Table of Contents

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

(Mark One)

 

☒

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

For the Quarterly Period Ended September 30, 20222023

OR

 

☐

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

 

For the transition period from               to               

Commission File Number:  000-11486

cnoblogo.jpg

CONNECTONE BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter) 

New Jersey

52-1273725

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

301 Sylvan Avenue

Englewood Cliffs, New Jersey 07632

(Address of Principal Executive Offices) (Zip Code)

201-816-8900

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class

Trading symbol

Name of each exchange on which registered

Common stock

CNOB

NASDAQ

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

CNOBP

NASDAQ

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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:

39,243,12338,606,370 shares

(Title of Class)

(Outstanding as of November 4, 2022)3, 2023)

 

 
Table of Contents

    

 
 

Table of Contents

 

  

Page

   

PART I – FINANCIAL INFORMATION

 
   

Item 1.

Financial Statements

3

 

Consolidated Statements of Condition as of September 30, 20222023 (unaudited) and December 31, 20212022

3

 

Consolidated Statements of Income for the three and nine months ended September 30, 20222023 and 20212022 (unaudited)

4

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 20222023 and 20212022 (unaudited)

5

 

Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 20222023 and 20212022 (unaudited)

6

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 20222023 and 20212022 (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

  

2
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Item 1. Financial Statements

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

(unaudited)

 

(in thousands, except for share data)

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 
 

2022

  

2021

 

2023

 

2022

 
  (unaudited)   

ASSETS

        

Cash and due from banks

 $58,852  $54,352 $56,170 $61,629 

Interest-bearing deposits with banks

  274,992   211,184  197,128  206,686 

Cash and cash equivalents

 333,844  265,536  253,298  268,315 
  

Investment securities

 623,629  534,507  581,867  634,884 

Equity securities

 15,563  13,794  17,677  15,811 
  

Loans held-for-sale

 8,080  250  -  13,772 
  

Loans receivable

 7,900,450  6,828,622  8,181,109  8,099,689 

Less: Allowance for credit losses - loans

  91,717   78,773  88,230  90,513 

Net loans receivable

 7,808,733  6,749,849  8,092,879  8,009,176 
  

Investment in restricted stock, at cost

 45,324  27,826  49,387  46,604 

Bank premises and equipment, net

 28,519  29,032  28,432  27,800 

Accrued interest receivable

 38,940  34,152  46,795  46,062 

Bank owned life insurance

 229,800  195,731  236,009  231,328 

Right of use operating lease assets

 10,196  11,017  11,229  10,179 

Other real estate owned

 264  -  -  264 

Goodwill

 208,372  208,372  208,372  208,372 

Core deposit intangibles

 7,721  8,997  6,222  7,312 

Other assets

  119,267   50,417  146,718  125,069 

Total assets

 $9,478,252  $8,129,480 $9,678,885 $9,644,948 

LIABILITIES

        

Deposits:

  

Noninterest-bearing

 $1,665,658  $1,617,049 $1,224,125 $1,501,614 

Interest-bearing

  5,644,852   4,715,904  6,214,370  5,855,008 

Total deposits

  7,310,510   6,332,953  7,438,495  7,356,622 

Borrowings

 829,953  468,193  887,590  857,622 

Subordinated debentures, net

 153,179  152,951  79,313  153,255 

Operating lease liabilities

 11,454  12,417  12,424  11,397 

Other liabilities

  24,861   38,754  72,909  87,301 

Total liabilities

  8,329,957   7,005,268  8,490,731  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 September 30, 2023 and as of December 31, 2022; outstanding 115,000 shares as of September 30, 2023 and as of December 31, 2022

 110,927  110,927 

Common stock, no par value: Authorized 100,000,000 shares; issued 42,122,948 shares as of September 30, 2023 and 41,942,149 shares as of December 31, 2022; outstanding 38,621,970 shares as of September 30, 2023 and 39,243,123 as of December 31, 2022

 586,946  586,946 

Additional paid-in capital

 28,756  27,246  32,027  30,126 

Retained earnings

 510,957  440,169  579,776  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 3,500,978 common shares as of September 30, 2023 and 2,699,026 as of December 31, 2022

 (68,108) (52,799)

Accumulated other comprehensive loss

  (36,492)  (1,404) (53,414) (32,364)

Total stockholders’ equity

  1,148,295   1,124,212  1,188,154  1,178,751 

Total liabilities and stockholders’ equity

 $9,478,252  $8,129,480 $9,678,885 $9,644,948 

 

See accompanying notes to unaudited consolidated financial statements.

 

3
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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

 

Three Months Ended

 

Nine Months Ended

  

Three Months Ended

 

Nine Months Ended

 
 

September 30,

  

September 30,

  

September 30,

  

September 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  $115,405  $90,731  $333,356  $248,041 

Interest and dividends on investment securities:

  

Taxable

 4,063  1,065  8,487  3,148  4,128  4,063  12,386  8,487 

Tax-exempt

 1,083  511  2,708  1,885  1,136  1,083  3,475  2,708 

Dividends

 438  245  943  764  907  438  2,750  943 

Interest on federal funds sold and other short-term investments

  665   113   1,098   246   2,110   665   9,141   1,098 

Total interest income

  96,980   77,026   261,277   222,698   123,686   96,980   361,108   261,277 

Interest expense

                

Deposits

 13,299  5,478  24,018  19,487  56,043  13,299  146,844  24,018 

Borrowings

  5,520   3,303   13,149   10,794   5,286   5,520   20,980   13,149 

Total interest expense

  18,819   8,781   37,167   30,281   61,329   18,819   167,824   37,167 

Net interest income

 78,161  68,245  224,110  192,417  62,357  78,161  193,284  224,110 

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

  1,500   10,000   5,500   14,450 

Net interest income after provision for credit losses

  60,857   68,161   187,784   209,660 

Noninterest income

                

Deposit, loan and other income

 1,969  1,702  5,578  5,092  1,605  1,969  4,553  5,578 

Income on bank owned life insurance

 1,521  1,278  4,069  3,527  1,597  1,521  4,681  4,069 

Net gains on sale of loans held-for-sale

 262  1,114  1,519  2,668  633  262  1,232  1,519 

Gain on sale of branches

 -  -  -  674 

Net losses on equity securities

 (430) (78) (1,431) (242)  (273)  (430)  (674)  (1,431)

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

 -  -  -  195 

Total noninterest income

  3,322   4,016   9,735   11,914   3,562   3,322   9,792   9,735 

Noninterest expenses

                

Salaries and employee benefits

 21,025  16,807  59,470  47,790  22,276  21,025  66,289  59,470 

Occupancy and equipment

 2,600  2,656  7,262  8,876  2,738  2,600  8,176  7,262 

FDIC insurance

 720  525  2,051  2,040  1,800  720  4,465  2,051 

Professional and consulting

 1,980  2,217  5,896  6,290  1,834  1,980  5,960  5,896 

Marketing and advertising

 461  345  1,238  864  554  461  1,642  1,238 

Information technology and communications

 2,747  3,048  8,414  8,209  3,487  2,747  10,192  8,414 

Amortization of core deposit intangibles

 409  483  1,276  1,498  347  409  1,090  1,276 

Other components of net periodic pension expense

 (143) (67) (429) (201) (25) (143) (76) (429)

Increase in value of acquisition price

 -  -  1,516  -  -  -  -  1,516 

Other expenses

  2,344   2,169   6,382   5,561   2,773   2,344   8,366   6,382 

Total noninterest expenses

  32,143   28,183   93,076   80,927   35,784   32,143   106,104   93,076 

Income before income tax expense

 39,340  42,978  126,319  129,719  28,635  39,340  91,472  126,319 

Income tax expense

  10,425   10,881   33,665   32,404   7,228   10,425   23,742   33,665 

Net income

 28,915  32,097  92,654  97,315  21,407  28,915  67,730  92,654 

Preferred dividends

  1,509   -   4,527   -   1,509   1,509   4,527   4,527 

Net income available to common stockholders

 $27,406  $32,097  $88,127  $97,315  $19,898  $27,406  $63,203  $88,127 

Earnings per common share

                

Basic

 $0.70  $0.81  $2.24  $2.45  $0.51  $0.70  $1.62  $2.24 

Diluted

 0.70  0.80  2.23  2.43  0.51  0.70  1.61  2.23 

 

See accompanying notes to unaudited consolidated financial statements.

 

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

Three Months Ended

 

Nine Months Ended

  

Three Months Ended

 

Nine Months Ended

 
 

September 30,

  

September 30,

  

September 30,

  

September 30,

 

(dollars in thousands)

 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Net income

 $28,915  $32,097  $92,654  $97,315  $21,407  $28,915  $67,730  $92,654 

Other comprehensive income (loss):

  
  

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

 (39,912) (3,228) (94,428) (8,397) (32,285) (39,912) (36,060) (94,428)

Tax effect

 11,471  796  27,178  2,160   9,177   11,471   10,087   27,178 

Net of tax

  (28,441)  (2,432)  (67,250)  (6,237) (23,108) (28,441) (25,973) (67,250)
  

Reclassification adjustment for realized gains included in net income

 -  -  -  (195)

Tax effect

  -  -   -   48 

Net of tax

 -   -  -  (147)
 

Unrealized gains on cash flow hedges

 16,969 1,890 44,253 1,872  9,768  16,969  19,832  44,253 

Tax effect

  (5,094) (533)  (13,381)  (529)  (2,938)  (5,094)  (5,966)  (13,381)

Net of tax

 11,875   1,357  30,872  1,343  6,830  11,875  13,866  30,872 
  

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

 (1,178) 328  (524) 1,543 

Reclassification adjustment for realized gains on cash flow hedges

 (4,793) (1,178) (13,013) (524)

Tax effect

  343   (90)  159   (434)  1,442   343   3,915   159 

Net of tax

 (835) 238  (365) 1,109  (3,351) (835) (9,098) (365)
  

Unrealized gains on pension plan

 -  -  2,187  -  -  -  -  2,187 

Tax effect

 -  -  (567) -   -   -   -   (567)

Net of tax

  -   -   1,620   -  -  -  -  1,620 
  

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

 17  75  49  225  74  17  222  49 

Tax effect

  (5)  (21)  (14)  (63)  (22)  (5)  (67)  (14)

Net of tax

 12 54 35 162  52  12  155  35 
  

Total other comprehensive loss

  (17,389)  (783)  (35,088)  (3,770)  (19,577)  (17,389)  (21,050)  (35,088)
  

Total comprehensive income

 $11,526  $31,314  $57,566  $93,545  $1,830  $11,526  $46,680  $57,566 

 

See accompanying notes to unaudited consolidated financial statements.

 

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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 September 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 June 30, 2023

 $110,927  $586,946  $30,740  $566,498  $(61,877) $(33,837) $1,199,397 

Net income

  -   -   -   21,407   -   -   21,407 

Other comprehensive loss, net of tax

  -   -   -   -   -   (19,577)  (19,577)

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)

  -   -   -   (6,620)  -   -   (6,620)

Exercise of stock options (646 shares)

  -   -   11   -   -   -   11 

Net shares issued in satisfaction of deferred stock units earned (3,938 shares)

  -   -   -   -   -   -   - 

Restricted stock grants, net of forfeitures (2,477 shares)

  -   -   -   -   -   -   - 

Repurchase of treasury stock (316,789 shares)

  -   -   -   -   (6,231)  -   (6,231)

Stock-based compensation expense

  -   -   1,276   -   -   -   1,276 
                             

Balance as of September 30, 2023

 $110,927  $586,946  $32,027  $579,776  $(68,108) $(53,414) $1,188,154 

  

 

Three Months Ended September 30, 2022

  

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

Net income

 -  -  -  28,915  -  -  28,915  -  -  -  28,915  -  -  28,915 

Other comprehensive loss, net of tax

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

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) -  -  -  (6,089) -  -  (6,089)

Stock-based compensation expense

  -   -   1,220   -   -   -   1,220   -   -   1,220   -   -   -   1,220 
  

Balance as of September 30, 2022

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

 

6
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 
  

Nine Months Ended September 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

  -   -   -   67,730   -   -   67,730 

Other comprehensive loss, net of tax

  -   -   -   -   -   (21,050)  (21,050)

Cash dividends paid on preferred stock ($0.984375 per depositary share)

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

Cash dividends paid on common stock ($0.51 per share)

  -   -   -   (19,342)  -   -   (19,342)

Exercise of stock options (7,388 shares)

  -   -   96   -   -   -   96 

Restricted stock grants, net of forfeitures (84,057 shares)

  -   -   -   -   -   -   - 

Stock grants (995 shares)

  -   -   -   -   -   -   - 

Net shares issued in satisfaction of deferred stock units earned (36,006 shares)

  -   -   -   -   -   -   - 

Net shares issued in satisfaction of 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 (801,952 shares)

  -   -   -   -   (15,309)  -   (15,309)

Stock-based compensation expense

  -   -   3,641   -   -   -   3,641 
                             

Balance as of September 30, 2023

 $110,927  $586,946  $32,027  $579,776  $(68,108) $(53,414) $1,188,154 

 

  

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 
  

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 dividends 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 deferred 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 

 

See accompanying notes to unaudited consolidated financial statements.

 

7
Table of Contents

 

 

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

Nine Months Ended

  

Nine Months Ended

 
 

September 30,

  

September 30,

 

(dollars in thousands)

 

2022

  

2021

  

2023

  

2022

 

Cash flows from operating activities

        

Net income

 $92,654  $97,315  $67,730  $92,654 

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

  

Depreciation and amortization of premises and equipment

 2,903  2,832  3,355  2,903 

Provision for (reversal of) credit losses

 14,450  (6,315)

Provision for credit losses

 5,500  14,450 

Amortization of intangibles

 1,276  1,498  1,090  1,276 

Net accretion of loans

 (2,448) (4,130) (1,618) (2,448)

Accretion on bank premises

 (37) (61) (37) (37)

Accretion on deposits

 (657) (1,762) (232) (657)

Amortization (accretion) on borrowings, net

 27  (43)

Amortization on borrowings, net

 16  27 

Stock-based compensation

 3,519  3,202  3,641  3,519 

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

 - (195)

Losses on equity securities, net

 1,431  242  674  1,431 

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) (1,232) (1,519)

Loans originated for resale

 (18,619) (43,676) (19,511) (18,619)

Proceeds from sale of loans held-for-sale

 25,955  57,674  29,531 25,955 

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

 6 (18)

Loss on sale of other real estate owned

 22 6 

Increase in cash surrender value of bank owned life insurance

 (4,069) (3,527) (4,681) (4,069)

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

 821  1,848 

Amortization of subordinated debentures issuance costs

 228  227  1,058  228 

(Increase) decrease in accrued interest receivable

 (4,788) 1,707 

Increase in accrued interest receivable

 (733) (4,788)

Net change in operating leases

 (142) (734) (23) (142)

(Increase) decrease in other assets

 (4,781) 43,319 

(Decrease) increase in other liabilities

  (12,291)  5,689 

Increase in other assets

 (6,861) (4,781)

Decrease in other liabilities

  (13,949)  (12,291)

Net cash provided by operating activities

  94,946   154,644   64,561   94,946 
  

Cash flows from investing activities

        

Investment securities available-for-sale:

  

Purchases

 (320,946) (203,534) (33,454) (320,946)

Maturities, calls and principal repayments

 135,548  215,531  49,590  135,548 

Purchases of equity securities

 (3,200) (555)

Net (purchases) redemptions of restricted investment in bank stocks

 (17,498) 6,993 

Purchase of equity securities

 (2,540) (3,200)

Net purchases of restricted investment in bank stocks

 (2,783) (17,498)

Cash flow hedge premium payment

 (6,965) -  - (6,965)

Payments on loans held-for-sale

 5  32  25  5 

Net increase in loans

 (1,084,483) (345,098) (82,847) (1,084,483)

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) (3,950) (2,353)

Proceeds from sale of branches

 -  1,087 

Proceeds from sale of other real estate owned

  309  321 

Proceeds from sale of OREO

 242 309 

Net cash used in investing activities

  (1,329,583)  (352,696)  (75,717)  (1,329,583)
  

Cash flows from financing activities

        

Net increase in deposits

 978,214  440,876  82,105  978,214 

Repayment of subordinated debentures

 -  (50,000)

Advances of borrowings

 2,305,181  100,000 

Advances of Federal Home Loan Bank (“FHLB”) borrowings

 2,391,500 2,305,181 

Repayments of subordinated debt

 (75,000) - 

Repayments of borrowings

 (1,943,448) (272,686) (2,361,548) (1,943,448)

Cash dividends on preferred stock

 (4,528) -  (4,527) (4,528)

Cash dividends paid on common stock

 (19,342) (17,338)

Repurchase of treasury stock

 (13,127) (8,043) (15,309) (13,127)

Cash dividends paid on common stock

 (17,338) (12,345)

Proceeds from exercise of stock options

 124  45  96  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)

Net cash provided by financing activities

  1,302,945   307,491 

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

 (1,836) (2,133)

Net cash (used by) provided by financing activities

  (3,861)  1,302,945 

Net change in cash and cash equivalents

 68,308  109,439  (15,017) 68,308 

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  $253,298  $333,844 

 

8
Table of Contents

 

(continued)

 

Supplemental disclosures of cash flow information

        

Cash payments for:

  

Interest paid on deposits and borrowings

 $34,552  $32,664  $164,108  $34,552 

Income taxes

 31,426  35,809  27,377  31,426 

 

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

 $-  $579 

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

 11,197  - 

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

 13,652  14,211  16,156  13,652 

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

 -  1,963 

See accompanying notes to unaudited consolidated financial statements.

 

9
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”). and making certain limited investments. 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-four24 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 rentalsrental 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 Principles of Consolidation

 

The consolidated financial statements have been prepared in conformity with GAAP. Some items in the prior yearU.S. generally accepted accounting principles. The consolidated financial statements were reclassified to conform to current presentation. Reclassifications had no effectof 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.

 

10
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Risks and Uncertainties

As previously disclosed, on March 11, 2020 the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to impact the United States and the world. On March 27, 2020, the Coronavirus Aid, Relief, andEconomic Security Act (CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The 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.  

 

11
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 Accounting Standards

 

In June 2022, the Financial

Adoption of New Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)in 20222023-03, “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.

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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

 

Nine Months Ended

 
 

September 30,

  

September 30,

  

September 30,

  

September 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  $19,898  $27,406  $63,203  $88,127 

Earnings allocated to participating securities

  (67)  (76)  (217)  (250)  (63)  (67)  (160)  (217)

Income attributable to common stock

 $27,339  $32,021  $87,910  $97,065  $19,835  $27,339  $63,043  $87,910 
  

Weighted average common shares outstanding, including participating securities

 39,243  39,741  39,393  39,770  38,817  39,243  39,020  39,393 

Weighted average participating securities

  (96)  (95)  (97)  (102)  (123)  (96)  (99)  (97)

Weighted average common shares outstanding

 39,147  39,646  39,296  39,668  38,694  39,147  38,921  39,296 

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

  192   223   214   220   135   192   135   214 

Weighted average common and equivalent shares outstanding

  39,339   39,869   39,510   39,888   38,829   39,339   39,056   39,510 
  

Earnings per common share:

  

Basic

 $0.70  $0.81  $2.24  $2.45  $0.51  $0.70  $1.62  $2.24 

Diluted

 0.70  0.80  2.23  2.43  0.51  0.70  1.61  2.23 

 

There were no antidilutive share equivalents as ofduring the nine months ended September 30, 2023 and September 30, 2022 or September 30, 2021.

 

13
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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 3.  Investment Securities

 

TheAll of the Company’s investment securities are classified as available-for-sale as of September 30, 20222023 and December 31, 20212022. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in stockholders’ equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value as of September 30, 20222023 and December 31, 20212022. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 6 of the Notes to Consolidated Financial Statements for a further discussion.

 

The following tables present information related to the Company’s portfolio of securities available-for-sale as of September 30, 20222023 and December 31, 20212022.

 

         

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

 

September 30, 2023

 

Investment securities available-for-sale:

 

Federal agency obligations

 $55,896  $-  $(10,276) $45,620  $-  $57,243  $-  $(13,274) $43,969  $- 

Residential mortgage pass-through securities

 468,783  -  (61,798) 406,985  -  466,362  -  (76,935) 389,427  - 

Commercial mortgage pass-through securities

 25,546  -  (4,651) 20,895  -  25,303  -  (5,376) 19,927  - 

Obligations of U.S. states and political subdivisions

 159,441  46  (18,380) 141,107  -  150,218  -  (27,319) 122,899  - 

Corporate bonds and notes

 6,998  -  (8) 6,990  -  3,000  -  (39) 2,961  - 

Asset-backed securities

 1,934  -  (36) 1,898    1,354 - (32) 1,322 - 

Other securities

  134   -   -   134   -   1,362   -   -   1,362   - 

Total securities available-for-sale

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

Total investment securities available-for-sale

 $704,842  $-  $(122,975) $581,867  $- 
  

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  $- 

Total investment securities available-for-sale

 $721,799  $289  $(87,204) $634,884  $- 

 

14
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$332.5 million and $71.2$157.0 million as of September 30, 20222023 and December 31, 20212022, respectively, were pledged to secure public deposits, borrowings, repurchase agreements, access to unutilized Federal Reserve Discount Window, Bank Term Funding Program ("BTFP") borrowings, and access to unutilized Federal Home Loan Bank advances and for other purposes required or permitted by law. As of September 30, 20222023 and December 31, 20212022, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

The following table presents information for investments in securities available-for-sale as of September 30, 20222023, 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

  

September 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  $1,967 

Due after one year through five years

 4,106  4,107  4,389  4,331 

Due after five years through ten years

 2,342  2,289  1,856  1,783 

Due after ten years

 212,370  183,775  203,570  163,070 

Residential mortgage pass-through securities

 468,783  406,985  466,362  389,427 

Commercial mortgage pass-through securities

 25,546  20,895  25,303  19,927 

Other securities

  134   134  1,362  1,362 

Total securities available-for-sale

 $718,732  $623,629 

Total investment securities available-for-sale

 $704,842  $581,867 

 

GrossThere were no realized gains or losses on securities during the nine months ended September 30, 2023and losses from the sales and redemptions of securities for periods presented were as follows:September 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 

15
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 3.  Investment Securities – (continued)

Impairment Analysis of Available--for-saleAvailable-for-Sale Debt Securities

 

The following tables indicate securities in an unrealized loss position for which an allowance for credit losses (“ACL”) has not been recorded, aggregated by investment category and by the length of continuous time individual securities have been in an unrealized loss position as of September 30, 20222023 and December 31, 20212022.

 

 

September 30, 2022

  

September 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) $43,969  $(13,274) $6,056  $(194) $37,913  $(13,080)

Residential mortgage pass-through securities

 406,984  (61,798) 293,070  (32,342) 113,914  (29,456) 389,427  (76,935) 28,555  (858) 360,872  (76,077)

Commercial mortgage pass-through securities

 20,895  (4,651) 15,961  (2,943) 4,934  (1,708) 19,927  (5,376) -  -  19,927  (5,376)

Obligations of U.S. states and political subdivisions

 135,483  (18,380) 81,466  (11,098) 54,017  (7,282) 122,899  (27,319) 22,739  (1,825) 100,160  (25,494)

Corporate bonds and notes

 2,991  (8) 2,991  (8) -  -  2,961  (39) 994  (6) 1,967  (33)

Asset-backed securities

  1,898   (36)  1,242   (16)  656   (20)  1,322   (32)  -   -   1,322   (32)

Total temporarily impaired securities

 $613,871  $(95,149) $425,265  $(50,668) $188,606  $(44,481) $580,505  $(122,975) $58,344  $(2,883) $522,161  $(120,092)

 

 

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)

 

16
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 saleavailable-for-sale as of September 30, 20222023 and December 31, 20212022, totaled $2.6$2.1 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 ofUnrealized losses on asset backed securities and state and municipal securities have September 30, 2022, not been recognized into income because the issuers are of thesehigh 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 September 30,2023.

 

Federal agency obligations, residential mortgage backedmortgage-backed pass-through securities and commercial mortgage backedmortgage-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.

 

17
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 startingeleven 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”).  AllThe eleven swaps are currently on the books withcarry 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 onetwo forward starting interest rate cap spread transaction,transactions, one with a total notional amount of $150 million, which became effective on October 1, 2022 and matures in October of 2027 and one 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 isThese are designated as a cash flow hedgehedges 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 $150total 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 $150a total of $225 million notional amount of an interest rate cap agreementagreements 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 recorded on these swap and interest rate cap transactions totaled approximately $5.5 million and $14.6 million during the three and nine months ended September 30, 2023, respectively, compared to $1.2 million and $0.5 million for the three and nine months ended September 30,2022, respectively, and is recorded as a component of either interest expense on Federal Home Loan Bank advances or brokered certificates of deposits.

18
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  $- 

18
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) $- 
  

Nine Months Ended September 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

 $19,832  $(13,013) $- 

 

  

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  $- 
  

Nine Months Ended September 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

 $44,253  $(524) $- 

 

The following table reflects the cash flow hedges included in the consolidated statements of condition as of September 30, 20222023 and December 31, 20212022:

 

  

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 
                 
                 
  

September 30, 2023

  

December 31, 2022

 
  

Notional Amount

  

Fair Value

  

Notional Amount

  

Fair Value

 
      

(dollars in thousands)

     

Interest rate contracts

 $950,000  $61,972  $950,000  $56,797 

 

19
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 30, 20222023 and December 31, 20212022:

 

  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.

  September 30, 2023  December 31, 2022 
  

(dollars in thousands)

 

Commercial

 $1,475,571  $1,472,734 

Commercial real estate

  5,837,539   5,795,228 

Commercial construction

  622,748   574,139 

Residential real estate

  251,416   264,748 

Consumer

  936   2,312 

Gross loans

  8,188,210   8,109,161 

Net deferred loan fees

  (7,101)  (9,472)

Total loans receivable

 $8,181,109  $8,099,689 

 

As of September 30, 20222023 and December 31, 20212022, loans totaling approximately $2.6$5.7 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 30, 20222023 and December 31, 20212022:

 

 September 30, 2022  December 31, 2021  September 30, 2023  December 31, 2022 
 

(dollars in thousands)

  

(dollars in thousands)

 

Commercial real estate

 $8,080  $-  $-  $13,473 

Residential real estate

  -   250   -   299 

Total carrying amount

 $8,080  $250  $-  $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 30, 20222023 and December 31, 20212022:

 

 

September 30, 2022

  

September 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  $21,604  $555  $22,159 

Commercial real estate

 21,511  6,627  28,138  70  29,754  29,824 

Residential real estate

  623   1,828   2,451   806   3,270   4,076 

Total

 $47,791  $9,656  $57,447  $22,480  $33,579  $56,059 

 

20
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 loancredit 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.

 

21
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 30, 20222023 (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  $146,241  $259,603  $271,580  $41,459  $13,749  $119,592  $590,667  $1,442,891 

Special mention

 -  -  -  588  -  3,556  3,301  7,445  -  337  86  -  567  3,445  3,989  8,424 

Substandard

 7,636  152  17  2,023  11,190  22,639  3,690  47,347  304  1,316  163  4  1,551  19,559  1,359  24,256 

Doubtful

  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 

Total Commercial

 $256,309  $311,157  $50,818  $34,013  $66,062  $190,734  $539,634  $1,448,727  $146,545  $261,256  $271,829  $41,463  $15,867  $142,596  $596,015  $1,475,571 
  

Commercial Real Estate

                                

Pass

 $1,386,412  $1,617,355  $387,135  $364,220  $384,288  $1,033,994  $370,982  $5,544,386  $170,541  $1,572,880  $1,581,212  $356,251  $355,665  $1,269,678  $462,573  $5,768,800 

Special mention

 -  -  -  1,317  -  41,841  8,883  52,041  -  -  -  -  -  26,421  -  26,421 

Substandard

 -  1,939  4,500  12,517  19,314  23,984  8,167  70,421  -  -  1,899  -  2,625  20,964  16,830  42,318 

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  $170,541  $1,572,880  $1,583,111  $356,251  $358,290  $1,317,063  $479,403  $5,837,539 
  

Commercial Construction

                                

Pass

 $2,056  $7,605  $7,320  $508  $-  $-  $512,107  $529,596  $582  $5,693  $15,682  $6,236  $-  $-  $585,855  $614,048 

Special mention

 -  -  -  -  -  -  -  -  -  -  -  -  -  -  -  - 

Substandard

 -  -  -  -  -  -  7,727  7,727  -  -  -  -  -  -  8,700  8,700 

Doubtful

  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 

Total Commercial Construction

 $2,056  $7,605  $7,320  $508  $-  $-  $519,834  $537,323  $582  $5,693  $15,682  $6,236  $-  $-  $594,555  $622,748 
  

Residential

                                

Pass

 $34,852  $25,487  $25,292  $21,732  $20,493  $80,042  $41,104  $249,002  $8,009  $43,048  $23,247  $21,863  $20,059  $92,966  $34,663  $243,855 

Special mention

 -  -  -  -  -  -  -  -  -  -  -  -  -  655  2,830  3,485 

Substandard

 -  -  -  -  -  3,509  3,574  7,083  -  -  563  438  -  2,520  555  4,076 

Doubtful

  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 

Total Residential Real Estate

 $34,852  $25,487  $25,292  $21,732  $20,493  $83,551  $44,678  $256,085  $8,009  $43,048  $23,810  $22,301  $20,059  $96,141  $38,048  $251,416 
  

Consumer

                                

Pass

 $903  $-  $10  $-  $5  $1  $111  $1,030  $747  $96  $-  $6  $-  $-  $87  $936 

Special mention

 -  -  -  -  -  -  -  -  -  -  -  -  -  -  -  - 

Substandard

 -  -  -  -  -  -  -  -  -  -  -  -  -  -  -  - 

Doubtful

  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 

Total Consumer

 $903  $-  $10  $-  $5  $1  $111  $1,030  $747  $96  $-  $6  $-  $-  $87  $936 
  

Total

                                

Pass

 $1,672,896  $1,961,452  $470,558  $417,862  $459,658  $1,278,576  $1,456,947  $7,717,949  $326,120  $1,881,320  $1,891,721  $425,815  $389,473  $1,482,236  $1,673,845  $8,070,530 

Special mention

 -  -  -  1,905  -  45,397  12,184  59,486  -  337  86  -  567  30,521  6,819  38,330 

Substandard

 7,636  2,091  4,517  14,540  30,504  50,132  23,158  132,578  304  1,316  2,625  442  4,176  43,043  27,444  79,350 

Doubtful

  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 

Grand Total

 $1,680,532  $1,963,543  $475,075  $434,307  $490,162  $1,374,105  $1,492,289  $7,910,013  $326,424  $1,882,973  $1,894,432  $426,257  $394,216  $1,555,800  $1,708,108  $8,188,210 
 
 
 

 

22
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, 20212022 (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 

    

23
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 30, 20222023 and December 31, 20212022:

 

 

September 30, 2022

  

September 30, 2023

 
 Real Estate  

Other

  

Total

  Real Estate  

Other

  

Total

 
 

(dollars in thousands)

  

(dollars in thousands)

 

Commercial

 $5,446  $23,449  $28,895  $4,891  $14,719  $19,610 

Commercial real estate

 64,718  -  64,718  41,636  -  41,636 

Commercial construction

 7,727  -  7,727  8,700  -  8,700 

Residential real estate

 5,634  -  5,634  6,755  -  6,755 

Consumer

  -   -   - 

Total

 $83,525  $23,449  $106,974  $61,982  $14,719  $76,701 

 

 

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, thatwhich are past due as of September 30, 20222023 and December 31, 20212022::

  

 

September 30, 2022

  

September 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  $433  $1,979  $-  $22,159  $24,571  $1,451,000  $1,475,571 

Commercial real estate

 -  -  5,676  28,138  33,814  5,633,034  5,666,848  -  597  -  29,824  30,421  5,807,118  5,837,539 

Commercial construction

 -  -  -  -  -  537,323  537,323  -  -  -  -  -  622,748  622,748 

Residential real estate

 671  -  -  2,451  3,122  252,963  256,085  227  -  -  4,076  4,303  247,113  251,416 

Consumer

  -   -   -   -   -   1,030   1,030   -   254   -   -   254   682   936 

Total

 $842  $13  $10,068  $57,447  $68,370  $7,841,643  $7,910,013  $660  $2,830  $-  $56,059  $59,549  $8,128,661  $8,188,210 

 

 

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 

 

24
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

  

September 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  $7,685  $661  $-  $-  $-  $8,346 

Collectively evaluated impairment

 16,812  49,370  3,444  3,977  5  73,608  19,433  52,072  3,909  3,732  5  79,151 

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  $27,851  $52,733  $3,909  $3,732  $5  $88,230 
  

Gross loans

  

Individually evaluated impairment

 $29,482  $59,042  $7,727  $5,634  $-  $101,885  $24,676  $41,636  $8,700  $6,755  $-  $81,767 

Collectively evaluated impairment

 1,414,286  5,602,130  529,596  250,451  1,030  7,797,493  1,450,405  5,795,903  614,048  244,661  936  8,105,953 

Acquired with deteriorated credit quality individually analyzed

  4,959   5,676   -   -   -   10,635   490   -   -   -   -   490 

Total

 $1,448,727  $5,666,848  $537,323  $256,085  $1,030  $7,910,013  $1,475,571  $5,837,539  $622,748  $251,416  $936  $8,188,210 

 

 

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 

 

25
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 

26
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 in a troubled debt restructuring (“TDRs”) when, except as discussed below, due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may resultActivity in the loan being returned to accrual status atCompany’s ACL for loans for the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status.

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

As of 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, 2022three andDecember 31, 2021, respectively.

The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 20222023: is summarized in the tables below.

 

      

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 
  

Three Months Ended September 30, 2023

 
  

Commercial

  

Commercial real estate

  

Commercial construction

  

Residential real estate

  

Consumer

  

Total

 
  

(dollars in thousands)

 

Balance as of June 30, 2023

 $29,326  $52,509  $3,546  $3,819  $5  $89,205 

Charge-offs

  (2,250)  (237)  -   -   -   (2,487)

Recoveries

  -   -   -   1   7   8 

Provision for (reversal of) credit losses - loans

  775   461   363   (88)  (7)  1,504 
                         

Balance as of September 30, 2023

 $27,851  $52,733  $3,909  $3,732  $5  $88,230 

  

Nine Months Ended September 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

  (6,117)  (1,954)  -   (18)  -   (8,089)

Recoveries

  9   -   -   69   7   85 

Provision for (reversal of) credit losses - loans

  5,056   945   191   (462)  (9)  5,721 
                         

Balance as of September 30, 2023

 $27,851  $52,733  $3,909  $3,732  $5  $88,230 

  

Three Months Ended September 30, 2022

 
  

Commercial

  

Commercial real estate

  

Commercial construction

  

Residential real estate

  

Consumer

  

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

  

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 (reversal of) 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 

 

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:

  

Nine Months Ended

 
  September 30, 2023 
  

Term Extension

  

% of Portfolio

 
  

(dollars in thousands)

 

Commercial

 $44   0.00%

Commercial real estate

  211   0.00%

The above table consists of loans that added a weighted average of 13 years to the maturity of the modified asloans, which did not have a TDRmaterial effect on the cash flows. 

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

  

September 30, 2023

 
  

Current

  

Past Due 30-89 Days

  

Past Due 90 Days or More

 
  

(dollars in thousands)

 

Commercial

 $44  $-  $- 

Commercial real estate

  211   -   - 

There were no loans to borrowers experiencing financial difficulty that had a payment default during the nine months ended September 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 nine months ended September 30,2022, included the Company modified five loans with maturity extensions and one loan interest rate reduction. The one loan that was an interest rate reduction was a commercial real estate loan that included a one-time $500,000 principal paydown. 

 

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

twelve27 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 duringNote 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 rollforwardroll forward of the allowance for credit losses for unfunded commitments for the three and nine months ended September 30, 20222023 and 20212022:

 

 

Three Months Ended

 

Three Months Ended

  

Three Months Ended

 

Three Months Ended

 
 

September 30,

 

September 30,

  

September 30,

 

September 30,

 
 

2022

  

2021

  

2023

  

2022

 
 

(dollars in thousands)

  

(dollars in thousands)

 

Balance at beginning of period

 $2,324  $2,380  $2,819  $2,324 

Provision for credit losses - unfunded commitments

  662   184 

(Reversal of) provision for credit losses - unfunded commitments

  (4)  662 

Balance at end of period

 $2,986  $2,564  $2,815  $2,986 

 

 

Nine Months Ended

 

Nine Months Ended

  

Nine Months Ended

 

Nine Months Ended

 
 

September 30,

 

September 30,

  

September 30,

 

September 30,

 
 

2022

  

2021

  

2023

  

2022

 
 

(dollars in thousands)

  

(dollars in thousands)

 

Balance at beginning of period

 $2,352  $-  $3,036  $2,352 

Day 1 Effect of CECL

 -  2,833 

Provision for (reversal of) credit losses - unfunded commitments

  634   (269)

(Reversal of) provision for credit losses - unfunded commitments

  (221)  634 

Balance at end of period

 $2,986  $2,564  $2,815  $2,986 

 

28
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 months ended September 30, 20222023 and 20212022:

 

  

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

 
  

September 30,

  

September 30,

 
  

2023

  

2022

 
  

(dollars in thousands)

 

Provision for credit losses – loans

 $1,504  $9,338 

(Reversal of) provision for credit losses - unfunded commitments

  (4)  662 

Provision for credit losses

 $1,500  $10,000 

 

  

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)
  

Nine Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2023

  

2022

 
  

(dollars in thousands)

 

Provision for credit losses – loans

 $5,721  $13,816 

(Reversal of) provision for credit losses - unfunded commitments

  (221)  634 

Provision for credit losses

 $5,500  $14,450 

 

 

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.

 

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of September 30, 20222023 and December 31, 20212022:

 

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 30, 20222023 and December 31, 20212022 are as follows:

 

    

September 30, 2022

     

September 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  $-  $43,969  $-  $43,969  $- 

Residential mortgage pass-through securities

 406,985  -  406,985  -  389,427  -  389,427  - 

Commercial mortgage pass-through securities

 20,895  -  20,895  -  19,927  -  19,927  - 

Obligations of U.S. states and political subdivision

 141,107  -  133,730  7,377  122,899  -  115,882  7,017 

Corporate bonds and notes

 6,990  -  6,990  -  2,961  -  2,961  - 

Asset-backed securities

 1,898  -  1,898  -  1,322  -  1,322  - 

Other securities

  134   134   -   -   1,362   1,362   -   - 

Total available-for-sale

 623,629  134  616,118  7,377  581,867  1,362  573,488  7,017 
     

Equity securities

 15,563  9,701  5,862  -  17,677  9,394  8,283  - 

Derivatives

  54,041   -   54,041   -   61,972   -   61,972   - 

Total assets

 $693,233  $9,835  $676,021  $7,377  $661,516  $10,756  $643,743  $7,017 

 

30
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 months ended September 30, 20222023 and during the year ended December 31, 20212022.

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis as of September 30, 20222023 and December 31, 20212022.

 

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).

 

31
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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 30, 20222023 and December 31, 20212022 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)  September 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  $10,659  $-  $-  $10,659 

Commercial real estate

 26,197  -  -  26,197  7,330  -  -  7,330 

Residential real estate

 1,372  -  -  1,372 
            

 

    

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 30, 20222023 that required a valuation allowance were $42.0$23.8 million with a related valuation allowance of $15.9$5.8 million compared to $54.1$43.8 million with a related valuation allowance of $17.8$10.5 million as of December 31, 20212022.

 

32
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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 months ended September 30, 20222023 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

  (221)

Change in unrealized gain

  (111)

Ending balance, September 30, 2023

 $7,017 

  

  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 30, 20222023 and December 31, 20212022. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.

 

September 30, 2022

         

September 30, 2023

         
 

Fair Value

 

Valuation Techniques

 

Unobservable Input

 

Rate

  

Fair Value

 

Valuation Techniques

 

Unobservable Input

 

Rate

 

Securities available-for-sale:

   

(dollars in thousands)

        

(dollars in thousands)

     

Municipal securities

 $7,377 

Discounted cash flows

 

Discount rate

 4.3% $7,017 

Discounted cash flows

 

Discount rate

 4.4%

 

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)

        

(dollars in thousands)

     

Municipal securities

 $8,565 

Discounted cash flows

 

Discount rate

 2.9% $7,349 

Discounted cash flows

 

Discount rate

 4.3%

 

33
Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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

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

 

September 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%)  $10,205 

Market approach (100%)

Average transfer price as a price to unpaid principal balance

 65% –92% (68%) 

Commercial

  483 

Appraisals of collateral value

Comparable sales

 -5% to +35% (+17%)   454 

Appraisals of collateral value

Adjustment for comparable sales

 -7.5% to +25% (+0.1%) 

Commercial real estate

  26,197 

Appraisals of collateral value

Comparable sales

 -25% to +10% (-16%)   7,330 

Appraisals of collateral value

Adjustment for comparable sales

 -15% to +5% (+4%) 

Residential real estate

  1,372 

Appraisals of collateral value

Comparable sales

 +21% to +39% (+22%) 

 

December 31, 2021

           

(dollars in thousands)

 

Fair Value

  

Valuation Techniques

Unobservable Input

 

Range (weighted average)

 

Commercial

 $12,193  

Market approach (100%)

Average transfer price as a price to unpaid principal balance

  48% to 73% (49%) 

Commercial

  1,206  

Appraisals of collateral value

Adjustment for comparable sales

 

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

 

Commercial real estate

  20,185  

Appraisals of collateral value

Adjustment for comparable sales

 

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

 

Residential real estate

  2,794  

Appraisals of collateral value

Adjustment for comparable sales

 

-15% to +39% (5%)

 

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%)

 

 

34
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 30, 20222023 the fair value measurements presented are consistent with Topic 820, Fair Value Measurement, in which fair value represents exit price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 20222023 and December 31, 20212022: 

 

     

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

          

September 30, 2023

           

Financial assets:

     

Cash and due from banks

 $333,844  $333,844  $333,844  $-  $-  $253,298  $253,298  $253,298  $-  $- 

Securities available-for-sale

 623,629  623,629  134  616,118  7,377  581,867  581,867  1,362  573,488  7,017 

Restricted investments in bank stocks

 45,324 n/a n/a n/a n/a  49,387 n/a n/a  n/a n/a 

Equity securities

 15,563  15,563  9,701  5,862  -  17,677  17,677  9,394  8,283  - 

Net loans

 7,808,733  7,524,799  -  -  7,524,799  8,092,879  7,725,439  -  -  7,725,439 

Derivatives

 54,041  54,041  -  54,041  - 

Derivatives - interest rate contracts

 61,972  61,972  -  61,972  - 

Accrued interest receivable

 38,940  38,940  -  3,219  35,721  46,795  46,795  -  5,160  41,635 
     

Financial liabilities:

     

Noninterest-bearing deposits

 1,665,658  1,665,658  1,665,658  -  -  1,224,125  1,224,125  1,224,125  -  - 

Interest-bearing deposits

 5,644,852  5,599,170  3,723,617  1,875,553  -  6,214,370  6,181,082  3,692,159  2,488,923  - 

Borrowings

 829,953  826,280  -  826,280  -  887,590  884,745  -  884,745  - 

Subordinated debentures

 153,179  153,170  -  153,170  -  79,313  77,588  -  77,588  - 

Accrued interest payable

 5,733  5,733  -  5,733  -  9,800  9,800  -  9,800  - 
     

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  - 

 

35
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 September 30,

  

Nine Months Ended September 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

 $4,793  $1,178  $13,013  $524 

Borrowings and deposits expense

  (343)  90   (159)  434 

Income tax (expense) benefit

  (1,442)  (343)  (3,915)  (159)

Income tax (expense) benefit

 $835  $(238) $365  $(1,109)  $3,351  $835  $9,098  $365  
           

Amortization of pension plan net actuarial losses

 $(17) $(75) $(49) $(225)

Other components of net periodic pension expense

 $(74) $(17) $(222) $(49)

Other components of net periodic pension expense

  5   21   14   63 

Income tax benefit

  22   5   67   14 

Income tax benefit

 $(12) $(54) $(35) $(162)  $(52) $(12) $(155) $(35) 

Total reclassification

 $823  $(292) $330  $(1,124)  $3,299  $823  $8,943  $330  

 

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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

 

Accumulated other comprehensive loss as of September 30, 20222023 and December 31, 20212022 consisted of the following:

 

 

September 30, 2022

  

December 31, 2021

  

September 30, 2023

  

December 31, 2022

 
 

(dollars in thousands)

  

(dollars in thousands)

 

Investment securities available-for-sale, net of tax

 $(67,734) $(484) $(87,748) $(61,775)

Cash flow hedge, net of tax

 32,913  2,406  37,128  32,360 

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

  (1,671)  (3,326)  (2,794)  (2,949)

Total

 $(36,492) $(1,404) $(53,414) $(32,364)

 

 

Note 8.  Stock-based Compensation 

 

The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 20172017. . The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of September 30, 20222023. On May 30, 2023, the Company's stockholders approved an amendment to the Plan that increased 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 sharedeferred stock units or performance units. Shares available for grant and issuance under the Plan as of September 30, 20222023 were approximately 200,300.469,501. The Company intends to issue all shares under the Plan in the form of newly issued shares.

 

Restricted stock, options and restricteddeferred 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 restricteddeferred 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 restricteddeferred stock units do not.

 

All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are recorded as incurred. Stock-based compensation expense for the three and nine months ended September 30, 20222023 was $1.2$1.3 million and $3.5$3.6 million, respectively.  Stock-based compensation expense for the three and nine months ended September 30, 20212022 was $1.2 million and $3.2$3.5 million, respectively.

 

Activity under the Company’s options for the nine months ended September 30, 20222023 was as follows:

 

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

Outstanding as of December 31, 2021

  23,766  $9.94         

Granted

  -   -         

Exercised

  (15,086)  8.21         

Forfeited/cancelled/expired

  -   -         

Outstanding as of September 30, 2022

  8,680   12.95   0.54  $87,691 

Exercisable as of September 30, 2022

  8,680  $12.95   -  $- 
  

Number of Stock Options

  

Weighted-Average Exercise Price

 

Outstanding as of December 31, 2022

  8,680  $12.95 

Exercised

  (7,388)  12.73 

Forfeited/cancelled/expired

  (1,292)  14.24 

Outstanding as of September 30, 2023

  -   - 

Exercisable as of September 30, 2023

  -  $- 

 

The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on September 30, 2022 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2022. This amount changes based on the fair market value of the Company’s stock.

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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 months ended September 30, 20222023 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  (47,067) 27.59 

Forfeited/cancelled/expired

  (374) 30.99   (9,090) 21.76 

Nonvested as of September 30, 2022

  93,047  $25.43 

Nonvested as of September 30, 2023

  122,921  $18.41 

 

As of September 30, 20222023, there was approximately $1.3$1.1 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 1.11.2 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 September 30, 2023

  164,231   233,087  $23.06 

 

As of September 30, 20222023, 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 30, 20222023, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 221,541.233,087. During the nine months ended September 30, 20222023, 49,604116,192 shares vested. A total of 27,25463,839 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of performance units during the nine months ended September 30, 20222023 were 22,35052,353 shares. As of September 30, 20222023, compensation cost of approximately $1.5$1.8 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.81.9 years.

 

A summary of the status of unearned restricteddeferred stock units and the changes in restricteddeferred 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  18.97 

Vested shares

  (69,225) 16.13   (78,544) 19.71 

Unearned as of September 30, 2022

  120,035  $23.84 

Unearned as of September 30, 2023

  188,348  $21.77 

 

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 months ended September 30, 20222023, 69,22578,544 shares vested. A total of 37,84242,538 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of restricteddeferred stock units during the nine months ended September 30, 20222023 were 31,38336,006 shares. As of September 30, 20222023, compensation cost of approximately $1.5$2.3 million related to non-vested restricteddeferred stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.5 years.

 

38
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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

 

September 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   17 

Other components of net periodic pension expense

Total periodic pension income

 $(142) $(67)  $(25) $(142) 

 

 

Nine Months Ended

 

Affected Line Item in the Consolidated

 

Nine Months Ended

 

Affected Line Item in the Consolidated

 

September 30,

 

Statements of Income

 

September 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

 330  233 

Other components of net periodic pension expense

Expected return on plan assets

 (711) (639)

Other components of net periodic pension expense

 (628) (711)

Other components of net periodic pension expense

Net amortization

  49   225 

Other components of net periodic pension expense

  222   49 

Other components of net periodic pension expense

Total periodic pension income

 $(429) $(201)  $(76) $(429) 

 

Contributions

 

The Company did not contribute to the Pension Trust during the nine months ended September 30, 20222023. The Company does not plan on contributing amounts to the Pension Trust for the remainder of 20222023.. 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

  

September 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% $835,000  5.60% $830,000  4.42%

1 year through less than 2 years

 -  n/a  50,000  1.84% 25,000 1.00 - - 

2 years through less than 3 years

 25,000  1.00% -  n/a  2,050 2.23 25,000 1.00 

3 years through less than 4 years

 2,050  2.23% 25,000  1.00% -  -  2,050  2.23 

4 years through 5 years

 -  n/a  2,050  2.23% 25,301 4.16 326 2.85 

After 5 years

  667  2.91%  714  2.91%  302  2.96   326  2.96 

FHLB borrowings - gross

 830,046  2.93% 468,313  0.73% 887,653  5.42% 857,702  4.32%

Fair value discount

  (93)     (120)     (63)     (80)   

Total FHLB borrowings

 $829,953     $468,193     $887,590     $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 30, 20222023 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 30, 20222023 the Company had remaining borrowing capacity of approximately $0.6$1.4 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 ownedwholly-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 subordinatedsubordinate debentures iswas previously three-month LIBOR plus 2.85% and re-pricesreprices quarterly. 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 converted effective June 30, 2023 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. Therefore, 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%. The rate as of September 30, 20222023 was 5.63%8.48%. 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 30, 20222023 and December 31, 20212022.

 

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

As of September 30, 2023

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 CME Term SOFR + 285 Basis Points + 26.161 Basis Points

1/23/2034

1/23/2009

As of December 31, 2022

Issuance DateSecurities IssuedLiquidation ValueCoupon RateMaturityRedeemable by Issuer Beginning

12/19/2003

$5,000,000

$1,000 per Capital Security

Floating 3-month CME Term SOFR + 285 Basis Points

1/23/2034

1/23/2009

 

DuringOn 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 up 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.

 

DuringOn 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 ofNotes”). 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 bearbore interest at a fixed rate of 5.20% per year, from and including January 17, 2018that resets quarterly to but excluding February 1, 2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, thean interest rate will reset quarterly to a levelper annum equal to the then current three-month LIBOR rate plus 284 basis points.

Notepoints (2.84%) payable quarterly in arrears. Interest on the 12.2018 Preferred Stock

On Notes was to be paid on February 1, May 1, August 19, 20211, ,and November 1, of each year to but excluding the Company completed an underwritten public offering of 115,000 shares, or $115.0 millionstated maturity date, unless in aggregate liquidation preference, of its depositary shares, each representing a 1/40th interestany case previously redeemed. The 2018 Notes were redeemed 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.full on February 1, 2023.

 

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Table of Contents
 
 

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

 

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of September 30, 20222023 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 and instability in the Middle East, 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’sOur accounting policies are fundamentalintegral to understanding Management’sthe 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 conditionFinancial Condition and resultsResults 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.

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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 30, 20222023 was $27.4$19.9 million compared to $32.1$27.4 million for the comparable three-month period ended September 30, 2021.2022. The Company’s diluted earnings per share were $0.70$0.51 for the three months ended September 30, 20222023 as compared with diluted earnings per share of $0.80$0.70 for the comparable three-month period ended September 30, 2021.2022. The $4.7$7.5 million decrease in net income available to common stockholders and $0.10$0.19 decrease in diluted earnings per share versus the three months ended September 30  2021third quarter of 2022 were primarily due to an $8.9a $15.8 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$3.6 million increase in noninterest expenses, partially offset by a $8.5 million decrease in provision for credit losses, a $3.2 million decrease in income tax expense.expense and a $0.2 million increase in noninterest income.

 

Net income available to common stockholders for the nine months ended September 30, 20222023 was $88.1$63.2 million compared to $97.3$88.1 million for the comparable nine-month period ended September 30, 2021.2022. The Company’s diluted earnings per share were $2.23$1.61 for the nine months ended September 30, 20222023 as compared with diluted earnings per share of $2.43$2.23 for the comparable nine-month period ended September 30, 2021.2022. The $9.2$24.9 million decrease in net income available to common stockholders and $0.20$0.62 decrease in diluted earnings per share versus the nine months ended September 30, 20212022 were due to a $20.8$30.8 million decrease in net interest income and a $13.0 million increase toin noninterest expenses, partially offset by an $8.9 million decrease in provision for credit losses, a $12.1$9.9 million decrease in income tax expense and a $0.1 million increase in noninterest expenses, $4.5 million in preferred dividends which were not paid in the 2021 period, a $2.2 million decrease in noninterest income, and a $1.3 million increase in income tax expense, partially offset by a $31.7 million increase in net interest income.

 

Net Interest Income and Margin

 

Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid foron 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 30, 2022 increased2023 decreased by $10.1$15.6 million, or 14.7%19.8%, from the comparable three-month period ended September 30, 2021.2022. The increasedecrease from the three months ended September 30, 20212022 resulted primarily from a 16.1%250 basis-point increase in average interest earning assets, primarily loans, and wasrate paid on interest-bearing deposits, partially offset by an 88 basis-point increase rate earned on total interest-earning assets and a 592 basis-point contraction of the net interest margin to 3.68%2.76% from 3.73%3.68%. 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 months ended September 30, 2022 increased2023 decreased by $32.1$30.2 million, or 16.6%13.4%, from the comparable nine-month period ended September 30, 2021.2022. The increasedecrease from the nine months ended September 30, 20212022 resulted primarily from a 12.5%254 basis-point increase in average interest earningrate paid on interest-bearing deposits, partially offset by a 92 basis increase in rate earned on total interest-earning assets primarily loans, and a 1391 basis-point wideningcontraction of the net interest margin to 3.76%2.85% from 3.63%3.76%. 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 and nine months ended September 30, 20222023 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 September 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% $723,408  $5,566  3.05% $740,394  $5,434  2.91%

Total loans (2) (3) (4)

 7,582,371  91,132  4.77  6,455,952  75,434  4.64  8,169,310  115,954  5.63  7,582,371  91,132  4.77 

Federal funds sold and interest-bearing with banks

 135,331  665  1.95  387,155  151  0.15  158,155  2,110  5.29  135,331  665  1.95 

Restricted investment in bank stocks

 42,220  438  4.12  19,105  245  5.09   38,558   907  9.33   42,220   438  4.12 

Total interest-earning assets

 8,500,316  97,669  4.56  7,321,771  77,542  4.20   9,089,431   124,537  5.44   8,500,316   97,669  4.56 

Noninterest-earning assets:

  

Allowance for credit losses

 (84,307)      (78,327)      (89,966)      (84,307)     

Other noninterest-earning assets

 614,580        594,553         626,160        614,580      

Total assets

$9,030,589       $7,837,997        $9,625,625       $9,030,589      
  

Interest-bearing liabilities:

  

Interest-bearing deposits:

  

Time deposits

$1,525,076  5,396  1.40 $1,252,818  2,983  0.94  $2,606,122  25,437  3.87  $1,525,076  5,396  1.40 

Other interest-bearing deposits

 3,686,520  7,903  0.85  3,582,261  2,495  0.28   3,723,561   30,606  3.26   3,686,520   7,903  0.85 

Total interest-bearing deposits

 5,211,596  13,299  1.01  4,835,079  5,478  0.45  6,329,683  56,043  3.51  5,211,596  13,299  1.01 
  

Borrowings

 772,561  3,297  1.69  276,183  1,105  1.59  651,112  3,950  2.41  772,561  3,297  1.69 

Subordinated debentures

 153,129  2,196  5.91  152,825  2,168  5.63  79,230  1,312  6.57  153,129  2,196  5.69 

Finance lease

 1,813  27  6.02  2,018  30  5.90   1,603   24  5.94   1,813   27  5.91 

Total interest-bearing liabilities

 6,139,099  18,819  1.22  5,266,105  8,781  0.66  7,061,628  61,329  3.45  6,139,099  18,819  1.22 
  

Demand deposits

 1,682,135       1,495,456       1,275,325       1,682,135      

Other liabilities

 48,907        44,245         86,025        48,907      

Total noninterest-bearing liabilities

 1,731,042       1,539,701       1,361,350       1,731,042      

Stockholders’ equity

 1,160,448        1,032,191         1,202,647        1,160,448      

Total liabilities and stockholders’ equity

$9,030,589       $7,837,997        $9,625,625       $9,030,589      

Net interest income (tax-equivalent basis)

    78,850       68,761        63,208       78,850    

Net interest spread (5)

      3.34%      3.54%      1.99%      3.34%

Net interest margin (6)

      3.68%      3.73%      2.76%      3.68%

Tax-equivalent adjustment

    (689)       (516)        (851)       (689)   

Net interest income

   $78,161       $68,245        $62,357       $78,161    

 

(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.  

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Nine Months Ended September 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)

 $727,516  $16,784   3.08% $632,736  $11,915   2.52%

Total loans (2) (3) (4)

  8,150,047   334,810   5.49   7,159,107   249,049   4.65 

Federal funds sold and interest-bearing with banks

  242,262   9,141   5.04   200,937   1,098   0.73 

Restricted investment in bank stocks

  43,757   2,750   8.40   32,997   943   3.82 

Total interest-earning assets

  9,163,582   363,485   5.30   8,025,777   263,005   4.38 

Noninterest-earning assets:

                        

Allowance for credit losses

  (89,206)          (81,711)        

Other noninterest-earning assets

  622,750           600,171         

Total assets

 $9,697,126          $8,544,237         
                         

Interest-bearing liabilities:

                        

Interest-bearing deposits:

                        

Time deposits

 $2,541,620   66,482   3.50  $1,252,503   9,729   1.04 

Other interest-bearing deposits

  3,641,362   80,362   2.95   3,751,266   14,289   0.51 

Total interest-bearing deposits

  6,182,982   146,844   3.18   5,003,769   24,018   0.64 
                         

Borrowings

  781,831   15,986   2.73   576,728   6,522   1.51 

Subordinated debentures

  87,234   4,921   7.54   153,054   6,543   5.72 

Finance lease

  1,658   73   5.89   1,865   84   6.02 

Total interest-bearing liabilities

  7,053,705   167,824   3.18   5,735,416   37,167   0.87 
                         

Demand deposits

  1,360,120           1,612,713         

Other liabilities

  86,291           50,834         

Total noninterest-bearing liabilities

  1,446,411           1,663,547         

Stockholders’ equity

  1,197,010           1,145,274         

Total liabilities and stockholders’ equity

 $9,697,126          $8,544,237         

Net interest income (tax-equivalent basis)

      195,661           225,838     

Net interest spread (5)

          2.12%          3.51%

Net interest margin (6)

          2.85%          3.76%

Tax-equivalent adjustment

      (2,377)          (1,728)    

Net interest income

     $193,284          $224,110     

(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.  

 

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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.

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Noninterest Income

 

Noninterest income totaled $3.6 million for the three months ended September 30, 2023, compared with $3.3 million for the three months ended September 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 30, 20222023 and September 30, 20212022 were net losses on equity securities of $0.4$0.3 million and $0.1$0.4 million, respectively. Excluding net losses on equity securities, adjustedthese items, noninterest income was $3.8increased $0.1 million and $4.1 million forwhen compared to the three months ended September 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, 2021increase was primarily dueattributable to a decreasean increase in net gains on sale of loans held-for-sale, primarily Small Business Administration (“SBA”) loans of $0.8 million, partially offset by increases in deposit, loan and other income of $0.3$0.4 million and an increase in bank owned life insurance ("BOLI") income of $0.2$0.1 million, partially offset by a decrease in deposit, loan, and other income of $0.4 million.

 

Noninterest income totaled $9.8 million for the nine months ended September 30, 2023, compared with $9.7 million for the nine months ended September 30, 2022, compared with $11.9 million for the nine months ended September 30, 2021.2022. Included in noninterest income were net losses on equity securities of $1.4$0.7 million and $0.2$1.4 million for the nine months ended September 30, 2023 and September 30, 2022, and 2021, respectively. Additionally, there was aExcluding these items, noninterest income decreased $0.7 million gain on the sale of branches and $0.2 million gain on sale/redemption of investment securities duringwhen compared to the nine months ended September 30, 2021. Excluding the aforementioned items, noninterest income was $11.2 million and $11.3 million for the nine months ended September 30, 2022 and 2021, respectively.2022. The $0.1 million decrease in noninterest income excluding the items discussed above for the nine months ended September 30, 2022 versus the nine months ended September 30, 2021 was primarily dueattributable to a 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$1.0 million and a decrease in net gains on sale of loans held-for-sale, primarily SBA, of $0.3 million, partially offset by an increase in BOLI income of $0.5$0.6 million.

 

Noninterest Expenses

 

Noninterest expenses totaled $35.8 million for the three months ended September 30, 2023, compared with $32.1 million for the three months ended September 30, 2022,2022. Noninterest expenses increased by $3.6 million when compared with $28.2 million forto the three months ended September 30, 2021.The2022. The increase in noninterest expenses of $4.0 million from the three months ended September 30, 2021 was primarily attributable to increasesan increase in salaries and employee benefits of $4.2 million. The increase in salaries and employee benefits$1.3 million, which was attributable to increased staffnew hires, an increase in bothFDIC insurance expense of $1.1 million, which was attributable to balance sheet growth and a two-basis point increase in the revenueBank’s initial base rate, an increase in information technology and back-officecommunication expenses of the Bank, base salary increases,$0.7 million, which was primarily attributable to additional investments in technology, equipment, and incentive compensation accruals.software, an increase in other expenses of $0.4 million, an increase in occupancy and equipment of $0.1 million, an increase in marketing and advertising expenses of $0.1 million and an increase in other components of net periodic pension expense of $0.1 million, partially offset by a decrease in professional and consulting of $0.1 million and a decrease in amortization of core deposit intangibles of $0.1 million.

 

Noninterest expenses totaled $106.1 million for the nine months ended September 30, 2023, compared to $93.1 million for the nine months ended September 30, 2022, compared to $80.9 million for the nine months ended September 30, 2021. Included in noninterest expenses for the nine months ended September 30, 2022 was an increase in acquisition price related to the BoeFly acquisition of $1.5 million. Excluding this item, noninterest2022. Noninterest expenses increased $10.6by $13.0 million when compared to the nine months ended September 30, 2021.2022. The increase was primarily attributable to increasesan increase in salaries and employee benefits of $11.7$6.8 million, which was attributable to new hires, an increase in bothFDIC insurance expense of $2.4 million, which was attributable to balance sheet growth and a two-basis point increase in the revenueBank’s initial base rate, an increase in information technology and back-office areas, base-salary increases,communication expenses of $1.8 million, which was primarily attributable to additional investments in technology, equipment, and bonus accruals. Also, contributing to thesoftware, an increase were increases in other expenses of $0.8$2.0 million, information technologywhich was primarily attributable to expenses incurred related to derivatives cash collateral during the nine months ended September 30, 2023, an increase in occupancy and communicationsequipment of $0.2$0.9 million, an increase in marketing and advertising expenses of $0.4 million and marketing and advertisingan increase in other components of net periodic pension expense of $0.4 million, partially offset by decreasesa decrease in occupancyBoeFly acquisition expense of $1.6$1.5 million professional and consulting of $0.4 million anda decrease in amortization of core deposit intangibles of $0.2 million.

 

Income Taxes

 

Income tax expense was $7.2 million for the three months ended September 30, 2023, compared to $10.4 million for the three months ended September 30, 2022, compared to $10.9 million for the three months ended September 30, 2021.2022. The decrease in income tax expense was the result of lower income before taxes.income tax expense. The effective tax rate for the three months ended September 30, 20222023 and September 30, 20212022 was 26.5%25.2% and 25.3%26.5%, respectively. The higherdecrease in the effective tax rate during the three months ended September 30, 2022 when compared to the three months ended September 30, 2021 resulted from a2022 is largely attributable to lower proportion of income from non-taxable sources. taxable income.

 

Income tax expense was $23.7 million for the nine months ended September 30, 2023, compared to $33.7 million for the nine months ended September 30, 2022, compared to $32.4 million for the nine months ended September 30, 2021.2022. The effective tax rate for the nine months ended September 30, 20222023 and September 30, 2021 was 26.7% and 25.0%, respectively. The effective tax rate for the nine months ended of September 30, 2022 was higher26.0% and 26.7%, respectively. The decrease in the effective tax rate when compared to the nine months ended September 30, 2021 due2022 is largely attributable to a lower proportion of income from non-taxable sources.taxable income.

 

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Financial Condition

 

Loan Portfolio

 

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

 

 

September 30, 2022

  

December 31, 2021

  

Amount Increase/

  

September 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  $1,475,571  18.0  $1,472,734  18.2% $2,837 

Commercial real estate

 5,666,848  71.6% 4,741,590  69.3% 925,258  5,837,539  71.3  5,795,228  71.5  42,311 

Commercial construction

 537,323  6.8% 540,178  7.9% (2,855) 622,748  7.6  574,139  7.1  48,609 

Residential real estate

 256,085  3.2% 255,269  3.7% 816  251,416  3.1  264,748  3.3  (13,332)

Consumer

  1,030   0.1%  1,886   0.1%  (856)  936   -   2,312   -   (1,376)

Gross loans

 $7,910,013   100.0% $6,838,351   100.0% $1,071,662  $8,188,210   100.0% $8,109,161   100.0% $79,049 

 

As of September 30, 2022,2023, gross loans totaled $7.9$8.2 billion, an increase of $1.1 billion$79.0  million or 15.7%1.0%, 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 30, 2022,2023, the Company’s allowance for credit losses for loans was $91.7$88.2 million, an increasea decrease of $12.9$2.3 million from $78.8$90.5 million atas of December 31, 2021.2022. The increasedecrease was primarily attributable to $8.0 million in net charge-offs, offset by a $5.7 million provision for credit losses.

  The 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.

The provision for (reversal of) credit losses, which includes a provision for unfunded commitments, for the three and nine months ended September 30, 2023 and September 30, 2022 was $1.5 million and $5.5 million, respectively, compared to $10.0 million and $14.5 million, respectively, compared to $1.1 million and $(6.3) million, for the three and nine months ended September 30, 2021,2022, respectively. The increasedecrease in the provision for credit losses when compared to the comparable prior-year periods reflected strong organic loan growth andin 2022 was mainly attributable to changes in forecasted macroeconomic conditions. The prior year provision

  There were $2.5 million and $8.1 million in net charge-offs for the three and nine months ended September 30, 2021, was primarily the result of  an improved macro-economic forecast as of September 30, 2021 when2023, compared to January 1, 2021, the day the Company adopted CECL.

There werewith $0.4 million and $0.9 million in net charge-offs for the three and nine months ended September 30, 2022, respectively, compared with $1.6 million and $1.8 millionrespectively. The increase in net charge-offs for the three andended September 30, 2023 when compared to the comparable prior period resulted from the partial charge-off of one commercial loan that we previously reserved for.  The increase in net charge-offs for the nine months ended September 30, 2021, respectively.2023 when compared to the comparable prior period resulted from the aforementioned partial charge-off during the third quarter of 2023, 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%1.08% as of September 30, 20222023 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 20222023 and 20212022 reflects the credit quality within the loan portfolio, loan growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the ACL as of September 30, 20222023 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.

 

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

 

 

Three Months Ended

  

Three Months Ended

 
 

September 30,

  

September 30,

 
 

2022

 

2021

  

2023

 

2022

 
 

(dollars in thousands)

  

(dollars in thousands)

 

Average loans receivable

 $7,580,176  $6,449,726  $8,169,139  $7,580,176 

Analysis of the ACL:

  

Balance - beginning of quarter

 $82,739  $78,684  $89,205  $82,739 

Charge-offs:

  

Commercial

 (410) (254) (2,250) (410)

Commercial real estate

 - (1,473) (237) - 

Residential real estate

 - - 

Consumer

 (3) -  - (3)

Total charge-offs

  (413)  (1,727)  (2,487)  (413)

Recoveries:

  

Commercial

 53  1  -  53 

Commercial real estate

  -   85 

Residential real estate

 - 20  1 - 

Consumer

  -   7   7   - 

Total recoveries

  53   113   8   53 

Net charge-offs

 (360) (1,614) (2,479) (360)

Provision for credit losses - loans

  9,338   916 

Provision for credit losses – loans

  1,504   9,338 

Balance - end of period

 $91,717  $77,986  $88,230  $91,717 
  

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

 0.02% 0.10% 0.12% 0.02%

Loans receivable

 $7,900,450  $6,576,439  $8,181,109  $7,900,450 

ACL as a percentage of loans receivable

 1.16% 1.19% 1.08% 1.16%

 

 

Nine Months Ended

  

Nine Months Ended

 
 

September 30,

  

September 30,

 
 

2022

 

2021

  

2023

  

2022

 
 

(dollars in thousands)

  

(dollars in thousands)

 

Average loans receivable

 $7,155,209  $6,314,433  $8,142,712  $7,155,209 

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) (6,117) (751)

Commercial real estate

 (226) (1,628) (1,954) (226)

Residential real estate

 (9) (7) (18) (9)

Consumer

  (3)  -   -   (3)

Total charge-offs

 (989) (1,939) (8,089) (989)

Recoveries:

  

Commercial

 54  74  9  54 

Commercial real estate

 - 85 

Residential real estate

 35 20  69  35 

Consumer

 28 9  7 28 

Total recoveries

  117   188   85   117 

Net charge-offs

 (872) (1,751) (8,004) (872)

Provision for (reversal of) credit losses - loans

  13,816   (6,046)

Provision for credit losses – loans

  5,721   13,816 

Balance - end of period

 $91,717  $77,986  $88,230  $91,717 
  

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

 0.02% 0.04% 0.13% 0.02%

Loans receivable

 $7,900,450  $6,576,439  $8,181,109  $7,900,450 

ACL as a percentage of loans receivable

 1.16% 1.19% 1.08% 1.16%

 

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Asset Quality

 

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that includeincludes 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

  

September 30, 2023

  

December 31, 2022

 
 

(dollars in thousands)

  

(dollars in thousands)

 

Nonaccrual loans

 $57,447  $61,700  $56,059  $44,454 

OREO

  264   -   -   264 

Total nonperforming assets (1)

 $57,711  $61,700  $56,059  $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% 0.69% 0.55%

Nonperforming assets to total assets

 0.61% 0.76% 0.58% 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 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 30, 2022,2023, average securities, increased $280.8on an amortized cost basis, decreased by $17.0 million to approximately $723.4 million, or 8.0% of average total interest-earning assets, from approximately $740.4 million, or 8.7% of average total interest-earning assets, from approximately $459.6 million, or 6.3%as of average interest-earning assets, compared to September 30, 2021.2022.

 

As of September 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$87.7 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$10.1 million increase in deferred tax assets, attributable to the decline in fair value on securities available-for-sale since December 31, 2021.2022. 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 securities as of September 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 30, 20222023 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 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 8.20%, while a 100 basis-point instantaneous decrease in interest rates would increase net interest income by 4.98%. 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 increasedecrease 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,September 30, 2023, we estimated that over the next one-year periodthree years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increasedecrease our net interest income by 3.35%5.89%, while a 100 basis-point instantaneous decrease in interest rates would decreaseincrease net interest income by 5.64%4.68%.

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 increasedecrease 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

49
Table of December 31, 2021, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 9.77%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 10.41%.

Contents

 

An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of September 30, 2022,2023, would decrease by 5.54%16.49% with an instantaneous rate shock of up 200 basis points, and declineincrease by 0.95%8.66% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2021,2022, would increasedecrease by 0.24%10.51% with an instantaneous rate shock of up 200 basis points, and declinedecrease by 5.20%1.13% with an instantaneous rate shock of down 100 basis points.basis-points.

 

50
Table

The change in interest rate sensitivity was impacted by changes in overall market interest rates, updates to certain model assumptions, changes in short and intermediate-term fixed rate funding and 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 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)  $817,231  (270,740) (24.88) +300  $228,618  $(33,287) (12.71)
+200  1,297,091  (76,115) (5.54) +200  315,615  868  0.28   908,543  (179,428) (16.49) +200  240,419  (21,486) (8.20)
+100  1,353,613  (19,593) (1.43) +100  317,301  2,554  0.81   1,009,054  (78,917) (7.25) +100  252,499  (9,406) (3.59)
0  1,373,206  -  -  0  314,747  -  -   1,087,971  -  -  0  261,905  -  - 
-100  1,360,103  (13,103) (0.95) -100  310,005  (4,742) (1.51)  1,182,198  94,227  8.66  -100  274,945  13,040  4.98 
-200 1,285,872 (87,334) (6.36) -200 297,606 (17,141) (5.45) 1,218,810 130,839 12.03 -200 278,365 16,460 6.28 
-300 1,251,200 163,229 15.00 -300 281,872 19,967 7.62 

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 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 30, 2022,2023, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $796.9$515.6 million, which represented 8.4%5.3% of total assets and 9.8%6.2% 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 September 30, 2023, not included in the above liquid assets were securities with a market value of $231.6 million which were pledged to either the Federal Reserve Bank’s Bank Term Funding Program (“BTFP”), or the Federal Home Loan Bank, which support aggregate unutilized borrowing capacity of $262.8 million as of September 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 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 and had the ability to borrow $1.5 billion as of September 30, 2023. In addition, as of September 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 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$4.8 billion net of $1.4$1.5 billion in outstanding borrowings and letters of credit. As of September 30, 2022,2023, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.

 

Cash and cash equivalents totaled $333.8$253.3 million as of September 30, 2022,2023, increasing by $68.3$15.0 million from $265.5$268.3 million as of December 31, 2021.2022. Operating activities provided $94.9$64.6 million in net cash. Investing activities used $1.3 billion$75.7 million in net cash, primarily reflecting an increase in loans and investment securities. Financing activities provided $1.3 billionused $3.9 million in net cash, primarily reflecting a decrease of $2.4 billion in repayment of borrowings and $75 million in repayment of subordinated debt, partially offset by $2.4 billion in advances of FHLB borrowings and an increase in deposits of $978.2 million and an increase in net borrowings of $361.7$82.1 million.

 

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Deposits

 

Total deposits increased by $977.6$81.9 million, or 15.4%1.1%, to $7.3$7.4 billion as of September 30, 20222023 from December 31, 2021.2022. The increase was primarily due to increases in noninterest bearing demand deposits, interest-bearing and NOW deposits 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/

  

September 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  $1,224,125  16.5% $1,501,614  20.4% $(277,489)

Demand, interest-bearing and NOW

 3,335,187  45.6  3,127,350  49.4  207,837  3,318,092  44.6  3,085,613  41.9  232,479 

Savings

 388,430  5.3  438,445  6.9  (50,015) 374,067  5.0  375,205  5.1  (1,138)

Time

  1,921,235   26.3   1,150,109   18.2   771,126   2,522,211   33.9   2,394,190   32.6   128,021 

Total deposits

 $7,310,510   100.0% $6,332,953   100.0% $977,557  $7,438,495   100.0% $7,356,622   100.0% $81,873 

 

Subordinated Debentures

 

During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-ownedwholly owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The 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 monthwas three-month LIBOR plus 2.85% and re-prices quarterly. 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 converted as of June 30, 2023 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%. The rate as of September 30, 20222023 was 5.63%8.48%.

 

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 up to, but excluding, JuneSeptember 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on JuneSeptember 15 and December 15 of each year, commencing December 15, 2020. From and including JuneSeptember 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 arewere non-callable for five years, havehad a stated maturity of February 1, 2028 and bearbore interest at a fixed rate of 5.20% per year, from and including January 17, 2018 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 30, 2022,2023, an increase of $24.1$9 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,retained earnings of $44 million, partially offset by a decreasean increase in accumulated other comprehensive income, reflecting the after-tax decline in the fair valuelosses of investment securities net of unrealized hedge gains recorded in other assets,$21 million and an increase in treasury stock.stock of $15 million. The increase in accumulated other comprehensive losses during 2023 resulted from higher interest rates. As of September 30, 2022,2023, the Company’s tangible common equity ratio and tangible book value per share were 8.87%9.11% and $20.93, respectively. As$22.34, respectively, which improved from 9.04% and $21.71, respectively, as of December 31, 2021, the tangible common equity ratio and tangible book value per share were 10.06% and $20.12, respectively.2022. Total goodwill and other intangible assets were approximately $216.1 million and $217.4$214.6 million as of September 30, 20222023, and $215.7 million as of December 31, 2021, respectively.  2022.

 

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

  

September 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  $1,077,227  $1,067,824 

Less: intangible assets

  (216,093)  (217,369)  (214,594)  (215,684)

Tangible common stockholders’ equity

 $821,275  $795,916  $862,633  $852,140 
  

Total assets

 $9,478,252  $8,129,480  $9,678,885  $9,644,948 

Less: intangible assets

  (216,093)  (217,369)  (214,594)  (215,684)

Tangible assets

 $9,262,159  $7,912,111  $9,464,291  $9,429,264 
  

Common stock outstanding at period end

 39,243,123  39,568,090  38,621,970  39,243,123 
  

Tangible common equity ratio (1)

 8.87% 10.06% 9.11% 9.04%
  

Book value per common share

 $26.43  $25.61  $27.89  $27.21 

Less: intangible assets

  5.50   5.49   5.55   5.50 

Tangible book value per common share

 $20.93  $20.12  $22.34  $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 30, 20222023 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 September 30, 2023

 

(dollars in thousands)

 

Tier 1 leverage capital

 $970,240  10.95% $354,560  4.00%  NA  NA  $1,031,973  10.86% $380,234  4.00%  NA  NA 

CET I risk-based ratio

 854,158  10.20  376,969  4.50  NA  NA  915,891  10.64  387,539  4.50  NA  NA 

Tier 1 risk-based capital

 970,240  11.58  502,626  6.00  NA  NA  1,031,973  11.98  516,719  6.00  NA  NA 

Total risk-based capital

 1,210,745  14.45  670,168  8.00  NA  NA  1,197,285  13.90  688,959  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 September 30, 2023

 

(dollars in thousands)

 

Tier 1 leverage capital

 $966,014  10.91% $354,314  4.00% 442,892  5.00% $1,066,568  11.23% $379,965  4.00% 474,956  5.00%

CET I risk-based ratio

 966,014  11.53  376,962  4.50  544,500  6.50  1,066,568  12.38  387,532  4.50  559,769  6.50 

Tier 1 risk-based capital

 966,014  11.53  502,616  6.00  670,154  8.00  1,066,568  12.38  516,710  6.00  688,946  8.00 

Total risk-based capital

 1,088,769  13.00  670,154  8.00  837,693  10.00  1,156,880  13.43  688,946  8.00  861,183  10.00 

 

As of September 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 ITotal Risk Based Capital Ratio which was 3.08%3.40% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 2.50%2.93% 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 officerChief Executive Officer and chief financial officer,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 officerChief Executive Officer and chief financial officerChief 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 officerChief Executive Officer and chief financial officer,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 30, 2022,2023, the Company did not repurchase anyrepurchased a total of 316,789 shares. As of  September 30, 2022,2023, shares remaining for repurchase under the program were 1,827,640.1,025,688.

The following table details share repurchases for the three months ended September 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

 

July 1, 2023 - July 31, 2023

  -   n/a   -   1,342,477 

August 1, 2023 - August 31, 2023

  217,989   19.68   217,989   1,124,488 

September 1, 2023 - September 30, 2023

  98,800   18.74   316,789   1,025,688 

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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

 

 
10.1Separation and Release Agreement by and between ConnectOne Bancorp, Inc., ConnectOne Bank and Christopher J. Ewing dated September 29, 2023. (1) 

31.1

 

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

31.2

 

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

32.1

 

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

32.2

 

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

101.INS

 

Inline XBRL Instance Document

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

 

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

              

(1) Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on September 29, 2023.

 

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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 4, 20223, 2023

  

Date: November 4, 20223, 2023

 

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