UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)ma

☒

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

For the Quarterly Period Ended ~~September~~June 30, ~~2022~~2023

☐

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

For the transition period from to

Commission File Number: 000-11486

CONNECTONE BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

New Jersey

52-1273725

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

301 Sylvan Avenue

Englewood Cliffs, New Jersey 07632

(Address of Principal Executive Offices) (Zip Code)

201-816-8900

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class	Trading symbol	Name of each exchange on which registered
Common stock	CNOB	NASDAQ
Depositary Shares (each representing a 1/40^th interest in a share of 5.25% Series A Non-Cumulative, perpetual preferred stock)	CNOBP	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, no par value:	~~39,243,123~~38,938,113 shares
(Title of Class)	(Outstanding as of ~~November~~August 4, ~~2022)~~2023)

Table of Contents

Table of Contents

		Page

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Statements of Condition as of ~~September~~June 30, ~~2022~~2023 (unaudited) and December 31, ~~2021~~2022	3
	Consolidated Statements of Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 (unaudited)	6
	Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 (unaudited)	8
	Notes to Consolidated Financial Statements (unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3.	Qualitative and Quantitative Disclosures about Market Risks	55

Item 4.	Controls and Procedures	56

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	57

Item 1a.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3.	Defaults Upon Senior Securities	5758

Item 4.	Mine Safety Disclosures	5758

Item 5.	Other Information	5758

Item 6.	Exhibits	5859

SIGNATURES		5960

Table of Contents

Item 1. Financial Statements

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

(unaudited)

(in thousands, except for share data)	September 30,			December 31,			June 30,			December 31,
	2022			2021			2023			2022

ASSETS
Cash and due from banks	$	58,852		$	54,352		$	56,286		$	61,629
Interest-bearing deposits with banks		274,992			211,184			263,638			206,686
Cash and cash equivalents		333,844			265,536			319,924			268,315

Investment securities		623,629			534,507			612,819			634,884
Equity securities		15,563			13,794			17,950			15,811

Loans held-for-sale		8,080			250			1,089			13,772

Loans receivable		7,900,450			6,828,622			8,148,540			8,099,689
Less: Allowance for credit losses - loans		91,717			78,773			89,205			90,513
Net loans receivable		7,808,733			6,749,849			8,059,335			8,009,176

Investment in restricted stock, at cost		45,324			27,826			46,688			46,604
Bank premises and equipment, net		28,519			29,032			29,093			27,800
Accrued interest receivable		38,940			34,152			46,237			46,062
Bank owned life insurance		229,800			195,731			234,412			231,328
Right of use operating lease assets		10,196			11,017			8,874			10,179
Other real estate owned		264			-			-			264
Goodwill		208,372			208,372			208,372			208,372
Core deposit intangibles		7,721			8,997			6,569			7,312
Other assets		119,267			50,417			132,601			125,069
Total assets	$	9,478,252		$	8,129,480		$	9,723,963		$	9,644,948
LIABILITIES
Deposits:
Noninterest-bearing	$	1,665,658		$	1,617,049		$	1,356,293		$	1,501,614
Interest-bearing		5,644,852			4,715,904			6,182,004			5,855,008
Total deposits		7,310,510			6,332,953			7,538,297			7,356,622
Borrowings		829,953			468,193			827,601			857,622
Subordinated debentures, net		153,179			152,951			79,187			153,255
Operating lease liabilities		11,454			12,417			10,007			11,397
Other liabilities		24,861			38,754			69,474			87,301
Total liabilities		8,329,957			7,005,268			8,524,566			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 September 30, 2022 and as of December 31, 2021; outstanding 115,000 shares as of September 30, 2022 and as of December 31, 2021		110,927			110,927
Common stock, no par value: Authorized 100,000,000 shares; issued 42,679,405 shares as of September 30, 2022 and 42,557,264 shares as of December 31, 2021; outstanding 39,243,123 shares as of September 30, 2022 and 39,568,090 as of December 31, 2021		586,946			586,946
Preferred Stock, no par value; $1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of June 30, 2023 and as of December 31, 2022; outstanding 115,000 shares as of June 30, 2023 and as of December 31, 2022								110,927			110,927
Common stock, no par value: Authorized 100,000,000 shares; issued 42,120,841 shares as of June 30, 2023 and 41,942,149 shares as of December 31, 2022; outstanding 38,936,652 shares as of June 30, 2023 and 39,243,123 as of December 31, 2022								586,946			586,946
Additional paid-in capital		28,756			27,246			30,740			30,126
Retained earnings		510,957			440,169			566,498			535,915
Treasury stock, at cost 3,436,282 common shares as of September 30, 2022 and 2,989,174 as of December 31, 2021		(52,799	)		(39,672	)
Treasury stock, at cost 3,184,189 common shares as of June 30, 2023 and 2,699,026 as of December 31, 2022								(61,877	)		(52,799	)
Accumulated other comprehensive loss		(36,492	)		(1,404	)		(33,837	)		(32,364	)
Total stockholders’ equity		1,148,295			1,124,212			1,199,397			1,178,751
Total liabilities and stockholders’ equity	$	9,478,252		$	8,129,480		$	9,723,963		$	9,644,948

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2022			2021			2022			2021			2023			2022			2023			2022
(dollars in thousands, except for per share data)
Interest income
Interest and fees on loans	$	90,731		$	75,092		$	248,041		$	216,655		$	111,048		$	81,285		$	217,951		$	157,310
Interest and dividends on investment securities:
Taxable		4,063			1,065			8,487			3,148			4,029			2,551			8,258			4,424
Tax-exempt		1,083			511			2,708			1,885			1,247			916			2,339			1,625
Dividends		438			245			943			764			945			291			1,843			505
Interest on federal funds sold and other short-term investments		665			113			1,098			246			4,056			313			7,031			433
Total interest income		96,980			77,026			261,277			222,698			121,325			85,356			237,422			164,297
Interest expense
Deposits		13,299			5,478			24,018			19,487			50,714			5,709			90,801			10,719
Borrowings		5,520			3,303			13,149			10,794			6,768			4,056			15,694			7,629
Total interest expense		18,819			8,781			37,167			30,281			57,482			9,765			106,495			18,348
Net interest income		78,161			68,245			224,110			192,417			63,843			75,591			130,927			145,949
Provision for (reversal of) credit losses		10,000			1,100			14,450			(6,315	)
Net interest income after provision for (reversal of) credit losses		68,161			67,145			209,660			198,732
Provision for credit losses														3,000			3,000			4,000			4,450
Net interest income after provision for credit losses														60,843			72,591			126,927			141,499
Noninterest income
Deposit, loan and other income		1,969			1,702			5,578			5,092			1,545			1,866			2,948			3,609
Income on bank owned life insurance		1,521			1,278			4,069			3,527			1,553			1,342			3,084			2,548
Net gains on sale of loans held-for-sale		262			1,114			1,519			2,668			550			556			599			1,257
Gain on sale of branches		-			-			-			674
Net losses on equity securities		(430	)		(78	)		(1,431	)		(242	)		(210	)		(405	)		(401	)		(1,001	)
Net gain on sales/redemptions of securities available-for-sale		-			-			-			195
Total noninterest income		3,322			4,016			9,735			11,914			3,438			3,359			6,230			6,413
Noninterest expenses
Salaries and employee benefits		21,025			16,807			59,470			47,790			21,751			19,662			44,013			38,445
Occupancy and equipment		2,600			2,656			7,262			8,876			2,677			2,733			5,438			4,662
FDIC insurance		720			525			2,051			2,040			1,715			725			2,665			1,331
Professional and consulting		1,980			2,217			5,896			6,290			1,932			2,124			4,126			3,916
Marketing and advertising		461			345			1,238			864			556			426			1,088			777
Information technology and communications		2,747			3,048			8,414			8,209			3,644			2,801			6,705			5,667
Amortization of core deposit intangibles		409			483			1,276			1,498			371			434			743			867
Other components of net periodic pension expense		(143	)		(67	)		(429	)		(201	)		(25	)		(143	)		(51	)		(286	)
Increase in value of acquisition price		-			-			1,516			-			-			833			-			1,516
Other expenses		2,344			2,169			6,382			5,561			2,829			2,108			5,593			4,038
Total noninterest expenses		32,143			28,183			93,076			80,927			35,450			31,703			70,320			60,933
Income before income tax expense		39,340			42,978			126,319			129,719			28,831			44,247			62,837			86,979
Income tax expense		10,425			10,881			33,665			32,404			7,437			11,889			16,514			23,240
Net income		28,915			32,097			92,654			97,315			21,394			32,358			46,323			63,739
Preferred dividends		1,509			-			4,527			-			1,509			1,509			3,018			3,018
Net income available to common stockholders	$	27,406		$	32,097		$	88,127		$	97,315		$	19,885		$	30,849		$	43,305		$	60,721
Earnings per common share
Basic	$	0.70		$	0.81		$	2.24		$	2.45		$	0.51		$	0.78		$	1.11		$	1.54
Diluted		0.70			0.80			2.23			2.43			0.51			0.78			1.10			1.53

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
(dollars in thousands)	2022			2021			2022			2021			2023			2022			2023			2022
Net income	$	28,915		$	32,097		$	92,654		$	97,315		$	21,394		$	32,358		$	46,323		$	63,739
Other comprehensive income (loss):

Unrealized holding losses on available-for-sale securities arising during the period		(39,912	)		(3,228	)		(94,428	)		(8,397	)		(10,303	)		(23,891	)		(3,775	)		(54,516	)
Tax effect		11,471			796			27,178			2,160
Net of tax		(28,441	)		(2,432	)		(67,250	)		(6,237	)

Reclassification adjustment for realized gains included in net income		-			-			-			(195	)
Tax effect		-			-			-			48			2,955			7,616			910			15,755
Net of tax		-			-			-			(147	)		(7,348	)		(16,275	)		(2,865	)		(38,761	)

Unrealized gains on cash flow hedges		16,969			1,890			44,253			1,872			14,425			8,284			10,064			27,284
Tax effect		(5,094	)		(533	)		(13,381	)		(529	)		(4,340	)		(2,946	)		(3,028	)		(8,287	)
Net of tax		11,875			1,357			30,872			1,343			10,085			5,338			7,036			18,997

Reclassification adjustment for realized (gains) losses on cash flow hedges		(1,178	)		328			(524	)		1,543			(3,953	)		129			(8,220	)		654
Tax effect		343			(90	)		159			(434	)		1,189			(37	)		2,473			(184	)
Net of tax		(835	)		238			(365	)		1,109			(2,764	)		92			(5,747	)		470

Unrealized gains on pension plan		-			-			2,187			-			-			-			-			2,187
Tax effect		-			-			(567	)		-			-			-			-			(615	)
Net of tax		-			-			1,620			-			-			-			-			1,572

Reclassification adjustment for realized losses on pension plan included in net income		17			75			49			225			74			16			148			32
Tax effect		(5	)		(21	)		(14	)		(63	)		(22	)		(5	)		(45	)		(9	)
Net of tax		12			54			35			162			52			11			103			23

Total other comprehensive loss		(17,389	)		(783	)		(35,088	)		(3,770	)
Total other comprehensive income (loss)														25			(10,834	)		(1,473	)		(17,699	)

Total comprehensive income	$	11,526		$	31,314		$	57,566		$	93,545		$	21,419		$	21,524		$	44,850		$	46,040

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

Nine Months Ended September 30, 2022

Accumulated

Additional

Other

Total

Preferred

Common

Paid-In

Retained

Treasury

Comprehensive

Stockholders’

(in thousands, except share data)

Stock

Stock

Capital

Earnings

Stock

(Loss) Income

Equity

Balance as of December 31, 2021
$ 110,927 $ 586,946 $ 27,246 $ 440,169 $ (39,672 ) $ (1,404 ) $ 1,124,212
Net income
- - - 92,654 - - 92,654
Other comprehensive loss, net of tax
- - - - - (35,088 ) (35,088 )
Cash dividend declared on preferred stock ($0.984375 per depositary share)
- - - (4,527 ) - - (4,527 )
Cash dividends declared on common stock ($0.44 per share)
- - - (17,339 ) - - (17,339 )
Exercise of stock options (15,086 shares)
- - 124 - - - 124
Restricted stock grants, net of forfeitures (53,169 shares)
- - - - - - -
Stock grants (153 shares)
- - - - - - -
Net shares issued in satisfaction of restricted stock units earned (31,383 shares)
- - - - - - -
Net shares issued in satisfaction of performance units earned (22,350 shares)
- �� - - - - - -
Share redemption for tax withholdings on performance units and restricted stock units earned
- - (2,133 ) - - - (2,133 )
Repurchase of treasury stock (447,108 shares)
- - - - (13,127 ) - (13,127 )
Stock-based compensation expense
- - 3,519 - - - 3,519

Balance as of September 30, 2022
$ 110,927 $ 586,946 $ 28,756 $ 510,957 $ (52,799 ) $ (36,492 ) $ 1,148,295

	*Three Months Ended June 30, 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 March 31, 2023	$	110,927	$	586,946	$	31,350		$	553,261		$	(57,652	)	$	(33,862	)	$	1,190,970
Net income		-		-		-			21,394			-			-			21,394
Other comprehensive loss, net of tax		-		-		-			-			-			25			25
Cash dividends paid on preferred stock ($0.328125 per depositary share)		-		-		-			(1,509	)		-			-			(1,509	)
Cash dividends paid on common stock ($0.17 per share)		-		-		-			(6,648	)		-			-			(6,648	)
Exercise of stock options (269 shares)		-		-		4			-			-			-			4
Restricted stock grants, net of forfeitures (37,332 shares)		-		-		-			-			-			-			-
Share redemption for tax withholdings on performance units and deferred stock units earned		-		-		(1,836	)		-			-			-			(1,836	)
Repurchase of treasury stock (270,000 shares)		-		-		-			-			(4,225	)		-			(4,225	)
Stock-based compensation expense		-		-		1,222			-			-			-			1,222

Balance as of June 30, 2023	$	110,927	$	586,946	$	30,740		$	566,498		$	(61,877	)	$	(33,837	)	$	1,199,397

	*Three Months Ended September 30, 2022*																		*Three Months Ended June 30, 2022*
													Accumulated																			Accumulated
					Additional								Other			Total							Additional									Other			Total
	Preferred		Common		Paid-In		Retained			Treasury			Comprehensive			Stockholders’			Preferred		Common		Paid-In			Retained			Treasury			Comprehensive			Stockholders’
(in thousands, except share data)	Stock		Stock		Capital		Earnings			Stock			(Loss) Income			Equity			Stock		Stock		Capital			Earnings			Stock			(Loss) Income			Equity
Balance as of June 30, 2022	$	110,927	$	586,946	$	27,536	$	489,640		$	(52,799	)	$	(19,103	)	$	1,143,147
Balance as of March 31, 2022																			$	110,927	$	586,946	$	28,484		$	464,889		$	(44,458	)	$	(8,269	)	$	1,138,519
Net income		-		-		-		28,915			-			-			28,915			-		-		-			32,358			-			-			32,358
Other comprehensive loss, net of tax		-		-		-		-			-			(17,389	)		(17,389	)		-		-		-			-			-			(10,834	)		(10,834	)
Cash dividends declared on preferred stock ($0.328125 per depositary share)		-		-		-		(1,509	)		-			-			(1,509	)									(1,509	)								(1,509	)
Cash dividends declared on common stock ($0.155 per share)		-		-		-		(6,089	)		-			-			(6,089	)		-		-		-			(6,098	)		-			-			(6,098	)
Exercise of stock options (6,312 shares)																				-		-		33			-			-			-			33
Restricted stock grants, net of forfeitures (20,715 shares)																				-		-		-			-			-			-			-
Share redemption for tax withholdings on performance units and deferred stock units earned																				-		-		(2,133	)		-			-			-			(2,133	)
Repurchase of treasury stock (302,315 shares)																				-		-		-			-			(8,341	)		-			(8,341	)
Stock-based compensation expense		-		-		1,220		-			-			-			1,220			-		-		1,152			-			-			-			1,152

Balance as of September 30, 2022	$	110,927	$	586,946	$	28,756	$	510,957		$	(52,799	)	$	(36,492	)	$	1,148,295
Balance as of June 30, 2022																			$	110,927	$	586,946	$	27,536		$	489,640		$	(52,799	)	$	(19,103	)	$	1,143,147

Table of Contents

(continued)

Nine Months Ended September 30, 2021

Accumulated

Additional

Other

Total

Preferred

Common

Paid-In

Retained

Treasury

Comprehensive

Stockholders’

(in thousands, except share data)

Stock

Stock

Capital

Earnings

Stock

(Loss) Income

Equity

Balance as of December 31, 2020
$ - $ 586,946 $ 23,887 $ 331,951 $ (30,271 ) $ 2,797 $ 915,310
Cumulative effect of change in accounting principle (see note 1b. “Authoritative Accounting Guidance Presentation”), net of tax
- - - (2,925 ) - - (2,925 )
Balance as of January 1, 2021 as adjusted for changes in accounting principle
- 586,946 23,887 329,026 (30,271 ) 2,797 912,385
Net income
- - - 97,315 - - 97,315
Other comprehensive loss, net of tax
- - - - - (3,770 ) (3,770 )
Cash dividends declared on common stock ($0.31 per share)
- - - (12,345 ) - - (12,345 )
Exercise of stock options (5,449 shares)
- - 45 - - - 45
Restricted stock grants, net of forfeitures (46,900 shares)
- - - - - - -
Stock grants (4,981 shares)
- - - - - - -
Net shares issued in satisfaction of restricted stock units earned (14,711 shares)
- - - - - - -
Net shares issued in satisfaction of performance units earned (34,458 shares)
- - - - - - -
Share redemption for tax withholdings on performance units and restricted stock units earned
- - (1,283 ) - - - (1,283 )
Repurchase of treasury stock (289,698 shares)
- - - - (8,043 ) - (8,043 )
Proceeds from preferred stock issuance, net of costs (115,000 shares)
110,927 - - - - - 110,927
Stock-based compensation expense
- - 3,202 - - - 3,202

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

	*Six Months Ended June 30, 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		-		-		-			46,323			-			-			46,323
Other comprehensive loss, net of tax		-		-		-			-			-			(1,473	)		(1,473	)
Cash dividends paid on preferred stock ($0.65625 per depositary share)		-		-		-			(3,018	)		-			-			(3,018	)
Cash dividends paid on common stock ($0.34 per share)		-		-		-			(12,722	)		-			-			(12,722	)
Exercise of stock options (6,742 shares)		-		-		85			-			-			-			85
Restricted stock grants, net of forfeitures (86,534 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)		-		-		-			-			-			-			-
Share redemption for tax withholdings on performance units and deferred stock units earned		-		-		(1,836	)		-			-			-			(1,836	)
Repurchase of treasury stock (485,163 shares)		-		-		-			-			(9,078	)		-			(9,078	)
Stock-based compensation expense		-		-		2,365			-			-			-			2,365

Balance as of June 30, 2023	$	110,927	$	586,946	$	30,740		$	566,498		$	(61,877	)	$	(33,837	)	$	1,199,397

Three Months Ended September 30, 2021

Accumulated

Additional

Other

Total

Preferred

Common

Paid-In

Retained

Treasury

Comprehensive

Stockholders’

(in thousands, except share data)

Stock

Stock

Capital

Earnings

Stock

(Loss) Income

Equity

Balance as of June 30, 2021
$ - $ 586,946 $ 24,606 $ 386,280 $ (32,682 ) $ (190 )
:
$ 964,960
Net income
- - - 32,097 - - 32,097
Other comprehensive loss, net of tax
- - - - - (783 ) (783 )
Cash dividends declared on common stock ($0.11 per share)
- - - (4,381 ) - - (4,381 )
Restricted stock grants, net of forfeitures (1,082 shares)
- - - - - - -
Stock grants (4,535 shares)
- - - - - - -
Repurchase of treasury stock (196,069 shares)
- - - - (5,632 ) - (5,632 )
Proceeds from preferred stock issuance, net of costs (115,000 shares)
110,927 110,927
Stock-based compensation expense
- - 1,245 - - - 1,245

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

	*Six Months Ended June 30, 2022*
														Accumulated
					Additional									Other			Total
	Preferred		Common		Paid-In			Retained			Treasury			Comprehensive			Stockholders’
(in thousands, except share data)	Stock		Stock		Capital			Earnings			Stock			(Loss) Income			Equity
Balance as of December 31, 2021	$	110,927	$	586,946	$	27,246		$	440,169		$	(39,672	)	$	(1,404	)	$	1,124,212
Net income		-		-		-			63,739			-			-			63,739
Other comprehensive loss, net of tax		-		-		-			-			-			(17,699	)		(17,699	)
Cash dividends declared on preferred stock ($0.65625 per depositary share)									(3,018	)								(3,018	)
Cash dividends declared on common stock ($0.285 per share)		-		-		-			(11,250	)		-			-			(11,250	)
Exercise of stock options (15,086 shares)		-		-		124			-			-			-			124
Restricted stock grants, net of forfeitures (53,169 shares)		-		-		-			-			-			-			-
Stock grants (153 shares)		-		-		-			-			-			-			-
Net shares issued in satisfaction of restricted stock units earned (31,383 shares)		-		-		-			-			-			-			-
Net shares issued in satisfaction of performance units earned (22,350 shares)		-		-		-			-			-			-			-
Share redemption for tax withholdings on performance units and deferred stock units earned		-		-		(2,133	)		-			-			-			(2,133	)
Repurchase of treasury stock (447,108 shares)		-		-		-			-			(13,127	)		-			(13,127	)
Stock-based compensation expense		-		-		2,299			-			-			-			2,299

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

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine Months Ended						Six Months Ended
	September 30,						June 30,
(dollars in thousands)	2022			2021			2023			2022
Cash flows from operating activities
Net income	$	92,654		$	97,315		$	46,323		$	63,739
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		2,903			2,832			2,211			1,942
Provision for (reversal of) credit losses		14,450			(6,315	)
Provision for credit losses								4,000			4,450
Amortization of intangibles		1,276			1,498			743			867
Net accretion of loans		(2,448	)		(4,130	)		(1,248	)		(1,689	)
Accretion on bank premises		(37	)		(61	)		(24	)		(24	)
Accretion on deposits		(657	)		(1,762	)		(177	)		(518	)
Amortization (accretion) on borrowings, net		27			(43	)
Amortization on borrowings, net								11			14
Stock-based compensation		3,519			3,202			2,365			2,299
Gains on sales/redemptions of securities available-for-sale, net		-			(195	)
Losses on equity securities, net		1,431			242			401			1,001
Gain on sale of branches		-			(674	)
Net losses on disposition of other premises and equipment		-			65
Gains on sale of loans held-for-sale, net		(1,519	)		(2,668	)		(599	)		(1,257	)
Loans originated for resale		(18,619	)		(43,676	)		(10,084	)		(14,795	)
Proceeds from sale of loans held-for-sale		25,955			57,674			18,382			16,302
Loss/(gain) on sale of other real estate owned		6			(18	)
Gain on sale of other real estate owned								22			-
Increase in cash surrender value of bank owned life insurance		(4,069	)		(3,527	)		(3,084	)		(2,548	)
Amortization of premiums and accretion of discounts on securities available-for-sale		1,848			4,677
Amortization of premium and accretion of discounts on securities available-for-sale								565			1,481
Amortization of subordinated debentures issuance costs		228			227			932			152
(Increase) decrease in accrued interest receivable		(4,788	)		1,707
Increase in accrued interest receivable								(175	)		(463	)
Net change in operating leases		(142	)		(734	)		(85	)		(93	)
(Increase) decrease in other assets		(4,781	)		43,319
Increase in other assets								(5,378	)		(4,024	)
(Decrease) increase in other liabilities		(12,291	)		5,689			(17,463	)		4,131
Net cash provided by operating activities		94,946			154,644			37,638			70,967

Cash flows from investing activities
Investment securities available-for-sale:
Purchases		(320,946	)		(203,534	)		(14,678	)		(296,254	)
Maturities, calls and principal repayments		135,548			215,531			32,403			98,824
Purchases of equity securities		(3,200	)		(555	)
Net (purchases) redemptions of restricted investment in bank stocks		(17,498	)		6,993
Cash flow hedge premium payment		(6,965	)		-
Purchase of equity securities								(2,540	)		(3,200	)
Net redemptions of restricted investment in bank stocks								(84	)		(19,461	)
Payments on loans held-for-sale		5			32			25			2,390
Net increase in loans		(1,084,483	)		(345,098	)		(48,168	)		(450,723	)
Purchases of bank owned life insurance		(30,000	)		(25,000	)
Purchase of bank owned life insurance								-			(30,000	)
Purchases of premises and equipment		(2,353	)		(2,473	)		(3,480	)		(1,276	)
Proceeds from sale of branches		-			1,087
Proceeds from sale of other real estate owned		309			321
Proceeds from sale of OREO								242			-
Net cash used in investing activities		(1,329,583	)		(352,696	)		(36,280	)		(699,700	)

Cash flows from financing activities
Net increase in deposits		978,214			440,876			181,852			285,164
Repayment of subordinated debentures		-			(50,000	)
Advances of borrowings		2,305,181			100,000
Advances of Federal Home Loan Bank (“FHLB”) borrowings								1,377,000			1,450,181
Repayments of subordinated debt								(75,000	)		-
Repayments of borrowings		(1,943,448	)		(272,686	)		(1,407,032	)		(1,043,424	)
Cash dividends on preferred stock		(4,528	)		-			(3,018	)		(3,018	)
Cash dividends paid on common stock								(12,722	)		(13,127	)
Repurchase of treasury stock		(13,127	)		(8,043	)		(9,078	)		(11,250	)
Cash dividends paid on common stock		(17,338	)		(12,345	)
Proceeds from exercise of stock options		124			45			85			124
Net proceeds from the issuance of preferred stock		-			110,927
Share redemption for tax withholdings on performance units and restricted stock units earned		(2,133	)		(1,283	)
Share redemption for tax withholdings on performance units and deferred stock units earned								(1,836	)		(2,133	)
Net cash provided by financing activities		1,302,945			307,491			50,251			662,517
Net change in cash and cash equivalents		68,308			109,439			51,609			33,784
Cash and cash equivalents at beginning of period		265,536			303,756			268,315			265,536

Cash and cash equivalents at end of period	$	333,844		$	413,195		$	319,924		$	299,320

Table of Contents

(continued)

Supplemental disclosures of cash flow information
Cash payments for:
Interest paid on deposits and borrowings	$	34,552	$	32,664	$	104,572	$	18,117
Income taxes		31,426		35,809		18,655		20,832

Supplemental disclosures of noncash activities
Investing:
Transfer of loans from held-for-investment to other real estate owned	$	579	$	304
Transfer of loans held-for-investment to other real estate owned					$	-	$	316
Transfer of loans from held-for-sale to held-for-investment						16,156		-
Transfer of loans from held-for-investment to held-for-sale		13,652		14,211		11,197		5,572
Transfer of loans from held-for-sale to held-for-investment		-		1,963

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 ~~primarily~~ of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”). The Bank’s direct and indirect 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, 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-four other banking ~~offices and~~ ~~two~~ ~~loan production/business development offices throughout New Jersey, New York and South Florida.~~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 ~~rentals~~rental and consumer wages.

The preceding unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10~~-Q and Rule~~ 10-01 ~~of Regulation S-~~X, ~~and, accordingly, do~~ ~~not~~ include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 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.

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 United States and 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 and businesses affected by the COVID-~~19 ~~pandemic. The COVID-~~19 ~~pandemic has adversely affected, and continues to adversely affect economic activity globally, nationally and locally. Although economic activity began to accelerate in~~ ~~2021,~~ ~~and the United States continues to implement a COVID-~~19 ~~vaccination program, COVID-~~~~19,~~ ~~its variants and actions taken to mitigate the spread of it have had and~~ ~~may~~ in the future have an adverse impact on the economies and financial markets of many countries and parts of the United States, including the New Jersey/New York metropolitan area in which the Company primarily operates. Although the Company has been able to mitigate the impact of the pandemic on its operations, COVID-19 ~~could impact the Company’s operations in the future. The effects of the COVID-~~19 ~~pandemic~~ ~~may~~ adversely affect the Company’s financial condition and results of operations in future periods. Although state and local governments have lifted most restrictions on conducting business, it is possible that restrictions could be reimposed.

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

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

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 ~~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~~-03 ~~will have on its consolidated financial statements.~~

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings (“TDRs”) in ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors” for entities that have adopted the current expected credit loss (“CECL”) model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13”). ASU 2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, “Financial Instruments—Credit Losses—Measured at Amortized Cost”. ASU 2022-02 is effective for the 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 2022-0203 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 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). The restricted stock awards granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities. The two-class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities.

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

	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
(dollars in thousands, except for per share data)	2022			2021			2022			2021			2023			2022			2023			2022
Net income available to common stockholders	$	27,406		$	32,097		$	88,127		$	97,315		$	19,885		$	30,849		$	43,305		$	60,721
Earnings allocated to participating securities		(67	)		(76	)		(217	)		(250	)		(53	)		(70	)		(98	)		(150	)
Income attributable to common stock	$	27,339		$	32,021		$	87,910		$	97,065		$	19,832		$	30,779		$	43,207		$	60,571

Weighted average common shares outstanding, including participating securities		39,243			39,741			39,393			39,770			39,078			39,379			39,127			39,469
Weighted average participating securities		(96	)		(95	)		(97	)		(102	)		(104	)		(89	)		(88	)		(98	)
Weighted average common shares outstanding		39,147			39,646			39,296			39,668			38,974			39,290			39,039			39,371
Incremental shares from assumed conversions of options, performance units and restricted shares		192			223			214			220			43			176			135			225
Weighted average common and equivalent shares outstanding		39,339			39,869			39,510			39,888			39,017			39,466			39,174			39,596

Earnings per common share:
Basic	$	0.70		$	0.81		$	2.24		$	2.45		$	0.51		$	0.78		$	1.11		$	1.54
Diluted		0.70			0.80			2.23			2.43			0.51			0.78			1.10			1.53

There were no antidilutive share equivalents ~~as of~~during the ~~September~~six months ended June 30, 2023 and June 30, 2022 or ~~September 30, 2021~~.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3. Investment Securities

~~The~~All of the Company’s investment securities are classified as available-for-sale as of ~~September~~June 30, ~~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 ~~September~~June 30, ~~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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022.

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

Securities available-for-sale
June 30, 2023
Investment securities available-for-sale:
Federal agency obligations	$	55,896	$	-	$	(10,276	)	$	45,620	$	-	$	54,102	$	-	$	(10,949	)	$	43,153	$	-
Residential mortgage pass-through securities		468,783		-		(61,798	)		406,985		-		465,856		80		(56,810	)		409,126		-
Commercial mortgage pass-through securities		25,546		-		(4,651	)		20,895		-		25,364		-		(4,154	)		21,210		-
Obligations of U.S. states and political subdivisions		159,441		46		(18,380	)		141,107		-		152,614		109		(18,884	)		133,839		-
Corporate bonds and notes		6,998		-		(8	)		6,990		-		4,000		-		(41	)		3,959		-
Asset-backed securities		1,934		-		(36	)		1,898				1,422		-		(41	)		1,381		-
Other securities		134		-		-			134		-		151		-		-			151		-
Total securities available-for-sale	$	718,732	$	46	$	(95,149	)	$	623,629	$	-	$	703,509	$	189	$	(90,879	)	$	612,819	$	-

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 ~~$174.8~~$354.8 million and ~~$71.2~~$157.0 million as of ~~September~~June 30, ~~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 ~~September~~June 30, ~~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 ~~September~~June 30, ~~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.

	September 30, 2022				June 30, 2023
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(dollars in thousands)				(dollars in thousands)
Securities available-for-sale:
Investment securities available-for-sale:
Due in one year or less	$	5,451	$	5,444	$	2,000	$	2,000
Due after one year through five years		4,106		4,107		4,388		4,339
Due after five years through ten years		2,342		2,289		2,574		2,558
Due after ten years		212,370		183,775		203,176		173,435
Residential mortgage pass-through securities		468,783		406,985		465,856		409,126
Commercial mortgage pass-through securities		25,546		20,895		25,364		21,210
Other securities		134		134		151		151
Total securities available-for-sale	$	718,732	$	623,629	$	703,509	$	612,819

~~Gross~~There were no realized gains or losses on securities during the six months ended June 30, 2023and ~~losses from the sales and redemptions of securities for periods presented were as follows:~~June 30, 2022.

Three Months Ended

Nine Months Ended

September 30,

September 30,

2022

2021

2022

2021

(dollars in thousands)

Proceeds
$ - $ - $ - $ 5,185

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

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 securities in an unrealized loss position for which an allowance for credit losses (“ACL”) has not been recorded, aggregated by investment category and by the length of continuous time individual securities have been in an unrealized loss position as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022.

	September 30, 2022															June 30, 2023
	Total					Less than 12 Months					12 Months or Longer					Total					Less than 12 Months					12 Months or Longer
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
	(dollars in thousands)															(dollars in thousands)
Securities available-for-sale:
Investment securities available-for-sale:
Federal agency obligations	$	45,620	$	(10,276	)	$	30,535	$	(4,261	)	$	15,085	$	(6,015	)	$	43,154	$	(10,949	)	$	4,565	$	(347	)	$	38,589	$	(10,602	)
Residential mortgage pass-through securities		406,984		(61,798	)		293,070		(32,342	)		113,914		(29,456	)		395,195		(56,810	)		130,196		(5,818	)		264,999		(50,992	)
Commercial mortgage pass-through securities		20,895		(4,651	)		15,961		(2,943	)		4,934		(1,708	)		21,210		(4,154	)		-		-			21,210		(4,154	)
Obligations of U.S. states and political subdivisions		135,483		(18,380	)		81,466		(11,098	)		54,017		(7,282	)		116,310		(18,884	)		22,408		(1,320	)		93,902		(17,564	)
Corporate bonds and notes		2,991		(8	)		2,991		(8	)		-		-			1,959		(41	)		1,959		(41	)		-		-
Asset-backed securities		1,898		(36	)		1,242		(16	)		656		(20	)		1,381		(41	)		381		(17	)		1,000		(24	)
Total temporarily impaired securities	$	613,871	$	(95,149	)	$	425,265	$	(50,668	)	$	188,606	$	(44,481	)	$	579,209	$	(90,879	)	$	159,509	$	(7,543	)	$	419,700	$	(83,336	)

	December 31, 2021															December 31, 2022
	Total					Less than 12 Months					12 Months or Longer					Total					Less than 12 Months					12 Months or Longer
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
	(dollars in thousands)															(dollars in thousands)
Securities available-for-sale:
Investment securities available-for-sale:
Federal agency obligations	$	28,974	$	(625	)	$	28,974	$	(625	)	$	-	$	-		$	44,451	$	(10,439	)	$	20,517	$	(1,831	)	$	23,934	$	(8,608	)
Residential mortgage pass-through securities		246,396		(2,884	)		214,701		(2,111	)		31,695		(773	)		403,039		(57,863	)		218,918		(13,869	)		184,121		(43,994	)
Commercial mortgage pass-through securities		8,370		(463	)		4,682		(75	)		3,688		(388	)		21,105		(4,381	)		14,523		(2,304	)		6,582		(2,077	)
Obligations of U.S. states and political subdivisions		89,473		(982	)		89,473		(982	)		-		-			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		802		(2	)		802		(2	)		-		-			1,640		(33	)		1,048		(16	)		592		(17	)
Total Temporarily Impaired Securities	$	374,015	$	(4,956	)	$	338,632	$	(3,795	)	$	35,383	$	(1,161	)
Total temporarily impaired securities																$	608,473	$	(87,204	)	$	307,425	$	(21,450	)	$	301,048	$	(65,754	)

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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022, totaled ~~$2.6~~$2.3 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. ~~As of~~Unrealized losses on asset backed securities and state and municipal securities have ~~September 30, 2022,~~ not been recognized into income because the issuers are of ~~these~~high credit quality and 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. The decline in fair value is primarily due to changes in interest rates and market conditions,~~ ~~not~~ ~~changes in credit quality. No allowance for credit losses was recorded as of~~ ~~September 30, 2022.~~ 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 June 30,2023.

Federal agency obligations, residential ~~mortgage backed~~mortgage-backed pass-through securities and commercial ~~mortgage backed~~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 approach for these investment securities is appropriate.

Note 4. Derivatives

As part of our overall asset liability management ~~and~~ strategy the Company uses derivative instruments, which can include interest rate swaps, collars, caps, and floors. The notional amount 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 ~~nine forward starting~~eleven pay fixed-rate interest rate swaps, with a total notional amount of ~~$400~~$500 million, all of which ~~have since commenced.~~were entered into in 2021 and 2022. These are designated as cash flow hedges of current, Federal Home Loan Bank advances. We are required to pay fixed rates of interest ranging from ~~0.631%~~0.63% to ~~1.23%~~3.41% and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”). ~~All~~The eleven swaps ~~are currently on the books with~~carry expiration dates ~~on the nine positions~~ ranging from December 2025 to March ~~2028~~.2028. The 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 swaps.

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

The Company previously entered into one forward starting interest rate cap spread transaction, with a total notional amount of $150 million, which became effective on October 1, 2022 and 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. ~~This is~~These are designated as a cash flow ~~hedge~~hedges of brokered certificates of ~~deposit,~~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 ~~$150~~total of $225 million in notional amount of a sold interest rate cap ~~agreement,~~agreements, in which we are required to pay the counterparty an incremental amount if the index rate exceeds a set cap rate. Simultaneously, the Company purchased ~~$150~~a total of $225 million notional amount of an interest rate cap ~~agreement~~agreements in which we receive an incremental amount if the index rate is above a set cap rate. No payments are required if the index rate is at, or below, the cap rate on the sold or purchased interest rate cap agreements.

Net interest (income) expense recorded on these swap and interest rate cap transactions totaled approximately ($5.0) million and ($9.3) million during the three and six months ended June 30, 2023, respectively, compared to $0.1 million and $0.7 million for the three and six months ended June 30,2022, 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)

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

Three Months Ended September 30, 2022

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

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

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

(dollars in thousands)

Interest rate contracts
$ 16,969 $ (1,178 ) $ -

Three Months Ended September 30, 2021

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

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

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

(dollars in thousands)

Interest rate contracts
$ 1,890 $ 328 $ -

~~Table of Contents~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note~~ 4. ~~Derivatives~~ – ~~(continued)~~

Nine Months Ended September 30, 2022

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

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

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

(dollars in thousands)

Interest rate contracts
$ 44,253 $ (524 ) $ -

	Six Months Ended June 30, 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	$	10,064	$	(8,221	)	$	-

Nine Months Ended September 30, 2021

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

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

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

(dollars in thousands)

Interest rate contracts
$ 1,872 $ 1,543 $ -

	Six Months Ended June 30, 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	$	27,284	$	654	$	-

The following table reflects the cash flow hedges included in the consolidated statements of condition as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022:

September 30, 2022

December 31, 2021

Notional Amount

Fair Value

Notional Amount

Fair Value

(dollars in thousands)

Interest rate contracts
$ 700,000 $ 54,041 $ 475,000 $ 3,347

	June 30, 2023				December 31, 2022
	Notional Amount		Fair Value		Notional Amount		Fair Value
			(dollars in thousands)
Interest rate contracts	$	950,000	$	57,545	$	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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022:

September 30, 2022 December 31, 2021

(dollars in thousands)

Commercial ⁽¹⁾
$ 1,448,727 $ 1,299,428
Commercial real estate
5,666,848 4,741,590
Commercial construction
537,323 540,178
Residential real estate
256,085 255,269
Consumer
1,030 1,886
Gross loans
7,910,013 6,838,351
Net deferred loan fees
(9,563 ) (9,729 )
Total loans receivable
$ 7,900,450 $ 6,828,622

⁽¹⁾

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

	June 30, 2023			December 31, 2022
	(dollars in thousands)
Commercial	$	1,472,795		$	1,472,734
Commercial real estate		5,831,382			5,795,228
Commercial construction		596,219			574,139
Residential real estate		254,405			264,748
Consumer		1,416			2,312
Gross loans		8,156,217			8,109,161
Net deferred loan fees		(7,677	)		(9,472	)
Total loans receivable	$	8,148,540		$	8,099,689

As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022, loans totaling approximately ~~$2.6~~$5.5 billion and ~~$2.5~~$2.7 billion, respectively, were pledged to secure borrowings from the FHLB of New York and the Federal Reserve Bank of New York.

Loans held-for-sale - The following table sets forth the composition of the Company’s loans held-for-sale as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022:

	September 30, 2022		December 31, 2021		June 30, 2023		December 31, 2022
	(dollars in thousands)				(dollars in thousands)
Commercial real estate	$	8,080	$	-	$	-	$	13,473
Residential real estate		-		250		1,089		299
Total carrying amount	$	8,080	$	250	$	1,089	$	13,772

Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL and nonaccrual loans without an ACL as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022:

	September 30, 2022						June 30, 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	$	25,657	$	1,201	$	26,858	$	18,829	$	5,824	$	24,653
Commercial real estate		21,511		6,627		28,138		3,346		20,183		23,529
Residential real estate		623		1,828		2,451		984		2,330		3,314
Total	$	47,791	$	9,656	$	57,447	$	23,159	$	28,337	$	51,496

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
Total	$	45,347	$	16,353	$	61,700	$	34,336	$	10,118	$	44,454

Nonaccrual loans 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 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~~credit 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 ~~September~~June 30, ~~2022~~2023 (dollars in thousands):

	*Term loans amortized cost basis by origination year*																*Term loans amortized cost basis by origination year*
	*2022*		*2021*		*2020*		*2019*		*2018*		*Prior*		*Revolving Loans*		*Total Gross Loans*		*2023*		*2022*		*2021*		*2020*		*2019*		*Prior*		*Revolving Loans*		*Total Gross Loans*
Commercial
Pass	$	248,673	$	311,005	$	50,801	$	31,402	$	54,872	$	164,539	$	532,643	$	1,393,935	$	113,591	$	261,352	$	277,527	$	43,047	$	15,418	$	129,241	$	593,410	$	1,433,586
Special mention		-		-		-		588		-		3,556		3,301		7,445		-		-		-		-		572		8,444		3,298		12,314
Substandard		7,636		152		17		2,023		11,190		22,639		3,690		47,347		304		3,585		169		7		1,578		19,766		1,486		26,895
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Commercial	$	256,309	$	311,157	$	50,818	$	34,013	$	66,062	$	190,734	$	539,634	$	1,448,727	$	113,895	$	264,937	$	277,696	$	43,054	$	17,568	$	157,451	$	598,194	$	1,472,795

Commercial Real Estate
Pass	$	1,386,412	$	1,617,355	$	387,135	$	364,220	$	384,288	$	1,033,994	$	370,982	$	5,544,386	$	105,297	$	1,579,132	$	1,594,527	$	361,785	$	359,274	$	1,297,204	$	450,459	$	5,747,678
Special mention		-		-		-		1,317		-		41,841		8,883		52,041		-		-		-		-		-		36,141		-		36,141
Substandard		-		1,939		4,500		12,517		19,314		23,984		8,167		70,421		-		-		1,909		-		2,637		26,143		16,874		47,563
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Commercial Real Estate	$	1,386,412	$	1,619,294	$	391,635	$	378,054	$	403,602	$	1,099,819	$	388,032	$	5,666,848	$	105,297	$	1,579,132	$	1,596,436	$	361,785	$	361,911	$	1,359,488	$	467,333	$	5,831,382

Commercial Construction
Pass	$	2,056	$	7,605	$	7,320	$	508	$	-	$	-	$	512,107	$	529,596	$	400	$	4,931	$	15,717	$	6,720	$	-	$	-	$	559,801	$	587,569
Special mention		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		7,727		7,727		-		-		-		-		-		-		8,650		8,650
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Commercial Construction	$	2,056	$	7,605	$	7,320	$	508	$	-	$	-	$	519,834	$	537,323	$	400	$	4,931	$	15,717	$	6,720	$	-	$	-	$	568,451	$	596,219

Residential
Pass	$	34,852	$	25,487	$	25,292	$	21,732	$	20,493	$	80,042	$	41,104	$	249,002	$	3,300	$	44,256	$	24,397	$	23,349	$	20,530	$	94,296	$	36,911	$	247,039
Special mention		-		-		-		-		-		-		-		-		-		-		-		-		-		658		3,393		4,051
Substandard		-		-		-		-		-		3,509		3,574		7,083		-		-		579		-		-		2,567		169		3,315
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Residential Real Estate	$	34,852	$	25,487	$	25,292	$	21,732	$	20,493	$	83,551	$	44,678	$	256,085	$	3,300	$	44,256	$	24,976	$	23,349	$	20,530	$	97,521	$	40,473	$	254,405

Consumer
Pass	$	903	$	-	$	10	$	-	$	5	$	1	$	111	$	1,030	$	1,218	$	101	$	-	$	7	$	-	$	-	$	90	$	1,416
Special mention		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Consumer	$	903	$	-	$	10	$	-	$	5	$	1	$	111	$	1,030	$	1,218	$	101	$	-	$	7	$	-	$	-	$	90	$	1,416

Total
Pass	$	1,672,896	$	1,961,452	$	470,558	$	417,862	$	459,658	$	1,278,576	$	1,456,947	$	7,717,949	$	223,806	$	1,889,772	$	1,912,168	$	434,908	$	395,222	$	1,520,741	$	1,640,671	$	8,017,288
Special mention		-		-		-		1,905		-		45,397		12,184		59,486		-		-		-		-		572		45,243		6,691		52,506
Substandard		7,636		2,091		4,517		14,540		30,504		50,132		23,158		132,578		304		3,585		2,657		7		4,215		48,476		27,179		86,423
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Grand Total	$	1,680,532	$	1,963,543	$	475,075	$	434,307	$	490,162	$	1,374,105	$	1,492,289	$	7,910,013	$	224,110	$	1,893,357	$	1,914,825	$	434,915	$	400,009	$	1,614,460	$	1,674,541	$	8,156,217

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*																*Term loans amortized cost basis by origination year*
	*2021*		*2020*		*2019*		*2018*		*8.5*		*Prior*		*Revolving Loans*		*Total 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	$	1,590	$	85	$	39	$	21	$	28	$	-	$	123	$	1,886	$	2,219	$	-	$	9	$	-	$	-	$	2	$	82	$	2,312
Special mention		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Consumer	$	1,590	$	85	$	39	$	21	$	28	$	-	$	123	$	1,886	$	2,219	$	-	$	9	$	-	$	-	$	2	$	82	$	2,312

Total
Pass	$	2,131,990	$	628,843	$	511,755	$	540,362	$	623,860	$	995,049	$	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	$	2,134,128	$	637,882	$	517,603	$	574,284	$	639,093	$	1,103,926	$	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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022:

	September 30, 2022						June 30, 2023
	Real Estate		Other		Total		Real Estate		Other		Total
	(dollars in thousands)						(dollars in thousands)
Commercial	$	5,446	$	23,449	$	28,895	$	4,918	$	14,826	$	19,744
Commercial real estate		64,718		-		64,718		47,478		-		47,478
Commercial construction		7,727		-		7,727		8,650		-		8,650
Residential real estate		5,634		-		5,634		6,382		-		6,382
Consumer		-		-		-
Total	$	83,525	$	23,449	$	106,974	$	67,428	$	14,826	$	82,254

	December 31, 2021						December 31, 2022
	Real Estate		Other		Total		Real Estate		Other		Total
	(dollars in thousands)						(dollars in thousands)
Commercial	$	6,385	$	26,182	$	32,567	$	5,352	$	22,517	$	27,869
Commercial real estate		55,244		-		55,244		52,477		-		52,477
Commercial construction		13,196		-		13,196		8,232		-		8,232
Residential real estate		8,856		-		8,856		5,864		-		5,864
Consumer		-		-		-
Total	$	83,681	$	26,182	$	109,863	$	71,925	$	22,517	$	94,442

Aging Analysis - 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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022::

	September 30, 2022														June 30, 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	$	171	$	13	$	4,392	$	26,858	$	31,434	$	1,417,293	$	1,448,727	$	457	$	1,375	$	-	$	24,653	$	26,485	$	1,446,310	$	1,472,795
Commercial real estate		-		-		5,676		28,138		33,814		5,633,034		5,666,848		-		534		5,739		23,529		29,802		5,801,580		5,831,382
Commercial construction		-		-		-		-		-		537,323		537,323		-		-		-		-		-		596,219		596,219
Residential real estate		671		-		-		2,451		3,122		252,963		256,085		51		438		-		3,314		3,803		250,602		254,405
Consumer		-		-		-		-		-		1,030		1,030		-		-		-		-		-		1,416		1,416
Total	$	842	$	13	$	10,068	$	57,447	$	68,370	$	7,841,643	$	7,910,013	$	508	$	2,347	$	5,739	$	51,496	$	60,090	$	8,096,127	$	8,156,217

	December 31, 2021														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		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	$	4,305	$	729	$	4,457	$	30,062	$	39,553	$	1,259,875	$	1,299,428	$	306	$	-	$	-	$	25,257	$	25,563	$	1,447,171	$	1,472,734
Commercial real estate		1,622		1,009		5,935		25,393		33,959		4,707,631		4,741,590		90		-		5,591		16,817		22,498		5,772,730		5,795,228
Commercial construction		-		-		-		3,150		3,150		537,028		540,178		-		-		-		-		-		574,139		574,139
Residential real estate		1,437		292		3,139		3,095		7,963		247,306		255,269		1,569		-		-		2,380		3,949		260,799		264,748
Consumer		-		-		-		-		-		1,886		1,886		-		-		-		-		-		2,312		2,312
Total	$	7,364	$	2,030	$	13,531	$	61,700	$	84,625	$	6,753,726	$	6,838,351	$	1,965	$	-	$	5,591	$	44,454	$	52,010	$	8,057,151	$	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)

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:

	September 30, 2022												June 30, 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	$	10,600	$	3,235	$	-	$	76	$	-	$	13,911	$	8,482	$	902	$	-	$	109	$	-	$	9,493
Collectively evaluated impairment		16,812		49,370		3,444		3,977		5		73,608		20,111		51,607		3,546		3,710		5		78,979
Acquired with deteriorated credit quality individually analyzed		2,277		1,921		-		-		-		4,198		733		-		-		-		-		733
Total	$	29,689	$	54,526	$	3,444	$	4,053	$	5	$	91,717	$	29,326	$	52,509	$	3,546	$	3,819	$	5	$	89,205

Gross loans
Individually evaluated impairment	$	29,482	$	59,042	$	7,727	$	5,634	$	-	$	101,885	$	27,207	$	47,478	$	8,650	$	6,382	$	-	$	89,717
Collectively evaluated impairment		1,414,286		5,602,130		529,596		250,451		1,030		7,797,493		1,445,086		5,783,904		587,569		248,023		1,416		8,065,998
Acquired with deteriorated credit quality individually analyzed		4,959		5,676		-		-		-		10,635		502		-		-		-		-		502
Total	$	1,448,727	$	5,666,848	$	537,323	$	256,085	$	1,030	$	7,910,013	$	1,472,795	$	5,831,382	$	596,219	$	254,405	$	1,416	$	8,156,217

	December 31, 2021												December 31, 2022
	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	$	15,131	$	955	$	-	$	131	$	-	$	16,217	$	7,426	$	1,003	$	-	$	50	$	-	$	8,479
Collectively evaluated impairment		8,561		42,713		3,580		3,497		7		58,358		19,319		50,818		3,718		4,093		7		77,955
Acquired with deteriorated credit quality individually analyzed		2,277		1,921		-		-		-		4,198		2,158		1,921		-		-		-		4,079
Total	$	25,969	$	45,589	$	3,580	$	3,628	$	7	$	78,773	$	28,903	$	53,742	$	3,718	$	4,143	$	7	$	90,513

Gross loans
Individually evaluated impairment	$	33,726	$	49,310	$	13,196	$	5,717	$	-	$	101,949	$	30,994	$	46,886	$	8,232	$	5,864	$	-	$	91,976
Collectively evaluated impairment		1,260,537		4,686,346		526,982		246,413		1,886		6,722,164		1,436,866		5,742,751		565,907		258,884		2,312		8,006,720
Acquired with deteriorated credit quality individually analyzed		5,165		5,934		-		3,139		-		14,238		4,874		5,591		-		-		-		10,465
Total	$	1,299,428	$	4,741,590	$	540,178	$	255,269	$	1,886	$	6,838,351	$	1,472,734	$	5,795,228	$	574,139	$	264,748	$	2,312	$	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)~~

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

Three Months Ended September 30, 2022

Commercial

Commercial real estate

Commercial construction

Residential real estate

Consumer

Unallocated

Total

(dollars in thousands)

Balance as of June 30, 2022
$ 28,135 $ 47,562 $ 3,413 $ 3,625 $ 4 $ - $ 82,739
Charge-offs
(410 ) - - - (3 ) - (413 )
Recoveries
53 - - - - - 53
Provision for credit losses - loans
1,911 6,964 31 428 4 - 9,338

Balance as of September 30, 2022
$ 29,689 $ 54,526 $ 3,444 $ 4,053 $ 5 $ - $ 91,717

Nine Months Ended September 30, 2022

Commercial

Commercial real estate

Commercial construction

Residential real estate

Consumer

Unallocated

Total

(dollars in thousands)

Balance as of December 31, 2021
$ 25,969 $ 45,589 $ 3,580 $ 3,628 $ 7 $ - $ 78,773
Charge-offs
(751 ) (226 ) - (9 ) (3 ) - (989 )
Recoveries
54 - - 63 - - 117
Provision for credit losses - loans
4,417 9,163 (136 ) 371 1 - 13,816

Balance as of September 30, 2022
$ 29,689 $ 54,526 $ 3,444 $ 4,053 $ 5 $ - $ 91,717

~~Activity in the Company’s ACL for loans for the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021~~ ~~is summarized in the table below. The CECL Day~~ 1 ~~row in the table for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021~~ presents adjustments recorded through retained earnings to adopt the CECL standard and the increase to the ACL for loans associated with nonaccretable purchase accounting marks on loans that were classified as purchased credit-impaired as of ~~December 31, 2020~~.

Three Months Ended September 30, 2021

Commercial

Commercial real estate

Commercial construction

Residential real estate

Consumer

Unallocated

Total

(dollars in thousands)

Balance as of June 30, 2021
$ 25,567 $ 43,815 $ 4,927 $ 4,366 $ 9 $ - $ 78,684
Charge-offs
(254 ) (1,473 ) - - - - (1,727 )
Recoveries
1 85 - 20 7 - 113
(Reversal of) provision for credit losses - loans
2,022 915 (1,225 ) (788 ) (8 ) - 916

Balance as of September 30, 2021
$ 27,336 $ 43,342 $ 3,702 $ 3,598 $ 8 $ - $ 77,986

~~Table of Contents~~

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Nine Months Ended September 30, 2021

Commercial

Commercial real estate

Commercial construction

Residential real estate

Consumer

Unallocated

Total

(dollars in thousands)

Balance as of December 31, 2020
$ 28,443 $ 39,330 $ 8,194 $ 2,687 $ 4 $ 568 $ 79,226
Day 1 effect of CECL
(4,225 ) 9,605 (961 ) 2,697 9 (568 ) 6,557

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

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

Recoveries
74 85 - 20 9 - 188
(Reversal of) provision for credit losses - loans
3,348 (4,050 ) (3,531 ) (1,799 ) (14 ) - (6,046 )

Balance as of September 30, 2021
$ 27,336 $ 43,342 $ 3,702 $ 3,598 $ 8 $ - $ 77,986

~~Troubled Debt Restructurings~~

~~Loans are considered to have been modified~~Activity in ~~a troubled debt restructuring (“TDRs”) when, except as discussed below, due to a borrower’s financial difficulties,~~ the ~~Company makes certain concessions to~~Company’s ACL for loans for the ~~borrower that it would~~ ~~not~~three ~~otherwise consider. Modifications~~ ~~may~~ ~~include interest rate reductions, principal or interest forgiveness, forbearance,~~ and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of six months ~~to demonstrate that the borrower~~ended June 30, 2023 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~~summarized 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.tables below.

~~As of~~ ~~September 30, 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.~~

	Three Months Ended June 30, 2023
	Commercial			Commercial real estate			Commercial construction			Residential real estate			Consumer			Total
	(dollars in thousands)
Balance as of March 31, 2023	$	26,162		$	53,000		$	3,966		$	3,868		$	6		$	87,002
Charge-offs		(1,100	)		-			-			(18	)		-			(1,118	)
Recoveries		9			-			-			67			-			76
Provision for (reversal of) credit losses - loans		4,255			(491	)		(420	)		(98	)		(1	)		3,245

Balance as of June 30, 2023	$	29,326		$	52,509		$	3,546		$	3,819		$	5		$	89,205

~~As of~~ ~~September 30, 2022~~~~, TDRs totaled $74.5 million, of which $27.5 million were on nonaccrual status and $47.0 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 $7.5 million and $10.4 million of specific allowance related to TDRs as of ~~September 30, 2022~~ ~~and~~ ~~December 31, 2021~~~~, respectively.~~

	Six Months Ended June 30, 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		(3,867	)		(1,717	)		-			(18	)		-			(5,602	)
Recoveries		9			-			-			68			-			77
Provision for (reversal of) credit losses - loans		4,281			484			(172	)		(374	)		(2	)		4,217

Balance as of June 30, 2023	$	29,326		$	52,509		$	3,546		$	3,819		$	5		$	89,205

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

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

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

Pre-Modification

Post-Modification

Outstanding

Outstanding

Number of

Recorded

Recorded

Loans

Investment

Investment

(dollars in thousands)

Troubled debt restructurings:

Commercial
2 $ 633 $ 633
Commercial real estate
2 9,043 8,543
Residential real estate
2 399 399
Total
6 $ 10,075 $ 9,575

	Six Months Ended June 30, 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		(341	)		(226	)		-			(9	)		-			(576	)
Recoveries		1			-			-			63			-			64
Provision for (reversal of) credit losses - loans		2,506			2,199			(167	)		(57	)		(3	)		4,478

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

2726

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Loan Modifications to Borrowers Experiencing Financial Difficulty:

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:

	Six Months Ended
	June 30, 2023
	Term Extension		% of Portfolio
	(dollars in thousands)
Commercial	$	53		0.00	%
Commercial real estate		213		0.00	%

The above table consists of loans that added a weighted average of 13 years to the maturity of the modified loans, 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:

	June 30, 2023
	Current		Past Due 30-89 Days		Past Due 90 Days or More
	(dollars in thousands)
Commercial	$	53	$	-	$	-
Commercial real estate		213		-		-

There were no loans to borrowers experiencing financial difficulty that had a payment default during the six months ended June 30,2023 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 six months ended June 30,2022, the Company modified two loans that were determined to be troubled debt restructurings, a commercial loan and a commercial real estate loan, with outstanding balances of $98 thousand and $8.3 million, respectively. The commercial loan modified as a TDR during the ~~nine~~six months ended ~~September~~June 30, 2022was a maturity extension, while the commercial real estate loan modified as a TDR during the six ~~included~~months ended ~~five~~June 30, 2022 ~~maturity extensions and~~ ~~one~~ ~~interest rate reduction. The~~ ~~one~~ ~~loan that~~ was an interest rate reduction, that was ~~a commercial real estate loan that included~~commensurate with a one-time $500,000 principal paydown.

~~There were no TDRs for which there was a payment default within~~

~~twelve~~27 ~~months following the modification during the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022~~ ~~and~~ ~~September 30, 2021~~.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~The following table presents loans by class modified as TDRs that occurred during~~Note 5. Loans and the ~~nine~~ ~~months ended~~ ~~September 30, 2021~~:Allowance for Credit Losses – (continued)

Pre-Modification

Post-Modification

Outstanding

Outstanding

Number of

Recorded

Recorded

Loans

Investment

Investment

(dollars in thousands)

Troubled debt restructurings:

Commercial
4 $ 1,276 $ 1,276
Commercial real estate
10 35,595 35,595
Commercial construction
1 1,641 1,641
Residential real estate
3 1,758 1,758
Total
18 $ 40,270 $ 40,270

~~The loans modified as TDRs during the~~ ~~nine~~ ~~months ended~~ ~~September~~ ~~30,~~~~2021~~ ~~included maturity extensions and interest rate reductions.~~

Allowance for Credit Losses for Unfunded Commitments

The Company has recorded an ACL for unfunded credit commitments, which was recorded in other liabilities. The provision is recorded within the provision for (reversal of) credit losses on the Company’s income statement. The following table presents a ~~rollforward~~roll forward of the allowance for credit losses for unfunded commitments for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022:

	Three Months Ended		Three Months Ended		Three Months Ended			Three Months Ended
	September 30,		September 30,		June 30,			June 30,
	2022		2021		2023			2022
	(dollars in thousands)				(dollars in thousands)
Balance at beginning of period	$	2,324	$	2,380	$	3,064		$	2,262
Provision for credit losses - unfunded commitments		662		184
Provision for (reversal of) credit losses - unfunded commitments						(245	)		61
Balance at end of period	$	2,986	$	2,564	$	2,819		$	2,323

	Nine Months Ended		Nine Months Ended			Six Months Ended			Six Months Ended
	September 30,		September 30,			June 30,			June 30,
	2022		2021			2023			2022
	(dollars in thousands)					(dollars in thousands)
Balance at beginning of period	$	2,352	$	-		$	3,036		$	2,351
Day 1 Effect of CECL		-		2,833
Provision for (reversal of) credit losses - unfunded commitments		634		(269	)
Reversal of credit losses - unfunded commitments							(217	)		(28	)
Balance at end of period	$	2,986	$	2,564		$	2,819		$	2,323

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) credit losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 :

Three Months Ended

Three Months Ended

September 30,

September 30,

2022

2021

(dollars in thousands)

Provision for credit losses - loans
$ 9,338 $ 916
Provision for credit losses - unfunded commitments
662 184
Provision for credit losses
$ 10,000 $ 1,100

	Three Months Ended			Three Months Ended
	June 30,			June 30,
	2023			2022
	(dollars in thousands)
Provision for credit losses – loans	$	3,245		$	2,939
Provision for (reversal of) credit losses - unfunded commitments		(245	)		61
Provision for credit losses	$	3,000		$	3,000

Nine Months Ended

Nine Months Ended

September 30,

September 30,

2022

2021

(dollars in thousands)

Provision for (reversal of) credit losses - loans
$ 13,816 $ (6,046 )
Provision for (reversal of) credit losses - unfunded commitments
634 (269 )
Provision for (reversal of) credit losses
$ 14,450 $ (6,315 )

	Six Months Ended			Six Months Ended
	June 30,			June 30,
	2023			2022
	(dollars in thousands)
Provision for credit losses – loans	$	4,217		$	4,478
Reversal of credit losses - unfunded commitments		(217	)		(28	)
Provision for credit losses	$	4,000		$	4,450

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:

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). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows:

			September 30, 2022								June 30, 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:
Federal agency obligations	$	45,620	$	-	$	45,620	$	-	$	43,153	$	-	$	43,153	$	-
Residential mortgage pass-through securities		406,985		-		406,985		-		409,126		-		409,126		-
Commercial mortgage pass-through securities		20,895		-		20,895		-		21,210		-		21,210		-
Obligations of U.S. states and political subdivision		141,107		-		133,730		7,377		133,839		-		126,602		7,237
Corporate bonds and notes		6,990		-		6,990		-		3,959		-		3,959		-
Asset-backed securities		1,898		-		1,898		-		1,381		-		1,381		-
Other securities		134		134		-		-		151		151		-		-
Total available-for-sale		623,629		134		616,118		7,377		612,819		151		605,431		7,237

Equity securities		15,563		9,701		5,862		-		17,950		9,736		8,214		-
Derivatives		54,041		-		54,041		-		57,545		-		57,545		-
Total assets	$	693,233	$	9,835	$	676,021	$	7,377	$	688,314	$	9,887	$	671,190	$	7,237

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:
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 ~~nine~~six months ended ~~September~~June 30, ~~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 ~~September~~June 30, ~~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).

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

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 ~~September~~June 30, ~~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 September 30, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		June 30, 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)								(dollars in thousands)
Commercial	$	14,443	$	-	$	-	$	14,443	$	10,779	$	-	$	-	$	10,779
Commercial real estate		26,197		-		-		26,197		10,376		-		-		10,376
Residential real estate		1,372		-		-		1,372		1,319		-		-		1,319

			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)								(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 ~~September~~June 30, ~~2022~~2023 that required a valuation allowance were ~~$42.0~~$28.7 million with a related valuation allowance of ~~$15.9~~$6.2 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) for the ~~nine~~six months ended ~~September~~June 30, ~~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
(214 )
Change in unrealized gain (loss)
(974 )
Ending balance, September 30, 2022
$ 7,377

	Municipal Securities
	(dollars in thousands)
Beginning balance, December 31, 2022	$	7,349
Principal paydowns		(147	)
Change in unrealized gain		35
Ending balance, June 30, 2023	$	7,237

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 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 ~~September~~June 30, ~~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.

September 30, 2022

June 30, 2023

Fair Value

Valuation Techniques

Unobservable Input

Rate

Fair Value

Valuation Techniques

Unobservable Input

Rate

Securities available-for-sale:

(dollars in thousands)

Municipal securities

7,377

Discounted cash flows

Discount rate

4.3

7,237

Discounted cash flows

Discount rate

4.3

December 31, 2021

December 31, 2022

Fair Value

Valuation Techniques

Unobservable Input

Rate

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

7,349

Discounted cash flows

Discount rate

4.3

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)

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.

September 30, 2022

June 30, 2023

(dollars in thousands)

Fair Value

Valuation Techniques

Unobservable Input

Range (weighted average)

Fair Value

Valuation Techniques

Unobservable Input

Range (weighted average)

Commercial

13,960

Market approach (100%)

Average transfer price as a price to unpaid principal balance

61% –95% (64%)

10,311

Market approach (100%)

Average transfer price as a price to unpaid principal balance

65% –92% (67%)

Commercial

483

Appraisals of collateral value

Comparable sales

-5% to +35% (+17%)

468

Appraisals of collateral value

Adjustment for comparable sales

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

Commercial real estate

26,197

Appraisals of collateral value

Comparable sales

-25% to +10% (-16%)

10,376

Appraisals of collateral value

Adjustment for comparable sales

-15% to +5% (6%)

Residential real estate

1,372

Appraisals of collateral value

Comparable sales

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

1,319

Appraisals of collateral value

Adjustment for comparable sales

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

December 31, 2021

(dollars in thousands)

Fair Value

Valuation Techniques
Unobservable Input

Range (weighted average)

Commercial
$ 12,193
Market approach (100%)
Average transfer price as a price to unpaid principal balance
48% to 73% (49%)
Commercial
1,206
Appraisals of collateral value
Adjustment for comparable sales

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

Commercial real estate
20,185
Appraisals of collateral value
Adjustment for comparable sales

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

Residential real estate
2,794
Appraisals of collateral value
Adjustment for comparable sales

-15% to +39% (5%)

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%)

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 ~~September~~June 30, ~~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 ~~September~~June 30, ~~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)

September 30, 2022
June 30, 2023
Financial assets:
Cash and due from banks	$	333,844	$	333,844	$	333,844	$	-	$	-	$	319,924	$	319,924	$	319,924	$	-	$	-
Securities available-for-sale		623,629		623,629		134		616,118		7,377		612,819		612,819		151		605,431		7,237
Restricted investments in bank stocks		45,324		n/a		n/a		n/a		n/a		46,688		n/a		n/a		n/a		n/a
Equity securities		15,563		15,563		9,701		5,862		-		17,950		17,950		9,736		8,214		-
Net loans		7,808,733		7,524,799		-		-		7,524,799		8,059,335		7,724,946		-		-		7,724,946
Derivatives		54,041		54,041		-		54,041		-
Derivatives - interest rate contracts												57,545		57,545		-		57,545		-
Accrued interest receivable		38,940		38,940		-		3,219		35,721		46,237		46,236		-		5,201		41,035

Financial liabilities:
Noninterest-bearing deposits		1,665,658		1,665,658		1,665,658		-		-		1,356,293		1,356,293		1,356,293		-		-
Interest-bearing deposits		5,644,852		5,599,170		3,723,617		1,875,553		-		6,182,004		6,146,249		3,560,856		2,585,393		-
Borrowings		829,953		826,280		-		826,280		-		827,601		825,002		-		825,002		-
Subordinated debentures		153,179		153,170		-		153,170		-		79,187		77,576		-		77,576		-
Accrued interest payable		5,733		5,733		-		5,733		-		8,083		8,083		-		8,083		-

December 31, 2021
December 31, 2022
Financial assets:
Cash and due from banks	$	265,536	$	265,536	$	265,536	$	-	$	-	$	268,315	$	268,315	$	268,315	$	-	$	-
Investment securities available-for-sale		534,507		534,507		195		525,747		8,565		634,884		634,884		242		627,293		7,349
Restricted investment in bank stocks		27,826		n/a		n/a		n/a		n/a		46,604		n/a		n/a		n/a		n/a
Equity securities		13,794		13,794		11,081		2,713		-		15,811		15,811		9,733		6,078		-
Net loans		6,749,849		6,800,287		-		-		6,800,287		8,009,176		7,723,378		-		-		7,723,378
Derivatives		3,347		3,347		-		3,347		-
Derivatives - interest rate contracts												56,797		56,797		-		56,797		-
Accrued interest receivable		34,152		34,152		-		1,554		32,598		46,062		46,062		-		4,685		41,377

Financial liabilities:
Noninterest-bearing deposits		1,617,049		1,617,049		1,617,049		-		-		1,501,614		1,501,614		1,501,614		-		-
Interest-bearing deposits		4,715,904		4,716,358		3,565,795		1,150,563		-		5,855,008		5,811,291		3,460,818		2,350,473		-
Borrowings		468,193		469,671		-		469,671		-		857,622		854,698		.		854,698		-
Subordinated debentures		152,951		163,995		-		163,995		-		153,255		153,581		-		153,581		-
Accrued interest payable		2,716		2,716		-		2,716		-		6,925		6,925		-		6,925		-

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						Amounts Reclassified from Accumulated Other Comprehensive Income						Affected Line item in the Consolidated Statements of Income	Amounts Reclassified from Accumulated Other Comprehensive Income						Amounts Reclassified from Accumulated Other Comprehensive Income						Affected Line item in the Consolidated Statements of Income
	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021				2023			2022			2023			2022
Sale of investment securities available-for-sale	$	-		$	-		$	-		$	195		Net gains on sale of securities available-for-sale
		-			-			-			(48	)	Income tax expense
	$	-		$	-		$	-		$	147

Net interest expense on swaps	$	1,178		$	(328	)	$	524		$	(1,543	)	Borrowings
Interest income (expense) on cash flow hedges														$	3,953		$	(129	)	$	8,220		$	(654	)	Borrowings and deposits expense
		(343	)		90			(159	)		434		Income tax (expense) benefit		(1,189	)		37			(2,473	)		184		Income tax (expense) benefit
	$	835		$	(238	)	$	365		$	(1,109	)		$	2,764		$	(92	)	$	5,747		$	(470	)

Amortization of pension plan net actuarial losses	$	(17	)	$	(75	)	$	(49	)	$	(225	)	Other components of net periodic pension expense	$	(74	)	$	(16	)	$	(148	)	$	(32	)	Other components of net periodic pension expense
		5			21			14			63		Income tax benefit		22			5			45			9		Income tax benefit
	$	(12	)	$	(54	)	$	(35	)	$	(162	)		$	(52	)	$	(11	)	$	(103	)	$	(23	)
Total reclassification	$	823		$	(292	)	$	330		$	(1,124	)		$	2,712		$	(103	)	$	5,644		$	(493	)

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Accumulated other comprehensive loss as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 consisted of the following:

	September 30, 2022			December 31, 2021			June 30, 2023			December 31, 2022
	(dollars in thousands)						(dollars in thousands)
Investment securities available-for-sale, net of tax	$	(67,734	)	$	(484	)	$	(64,640	)	$	(61,775	)
Cash flow hedge, net of tax		32,913			2,406			33,649			32,360
Defined benefit pension and post-retirement plans, net of tax		(1,671	)		(3,326	)		(2,846	)		(2,949	)
Total	$	(36,492	)	$	(1,404	)	$	(33,837	)	$	(32,364	)

Note 8. Stock-based Compensation

The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of ~~September~~June 30, ~~2022~~2023. On May 30, 2023, the Company's stockholders approved an amendment to the Plan that will increase the maximum number of shares issuable by 450,000. The maximum number of shares of common stock or equivalents which may be issued under the Plan is ~~750,000.~~now 1,200,000. Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, ~~restricted share~~deferred stock units or performance units. Shares available for grant and issuance under the Plan as of ~~September~~June 30, ~~2022~~2023 were approximately ~~200,300.~~470,147. 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 vesting period starting one year after the date of grant with one-third vesting each year. The options generally expire ten years from the date of grant. Restricted stock and ~~restricted~~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 is no longer employed prior to the 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 and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was $1.2 million and ~~$3.5~~$2.4 million, respectively. Stock-based compensation expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was $1.2 million and ~~$3.2~~$2.3 million, respectively.

Activity under the Company’s options for the ~~nine~~six months ended ~~September~~June 30, ~~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		(15,086	)		8.21						(6,742	)		12.59
Forfeited/cancelled/expired		-			-						-			-
Outstanding as of September 30, 2022		8,680			12.95		0.54	$	87,691
Exercisable as of September 30, 2022		8,680		$	12.95		-	$	-
Outstanding as of June 30, 2023											1,938			14.24		0.16	$	5,368
Exercisable as of June 30, 2023											1,938		$	14.24		0.16	$	5,368

The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on ~~September~~June 30, ~~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 ~~September~~June 30, ~~2022~~2023. This amount changes based on the fair market value of the Company’s stock.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 8. Stock-Based Compensation – (continued)

Activity under the Company’s restricted stock for the ~~nine~~six months ended ~~September~~June 30, ~~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		53,543			30.76		93,147			16.19
Vested		(42,815	)		25.00		(46,940	)		27.59
Forfeited/cancelled/expired		(374	)		30.99		(6,613	)		23.60
Nonvested as of September 30, 2022		93,047		$	25.43
Nonvested as of June 30, 2023							125,525		$	18.39

As of ~~September~~June 30, ~~2022~~2023, there was approximately ~~$1.3~~$1.5 million of total unrecognized compensation cost related to nonvested restricted stock granted. The cost is expected to be recognized over a weighted average period of ~~1.1~~1.3 years.

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

	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		209,995				$	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 September 30, 2022		195,265			221,541	$	17.98
Unearned as of June 30, 2023									164,231			233,087	$	23.06

As of ~~September~~June 30, ~~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 ~~September~~June 30, ~~2022~~2023, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is ~~221,541.~~233,087. During the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023, ~~49,604~~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 ~~nine~~six months ended ~~September~~ June 30, ~~2022~~2023 were ~~22,350~~52,353 shares. As of ~~September~~June 30, ~~2022~~2023, compensation cost of approximately ~~$1.5~~$2.1 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of ~~1.8~~2.1 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		(69,225	)		16.13		(70,669	)		19.19
Unearned as of September 30, 2022		120,035		$	23.84
Unearned as of June 30, 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 ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023, ~~69,225~~70,669 shares vested. A total of ~~37,842~~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 ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 were ~~31,383~~32,068 shares. As of ~~September~~June 30, ~~2022~~2023, compensation cost of approximately ~~$1.5~~$2.6 million related to non-vested ~~restricted~~deferred stock units, not yet recognized, is expected to be recognized over a weighted-average period of ~~1.5~~1.7 years.

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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
	September 30,						Statements of Income	June 30,						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		17			75		Other components of net periodic pension expense		74			16		Other components of net periodic pension expense
Total periodic pension income	$	(142	)	$	(67	)		$	(25	)	$	(143	)

	Nine Months Ended						Affected Line Item in the Consolidated	Six Months Ended						Affected Line Item in the Consolidated
	September 30,						Statements of Income	June 30,						Statements of Income
	2022			2021				2023			2022
	(dollars in thousands)							(dollars in thousands)
Service cost	$	-		$	-			$	-		$	-
Interest cost		233			213		Other components of net periodic pension expense		220			156		Other components of net periodic pension expense
Expected return on plan assets		(711	)		(639	)	Other components of net periodic pension expense		(419	)		(474	)	Other components of net periodic pension expense
Net amortization		49			225		Other components of net periodic pension expense		148			32		Other components of net periodic pension expense
Total periodic pension income	$	(429	)	$	(201	)		$	(51	)	$	(286	)

Contributions

The Company did not contribute to the Pension Trust during the ~~nine~~six months ended ~~September~~June 30, ~~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:

	September 30, 2022						December 31, 2021						June 30, 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	$	802,329			2.99	%	$	390,549			0.56	%	$	775,001			5.35	%	$	830,000			4.42	%
1 year through less than 2 years		-			n/a			50,000			1.84	%		-			-			-			-
2 years through less than 3 years		25,000			1.00	%		-			n/a			25,000			1.00			25,000			1.00
3 years through less than 4 years		2,050			2.23	%		25,000			1.00	%		2,050			2.23			2,050			2.23
4 years through 5 years		-			n/a			2,050			2.23	%		25,309			4.16			326			2.85
After 5 years		667			2.91	%		714			2.91	%		310			2.96			326			2.96
FHLB borrowings - gross		830,046			2.93	%		468,313			0.73	%		827,670			5.17	%		857,702			4.32	%
Fair value discount		(93	)					(120	)					(69	)					(80	)
Total FHLB borrowings	$	829,953					$	468,193					$	827,601					$	857,622

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 10. FHLB Borrowings – (continued)

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

Advances are payable at stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances bear fixed rates. The advances as of ~~September~~June 30, ~~2022~~2023 were primarily collateralized by approximately ~~$1.9~~$2.8 billion of commercial mortgage loans and securities, net of required over collateralization amounts, under a blanket lien arrangement. As of ~~September~~June 30, ~~2022~~2023 the Company had remaining borrowing capacity of approximately ~~$0.6~~$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~~.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 LIBOR plus 2.85% and ~~re-prices~~reprices quarterly. The rate as of ~~September~~ June 30, ~~2022~~2023 was ~~5.63%~~8.15%. Upon the cessation of publication of LIBOR rates and pursuant to the Federal LIBOR Act and Federal Reserve regulations implementing the Act, applicable US Dollar LIBOR indexed instruments like the Company’s outstanding $5.0 million of MMCapS capital securities will convert to a new index based on CME Term SOFR, as defined in the LIBOR Act, plus a tenor spread adjustment, which is referred to as the Benchmark Replacement. Effective for quarterly interest rate resets after July 3, 2023 the subordinated debentures’ floating rate will be three-month CME Term SOFR plus 2.85% plus a tenor spread adjust of 0.26161%. 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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022.

Issuance Date		Securities Issued			Liquidation Value		Coupon Rate		Maturity		Redeemable by Issuer Beginning
12/19/2003		$	5,000,000		$1,000 per Capital Security		Floating 3-month LIBOR + 285 Basis Points		1/23/2034		1/23/2009

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

~~During~~On January 11, 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the ~~“Notes”) to certain accredited investors. The net proceeds from the sale of the Notes were used in the~~ ~~first~~“2018 ~~quarter of~~Notes”). The 2018 ~~for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity. The~~ Notes ~~are non-callable for~~ ~~five~~ ~~years, have a stated maturity of~~ ~~February 1, 2028~~ ~~and bear~~bore 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 LIBOR rate plus 284 basis ~~points.~~

~~Note~~points (2.84%) payable quarterly in arrears. Interest on the ~~12.~~2018 ~~Preferred Stock~~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.

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.

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

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of ~~September~~June 30, ~~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 June 30, 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.

~~Table of Contents~~

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.

~~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.~~

~~Impact of COVID-19~~

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

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

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Operating Results Overview

Net income available to common stockholders for the three months ended ~~September~~June 30, ~~2022~~2023 was ~~$27.4~~$19.9 million compared to ~~$32.1~~$30.8 million for the comparable three-month period ended ~~September~~June 30, ~~2021.~~2022. The Company’s diluted earnings per share were ~~$0.70~~$0.51 for the three months ended ~~September~~June 30, ~~2022~~2023 as compared with diluted earnings per share of ~~$0.80~~$0.78 for the comparable three-month period ended ~~September~~June 30, ~~2021.~~2022. The ~~$4.7~~$10.9 million decrease in net income available to common stockholders and ~~$0.10~~$0.27 decrease in diluted earnings per share versus the ~~three months ended September 30 2021~~second quarter of 2022 were ~~primarily~~ due to ~~an $8.9~~a $11.8 million ~~increase in the provision for credit losses, a $4.0 million increase in noninterest expenses, $1.5 million in preferred dividends, which were not paid in the 2021 period, and a $0.7 million~~ decrease ~~in noninterest income, partially offset by a $9.9 million increase~~ in net interest income and a ~~$0.5~~$3.7 million increase in noninterest expenses, partially offset by a $4.5 million decrease in income tax ~~expense.~~expense and $0.1 million increase in noninterest income.

Net income available to common stockholders for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$88.1~~$43.3 million compared to ~~$97.3~~$60.7 million for the comparable ~~nine-month~~six-month period ended ~~September~~June 30, ~~2021.~~2022. The Company’s diluted earnings per share were ~~$2.23~~$1.10 for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 as compared with diluted earnings per share of ~~$2.43~~$1.53 for the comparable ~~nine-month~~six-month period ended ~~September~~June 30, ~~2021.~~2022. The ~~$9.2~~$17.4 million decrease in net income available to common stockholders and ~~$0.20~~$0.43 decrease in diluted earnings per share versus the ~~nine months ended September 30, 2021~~first half of 2022 were due to a ~~$20.8~~$15.0 million ~~increase to provision for credit losses,~~decrease in net interest income, a ~~$12.1~~$9.4 million increase in noninterest expenses, ~~$4.5 million in preferred dividends which were not paid in the 2021 period,~~and a ~~$2.2~~$0.2 million decrease in noninterest income, ~~and~~partially offset by a ~~$1.3~~$6.7 million ~~increase~~decrease in income tax expense ~~partially offset by~~and a ~~$31.7~~$0.5 million ~~increase~~decrease in ~~net interest income.~~provision for credit losses.

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 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 ~~September~~June 30, ~~2022 increased~~2023 decreased by ~~$10.1~~$11.5 million, or ~~14.7%~~15.1%, from the comparable three-month period ended ~~September~~June 30, ~~2021.~~2022. The ~~increase~~decrease from the ~~three months ended September 30, 2021~~second quarter of 2022 resulted primarily from a ~~16.1%~~276 basis-point increase in ~~average interest earning assets, primarily loans, and was~~rate paid on interest-bearing deposits, partially offset by 90 basis increase in total interest-earning assets and a 5110 basis-point contraction of the net interest margin to ~~3.68%~~2.81% from ~~3.73%~~3.91%. The contraction in the net interest margin resulted from a 56 basis-point increase in the cost of average interest-bearing liabilities, partially offset by a 36 basis-point increase in the yield on average interest-earning assets and a 12.5% increase in average noninterest-bearing demand deposits.

Fully taxable equivalent net interest income for the ~~nine~~six months ended ~~September~~June 30, ~~2022 increased~~2023 decreased by ~~$32.1~~$14.5 million, or ~~16.6%~~9.9%, from the comparable ~~nine-month~~six-month period ended ~~September~~June 30, ~~2021.~~2022. The ~~increase~~decrease from the ~~nine months~~six-month period ended ~~September~~June 30, ~~2021~~2022 resulted primarily from a ~~12.5%~~254 basis-point increase in ~~average interest earning~~interest-bearing deposits, partially offset by 80 basis increase in total interest-earning assets ~~primarily loans,~~ and a 1392 basis-point ~~widening~~contraction of the net interest margin to ~~3.76%~~2.89% from ~~3.63%~~3.81%. The widening of the net interest margin resulted from an 18 basis-point increase in the yield on interest-earning assets and a 13.1% increase in average noninterest-bearing demand deposits partially offset by a 9 basis-point increase in the cost of interest-bearing liabilities.

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The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three months ended ~~September~~June 30, ~~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 September 30,																		Three Months Ended June 30,
	2022									2021									2023									2022
				Interest									Interest									Interest									Interest
	Average			Income/			Average			Average			Income/			Average			Average			Income/			Average			Average			Income/			Average
	Balance			Expense			Rate⁽⁷⁾			Balance			Expense			Rate ⁽⁷⁾			Balance			Expense			Rate ⁽⁷⁾			Balance			Expense			Rate⁽⁷⁾
	(dollars in thousands)																		(dollars in thousands)
Interest-earning assets:
Securities ^{(1) (2)}	$	740,394		$	5,434			2.91	%	$	459,559		$	1,712			1.48	%	$	726,315		$	5,607			3.10	%	$	610,465		$	3,710			2.44	%
Total loans ⁽²⁾ ^{(3) (4)}		7,582,371			91,132			4.77			6,455,952			75,434			4.64			8,149,374			111,501			5.49			7,008,174			81,597			4.67
Federal funds sold and interest-bearing with banks		135,331			665			1.95			387,155			151			0.15			309,458			4,056			5.26			157,201			313			0.80
Restricted investment in bank stocks		42,220			438			4.12			19,105			245			5.09			42,932			945			8.83			31,605			291			3.69
Total interest-earning assets		8,500,316			97,669			4.56			7,321,771			77,542			4.20			9,228,079			122,109			5.31			7,807,445			85,911			4.41
Noninterest-earning assets:
Allowance for credit losses		(84,307	)								(78,327	)								(87,473	)								(81,012	)
Other noninterest-earning assets		614,580									594,553									624,976									596,390
Total assets	$	9,030,589								$	7,837,997								$	9,765,582								$	8,322,823

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits	$	1,525,076			5,396			1.40		$	1,252,818			2,983			0.94		$	2,658,673			23,778			3.59		$	1,103,418			2,179			0.79
Other interest-bearing deposits		3,686,520			7,903			0.85			3,582,261			2,495			0.28			3,640,939			26,936			2.97			3,717,531			3,530			0.38
Total interest-bearing deposits		5,211,596			13,299			1.01			4,835,079			5,478			0.45			6,299,612			50,714			3.23			4,820,949			5,709			0.47

Borrowings		772,561			3,297			1.69			276,183			1,105			1.59			756,303			5,438			2.88			548,675			1,849			1.35
Subordinated debentures		153,129			2,196			5.91			152,825			2,168			5.63			79,104			1,306			6.62			153,053			2,179			5.71
Finance lease		1,813			27			6.02			2,018			30			5.90			1,658			24			5.81			1,865			28			6.02
Total interest-bearing liabilities		6,139,099			18,819			1.22			5,266,105			8,781			0.66			7,136,677			57,482			3.23			5,524,542			9,765			0.71

Demand deposits		1,682,135									1,495,456									1,347,268									1,607,465
Other liabilities		48,907									44,245									84,594									47,719
Total noninterest-bearing liabilities		1,731,042									1,539,701									1,431,862									1,655,184
Stockholders’ equity		1,160,448									1,032,191									1,197,043									1,143,097
Total liabilities and stockholders’ equity	$	9,030,589								$	7,837,997								$	9,765,582								$	8,322,823
Net interest income (tax-equivalent basis)					78,850									68,761									64,627									76,146
Net interest spread ⁽⁵⁾								3.34	%								3.54	%								2.08	%								3.70	%
Net interest margin ⁽⁶⁾								3.68	%								3.73	%								2.81	%								3.91	%
Tax-equivalent adjustment					(689	)								(516	)								(784	)								(555	)
Net interest income				$	78,161								$	68,245								$	63,843								$	75,591

⁽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.

Table of Contents

	Six Months Ended June 30,
	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)}	$	729,604		$	11,219			3.08	%	$	578,014		$	6,481			2.26	%
Total loans ^{(2) (3) (4)}		8,140,255			218,856			5.39			6,940,203			157,917			4.59
Federal funds sold and interest-bearing with banks		285,014			7,031			4.95			234,284			433			0.37
Restricted investment in bank stocks		46,400			1,843			7.97			28,310			505			3.60
Total interest-earning assets		9,201,273			238,949			5.21			7,780,811			165,336			4.29
Noninterest-earning assets:
Allowance for credit losses		(88,820	)								(80,391	)
Other noninterest-earning assets		620,782									592,847
Total assets	$	9,733,235								$	8,293,267

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits	$	2,508,835			41,045			3.28		$	1,113,958			4,333			0.78
Other interest-bearing deposits		3,599,582			49,756			2.77			3,784,173			6,386			0.34
Total interest-bearing deposits		6,108,417			90,801			2.98			4,898,131			10,719			0.44

Borrowings		848,273			12,035			2.85			477,188			3,226			1.36
Subordinated debentures		91,303			3,609			7.93			153,016			4,346			5.73
Finance lease		1,686			50			5.95			1,891			57			6.08
Total interest-bearing liabilities		7,049,679			106,495			3.03			5,530,226			18,348			0.67

Demand deposits		1,403,220									1,577,427
Other liabilities		86,191									48,052
Total noninterest-bearing liabilities		1,489,411									1,625,479
Stockholders’ equity		1,194,145									1,137,562
Total liabilities and stockholders’ equity	$	9,733,235								$	8,293,267
Net interest income (tax-equivalent basis)					132,454									146,988
Net interest spread ⁽⁵⁾								2.18	%								3.62	%
Net interest margin ⁽⁶⁾								2.89	%								3.81	%
Tax-equivalent adjustment					(1,527	)								(1,039	)
Net interest income				$	130,927								$	145,949

⁽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.

Table of Contents

Nine Months Ended September 30,

2022

2021

Interest

Interest

Average

Income/

Average

Average

Income/

Average

Balance

Expense

Rate ⁽⁷⁾

Balance

Expense
Rate⁽⁷⁾

(dollars in thousands)

Interest-earning assets:

Securities ^{(1) (2)}
$ 632,736 $ 11,915 2.52 % $ 459,017 $ 5,534 1.61 %
Total loans ⁽²⁾ ^{(3) (4)}
7,159,107 249,049 4.65 6,319,160 217,465 4.60
Federal funds sold and interest-bearing with banks
200,937 1,098 0.73 333,290 285 0.11
Restricted investment in bank stocks
32,997 943 3.82 21,098 764 4.84
Total interest-earning assets
8,025,777 263,005 4.38 7,132,565 224,048 4.20
Noninterest-earning assets:

Allowance for credit losses
(81,711 ) (80,129 )
Other noninterest-earning assets
600,171 585,043
Total assets
$ 8,544,237 $ 7,637,479

Interest-bearing liabilities:

Interest-bearing deposits:

Time deposits
$ 1,252,503 9,729 1.04 $ 1,332,587 12,096 1.21
Other interest-bearing deposits
3,751,266 14,289 0.51 3,377,443 7,391 0.29
Total interest-bearing deposits
5,003,769 24,018 0.64 4,710,030 19,487 0.55

Borrowings
576,728 6,522 1.51 327,412 4,199 1.71
Subordinated debentures
153,054 6,543 5.72 153,300 6,502 5.67
Finance lease
1,865 84 6.02 2,066 93 6.02
Total interest-bearing liabilities
5,735,416 37,167 0.87 5,192,808 30,281 0.78

Demand deposits
1,612,713 1,426,121
Other liabilities
50,834 47,417
Total noninterest-bearing liabilities
1,663,547 1,473,538
Stockholders’ equity
1,145,274 971,133
Total liabilities and stockholders’ equity
$ 8,544,237 $ 7,637,479
Net interest income (tax-equivalent basis)
225,838 193,767
Net interest spread ⁽⁵⁾
3.51 % 3.42 %
Net interest margin ⁽⁶⁾
3.76 % 3.63 %
Tax-equivalent adjustment
(1,728 ) (1,350 )
Net interest income
$ 224,110 $ 192,417

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

~~Table of Contents~~

Noninterest Income

Noninterest income totaled $3.4 million for the three months ended June 30, 2023, compared with $3.3 million for the three months ended ~~September~~June 30, ~~2022, compared with $4.0 million for the comparable three month period ended September 30, 2021.~~2022. Included in noninterest income for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~September~~June 30, ~~2021~~2022 were net losses on equity securities of ~~$0.4~~$0.2 million and ~~$0.1~~$0.4 million, respectively. Excluding ~~net losses on equity securities, adjusted~~these items, noninterest income ~~was $3.8~~decreased $0.1 million ~~and $4.1 million for~~when compared to the ~~three months~~comparable three-month period ended ~~September~~June 30, ~~2022 and September 30, 2021, respectively.~~2022. The ~~$0.3 million~~ decrease ~~in adjusted noninterest income for the three months ended September 30, 2022 versus the three months ended September 30, 2021~~ was primarily ~~due~~attributable to ~~a decrease in net gains on loans held-for-sale of $0.8 million, partially offset by increases~~decreases in deposit, loan and other income of $0.3 million and partially offset by an increase in bank owned life insurance ("BOLI") ~~income~~ of $0.2 million.

Noninterest income totaled ~~$9.7~~$6.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared with ~~$11.9~~$6.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. Included in noninterest income were net losses on equity securities of ~~$1.4~~$0.4 million and ~~$0.2~~$1.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021, respectively. Additionally, there was a $0.7 million gain on the sale of branches and $0.2 million gain on sale/redemption of investment securities during the nine~~six months ended ~~September 30, 2021.~~June 2022, respectively. Excluding the aforementioned items, noninterest income was ~~$11.2~~$6.6 million and ~~$11.3~~$7.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The ~~$0.1~~$0.8 million decrease in noninterest income excluding the items discussed above for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 versus the ~~nine months~~comparable six-month period ended ~~September~~June 30, ~~2021~~2022 was primarily due to decreases ~~of $1.1 million in gains on sale of loans held-for-sale, partially offset by increases~~ in deposit, loan and other income of ~~$0.5~~$0.7 million and a decrease in net gains on sale of loans held-for-sale of $0.6 million, partially offset by an increase in BOLI ~~income~~ of $0.5 million.

Noninterest Expenses

Noninterest expenses totaled ~~$32.1~~$35.4 million for the three months ended ~~September~~June 30, ~~2022,~~2023, compared with ~~$28.2~~$31.7 million for the ~~three months~~comparable three-month period ended ~~September~~June 30, ~~2021.The increase in noninterest expenses of $4.0~~2022. Noninterest expense increased by $3.7 million ~~from the three months ended September 30, 2021~~which was primarily attributable to increases in salaries and employee benefits of ~~$4.2 million. The increase in salaries and employee benefits was~~$2.1 million attributable to ~~increased staff~~new hires, increases in ~~both the revenue~~FDIC insurance expense of $1.0 million, information technology and ~~back-office~~communication expenses of ~~the Bank, base salary increases,~~$0.8 million, other expenses of $0.7 million, marketing and ~~incentive compensation accruals.~~advertising expenses of $0.1 million and other components of net periodic pension expense of $0.1 million, partially offset by decreases in BoeFly acquisition expense of $1.5 million, professional and consulting expenses of $0.2 million and amortization of core deposit intangibles expense of $0.1 million.

Noninterest expenses totaled ~~$93.1~~$70.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~$80.9~~$60.9 million for the ~~nine~~six months ended ~~September~~June 30, 2021. Included in noninterest expenses for the nine months ended September 30, 2022 was an increase in acquisition price related to the BoeFly acquisition of $1.5 million. Excluding this item, noninterest2022. Noninterest expenses increased ~~$10.6~~by $9.4 million ~~when compared to the nine months ended September 30, 2021. The increase~~and was primarily attributable to increases in salaries and employee benefits of ~~$11.7~~$5.6 million attributable to new hires in both the revenue and back-office areas ~~base-salary increases, and bonus accruals.~~of the Bank. Also, contributing to the increase were increases in other expenses of ~~$0.8~~$1.6 million, FDIC insurance expense of $1.3 million, information technology and communications expense of $1.0 million, occupancy and equipment expense of $0.8 million, marketing and advertising expense of $0.3 million, professional and consulting expense of $0.2 million, ~~and marketing and advertising~~other components of ~~$0.4~~net periodic pension expense of $0.2 million, partially offset by decreases ~~in occupancy~~BoeFly acquisition expense of ~~$1.6 million, professional and consulting of $0.4~~$1.5 million, and amortization of core deposit intangibles of ~~$0.2~~$0.1 million.

Income Taxes

Income tax expense was ~~$10.4~~$7.4 million for the three months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~$10.9~~$11.9 million for the ~~three months~~comparable three-month period ended ~~September~~June 30, ~~2021.~~2022. The decrease in income tax expense was the result of lower income before taxes. The effective tax rate for the three months ended ~~September~~June 30, 2023 and June 30, 2022 was 25.8% and ~~September 30, 2021 was 26.5% and 25.3%~~26.9%, respectively. The ~~higher~~decrease in the effective tax rate ~~during the three months ended September 30, 2022~~ when compared to the three months ended ~~September~~June 30, ~~2021 resulted from a~~2022 is largely attributable to lower ~~proportion of income from non-taxable sources.~~ taxable income.

Income tax expense was ~~$33.7~~$16.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~$32.4~~$23.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The effective tax rate for the ~~nine~~three months ended ~~September~~June 30, 2023 and June 30, 2022 was 26.3% and ~~September 30, 2021 was~~ 26.7% ~~and 25.0%~~, respectively. The effective tax rate for the ~~nine~~first six months ended of ~~September 30, 2022~~2023 was ~~higher~~lower compared to the ~~nine~~first six months ~~ended September~~of June 30, ~~2021~~2022 due to ~~a lower proportion~~different proportions of income from non-taxable sources.

4645

Table of Contents

Financial Condition

Loan Portfolio

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

	September 30, 2022					December 31, 2021					Amount Increase/			June 30, 2023					December 31, 2022					Amount Increase/
	Amount		%			Amount		%			(Decrease)			Amount		%			Amount		%			(Decrease)
	(dollars in thousands)													(dollars in thousands)
Commercial ⁽¹⁾	$	1,448,727		18.3	%	$	1,299,428		19.0	%	$	149,299		$	1,472,795		18.1	%	$	1,472,734		18.2	%	$	61
Commercial real estate		5,666,848		71.6	%		4,741,590		69.3	%		925,258			5,831,382		71.5			5,795,228		71.5			36,154
Commercial construction		537,323		6.8	%		540,178		7.9	%		(2,855	)		596,219		7.3			574,139		7.1			22,080
Residential real estate		256,085		3.2	%		255,269		3.7	%		816			254,405		3.1			264,748		3.3			(10,343	)
Consumer		1,030		0.1	%		1,886		0.1	%		(856	)		1,416		-			2,312		-			(896	)
Gross loans	$	7,910,013		100.0	%	$	6,838,351		100.0	%	$	1,071,662		$	8,156,217		100.0	%	$	8,109,161		100.0	%	$	47,056

As of ~~September~~June 30, ~~2022,~~2023, gross loans totaled ~~$7.9~~$8.2 billion, an increase of ~~$1.1 billion~~$47.1 million or ~~15.7%~~0.6%, as compared to December 31, ~~2021.~~2022. Net loan growth was attributable to organic loan originations.

⁽¹⁾	~~Includes PPP loans of $11.5 million and $93.1 million as of September 30, 2022 and December 31, 2021 , respectively.~~

Allowance for Credit Losses and Related Provision

As of ~~September~~June 30, ~~2022,~~2023, the Company’s allowance for credit losses for loans was ~~$91.7~~$89.2 million, ~~an increase~~a decrease of ~~$12.9~~$1.3 million from ~~$78.8~~$90.5 million atas of December 31, ~~2021.~~2022. The ~~increase~~decrease was primarily attributable to $5.5 million in net charge-offs, offset by a $4.2 million provision for credit ~~losses for loans of $13.8 million partially related to organic loan originations, partially offset by $0.9 million in net charge-offs.~~losses.

The provision for ~~(reversal of)~~ credit losses, which includes provision for unfunded commitments, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$10.0~~$3.0 million and ~~$14.5~~$4.0 million, respectively, compared to ~~$1.1~~$3.0 million and ~~$(6.3)~~$4.5 million, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively. The increase in provision for credit losses when compared to the comparable prior-year periods, reflected strong organic loan growth and changes in forecasted macroeconomic conditions. The prior year provision in the three and nine months ended September 30, 2021, was primarily the result of an improved macro-economic forecast as of September 30, 2021 when compared to January 1, 2021, the day the Company adopted CECL.

There were ~~$0.4~~$1.0 million and ~~$0.9~~$5.5 million in net charge-offs for the three months and six months ended June 30, 2023, compared with $0.3 million and $0.5 million in net charge-offs for the three and ~~nine~~six months ended ~~September~~June 30, 2022, ~~respectively, compared with $1.6 million and $1.8 million~~respectively. The increase in net charge-offs for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021, respectively.~~2023 when compared to the comparable prior period resulted from 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 ~~1.16%~~1.09% as of ~~September~~June 30, ~~2022~~2023 compared to ~~1.15%~~1.12% as of December 31, 2021. Excluding the impact of PPP loans in the calculation of the ACL as a percentage of loans receivable, the September 30, 2022 ratio was at 1.16%, compared to 1.17% as of December 31, 2021. PPP loans do not have allowance for credit losses attributable to them, as they are fully guaranteed by the SBA.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 ~~September~~June 30, ~~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.

4746

Table of Contents

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

	Three Months Ended						Three Months Ended
	September 30,						June 30,
	2022			2021			2023			2022
	(dollars in thousands)						(dollars in thousands)
Average loans receivable	$	7,580,176		$	6,449,726		$	8,140,859		$	7,007,207
Analysis of the ACL:
Balance - beginning of quarter	$	82,739		$	78,684		$	87,002		$	80,070
Charge-offs:
Commercial		(410	)		(254	)		(1,100	)		(292	)
Commercial real estate		-			(1,473	)		-			(1	)
Consumer		(3	)		-
Residential real estate								(18	)		(9	)
Total charge-offs		(413	)		(1,727	)		(1,118	)		(302	)
Recoveries:
Commercial		53			1			9			-
Commercial real estate		-			85
Residential real estate		-			20			67			4
Consumer		-			7			-			28
Total recoveries		53			113			76			32
Net charge-offs		(360	)		(1,614	)		(1,042	)		(270	)
Provision for credit losses - loans		9,338			916			3,245			2,939
Balance - end of period	$	91,717		$	77,986		$	89,205		$	82,739

Ratio of annualized net charge-offs during the period to average loans receivable during the period		0.02	%		0.10	%		0.05	%		0.02	%
Loans receivable	$	7,900,450		$	6,576,439		$	8,148,540		$	7,274,573
ACL as a percentage of loans receivable		1.16	%		1.19	%		1.09	%		1.14	%

	Nine Months Ended						Six Months Ended
	September 30,						June 30,
	2022			2021			2023			2022
	(dollars in thousands)						(dollars in thousands)
Average loans receivable	$	7,155,209		$	6,314,433		$	8,129,280		$	6,939,527
Analysis of the ACL:
Balance - beginning of quarter	$	78,773		$	79,226		$	90,513		$	78,773
CECL Day 1 Adjustment		-			6,557
Balance – beginning of quarter (as adjusted)		78,773			85,783
Charge-offs:
Commercial		(751	)		(304	)		(3,867	)		(341	)
Commercial real estate		(226	)		(1,628	)		(1,717	)		(226	)
Residential real estate		(9	)		(7	)		(18	)		(9	)
Consumer		(3	)		-			-			-
Total charge-offs		(989	)		(1,939	)		(5,602	)		(576	)
Recoveries:
Commercial		54			74			9			1
Commercial real estate		-			85
Residential real estate		35			20			68			63
Consumer		28			9
Total recoveries		117			188			77			64
Net charge-offs		(872	)		(1,751	)		(5,525	)		(512	)
Provision for (reversal of) credit losses - loans		13,816			(6,046	)
Provision for credit losses - loans								4,217			4,478
Balance - end of period	$	91,717		$	77,986		$	89,205		$	82,739

Ratio of annualized net charge-offs during the period to average loans receivable during the period		0.02	%		0.04	%		0.14	%		0.01	%
Loans receivable	$	7,900,450		$	6,576,439		$	8,148,540		$	7,274,573
ACL as a percentage of loans receivable		1.16	%		1.19	%		1.09	%		1.14	%

4847

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

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

	September 30, 2022		December 31, 2021		June 30, 2023		December 31, 2022
	(dollars in thousands)				(dollars in thousands)
Nonaccrual loans	$	57,447	$	61,700	$	51,496	$	44,454
OREO		264		-		-		264
Total nonperforming assets ⁽¹⁾	$	57,711	$	61,700	$	51,496	$	44,718

Performing TDRs	$	46,973	$	43,587
Loans 90 days or greater past due and still accruing (non PCD)	$	-	$	-
Loans 90 days or greater past due and still accruing (PCD)	$	10,068	$	13,531

⁽¹⁾	Nonperforming assets are defined as nonaccrual loans and OREO.

Nonaccrual loans to total loans receivable	0.73	%	0.90	%	0.63	%	0.55	%
Nonperforming assets to total assets	0.61	%	0.76	%	0.53	%	0.46	%
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable	1.45	%	1.74	%

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Investment Securities

As of ~~September~~June 30, ~~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 three-months ended ~~September~~June 30, ~~2022,~~2023, average securities, on an amortized cost basis, increased ~~$280.8~~by $115.6 million to approximately ~~$740.4~~$726.3 million, or ~~8.7%~~7.9% of average total interest-earning assets, from approximately ~~$459.6~~$610.5 million, or ~~6.3%~~7.8% of average interest-earning assets, ~~compared to September~~as of June 30, ~~2021.~~2022.

As of ~~September~~June 30, ~~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 ~~$67.7~~$64.6 million as compared with net unrealized losses of ~~$0.5~~$61.8 million as of December 31, ~~2021.~~2022. The increase 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. ~~This also resulted in a $27.2 million increase in deferred tax assets, attributable to the decline in fair value on securities available-for-sale since December 31, 2021.~~ The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not 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 ~~September~~June 30, ~~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 ~~September~~June 30, ~~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 ~~September~~June 30, 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 1.87%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 1.75%. 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 ~~0.28%~~2.22%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~1.51%~~2.01%. As

Based on our model, which was run as of ~~December 31, 2021,~~June 30, 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%~~1.91%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~5.64%~~4.08%.

~~Based on our model, which was run as~~ As of ~~September 30,~~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 ~~1.87%~~2.66%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~3.27%~~3.99%. As

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%.

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An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of ~~September~~June 30, ~~2022,~~2023, would decrease by ~~5.54%~~12.72% with an instantaneous rate shock of up 200 basis points, and ~~decline~~increase by ~~0.95%~~0.04% 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.~~basis-points.

~~Table~~

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 ~~Contents~~

deposit, from both noninterest-bearing and interest-bearing non-maturity deposits.

The following table illustrates the most recent results for EVE and one-year NII sensitivity as of ~~September~~June 30, ~~2022.~~2023.

Interest Rates	Estimated		Estimated Change in EVE						Interest Rates		Estimated		Estimated Change in NII						Estimated		Estimated Change in EVE						Interest Rates		Estimated		Estimated Change in NII
(basis points)	EVE		Amount			%			(basis points)		NII		Amount			%			EVE		Amount			%			(basis points)		NII		Amount			%
+300	$	1,237,824		(135,382	)		(9.86	)		+300	$	313,916	$	(831	)		(0.26	)	$	1,020,843		(222,517	)		(17.90	)		+300	$	243,312	$	(6,095	)		(2.44	)
+200		1,297,091		(76,115	)		(5.54	)		+200		315,615		868			0.28			1,085,201		(158,159	)		(12.72	)		+200		244,744		(4,663	)		(1.87	)
+100		1,353,613		(19,593	)		(1.43	)		+100		317,301		2,554			0.81			1,153,040		(90,320	)		(7.26	)		+100		246,111		(3,296	)		(1.32	)
0		1,373,206		-			-			0		314,747		-			-			1,243,360		-			-			0		249,407		-			-
-100		1,360,103		(13,103	)		(0.95	)		-100		310,005		(4,742	)		(1.51	)		1,243,913		553			0.04			-100		245,050		(4,357	)		(1.75	)
-200		1,285,872		(87,334	)		(6.36	)		-200		297,606		(17,141	)		(5.45	)		1,232,240		(11,120	)		(0.89	)		-200		238,314		(11,093	)		(4.45	)
-300																				1,212,049		(31,311	)		(2.52	)		-300		232,321		(17,086	)		(6.85	)

Certain model limitations are inherent in the methodology used in the EVE and net interest income measurements. The models require the making of 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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Liquidity

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

As of ~~September~~June 30, ~~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 ~~September~~June 30, ~~2022,~~2023, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were ~~$796.9~~$591.8 million, which represented ~~8.4%~~6.1% of total assets and ~~9.8%~~7.1% 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. As of June 30, 2023, not included in the above liquid assets were securities with a market value of $249.5 million which were pledged to either the Federal Reserve Bank’s Bank Term Funding Program (“BTFP”), or the Federal Home Loan Bank, which carry aggregate unutilized borrowing capacity of $272.9 million as of June 30, 2023.

The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of ~~September~~June 30, ~~2022,~~2023, had the ability to borrow ~~$2.0~~$2.9 billion. The Bank also has two credit facilities established with the Federal Reserve Bank of New York for direct discount window borrowings and BTFP capacity based on pledged collateral had the ability to borrow $1.3 billion. In addition, as of ~~September~~June 30, ~~2022,~~2023, the Bank had in place borrowing capacity of ~~$325~~$390 million through correspondent banks and other unsecured borrowing lines. As of ~~September~~June 30, ~~2022,~~2023, the Bank had aggregate available and unused credit of approximately ~~$0.9~~$3.3 billion, which represents the aforementioned facilities totaling ~~$2.3~~$4.6 billion net of $1.4 billion in outstanding borrowings and letters of credit. As of ~~September~~June 30, ~~2022,~~2023, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.

Cash and cash equivalents totaled ~~$333.8~~$319.9 million as of ~~September~~June 30, ~~2022,~~2023, increasing by ~~$68.3~~$51.6 million from ~~$265.5~~$268.3 million as of December 31, ~~2021.~~2022. Operating activities provided ~~$94.9~~$37.6 million in net cash. Investing activities used ~~$1.3 billion~~$36.3 million in net cash, primarily reflecting an increase in loans and investment securities. Financing activities provided ~~$1.3 billion~~$50.3 million in net cash, primarily reflecting an increase in FHLB advances of $1.4 billion and deposits of ~~$978.2~~$181.9 million and ~~an increase in net~~partially offset by repayment of borrowings of ~~$361.7 million.~~$1.4 billion.

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Deposits

Total deposits increased by ~~$977.6~~$181.7 million, or ~~15.4%~~2.5%, to ~~$7.3~~$7.5 billion as of ~~September~~June 30, ~~2022~~2023 from December 31, ~~2021.~~2022. The increase was primarily due to increases in ~~noninterest bearing demand~~time deposits and interest-bearing and NOW ~~and time~~ deposits partially offset by a decrease in demand, noninterest-bearing deposits and savings deposits. The following table sets forth the composition of our deposit base by the periods indicated.

	September 30, 2022					December 31, 2021
											Amount													Amount
											Increase/			June 30, 2023					December 31, 2022					Increase/
	Amount		%			Amount		%			(Decrease)			Amount		%			Amount		%			(Decrease)
	(dollars in thousands)													(dollars in thousands)
Demand, noninterest-bearing	$	1,665,658		22.8	%	$	1,617,049		25.5	%	$	48,609		$	1,356,293		18.0	%	$	1,501,614		20.4	%	$	(145,321	)
Demand, interest-bearing and NOW		3,335,187		45.6			3,127,350		49.4			207,837			3,203,160		42.5			3,085,613		41.9			117,547
Savings		388,430		5.3			438,445		6.9			(50,015	)		357,696		4.7			375,205		5.1			(17,509	)
Time		1,921,235		26.3			1,150,109		18.2			771,126			2,621,148		34.8			2,394,190		32.6			226,958
Total deposits	$	7,310,510		100.0	%	$	6,332,953		100.0	%	$	977,557		$	7,538,297		100.0	%	$	7,356,622		100.0	%	$	181,675

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 ~~September~~June 30, ~~2022~~2023 was ~~5.63%~~8.15%. Upon the cessation of publication of LIBOR rates and pursuant to the Federal LIBOR Act and Federal Reserve regulations implementing the Act, applicable US Dollar LIBOR indexed instruments like the Company’s outstanding $5.0 million of MMCapS capital securities will convert to a new index based on CME Term SOFR, as defined in the LIBOR Act, plus a tenor spread adjustment, which is referred to as the Benchmark Replacement. Effective for quarterly interest rate resets after July 3, 2023 the subordinated debentures’ floating rate will be three-month CME Term SOFR plus 2.85% plus a tenor spread adjust of 0.26161%. Had the interest rate contractually reset on June 30, 2023, the three-month term CME Term SOFR would have been 5.27%, and, based upon the benchmark replacement interest rate formula, that would compute an interest rate of 8.38%.

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.

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Stockholders’ Equity

The Company’s stockholders’ equity was ~~$1.1~~$1.2 billion as of ~~September~~June 30, ~~2022,~~2023, an increase of ~~$24.1~~$20.6 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 ~~September~~June 30, ~~2022,~~2023, the Company’s tangible common equity ratio and tangible book value per share were ~~8.87%~~9.19% and ~~$20.93,~~$22.34, 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 ~~$216.1~~$214.9 million and ~~$217.4~~$215.7 million, as of ~~September~~June 30, ~~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.

	September 30, 2022			December 31, 2021			June 30, 2023			December 31, 2022
	(dollars in thousands, except for share and per share data)						(dollars in thousands, except for share and per share data)
Common equity	$	1,037,368		$	1,013,285		$	1,088,470		$	1,067,824
Less: intangible assets		(216,093	)		(217,369	)		(214,941	)		(215,684	)
Tangible common stockholders’ equity	$	821,275		$	795,916		$	873,529		$	852,140

Total assets	$	9,478,252		$	8,129,480		$	9,723,963		$	9,644,948
Less: intangible assets		(216,093	)		(217,369	)		(214,941	)		(215,684	)
Tangible assets	$	9,262,159		$	7,912,111		$	9,509,022		$	9,429,264

Common stock outstanding at period end		39,243,123			39,568,090			38,936,652			39,243,123

Tangible common equity ratio ⁽¹⁾		8.87	%		10.06	%		9.19	%		9.04	%

Book value per common share	$	26.43		$	25.61		$	27.95		$	27.21
Less: intangible assets		5.50			5.49			5.52			5.50
Tangible book value per common share	$	20.93		$	20.12		$	22.43		$	21.71

(1)	Tangible common equity ratio is a non-GAAP measure.

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Regulatory Capital and Capital Adequacy

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

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

The following is a summary of regulatory capital amounts and ratios as of ~~September~~June 30, ~~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				ConnectOne Bancorp, Inc.					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
The Company	Amount		Ratio			Amount		Ratio			Amount		Ratio		Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2022	(dollars in thousands)
As of June 30, 2023															(dollars in thousands)
Tier 1 leverage capital	$	970,240		10.95	%	$	354,560		4.00	%		NA		NA	$	1,023,292		10.62	%	$	385,355		4.00	%		NA		NA
CET I risk-based ratio		854,158		10.20			376,969		4.50			NA		NA		907,210		10.55			386,956		4.50			NA		NA
Tier 1 risk-based capital		970,240		11.58			502,626		6.00			NA		NA		1,023,292		11.90			515,941		6.00			NA		NA
Total risk-based capital		1,210,745		14.45			670,168		8.00			NA		NA		1,189,670		13.83			687,921		8.00			NA		NA

N/A - not applicable

	ConnectOne Bank					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions					ConnectOne Bank					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
The Bank	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2022						(dollars in thousands)
As of June 30, 2023																					(dollars in thousands)
Tier 1 leverage capital	$	966,014		10.91	%	$	354,314		4.00	%		442,892		5.00	%	$	1,054,606		10.95	%	$	385,141		4.00	%		481,426		5.00	%
CET I risk-based ratio		966,014		11.53			376,962		4.50			544,500		6.50			1,054,606		12.26			386,949		4.50			558,926		6.50
Tier 1 risk-based capital		966,014		11.53			502,616		6.00			670,154		8.00			1,054,606		12.26			515,931		6.00			687,909		8.00
Total risk-based capital		1,088,769		13.00			670,154		8.00			837,693		10.00			1,145,984		13.33			687,909		8.00			859,886		10.00

As of ~~September~~June 30, ~~2022,~~2023, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the ~~Tier I~~Total Risk Based Capital Ratio which was ~~3.08%~~3.34% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was ~~2.50%~~2.83% above the minimum buffer ratio.

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Item 3. Qualitative and Quantitative Disclosures about Market Risks

Market Risk

Interest rate risk management is our primary market risk. See “Item 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.

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Item 4. Controls and Procedures

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

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

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1a. Risk Factors

There have been no material changes to the risks inherent in our business from those described under Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, ~~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 ~~September~~June 30, ~~2022,~~2023, the Company ~~did not repurchase any~~repurchased a total of 270,000 shares. As of ~~September~~June 30, ~~2022,~~2023, shares remaining for repurchase under the program were ~~1,827,640.~~1,342,477.

The following table details share repurchases for the three months ended June 30, 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
April 1, 2023 - April 30, 2023		-		0.00		-		1,612,477
May 1, 2023 - May 31, 2023		150,000		14.19		150,000		1,462,477
June 1, 2023 - June 30, 2023		120,000		16.66		270,000		1,342,477

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Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5 Other Information

Not applicable

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Item 6. Exhibits

Exhibit No.		Description

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).

5859

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SIGNATURES

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

CONNECTONE BANCORP, INC.

(Registrant)

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

	Date: ~~November~~August 4, ~~2022~~2023		Date: ~~November~~August 4, ~~2022~~2023

5960

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

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


	Three Months Ended September 30, 2022
	Amount of gain (loss) recognized in OCI (Effective Portion)		Amount of (gain) loss reclassified from OCI to interest income			Amount of gain recognized in other Noninterest income (Ineffective Portion)
	(dollars in thousands)
Interest rate contracts	$	16,969	$	(1,178	)	$	-

	Three Months Ended September 30, 2021
	Amount of gain (loss) recognized in OCI (Effective Portion)		Amount of gain (loss) reclassified from OCI to interest income		Amount of gain recognized in other Noninterest income (Ineffective Portion)
	(dollars in thousands)
Interest rate contracts	$	1,890	$	328	$	-

	Nine Months Ended September 30, 2022
	Amount of gain (loss) recognized in OCI (Effective Portion)		Amount of (gain) loss reclassified from OCI to interest income			Amount of gain recognized in other Noninterest income (Ineffective Portion)
	(dollars in thousands)
Interest rate contracts	$	44,253	$	(524	)	$	-

	Nine Months Ended September 30, 2021
	Amount of gain (loss) recognized in OCI (Effective Portion)		Amount of gain (loss) reclassified from OCI to interest income		Amount of gain recognized in other Noninterest income (Ineffective Portion)
	(dollars in thousands)
Interest rate contracts	$	1,872	$	1,543	$	-

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Loans		Investment		Investment
	(dollars in thousands)
Troubled debt restructurings:
Commercial		2	$	633	$	633
Commercial real estate		2		9,043		8,543
Residential real estate		2		399		399
Total		6	$	10,075	$	9,575

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

	Nine Months Ended September 30,
	2022									2021
				Interest									Interest
	Average			Income/			Average			Average			Income/			Average
	Balance			Expense			Rate ⁽⁷⁾			Balance			Expense			Rate⁽⁷⁾
	(dollars in thousands)
Interest-earning assets:
Securities ^{(1) (2)}	$	632,736		$	11,915			2.52	%	$	459,017		$	5,534			1.61	%
Total loans ⁽²⁾ ^{(3) (4)}		7,159,107			249,049			4.65			6,319,160			217,465			4.60
Federal funds sold and interest-bearing with banks		200,937			1,098			0.73			333,290			285			0.11
Restricted investment in bank stocks		32,997			943			3.82			21,098			764			4.84
Total interest-earning assets		8,025,777			263,005			4.38			7,132,565			224,048			4.20
Noninterest-earning assets:
Allowance for credit losses		(81,711	)								(80,129	)
Other noninterest-earning assets		600,171									585,043
Total assets	$	8,544,237								$	7,637,479

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits	$	1,252,503			9,729			1.04		$	1,332,587			12,096			1.21
Other interest-bearing deposits		3,751,266			14,289			0.51			3,377,443			7,391			0.29
Total interest-bearing deposits		5,003,769			24,018			0.64			4,710,030			19,487			0.55

Borrowings		576,728			6,522			1.51			327,412			4,199			1.71
Subordinated debentures		153,054			6,543			5.72			153,300			6,502			5.67
Finance lease		1,865			84			6.02			2,066			93			6.02
Total interest-bearing liabilities		5,735,416			37,167			0.87			5,192,808			30,281			0.78

Demand deposits		1,612,713									1,426,121
Other liabilities		50,834									47,417
Total noninterest-bearing liabilities		1,663,547									1,473,538
Stockholders’ equity		1,145,274									971,133
Total liabilities and stockholders’ equity	$	8,544,237								$	7,637,479
Net interest income (tax-equivalent basis)					225,838									193,767
Net interest spread ⁽⁵⁾								3.51	%								3.42	%
Net interest margin ⁽⁶⁾								3.76	%								3.63	%
Tax-equivalent adjustment					(1,728	)								(1,350	)
Net interest income				$	224,110								$	192,417