		-		417,578		-
Commercial mortgage pass-through securities		10,469		-		10,469		-		21,104		-		21,104		-
Obligations of U.S. states and political subdivision		145,625		-		137,060		8,565		142,896		-		135,547		7,349
Corporate bonds and notes		9,049		-		9,049		-		6,974		-		6,974		-
Asset-backed securities		2,564		-		2,564		-		1,640		-		1,640		-
Certificates of deposit		150		-		150		-
Other securities		195		195		-		-		242		242		-		-
Total available-for-sale	$	534,507	$	195	$	525,747	$	8,565	$	634,884	$	242	$	627,293	$	7,349

Equity securities		13,794		11,081		2,713		-		15,811		9,733		6,078		-
Derivatives		3,347		-		3,347		-		56,797		-		56,797		-
Total assets	$	551,648	$	11,276	$	531,807	$	8,565	$	707,492	$	9,975	$	690,168	$	7,349

There were no transfers between Level 1 and Level 2 during the three months ended March 31, ~~2022~~2023 and during the year ended December 31, ~~2021.~~2022.

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 March 31, ~~2022~~2023 and December 31, ~~2021.~~2022.

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

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

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

For assets measured at fair value on a nonrecurring basis, the fair value measurements as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows:

			Fair Value Measurements at Reporting Date Using								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)		March 31, 2023		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)
Collateral dependent loans:									(dollars in thousands)
Commercial	$	14,698	$	-	$	-	$	14,698	$	11,635	$	-	$	-	$	11,635
Commercial real estate		29,370		-		-		29,370		10,428		-		-		10,428
Residential real estate		1,366		-		-		1,366		1,363		-		-		1,363

			Fair Value Measurements at Reporting Date Using								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)		December 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)
Collateral dependent loans:									(dollars in thousands)
Commercial	$	13,399	$	-	$	-	$	13,399	$	14,550	$	-	$	-	$	14,550
Commercial real estate		20,185		-		-		20,185		17,264		-		-		17,264
Residential real estate		2,794		-		-		2,794		1,392		-		-		1,392

Collateral dependent loans –– Collateral dependent loans as of March 31, ~~2022~~2023 that required a valuation allowance were ~~$62.4~~$30.6 million with a related valuation allowance of ~~$16.9~~$7.2 million compared to ~~$54.1~~$43.8 million with a related valuation allowance of ~~$17.8~~$10.5 million as of December 31, ~~2021.~~2022.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Assets Measured with Significant Unobservable Level 3 Inputs

Recurring basis

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3)3) for the three months ended March 31, ~~2022~~2023 and for the year ended December 31, ~~2021:~~2022:

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, 2022	$	7,349
Principal paydowns		(74	)
Change in unrealized gain (loss)		213
Ending balance, March 31, 2023	$	7,488

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)
Beginning balance, December 31, 2021	$	8,565
Principal paydowns		(287	)
Changes in unrealized gain (loss)		(929	)
Ending balance, December 31, 2022	$	7,349

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 March 31, ~~2022~~2023 and December 31, ~~2021.~~2022. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.

March 31, 2022

March 31, 2023

Fair Value

Valuation
Techniques

Unobservable
Input

Rate

Fair Value

Valuation Techniques

Unobservable Input

Rate

Securities available-for-sale:

(dollars in thousands)

(dollars in thousands)

Municipal securities

8,493

Discounted cash flows

Discount rate

2.9

7,488

Discounted cash flows

Discount rate

4.0

December 31, 2022
	Fair Value		Valuation Techniques	Unobservable Input	Rate
Securities available-for-sale:			(dollars in thousands)
Municipal securities	$	7,349	Discounted cash flows	Discount rate		4.3	%

December 31, 2021
Fair Value Valuation
Techniques Unobservable
Input Rate
Securities available-for-sale: (dollars in thousands)
Municipal securities $ 8,565 Discounted cash flows Discount rate 2.9 %

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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 of collateral dependent loans.

March 31, 2022

March 31, 2023

(dollars in thousands)

Fair Value

Valuation
Techniques

Unobservable
Input

Range (weighted average)

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%)

11,150

Market approach (100%)

Average transfer price as a price to unpaid principal balance

65% –96% (67%)

Commercial

705

Appraisals of collateral value

Comparable sales

-10% to +35% (+8%)

485

Appraisals of collateral value

Comparable sales

-10% to +13% (+3%)

Commercial real estate

29,370

Appraisals of collateral value

Comparable sales

-25% to 10% (-14%)

10,428

Appraisals of collateral value

Comparable sales

-15% to +5% (6%)

Residential real estate

1,366

Appraisals of collateral value

Comparable sales

+21% to +39% (+22%)

1,363

Appraisals of collateral value

Comparable sales

+21% to +39% (+27%)

December 31, 2022

(dollars in thousands)

Fair Value

Valuation Techniques
Unobservable Input

Range (weighted average)

Commercial loans
$ 14,028
Market approach (100%)
Average transfer price as a price to unpaid principal balance
65% to 96% (67%)
Commercial loans
522
Appraisals of collateral value
Adjustment for comparable sales

-10% to +13% (+3%)

Commercial real estate loans
17,264
Appraisals of collateral value
Adjustment for comparable sales

-20% to +0% (-15%)

Residential real estate loans
1,392
Appraisals of collateral value
Adjustment for comparable sales

+21% to +39% (22%)

December 31, 2021
(dollars in thousands) Fair Value Valuation
Techniques Unobservable
Input Range (weighed average)
Commercial $ 12,193 Market approach (100%) Average transfer price as a price to unpaid principal balance 48% to 73% (49%)
Commercial $ 1,206 Appraisals of collateral value Adjustment for comparable sales -10% to +35% (+6%)
Commercial real estate $ 20,185 Appraisals of collateral value Adjustment for comparable sales -20% to +15% (-6%)
Residential real estate $ 2,794 Appraisals of collateral value Adjustment for comparable sales -15% to +39% (5%)
33

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

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

As of March 31, ~~2022~~2023 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 March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:

Fair Value Measurements
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)
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)
(dollars in thousands)

March 31, 2022
March 31, 2023

Financial assets:
Cash and due from banks $ 311,544 $ 311,544 $ 311,544 $ - $ - $ 562,416 $ 562,416 $ 562,416 $ - $ -
Securities available-for-sale 512,030 512,030 191 503,346 8,493 629,001 629,001 132 621,381 7,488
Restricted investments in bank stocks 25,254 n/a n/a n/a n/a 46,379 n/a n/a n/a n/a
Equity securities 13,198 13,198 10,550 2,648 - 18,025 18,025 9,892 8,133 -
Net loans 6,899,525 6,874,974 - - 6,874,974 8,045,117 7,749,886 - - 7,749,886
Derivatives 22,872 22,872 - 22,872 -
Derivatives - interest rate contracts
47,620 47,620 - 47,620 -
Accrued interest receivable 34,081 34,081 - 1,472 32,609 46,301 46,301 - 4,829 41,472

Financial liabilities:
Noninterest-bearing deposits 1,631,292 1,631,292 1,631,292 - - 1,345,265 1,345,265 1,345,265 - -
Interest-bearing deposits 4,929,113 4,909,128 3,863,299 1,045,829 - 6,407,911 6,378,261 3,701,249 2,677,012 -
Borrowings 412,170 410,535 - 410,535 - 852,611 850,698 - 850,698 -
Subordinated debentures 153,027 155,940 - 155,940 - 79,060 78,040 - 78,040 -
Accrued interest payable 2,889 2,889 - 2,889 - 8,639 8,639 - 8,639 -

December 31, 2022

Financial assets:

Cash and due from banks
$ 268,315 $ 268,315 $ 268,315 $ - $ -
Investment securities available-for-sale
634,884 634,884 242 627,293 7,349
Restricted investment in bank stocks
46,604 n/a n/a n/a n/a
Equity securities
15,811 15,811 9,733 6,078 -
Net loans
8,009,176 7,723,378 - - 7,723,378
Derivatives - interest rate contracts
56,797 56,797 - 56,797 -
Accrued interest receivable
46,062 46,062 - 4,685 41,377

Financial liabilities:

Noninterest-bearing deposits
1,501,614 1,501,614 1,501,614 - -
Interest-bearing deposits
5,855,008 5,811,291 3,460,818 2,350,473 -
Borrowings
857,622 854,698 . 854,698 -
Subordinated debentures
153,255 153,581 - 153,581 -
Accrued interest payable
6,925 6,925 - 6,925 -

34
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)

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, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above.

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

The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company’s core deposit base is required by FASB ASC 825-10.
Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

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

Note 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) for the periods presented (dollars in thousands):

Details about Accumulated Other
Comprehensive Income Components Amounts Reclassified from Accumulated
Other Comprehensive Income Affected Line item in the
Consolidated Statements of Income
Amounts Reclassified from Accumulated Other Comprehensive Income

Affected Line item in the Consolidated Statements of Income
Three Months Ended March 31,
Three Months Ended March 31,

2022 2021
2023

2022

Net interest income on swaps $ (525 ) $ (631 ) Interest expense
Interest income (expense) on cash flow hedges
$ 4,267 $ (525 )
Borrowings and brokered certificate of deposits expense
147 177 Income tax expense (1,284 ) 147
Income tax (expense) benefit
$ (378 ) $ (454 ) $ 2,983 $ (378 )

Amortization of pension plan net actuarial losses $ (16 ) $ (75 ) Other components of net periodic pension expense $ (74 ) $ (16 )
Other components of net periodic pension expense
4 20 Income tax expense 23 4
Income tax benefit
$ (12 ) $ (55 ) $ (51 ) $ (12 )
Total reclassification $ (390 ) $ (509 ) $ 2,932 $ (390 )

35

Table of Contents
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7.Comprehensive (Loss) Income – (continued)

Accumulated other comprehensive ~~(loss)~~loss as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 consisted of the following:

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 )

March 31, 2023

December 31, 2022

(dollars in thousands)

Investment securities available-for-sale, net of tax
$ (57,292 ) $ (61,775 )
Cash flow hedge, net of tax
26,328 32,360
Defined benefit pension and post-retirement plans, net of tax
(2,898 ) (2,949 )
Total
$ (33,862 ) $ (32,364 )

Note 8.Stock-based Compensation

The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, ~~2017.~~2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of March 31, ~~2022.~~2023. 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 March 31, ~~2022 are~~2023 were approximately ~~222,593.~~59,209. The Company intends to issue all shares under the Plan in the form of newly issued shares.

Restricted stock, options and ~~restricted~~deferred stock units typically have a ~~three-year~~three-year vesting period starting one year after the date of grant with ~~one-third~~one-third vesting each year. The options generally expire ten years from the date of grant. Restricted stock and deferred stock units granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control. All issuances are subject to forfeiture if the recipient ~~leaves or~~ is ~~terminated~~no longer employed prior to the ~~awards~~award's vesting. Any forfeitures would result in previously recognized expense being reversed. Restricted stock grants have the same dividend and voting rights as common stock, while options, performance units and ~~restricted~~deferred 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 months ended March 31, 2022 and March 31, 2021~~ was $1.1 million for both the three months ended March 31, 2023 and ~~$1.0 million, respectively.~~March 31, 2022.

Activity under the Company’s options for the three months ended March 31, ~~2022~~2023 was as follows:

Number of Stock Options Weighted-
Average
Exercise
Price Weighted-
Average
Remaining
Contractual
Term
(in years) Aggregate
Intrinsic Value Number of Stock Options Weighted-Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value
Outstanding as of December 31, 2021 23,766 $ 9.94
Outstanding as of December 31, 2022
8,680 $ 12.95
Granted - - - -
Exercised (8,774 ) 9.09 (6,473 ) 12.52
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
Outstanding as of March 31, 2023
2,207 14.24 0.41 $ 7,592
Exercisable as of March 31, 2023
2,207 $ 14.24 0.41 $ 7,592

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 March 31, ~~2022~~2023 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 March 31, ~~2022.~~2023. This amount changes based on the fair market value of the Company’s stock.

36

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

Note 8.Stock-Based Compensation – (continued)

Activity under the Company’s restricted ~~shares~~stock for the three months ended March 31, ~~2022~~2023 was as follows:

Nonvested Shares Weighted-
Average
Grant Date
Fair Value Nonvested Shares Weighted Average Grant Date Fair Value
Nonvested as of December 31, 2021 82,693 $ 21.78
Nonvested as of December 31, 2022
85,931 $ 26.20
Granted 32,522 32.71 50,617 17.93
Vested (18,742 ) 23.13 (24,445 ) 27.49
Forfeited/cancelled/expired (68 ) 23.23 (1,415 ) 29.46
Nonvested March 31, 2022 96,405 $ 25.20
Nonvested as of March 31, 2023
110,688 $ 22.09

As of March 31, ~~2022,~~2023, there was approximately $1.4 million of total unrecognized compensation cost related to nonvested restricted ~~shares~~stock granted. The cost is expected to be recognized over a weighted average period of 1.6 years.

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

Units (expected) Units (maximum) Weighted Average Grant Date Fair Value Units (expected) Units (maximum) Weighted Average Grant Date Fair Value
Unearned as of December 31, 2021 209,994 $ 16.18
Unearned as of December 31, 2022
195,265 $ 17.98
Awarded 34,874 32.80 85,158 17.93
Vested shares (49,604 ) 20.79 (116,192 ) 10.77
Unearned as of March 31, 2022 195,264 221,541 $ 17.98
Unearned as of March 31, 2023
164,231 233,087 $ 23.06

As of March 31, ~~2022,~~2023, the specific number of shares related to performance units that were expected to vest was ~~195,264,~~164,231, 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 March 31, ~~2022,~~2023, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is ~~221,541.~~233,087. During the three months ended March 31, ~~2022, 49,604~~2023, 116,192 shares vested. A total of ~~27,254~~63,839 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of performance units during the three months ended March 31, ~~2022~~ 2023 were ~~22,350~~52,353 shares. As of March 31, ~~2022,~~2023, compensation cost of approximately ~~$2.1~~$2.4 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of ~~2.1~~2.3 years.

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

Units
(expected) Weighted
Average
Grant Date
Fair Value Units (expected) Weighted Average Grant Date Fair Value
Unearned as of December 31, 2021 136,948 $ 16.52
Unearned as of December 31, 2022
120,035 $ 23.84
Awarded 52,312 32.80 146,857 18.98
Vested shares (69,584 ) 16.13 (70,669 ) 19.19
Unearned as of March 31, 2022 119,676 $ 23.86
Unearned as of March 31, 2023
196,223 $ 21.88

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 three months ended March 31, ~~2022, 69,584~~2023, 70,669 shares vested. A total of ~~38,201~~38,601 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of ~~restricted~~deferred stock units during the three months ended March 31, ~~2022~~2023 were ~~31,383~~32,068 shares. As of March 31, ~~2022,~~2023, compensation cost of approximately ~~$2.4~~$3.1 million related to non-vested ~~restricted~~deferred stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.8 years.

37
Table of Contents
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 9.Components of Net Periodic Pension Cost

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

Three Months Ended Affected Line Item in the Consolidated
Three Months Ended

Affected Line Item in the Consolidated
March 31, Statements of Income
March 31,

Statements of Income
2022 2021
2023

2022

(dollars in thousands)
(dollars in thousands)

Service cost $ - $ - $ - $ -
Interest cost 78 71 Other components of net periodic pension expense 110 78
Other components of net periodic pension expense
Expected return on plan assets (237 ) (213 ) Other components of net periodic pension expense (209 ) (237 )
Other components of net periodic pension expense
Net amortization 16 75 Other components of net periodic pension expense 74 16
Other components of net periodic pension expense
Total periodic pension income $ (143 ) $ (67 ) $ (25 ) $ (143 )

Contributions

The Company did not contribute to the Pension Trust during the three months ended March 31, ~~2022.~~2023. The Company does not plan on contributing amounts to the Pension Trust for the remainder of ~~2022.~~2023. The trust is established to provide retirement and other benefits for eligible employees and their beneficiaries. No part of the trust assets may be applied to any purpose other than providing benefits under the plan and for defraying expenses of administering the plan and the trust.

Note 10. FHLB Borrowings

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

March 31, 2022 December 31, 2021
March 31, 2023

December 31, 2022

Amount Rate Amount Rate
Amount

Rate

Amount

Rate

(dollars in thousands)
(dollars in thousands)

By remaining period to maturity:
Less than 1 year $ 359,526 0.79 % $ 390,549 0.56 % $ 825,000 5.08 % $ 830,000 4.42 %
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 25,000 1.00 25,000 1.00
3 years through less than 4 years 25,000 1.00 % 25,000 1.00 % 2,050 2.23 2,050 2.23
4 years through 5 years 2,050 2.23 % 2,050 2.23 % 317 2.85 326 2.85
After 5 years 698 2.91 % 714 2.91 % 318 2.96 326 2.96
FHLB borrowings - gross 412,274 0.94 % 468,313 0.73 % 852,685 4.95 % 857,702 4.32 %
Fair value (discount) (104 ) (120 )
Fair value discount
(74 ) (80 )
Total FHLB borrowings $ 412,170 $ 468,193 $ 852,611 $ 857,622

38
Table of Contents
CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 10. FHLB Borrowings – (continued)
The FHLB borrowings are secured by pledges of certain collateral including, but not limited to, U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans.

Advances are payable at stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances ~~are~~bear fixed rates. The advances as of March 31, ~~2022~~2023 were primarily collateralized by approximately ~~$1.9~~$2.1 billion of commercial mortgage loans and securities, net of required over collateralization amounts, under a blanket lien arrangement. As of March 31, ~~2022~~2023 the Company had remaining borrowing capacity of approximately ~~$1.0~~$0.7 billion at FHLB.

~~Table~~ As of ~~Contents~~
~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~Note 11. Subordinated Debentures~~April 2023, the Company increased its collateral for advances to $2.9 billion, net of required over collateralization amounts, and increased its remaining borrowing capacity of $1.5 billion at FHLB.

Note 11. Subordinated Debentures
During 2003, the Company formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and ~~wholly owned~~wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034.The capital securities presently qualify as Tier I capital. 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.~~in part prior to maturity. The floating interest rate on the ~~subordinated~~subordinate debentures is ~~three-month~~three-month LIBOR plus 2.85% and ~~re-prices~~reprices quarterly. The rate as of March 31, ~~2022~~2023 was ~~3.15%~~7.65%. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with FASB ASC 810-10. Distributions on the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income.

The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of March 31, ~~2022~~2023 and December 31, ~~2021.~~2022.

Issuance Date Securities
Issued Liquidation Value Coupon Rate Maturity Redeemable by
Issuer Beginning
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 $ 5,000,000
$1,000 per Capital Security

Floating 3-month LIBOR + 285 Basis Points

1/23/2034

1/23/2009

~~During~~ On June 10, 2020, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the ~~“2020~~“2020 Notes”). The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding, June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2020. From and including June 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.

~~During~~ On January 11, 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the ~~“Notes”~~“2018 Notes”) ~~to certain accredited investors.~~. The ~~net proceeds from the sale of the~~2018 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 bearbore interest at a ~~fixed~~ rate ~~of 5.20% per year, from and including January 17, 2018~~that resets quarterly to ~~but excluding February 1, 2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, the~~an interest rate ~~will reset quarterly to a level~~per annum equal to the then current ~~three-month~~three-month LIBOR rate plus 284 basis ~~points.~~points (2.84%) payable quarterly in arrears. Interest on the 2018 Notes was to be paid on February 1, May 1, August 1, and November 1, of each year to but excluding the stated maturity date, unless in any case previously redeemed. The 2018 Notes were redeemed in full on February 1, 2023.

~~Note 12. Preferred Stock~~

39
On August 19, 2021, the Company completed an underwritten public offering of 115,000 shares, or $115.0 million in aggregate liquidation preference, of its depositary shares, each representing a 1/40th interest 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.

Table of Contents
Item 2. ~~Management’s~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of March 31, ~~2022~~2023 and December 31, ~~2021.~~2022. 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 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~~Our accounting policies are ~~fundamental~~integral to understanding ~~Management’s~~the results reported. We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. As of March 31, 2023, there have been no material changes to our critical accounting policies as compared to the critical accounting policies disclosed in our most recent Annual Report on Form 10-K. Reference is made to Item 7 “Management’s Discussion and Analysis ~~(“MD&A”)~~ of ~~financial condition~~Financial Condition and ~~results~~Results of operations. The Company has identified the determination of the 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 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 credit losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers’ ability to pay. The evaluation also details historical losses by loan segment and the resulting credit loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the ACL may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for credit losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 5 of the Notes to Consolidated Financial Statements.

~~Table of Contents~~
~~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 recognizedOperations” 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 10 of the Notes to Consolidated Financial Statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31, ~~2021 includes additional discussion on the accounting for income taxes.~~2022.
40
Table of Contents

~~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 March 31, 2022, the Company has one deferred loan with a total outstanding loan balance of $0.5 million. As provided for under the CARES act, these short-term deferrals are not considered troubled debt restructurings, provided that the modification is related to COVID-19, executed on a loan that was not more than 30 days past due as of December 31, 2019 or the date of the deferral, and executed between March 1, 2020 and January 1, 2022, or the date that is 60 days after the termination date of the national emergency declared by the president on March 13, 2020, under the National Emergencies Act related to the outbreak of COVID-19.
With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company was an active participant in assisting its customers with applications for resources through the program. PPP loans originated prior to June 5, 2020 have a two-year term, which may be extended to five years with the consent of the Company, and those originated on or after June 5, 2020 have a five-year 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 March 31, 2022, PPP loans were $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 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 March 31, 2022 remaining deferred and unrecognized PPP fees were $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.
Operating Results Overview

Net income available to common stockholders for the three months ended March 31, ~~2022~~2023 was ~~$29.9~~$23.4 million compared to ~~$33.0~~$29.9 million for the comparable three-month period ended March 31, ~~2021.~~2022. The Company’s diluted earnings per share were ~~$0.75~~$0.59 for the three months ended March 31, ~~2022~~2023 as compared with diluted earnings per share of ~~$0.82~~$0.75 for the comparable three-month period ended March 31, ~~2021.~~2022. The ~~$3.1~~$6.5 million decrease in net income available to common stockholders and ~~$0.07~~$0.16 decrease in diluted earnings per share versus the ~~first quarter of 2021~~three months ended March 31, 2022 were primarily due to a ~~$7.2~~$3.3 million ~~increase to provision for credit losses,~~decrease in net interest income, a ~~$2.7 million increase in noninterest expenses, $1.5 million in preferred dividends, a $0.4~~$0.3 million decrease in noninterest income and a ~~$0.5~~$5.6 million increase in ~~income tax~~noninterest expenses, partially offset by a ~~$9.2~~decrease in provision for credit losses of $0.5 million ~~increase~~and a $2.3 million decrease in ~~net interest income.~~income tax expenses.

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

Fully taxable equivalent net interest income for the three months ended March 31, ~~2022 increased~~2023 decreased by ~~$9.2~~$3.0 million, or ~~15.0%~~4.3%, from the comparable three-month period ended March 31, ~~2021.~~2022. The ~~increase~~decrease from the three months ended March 31, ~~2021~~2022 resulted primarily from a ~~10.1% increase in average loans and a 15~~71 basis-point ~~widening~~decrease of the net interest margin from 3.71% to ~~3.71% from 3.56%.~~3.00%, partially offset by an increase in interest-earning assets of $1.4 billion. The ~~widening~~contraction of the net interest margin ~~resulted from~~for the three months ended March 31, 2023 when compared to the three months ended March 31, 2022 was primarily attributable to a 27222 basis-point ~~reduction~~increase in the cost of interest-bearing liabilities, partially offset by ~~an 8~~102 basis-point ~~reduction~~increase in the yield on average interest-earning assets.

41

Table of Contents

The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, 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 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

Three Months Ended March 31,

2023

2022

Interest

Interest

Average

Income/

Average

Average

Income/

Average

Balance

Expense

Rate ⁽⁷⁾

Balance

Expense

Rate⁽⁷⁾

(dollars in thousands)

Interest-earning assets:

Securities ^{(1) (2)}
$ 732,929 $ 5,620 3.11 % $ 545,203 $ 2,771 2.06 %
Total loans ^{(2) (3) (4)}
8,131,035 107,348 5.35 6,871,477 76,320 4.50
Federal funds sold and interest-bearing with banks
260,297 2,975 4.64 312,224 120 0.16
Restricted investment in bank stocks
49,906 898 7.29 24,977 214 3.47
Total interest-earning assets
9,174,167 116,841 5.17 7,753,881 79,425 4.15
Noninterest-earning assets:

Allowance for credit losses
(90,182 ) (79,763 )
Other noninterest-earning assets
616,545 589,264
Total assets
$ 9,700,530 $ 8,263,382

Interest-bearing liabilities:

Interest-bearing deposits:

Time deposits
$ 2,357,332 17,267 2.97 $ 1,124,614 2,154 0.78
Other interest-bearing deposits
3,565,904 22,820 2.60 3,851,558 2,856 0.30
Total interest-bearing deposits
5,923,236 40,087 2.74 4,976,172 5,010 0.41

Borrowings
941,266 7,322 3.15 404,907 1,377 1.38
Subordinated debentures
103,638 1,579 6.18 152,977 2,168 5.75
Finance lease
1,714 25 5.92 1,917 28 5.92
Total interest-bearing liabilities
6,969,854 49,013 2.85 5,535,973 8,583 0.63

Demand deposits
1,451,654 1,547,055
Other liabilities
87,807 48,386
Total noninterest-bearing liabilities
1,539,461 1,595,441
Stockholders’ equity
1,191,215 1,131,968
Total liabilities and stockholders’ equity
$ 9,700,530 $ 8,263,382
Net interest income (tax-equivalent basis)
67,828 70,842
Net interest spread ⁽⁵⁾
2.32 % 3.53 %
Net interest margin ⁽⁶⁾
3.00 % 3.71 %
Tax-equivalent adjustment
(744 ) (484 )
Net interest income
$ 67,084 $ 70,358

⁽¹⁾
Average balances are based on amortized cost and include equity securities.
⁽²⁾
Interest income is presented on a tax-equivalent basis using a 21%. assumed tax rate.
⁽³⁾
Includes loan fee income and accretion of purchase accounting adjustments.
⁽⁴⁾
Total loans include loans held-for-sale and nonaccrual loans.
⁽⁵⁾
Represents the 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.

42

Table of Contents

Noninterest Income

Noninterest income totaled ~~$3.1~~$2.8 million for the three months ended March 31, ~~2022,~~2023, compared with ~~$3.4~~$3.1 million for the comparable three-month period ended March 31, 2022. Included in noninterest income for the three months ended March 31, 2023 and March 31, 2022 were net losses on equity securities of $0.2 million and $0.6 million, respectively. Excluding net losses on equity securities, adjusted noninterest income was $3.0 million and $3.7 million for the three months ended March 31, ~~2021. Included~~2023 and March 31, 2022, respectively. The $0.7 million decrease in adjusted noninterest income ~~were~~for the three months ended March 31, 2023 versus the three months ended March 31, 2022 was primarily due to decreases in net ~~losses~~gains on ~~equity securities~~sale of ~~$0.6~~loans held-for-sale of $0.7 million and ~~$0.2~~deposit, loan and other income of $0.3 million, partially offset by an increase in bank owned life insurance ("BOLI") income of $0.3 million.
Noninterest Expenses
Noninterest expenses totaled $34.9 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 March 31, 2021 was primarily due to increases in deposit, loan and other income of $0.4 million, BoeFly income of $0.2 million and BOLI income of $0.1 million.
~~Noninterest Expenses~~
~~Noninterest expenses totaled~~2023, compared with $29.2 million for the three months ended March 31, ~~2022, compared to $26.5~~2022.The increase in noninterest expenses of $5.6 million ~~for~~from the three months ended March 31, ~~2021. The increase in noninterest expenses of $2.7 million from the comparable three-month period ended period March 31, 2021~~2022 was primarily attributable to increases in salaries and employee benefits of ~~$3.1~~$3.5 million, other expenses of $0.8 million, occupancy and equipment of $0.8 million, professional and consulting of $0.4 million, FDIC insurance of $0.3 million, information technology and communications of $0.2 million, marketing and advertising of $0.2 million and amortizations of core deposit intangible of $0.1 million partially offset by a ~~$0.7 million increase~~decrease in acquisition expenses related to BoeFly ~~and increases in other expenses~~ of $0.6 million, and information technology and communications of $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 of $0.3 million and professional and consulting of $0.2$0.7 million. The increase in salaries and employee benefits ~~from the prior year quarter~~ was attributable to ~~new hires, a~~increased staff in both the revenue and back-office of the Bank and seasonal ~~increase~~increases in payroll ~~taxes, as well as higher incentive-based, stock compensation expense.~~taxes.

Income Taxes

Income tax expense was $9.1 million for the three months ended March 31, 2023, compared to $11.4 million for the three months ended March 31, ~~2022, compared to $10.9 million for~~2022. The decrease in income tax expense was the ~~three months ended March 31, 2021.~~result of lower income before taxes. The effective tax rate for the three months ended March 31, ~~2022~~2023 and March 31, ~~2021~~2022 was ~~26.6%~~26.7% and ~~24.8%~~26.6%, respectively.  ~~The effective tax rate for the first quarter~~
43
Table of ~~2022 was higher compared to March 31, 2021 due to different proportions of income from non-taxable sources.~~
Contents

Financial Condition

Loan Portfolio

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

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

March 31, 2023

December 31, 2022

Amount Increase/

Amount

%

Amount

%

(Decrease)

(dollars in thousands)

Commercial
$ 1,414,226 17.3 % $ 1,472,734 18.2 % $ (58,508 )
Commercial real estate
5,835,880 71.7 5,795,228 71.4 40,652
Commercial construction
630,469 7.7 574,139 7.1 56,330
Residential real estate
259,166 3.2 264,748 3.2 (5,582 )
Consumer
1,435 0.1 2,312 0.1 (877 )
Gross loans
$ 8,141,176 100.0 % $ 8,109,161 100.0 % $ 32,015

As of March 31, ~~2022,~~2023, gross loans totaled ~~$7.0~~$8.1 billion, an increase of ~~$149.6~~$32.0  million or ~~2.2%~~0.4%, as compared to December 31, ~~2021.~~2022. Net loan growth was attributable to 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 Contents~~
Allowance for Credit Losses and Related Provision

As of March 31, ~~2022,~~2023, the Company’s allowance for credit losses for loans was ~~$80.1~~$87.0 million, ~~an increase~~a decrease of ~~$1.3~~$3.5 million from ~~$78.8~~$90.5 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. Excluding that increase, the allowance for credit losses for loans increased by $7.8 million.2022. The ~~increase~~decrease was primarily attributable to ~~an increase~~$4.5 million in net charge-offs, offset by a $1.0 million provision for credit losses.
The provision for credit losses was $1.0 million for ~~loans of $6.6 million~~the three months ended March 31, 2023 and ~~a decrease of $2.1 million in charge-offs, partially offset by a decrease of $0.4 million in recoveries.~~
~~The provision for (reversal of) credit losses was~~ $1.5 million for the three months ended March 31, ~~2022 and $(5.8) million for the three months ended March 31, 2021.~~2022. The provision for credit losses during the three months ended March 31, ~~2022 reflected strong organic~~2023 reflects modest 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 forecast when compared to January 1, 2021, the date of CECL implementation.~~increase in qualitative factors.

There were ~~$0.2~~$4.5 million net charge-offs for the three months ended March 31, ~~2022,~~2023, compared with ~~$0.1~~$0.2 million in net ~~recoveries~~charge-offs for the three months ended March 31, ~~2021.~~2022. The net charge-offs for the three months ended March 31, 2023 reflect the resolution of certain nonaccrual taxi loans and one owner-occupied commercial real estate loan that were previously reserved for and, therefore, required no additional loan loss provisioning. The ACL as a percentage of loans receivable amounted to ~~1.15% as of both March 31, 2022 and December 31, 2021. Excluding the impact of PPP loans in the calculation of the ACL as a percentage of loans receivable, the ratio increases to 1.16%~~1.07% as of March 31, ~~2022, compared to 1.17%~~2023 and 1.12% as of December 31, ~~2021. PPP loans do not have allowance for credit losses attributable to them, as they are fully guaranteed by the SBA.~~2022.

The level of the allowance for the respective periods of ~~2022~~2023 and ~~2021~~2022 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 March 31, ~~2022~~2023 is adequate to cover credit losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.
44
Table of Contents

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

Three Months Ended

March 31,

2023

2022

(dollars in thousands)

Average loans receivable
$ 8,117,572 $ 6,871,095
Analysis of the ACL:

Balance - beginning of quarter
$ 90,513 $ 78,773
Charge-offs:

Commercial
(2,767 ) (274 )
Commercial real estate
(1,716 ) -
Total charge-offs
(4,483 ) (274 )
Recoveries:

Commercial
- 1
Consumer
1 31
Total recoveries
1 32
Net charge-offs
(4,482 ) (242 )
Provision for credit losses - loans
1,000 1,539
Balance - end of period
$ 87,031 $ 80,070

Ratio of annualized net charge-offs during the period to average loans receivable during the period
0.22 % 0.01 %
Loans receivable
$ 8,132,119 $ 6,979,595
ACL as a percentage of loans receivable
1.07 % 1.15 %

45
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 %

Table of Contents

Asset Quality

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

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

March 31, 2023

December 31, 2022

(dollars in thousands)

Nonaccrual loans
$ 47,667 $ 44,454
OREO
- 264
Total nonperforming assets ⁽¹⁾
$ 47,667 $ 44,718

⁽¹⁾
~~(1)~~
Nonperforming assets are defined as nonaccrual loans and OREO.
Nonaccrual loans to total loans receivable
0.59 % 0.55 %
Nonperforming assets to total assets
0.48 % 0.46 %

46
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 %

Table of Contents

Investment Securities

As of March 31, ~~2022,~~2023, 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 ~~quarter~~three-months ended March 31, ~~2022,~~2023, average securities ~~increased $65.1~~decreased $11.0 million to approximately ~~$545.2~~$732.9 million, or ~~7.0%~~8.0% of average total interest-earning assets, from approximately ~~$480.1~~$743.9 million, or ~~6.4%~~8.3% of average interest-earning assets, ~~compared to~~at December 31, ~~2021.~~ 2022.

As of March 31, ~~2022,~~2023, net unrealized losses on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included in stockholders’ equity, net of tax, amounted to ~~$23.0~~$57.3 million as compared with net unrealized losses of ~~$0.5~~$61.8 million as of December 31, ~~2021.~~2022. The ~~increase~~decrease in unrealized 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 allowance for credit losses for available-for-sale as of March 31, ~~2022.~~2023.

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.

The Company utilizes a number of strategies to manage interest rate risk including, but not limited to: (i) balancing the types and structures of interest-earning assets and interest-bearing liabilities by diversifying mix, coupons, maturities and/or repricing characteristics (ii) reducing the overall interest rate sensitivity of liabilities by emphasizing core and/or longer-term deposits; utilizing FHLB advances and wholesale deposits for our interest rate risk profile, (iii) managing the investment portfolio for liquidity and interest rate risk profile, and (iv) entering into interest rate swap and cap agreements.
We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, 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 March 31, 2023, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 0.63%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.79%. As of December 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~~decrease our net interest income by ~~3.60%~~2.22%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~6.28%~~2.01%. As
Based on our model, which was run as of ~~December~~March 31, ~~2021,~~2023, 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~~decrease our net interest income by ~~3.35%~~3.11%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~5.64%~~3.01%.
~~Based on our model, which was run as~~ As of ~~March~~December 31, 2022, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would ~~increase~~decrease our net interest income by ~~9.20%~~2.66%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~10.89%~~3.99%. As
47
Table of 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 9.77%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 10.41%.
Contents

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 March 31, ~~2022,~~2023, would ~~increase~~decrease by ~~0.65%~~12.16% with an instantaneous rate shock of up 200 basis points, and decline by ~~6.89%~~0.49% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, ~~2021,~~2022, would ~~increase~~decrease by ~~0.24%~~10.51% with an instantaneous rate shock of up 200 basis points, and ~~decline~~decrease by ~~5.20%~~1.13% with an instantaneous rate shock of down 100 basis points.

The change in interest rate sensitivity was impacted by an increases in our cash on hand position and in short and intermediate-term fixed rate funding, partially offset by the deposit mix shift into certificates of deposit, from both noninterest-bearing and interest-bearing nonmaturity deposits.
The following table illustrates the most recent results for EVE and one-year NII sensitivity as of March 31, ~~2022.~~2023.

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 )
Interest Rates

Estimated

Estimated Change in EVE

Interest Rates

Estimated

Estimated Change in NII

(basis points)

EVE

Amount

%

(basis points)

NII

Amount

%

+300 $ 1,012,527 (212,442 ) (17.34 ) +300 $ 268,853 $ (605 ) (0.22 )
+200 1,076,038 (148,931 ) (12.16 ) +200 267,757 (1,701 ) (0.63 )
+100 1,142,074 (82,895 ) (6.77 ) +100 266,795 (2,663 ) (0.99 )
0 1,224,969 - - 0 269,458 - -
-100 1,218,995 (5,974 ) (0.49 ) -100 261,947 (7,511 ) (2.79 )
-200 1,199,347 (25,622 ) (2.09 ) -200 252,496 (16,962 ) (6.29 )
-300 1,170,922 (54,047 ) (4.41 ) -300 244,526 (24,932 ) (9.25 )

~~Table~~Certain model limitations are inherent in the methodology used in the EVE and net interest income measurements. The models require the making of ~~Contents~~certain assumptions which may tend to oversimplify the way actual yields and costs respond to changes in market interest rates. The models assume that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured, thus they do not consider the Company’s strategic plans, or any other steps it may take to respond to changes in rates over the forecasted period of time. Additionally, the models assume immediate changes in interest rates, based on yield curves as of a point-in-time, which are reflected in a parallel, instantaneous and uniform manner across all yield curves, when in reality changes may rarely be of this nature. The models also utilize data derived from historical performance and as interest rates change the actual performance of loan prepayments, rate sensitivities, and average life assumptions may deviate from assumptions utilized in the models and can impact the results. Accordingly, although the above measurements provide an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates. Given the unique nature of the post-pandemic interest rate environment and the speed with which interest rates have been changing, the projections noted above on the Company’s EVE and net interest income and can be expected to differ from actual results.

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.
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Table of Contents

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 March 31, ~~2022,~~2023, 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 March 31, ~~2022,~~2023, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were ~~$742.8~~$827.7 million, which represented ~~9.1%~~8.1% of total assets and ~~10.9%~~9.6% of total deposits and borrowings, compared to ~~$742.1~~$760.0 million as of December 31, ~~2021,~~2022, which represented ~~9.1%~~7.9% of total assets and ~~10.9%~~9.3% 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 March 31, ~~2022,~~2023, had the ability to borrow ~~$1.9~~$2.1 billion. ~~In addition, as of March 31, 2022, the Bank had in place borrowing capacity of $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 ~~$1.8~~$73.7 million. In addition, as of March 31, 2023, the Bank had in place borrowing capacity of $410 million through correspondent banks and other unsecured borrowing lines. As of March 31, ~~2022,~~2023, the Bank had aggregate available and unused credit of approximately ~~$1.0~~$1.2 billion, which represents the aforementioned facilities totaling ~~$1.9~~$2.6 billion net of ~~$0.9~~$1.4 billion in outstanding borrowings and letters of credit. As of March 31, ~~2022,~~2023, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.

During April 2023 the Bank increased its availability at both the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York, by a total of approximately $2.0 billion, primarily through the additional pledging of previously unencumbered and unpledged loans. The Bank’s access to the Federal Reserve Bank of New York, for both discount window and BTF access, was increased to $1.2 billion, from $0.1 billion as of March 31, 2023, primarily reflecting loans now pledged with unpaid principal balances of approximately $1.4 billion. The Bank’s access to the Federal Home Loan Bank was increased to $2.9 billion, from $2.1 billion as of March 31, 2023, primarily reflecting increased loans pledged with unpaid principal balances of approximately $1.2 billion.
Cash and cash equivalents totaled ~~$311.5~~$562.4 million as of March 31, ~~2022,~~2023, increasing by ~~$46.0~~$294.1 million from ~~$265.5~~$268.3 million as of December 31, ~~2021.~~2022.  Operating activities provided ~~$45.8~~$16.4 million in net cash.  Investing activities used ~~$160.2~~$26.6 million in net cash, primarily reflecting an increase in ~~loans.~~loans and investment securities. Financing activities provided ~~$160.4~~$304.3 million in net cash, primarily reflecting an increase in deposits of $396.7 million and partially offset by ~~net~~ repayment of ~~FHLB borrowings~~subordinated debt of ~~$56~~$75.0 million.

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Table of Contents

Deposits

Total deposits increased by ~~$227.5~~$396.6 million, or ~~3.6%~~5.4%, to ~~$6.6~~$7.8 billion as of March 31, ~~2022~~2023 from December 31, ~~2021.~~2022. The increase was primarily due to increases in ~~demand,~~time deposits and interest-bearing and NOW ~~savings, and demand, noninterest bearing~~ deposits partially offset by a decrease in ~~time~~demand, noninterest-bearing deposits and savings deposits. The following table sets forth the composition of our deposit base by the periods indicated.

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

Amount

March 31, 2023

December 31, 2022

Increase/

Amount

%

Amount

%

(Decrease)

(dollars in thousands)

Demand, noninterest-bearing
$ 1,345,265 17.4 % $ 1,501,614 20.4 % $ (156,349 )
Demand, interest-bearing and NOW
3,328,582 42.9 3,085,613 41.9 242,969
Savings
372,667 4.8 375,205 5.1 (2,538 )
Time
2,706,662 34.9 2,394,190 32.6 312,472
Total deposits
$ 7,753,176 100.0 % $ 7,356,622 100.0 % $ 396,554

Subordinated Debentures

During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and ~~wholly-owned~~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.~~part. The floating interest rate on the subordinated debentures is ~~three month~~three-month LIBOR plus 2.85% and re-prices quarterly. The rate as of March 31, ~~2022~~2023 was ~~3.15%~~7.65%.

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

During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the ~~“2018 Notes”~~“Notes”) to certain accredited investors. The net proceeds from the sale of the ~~2018~~ 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 in the first quarter of 2018.~~equity. The ~~2018~~ Notes ~~are~~were non-callable for five years, ~~have~~had a stated maturity of February 1, 2028 and ~~bear~~bore 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 willthat reset quarterly to ~~a level equal to the~~ then current three-month LIBOR rate plus 284 basis points. The 2018 Notes were redeemed in full on February 1, 2023.

50

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~~Stockholders’~~Stockholders’ Equity

The Company’s stockholders’ equity was ~~$1.1~~$1.2 billion as of March 31, ~~2022,~~2023, an increase of ~~$14.3~~$12.2 million from December 31, ~~2021.~~2022. The increase in stockholders’ equity was primarily attributable to retained earnings, in addition to an increase in additional paid-in capital, partially offset by a decrease in accumulated other comprehensive income, reflecting the after-tax decline in the fair value of investment securities net of unrealized hedge gains recorded in other assets, and an increase in treasury stock. As of March 31, ~~2022,~~2023, the Company’s tangible common equity ratio and tangible book value per share were ~~9.99%~~8.87% and ~~$20.51,~~$22.07, respectively. As of December 31, ~~2021,~~2022, the tangible common equity ratio and tangible book value per share were ~~10.06%~~9.04% and ~~$20.12,~~$21.71, respectively. Total goodwill and other intangible assets were approximately ~~$216.9~~$215.3 million and ~~$217.4~~$215.7 million, as of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

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

March 31, 2023

December 31, 2022

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

Common equity
$ 1,080,043 $ 1,067,824
Less: intangible assets
(215,312 ) (215,684 )
Tangible common stockholders’ equity
$ 864,731 $ 852,140

Total assets
$ 9,960,467 $ 9,644,948
Less: intangible assets
(215,312 ) (215,684 )
Tangible assets
$ 9,745,155 $ 9,429,264

Common stock outstanding at period end
39,179,051 39,568,090

Tangible common equity ratio ⁽¹⁾
8.87 % 9.04 %

Book value per common share
$ 27.57 $ 27.21
Less: intangible assets
5.50 5.50
Tangible book value per common share
$ 22.07 $ 21.71

(1)
Tangible common equity ratio is a non-GAAP measure.
51
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Regulatory Capital and Capital Adequacy

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

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

~~Table of Contents~~
The following is a summary of regulatory capital amounts and ratios as of March 31, ~~2022~~2023 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution (for the Bank).

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 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, 2023

(dollars in thousands)

Tier 1 leverage capital
$ 1,014,519 10.60 % $ 382,730 4.00 % NA NA
CET I risk-based ratio
898,437 10.55 383,258 4.50 NA NA
Tier 1 risk-based capital
1,014,519 11.91 511,011 6.00 NA NA
Total risk-based capital
1,178,852 13.84 681,348 8.00 NA NA

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

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, 2023

(dollars in thousands)

Tier 1 leverage capital
$ 1,015,381 10.62 % $ 382,549 4.00 % 478,186 5.00 %
CET I risk-based ratio
1,015,381 11.92 383,251 4.50 553,585 6.50
Tier 1 risk-based capital
1,015,381 11.92 511,002 6.00 681,355 8.00
Total risk-based capital
1,130,514 13.27 681,335 8.00 851,669 10.00

As of March 31, ~~2022,~~2023, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the ~~CET I~~Total Risk Based Capital Ratio which was ~~3.69%~~3.34% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was ~~3.02%~~2.77% above the minimum buffer ratio.

52

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 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity Analysis” herein for a discussion of our management of our interest rate risk.

53

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Item 4. Controls and Procedures

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

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

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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, ~~2021.~~2022, with the exception of:

Risks Related to Recent Events Impacting the Financial Services Industry:
Recent events impacting the financial services industry, including the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, have resulted in increased volatility and reduced valuations of equity and other securities of banks in the capital markets. In addition, the Federal Reserve, in order to combat inflation, has employed quantitative tightening in order to reduce the size of its balance sheet, resulting in increased competition and costs for bank deposits and an increased risk of an economic recession. These recent events have, and could continue to, increase competition for deposits and adversely impact the market price and volatility of the Company’s common stock.
These recent events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business. We may be impacted by concerns regarding the soundness or creditworthiness of other financial institutions, which can cause substantial disruption within the financial markets and increased expenses. The cost of resolving the recent bank failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchase Program
Historically, repurchases have been made from time to time as, in the opinion of management, market conditions warranted, in the open market or in privately negotiated transactions.
During the quarter ended March 31, ~~2022,~~2023, the Company repurchased a total of ~~144,793~~205,163 shares. As of March 31, ~~2022,~~2023, shares remaining for repurchase under the program were ~~2,129,955.~~1,622,477.
The following table details share repurchases for the three months ended March 31, ~~2022:~~2023:

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, 2023 - January 31, 2023
- $ - - 1,827,640
February 1, 2023 - February 28, 2023
98,063 24.00 98,063 1,729,577
March 1, 2023 - March 31, 2023
107,100 22.47 205,163 1,622,477
55
Table of Contents
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

56

Table of Contents

Item 6. Exhibits

Exhibit No.

Description

31.1

Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2

Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1

Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2

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

Inline XBRL Instance Document
101.SCH

Inline XBRL Taxonomy Extension Schema Document.
101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104

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

57

Table of Contents

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: May ~~6, 2022~~5, 2023

Date: May ~~6, 2022~~ 5, 2023

52
58
0000712771 cnob:ImpairedLoansMember us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsNonrecurringMember us-gaap:CommercialRealEstatePortfolioSegmentMember 2021-12-31 iso4217:USD xbrli:shares

(in thousands, except for share data)	March 31,			December 31,
	2023			2022

ASSETS
Cash and due from banks	$	58,063		$	61,629
Interest-bearing deposits with banks		504,353			206,686
Cash and cash equivalents		562,416			268,315

Investment securities		629,001			634,884
Equity securities		18,025			15,811

Loans held-for-sale		11,197			13,772

Loans receivable		8,132,119			8,099,689
Less: Allowance for credit losses - loans		87,002			90,513
Net loans receivable		8,045,117			8,009,176

Investment in restricted stock, at cost		46,379			46,604
Bank premises and equipment, net		29,603			27,800
Accrued interest receivable		46,301			46,062
Bank owned life insurance		232,859			231,328
Right of use operating lease assets		9,541			10,179
Other real estate owned		-			264
Goodwill		208,372			208,372
Core deposit intangibles		6,940			7,312
Other assets		114,716			125,069
Total assets	$	9,960,467		$	9,644,948
LIABILITIES
Deposits:
Noninterest-bearing	$	1,345,265		$	1,501,614
Interest-bearing		6,407,911			5,855,008
Total deposits		7,753,176			7,356,622
Borrowings		852,611			857,622
Subordinated debentures, net		79,060			153,255
Operating lease liabilities		10,717			11,397
Other liabilities		73,933			87,301
Total liabilities		8,769,497			8,466,197

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, 2023 and as of December 31, 2022; outstanding 115,000 shares as of March 31, 2023 and as of December 31, 2022		110,927			110,927
Common stock, no par value: Authorized 100,000,000 shares; issued 42,083,240 shares as of March 31, 2023 and 41,942,149 shares as of December 31, 2022; outstanding 39,179,051 shares as of March 31, 2023 and 39,243,123 as of December 31, 2022		586,946			586,946
Additional paid-in capital		31,350			30,126
Retained earnings		553,261			535,915
Treasury stock, at cost 2,904,189 common shares as of March 31, 2023 and 2,699,026 as of December 31, 2022		(57,652	)		(52,799	)
Accumulated other comprehensive loss		(33,862	)		(32,364	)
Total stockholders’ equity		1,190,970			1,178,751
Total liabilities and stockholders’ equity	$	9,960,467		$	9,644,948

(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

	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 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	$	-

	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

			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

	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

					Fair Value Measurements										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)		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)										(dollars in thousands)

March 31, 2022
March 31, 2023
Financial assets:
Cash and due from banks	$	311,544	$	311,544	$	311,544	$	-	$	-	$	562,416	$	562,416	$	562,416	$	-	$	-
Securities available-for-sale		512,030		512,030		191		503,346		8,493		629,001		629,001		132		621,381		7,488
Restricted investments in bank stocks		25,254		n/a		n/a		n/a		n/a		46,379		n/a		n/a		n/a		n/a
Equity securities		13,198		13,198		10,550		2,648		-		18,025		18,025		9,892		8,133		-
Net loans		6,899,525		6,874,974		-		-		6,874,974		8,045,117		7,749,886		-		-		7,749,886
Derivatives		22,872		22,872		-		22,872		-
Derivatives - interest rate contracts												47,620		47,620		-		47,620		-
Accrued interest receivable		34,081		34,081		-		1,472		32,609		46,301		46,301		-		4,829		41,472

Financial liabilities:
Noninterest-bearing deposits		1,631,292		1,631,292		1,631,292		-		-		1,345,265		1,345,265		1,345,265		-		-
Interest-bearing deposits		4,929,113		4,909,128		3,863,299		1,045,829		-		6,407,911		6,378,261		3,701,249		2,677,012		-
Borrowings		412,170		410,535		-		410,535		-		852,611		850,698		-		850,698		-
Subordinated debentures		153,027		155,940		-		155,940		-		79,060		78,040		-		78,040		-
Accrued interest payable		2,889		2,889		-		2,889		-		8,639		8,639		-		8,639		-

December 31, 2022
Financial assets:
Cash and due from banks											$	268,315	$	268,315	$	268,315	$	-	$	-
Investment securities available-for-sale												634,884		634,884		242		627,293		7,349
Restricted investment in bank stocks												46,604		n/a		n/a		n/a		n/a
Equity securities												15,811		15,811		9,733		6,078		-
Net loans												8,009,176		7,723,378		-		-		7,723,378
Derivatives - interest rate contracts												56,797		56,797		-		56,797		-
Accrued interest receivable												46,062		46,062		-		4,685		41,377

Financial liabilities:
Noninterest-bearing deposits												1,501,614		1,501,614		1,501,614		-		-
Interest-bearing deposits												5,855,008		5,811,291		3,460,818		2,350,473		-
Borrowings												857,622		854,698		.		854,698		-
Subordinated debentures												153,255		153,581		-		153,581		-
Accrued interest payable												6,925		6,925		-		6,925		-

Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income						Affected Line item in the Consolidated Statements of Income	Amounts Reclassified from Accumulated Other Comprehensive Income						Affected Line item in the Consolidated Statements of Income
	Three Months Ended March 31,							Three Months Ended March 31,
	2022			2021				2023			2022
Net interest income on swaps	$	(525	)	$	(631	)	Interest expense
Interest income (expense) on cash flow hedges								$	4,267		$	(525	)	Borrowings and brokered certificate of deposits expense
		147			177		Income tax expense		(1,284	)		147		Income tax (expense) benefit
	$	(378	)	$	(454	)		$	2,983		$	(378	)

Amortization of pension plan net actuarial losses	$	(16	)	$	(75	)	Other components of net periodic pension expense	$	(74	)	$	(16	)	Other components of net periodic pension expense
		4			20		Income tax expense		23			4		Income tax benefit
	$	(12	)	$	(55	)		$	(51	)	$	(12	)
Total reclassification	$	(390	)	$	(509	)		$	2,932		$	(390	)

	Number of Stock Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value		Number of Stock Options			Weighted-Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding as of December 31, 2021		23,766		$	9.94
Outstanding as of December 31, 2022											8,680		$	12.95
Granted		-			-						-			-
Exercised		(8,774	)		9.09						(6,473	)		12.52
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
Outstanding as of March 31, 2023											2,207			14.24		0.41	$	7,592
Exercisable as of March 31, 2023											2,207		$	14.24		0.41	$	7,592

	Nonvested Shares			Weighted- Average Grant Date Fair Value		Nonvested Shares			Weighted Average Grant Date Fair Value
Nonvested as of December 31, 2021		82,693		$	21.78
Nonvested as of December 31, 2022							85,931		$	26.20
Granted		32,522			32.71		50,617			17.93
Vested		(18,742	)		23.13		(24,445	)		27.49
Forfeited/cancelled/expired		(68	)		23.23		(1,415	)		29.46
Nonvested March 31, 2022		96,405		$	25.20
Nonvested as of March 31, 2023							110,688		$	22.09

	Units (expected)			Units (maximum)		Weighted Average Grant Date Fair Value		Units (expected)			Units (maximum)		Weighted Average Grant Date Fair Value
Unearned as of December 31, 2021		209,994				$	16.18
Unearned as of December 31, 2022									195,265				$	17.98
Awarded		34,874					32.80		85,158					17.93
Vested shares		(49,604	)				20.79		(116,192	)				10.77
Unearned as of March 31, 2022		195,264			221,541	$	17.98
Unearned as of March 31, 2023									164,231			233,087	$	23.06

	Units (expected)			Weighted Average Grant Date Fair Value		Units (expected)			Weighted Average Grant Date Fair Value
Unearned as of December 31, 2021		136,948		$	16.52
Unearned as of December 31, 2022							120,035		$	23.84
Awarded		52,312			32.80		146,857			18.98
Vested shares		(69,584	)		16.13		(70,669	)		19.19
Unearned as of March 31, 2022		119,676		$	23.86
Unearned as of March 31, 2023							196,223		$	21.88

	Three Months Ended						Affected Line Item in the Consolidated	Three Months Ended						Affected Line Item in the Consolidated
	March 31,						Statements of Income	March 31,						Statements of Income
	2022			2021				2023			2022
	(dollars in thousands)							(dollars in thousands)
Service cost	$	-		$	-			$	-		$	-
Interest cost		78			71		Other components of net periodic pension expense		110			78		Other components of net periodic pension expense
Expected return on plan assets		(237	)		(213	)	Other components of net periodic pension expense		(209	)		(237	)	Other components of net periodic pension expense
Net amortization		16			75		Other components of net periodic pension expense		74			16		Other components of net periodic pension expense
Total periodic pension income	$	(143	)	$	(67	)		$	(25	)	$	(143	)

	Three Months Ended March 31,
	2023									2022
				Interest									Interest
	Average			Income/			Average			Average			Income/			Average
	Balance			Expense			Rate ⁽⁷⁾			Balance			Expense			Rate⁽⁷⁾
	(dollars in thousands)
Interest-earning assets:
Securities ^{(1) (2)}	$	732,929		$	5,620			3.11	%	$	545,203		$	2,771			2.06	%
Total loans ^{(2) (3) (4)}		8,131,035			107,348			5.35			6,871,477			76,320			4.50
Federal funds sold and interest-bearing with banks		260,297			2,975			4.64			312,224			120			0.16
Restricted investment in bank stocks		49,906			898			7.29			24,977			214			3.47
Total interest-earning assets		9,174,167			116,841			5.17			7,753,881			79,425			4.15
Noninterest-earning assets:
Allowance for credit losses		(90,182	)								(79,763	)
Other noninterest-earning assets		616,545									589,264
Total assets	$	9,700,530								$	8,263,382

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits	$	2,357,332			17,267			2.97		$	1,124,614			2,154			0.78
Other interest-bearing deposits		3,565,904			22,820			2.60			3,851,558			2,856			0.30
Total interest-bearing deposits		5,923,236			40,087			2.74			4,976,172			5,010			0.41

Borrowings		941,266			7,322			3.15			404,907			1,377			1.38
Subordinated debentures		103,638			1,579			6.18			152,977			2,168			5.75
Finance lease		1,714			25			5.92			1,917			28			5.92
Total interest-bearing liabilities		6,969,854			49,013			2.85			5,535,973			8,583			0.63

Demand deposits		1,451,654									1,547,055
Other liabilities		87,807									48,386
Total noninterest-bearing liabilities		1,539,461									1,595,441
Stockholders’ equity		1,191,215									1,131,968
Total liabilities and stockholders’ equity	$	9,700,530								$	8,263,382
Net interest income (tax-equivalent basis)					67,828									70,842
Net interest spread ⁽⁵⁾								2.32	%								3.53	%
Net interest margin ⁽⁶⁾								3.00	%								3.71	%
Tax-equivalent adjustment					(744	)								(484	)
Net interest income				$	67,084								$	70,358

⁽¹⁾	Average balances are based on amortized cost and include equity securities.
⁽²⁾	Interest income is presented on a tax-equivalent basis using a 21%. assumed tax rate.
⁽³⁾	Includes loan fee income and accretion of purchase accounting adjustments.
⁽⁴⁾	Total loans include loans held-for-sale and nonaccrual loans.
⁽⁵⁾	Represents the 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.

	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

	March 31, 2023					December 31, 2022					Amount Increase/
	Amount		%			Amount		%			(Decrease)
	(dollars in thousands)
Commercial	$	1,414,226		17.3	%	$	1,472,734		18.2	%	$	(58,508	)
Commercial real estate		5,835,880		71.7			5,795,228		71.4			40,652
Commercial construction		630,469		7.7			574,139		7.1			56,330
Residential real estate		259,166		3.2			264,748		3.2			(5,582	)
Consumer		1,435		0.1			2,312		0.1			(877	)
Gross loans	$	8,141,176		100.0	%	$	8,109,161		100.0	%	$	32,015

Nonaccrual loans to total loans receivable			0.59	%			0.55	%
Nonperforming assets to total assets			0.48	%			0.46	%

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	%

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	)

	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

	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
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






	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, 2023 - January 31, 2023		-	$	-		-		1,827,640
February 1, 2023 - February 28, 2023		98,063		24.00		98,063		1,729,577
March 1, 2023 - March 31, 2023		107,100		22.47		205,163		1,622,477

	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

Exhibit No.		Description

31.1		Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		Inline XBRL Instance Document
101.SCH		Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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: May ~~6, 2022~~5, 2023		Date: May ~~6, 2022~~ 5, 2023