Equibles

10-Q

ConnectOne Bancorp, Inc. (CNOB)

10-Q 2023-11-03 For: 2023-09-30
View Original
Added on April 06, 2026

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, 2023

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<br> <br>Incorporation or Organization) (IRS Employer<br> <br>Identification No.)

301 Sylvan Avenue

Englewood Cliffs, New Jersey 07632

(Address of Principal Executive Offices) (Zip Code)

201-816-8900

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

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

Large accelerated filer   ☒ Accelerated filer  ☐ Non-accelerated filer  ☐ Smaller reporting company  ☐<br> <br>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: 38,606,370 shares
(Title of Class) (Outstanding as of November 3, 2023)

Table of Contents

Table of Contents

Page
PART I –FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Statements of Condition as ofSeptember 30, 2023(unaudited) and December 31, 2022 3
Consolidated Statements of Income for thethree and nine months ended September 30, 2023 and 2022 (unaudited) 4
Consolidated Statements of Comprehensive Income for thethree and nine months ended September 30, 2023 and 2022 (unaudited) 5
Consolidated Statements of Changes in Stockholders’ Equity for thethree and nine months ended September 30, 2023 and 2022 (unaudited) 6
Consolidated Statements of Cash Flows for thenine months ended September 30, 2023 and 2022 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 41
Item 3. Qualitative and Quantitative Disclosures about Market Risks 55
Item 4. Controls and Procedures 56
PART II –OTHER INFORMATION
Item 1. Legal Proceedings 57
Item 1a. Risk Factors 57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 57
Item 3. Defaults Upon Senior Securities 58
Item 4. Mine Safety Disclosures 58
Item 5. Other Information 58
Item 6. Exhibits 59
SIGNATURES 60

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Item 1. Financial Statements

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

(in thousands, except for share data) December 31,
2022
(unaudited)
ASSETS **** ****
Cash and due from banks 56,170 $ 61,629
Interest-bearing deposits with banks 197,128 206,686
Cash and cash equivalents 253,298 268,315
Investment securities 581,867 634,884
Equity securities 17,677 15,811
Loans held-for-sale - 13,772
Loans receivable 8,181,109 8,099,689
Less: Allowance for credit losses - loans 88,230 90,513
Net loans receivable 8,092,879 8,009,176
Investment in restricted stock, at cost 49,387 46,604
Bank premises and equipment, net 28,432 27,800
Accrued interest receivable 46,795 46,062
Bank owned life insurance 236,009 231,328
Right of use operating lease assets 11,229 10,179
Other real estate owned - 264
Goodwill 208,372 208,372
Core deposit intangibles 6,222 7,312
Other assets 146,718 125,069
Total assets 9,678,885 $ 9,644,948
LIABILITIES **** ****
Deposits:
Noninterest-bearing 1,224,125 $ 1,501,614
Interest-bearing 6,214,370 5,855,008
Total deposits 7,438,495 7,356,622
Borrowings 887,590 857,622
Subordinated debentures, net 79,313 153,255
Operating lease liabilities 12,424 11,397
Other liabilities 72,909 87,301
Total liabilities 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, 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 32,027 30,126
Retained earnings 579,776 535,915
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 (53,414 ) (32,364 )
Total stockholders’ equity 1,188,154 1,178,751
Total liabilities and stockholders’ equity 9,678,885 $ 9,644,948

All values are in US Dollars.

See accompanying notes to unaudited consolidated financial statements.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 2023 2022
(dollars in thousands, except for per share data) **** **** **** ****
Interest income **** **** **** ****
Interest and fees on loans $ 115,405 $ 90,731 $ 333,356 $ 248,041
Interest and dividends on investment securities:
Taxable 4,128 4,063 12,386 8,487
Tax-exempt 1,136 1,083 3,475 2,708
Dividends 907 438 2,750 943
Interest on federal funds sold and other short-term investments 2,110 665 9,141 1,098
Total interest income 123,686 96,980 361,108 261,277
Interest expense **** **** **** ****
Deposits 56,043 13,299 146,844 24,018
Borrowings 5,286 5,520 20,980 13,149
Total interest expense 61,329 18,819 167,824 37,167
Net interest income 62,357 78,161 193,284 224,110
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 1,605 1,969 4,553 5,578
Income on bank owned life insurance 1,597 1,521 4,681 4,069
Net gains on sale of loans held-for-sale 633 262 1,232 1,519
Net losses on equity securities (273 ) (430 ) (674 ) (1,431 )
Total noninterest income 3,562 3,322 9,792 9,735
Noninterest expenses **** **** **** ****
Salaries and employee benefits 22,276 21,025 66,289 59,470
Occupancy and equipment 2,738 2,600 8,176 7,262
FDIC insurance 1,800 720 4,465 2,051
Professional and consulting 1,834 1,980 5,960 5,896
Marketing and advertising 554 461 1,642 1,238
Information technology and communications 3,487 2,747 10,192 8,414
Amortization of core deposit intangibles 347 409 1,090 1,276
Other components of net periodic pension expense (25 ) (143 ) (76 ) (429 )
Increase in value of acquisition price - - - 1,516
Other expenses 2,773 2,344 8,366 6,382
Total noninterest expenses 35,784 32,143 106,104 93,076
Income before income tax expense 28,635 39,340 91,472 126,319
Income tax expense 7,228 10,425 23,742 33,665
Net income 21,407 28,915 67,730 92,654
Preferred dividends 1,509 1,509 4,527 4,527
Net income available to common stockholders $ 19,898 $ 27,406 $ 63,203 $ 88,127
Earnings per common share **** **** **** ****
Basic $ 0.51 $ 0.70 $ 1.62 $ 2.24
Diluted 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
September 30, September 30,
(dollars in thousands) 2023 2022 2023 2022
Net income $ 21,407 $ 28,915 $ 67,730 $ 92,654
Other comprehensive income (loss):
Unrealized holding losses on available-for-sale securities arising during the period (32,285 ) (39,912 ) (36,060 ) (94,428 )
Tax effect 9,177 11,471 10,087 27,178
Net of tax (23,108 ) (28,441 ) (25,973 ) (67,250 )
Unrealized gains on cash flow hedges 9,768 16,969 19,832 44,253
Tax effect (2,938 ) (5,094 ) (5,966 ) (13,381 )
Net of tax 6,830 11,875 13,866 30,872
Reclassification adjustment for realized gains on cash flow hedges (4,793 ) (1,178 ) (13,013 ) (524 )
Tax effect 1,442 343 3,915 159
Net of tax (3,351 ) (835 ) (9,098 ) (365 )
Unrealized gains on pension plan - - - 2,187
Tax effect - - - (567 )
Net of tax - - - 1,620
Reclassification adjustment for realized losses on pension plan included in net income 74 17 222 49
Tax effect (22 ) (5 ) (67 ) (14 )
Net of tax 52 12 155 35
Total other comprehensive loss (19,577 ) (17,389 ) (21,050 ) (35,088 )
Total comprehensive income $ 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)
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders’
(in thousands, except share data) 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

All values are in US Dollars.
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders’
(in thousands, except share data) 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
Net income - - - 28,915 - - 28,915
Other comprehensive loss, net of tax - - - - - (17,389 ) (17,389 )
Cash dividends declared on preferred stock (0.328125 per depositary share) (1,509 ) (1,509 )
Cash dividends declared on common stock (0.155 per share) - - - (6,089 ) - - (6,089 )
Stock-based compensation expense - - 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

All values are in US Dollars.

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(continued)
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders’
(in thousands, except share data) 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

All values are in US Dollars.
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders’
(in thousands, except share data) 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

All values are in US Dollars.

See accompanying notes to unaudited consolidated financial statements.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Nine Months Ended
September 30,
(dollars in thousands) 2023 2022
Cash flows from operating activities **** ****
Net income $ 67,730 $ 92,654
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 3,355 2,903
Provision for credit losses 5,500 14,450
Amortization of intangibles 1,090 1,276
Net accretion of loans (1,618 ) (2,448 )
Accretion on bank premises (37 ) (37 )
Accretion on deposits (232 ) (657 )
Amortization on borrowings, net 16 27
Stock-based compensation 3,641 3,519
Losses on equity securities, net 674 1,431
Gains on sale of loans held-for-sale, net (1,232 ) (1,519 )
Loans originated for resale (19,511 ) (18,619 )
Proceeds from sale of loans held-for-sale 29,531 25,955
Loss on sale of other real estate owned 22 6
Increase in cash surrender value of bank owned life insurance (4,681 ) (4,069 )
Amortization of premium and accretion of discounts on securities available-for-sale 821 1,848
Amortization of subordinated debentures issuance costs 1,058 228
Increase in accrued interest receivable (733 ) (4,788 )
Net change in operating leases (23 ) (142 )
Increase in other assets (6,861 ) (4,781 )
Decrease in other liabilities (13,949 ) (12,291 )
Net cash provided by operating activities 64,561 94,946
Cash flows from investing activities **** ****
Investment securities available-for-sale:
Purchases (33,454 ) (320,946 )
Maturities, calls and principal repayments 49,590 135,548
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 )
Payments on loans held-for-sale 25 5
Net increase in loans (82,847 ) (1,084,483 )
Purchase of bank owned life insurance - (30,000 )
Purchases of premises and equipment (3,950 ) (2,353 )
Proceeds from sale of OREO 242 309
Net cash used in investing activities (75,717 ) (1,329,583 )
Cash flows from financing activities **** ****
Net increase in deposits 82,105 978,214
Advances of Federal Home Loan Bank (“FHLB”) borrowings 2,391,500 2,305,181
Repayments of subordinated debt (75,000 ) -
Repayments of borrowings (2,361,548 ) (1,943,448 )
Cash dividends on preferred stock (4,527 ) (4,528 )
Cash dividends paid on common stock (19,342 ) (17,338 )
Repurchase of treasury stock (15,309 ) (13,127 )
Proceeds from exercise of stock options 96 124
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 (15,017 ) 68,308
Cash and cash equivalents at beginning of period 268,315 265,536
Cash and cash equivalents at end of period $ 253,298 $ 333,844

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(continued)

Supplemental disclosures of cash flow information
Cash payments for:
Interest paid on deposits and borrowings $ 164,108 $ 34,552
Income taxes 27,377 31,426
Supplemental disclosures of noncash activities
--- --- --- --- ---
Investing:
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 16,156 13,652

See accompanying notes to unaudited consolidated financial statements.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1a. Nature of Operations, Principles of Consolidation and Risk and Uncertainties

Nature of Operations

ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Parent Corporation’s business currently consists of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”) 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 24 other banking offices. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’ business, real estate rental and consumer wages.

Basis of Presentation and Principles of Consolidation

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. The consolidated financial statements of the Parent Corporation are prepared on 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.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Risks and Uncertainties

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.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1b. Authoritative Accounting Guidance

Adoption of New Accounting Standards in 2023

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 2022-03 will have on its consolidated financial statements.

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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
September 30, September 30,
(dollars in thousands, except for per share data) 2023 2022 2023 2022
Net income available to common stockholders $ 19,898 $ 27,406 $ 63,203 $ 88,127
Earnings allocated to participating securities (63 ) (67 ) (160 ) (217 )
Income attributable to common stock $ 19,835 $ 27,339 $ 63,043 $ 87,910
Weighted average common shares outstanding, including participating securities 38,817 39,243 39,020 39,393
Weighted average participating securities (123 ) (96 ) (99 ) (97 )
Weighted average common shares outstanding 38,694 39,147 38,921 39,296
Incremental shares from assumed conversions of options, performance units and restricted shares 135 192 135 214
Weighted average common and equivalent shares outstanding 38,829 39,339 39,056 39,510
Earnings per common share:
Basic $ 0.51 $ 0.70 $ 1.62 $ 2.24
Diluted 0.51 0.70 1.61 2.23

There were no antidilutive share equivalents during the nine months ended September 30, 2023 and  September 30, 2022.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3.  Investment Securities

All of the Company’s investment securities are classified as available-for-sale as of September 30, 2023 and December 31, 2022. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in stockholders’ equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value as of September 30, 2023 and December 31, 2022. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 6 of the Notes to Consolidated Financial Statements for further discussion.

The following tables present information related to the Company’s portfolio of securities available-for-sale as of September 30, 2023 and December 31, 2022.

Allowance
for
Gross Gross Investment
Amortized Unrealized Unrealized Fair Credit
Cost Gains Losses Value Losses
(dollars in thousands)
September 30, 2023
Investment securities available-for-sale:
Federal agency obligations $ 57,243 $ - $ (13,274 ) $ 43,969 $ -
Residential mortgage pass-through securities 466,362 - (76,935 ) 389,427 -
Commercial mortgage pass-through securities 25,303 - (5,376 ) 19,927 -
Obligations of U.S. states and political subdivisions 150,218 - (27,319 ) 122,899 -
Corporate bonds and notes 3,000 - (39 ) 2,961 -
Asset-backed securities 1,354 - (32 ) 1,322 -
Other securities 1,362 - - 1,362 -
Total investment securities available-for-sale $ 704,842 $ - $ (122,975 ) $ 581,867 $ -
December 31, 2022
Investment securities available-for-sale:
Federal agency obligations $ 54,889 $ - $ (10,439 ) $ 44,450 $ -
Residential mortgage pass-through securities 475,263 178 (57,863 ) 417,578 -
Commercial mortgage pass-through securities 25,485 - (4,381 ) 21,104 -
Obligations of U.S. states and political subdivisions 157,247 111 (14,462 ) 142,896 -
Corporate bonds and notes 7,000 - (26 ) 6,974 -
Asset-backed securities 1,673 - (33 ) 1,640 -
Other securities 242 - - 242 -
Total investment securities available-for-sale $ 721,799 $ 289 $ (87,204 ) $ 634,884 $ -

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3.  Investment Securities – (continued)

Investment securities having a carrying value of approximately $332.5 million and $157.0 million as of September 30, 2023 and December 31, 2022, 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, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

The following table presents information for investments in securities available-for-sale as of September 30, 2023, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer. Securities not due at a single maturity date are shown separately.

September 30, 2023
Amortized Fair
Cost Value
(dollars in thousands)
Investment securities available-for-sale:
Due in one year or less $ 2,000 $ 1,967
Due after one year through five years 4,389 4,331
Due after five years through ten years 1,856 1,783
Due after ten years 203,570 163,070
Residential mortgage pass-through securities 466,362 389,427
Commercial mortgage pass-through securities 25,303 19,927
Other securities 1,362 1,362
Total investment securities available-for-sale $ 704,842 $ 581,867

There were no realized gains or losses on securities during the nine months ended September 30, 2023 and September 30, 2022.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3.  Investment Securities – (continued)

Impairment Analysis of Available-for-Sale Debt Securities

The following tables indicate 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, 2023 and December 31, 2022.

September 30, 2023
Total Less than 12 Months 12 Months or Longer
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
(dollars in thousands)
Investment securities available-for-sale:
Federal agency obligations $ 43,969 $ (13,274 ) $ 6,056 $ (194 ) $ 37,913 $ (13,080 )
Residential mortgage pass-through securities 389,427 (76,935 ) 28,555 (858 ) 360,872 (76,077 )
Commercial mortgage pass-through securities 19,927 (5,376 ) - - 19,927 (5,376 )
Obligations of U.S. states and political subdivisions 122,899 (27,319 ) 22,739 (1,825 ) 100,160 (25,494 )
Corporate bonds and notes 2,961 (39 ) 994 (6 ) 1,967 (33 )
Asset-backed securities 1,322 (32 ) - - 1,322 (32 )
Total temporarily impaired securities $ 580,505 $ (122,975 ) $ 58,344 $ (2,883 ) $ 522,161 $ (120,092 )
December 31, 2022
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Total Less than 12 Months 12 Months or Longer
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
(dollars in thousands)
Investment securities available-for-sale:
Federal agency obligations $ 44,451 $ (10,439 ) $ 20,517 $ (1,831 ) $ 23,934 $ (8,608 )
Residential mortgage pass-through securities 403,039 (57,863 ) 218,918 (13,869 ) 184,121 (43,994 )
Commercial mortgage pass-through securities 21,105 (4,381 ) 14,523 (2,304 ) 6,582 (2,077 )
Obligations of U.S. states and political subdivisions 133,265 (14,462 ) 47,446 (3,404 ) 85,819 (11,058 )
Corporate bonds and notes 4,973 (26 ) 4,973 (26 ) - -
Asset-backed securities 1,640 (33 ) 1,048 (16 ) 592 (17 )
Total temporarily impaired securities $ 608,473 $ (87,204 ) $ 307,425 $ (21,450 ) $ 301,048 $ (65,754 )

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3.  Investment Securities – (continued)

The Company has elected to exclude accrued interest from the amortized cost of its investment securities available-for-sale. Accrued interest receivable for investment securities available-for-sale as of September 30, 2023 and December 31, 2022, totaled $2.1 million and $2.4 million, respectively.

The Company evaluates securities in an unrealized loss position for impairment related to credit losses on at least a quarterly basis. Securities in unrealized loss positions are first assessed as to whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If one of the criteria is met, the security’s amortized cost basis is written down to fair value through current earnings. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value resulted from credit losses or other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Unrealized losses on asset backed securities and state and municipal securities have not been recognized into income because the issuers are of high credit quality 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 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-backed pass-through securities and commercial mortgage-backed pass-through securities are issued by U.S. Government agencies and U.S. Government sponsored enterprises. Although a government guarantee exists on these investments, these entities are not legally backed by the full faith and credit of the federal government, and the current support they receive is subject to a cap as part of the agreement entered into in 2008. Nonetheless, at this time we do not foresee any set of circumstances in which the government would not fund its commitments on these investments as the issuers are an integral part of the U.S. housing market in providing liquidity and stability. Therefore, we concluded that a zero-allowance approach for these investment securities is appropriate.

Note 4. Derivatives

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

Derivatives Designated as Hedges

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

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

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

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

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4. Derivatives – (continued)

Cash Flow Hedges

The Company entered into eleven pay fixed-rate interest rate swaps, with a total notional amount of $500 million, all of which 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 0.63% to 3.41% and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”).  The eleven swaps carry expiration dates ranging from December 2025to *March 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.

The Company previously entered into two forward starting interest rate cap spread 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. These are designated as cash flow hedges of brokered certificates of deposits, and the interest rate cap spread is indexed to a benchmark of fed funds with payment required on a monthly basis. The structure of these instruments is such that the Company entered into a total of $225 million in notional amount of sold interest rate cap agreements, in which we are required to pay the counterparty an incremental amount if the index rate exceeds a set cap rate. Simultaneously, the Company purchased a total of $225 million notional amount of interest rate cap agreements in which we receive an incremental amount if the index rate is above a set cap rate.  No payments are required if the index rate is at, or below, the cap rate on the sold or purchased interest rate cap agreements.

Net interest income 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.

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:

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, 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, 2023 and December 31, 2022:

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

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, 2023 and December 31, 2022:

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, 2023 and December 31, 2022, loans totaling approximately $5.7 billion and $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, 2023 and December 31, 2022:

September 30, 2023 December 31, 2022
(dollars in thousands)
Commercial real estate $ - $ 13,473
Residential real estate - 299
Total carrying amount $ - $ 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, 2023 and December 31, 2022:

September 30, 2023
Nonaccrual loans with ACL Nonaccrual loans without ACL Total nonaccrual loans
(dollars in thousands)
Commercial $ 21,604 $ 555 $ 22,159
Commercial real estate 70 29,754 29,824
Residential real estate 806 3,270 4,076
Total $ 22,480 $ 33,579 $ 56,059

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, 2022
Nonaccrual loans with ACL Nonaccrual loans without ACL Total nonaccrual loans
(dollars in thousands)
Commercial $ 23,512 $ 1,745 $ 25,257
Commercial real estate 10,220 6,597 16,817
Residential real estate 604 1,776 2,380
Total $ 34,336 $ 10,118 $ 44,454

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated and individually 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 credit quality or inadequately protect the Company’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP. Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below. The following table presents loans by origination and risk designation as of September 30, 2023 (dollars in thousands):

Term loans amortized cost basis by origination year
2023 2022 2021 2020 2019 Prior Revolving Loans Total Gross Loans
Commercial
Pass $ 146,241 $ 259,603 $ 271,580 $ 41,459 $ 13,749 $ 119,592 $ 590,667 $ 1,442,891
Special mention - 337 86 - 567 3,445 3,989 8,424
Substandard 304 1,316 163 4 1,551 19,559 1,359 24,256
Doubtful - - - - - - - -
Total Commercial $ 146,545 $ 261,256 $ 271,829 $ 41,463 $ 15,867 $ 142,596 $ 596,015 $ 1,475,571
Commercial Real Estate
Pass $ 170,541 $ 1,572,880 $ 1,581,212 $ 356,251 $ 355,665 $ 1,269,678 $ 462,573 $ 5,768,800
Special mention - - - - - 26,421 - 26,421
Substandard - - 1,899 - 2,625 20,964 16,830 42,318
Doubtful - - - - - - - -
Total Commercial Real Estate $ 170,541 $ 1,572,880 $ 1,583,111 $ 356,251 $ 358,290 $ 1,317,063 $ 479,403 $ 5,837,539
Commercial Construction
Pass $ 582 $ 5,693 $ 15,682 $ 6,236 $ - $ - $ 585,855 $ 614,048
Special mention - - - - - - - -
Substandard - - - - - - 8,700 8,700
Doubtful - - - - - - - -
Total Commercial Construction $ 582 $ 5,693 $ 15,682 $ 6,236 $ - $ - $ 594,555 $ 622,748
Residential
Pass $ 8,009 $ 43,048 $ 23,247 $ 21,863 $ 20,059 $ 92,966 $ 34,663 $ 243,855
Special mention - - - - - 655 2,830 3,485
Substandard - - 563 438 - 2,520 555 4,076
Doubtful - - - - - - - -
Total Residential Real Estate $ 8,009 $ 43,048 $ 23,810 $ 22,301 $ 20,059 $ 96,141 $ 38,048 $ 251,416
Consumer
Pass $ 747 $ 96 $ - $ 6 $ - $ - $ 87 $ 936
Special mention - - - - - - - -
Substandard - - - - - - - -
Doubtful - - - - - - - -
Total Consumer $ 747 $ 96 $ - $ 6 $ - $ - $ 87 $ 936
Total
Pass $ 326,120 $ 1,881,320 $ 1,891,721 $ 425,815 $ 389,473 $ 1,482,236 $ 1,673,845 $ 8,070,530
Special mention - 337 86 - 567 30,521 6,819 38,330
Substandard 304 1,316 2,625 442 4,176 43,043 27,444 79,350
Doubtful - - - - - - - -
Grand Total $ 326,424 $ 1,882,973 $ 1,894,432 $ 426,257 $ 394,216 $ 1,555,800 $ 1,708,108 $ 8,188,210

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, 2022 (dollars in thousands):

Term loans amortized cost basis by origination year
2022 2021 2020 2019 2018 Prior Revolving Loans Total Gross Loans
Commercial
Pass $ 301,636 $ 305,721 $ 47,952 $ 28,177 $ 52,950 $ 127,739 $ 550,483 $ 1,414,658
Special mention - - - 583 26 8,551 3,292 12,452
Substandard 7,615 146 15 1,769 11,214 22,596 2,269 45,624
Doubtful - - - - - - - -
Total Commercial $ 309,251 $ 305,867 $ 47,967 $ 30,529 $ 64,190 $ 158,886 $ 556,044 $ 1,472,734
Commercial Real Estate
Pass $ 1,571,751 $ 1,608,023 $ 382,987 $ 358,578 $ 375,886 $ 987,982 $ 401,365 $ 5,686,572
Special mention 3,040 - - - - 37,774 8,839 49,653
Substandard - 1,929 - 6,526 19,138 23,287 8,123 59,003
Doubtful - - - - - - - -
Total Commercial Real Estate $ 1,574,791 $ 1,609,952 $ 382,987 $ 365,104 $ 395,024 $ 1,049,043 $ 418,327 $ 5,795,228
Commercial Construction
Pass $ 8,615 $ 7,605 $ 6,720 $ 508 $ - $ - $ 542,460 $ 565,908
Special mention - - - - - - - -
Substandard - - - - - - 8,231 8,231
Doubtful - - - - - - - -
Total Commercial Construction $ 8,615 $ 7,605 $ 6,720 $ 508 $ - $ - $ 550,691 $ 574,139
Residential Real Estate
Pass $ 45,926 $ 25,318 $ 24,409 $ 21,557 $ 20,284 $ 78,314 $ 41,468 $ 257,276
Special mention - - - - - - - -
Substandard - - - - - 3,379 4,093 7,472
Doubtful - - - - - - - -
Total Residential Real Estate $ 45,926 $ 25,318 $ 24,409 $ 21,557 $ 20,284 $ 81,693 $ 45,561 $ 264,748
Consumer
Pass $ 2,219 $ - $ 9 $ - $ - $ 2 $ 82 $ 2,312
Special mention - - - - - - - -
Substandard - - - - - - - -
Doubtful - - - - - - - -
Total Consumer $ 2,219 $ - $ 9 $ - $ - $ 2 $ 82 $ 2,312
Total
Pass $ 1,930,147 $ 1,946,667 $ 462,077 $ 408,820 $ 449,120 $ 1,194,037 $ 1,535,858 $ 7,926,726
Special mention 3,040 - - 583 26 46,325 12,131 62,105
Substandard 7,615 2,075 15 8,295 30,352 49,262 22,716 120,330
Doubtful - - - - - - - -
Grand Total $ 1,940,802 $ 1,948,742 $ 462,092 $ 417,698 $ 479,498 $ 1,289,624 $ 1,570,705 $ 8,109,161

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Collateral Dependent Loans: Loans which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses. The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date. The following table presents collateral dependent loans that were individually evaluated for impairment as of September 30, 2023 and December 31, 2022:

September 30, 2023
Real Estate Other Total
(dollars in thousands)
Commercial $ 4,891 $ 14,719 $ 19,610
Commercial real estate 41,636 - 41,636
Commercial construction 8,700 - 8,700
Residential real estate 6,755 - 6,755
Total $ 61,982 $ 14,719 $ 76,701
December 31, 2022
--- --- --- --- --- --- ---
Real Estate Other Total
(dollars in thousands)
Commercial $ 5,352 $ 22,517 $ 27,869
Commercial real estate 52,477 - 52,477
Commercial construction 8,232 - 8,232
Residential real estate 5,864 - 5,864
Total $ 71,925 $ 22,517 $ 94,442

Aging Analysis - The following table provides an analysis of the aging of the loans by class, excluding the effect of net deferred fees, which are past due as of September 30, 2023 and December 31, 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
(dollars in thousands)
Commercial $ 433 $ 1,979 $ - $ 22,159 $ 24,571 $ 1,451,000 $ 1,475,571
Commercial real estate - 597 - 29,824 30,421 5,807,118 5,837,539
Commercial construction - - - - - 622,748 622,748
Residential real estate 227 - - 4,076 4,303 247,113 251,416
Consumer - 254 - - 254 682 936
Total $ 660 $ 2,830 $ - $ 56,059 $ 59,549 $ 8,128,661 $ 8,188,210
December 31, 2022
--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due and Still Accruing Nonaccrual Total Past Due and Nonaccrual Current Gross Loans
(dollars in thousands)
Commercial $ 306 $ - $ - $ 25,257 $ 25,563 $ 1,447,171 $ 1,472,734
Commercial real estate 90 - 5,591 16,817 22,498 5,772,730 5,795,228
Commercial construction - - - - - 574,139 574,139
Residential real estate 1,569 - - 2,380 3,949 260,799 264,748
Consumer - - - - - 2,312 2,312
Total $ 1,965 $ - $ 5,591 $ 44,454 $ 52,010 $ 8,057,151 $ 8,109,161

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, 2023
Commercial Commercial real estate Commercial construction Residential real estate Consumer Total
(dollars in thousands)
Allowance for credit losses - loans
Individually evaluated impairment $ 7,685 $ 661 $ - $ - $ - $ 8,346
Collectively evaluated impairment 19,433 52,072 3,909 3,732 5 79,151
Acquired with deteriorated credit quality individually analyzed 733 - - - - 733
Total $ 27,851 $ 52,733 $ 3,909 $ 3,732 $ 5 $ 88,230
Gross loans
Individually evaluated impairment $ 24,676 $ 41,636 $ 8,700 $ 6,755 $ - $ 81,767
Collectively evaluated impairment 1,450,405 5,795,903 614,048 244,661 936 8,105,953
Acquired with deteriorated credit quality individually analyzed 490 - - - - 490
Total $ 1,475,571 $ 5,837,539 $ 622,748 $ 251,416 $ 936 $ 8,188,210
December 31, 2022
--- --- --- --- --- --- --- --- --- --- --- --- ---
Commercial Commercial real estate Commercial construction Residential real estate Consumer Total
(dollars in thousands)
Allowance for credit losses - loans
Individually evaluated impairment $ 7,426 $ 1,003 $ - $ 50 $ - $ 8,479
Collectively evaluated impairment 19,319 50,818 3,718 4,093 7 77,955
Acquired with deteriorated credit quality individually analyzed 2,158 1,921 - - - 4,079
Total $ 28,903 $ 53,742 $ 3,718 $ 4,143 $ 7 $ 90,513
Gross loans
Individually evaluated impairment $ 30,994 $ 46,886 $ 8,232 $ 5,864 $ - $ 91,976
Collectively evaluated impairment 1,436,866 5,742,751 565,907 258,884 2,312 8,006,720
Acquired with deteriorated credit quality individually analyzed 4,874 5,591 - - - 10,465
Total $ 1,472,734 $ 5,795,228 $ 574,139 $ 264,748 $ 2,312 $ 8,109,161

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, 2023 is summarized in the tables below.

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

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 loans, which did not have a material effect on the cash flows.

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

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, 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.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Allowance for Credit Losses for Unfunded Commitments

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

Three Months Ended Three Months Ended
September 30, September 30,
2023 2022
(dollars in thousands)
Balance at beginning of period $ 2,819 $ 2,324
(Reversal of) provision for credit losses - unfunded commitments (4 ) 662
Balance at end of period $ 2,815 $ 2,986
Nine Months Ended Nine Months Ended
--- --- --- --- --- ---
September 30, September 30,
2023 2022
(dollars in thousands)
Balance at beginning of period $ 3,036 $ 2,352
(Reversal of) provision for credit losses - unfunded commitments (221 ) 634
Balance at end of period $ 2,815 $ 2,986

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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, 2023 and 2022:

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,
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.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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, 2023 and December 31, 2022:

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, 2023 and December 31, 2022 are as follows:

September 30, 2023
Fair Value Measurements at Reporting Date Using
Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
(dollars in thousands)
Recurring fair value measurements: Assets
Investment securities:
Available-for-sale:
Federal agency obligations $ 43,969 $ - $ 43,969 $ -
Residential mortgage pass-through securities 389,427 - 389,427 -
Commercial mortgage pass-through securities 19,927 - 19,927 -
Obligations of U.S. states and political subdivision 122,899 - 115,882 7,017
Corporate bonds and notes 2,961 - 2,961 -
Asset-backed securities 1,322 - 1,322 -
Other securities 1,362 1,362 - -
Total available-for-sale 581,867 1,362 573,488 7,017
Equity securities 17,677 9,394 8,283 -
Derivatives 61,972 - 61,972 -
Total assets $ 661,516 $ 10,756 $ 643,743 $ 7,017

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, 2022
Fair Value Measurements at Reporting Date Using
Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
(dollars in thousands)
Recurring fair value measurements: Assets
Investment securities:
Available-for-sale:
Federal agency obligations $ 44,450 $ - $ 44,450 $ -
Residential mortgage pass- through securities 417,578 - 417,578 -
Commercial mortgage pass-through securities 21,104 - 21,104 -
Obligations of U.S. states and political subdivision 142,896 - 135,547 7,349
Corporate bonds and notes 6,974 - 6,974 -
Asset-backed securities 1,640 - 1,640 -
Other securities 242 242 - -
Total available-for-sale $ 634,884 $ 242 $ 627,293 $ 7,349
Equity securities 15,811 9,733 6,078 -
Derivatives 56,797 - 56,797 -
Total assets $ 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, 2023 and during the year ended December 31, 2022.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis as of September 30, 2023 and December 31, 2022.

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

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

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

For assets measured at fair value on a nonrecurring basis, the fair value measurements as of September 30, 2023 and December 31, 2022 are as follows:

Fair Value Measurements at Reporting Date Using
Assets measured at fair value on a nonrecurring basis: 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)
Commercial $ 10,659 $ - $ - $ 10,659
Commercial real estate 7,330 - - 7,330
Fair Value Measurements at Reporting Date Using
--- --- --- --- --- --- --- --- ---
Assets measured at fair value on a nonrecurring basis: 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)
Commercial $ 14,550 $ - $ - $ 14,550
Commercial real estate 17,264 - - 17,264
Residential real estate 1,392 - - 1,392

Collateral dependent loans – **** Collateral dependent loans as of September 30, 2023 that required a valuation allowance were $23.8 million with a related valuation allowance of $5.8 million compared to $43.8 million with a related valuation allowance of $10.5 million as of December 31, 2022.

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Assets Measured with Significant Unobservable Level 3 Inputs

Recurring basis

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2023 and for the year ended December 31, 2022:

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

September 30, 2023
Fair Value Valuation Techniques Unobservable Input Rate
Securities available-for-sale: (dollars in thousands)
Municipal securities $ 7,017 Discounted cash flows Discount rate 4.4 %
December 31, 2022
--- --- --- --- --- --- --- ---
Fair Value Valuation Techniques Unobservable Input Rate
Securities available-for-sale: (dollars in thousands)
Municipal securities $ 7,349 Discounted cash flows Discount rate 4.3 %

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, 2023
(dollars in thousands) Fair Value Valuation Techniques Unobservable Input Range (weighted average)
Commercial $ 10,205 Market approach (100%) Average transfer price as a price to unpaid principal balance 65% –92% (68%)
Commercial 454 Appraisals of collateral value Adjustment for comparable sales -7.5% to +25% (+0.1%)
Commercial real estate 7,330 Appraisals of collateral value Adjustment for comparable sales -15% to +5% (+4%)
December 31, 2022
--- --- --- --- --- --- ---
(dollars in thousands) Fair Value Valuation Techniques Unobservable Input Range (weighted average)
Commercial loans $ 14,028 Market approach (100%) Average transfer price as a price to unpaid principal balance 65% to 96% (67%)
Commercial loans 522 Appraisals of collateral value Adjustment for comparable sales -10% to +13% (+3%)
Commercial real estate loans 17,264 Appraisals of collateral value Adjustment for comparable sales -20% to +0% (-15%)
Residential real estate loans 1,392 Appraisals of collateral value Adjustment for comparable sales +21% to +39% (22%)

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

As of September 30, 2023 the fair value measurements presented are consistent with Topic 820, Fair Value Measurement, in which fair value represents exit price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2023 and December 31, 2022:

Fair Value Measurements
Carrying Amount Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
(dollars in thousands)
September 30, 2023
Financial assets:
Cash and due from banks $ 253,298 $ 253,298 $ 253,298 $ - $ -
Securities available-for-sale 581,867 581,867 1,362 573,488 7,017
Restricted investments in bank stocks 49,387 n/a n/a n/a n/a
Equity securities 17,677 17,677 9,394 8,283 -
Net loans 8,092,879 7,725,439 - - 7,725,439
Derivatives - interest rate contracts 61,972 61,972 - 61,972 -
Accrued interest receivable 46,795 46,795 - 5,160 41,635
Financial liabilities:
Noninterest-bearing deposits 1,224,125 1,224,125 1,224,125 - -
Interest-bearing deposits 6,214,370 6,181,082 3,692,159 2,488,923 -
Borrowings 887,590 884,745 - 884,745 -
Subordinated debentures 79,313 77,588 - 77,588 -
Accrued interest payable 9,800 9,800 - 9,800 -
December 31, 2022
Financial assets:
Cash and due from banks $ 268,315 $ 268,315 $ 268,315 $ - $ -
Investment securities available-for-sale 634,884 634,884 242 627,293 7,349
Restricted investment in bank stocks 46,604 n/a n/a n/a n/a
Equity securities 15,811 15,811 9,733 6,078 -
Net loans 8,009,176 7,723,378 - - 7,723,378
Derivatives - interest rate contracts 56,797 56,797 - 56,797 -
Accrued interest receivable 46,062 46,062 - 4,685 41,377
Financial liabilities:
Noninterest-bearing deposits 1,501,614 1,501,614 1,501,614 - -
Interest-bearing deposits 5,855,008 5,811,291 3,460,818 2,350,473 -
Borrowings 857,622 854,698 . 854,698 -
Subordinated debentures 153,255 153,581 - 153,581 -
Accrued interest payable 6,925 6,925 - 6,925 -

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
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Interest income (expense) on cash flow hedges $ 4,793 $ 1,178 $ 13,013 $ 524 Borrowings and deposits expense
(1,442 ) (343 ) (3,915 ) (159 ) Income tax (expense) benefit
$ 3,351 $ 835 $ 9,098 $ 365
Amortization of pension plan net actuarial losses $ (74 ) $ (17 ) $ (222 ) $ (49 ) Other components of net periodic pension expense
22 5 67 14 Income tax benefit
$ (52 ) $ (12 ) $ (155 ) $ (35 )
Total reclassification $ 3,299 $ 823 $ 8,943 $ 330

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

September 30, 2023 December 31, 2022
(dollars in thousands)
Investment securities available-for-sale, net of tax $ (87,748 ) $ (61,775 )
Cash flow hedge, net of tax 37,128 32,360
Defined benefit pension and post-retirement plans, net of tax (2,794 ) (2,949 )
Total $ (53,414 ) $ (32,364 )

Note 8.  Stock-based Compensation

The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on *May 23, 2017.*The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of September 30, 2023. 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 now 1,200,000. Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, deferred stock units or performance units. Shares available for grant and issuance under the Plan as of September 30, 2023 were approximately 469,501. The Company intends to issue all shares under the Plan in the form of newly issued shares.

Restricted stock, options and deferred stock units typically have a three-year vesting period starting one year after the date of grant with one-third vesting each year. The options generally expire ten years from the date of grant. Restricted stock and deferred stock units granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control. All issuances are subject to forfeiture if the recipient is no longer employed prior to the award's vesting. Any forfeitures would result in previously recognized expense being reversed. Restricted stock grants have the same dividend and voting rights as common stock, while options, performance units and deferred stock units do not.

All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are recorded as incurred. Stock-based compensation expense for the three and nine months ended September 30, 2023was $1.3 million and $3.6 million, respectively.  Stock-based compensation expense for the three and nine months ended September 30, 2022 was $1.2 million and $3.5 million, respectively.

Activity under the Company’s options for the nine months ended September 30, 2023 was as follows:

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 - $ -

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 8.  Stock-Based Compensation – (continued)

Activity under the Company’s restricted stock for the nine months ended September 30, 2023 was as follows:

Nonvested Shares Weighted Average Grant Date Fair Value
Nonvested as of December 31, 2022 85,931 $ 26.20
Granted 93,147 16.19
Vested (47,067 ) 27.59
Forfeited/cancelled/expired (9,090 ) 21.76
Nonvested as of September 30, 2023 122,921 $ 18.41

As of September 30, 2023, there was approximately $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 1.2 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
Unearned as of December 31, 2022 195,265 $ 17.98
Awarded 85,158 17.93
Vested shares (116,192 ) 10.77
Unearned as of September 30, 2023 164,231 233,087 $ 23.06

As of September 30, 2023, the specific number of shares related to performance units that were expected to vest was 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, 2023, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 233,087. During the nine months ended September 30, 2023, 116,192 shares vested. A total of 63,839 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of performance units during the nine months ended September 30, 2023 were 52,353 shares. As of September 30, 2023, compensation cost of approximately $1.8 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.9 years.

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

Units (expected) Weighted Average Grant Date Fair Value
Unearned as of December 31, 2022 120,035 $ 23.84
Awarded 146,857 18.97
Vested shares (78,544 ) 19.71
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, 2023, 78,544 shares vested. A total of 42,538 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of deferred stock units during the nine months ended September 30, 2023 were 36,006 shares. As of September 30, 2023, compensation cost of approximately $2.3 million related to non-vested deferred stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.5 years.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 9.  Components of Net Periodic Pension Cost

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

Three Months Ended Affected Line Item in the Consolidated
September 30, Statements of Income
2023 2022
(dollars in thousands)
Service cost $ - $ -
Interest cost 110 78 Other components of net periodic pension expense
Expected return on plan assets (209 ) (237 ) Other components of net periodic pension expense
Net amortization 74 17 Other components of net periodic pension expense
Total periodic pension income $ (25 ) $ (142 )
Nine Months Ended Affected Line Item in the Consolidated
--- --- --- --- --- --- --- ---
September 30, Statements of Income
2023 2022
(dollars in thousands)
Service cost $ - $ -
Interest cost 330 233 Other components of net periodic pension expense
Expected return on plan assets (628 ) (711 ) Other components of net periodic pension expense
Net amortization 222 49 Other components of net periodic pension expense
Total periodic pension income $ (76 ) $ (429 )

Contributions

The Company did not contribute to the Pension Trust during the nine months ended September 30, 2023. The Company does not plan on contributing amounts to the Pension Trust for the remainder of 2023. The trust is established to provide retirement and other benefits for eligible employees and their beneficiaries. No part of the trust assets may be applied to any purpose other than providing benefits under the plan and for defraying expenses of administering the plan and the trust.

Note 10. FHLB Borrowings

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

September 30, 2023 December 31, 2022
Amount Rate Amount Rate
(dollars in thousands)
By remaining period to maturity:
Less than 1 year $ 835,000 5.60 % $ 830,000 4.42 %
1 year through less than 2 years 25,000 1.00 - -
2 years through less than 3 years 2,050 2.23 25,000 1.00
3 years through less than 4 years - - 2,050 2.23
4 years through 5 years 25,301 4.16 326 2.85
After 5 years 302 2.96 326 2.96
FHLB borrowings - gross 887,653 5.42 % 857,702 4.32 %
Fair value discount (63 ) (80 )
Total FHLB borrowings $ 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, 2023 were primarily collateralized by approximately $2.8 billion of commercial mortgage loans and securities, net of required over collateralization amounts, under a blanket lien arrangement. As of September 30, 2023 the Company had remaining borrowing capacity of approximately $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-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier I capital. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or in part prior to maturity. The floating interest rate on the subordinate debentures was previously three-month LIBOR plus 2.85% and reprices 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, 2023to 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, 2023 was 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, 2023 and December 31, 2022.

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 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 1/23/2034 1/23/2009

On June 10, 2020, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance 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.

On January 11, 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2018 Notes”). The 2018 Notes bore interest at a rate that resets quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 284 basis points (2.84%) payable quarterly in arrears. Interest on the 2018 Notes was to be paid on February 1, May 1, August 1, and November 1, of each year to but excluding the stated maturity date, unless in any case previously redeemed. The 2018 Notes were redeemed in full on February 1, 2023.

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

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of September 30, 2023 and December 31, 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

Our accounting policies are integral to understanding the results reported. We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. As of June 30, 2023, there have been no material changes to our critical accounting policies as compared to the critical accounting policies disclosed in our most recent Annual Report on Form 10-K. Reference is made to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

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Operating Results Overview

Net income available to common stockholders for the three months ended September 30, 2023 was $19.9 million compared to $27.4 million for the comparable three-month period ended September 30, 2022. The Company’s diluted earnings per share were $0.51 for the three months ended September 30, 2023 as compared with diluted earnings per share of $0.70 for the comparable three-month period ended September 30, 2022. The $7.5 million decrease in net income available to common stockholders and $0.19 decrease in diluted earnings per share versus the third quarter of 2022 were due to a $15.8 million decrease in net interest income and a $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 and a $0.2 million increase in noninterest income.

Net income available to common stockholders for the nine months ended September 30, 2023 was $63.2 million compared to $88.1 million for the comparable nine-month period ended September 30, 2022. The Company’s diluted earnings per share were $1.61 for the nine months ended September 30, 2023 as compared with diluted earnings per share of $2.23 for the comparable nine-month period ended September 30, 2022. The $24.9 million decrease in net income available to common stockholders and $0.62 decrease in diluted earnings per share versus the nine months ended September 2022 were due to a $30.8 million decrease in net interest income and a $13.0 million increase in noninterest expenses, partially offset by an $8.9 million decrease in provision for credit losses, a $9.9 million decrease in income tax expense and a $0.1 million increase in noninterest 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 on deposits and borrowings, which support these assets. Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (including interest earned on tax-free loans and on obligations of state and local political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable assets. Net interest margin is defined as net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.

Fully taxable equivalent net interest income for the three months ended September 30, 2023 decreased by $15.6 million, or 19.8%, from the comparable three-month period ended September 30, 2022. The decrease from the three months ended September 30, 2022 resulted primarily from a 250 basis-point increase in rate paid on interest-bearing deposits, partially offset by an 88 basis-point increase rate earned on total interest-earning assets and a 92 basis-point contraction of the net interest margin to 2.76% from 3.68%.

Fully taxable equivalent net interest income for the nine months ended September 30, 2023 decreased by $30.2 million, or 13.4%, from the comparable nine-month period ended September 30, 2022. The decrease from the nine months ended September 30, 2022 resulted primarily from a 254 basis-point increase in rate paid on interest-bearing deposits, partially offset by a 92 basis increase in rate earned on total interest-earning assets and a 91 basis-point contraction of the net interest margin to 2.85% from 3.76%.

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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, 2023 and 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,
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)^ $ 723,408 $ 5,566 3.05 % $ 740,394 $ 5,434 2.91 %
Total loans ^(2) (3) (4)^ 8,169,310 115,954 5.63 7,582,371 91,132 4.77
Federal funds sold and interest-bearing with banks 158,155 2,110 5.29 135,331 665 1.95
Restricted investment in bank stocks 38,558 907 9.33 42,220 438 4.12
Total interest-earning assets 9,089,431 124,537 5.44 8,500,316 97,669 4.56
Noninterest-earning assets:
Allowance for credit losses (89,966 ) (84,307 )
Other noninterest-earning assets 626,160 614,580
Total assets $ 9,625,625 $ 9,030,589
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits $ 2,606,122 25,437 3.87 $ 1,525,076 5,396 1.40
Other interest-bearing deposits 3,723,561 30,606 3.26 3,686,520 7,903 0.85
Total interest-bearing deposits 6,329,683 56,043 3.51 5,211,596 13,299 1.01
Borrowings 651,112 3,950 2.41 772,561 3,297 1.69
Subordinated debentures 79,230 1,312 6.57 153,129 2,196 5.69
Finance lease 1,603 24 5.94 1,813 27 5.91
Total interest-bearing liabilities 7,061,628 61,329 3.45 6,139,099 18,819 1.22
Demand deposits 1,275,325 1,682,135
Other liabilities 86,025 48,907
Total noninterest-bearing liabilities 1,361,350 1,731,042
Stockholders’ equity 1,202,647 1,160,448
Total liabilities and stockholders’ equity $ 9,625,625 $ 9,030,589
Net interest income (tax-equivalent basis) 63,208 78,850
Net interest spread ^(5)^ 1.99 % 3.34 %
Net interest margin ^(6)^ 2.76 % 3.68 %
Tax-equivalent adjustment (851 ) (689 )
Net interest income $ 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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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. Included in noninterest income for the three months ended September 30, 2023 and September 30, 2022 were net losses on equity securities of $0.3 million and $0.4 million, respectively. Excluding these items, noninterest income increased $0.1 million when compared to the three months ended September 30, 2022. The increase was primarily attributable to an increase in net gains on sale of loans held-for-sale, primarily Small Business Administration (“SBA”) loans of $0.4 million and an increase in bank owned life insurance ("BOLI") income of $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. Included in noninterest income were net losses on equity securities of $0.7 million and $1.4 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. Excluding these items, noninterest income decreased $0.7 million when compared to the nine months ended September 30, 2022. The decrease was primarily attributable to a decreases in deposit, loan and other income of $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 $0.6 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. Noninterest expenses increased by $3.6 million when compared to the three months ended September 30, 2022. The increase was primarily attributable to an increase in salaries and employee benefits of $1.3 million, which was attributable to new hires, an increase in FDIC insurance expense of $1.1 million, which was attributable to balance sheet growth and a two-basis point increase in the Bank’s initial base rate, an increase in information technology and communication expenses of $0.7 million, which was primarily attributable to additional investments in technology, equipment, and 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. Noninterest expenses increased by $13.0 million when compared to the nine months ended September 30, 2022. The increase was primarily attributable to an increase in salaries and employee benefits of $6.8 million, which was attributable to new hires, an increase in FDIC insurance expense of $2.4 million, which was attributable to balance sheet growth and a two-basis point increase in the Bank’s initial base rate, an increase in information technology and communication expenses of $1.8 million, which was primarily attributable to additional investments in technology, equipment, and software, an increase in other expenses of $2.0 million, which was primarily attributable to expenses incurred related to derivatives cash collateral during the nine months ended September 30, 2023, an increase in occupancy and equipment of $0.9 million, an increase in marketing and advertising expenses of $0.4 million and an increase in other components of net periodic pension expense of $0.4 million, partially offset by a decrease in BoeFly acquisition expense of $1.5 million and a 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. The decrease in income tax expense was the result of lower income before income tax expense. The effective tax rate for the three months ended September 30, 2023 and September 30, 2022 was 25.2% and 26.5%, respectively. The decrease in the effective tax rate when compared to the three months ended September 30, 2022 is largely attributable to lower 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. The effective tax rate for the nine months ended September 30, 2023 and September 30, 2022 was 26.0% and 26.7%, respectively. The decrease in the effective tax rate when compared to the nine months ended September 30, 2022 is largely attributable to lower 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, 2023 December 31, 2022 Amount Increase/
Amount % Amount % (Decrease)
(dollars in thousands)
Commercial $ 1,475,571 18.0 $ 1,472,734 18.2 % $ 2,837
Commercial real estate 5,837,539 71.3 5,795,228 71.5 42,311
Commercial construction 622,748 7.6 574,139 7.1 48,609
Residential real estate 251,416 3.1 264,748 3.3 (13,332 )
Consumer 936 - 2,312 - (1,376 )
Gross loans $ 8,188,210 100.0 % $ 8,109,161 100.0 % $ 79,049

As of September 30, 2023, gross loans totaled $8.2 billion, an increase of $79.0  million or 1.0%, compared to December 31, 2022. Net loan growth was attributable to organic loan originations.

Allowance for Credit Losses and Related Provision

As of September 30, 2023, the Company’s allowance for credit losses for loans was $88.2 million, a decrease of $2.3 million from $90.5 million as of December 31, 2022. The decrease 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, 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, for the three and nine months ended September 30, 2022, respectively. The decrease in the provision for credit losses when compared to the comparable periods in 2022 was mainly attributable to changes in forecasted macroeconomic conditions.

There were $2.5 million and $8.1 million in net charge-offs for the three and nine months ended September 30, 2023, compared with $0.4 million and $0.9 million in net charge-offs for the three and nine months ended September 30, 2022, respectively. The increase in net charge-offs for the three ended 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, 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 1.08% as of September 30, 2023 compared to 1.12% as of December 31, 2022.

The level of the allowance for the respective periods of 2023 and 2022 reflects the credit quality within the loan portfolio, loan growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the ACL as of September 30, 2023 is adequate to cover credit losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.

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

Three Months Ended
September 30,
2023 2022
(dollars in thousands)
Average loans receivable $ 8,169,139 $ 7,580,176
Analysis of the ACL:
Balance - beginning of quarter $ 89,205 $ 82,739
Charge-offs:
Commercial (2,250 ) (410 )
Commercial real estate (237 ) -
Residential real estate - -
Consumer - (3 )
Total charge-offs (2,487 ) (413 )
Recoveries:
Commercial - 53
Residential real estate 1 -
Consumer 7 -
Total recoveries 8 53
Net charge-offs (2,479 ) (360 )
Provision for credit losses – loans 1,504 9,338
Balance - end of period $ 88,230 $ 91,717
Ratio of annualized net charge-offs during the period to average loans receivable during the period 0.12 % 0.02 %
Loans receivable $ 8,181,109 $ 7,900,450
ACL as a percentage of loans receivable 1.08 % 1.16 %
Nine Months Ended
--- --- --- --- --- --- ---
September 30,
2023 2022
(dollars in thousands)
Average loans receivable $ 8,142,712 $ 7,155,209
Analysis of the ACL:
Balance - beginning of quarter $ 90,513 $ 78,773
Charge-offs:
Commercial (6,117 ) (751 )
Commercial real estate (1,954 ) (226 )
Residential real estate (18 ) (9 )
Consumer - (3 )
Total charge-offs (8,089 ) (989 )
Recoveries:
Commercial 9 54
Residential real estate 69 35
Consumer 7 28
Total recoveries 85 117
Net charge-offs (8,004 ) (872 )
Provision for credit losses – loans 5,721 13,816
Balance - end of period $ 88,230 $ 91,717
Ratio of annualized net charge-offs during the period to average loans receivable during the period 0.13 % 0.02 %
Loans receivable $ 8,181,109 $ 7,900,450
ACL as a percentage of loans receivable 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 includes analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix. The Company strives to identify loans experiencing difficulty early on, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for credit losses at all times.

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

Nonperforming assets include nonaccrual loans and other real estate owned. Nonaccrual loans represent loans on which interest accruals have been suspended. In general, it is the policy of management to consider the charge-off of uncollectible amounts of loans at the point they become past due 90 days.

The following table sets forth, as of the dates indicated, the amount of the Company’s nonperforming assets:

September 30, 2023 December 31, 2022
(dollars in thousands)
Nonaccrual loans $ 56,059 $ 44,454
OREO - 264
Total nonperforming assets ^(1)^ $ 56,059 $ 44,718
^(1)^ Nonperforming assets are defined as nonaccrual loans and OREO.
--- ---
Nonaccrual loans to total loans receivable 0.69 % 0.55 %
--- --- --- --- ---
Nonperforming assets to total assets 0.58 % 0.46 %

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Investment Securities

As of September 30, 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, 2023, average securities, on 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 interest-earning assets, as of September 30, 2022.

As of September 30, 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 $87.7 million as compared with net unrealized losses of $61.8 million as of December 31, 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 $10.1 million increase in deferred tax assets, attributable to the decline in fair value on securities available-for-sale since December 31, 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, 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, 2023 and December 31, 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 decrease our net interest income by 2.22%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.01%.

Based on our model, which was run as of September 30, 2023, 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 decrease our net interest income by 5.89%, while a 100 basis-point instantaneous decrease in interest rates would increase net interest income by 4.68%. As of 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 decrease our net interest income by 2.66%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 3.99%.

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

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 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, 2023.

Interest Rates Estimated Estimated Change in EVE Interest Rates Estimated Estimated Change in NII
(basis points) EVE Amount % (basis points) NII Amount %
+300 $ 817,231 (270,740 ) (24.88 ) +300 $ 228,618 $ (33,287 ) (12.71 )
+200 908,543 (179,428 ) (16.49 ) +200 240,419 (21,486 ) (8.20 )
+100 1,009,054 (78,917 ) (7.25 ) +100 252,499 (9,406 ) (3.59 )
0 1,087,971 - - 0 261,905 - -
-100 1,182,198 94,227 8.66 -100 274,945 13,040 4.98
-200 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, 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, 2023, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $515.6 million, which represented 5.3% of total assets and 6.2% of total deposits and borrowings, compared to $760.0 million as of December 31, 2022, which represented 7.9% of total assets and 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, 2023, had the ability to borrow $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, 2023, the Bank had in place borrowing capacity of $390 million through correspondent banks and other unsecured borrowing lines. As of September 30, 2023, the Bank had aggregate available and unused credit of approximately $3.3 billion, which represents the aforementioned facilities totaling $4.8 billion net of $1.5 billion in outstanding borrowings and letters of credit. As of September 30, 2023, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.

Cash and cash equivalents totaled $253.3 million as of September 30, 2023, increasing by $15.0 million from $268.3 million as of December 31, 2022. Operating activities provided $64.6 million in net cash. Investing activities used $75.7 million in net cash, primarily reflecting an increase in loans and investment securities. Financing activities used $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 $82.1 million.

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Deposits

Total deposits increased by $81.9 million, or 1.1%, to $7.4 billion as of September 30, 2023 from December 31, 2022. The increase was primarily due to increases in 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.

Amount
September 30, 2023 December 31, 2022 Increase/
Amount % Amount % (Decrease)
(dollars in thousands)
Demand, noninterest-bearing $ 1,224,125 16.5 % $ 1,501,614 20.4 % $ (277,489 )
Demand, interest-bearing and NOW 3,318,092 44.6 3,085,613 41.9 232,479
Savings 374,067 5.0 375,205 5.1 (1,138 )
Time 2,522,211 33.9 2,394,190 32.6 128,021
Total deposits $ 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 owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures was 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, 2023 was 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, September 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on September 15 and December 15 of each year, commencing December 15, 2020. From and including September 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.

During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain accredited investors. The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity. The Notes were non-callable for five years, had a stated maturity of February 1, 2028 and bore interest at a rate that reset quarterly to the 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 $1.2 billion as of September 30, 2023, an increase of $9 million from December 31, 2022. The increase in stockholders’ equity was primarily attributable to an increase in retained earnings of $44 million, partially offset by an increase in accumulated other comprehensive losses of $21 million and an increase in treasury stock of $15 million. The increase in accumulated other comprehensive losses during 2023 resulted from higher interest rates. As of September 30, 2023, the Company’s tangible common equity ratio and tangible book value per share were 9.11% and $22.34, respectively, which improved from 9.04% and $21.71, respectively, as of December 31, 2022. Total goodwill and other intangible assets were $214.6 million as of September 30, 2023, and $215.7 million as of December 31, 2022.

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

September 30, 2023 December 31, 2022
(dollars in thousands, except for share and per share data)
Common equity $ 1,077,227 $ 1,067,824
Less: intangible assets (214,594 ) (215,684 )
Tangible common stockholders’ equity $ 862,633 $ 852,140
Total assets $ 9,678,885 $ 9,644,948
Less: intangible assets (214,594 ) (215,684 )
Tangible assets $ 9,464,291 $ 9,429,264
Common stock outstanding at period end 38,621,970 39,243,123
Tangible common equity ratio ^(1)^ 9.11 % 9.04 %
Book value per common share $ 27.89 $ 27.21
Less: intangible assets 5.55 5.50
Tangible book value per common share $ 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, 2023 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution (for the Bank).

ConnectOne Bancorp, Inc. For Capital Adequacy Purposes To Be Well-Capitalized Under Prompt Corrective Action Provisions
The Company Amount Ratio Amount Ratio Amount Ratio
As of September 30, 2023 (dollars in thousands)
Tier 1 leverage capital $ 1,031,973 10.86 % $ 380,234 4.00 % NA NA
CET I risk-based ratio 915,891 10.64 387,539 4.50 NA NA
Tier 1 risk-based capital 1,031,973 11.98 516,719 6.00 NA NA
Total risk-based capital 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
The Bank Amount Ratio Amount Ratio Amount Ratio
As of September 30, 2023 (dollars in thousands)
Tier 1 leverage capital $ 1,066,568 11.23 % $ 379,965 4.00 % 474,956 5.00 %
CET I risk-based ratio 1,066,568 12.38 387,532 4.50 559,769 6.50
Tier 1 risk-based capital 1,066,568 12.38 516,710 6.00 688,946 8.00
Total risk-based capital 1,156,880 13.43 688,946 8.00 861,183 10.00

As of September 30, 2023, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the Total Risk Based Capital Ratio which was 3.40% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 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 Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and are operating in an effective manner and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1a. Risk Factors

There have been no material changes to the risks inherent in our business from those described under Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 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, 2023, the Company repurchased a total of 316,789 shares. As of  September 30, 2023, shares remaining for repurchase under the program were 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
10.1 Separation 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 3, 2023 Date: November 3, 2023

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EX-10.1 2 ex_575263.htm EXHIBIT 10.1

Exhibit 10.1

SEPARATION AND RELEASE AGREEMENT

This Separation and Release Agreement ("Agreement") is made as of this 29th day of September, 2023 by and among Christopher J. Ewing ("Employee"), ConnectOne Bancorp, Inc., a New Jersey corporation (“CNOB”) and ConnectOne Bank, a New Jersey chartered commercial bank (“Bank”, and with CNOB, collectively the "Employer").

WHEREAS, Employee has dutifully served as an executive officer of Employer;

WHEREAS, Employer and Employee determined that the parties shall terminate the Employee Agreement, and Employee’s employment with Employer, amicably;

WHEREAS, Employer and Employee wish to ensure an orderly transition of Employee’s position with Employer;

WHEREAS, subject to the terms and conditions hereof, Employee’s last day of employment with Employer will be December 31, 2023 (the “Separation Date”);

WHEREAS, Employee and the Employer desire to enter into this Agreement to set forth their respective agreements regarding Employee’s separation from employment;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Employee and the Employer agree as follows:

1.         Employment Until Separation Date. From the date hereof until the Separation Date, Employee will remain employed as an executive officer of Employer on the same terms and conditions, including base salary, as he is employed under as of the date of this Agreement, provided that Employee will at all times continue to comply with all of Employer’s policies, procedures and requirements applicable to employees and the terms of this Agreement as well as the terms of that certain Employment Agreement dated as of June 1, 2017 by and among Employee, CNOB and the Bank (the “Employment Agreement”). Employer and employee agree and understand that Employee’s duties, as defined in the Employment Agreement, shall be reasonably modified to reflect the spirit of this Agreement to effectuate an amicable and orderly transition of Employee’s position with Employer.

2.         2023 Cash Incentive Plan Award. Provided Employee remains employed in good standing by the Employer through the Separation Date, Employee will remain eligible to receive a cash bonus under the Employer’s Executive Incentive Plan for his performance in 2023, despite the fact that the Employee will not be an employee of the Employer on the date the bonus is paid, currently expected to be in the first quarter of 2024. Employee’s performance in 2023 will be evaluated by the Employer’s Board Compensation Committee under the terms of the Executive Incentive Plan, and Employee will be eligible to receive such bonus award as the Compensation Committee shall determine.

3.         Payment Under Employment Agreement. For purposes of that certain Employment Agreement dated as of June 1, 2017 by and among Employee, CNOB and the Bank (the “Employment Agreement”), provided Employee remains employed in good standing by the Employer through the Separation Date, the termination of Employee’s employment with Employer on the Separation Date shall be deemed a “termination without cause” under Section 6(d) of the Employment Agreement, and, provided that Employee complies with Section 11(g) of the Employment Agreement in accordance with its terms, Employer shall make the payments, and provide the benefits, provided for under Section 6(d) of the Employment Agreement to Employee under the terms provided for therein.

4.         Equity Awards Outstanding as of Separation Date. Employer agrees that, provided Employee remains employed in good standing by the Employer through the Separation Date, those certain equity awards listed on Exhibit A hereto will be deemed vested as of the Separation Date, and Employee shall be entitled to settlement of the Performance Units noted on Exhibit A as and when determined by Employer’s Compensation Committee in accordance with the terms of the Performance Units. Employee acknowledges that all unvested equity awards as of the Separation Date (other than those listed on Exhibit A) will terminate as of the Separation Date and be of no further force or effect.

5.         Supplemental Executive Retirement Plan. Provided Employee remains employed in good standing by the Employer through the Separation Date, Employee shall continue to vest in that certain Supplemental Executive Retirement Plan between Employee and Employer and (the “SERP”) until the Separation Date, and Employee’s rights thereunder after the Separation Date shall be as set forth in the SERP.

6.         Termination of Existing Agreement; Preservation of Certain Provisions. Effective as of the Separation Date, except as set forth herein, the Employment Agreement shall be deemed terminated, and provided that each party has until such date complied with all of its or his obligations under the Employment Agreement and this Agreement until such date, all obligations of the Employee and the Employer to one another shall be deemed satisfied. Notwithstanding the forgoing, Sections 8, 9, 10 and 11(f) and (g) of the Employment Agreement will remain in full force and effect in accordance with their terms, and are deemed incorporated herein.

7.         Employer Property. As of the Separation Date, Employee shall turn over or return to Employer any and all property in Employee’s possession, custody or control that belongs to the Employer.

8.         Non-Disparagement. Employee agrees to forever refrain from making any disparaging remarks or other negative or derogatory statements, written or oral, to any third party relating to the Employer, or its parents, subsidiaries, officers, employees, members or agents or customers~~;~~. Employer agrees to forever refrain from making any disparaging remarks or other negative or derogatory statements, written or oral, to any third party relating to the Employee; provided, however that the forgoing shall not prohibit Employee or Employer from providing truthful testimony in any judicial or administrative proceeding, if Employee or Employer, as appropriate, is legally compelled to so testify. For purposes hereof, only statements made by the Chief Executive Officer, President, Chief Financial Officer and Director of Human Resources of the Employer shall be deemed statements made by or on behalf of the Employer.

9.         Resignation From All Employer Positions; No Obligation to Re-Hire.

(a) By executing this Agreement, Employee is resigning from any and all additional positions Employee may hold with Employer, its affiliates or subsidiaries, including but not limited to (i) any positions with any compensation or benefit plans for the benefit of employees or directors of the Employer or (ii) any positions with any subsidiary or joint venture of the Employer, effective as of the Separation Date, or, with regard to positions with affiliates or subsidiaries of Employer, sooner if requested by Employer.

(b) Employee agrees that the Employer shall have no obligation, contractual or otherwise to hire, re-hire or re-employ Employee in the future.

10.         Employee's Release. Upon the Separation Date, as a condition to receiving the payments under Section 6(d) of the Employment Agreement, as well as the benefits provided for hereunder, Employee shall provide Employer with a general release as required by section 11(g) of the Employment Agreement.

11.         Equitable and other Remedies. Employee agrees that the Employer will suffer irreparable harm in the event that Employee breaches any of Employee’s obligations under this Agreement, and that it is impossible to measure in money the damages that will accrue to the Employer in the event of such a breach or threatened breach. Accordingly, if any action or proceeding is commenced by or on behalf of the Employer to enforce any of the provisions contained in this Agreement, Employee hereby waives the claim or defense that the Employer has an adequate remedy at law or has not been or is not being irreparably injured by such breach or threatened breach, and Employee agrees to not raise such claim or defense in any such action or proceeding. Employee further agrees that the Employer shall be entitled to temporary and permanent injunctive relief to restrain any breaches or further violations of this Agreement, without the posting of any bond, and that this right to injunctive relief shall be in addition to any and all of the Employer's other remedies and damages, including, but not limited to, costs and reasonable attorney's fees incurred as a result of said breach or threatened breach.

(a) The Employer, to the full extent permitted by law, shall indemnify Employee for any claims arising out of related to Employee’s employment as an officer of Employer. Expenses (including reasonable attorneys’ fees) incurred by Employee in defending any civil, criminal, administrative, or investigative action, suit or proceeding for which Employee may be entitled to indemnification shall be paid by the Employer in advance of the final disposition of such action, suit or proceeding (directly to counsel retained by Employer to represent Employee) provided that Employee has provided an undertaking to repay such amount if it shall ultimately be determined that he is not entitled to indemnification under the New Jersey Business Corporation Act or the New Jersey Banking Act if 1948, as amended.

12.         Entire Agreement. This Agreement and the exhibits hereto are the complete agreement of the parties with respect to the subject matter herein, and, except as otherwise provided for herein, supersedes all agreements previously made between the parties relating to its subject matter. This Agreement may not be amended or modified except by an agreement in writing signed by both parties.

13.         Liability for Breach of Agreement. Any party found by a court of competent jurisdiction to be in breach of this Agreement shall be liable for all reasonable attorneys' fees and costs incurred by the non-breaching party in connection with any efforts to enforce this Agreement against the party found to be in breach.

14.         Voluntary Nature of Agreement. Employee warrants, represents and acknowledges that this Agreement is entered into by Employee knowingly and voluntarily as an act of Employee’s own free will; that Employee is of sound mind; and that Employee is laboring under no physical or mental infirmity that would affect either Employee’s capacity to understand the terms of this Agreement or to freely enter into and be bound by the provisions of this Agreement**. Employee has been advised that Employee should have this Agreement reviewed by a legal representative of Employee**’s choice.

15.         Governing Law/Forum Selection. This Agreement shall be governed by the laws of the State of New Jersey. The parties agree that all disputes arising under this Agreement shall be resolved in the courts of the state of New Jersey sitting in Bergen County, or the federal district court for the District of New Jersey sitting on Newark, New Jersey.

16.         Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be considered an original and together which shall constitute one and the same instrument.

17.         409A. The payments and benefits described herein are intended to either comply with, or be exempt from, the requirements of Section 409A of the Internal Revenue Code of 1986, as amended and the parties intend that this Agreement will be administered and interpreted consistent with that intention.

I have read the foregoing Agreement and I accept and agree to its provisions and hereby execute it voluntarily with full understanding of its consequences.

[Signatures on Next Page]

[Signature Page to Separation and Release Agreement]

CONNECTONE BANCORP, INC.
By: /s/ Frank Sorrentino III
Name: Frank Sorrentino III<br><br> <br>Title: Chairman & CEO
CONNECTONE BANK
By: /s/ Frank Sorrentino III
Name: Frank Sorrentino III<br><br> <br>Title: Chairman & CEO
/s/ Christopher J. Ewing
Christopher J. Ewing

EXHIBIT A

6,356 Deferred Stock Units

4,457 Performance Units

ex_558560.htm

EXHIBIT 31.1

CERTIFICATION

I, Frank Sorrentino III, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of ConnectOne Bancorp, Inc.;

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

  4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

  1. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.

Date: November 3, 2023 /s/ Frank Sorrentino III
Frank Sorrentino III
Chairman and Chief Executive Officer

ex_558561.htm

EXHIBIT 31.2

CERTIFICATION

I, William S. Burns, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of ConnectOne Bancorp, Inc.;

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

  4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

  1. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.

Date: November 3, 2023 /s/ William S. Burns
William S. Burns
Senior Executive Vice President and Chief Financial Officer

ex_558562.htm

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report of ConnectOne Bancorp, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2023 filed with the Securities and Exchange Commission (the “Report”), I, Frank Sorrentino III, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

  1. The Report fully complies with the requirements of Section 13 (a) of the Securities Exchange Act of 1934; and

  2. The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated results of operations of the Company for the periods presented.

Date: November 3, 2023 /s/ Frank Sorrentino III
Frank Sorrentino III
Chairman and Chief Executive Officer

ex_558563.htm

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report of ConnectOne Bancorp, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2023 filed with the Securities and Exchange Commission (the “Report”), I, William S. Burns, Senior Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

  1. The Report fully complies with the requirements of Section 13 (a) of the Securities Exchange Act of 1934; and

  2. The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated results of operations of the Company for the periods presented.

Date: November 3, 2023 /s/ William S. Burns
William S. Burns
Senior Executive Vice President and Chief Financial Officer

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