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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, 2022

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

CONNECTONE BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

New Jersey | 52-1273725
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.)

301 Sylvan Avenue

Englewood Cliffs, New Jersey 07632

(Address of Principal Executive Offices) (Zip Code)

201-816-8900

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

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

Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ Emerging growth company ☐

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

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

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

Common Stock, no par value: | 39,243,123 shares
(Title of Class) | (Outstanding as of November 4, 2022)

Table of Contents

Table of Contents

|  | Page
PART I – FINANCIAL INFORMATION |
Item 1. | Financial Statements | 3
| Consolidated Statements of Condition as of September 30, 2022 (unaudited) and December 31, 2021 | 3
| Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021 (unaudited) | 4
| Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021 (unaudited) | 5
| Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 (unaudited) | 6
| Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (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 | 57
Item 4. | Mine Safety Disclosures | 57
Item 5. | Other Information | 57
Item 6. | Exhibits | 58
SIGNATURES | 59

2

Table of Contents

Item 1. Financial Statements

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

(unaudited)

(in thousands, except for share data) |  | September 30, |  |  | December 31, |
|  | 2022 |  |  | 2021 |
ASSETS |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 58,852 |  |  | $ | 54,352 |
Interest-bearing deposits with banks |  |  | 274,992 |  |  |  | 211,184 |
Cash and cash equivalents |  |  | 333,844 |  |  |  | 265,536 |
Investment securities |  |  | 623,629 |  |  |  | 534,507 |
Equity securities |  |  | 15,563 |  |  |  | 13,794 |
Loans held-for-sale |  |  | 8,080 |  |  |  | 250 |
Loans receivable |  |  | 7,900,450 |  |  |  | 6,828,622 |
Less: Allowance for credit losses - loans |  |  | 91,717 |  |  |  | 78,773 |
Net loans receivable |  |  | 7,808,733 |  |  |  | 6,749,849 |
Investment in restricted stock, at cost |  |  | 45,324 |  |  |  | 27,826 |
Bank premises and equipment, net |  |  | 28,519 |  |  |  | 29,032 |
Accrued interest receivable |  |  | 38,940 |  |  |  | 34,152 |
Bank owned life insurance |  |  | 229,800 |  |  |  | 195,731 |
Right of use operating lease assets |  |  | 10,196 |  |  |  | 11,017 |
Other real estate owned |  |  | 264 |  |  |  | - |
Goodwill |  |  | 208,372 |  |  |  | 208,372 |
Core deposit intangibles |  |  | 7,721 |  |  |  | 8,997 |
Other assets |  |  | 119,267 |  |  |  | 50,417 |
Total assets |  | $ | 9,478,252 |  |  | $ | 8,129,480 |
LIABILITIES |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |
Noninterest-bearing |  | $ | 1,665,658 |  |  | $ | 1,617,049 |
Interest-bearing |  |  | 5,644,852 |  |  |  | 4,715,904 |
Total deposits |  |  | 7,310,510 |  |  |  | 6,332,953 |
Borrowings |  |  | 829,953 |  |  |  | 468,193 |
Subordinated debentures, net |  |  | 153,179 |  |  |  | 152,951 |
Operating lease liabilities |  |  | 11,454 |  |  |  | 12,417 |
Other liabilities |  |  | 24,861 |  |  |  | 38,754 |
Total liabilities |  |  | 8,329,957 |  |  |  | 7,005,268 |
COMMITMENTS AND CONTINGENCIES |  |  |  |  |  |  |  |
STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |  |
Preferred Stock, no par value; $1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of September 30, 2022 and as of December 31, 2021; outstanding 115,000 shares as of September 30, 2022 and as of December 31, 2021 |  |  | 110,927 |  |  |  | 110,927 |
Common stock, no par value: Authorized 100,000,000 shares; issued 42,679,405 shares as of September 30, 2022 and 42,557,264 shares as of December 31, 2021; outstanding 39,243,123 shares as of September 30, 2022 and 39,568,090 as of December 31, 2021 |  |  | 586,946 |  |  |  | 586,946 |
Additional paid-in capital |  |  | 28,756 |  |  |  | 27,246 |
Retained earnings |  |  | 510,957 |  |  |  | 440,169 |
Treasury stock, at cost 3,436,282 common shares as of September 30, 2022 and 2,989,174 as of December 31, 2021 |  |  | (52,799 | ) |  |  | (39,672 | )
Accumulated other comprehensive loss |  |  | (36,492 | ) |  |  | (1,404 | )
Total stockholders’ equity |  |  | 1,148,295 |  |  |  | 1,124,212 |
Total liabilities and stockholders’ equity |  | $ | 9,478,252 |  |  | $ | 8,129,480 |

See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
(dollars in thousands, except for per share data) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest and fees on loans |  | $ | 90,731 |  |  | $ | 75,092 |  |  | $ | 248,041 |  |  | $ | 216,655 |
Interest and dividends on investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 4,063 |  |  |  | 1,065 |  |  |  | 8,487 |  |  |  | 3,148 |
Tax-exempt |  |  | 1,083 |  |  |  | 511 |  |  |  | 2,708 |  |  |  | 1,885 |
Dividends |  |  | 438 |  |  |  | 245 |  |  |  | 943 |  |  |  | 764 |
Interest on federal funds sold and other short-term investments |  |  | 665 |  |  |  | 113 |  |  |  | 1,098 |  |  |  | 246 |
Total interest income |  |  | 96,980 |  |  |  | 77,026 |  |  |  | 261,277 |  |  |  | 222,698 |
Interest expense |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 13,299 |  |  |  | 5,478 |  |  |  | 24,018 |  |  |  | 19,487 |
Borrowings |  |  | 5,520 |  |  |  | 3,303 |  |  |  | 13,149 |  |  |  | 10,794 |
Total interest expense |  |  | 18,819 |  |  |  | 8,781 |  |  |  | 37,167 |  |  |  | 30,281 |
Net interest income |  |  | 78,161 |  |  |  | 68,245 |  |  |  | 224,110 |  |  |  | 192,417 |
Provision for (reversal of) credit losses |  |  | 10,000 |  |  |  | 1,100 |  |  |  | 14,450 |  |  |  | (6,315 | )
Net interest income after provision for (reversal of) credit losses |  |  | 68,161 |  |  |  | 67,145 |  |  |  | 209,660 |  |  |  | 198,732 |
Noninterest income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposit, loan and other income |  |  | 1,969 |  |  |  | 1,702 |  |  |  | 5,578 |  |  |  | 5,092 |
Income on bank owned life insurance |  |  | 1,521 |  |  |  | 1,278 |  |  |  | 4,069 |  |  |  | 3,527 |
Net gains on sale of loans held-for-sale |  |  | 262 |  |  |  | 1,114 |  |  |  | 1,519 |  |  |  | 2,668 |
Gain on sale of branches |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 674 |
Net losses on equity securities |  |  | (430 | ) |  |  | (78 | ) |  |  | (1,431 | ) |  |  | (242 | )
Net gain on sales/redemptions of securities available-for-sale |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 195 |
Total noninterest income |  |  | 3,322 |  |  |  | 4,016 |  |  |  | 9,735 |  |  |  | 11,914 |
Noninterest expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 21,025 |  |  |  | 16,807 |  |  |  | 59,470 |  |  |  | 47,790 |
Occupancy and equipment |  |  | 2,600 |  |  |  | 2,656 |  |  |  | 7,262 |  |  |  | 8,876 |
FDIC insurance |  |  | 720 |  |  |  | 525 |  |  |  | 2,051 |  |  |  | 2,040 |
Professional and consulting |  |  | 1,980 |  |  |  | 2,217 |  |  |  | 5,896 |  |  |  | 6,290 |
Marketing and advertising |  |  | 461 |  |  |  | 345 |  |  |  | 1,238 |  |  |  | 864 |
Information technology and communications |  |  | 2,747 |  |  |  | 3,048 |  |  |  | 8,414 |  |  |  | 8,209 |
Amortization of core deposit intangibles |  |  | 409 |  |  |  | 483 |  |  |  | 1,276 |  |  |  | 1,498 |
Other components of net periodic pension expense |  |  | (143 | ) |  |  | (67 | ) |  |  | (429 | ) |  |  | (201 | )
Increase in value of acquisition price |  |  | - |  |  |  | - |  |  |  | 1,516 |  |  |  | - |
Other expenses |  |  | 2,344 |  |  |  | 2,169 |  |  |  | 6,382 |  |  |  | 5,561 |
Total noninterest expenses |  |  | 32,143 |  |  |  | 28,183 |  |  |  | 93,076 |  |  |  | 80,927 |
Income before income tax expense |  |  | 39,340 |  |  |  | 42,978 |  |  |  | 126,319 |  |  |  | 129,719 |
Income tax expense |  |  | 10,425 |  |  |  | 10,881 |  |  |  | 33,665 |  |  |  | 32,404 |
Net income |  |  | 28,915 |  |  |  | 32,097 |  |  |  | 92,654 |  |  |  | 97,315 |
Preferred dividends |  |  | 1,509 |  |  |  | - |  |  |  | 4,527 |  |  |  | - |
Net income available to common stockholders |  | $ | 27,406 |  |  | $ | 32,097 |  |  | $ | 88,127 |  |  | $ | 97,315 |
Earnings per common share |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.70 |  |  | $ | 0.81 |  |  | $ | 2.24 |  |  | $ | 2.45 |
Diluted |  |  | 0.70 |  |  |  | 0.80 |  |  |  | 2.23 |  |  |  | 2.43 |

See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
(dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Net income |  | $ | 28,915 |  |  | $ | 32,097 |  |  | $ | 92,654 |  |  | $ | 97,315 |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Unrealized holding losses on available-for-sale securities arising during the period |  |  | (39,912 | ) |  |  | (3,228 | ) |  |  | (94,428 | ) |  |  | (8,397 | )
Tax effect |  |  | 11,471 |  |  |  | 796 |  |  |  | 27,178 |  |  |  | 2,160 |
Net of tax |  |  | (28,441 | ) |  |  | (2,432 | ) |  |  | (67,250 | ) |  |  | (6,237 | )
Reclassification adjustment for realized gains included in net income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (195 | )
Tax effect |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 48 |
Net of tax |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (147 | )
Unrealized gains on cash flow hedges |  |  | 16,969 |  |  |  | 1,890 |  |  |  | 44,253 |  |  |  | 1,872 |
Tax effect |  |  | (5,094 | ) |  |  | (533 | ) |  |  | (13,381 | ) |  |  | (529 | )
Net of tax |  |  | 11,875 |  |  |  | 1,357 |  |  |  | 30,872 |  |  |  | 1,343 |
Reclassification adjustment for realized (gains) losses on cash flow hedges |  |  | (1,178 | ) |  |  | 328 |  |  |  | (524 | ) |  |  | 1,543 |
Tax effect |  |  | 343 |  |  |  | (90 | ) |  |  | 159 |  |  |  | (434 | )
Net of tax |  |  | (835 | ) |  |  | 238 |  |  |  | (365 | ) |  |  | 1,109 |
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 |  |  | 17 |  |  |  | 75 |  |  |  | 49 |  |  |  | 225 |
Tax effect |  |  | (5 | ) |  |  | (21 | ) |  |  | (14 | ) |  |  | (63 | )
Net of tax |  |  | 12 |  |  |  | 54 |  |  |  | 35 |  |  |  | 162 |
Total other comprehensive loss |  |  | (17,389 | ) |  |  | (783 | ) |  |  | (35,088 | ) |  |  | (3,770 | )
Total comprehensive income |  | $ | 11,526 |  |  | $ | 31,314 |  |  | $ | 57,566 |  |  | $ | 93,545 |

See accompanying notes to unaudited consolidated financial statements.

5

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

|  | Nine Months Ended September 30, 2022 |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |
|  |  |  |  |  |  |  |  |  | Additional |  |  |  |  |  |  |  |  |  |  | Other |  |  | Total |
|  | Preferred |  |  | Common |  |  | Paid-In |  |  | Retained |  |  | Treasury |  |  | Comprehensive |  |  | Stockholders’ |
(in thousands, except share data) |  | Stock |  |  | Stock |  |  | Capital |  |  | Earnings |  |  | Stock |  |  | (Loss) Income |  |  | Equity |
Balance as of December 31, 2021 |  | $ | 110,927 |  |  | $ | 586,946 |  |  | $ | 27,246 |  |  | $ | 440,169 |  |  | $ | (39,672 | ) |  | $ | (1,404 | ) |  | $ | 1,124,212 |
Net income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 92,654 |  |  |  | - |  |  |  | - |  |  |  | 92,654 |
Other comprehensive loss, net of tax |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (35,088 | ) |  |  | (35,088 | )
Cash dividend declared on preferred stock ($0.984375 per depositary share) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (4,527 | ) |  |  | - |  |  |  | - |  |  |  | (4,527 | )
Cash dividends declared on common stock ($0.44 per share) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (17,339 | ) |  |  | - |  |  |  | - |  |  |  | (17,339 | )
Exercise of stock options (15,086 shares) |  |  | - |  |  |  | - |  |  |  | 124 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 124 |
Restricted stock grants, net of forfeitures (53,169 shares) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Stock grants (153 shares) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Net shares issued in satisfaction of restricted stock units earned (31,383 shares) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Net shares issued in satisfaction of performance units earned (22,350 shares) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Share redemption for tax withholdings on performance units and restricted stock units earned |  |  | - |  |  |  | - |  |  |  | (2,133 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2,133 | )
Repurchase of treasury stock (447,108 shares) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (13,127 | ) |  |  | - |  |  |  | (13,127 | )
Stock-based compensation expense |  |  | - |  |  |  | - |  |  |  | 3,519 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3,519 |
Balance as of September 30, 2022 |  | $ | 110,927 |  |  | $ | 586,946 |  |  | $ | 28,756 |  |  | $ | 510,957 |  |  | $ | (52,799 | ) |  | $ | (36,492 | ) |  | $ | 1,148,295 |

|  | Three Months Ended September 30, 2022 |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |
|  |  |  |  |  |  |  |  |  | Additional |  |  |  |  |  |  |  |  |  |  | Other |  |  | Total |
|  | Preferred |  |  | Common |  |  | Paid-In |  |  | Retained |  |  | Treasury |  |  | Comprehensive |  |  | Stockholders’ |
(in thousands, except share data) |  | Stock |  |  | Stock |  |  | Capital |  |  | Earnings |  |  | Stock |  |  | (Loss) Income |  |  | Equity |
Balance as of 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 |

6

Table of Contents

(continued)

|  | Nine Months Ended September 30, 2021 |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |
|  |  |  |  |  |  |  |  |  | Additional |  |  |  |  |  |  |  |  |  |  | Other |  |  | Total |
|  | Preferred |  |  | Common |  |  | Paid-In |  |  | Retained |  |  | Treasury |  |  | Comprehensive |  |  | Stockholders’ |
(in thousands, except share data) |  | Stock |  |  | Stock |  |  | Capital |  |  | Earnings |  |  | Stock |  |  | (Loss) Income |  |  | Equity |
Balance as of December 31, 2020 |  | $ | - |  |  | $ | 586,946 |  |  | $ | 23,887 |  |  | $ | 331,951 |  |  | $ | (30,271 | ) |  | $ | 2,797 |  |  | $ | 915,310 |
Cumulative effect of change in accounting principle (see note 1b. “Authoritative Accounting Guidance Presentation”), net of tax |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2,925 | ) |  |  | - |  |  |  | - |  |  |  | (2,925 | )
Balance as of January 1, 2021 as adjusted for changes in accounting principle |  |  | - |  |  |  | 586,946 |  |  |  | 23,887 |  |  |  | 329,026 |  |  |  | (30,271 | ) |  |  | 2,797 |  |  |  | 912,385 |
Net income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 97,315 |  |  |  | - |  |  |  | - |  |  |  | 97,315 |
Other comprehensive loss, net of tax |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3,770 | ) |  |  | (3,770 | )
Cash dividends declared on common stock ($0.31 per share) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (12,345 | ) |  |  | - |  |  |  | - |  |  |  | (12,345 | )
Exercise of stock options (5,449 shares) |  |  | - |  |  |  | - |  |  |  | 45 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 45 |
Restricted stock grants, net of forfeitures (46,900 shares) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Stock grants (4,981 shares) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Net shares issued in satisfaction of restricted stock units earned (14,711 shares) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Net shares issued in satisfaction of performance units earned (34,458 shares) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Share redemption for tax withholdings on performance units and restricted stock units earned |  |  | - |  |  |  | - |  |  |  | (1,283 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,283 | )
Repurchase of treasury stock (289,698 shares) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (8,043 | ) |  |  | - |  |  |  | (8,043 | )
Proceeds from preferred stock issuance, net of costs (115,000 shares) |  |  | 110,927 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 110,927 |
Stock-based compensation expense |  |  | - |  |  |  | - |  |  |  | 3,202 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3,202 |
Balance as of September 30, 2021 |  | $ | 110,927 |  |  | $ | 586,946 |  |  | $ | 25,851 |  |  | $ | 413,996 |  |  | $ | (38,314 | ) |  | $ | (973 | ) |  | $ | 1,098,433 |

|  | Three Months Ended September 30, 2021 |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | Additional |  |  |  |  |  |  |  |  |  |  | Other |  |  |  | Total |
|  | Preferred |  |  | Common |  |  | Paid-In |  |  | Retained |  |  | Treasury |  |  | Comprehensive |  |  |  | Stockholders’ |
(in thousands, except share data) |  | Stock |  |  | Stock |  |  | Capital |  |  | Earnings |  |  | Stock |  |  | (Loss) Income |  |  |  | Equity |
Balance as of June 30, 2021 |  | $ | - |  |  | $ | 586,946 |  |  | $ | 24,606 |  |  | $ | 386,280 |  |  | $ | (32,682 | ) |  | $ | (190 | ) | : |  | $ | 964,960 |
Net income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 32,097 |  |  |  | - |  |  |  | - |  |  |  |  | 32,097 |
Other comprehensive loss, net of tax |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (783 | ) |  |  |  | (783 | )
Cash dividends declared on common stock ($0.11 per share) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (4,381 | ) |  |  | - |  |  |  | - |  |  |  |  | (4,381 | )
Restricted stock grants, net of forfeitures (1,082 shares) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  |  | - |
Stock grants (4,535 shares) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  |  | - |
Repurchase of treasury stock (196,069 shares) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5,632 | ) |  |  | - |  |  |  |  | (5,632 | )
Proceeds from preferred stock issuance, net of costs (115,000 shares) |  |  | 110,927 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 110,927 |
Stock-based compensation expense |  |  | - |  |  |  | - |  |  |  | 1,245 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  |  | 1,245 |
Balance as of September 30, 2021 |  | $ | 110,927 |  |  | $ | 586,946 |  |  | $ | 25,851 |  |  | $ | 413,996 |  |  | $ | (38,314 | ) |  | $ | (973 | ) |  |  | $ | 1,098,433 |

See accompanying notes to unaudited consolidated financial statements.

7

Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

|  | Nine Months Ended |
|  | September 30, |
(dollars in thousands) |  | 2022 |  |  | 2021 |
Cash flows from operating activities |  |  |  |  |  |  |  |
Net income |  | $ | 92,654 |  |  | $ | 97,315 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization of premises and equipment |  |  | 2,903 |  |  |  | 2,832 |
Provision for (reversal of) credit losses |  |  | 14,450 |  |  |  | (6,315 | )
Amortization of intangibles |  |  | 1,276 |  |  |  | 1,498 |
Net accretion of loans |  |  | (2,448 | ) |  |  | (4,130 | )
Accretion on bank premises |  |  | (37 | ) |  |  | (61 | )
Accretion on deposits |  |  | (657 | ) |  |  | (1,762 | )
Amortization (accretion) on borrowings, net |  |  | 27 |  |  |  | (43 | )
Stock-based compensation |  |  | 3,519 |  |  |  | 3,202 |
Gains on sales/redemptions of securities available-for-sale, net |  |  | - |  |  |  | (195 | )
Losses on equity securities, net |  |  | 1,431 |  |  |  | 242 |
Gain on sale of branches |  |  | - |  |  |  | (674 | )
Net losses on disposition of other premises and equipment |  |  | - |  |  |  | 65 |
Gains on sale of loans held-for-sale, net |  |  | (1,519 | ) |  |  | (2,668 | )
Loans originated for resale |  |  | (18,619 | ) |  |  | (43,676 | )
Proceeds from sale of loans held-for-sale |  |  | 25,955 |  |  |  | 57,674 |
Loss/(gain) on sale of other real estate owned |  |  | 6 |  |  |  | (18 | )
Increase in cash surrender value of bank owned life insurance |  |  | (4,069 | ) |  |  | (3,527 | )
Amortization of premiums and accretion of discounts on securities available-for-sale |  |  | 1,848 |  |  |  | 4,677 |
Amortization of subordinated debentures issuance costs |  |  | 228 |  |  |  | 227 |
(Increase) decrease in accrued interest receivable |  |  | (4,788 | ) |  |  | 1,707 |
Net change in operating leases |  |  | (142 | ) |  |  | (734 | )
(Increase) decrease in other assets |  |  | (4,781 | ) |  |  | 43,319 |
(Decrease) increase in other liabilities |  |  | (12,291 | ) |  |  | 5,689 |
Net cash provided by operating activities |  |  | 94,946 |  |  |  | 154,644 |
Cash flows from investing activities |  |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |
Purchases |  |  | (320,946 | ) |  |  | (203,534 | )
Maturities, calls and principal repayments |  |  | 135,548 |  |  |  | 215,531 |
Purchases of equity securities |  |  | (3,200 | ) |  |  | (555 | )
Net (purchases) redemptions of restricted investment in bank stocks |  |  | (17,498 | ) |  |  | 6,993 |
Cash flow hedge premium payment |  |  | (6,965 | ) |  |  | - |
Payments on loans held-for-sale |  |  | 5 |  |  |  | 32 |
Net increase in loans |  |  | (1,084,483 | ) |  |  | (345,098 | )
Purchases of bank owned life insurance |  |  | (30,000 | ) |  |  | (25,000 | )
Purchases of premises and equipment |  |  | (2,353 | ) |  |  | (2,473 | )
Proceeds from sale of branches |  |  | - |  |  |  | 1,087 |
Proceeds from sale of other real estate owned |  |  | 309 |  |  |  | 321 |
Net cash used in investing activities |  |  | (1,329,583 | ) |  |  | (352,696 | )
Cash flows from financing activities |  |  |  |  |  |  |  |
Net increase in deposits |  |  | 978,214 |  |  |  | 440,876 |
Repayment of subordinated debentures |  |  | - |  |  |  | (50,000 | )
Advances of borrowings |  |  | 2,305,181 |  |  |  | 100,000 |
Repayments of borrowings |  |  | (1,943,448 | ) |  |  | (272,686 | )
Cash dividends on preferred stock |  |  | (4,528 | ) |  |  | - |
Repurchase of treasury stock |  |  | (13,127 | ) |  |  | (8,043 | )
Cash dividends paid on common stock |  |  | (17,338 | ) |  |  | (12,345 | )
Proceeds from exercise of stock options |  |  | 124 |  |  |  | 45 |
Net proceeds from the issuance of preferred stock |  |  | - |  |  |  | 110,927 |
Share redemption for tax withholdings on performance units and restricted stock units earned |  |  | (2,133 | ) |  |  | (1,283 | )
Net cash provided by financing activities |  |  | 1,302,945 |  |  |  | 307,491 |
Net change in cash and cash equivalents |  |  | 68,308 |  |  |  | 109,439 |
Cash and cash equivalents at beginning of period |  |  | 265,536 |  |  |  | 303,756 |
Cash and cash equivalents at end of period |  | $ | 333,844 |  |  | $ | 413,195 |

8

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(continued)

Supplemental disclosures of cash flow information |  |  |  |  |  |  |  |
Cash payments for: |  |  |  |  |  |  |  |
Interest paid on deposits and borrowings |  | $ | 34,552 |  |  | $ | 32,664 |
Income taxes |  |  | 31,426 |  |  |  | 35,809 |

Supplemental disclosures of noncash activities |  |  |  |  |  |  |  |
Investing: |  |  |  |  |  |  |  |
Transfer of loans from held-for-investment to other real estate owned |  | $ | 579 |  |  | $ | 304 |
Transfer of loans from held-for-investment to held-for-sale |  |  | 13,652 |  |  |  | 14,211 |
Transfer of loans from held-for-sale to held-for-investment |  |  | - |  |  |  | 1,963 |

See accompanying notes to unaudited consolidated financial statements.

9

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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 primarily of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”). The Bank’s subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a Delaware investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), NJCB Spec-1, LLC (a New Jersey limited liability company), Port Jervis Holdings, LLC (a New Jersey limited liability company), BONJ Special Properties, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey financial technology company).

The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its twenty-four other banking offices and two loan production/business development offices throughout New Jersey, New York and South Florida. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’ business, real estate rentals and consumer wages.

The preceding unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022, or for any other interim period. The Company’s 2021 Annual Report on Form 10-K should be read in conjunction with these consolidated financial statements.

Basis of Presentation

The consolidated financial statements have been prepared in conformity with GAAP. Some items in the prior year consolidated financial statements were reclassified to conform to current presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.

Use of Estimates

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

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Risks and Uncertainties

As previously disclosed, on March 11, 2020 the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to impact the United States and the world. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The COVID-19 pandemic has adversely affected, and continues to adversely affect economic activity globally, nationally and locally. Although economic activity began to accelerate in 2021, and the United States continues to implement a COVID-19 vaccination program, COVID-19, its variants and actions taken to mitigate the spread of it have had and may in the future have an adverse impact on the economies and financial markets of many countries and parts of the United States, including the New Jersey/New York metropolitan area in which the Company primarily operates. Although the Company has been able to mitigate the impact of the pandemic on its operations, COVID-19 could impact the Company’s operations in the future. The effects of the COVID-19 pandemic may adversely affect the Company’s financial condition and results of operations in future periods. Although state and local governments have lifted most restrictions on conducting business, it is possible that restrictions could be reimposed.

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

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

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Note 1b. Authoritative Accounting Guidance

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.

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. The Company is evaluating the effect that ASU 2022-02 will have on its consolidated financial statements.

12

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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) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Net income available to common stockholders |  | $ | 27,406 |  |  | $ | 32,097 |  |  | $ | 88,127 |  |  | $ | 97,315 |
Earnings allocated to participating securities |  |  | (67 | ) |  |  | (76 | ) |  |  | (217 | ) |  |  | (250 | )
Income attributable to common stock |  | $ | 27,339 |  |  | $ | 32,021 |  |  | $ | 87,910 |  |  | $ | 97,065 |
Weighted average common shares outstanding, including participating securities |  |  | 39,243 |  |  |  | 39,741 |  |  |  | 39,393 |  |  |  | 39,770 |
Weighted average participating securities |  |  | (96 | ) |  |  | (95 | ) |  |  | (97 | ) |  |  | (102 | )
Weighted average common shares outstanding |  |  | 39,147 |  |  |  | 39,646 |  |  |  | 39,296 |  |  |  | 39,668 |
Incremental shares from assumed conversions of options, performance units and restricted shares |  |  | 192 |  |  |  | 223 |  |  |  | 214 |  |  |  | 220 |
Weighted average common and equivalent shares outstanding |  |  | 39,339 |  |  |  | 39,869 |  |  |  | 39,510 |  |  |  | 39,888 |
Earnings per common share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.70 |  |  | $ | 0.81 |  |  | $ | 2.24 |  |  | $ | 2.45 |
Diluted |  |  | 0.70 |  |  |  | 0.80 |  |  |  | 2.23 |  |  |  | 2.43 |

There were no antidilutive share equivalents as of September 30, 2022 or September 30, 2021.

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3. Investment Securities

The Company’s investment securities are classified as available-for-sale as of September 30, 2022 and December 31, 2021. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in stockholders’ equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value as of September 30, 2022 and December 31, 2021. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 6 of the Notes to Consolidated Financial Statements for a further discussion.

The following tables present information related to the Company’s portfolio of securities available-for-sale as of September 30, 2022 and December 31, 2021.

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Allowance |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | for |
|  |  |  |  |  | Gross |  |  | Gross |  |  |  |  |  |  | Investment |
|  | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |  |  | Credit |
|  | Cost |  |  | Gains |  |  | Losses |  |  | Value |  |  | Losses |
|  | (dollars in thousands) |
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal agency obligations |  | $ | 55,896 |  |  | $ | - |  |  | $ | (10,276 | ) |  | $ | 45,620 |  |  | $ | - |
Residential mortgage pass-through securities |  |  | 468,783 |  |  |  | - |  |  |  | (61,798 | ) |  |  | 406,985 |  |  |  | - |
Commercial mortgage pass-through securities |  |  | 25,546 |  |  |  | - |  |  |  | (4,651 | ) |  |  | 20,895 |  |  |  | - |
Obligations of U.S. states and political subdivisions |  |  | 159,441 |  |  |  | 46 |  |  |  | (18,380 | ) |  |  | 141,107 |  |  |  | - |
Corporate bonds and notes |  |  | 6,998 |  |  |  | - |  |  |  | (8 | ) |  |  | 6,990 |  |  |  | - |
Asset-backed securities |  |  | 1,934 |  |  |  | - |  |  |  | (36 | ) |  |  | 1,898 |  |  |  |  |
Other securities |  |  | 134 |  |  |  | - |  |  |  | - |  |  |  | 134 |  |  |  | - |
Total securities available-for-sale |  | $ | 718,732 |  |  | $ | 46 |  |  | $ | (95,149 | ) |  | $ | 623,629 |  |  | $ | - |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal agency obligations |  | $ | 50,336 |  |  | $ | 649 |  |  | $ | (625 | ) |  | $ | 50,360 |  |  | $ | - |
Residential mortgage pass-through securities |  |  | 317,111 |  |  |  | 1,868 |  |  |  | (2,884 | ) |  |  | 316,095 |  |  |  | - |
Commercial mortgage pass-through securities |  |  | 10,814 |  |  |  | 118 |  |  |  | (463 | ) |  |  | 10,469 |  |  |  | - |
Obligations of U.S. states and political subdivisions |  |  | 145,045 |  |  |  | 1,562 |  |  |  | (982 | ) |  |  | 145,625 |  |  |  | - |
Corporate bonds and notes |  |  | 8,968 |  |  |  | 81 |  |  |  | - |  |  |  | 9,049 |  |  |  | - |
Asset-backed securities |  |  | 2,563 |  |  |  | 3 |  |  |  | (2 | ) |  |  | 2,564 |  |  |  | - |
Certificates of deposit |  |  | 150 |  |  |  | - |  |  |  | - |  |  |  | 150 |  |  |  | - |
Other securities |  |  | 195 |  |  |  | - |  |  |  | - |  |  |  | 195 |  |  |  | - |
Total securities available-for-sale |  | $ | 535,182 |  |  | $ | 4,281 |  |  | $ | (4,956 | ) |  | $ | 534,507 |  |  | $ | - |

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3. Investment Securities – (continued)

Investment securities having a carrying value of approximately $174.8 million and $71.2 million as of September 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits, borrowings, repurchase agreements, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law. As of September 30, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

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

|  | September 30, 2022 |
|  | Amortized |  |  | Fair |
|  | Cost |  |  | Value |
|  | (dollars in thousands) |
Securities available-for-sale: |  |  |  |  |  |  |  |
Due in one year or less |  | $ | 5,451 |  |  | $ | 5,444 |
Due after one year through five years |  |  | 4,106 |  |  |  | 4,107 |
Due after five years through ten years |  |  | 2,342 |  |  |  | 2,289 |
Due after ten years |  |  | 212,370 |  |  |  | 183,775 |
Residential mortgage pass-through securities |  |  | 468,783 |  |  |  | 406,985 |
Commercial mortgage pass-through securities |  |  | 25,546 |  |  |  | 20,895 |
Other securities |  |  | 134 |  |  |  | 134 |
Total securities available-for-sale |  | $ | 718,732 |  |  | $ | 623,629 |

Gross gains and losses from the sales and redemptions of securities for periods presented were as follows:

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
|  | (dollars in thousands) |
Proceeds |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 5,185 |
Gross gains on sales/redemptions of securities |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 195 |
Gross losses on sales/redemptions of securities |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Net gain on sales/redemptions of securities |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 195 |
Less: tax provision on net gain |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (48 | )
Net gain on sales/redemptions of securities, after taxes |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 147 |

15

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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, 2022 and December 31, 2021.

|  | September 30, 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) |
Securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal agency obligations |  | $ | 45,620 |  |  | $ | (10,276 | ) |  | $ | 30,535 |  |  | $ | (4,261 | ) |  | $ | 15,085 |  |  | $ | (6,015 | )
Residential mortgage pass-through securities |  |  | 406,984 |  |  |  | (61,798 | ) |  |  | 293,070 |  |  |  | (32,342 | ) |  |  | 113,914 |  |  |  | (29,456 | )
Commercial mortgage pass-through securities |  |  | 20,895 |  |  |  | (4,651 | ) |  |  | 15,961 |  |  |  | (2,943 | ) |  |  | 4,934 |  |  |  | (1,708 | )
Obligations of U.S. states and political subdivisions |  |  | 135,483 |  |  |  | (18,380 | ) |  |  | 81,466 |  |  |  | (11,098 | ) |  |  | 54,017 |  |  |  | (7,282 | )
Corporate bonds and notes |  |  | 2,991 |  |  |  | (8 | ) |  |  | 2,991 |  |  |  | (8 | ) |  |  | - |  |  |  | - |
Asset-backed securities |  |  | 1,898 |  |  |  | (36 | ) |  |  | 1,242 |  |  |  | (16 | ) |  |  | 656 |  |  |  | (20 | )
Total temporarily impaired securities |  | $ | 613,871 |  |  | $ | (95,149 | ) |  | $ | 425,265 |  |  | $ | (50,668 | ) |  | $ | 188,606 |  |  | $ | (44,481 | )

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

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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, 2022 and December 31, 2021, totaled $2.6 million and $1.6 million, respectively.

The Company evaluates securities in an unrealized loss position for impairment related to credit losses on at least a quarterly basis. Securities in unrealized loss positions are first assessed as to whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If one of the criteria is met, the security’s amortized cost basis is written down to fair value through current earnings. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value resulted from credit losses or other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. As of September 30, 2022, the issuers of these securities continue to make timely principal and interest payments. The decline in fair value is primarily due to changes in interest rates and market conditions, not changes in credit quality. No allowance for credit losses was recorded as of September 30, 2022. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes.

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

Derivatives Designated as Hedges

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

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

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

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

17

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4. Derivatives – (continued)

Cash Flow Hedges

The Company entered into nine forward starting pay fixed-rate interest rate swaps, with a total notional amount of $400 million, all of which have since commenced. These are designated as cash flow hedges of current, Federal Home Loan Bank advances. We are required to pay fixed rates of interest ranging from 0.631% to 1.23% and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”). All swaps are currently on the books with expiration dates on the nine positions ranging from December 2025 to 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.

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

The Company entered into one forward starting interest rate cap spread transaction, with a total notional amount of $150 million, which became effective on October 1, 2022 and matures in October of 2027. This is designated as a cash flow hedge of brokered certificates of deposit, and the interest rate cap spread is indexed to a benchmark of fed funds with payment required on a monthly basis. The structure of these instruments is such that the Company entered into a $150 million notional amount of a sold interest rate cap agreement, in which we are required to pay the counterparty an incremental amount if the index rate exceeds a set cap rate. Simultaneously, the Company purchased $150 million notional amount of an interest rate cap agreement 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.

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

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

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

18

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4. Derivatives – (continued)

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

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

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

|  | September 30, 2022 |  |  | December 31, 2021 |
|  | Notional Amount |  |  | Fair Value |  |  | Notional Amount |  |  | Fair Value |
|  |  |  |  |  | (dollars in thousands) |  |  |  |  |
Interest rate contracts |  | $ | 700,000 |  |  | $ | 54,041 |  |  | $ | 475,000 |  |  | $ | 3,347 |

19

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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, 2022 and December 31, 2021:

|  | September 30, 2022 |  |  | December 31, 2021 |
|  | (dollars in thousands) |
Commercial (1) |  | $ | 1,448,727 |  |  | $ | 1,299,428 |
Commercial real estate |  |  | 5,666,848 |  |  |  | 4,741,590 |
Commercial construction |  |  | 537,323 |  |  |  | 540,178 |
Residential real estate |  |  | 256,085 |  |  |  | 255,269 |
Consumer |  |  | 1,030 |  |  |  | 1,886 |
Gross loans |  |  | 7,910,013 |  |  |  | 6,838,351 |
Net deferred loan fees |  |  | (9,563 | ) |  |  | (9,729 | )
Total loans receivable |  | $ | 7,900,450 |  |  | $ | 6,828,622 |

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

As of September 30, 2022 and December 31, 2021, loans totaling approximately $2.6 billion and $2.5 billion respectively, were pledged to secure borrowings from the FHLB of New York.

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

|  | September 30, 2022 |  |  | December 31, 2021 |
|  | (dollars in thousands) |
Commercial real estate |  | $ | 8,080 |  |  | $ | - |
Residential real estate |  |  | - |  |  |  | 250 |
Total carrying amount |  | $ | 8,080 |  |  | $ | 250 |

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

|  | September 30, 2022 |
|  | Nonaccrual loans with ACL |  |  | Nonaccrual loans without ACL |  |  | Total nonaccrual loans |
|  | (dollars in thousands) |
Commercial |  | $ | 25,657 |  |  | $ | 1,201 |  |  | $ | 26,858 |
Commercial real estate |  |  | 21,511 |  |  |  | 6,627 |  |  |  | 28,138 |
Residential real estate |  |  | 623 |  |  |  | 1,828 |  |  |  | 2,451 |
Total |  | $ | 47,791 |  |  | $ | 9,656 |  |  | $ | 57,447 |

20

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

|  | December 31, 2021 |
|  | Nonaccrual loans with ACL |  |  | Nonaccrual loans without ACL |  |  | Total nonaccrual loans |
|  | (dollars in thousands) |
Commercial |  | $ | 28,746 |  |  | $ | 1,316 |  |  | $ | 30,062 |
Commercial real estate |  |  | 15,362 |  |  |  | 10,031 |  |  |  | 25,393 |
Commercial construction |  |  | - |  |  |  | 3,150 |  |  |  | 3,150 |
Residential real estate |  |  | 1,239 |  |  |  | 1,856 |  |  |  | 3,095 |
Total |  | $ | 45,347 |  |  | $ | 16,353 |  |  | $ | 61,700 |

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.

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

21

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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, 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 |  | $ | 248,673 |  |  | $ | 311,005 |  |  | $ | 50,801 |  |  | $ | 31,402 |  |  | $ | 54,872 |  |  | $ | 164,539 |  |  | $ | 532,643 |  |  | $ | 1,393,935 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 588 |  |  |  | - |  |  |  | 3,556 |  |  |  | 3,301 |  |  |  | 7,445 |
Substandard |  |  | 7,636 |  |  |  | 152 |  |  |  | 17 |  |  |  | 2,023 |  |  |  | 11,190 |  |  |  | 22,639 |  |  |  | 3,690 |  |  |  | 47,347 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Commercial |  | $ | 256,309 |  |  | $ | 311,157 |  |  | $ | 50,818 |  |  | $ | 34,013 |  |  | $ | 66,062 |  |  | $ | 190,734 |  |  | $ | 539,634 |  |  | $ | 1,448,727 |
Commercial Real Estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 1,386,412 |  |  | $ | 1,617,355 |  |  | $ | 387,135 |  |  | $ | 364,220 |  |  | $ | 384,288 |  |  | $ | 1,033,994 |  |  | $ | 370,982 |  |  | $ | 5,544,386 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,317 |  |  |  | - |  |  |  | 41,841 |  |  |  | 8,883 |  |  |  | 52,041 |
Substandard |  |  | - |  |  |  | 1,939 |  |  |  | 4,500 |  |  |  | 12,517 |  |  |  | 19,314 |  |  |  | 23,984 |  |  |  | 8,167 |  |  |  | 70,421 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Commercial Real Estate |  | $ | 1,386,412 |  |  | $ | 1,619,294 |  |  | $ | 391,635 |  |  | $ | 378,054 |  |  | $ | 403,602 |  |  | $ | 1,099,819 |  |  | $ | 388,032 |  |  | $ | 5,666,848 |
Commercial Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 2,056 |  |  | $ | 7,605 |  |  | $ | 7,320 |  |  | $ | 508 |  |  | $ | - |  |  | $ | - |  |  | $ | 512,107 |  |  | $ | 529,596 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 7,727 |  |  |  | 7,727 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Commercial Construction |  | $ | 2,056 |  |  | $ | 7,605 |  |  | $ | 7,320 |  |  | $ | 508 |  |  | $ | - |  |  | $ | - |  |  | $ | 519,834 |  |  | $ | 537,323 |
Residential |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 34,852 |  |  | $ | 25,487 |  |  | $ | 25,292 |  |  | $ | 21,732 |  |  | $ | 20,493 |  |  | $ | 80,042 |  |  | $ | 41,104 |  |  | $ | 249,002 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3,509 |  |  |  | 3,574 |  |  |  | 7,083 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Residential Real Estate |  | $ | 34,852 |  |  | $ | 25,487 |  |  | $ | 25,292 |  |  | $ | 21,732 |  |  | $ | 20,493 |  |  | $ | 83,551 |  |  | $ | 44,678 |  |  | $ | 256,085 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 903 |  |  | $ | - |  |  | $ | 10 |  |  | $ | - |  |  | $ | 5 |  |  | $ | 1 |  |  | $ | 111 |  |  | $ | 1,030 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Consumer |  | $ | 903 |  |  | $ | - |  |  | $ | 10 |  |  | $ | - |  |  | $ | 5 |  |  | $ | 1 |  |  | $ | 111 |  |  | $ | 1,030 |
Total |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 1,672,896 |  |  | $ | 1,961,452 |  |  | $ | 470,558 |  |  | $ | 417,862 |  |  | $ | 459,658 |  |  | $ | 1,278,576 |  |  | $ | 1,456,947 |  |  | $ | 7,717,949 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,905 |  |  |  | - |  |  |  | 45,397 |  |  |  | 12,184 |  |  |  | 59,486 |
Substandard |  |  | 7,636 |  |  |  | 2,091 |  |  |  | 4,517 |  |  |  | 14,540 |  |  |  | 30,504 |  |  |  | 50,132 |  |  |  | 23,158 |  |  |  | 132,578 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Grand Total |  | $ | 1,680,532 |  |  | $ | 1,963,543 |  |  | $ | 475,075 |  |  | $ | 434,307 |  |  | $ | 490,162 |  |  | $ | 1,374,105 |  |  | $ | 1,492,289 |  |  | $ | 7,910,013 |

22

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The following table presents loans by origination and risk designation as of December 31, 2021 (dollars in thousands):

|  | Term loans amortized cost basis by origination year |  |  |  |  |  |  |
|  | 2021 |  |  | 2020 |  |  | 2019 |  |  | 2018 |  |  | 8.5 |  |  | Prior |  |  | Revolving Loans |  |  | Total Gross Loans |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 403,203 |  |  | $ | 58,534 |  |  | $ | 54,485 |  |  | $ | 60,409 |  |  | $ | 95,727 |  |  | $ | 86,556 |  |  | $ | 471,588 |  |  | $ | 1,230,502 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | 4,045 |  |  |  | 4,266 |  |  |  | 8,312 |
Substandard |  |  | 170 |  |  |  | - |  |  |  | 1,842 |  |  |  | 13,298 |  |  |  | 9,740 |  |  |  | 21,024 |  |  |  | 14,540 |  |  |  | 60,614 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Commercial |  | $ | 403,373 |  |  | $ | 58,534 |  |  | $ | 56,327 |  |  | $ | 73,707 |  |  | $ | 105,468 |  |  | $ | 111,625 |  |  | $ | 490,394 |  |  | $ | 1,299,428 |
Commercial Real Estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 1,692,098 |  |  | $ | 533,315 |  |  | $ | 420,995 |  |  | $ | 452,262 |  |  | $ | 497,065 |  |  | $ | 842,244 |  |  | $ | 170,721 |  |  | $ | 4,608,700 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 5,142 |  |  |  | 50,438 |  |  |  | 6,601 |  |  |  | 62,181 |
Substandard |  |  | 1,968 |  |  |  | 9,039 |  |  |  | 4,006 |  |  |  | 20,624 |  |  |  | - |  |  |  | 26,108 |  |  |  | 8,964 |  |  |  | 70,709 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Commercial Real Estate |  | $ | 1,694,066 |  |  | $ | 542,354 |  |  | $ | 425,001 |  |  | $ | 472,886 |  |  | $ | 502,207 |  |  | $ | 918,790 |  |  | $ | 186,286 |  |  | $ | 4,741,590 |
Commercial Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 8,018 |  |  | $ | 7,370 |  |  | $ | 12,625 |  |  | $ | 2,600 |  |  | $ | 2,339 |  |  | $ | - |  |  | $ | 490,119 |  |  | $ | 523,071 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 350 |  |  |  | - |  |  |  | 1,443 |  |  |  | 1,793 |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 15,314 |  |  |  | 15,314 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Commercial Construction |  | $ | 8,018 |  |  | $ | 7,370 |  |  | $ | 12,625 |  |  | $ | 2,600 |  |  | $ | 2,689 |  |  | $ | - |  |  | $ | 506,876 |  |  | $ | 540,178 |
Residential Real Estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 27,081 |  |  | $ | 29,539 |  |  | $ | 23,611 |  |  | $ | 25,070 |  |  | $ | 28,701 |  |  | $ | 66,249 |  |  | $ | 44,221 |  |  | $ | 244,472 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 7,262 |  |  |  | 3,535 |  |  |  | 10,797 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Residential Real Estate |  | $ | 27,081 |  |  | $ | 29,539 |  |  | $ | 23,611 |  |  | $ | 25,070 |  |  | $ | 28,701 |  |  | $ | 73,511 |  |  | $ | 47,756 |  |  | $ | 255,269 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 1,590 |  |  | $ | 85 |  |  | $ | 39 |  |  | $ | 21 |  |  | $ | 28 |  |  | $ | - |  |  | $ | 123 |  |  | $ | 1,886 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total Consumer |  | $ | 1,590 |  |  | $ | 85 |  |  | $ | 39 |  |  | $ | 21 |  |  | $ | 28 |  |  | $ | - |  |  | $ | 123 |  |  | $ | 1,886 |
Total |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 2,131,990 |  |  | $ | 628,843 |  |  | $ | 511,755 |  |  | $ | 540,362 |  |  | $ | 623,860 |  |  | $ | 995,049 |  |  | $ | 1,176,772 |  |  | $ | 6,608,631 |
Special mention |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 5,493 |  |  |  | 54,483 |  |  |  | 12,310 |  |  |  | 72,286 |
Substandard |  |  | 2,138 |  |  |  | 9,039 |  |  |  | 5,848 |  |  |  | 33,922 |  |  |  | 9,740 |  |  |  | 54,394 |  |  |  | 42,353 |  |  |  | 157,434 |
Doubtful |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Grand Total |  | $ | 2,134,128 |  |  | $ | 637,882 |  |  | $ | 517,603 |  |  | $ | 574,284 |  |  | $ | 639,093 |  |  | $ | 1,103,926 |  |  | $ | 1,231,435 |  |  | $ | 6,838,351 |

23

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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, 2022 and December 31, 2021:

|  | September 30, 2022 |
|  | Real Estate |  |  | Other |  |  | Total |
|  | (dollars in thousands) |
Commercial |  | $ | 5,446 |  |  | $ | 23,449 |  |  | $ | 28,895 |
Commercial real estate |  |  | 64,718 |  |  |  | - |  |  |  | 64,718 |
Commercial construction |  |  | 7,727 |  |  |  | - |  |  |  | 7,727 |
Residential real estate |  |  | 5,634 |  |  |  | - |  |  |  | 5,634 |
Consumer |  |  | - |  |  |  | - |  |  |  | - |
Total |  | $ | 83,525 |  |  | $ | 23,449 |  |  | $ | 106,974 |

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

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

|  | September 30, 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 |  | $ | 171 |  |  | $ | 13 |  |  | $ | 4,392 |  |  | $ | 26,858 |  |  | $ | 31,434 |  |  | $ | 1,417,293 |  |  | $ | 1,448,727 |
Commercial real estate |  |  | - |  |  |  | - |  |  |  | 5,676 |  |  |  | 28,138 |  |  |  | 33,814 |  |  |  | 5,633,034 |  |  |  | 5,666,848 |
Commercial construction |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 537,323 |  |  |  | 537,323 |
Residential real estate |  |  | 671 |  |  |  | - |  |  |  | - |  |  |  | 2,451 |  |  |  | 3,122 |  |  |  | 252,963 |  |  |  | 256,085 |
Consumer |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,030 |  |  |  | 1,030 |
Total |  | $ | 842 |  |  | $ | 13 |  |  | $ | 10,068 |  |  | $ | 57,447 |  |  | $ | 68,370 |  |  | $ | 7,841,643 |  |  | $ | 7,910,013 |

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

24

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for credit losses that are allocated to each loan portfolio segment:

|  | September 30, 2022 |
|  | Commercial |  |  | Commercial real estate |  |  | Commercial construction |  |  | Residential real estate |  |  | Consumer |  |  | Total |
|  | (dollars in thousands) |
Allowance for credit losses - loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated impairment |  | $ | 10,600 |  |  | $ | 3,235 |  |  | $ | - |  |  | $ | 76 |  |  | $ | - |  |  | $ | 13,911 |
Collectively evaluated impairment |  |  | 16,812 |  |  |  | 49,370 |  |  |  | 3,444 |  |  |  | 3,977 |  |  |  | 5 |  |  |  | 73,608 |
Acquired with deteriorated credit quality individually analyzed |  |  | 2,277 |  |  |  | 1,921 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4,198 |
Total |  | $ | 29,689 |  |  | $ | 54,526 |  |  | $ | 3,444 |  |  | $ | 4,053 |  |  | $ | 5 |  |  | $ | 91,717 |
Gross loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated impairment |  | $ | 29,482 |  |  | $ | 59,042 |  |  | $ | 7,727 |  |  | $ | 5,634 |  |  | $ | - |  |  | $ | 101,885 |
Collectively evaluated impairment |  |  | 1,414,286 |  |  |  | 5,602,130 |  |  |  | 529,596 |  |  |  | 250,451 |  |  |  | 1,030 |  |  |  | 7,797,493 |
Acquired with deteriorated credit quality individually analyzed |  |  | 4,959 |  |  |  | 5,676 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 10,635 |
Total |  | $ | 1,448,727 |  |  | $ | 5,666,848 |  |  | $ | 537,323 |  |  | $ | 256,085 |  |  | $ | 1,030 |  |  | $ | 7,910,013 |

|  | December 31, 2021 |
|  | Commercial |  |  | Commercial real estate |  |  | Commercial construction |  |  | Residential real estate |  |  | Consumer |  |  | Total |
|  | (dollars in thousands) |
Allowance for credit losses - loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated impairment |  | $ | 15,131 |  |  | $ | 955 |  |  | $ | - |  |  | $ | 131 |  |  | $ | - |  |  | $ | 16,217 |
Collectively evaluated impairment |  |  | 8,561 |  |  |  | 42,713 |  |  |  | 3,580 |  |  |  | 3,497 |  |  |  | 7 |  |  |  | 58,358 |
Acquired with deteriorated credit quality individually analyzed |  |  | 2,277 |  |  |  | 1,921 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4,198 |
Total |  | $ | 25,969 |  |  | $ | 45,589 |  |  | $ | 3,580 |  |  | $ | 3,628 |  |  | $ | 7 |  |  | $ | 78,773 |
Gross loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated impairment |  | $ | 33,726 |  |  | $ | 49,310 |  |  | $ | 13,196 |  |  | $ | 5,717 |  |  | $ | - |  |  | $ | 101,949 |
Collectively evaluated impairment |  |  | 1,260,537 |  |  |  | 4,686,346 |  |  |  | 526,982 |  |  |  | 246,413 |  |  |  | 1,886 |  |  |  | 6,722,164 |
Acquired with deteriorated credit quality individually analyzed |  |  | 5,165 |  |  |  | 5,934 |  |  |  | - |  |  |  | 3,139 |  |  |  | - |  |  |  | 14,238 |
Total |  | $ | 1,299,428 |  |  | $ | 4,741,590 |  |  | $ | 540,178 |  |  | $ | 255,269 |  |  | $ | 1,886 |  |  | $ | 6,838,351 |

25

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

|  | Three Months Ended September 30, 2022 |
|  | Commercial |  |  | Commercial real estate |  |  | Commercial construction |  |  | Residential real estate |  |  | Consumer |  |  | Unallocated |  |  | Total |
|  | (dollars in thousands) |
Balance as of June 30, 2022 |  | $ | 28,135 |  |  | $ | 47,562 |  |  | $ | 3,413 |  |  | $ | 3,625 |  |  | $ | 4 |  |  | $ | - |  |  | $ | 82,739 |
Charge-offs |  |  | (410 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3 | ) |  |  | - |  |  |  | (413 | )
Recoveries |  |  | 53 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 53 |
Provision for credit losses - loans |  |  | 1,911 |  |  |  | 6,964 |  |  |  | 31 |  |  |  | 428 |  |  |  | 4 |  |  |  | - |  |  |  | 9,338 |
Balance as of September 30, 2022 |  | $ | 29,689 |  |  | $ | 54,526 |  |  | $ | 3,444 |  |  | $ | 4,053 |  |  | $ | 5 |  |  | $ | - |  |  | $ | 91,717 |

|  | Nine Months Ended September 30, 2022 |
|  | Commercial |  |  | Commercial real estate |  |  | Commercial construction |  |  | Residential real estate |  |  | Consumer |  |  | Unallocated |  |  | Total |
|  | (dollars in thousands) |
Balance as of December 31, 2021 |  | $ | 25,969 |  |  | $ | 45,589 |  |  | $ | 3,580 |  |  | $ | 3,628 |  |  | $ | 7 |  |  | $ | - |  |  | $ | 78,773 |
Charge-offs |  |  | (751 | ) |  |  | (226 | ) |  |  | - |  |  |  | (9 | ) |  |  | (3 | ) |  |  | - |  |  |  | (989 | )
Recoveries |  |  | 54 |  |  |  | - |  |  |  | - |  |  |  | 63 |  |  |  | - |  |  |  | - |  |  |  | 117 |
Provision for credit losses - loans |  |  | 4,417 |  |  |  | 9,163 |  |  |  | (136 | ) |  |  | 371 |  |  |  | 1 |  |  |  | - |  |  |  | 13,816 |
Balance as of September 30, 2022 |  | $ | 29,689 |  |  | $ | 54,526 |  |  | $ | 3,444 |  |  | $ | 4,053 |  |  | $ | 5 |  |  | $ | - |  |  | $ | 91,717 |

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

|  | Three Months Ended September 30, 2021 |
|  | Commercial |  |  | Commercial real estate |  |  | Commercial construction |  |  | Residential real estate |  |  | Consumer |  |  | Unallocated |  |  | Total |
|  | (dollars in thousands) |
Balance as of June 30, 2021 |  | $ | 25,567 |  |  | $ | 43,815 |  |  | $ | 4,927 |  |  | $ | 4,366 |  |  | $ | 9 |  |  | $ | - |  |  | $ | 78,684 |
Charge-offs |  |  | (254 | ) |  |  | (1,473 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,727 | )
Recoveries |  |  | 1 |  |  |  | 85 |  |  |  | - |  |  |  | 20 |  |  |  | 7 |  |  |  | - |  |  |  | 113 |
(Reversal of) provision for credit losses - loans |  |  | 2,022 |  |  |  | 915 |  |  |  | (1,225 | ) |  |  | (788 | ) |  |  | (8 | ) |  |  | - |  |  |  | 916 |
Balance as of September 30, 2021 |  | $ | 27,336 |  |  | $ | 43,342 |  |  | $ | 3,702 |  |  | $ | 3,598 |  |  | $ | 8 |  |  | $ | - |  |  | $ | 77,986 |

26

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

|  | Nine Months Ended September 30, 2021 |
|  | Commercial |  |  | Commercial real estate |  |  | Commercial construction |  |  | Residential real estate |  |  | Consumer |  |  | Unallocated |  |  | Total |
|  | (dollars in thousands) |
Balance as of December 31, 2020 |  | $ | 28,443 |  |  | $ | 39,330 |  |  | $ | 8,194 |  |  | $ | 2,687 |  |  | $ | 4 |  |  | $ | 568 |  |  | $ | 79,226 |
Day 1 effect of CECL |  |  | (4,225 | ) |  |  | 9,605 |  |  |  | (961 | ) |  |  | 2,697 |  |  |  | 9 |  |  |  | (568 | ) |  |  | 6,557 |
Balance as of January 1, 2021 as adjusted for changes in accounting principle |  |  | 24,218 |  |  |  | 48,935 |  |  |  | 7,233 |  |  |  | 5,384 |  |  |  | 13 |  |  |  | - |  |  |  | 85,783 |
Charge-offs |  |  | (304 | ) |  |  | (1,628 | ) |  |  | - |  |  |  | (7 | ) |  |  | - |  |  |  | - |  |  |  | (1,939 | )
Recoveries |  |  | 74 |  |  |  | 85 |  |  |  | - |  |  |  | 20 |  |  |  | 9 |  |  |  | - |  |  |  | 188 |
(Reversal of) provision for credit losses - loans |  |  | 3,348 |  |  |  | (4,050 | ) |  |  | (3,531 | ) |  |  | (1,799 | ) |  |  | (14 | ) |  |  | - |  |  |  | (6,046 | )
Balance as of September 30, 2021 |  | $ | 27,336 |  |  | $ | 43,342 |  |  | $ | 3,702 |  |  | $ | 3,598 |  |  | $ | 8 |  |  | $ | - |  |  | $ | 77,986 |

Troubled Debt Restructurings

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

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

As of September 30, 2022, TDRs totaled $74.5 million, of which $27.5 million were on nonaccrual status and $47.0 million were performing under their restructured terms. As of December 31, 2021, TDRs totaled $79.5 million, of which $35.9 million were on nonaccrual status and $43.6 million were performing under their restructured terms. The Company has allocated $7.5 million and $10.4 million of specific allowance related to TDRs as of September 30, 2022 and December 31, 2021, respectively.

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

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

27

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The loans modified as a TDR during the nine months ended September 30, 2022 included five maturity extensions and one interest rate reduction. The one loan that was an interest rate reduction was a commercial real estate loan that included a one-time $500,000 principal paydown.

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

The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2021:

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

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

Allowance for Credit Losses for Unfunded Commitments

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

|  | Three Months Ended |  |  | Three Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |
|  | (dollars in thousands) |
Balance at beginning of period |  | $ | 2,324 |  |  | $ | 2,380 |
Provision for credit losses - unfunded commitments |  |  | 662 |  |  |  | 184 |
Balance at end of period |  | $ | 2,986 |  |  | $ | 2,564 |

|  | Nine Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |
|  | (dollars in thousands) |
Balance at beginning of period |  | $ | 2,352 |  |  | $ | - |
Day 1 Effect of CECL |  |  | - |  |  |  | 2,833 |
Provision for (reversal of) credit losses - unfunded commitments |  |  | 634 |  |  |  | (269 | )
Balance at end of period |  | $ | 2,986 |  |  | $ | 2,564 |

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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, 2022 and 2021 :

|  | Three Months Ended |  |  | Three Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |
|  | (dollars in thousands) |
Provision for credit losses - loans |  | $ | 9,338 |  |  | $ | 916 |
Provision for credit losses - unfunded commitments |  |  | 662 |  |  |  | 184 |
Provision for credit losses |  | $ | 10,000 |  |  | $ | 1,100 |

|  | Nine Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |
|  | (dollars in thousands) |
Provision for (reversal of) credit losses - loans |  | $ | 13,816 |  |  | $ | (6,046 | )
Provision for (reversal of) credit losses - unfunded commitments |  |  | 634 |  |  |  | (269 | )
Provision for (reversal of) credit losses |  | $ | 14,450 |  |  | $ | (6,315 | )

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

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

| Level 1: | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

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

| Level 3: | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).

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

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021:

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, 2022 and December 31, 2021 are as follows:

|  |  |  |  |  | September 30, 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 |  | $ | 45,620 |  |  | $ | - |  |  | $ | 45,620 |  |  | $ | - |
Residential mortgage pass-through securities |  |  | 406,985 |  |  |  | - |  |  |  | 406,985 |  |  |  | - |
Commercial mortgage pass-through securities |  |  | 20,895 |  |  |  | - |  |  |  | 20,895 |  |  |  | - |
Obligations of U.S. states and political subdivision |  |  | 141,107 |  |  |  | - |  |  |  | 133,730 |  |  |  | 7,377 |
Corporate bonds and notes |  |  | 6,990 |  |  |  | - |  |  |  | 6,990 |  |  |  | - |
Asset-backed securities |  |  | 1,898 |  |  |  | - |  |  |  | 1,898 |  |  |  | - |
Other securities |  |  | 134 |  |  |  | 134 |  |  |  | - |  |  |  | - |
Total available-for-sale |  |  | 623,629 |  |  |  | 134 |  |  |  | 616,118 |  |  |  | 7,377 |
Equity securities |  |  | 15,563 |  |  |  | 9,701 |  |  |  | 5,862 |  |  |  | - |
Derivatives |  |  | 54,041 |  |  |  | - |  |  |  | 54,041 |  |  |  | - |
Total assets |  | $ | 693,233 |  |  | $ | 9,835 |  |  | $ | 676,021 |  |  | $ | 7,377 |

30

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

|  |  |  |  |  | December 31, 2021 |
|  |  |  |  |  | Fair Value Measurements at Reporting Date Using |
|  | Total Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Recurring fair value measurements: Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal agency obligations |  | $ | 50,360 |  |  | $ | - |  |  | $ | 50,360 |  |  | $ | - |
Residential mortgage pass- through securities |  |  | 316,095 |  |  |  | - |  |  |  | 316,095 |  |  |  | - |
Commercial mortgage pass-through securities |  |  | 10,469 |  |  |  | - |  |  |  | 10,469 |  |  |  | - |
Obligations of U.S. states and political subdivision |  |  | 145,625 |  |  |  | - |  |  |  | 137,060 |  |  |  | 8,565 |
Corporate bonds and notes |  |  | 9,049 |  |  |  | - |  |  |  | 9,049 |  |  |  | - |
Asset-backed securities |  |  | 2,564 |  |  |  | - |  |  |  | 2,564 |  |  |  | - |
Certificates of deposit |  |  | 150 |  |  |  | - |  |  |  | 150 |  |  |  | - |
Other securities |  |  | 195 |  |  |  | 195 |  |  |  | - |  |  |  | - |
Total available-for-sale |  | $ | 534,507 |  |  | $ | 195 |  |  | $ | 525,747 |  |  | $ | 8,565 |
Equity securities |  |  | 13,794 |  |  |  | 11,081 |  |  |  | 2,713 |  |  |  | - |
Derivatives |  |  | 3,347 |  |  |  | - |  |  |  | 3,347 |  |  |  | - |
Total assets |  | $ | 551,648 |  |  | $ | 11,276 |  |  | $ | 531,807 |  |  | $ | 8,565 |

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2022 and during the year ended December 31, 2021.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis as of September 30, 2022 and December 31, 2021.

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

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

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

For assets measured at fair value on a nonrecurring basis, the fair value measurements as of September 30, 2022 and December 31, 2021 are as follows:

|  |  |  |  |  | Fair Value Measurements at Reporting Date Using |
Assets measured at fair value on a nonrecurring basis: |  | Carrying Value as of September 30, 2022 |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Collateral dependent loans: |  | (dollars in thousands) |
Commercial |  | $ | 14,443 |  |  | $ | - |  |  | $ | - |  |  | $ | 14,443 |
Commercial real estate |  |  | 26,197 |  |  |  | - |  |  |  | - |  |  |  | 26,197 |
Residential real estate |  |  | 1,372 |  |  |  | - |  |  |  | - |  |  |  | 1,372 |

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

Collateral dependent loans – Collateral dependent loans as of September 30, 2022 that required a valuation allowance were $42.0 million with a related valuation allowance of $15.9 million compared to $54.1 million with a related valuation allowance of $17.8 million as of December 31, 2021.

32

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Assets Measured with Significant Unobservable Level 3 Inputs

Recurring basis

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2022 and for the year ended December 31, 2021:

|  | Municipal Securities |
|  | (dollars in thousands) |
Beginning balance, December 31, 2021 |  | $ | 8,565 |
Principal paydowns |  |  | (214 | )
Change in unrealized gain (loss) |  |  | (974 | )
Ending balance, September 30, 2022 |  | $ | 7,377 |

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

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

September 30, 2022 |  |  |  |  |  |  |  |  |  |  |
|  | Fair Value |  | Valuation Techniques |  | Unobservable Input |  | Rate |
Securities available-for-sale: |  |  |  |  | (dollars in thousands) |  |  |  |  |  |
Municipal securities |  | $ | 7,377 |  | Discounted cash flows |  | Discount rate |  |  | 4.3 | %

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

33

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Nonrecurring basis: The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy of collateral dependent loans.

September 30, 2022 |  |  |  |  |  |  |  |  |  |  |
(dollars in thousands) |  | Fair Value |  |  | Valuation Techniques | Unobservable Input |  | Range (weighted average) |
Commercial |  | $ | 13,960 |  |  | Market approach (100%) | Average transfer price as a price to unpaid principal balance |  |  | 61% –95% (64%) |
Commercial |  |  | 483 |  |  | Appraisals of collateral value | Comparable sales |  | -5% to +35% (+17%) |
Commercial real estate |  |  | 26,197 |  |  | Appraisals of collateral value | Comparable sales |  |  | -25% to +10% (-16%) |
Residential real estate |  |  | 1,372 |  |  | Appraisals of collateral value | Comparable sales |  | +21% to +39% (+22%) |

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

34

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

As of September 30, 2022 the fair value measurements presented are consistent with Topic 820, Fair Value Measurement, in which fair value represents exit price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2022 and December 31, 2021:

|  |  |  |  |  |  |  |  |  | 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, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 333,844 |  |  | $ | 333,844 |  |  | $ | 333,844 |  |  | $ | - |  |  | $ | - |
Securities available-for-sale |  |  | 623,629 |  |  |  | 623,629 |  |  |  | 134 |  |  |  | 616,118 |  |  |  | 7,377 |
Restricted investments in bank stocks |  |  | 45,324 |  |  |  | n/a |  |  |  | n/a |  |  |  | n/a |  |  |  | n/a |
Equity securities |  |  | 15,563 |  |  |  | 15,563 |  |  |  | 9,701 |  |  |  | 5,862 |  |  |  | - |
Net loans |  |  | 7,808,733 |  |  |  | 7,524,799 |  |  |  | - |  |  |  | - |  |  |  | 7,524,799 |
Derivatives |  |  | 54,041 |  |  |  | 54,041 |  |  |  | - |  |  |  | 54,041 |  |  |  | - |
Accrued interest receivable |  |  | 38,940 |  |  |  | 38,940 |  |  |  | - |  |  |  | 3,219 |  |  |  | 35,721 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  |  | 1,665,658 |  |  |  | 1,665,658 |  |  |  | 1,665,658 |  |  |  | - |  |  |  | - |
Interest-bearing deposits |  |  | 5,644,852 |  |  |  | 5,599,170 |  |  |  | 3,723,617 |  |  |  | 1,875,553 |  |  |  | - |
Borrowings |  |  | 829,953 |  |  |  | 826,280 |  |  |  | - |  |  |  | 826,280 |  |  |  | - |
Subordinated debentures |  |  | 153,179 |  |  |  | 153,170 |  |  |  | - |  |  |  | 153,170 |  |  |  | - |
Accrued interest payable |  |  | 5,733 |  |  |  | 5,733 |  |  |  | - |  |  |  | 5,733 |  |  |  | - |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 265,536 |  |  | $ | 265,536 |  |  | $ | 265,536 |  |  | $ | - |  |  | $ | - |
Investment securities available-for-sale |  |  | 534,507 |  |  |  | 534,507 |  |  |  | 195 |  |  |  | 525,747 |  |  |  | 8,565 |
Restricted investment in bank stocks |  |  | 27,826 |  |  |  | n/a |  |  |  | n/a |  |  |  | n/a |  |  |  | n/a |
Equity securities |  |  | 13,794 |  |  |  | 13,794 |  |  |  | 11,081 |  |  |  | 2,713 |  |  |  | - |
Net loans |  |  | 6,749,849 |  |  |  | 6,800,287 |  |  |  | - |  |  |  | - |  |  |  | 6,800,287 |
Derivatives |  |  | 3,347 |  |  |  | 3,347 |  |  |  | - |  |  |  | 3,347 |  |  |  | - |
Accrued interest receivable |  |  | 34,152 |  |  |  | 34,152 |  |  |  | - |  |  |  | 1,554 |  |  |  | 32,598 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  |  | 1,617,049 |  |  |  | 1,617,049 |  |  |  | 1,617,049 |  |  |  | - |  |  |  | - |
Interest-bearing deposits |  |  | 4,715,904 |  |  |  | 4,716,358 |  |  |  | 3,565,795 |  |  |  | 1,150,563 |  |  |  | - |
Borrowings |  |  | 468,193 |  |  |  | 469,671 |  |  |  | - |  |  |  | 469,671 |  |  |  | - |
Subordinated debentures |  |  | 152,951 |  |  |  | 163,995 |  |  |  | - |  |  |  | 163,995 |  |  |  | - |
Accrued interest payable |  |  | 2,716 |  |  |  | 2,716 |  |  |  | - |  |  |  | 2,716 |  |  |  | - |

35

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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.

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, |  |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |  |
Sale of investment securities available-for-sale |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 195 |  | Net gains on sale of securities available-for-sale
|  |  | - |  |  |  | - |  |  |  | - |  |  |  | (48 | ) | Income tax expense
|  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 147 |  |
Net interest expense on swaps |  | $ | 1,178 |  |  | $ | (328 | ) |  | $ | 524 |  |  | $ | (1,543 | ) | Borrowings
|  |  | (343 | ) |  |  | 90 |  |  |  | (159 | ) |  |  | 434 |  | Income tax (expense) benefit
|  | $ | 835 |  |  | $ | (238 | ) |  | $ | 365 |  |  | $ | (1,109 | ) |
Amortization of pension plan net actuarial losses |  | $ | (17 | ) |  | $ | (75 | ) |  | $ | (49 | ) |  | $ | (225 | ) | Other components of net periodic pension expense
|  |  | 5 |  |  |  | 21 |  |  |  | 14 |  |  |  | 63 |  | Income tax benefit
|  | $ | (12 | ) |  | $ | (54 | ) |  | $ | (35 | ) |  | $ | (162 | ) |
Total reclassification |  | $ | 823 |  |  | $ | (292 | ) |  | $ | 330 |  |  | $ | (1,124 | ) |

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

|  | September 30, 2022 |  |  | December 31, 2021 |
|  | (dollars in thousands) |
Investment securities available-for-sale, net of tax |  | $ | (67,734 | ) |  | $ | (484 | )
Cash flow hedge, net of tax |  |  | 32,913 |  |  |  | 2,406 |
Defined benefit pension and post-retirement plans, net of tax |  |  | (1,671 | ) |  |  | (3,326 | )
Total |  | $ | (36,492 | ) |  | $ | (1,404 | )

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, 2022. The maximum number of shares of common stock or equivalents which may be issued under the Plan, is 750,000. Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, restricted share units or performance units. Shares available for grant and issuance under the Plan as of September 30, 2022 were approximately 200,300. The Company intends to issue all shares under the Plan in the form of newly issued shares.

Restricted stock, options and restricted stock units typically have a three-year vesting period starting one year after the date of grant with one-third vesting each year. The options generally expire ten years from the date of grant. Restricted stock and restricted stock units granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control. All issuances are subject to forfeiture if the recipient is no longer employed prior to the award's vesting. Any forfeitures would result in previously recognized expense being reversed. Restricted stock grants have the same dividend and voting rights as common stock, while options, performance units and restricted 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, 2022 was $1.2 million and $3.5 million, respectively. Stock-based compensation expense for the three and nine months ended September 30, 2021 was $1.2 million and $3.2 million, respectively.

Activity under the Company’s options for the nine months ended September 30, 2022 was as follows:

|  | Number of Stock Options |  |  | Weighted-Average Exercise Price |  |  | Weighted Average Remaining Contractual Term (in years) |  |  | Aggregate Intrinsic Value |
Outstanding as of December 31, 2021 |  |  | 23,766 |  |  | $ | 9.94 |  |  |  |  |  |  |  |  |
Granted |  |  | - |  |  |  | - |  |  |  |  |  |  |  |  |
Exercised |  |  | (15,086 | ) |  |  | 8.21 |  |  |  |  |  |  |  |  |
Forfeited/cancelled/expired |  |  | - |  |  |  | - |  |  |  |  |  |  |  |  |
Outstanding as of September 30, 2022 |  |  | 8,680 |  |  |  | 12.95 |  |  |  | 0.54 |  |  | $ | 87,691 |
Exercisable as of September 30, 2022 |  |  | 8,680 |  |  | $ | 12.95 |  |  |  | - |  |  | $ | - |

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

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CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 8. Stock-Based Compensation – (continued)

Activity under the Company’s restricted stock for the nine months ended September 30, 2022 was as follows:

|  | Nonvested Shares |  |  | Weighted Average Grant Date Fair Value |
Nonvested as of December 31, 2021 |  |  | 82,693 |  |  | $ | 21.78 |
Granted |  |  | 53,543 |  |  |  | 30.76 |
Vested |  |  | (42,815 | ) |  |  | 25.00 |
Forfeited/cancelled/expired |  |  | (374 | ) |  |  | 30.99 |
Nonvested as of September 30, 2022 |  |  | 93,047 |  |  | $ | 25.43 |

As of September 30, 2022, there was approximately $1.3 million of total unrecognized compensation cost related to nonvested restricted stock granted. The cost is expected to be recognized over a weighted average period of 1.1 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, 2021 |  |  | 209,995 |  |  |  |  |  |  | $ | 16.18 |
Awarded |  |  | 34,874 |  |  |  |  |  |  |  | 32.80 |
Vested shares |  |  | (49,604 | ) |  |  |  |  |  |  | 20.79 |
Unearned as of September 30, 2022 |  |  | 195,265 |  |  |  | 221,541 |  |  | $ | 17.98 |

As of September 30, 2022, the specific number of shares related to performance units that were expected to vest was 195,264, determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed. As of September 30, 2022, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 221,541. During the nine months ended September 30, 2022, 49,604 shares vested. A total of 27,254 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of performance units during the nine months ended September 30, 2022 were 22,350 shares. As of September 30, 2022, compensation cost of approximately $1.5 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.8 years.

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

|  | Units (expected) |  |  | Weighted Average Grant Date Fair Value |
Unearned as of December 31, 2021 |  |  | 136,948 |  |  | $ | 16.52 |
Awarded |  |  | 52,312 |  |  |  | 32.80 |
Vested shares |  |  | (69,225 | ) |  |  | 16.13 |
Unearned as of September 30, 2022 |  |  | 120,035 |  |  | $ | 23.84 |

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, 2022, 69,225 shares vested. A total of 37,842 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of restricted stock units during the nine months ended September 30, 2022 were 31,383 shares. As of September 30, 2022, compensation cost of approximately $1.5 million related to non-vested restricted 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
|  | 2022 |  |  | 2021 |  |
|  | (dollars in thousands) |  |
Service cost |  | $ | - |  |  | $ | - |  |
Interest cost |  |  | 78 |  |  |  | 71 |  | Other components of net periodic pension expense
Expected return on plan assets |  |  | (237 | ) |  |  | (213 | ) | Other components of net periodic pension expense
Net amortization |  |  | 17 |  |  |  | 75 |  | Other components of net periodic pension expense
Total periodic pension income |  | $ | (142 | ) |  | $ | (67 | ) |

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

Contributions

The Company did not contribute to the Pension Trust during the nine months ended September 30, 2022. The Company does not plan on contributing amounts to the Pension Trust for the remainder of 2022. The trust is established to provide retirement and other benefits for eligible employees and their beneficiaries. No part of the trust assets may be applied to any purpose other than providing benefits under the plan and for defraying expenses of administering the plan and the trust.

Note 10. FHLB Borrowings

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

|  | September 30, 2022 |  |  | December 31, 2021 |
|  | Amount |  |  | Rate |  |  | Amount |  |  | Rate |
|  | (dollars in thousands) |
By remaining period to maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Less than 1 year |  | $ | 802,329 |  |  |  | 2.99 | % |  | $ | 390,549 |  |  |  | 0.56 | %
1 year through less than 2 years |  |  | - |  |  |  | n/a |  |  |  | 50,000 |  |  |  | 1.84 | %
2 years through less than 3 years |  |  | 25,000 |  |  |  | 1.00 | % |  |  | - |  |  |  | n/a |
3 years through less than 4 years |  |  | 2,050 |  |  |  | 2.23 | % |  |  | 25,000 |  |  |  | 1.00 | %
4 years through 5 years |  |  | - |  |  |  | n/a |  |  |  | 2,050 |  |  |  | 2.23 | %
After 5 years |  |  | 667 |  |  |  | 2.91 | % |  |  | 714 |  |  |  | 2.91 | %
FHLB borrowings - gross |  |  | 830,046 |  |  |  | 2.93 | % |  |  | 468,313 |  |  |  | 0.73 | %
Fair value discount |  |  | (93 | ) |  |  |  |  |  |  | (120 | ) |  |  |  |
Total FHLB borrowings |  | $ | 829,953 |  |  |  |  |  |  | $ | 468,193 |  |  |  |  |

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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, 2022 were primarily collateralized by approximately $1.9 billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement. As of September 30, 2022 the Company had remaining borrowing capacity of approximately $0.6 billion at FHLB.

Note 11. Subordinated Debentures

During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85% and re-prices quarterly. The rate as of September 30, 2022 was 5.63%.

The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of September 30, 2022 and December 31, 2021.

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

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

During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain accredited investors. The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity. The Notes are non-callable for five years, have a stated maturity of February 1, 2028 and bear interest at a fixed rate of 5.20% per year, from and including January 17, 2018 to, but excluding February 1, 2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points.

Note 12. Preferred Stock

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

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

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of September 30, 2022 and December 31, 2021. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Cautionary Statement Concerning Forward-Looking Statements

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and credit loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities such as the ongoing conflict between Ukraine and Russia, may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp is engaged; (7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; (10) the outcome of regulatory and legal investigations and proceedings may not be anticipated, and (11) the impact of the COVID-19 pandemic on our employees and operations, and those of our customers. Further information on other factors that could affect the financial results of ConnectOne Bancorp is included in Item 1a. of ConnectOne Bancorp’s Annual Report on Form 10-K as amended and updated in ConnectOne Bancorp’s other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission’s website at http://www.sec.gov and/or from ConnectOne Bancorp, Inc.

Critical Accounting Policies and Estimates

The accounting and reporting policies followed by ConnectOne Bancorp, Inc. and its subsidiaries (collectively, the “Company”) conform, in all material respects, to GAAP. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the consolidated statements of income. Actual results could differ significantly from those estimates.

The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. The Company has identified the determination of the allowance for credit losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies is provided below.

Allowance for Credit Losses and Related Provision: The allowance for credit losses (“ACL”) represents management’s estimate of current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial asset(s). Determining the amount of the ACL is considered a critical accounting estimate because it requires significant judgment and the use of estimates including reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

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The ACL is established through a provision for credit losses charged to expense. Management believes that the current ACL will be adequate to absorb credit losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers’ ability to pay. The evaluation also details historical losses by loan segment and the resulting credit loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the ACL may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for credit losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 5 of the Notes to Consolidated Financial Statements.

Income Taxes: The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns.

Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of operations. Note 10 of the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2021 includes additional discussion on the accounting for income taxes.

Impact of COVID-19

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

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

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Operating Results Overview

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

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

Net Interest Income and Margin

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

Fully taxable equivalent net interest income for the three months ended September 30, 2022 increased by $10.1 million, or 14.7%, from the comparable three-month period ended September 30, 2021. The increase from the three months ended September 30, 2021 resulted primarily from a 16.1% increase in average interest earning assets, primarily loans, and was partially offset by a 5 basis-point contraction of the net interest margin to 3.68% from 3.73%. The contraction in the net interest margin resulted from a 56 basis-point increase in the cost of average interest-bearing liabilities, partially offset by a 36 basis-point increase in the yield on average interest-earning assets and a 12.5% increase in average noninterest-bearing demand deposits.

Fully taxable equivalent net interest income for the nine months ended September 30, 2022 increased by $32.1 million, or 16.6%, from the comparable nine-month period ended September 30, 2021. The increase from the nine months ended September 30, 2021 resulted primarily from a 12.5% increase in average interest earning assets, primarily loans, and a 13 basis-point widening of the net interest margin to 3.76% from 3.63%. The widening of the net interest margin resulted from an 18 basis-point increase in the yield on interest-earning assets and a 13.1% increase in average noninterest-bearing demand deposits partially offset by a 9 basis-point increase in the cost of interest-bearing liabilities.

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The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three months ended September 30, 2022 and 2021, 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, |
| 2022 |  | 2021 |
|  |  |  | Interest |  |  |  |  |  |  |  | Interest |  |  |  |
| Average |  | Income/ |  | Average |  | Average |  | Income/ |  | Average |
| Balance |  | Expense |  | Rate (7) |  | Balance |  | Expense |  | Rate (7) |
| (dollars in thousands) |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities (1) (2) | $ | 740,394 |  | $ | 5,434 |  |  | 2.91 | % | $ | 459,559 |  | $ | 1,712 |  |  | 1.48 | %
Total loans (2) (3) (4) |  | 7,582,371 |  |  | 91,132 |  |  | 4.77 |  |  | 6,455,952 |  |  | 75,434 |  |  | 4.64 |
Federal funds sold and interest-bearing with banks |  | 135,331 |  |  | 665 |  |  | 1.95 |  |  | 387,155 |  |  | 151 |  |  | 0.15 |
Restricted investment in bank stocks |  | 42,220 |  |  | 438 |  |  | 4.12 |  |  | 19,105 |  |  | 245 |  |  | 5.09 |
Total interest-earning assets |  | 8,500,316 |  |  | 97,669 |  |  | 4.56 |  |  | 7,321,771 |  |  | 77,542 |  |  | 4.20 |
Noninterest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for credit losses |  | (84,307 | ) |  |  |  |  |  |  |  | (78,327 | ) |  |  |  |  |  |
Other noninterest-earning assets |  | 614,580 |  |  |  |  |  |  |  |  | 594,553 |  |  |  |  |  |  |
Total assets | $ | 9,030,589 |  |  |  |  |  |  |  | $ | 7,837,997 |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Time deposits | $ | 1,525,076 |  |  | 5,396 |  |  | 1.40 |  | $ | 1,252,818 |  |  | 2,983 |  |  | 0.94 |
Other interest-bearing deposits |  | 3,686,520 |  |  | 7,903 |  |  | 0.85 |  |  | 3,582,261 |  |  | 2,495 |  |  | 0.28 |
Total interest-bearing deposits |  | 5,211,596 |  |  | 13,299 |  |  | 1.01 |  |  | 4,835,079 |  |  | 5,478 |  |  | 0.45 |
Borrowings |  | 772,561 |  |  | 3,297 |  |  | 1.69 |  |  | 276,183 |  |  | 1,105 |  |  | 1.59 |
Subordinated debentures |  | 153,129 |  |  | 2,196 |  |  | 5.91 |  |  | 152,825 |  |  | 2,168 |  |  | 5.63 |
Finance lease |  | 1,813 |  |  | 27 |  |  | 6.02 |  |  | 2,018 |  |  | 30 |  |  | 5.90 |
Total interest-bearing liabilities |  | 6,139,099 |  |  | 18,819 |  |  | 1.22 |  |  | 5,266,105 |  |  | 8,781 |  |  | 0.66 |
Demand deposits |  | 1,682,135 |  |  |  |  |  |  |  |  | 1,495,456 |  |  |  |  |  |  |
Other liabilities |  | 48,907 |  |  |  |  |  |  |  |  | 44,245 |  |  |  |  |  |  |
Total noninterest-bearing liabilities |  | 1,731,042 |  |  |  |  |  |  |  |  | 1,539,701 |  |  |  |  |  |  |
Stockholders’ equity |  | 1,160,448 |  |  |  |  |  |  |  |  | 1,032,191 |  |  |  |  |  |  |
Total liabilities and stockholders’ equity | $ | 9,030,589 |  |  |  |  |  |  |  | $ | 7,837,997 |  |  |  |  |  |  |
Net interest income (tax-equivalent basis) |  |  |  |  | 78,850 |  |  |  |  |  |  |  |  | 68,761 |  |  |  |
Net interest spread (5) |  |  |  |  |  |  |  | 3.34 | % |  |  |  |  |  |  |  | 3.54 | %
Net interest margin (6) |  |  |  |  |  |  |  | 3.68 | % |  |  |  |  |  |  |  | 3.73 | %
Tax-equivalent adjustment |  |  |  |  | (689 | ) |  |  |  |  |  |  |  | (516 | ) |  |  |
Net interest income |  |  |  | $ | 78,161 |  |  |  |  |  |  |  | $ | 68,245 |  |  |  |

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

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|  | Nine Months Ended September 30, |
|  | 2022 |  |  | 2021 |
|  |  |  |  |  | Interest |  |  |  |  |  |  |  |  |  |  | Interest |  |  |  |  |
|  | Average |  |  | Income/ |  |  | Average |  |  | Average |  |  | Income/ |  |  | Average |
|  | Balance |  |  | Expense |  |  | Rate (7) |  |  | Balance |  |  | Expense |  |  | Rate (7) |
|  | (dollars in thousands) |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities (1) (2) |  | $ | 632,736 |  |  | $ | 11,915 |  |  |  | 2.52 | % |  | $ | 459,017 |  |  | $ | 5,534 |  |  |  | 1.61 | %
Total loans (2) (3) (4) |  |  | 7,159,107 |  |  |  | 249,049 |  |  |  | 4.65 |  |  |  | 6,319,160 |  |  |  | 217,465 |  |  |  | 4.60 |
Federal funds sold and interest-bearing with banks |  |  | 200,937 |  |  |  | 1,098 |  |  |  | 0.73 |  |  |  | 333,290 |  |  |  | 285 |  |  |  | 0.11 |
Restricted investment in bank stocks |  |  | 32,997 |  |  |  | 943 |  |  |  | 3.82 |  |  |  | 21,098 |  |  |  | 764 |  |  |  | 4.84 |
Total interest-earning assets |  |  | 8,025,777 |  |  |  | 263,005 |  |  |  | 4.38 |  |  |  | 7,132,565 |  |  |  | 224,048 |  |  |  | 4.20 |
Noninterest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for credit losses |  |  | (81,711 | ) |  |  |  |  |  |  |  |  |  |  | (80,129 | ) |  |  |  |  |  |  |  |
Other noninterest-earning assets |  |  | 600,171 |  |  |  |  |  |  |  |  |  |  |  | 585,043 |  |  |  |  |  |  |  |  |
Total assets |  | $ | 8,544,237 |  |  |  |  |  |  |  |  |  |  | $ | 7,637,479 |  |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Time deposits |  | $ | 1,252,503 |  |  |  | 9,729 |  |  |  | 1.04 |  |  | $ | 1,332,587 |  |  |  | 12,096 |  |  |  | 1.21 |
Other interest-bearing deposits |  |  | 3,751,266 |  |  |  | 14,289 |  |  |  | 0.51 |  |  |  | 3,377,443 |  |  |  | 7,391 |  |  |  | 0.29 |
Total interest-bearing deposits |  |  | 5,003,769 |  |  |  | 24,018 |  |  |  | 0.64 |  |  |  | 4,710,030 |  |  |  | 19,487 |  |  |  | 0.55 |
Borrowings |  |  | 576,728 |  |  |  | 6,522 |  |  |  | 1.51 |  |  |  | 327,412 |  |  |  | 4,199 |  |  |  | 1.71 |
Subordinated debentures |  |  | 153,054 |  |  |  | 6,543 |  |  |  | 5.72 |  |  |  | 153,300 |  |  |  | 6,502 |  |  |  | 5.67 |
Finance lease |  |  | 1,865 |  |  |  | 84 |  |  |  | 6.02 |  |  |  | 2,066 |  |  |  | 93 |  |  |  | 6.02 |
Total interest-bearing liabilities |  |  | 5,735,416 |  |  |  | 37,167 |  |  |  | 0.87 |  |  |  | 5,192,808 |  |  |  | 30,281 |  |  |  | 0.78 |
Demand deposits |  |  | 1,612,713 |  |  |  |  |  |  |  |  |  |  |  | 1,426,121 |  |  |  |  |  |  |  |  |
Other liabilities |  |  | 50,834 |  |  |  |  |  |  |  |  |  |  |  | 47,417 |  |  |  |  |  |  |  |  |
Total noninterest-bearing liabilities |  |  | 1,663,547 |  |  |  |  |  |  |  |  |  |  |  | 1,473,538 |  |  |  |  |  |  |  |  |
Stockholders’ equity |  |  | 1,145,274 |  |  |  |  |  |  |  |  |  |  |  | 971,133 |  |  |  |  |  |  |  |  |
Total liabilities and stockholders’ equity |  | $ | 8,544,237 |  |  |  |  |  |  |  |  |  |  | $ | 7,637,479 |  |  |  |  |  |  |  |  |
Net interest income (tax-equivalent basis) |  |  |  |  |  |  | 225,838 |  |  |  |  |  |  |  |  |  |  |  | 193,767 |  |  |  |  |
Net interest spread (5) |  |  |  |  |  |  |  |  |  |  | 3.51 | % |  |  |  |  |  |  |  |  |  |  | 3.42 | %
Net interest margin (6) |  |  |  |  |  |  |  |  |  |  | 3.76 | % |  |  |  |  |  |  |  |  |  |  | 3.63 | %
Tax-equivalent adjustment |  |  |  |  |  |  | (1,728 | ) |  |  |  |  |  |  |  |  |  |  | (1,350 | ) |  |  |  |
Net interest income |  |  |  |  |  | $ | 224,110 |  |  |  |  |  |  |  |  |  |  | $ | 192,417 |  |  |  |  |

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

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Noninterest Income

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

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

Noninterest Expenses

Noninterest expenses totaled $32.1 million for the three months ended September 30, 2022, compared with $28.2 million for the three months ended September 30, 2021.The increase in noninterest expenses of $4.0 million from the three months ended September 30, 2021 was primarily attributable to increases in salaries and employee benefits of $4.2 million. The increase in salaries and employee benefits was attributable to increased staff in both the revenue and back-office of the Bank, base salary increases, and incentive compensation accruals.

Noninterest expenses totaled $93.1 million for the nine months ended September 30, 2022, compared to $80.9 million for the nine months ended September 30, 2021. Included in noninterest expenses for the nine months ended September 30, 2022 was an increase in acquisition price related to the BoeFly acquisition of $1.5 million. Excluding this item, noninterest expenses increased $10.6 million when compared to the nine months ended September 30, 2021. The increase was primarily attributable to increases in salaries and employee benefits of $11.7 million attributable to new hires in both the revenue and back-office areas, base-salary increases, and bonus accruals. Also, contributing to the increase were increases in other expenses of $0.8 million, information technology and communications of $0.2 million and marketing and advertising of $0.4 million, partially offset by decreases in occupancy of $1.6 million, professional and consulting of $0.4 million and amortization of core deposit intangibles of $0.2 million.

Income Taxes

Income tax expense was $10.4 million for the three months ended September 30, 2022, compared to $10.9 million for the three months ended September 30, 2021. The decrease in income tax expense was the result of lower income before taxes. The effective tax rate for the three months ended September 30, 2022 and September 30, 2021 was 26.5% and 25.3%, respectively. The higher effective tax rate during the three months ended September 30, 2022 when compared to the three months ended September 30, 2021 resulted from a lower proportion of income from non-taxable sources.

Income tax expense was $33.7 million for the nine months ended September 30, 2022, compared to $32.4 million for the nine months ended September 30, 2021. The effective tax rate for the nine months ended September 30, 2022 and September 30, 2021 was 26.7% and 25.0%, respectively. The effective tax rate for the nine months ended of September 30, 2022 was higher compared to the nine months ended September 30, 2021 due to a lower proportion of income from non-taxable sources.

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Financial Condition

Loan Portfolio

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

|  | September 30, 2022 |  |  | December 31, 2021 |  |  | Amount Increase/ |
|  | Amount |  |  | % |  |  | Amount |  |  | % |  |  | (Decrease) |
|  | (dollars in thousands) |
Commercial (1) |  | $ | 1,448,727 |  |  |  | 18.3 | % |  | $ | 1,299,428 |  |  |  | 19.0 | % |  | $ | 149,299 |
Commercial real estate |  |  | 5,666,848 |  |  |  | 71.6 | % |  |  | 4,741,590 |  |  |  | 69.3 | % |  |  | 925,258 |
Commercial construction |  |  | 537,323 |  |  |  | 6.8 | % |  |  | 540,178 |  |  |  | 7.9 | % |  |  | (2,855 | )
Residential real estate |  |  | 256,085 |  |  |  | 3.2 | % |  |  | 255,269 |  |  |  | 3.7 | % |  |  | 816 |
Consumer |  |  | 1,030 |  |  |  | 0.1 | % |  |  | 1,886 |  |  |  | 0.1 | % |  |  | (856 | )
Gross loans |  | $ | 7,910,013 |  |  |  | 100.0 | % |  | $ | 6,838,351 |  |  |  | 100.0 | % |  | $ | 1,071,662 |

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

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

Allowance for Credit Losses and Related Provision

As of September 30, 2022, the Company’s allowance for credit losses for loans was $91.7 million, an increase of $12.9 million from $78.8 million at December 31, 2021. The increase was primarily attributable to provision for credit losses for loans of $13.8 million partially related to organic loan originations, partially offset by $0.9 million in net charge-offs.

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

There were $0.4 million and $0.9 million in net charge-offs for the three and nine months ended September 30, 2022, respectively, compared with $1.6 million and $1.8 million in net charge-offs for the three and nine months ended September 30, 2021, respectively. The ACL as a percentage of loans receivable amounted to 1.16% as of September 30, 2022 compared to 1.15% as of December 31, 2021. Excluding the impact of PPP loans in the calculation of the ACL as a percentage of loans receivable, the September 30, 2022 ratio was at 1.16%, compared to 1.17% as of December 31, 2021. PPP loans do not have allowance for credit losses attributable to them, as they are fully guaranteed by the SBA.

The level of the allowance for the respective periods of 2022 and 2021 reflects the credit quality within the loan portfolio, loan growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the ACL as of September 30, 2022 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 are presented in the following table for the periods indicated.

|  | Three Months Ended |
|  | September 30, |
|  | 2022 |  |  | 2021 |
|  | (dollars in thousands) |
Average loans receivable |  | $ | 7,580,176 |  |  | $ | 6,449,726 |
Analysis of the ACL: |  |  |  |  |  |  |  |
Balance - beginning of quarter |  | $ | 82,739 |  |  | $ | 78,684 |
Charge-offs: |  |  |  |  |  |  |  |
Commercial |  |  | (410 | ) |  |  | (254 | )
Commercial real estate |  |  | - |  |  |  | (1,473 | )
Consumer |  |  | (3 | ) |  |  | - |
Total charge-offs |  |  | (413 | ) |  |  | (1,727 | )
Recoveries: |  |  |  |  |  |  |  |
Commercial |  |  | 53 |  |  |  | 1 |
Commercial real estate |  |  | - |  |  |  | 85 |
Residential real estate |  |  | - |  |  |  | 20 |
Consumer |  |  | - |  |  |  | 7 |
Total recoveries |  |  | 53 |  |  |  | 113 |
Net charge-offs |  |  | (360 | ) |  |  | (1,614 | )
Provision for credit losses - loans |  |  | 9,338 |  |  |  | 916 |
Balance - end of period |  | $ | 91,717 |  |  | $ | 77,986 |
Ratio of annualized net charge-offs during the period to average loans receivable during the period |  |  | 0.02 | % |  |  | 0.10 | %
Loans receivable |  | $ | 7,900,450 |  |  | $ | 6,576,439 |
ACL as a percentage of loans receivable |  |  | 1.16 | % |  |  | 1.19 | %

|  | Nine Months Ended |
|  | September 30, |
|  | 2022 |  |  | 2021 |
|  | (dollars in thousands) |
Average loans receivable |  | $ | 7,155,209 |  |  | $ | 6,314,433 |
Analysis of the ACL: |  |  |  |  |  |  |  |
Balance - beginning of quarter |  | $ | 78,773 |  |  | $ | 79,226 |
CECL Day 1 Adjustment |  |  | - |  |  |  | 6,557 |
Balance – beginning of quarter (as adjusted) |  |  | 78,773 |  |  |  | 85,783 |
Charge-offs: |  |  |  |  |  |  |  |
Commercial |  |  | (751 | ) |  |  | (304 | )
Commercial real estate |  |  | (226 | ) |  |  | (1,628 | )
Residential real estate |  |  | (9 | ) |  |  | (7 | )
Consumer |  |  | (3 | ) |  |  | - |
Total charge-offs |  |  | (989 | ) |  |  | (1,939 | )
Recoveries: |  |  |  |  |  |  |  |
Commercial |  |  | 54 |  |  |  | 74 |
Commercial real estate |  |  | - |  |  |  | 85 |
Residential real estate |  |  | 35 |  |  |  | 20 |
Consumer |  |  | 28 |  |  |  | 9 |
Total recoveries |  |  | 117 |  |  |  | 188 |
Net charge-offs |  |  | (872 | ) |  |  | (1,751 | )
Provision for (reversal of) credit losses - loans |  |  | 13,816 |  |  |  | (6,046 | )
Balance - end of period |  | $ | 91,717 |  |  | $ | 77,986 |
Ratio of annualized net charge-offs during the period to average loans receivable during the period |  |  | 0.02 | % |  |  | 0.04 | %
Loans receivable |  | $ | 7,900,450 |  |  | $ | 6,576,439 |
ACL as a percentage of loans receivable |  |  | 1.16 | % |  |  | 1.19 | %

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Asset Quality

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

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

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

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

|  | September 30, 2022 |  |  | December 31, 2021 |
|  | (dollars in thousands) |
Nonaccrual loans |  | $ | 57,447 |  |  | $ | 61,700 |
OREO |  |  | 264 |  |  |  | - |
Total nonperforming assets (1) |  | $ | 57,711 |  |  | $ | 61,700 |
Performing TDRs |  | $ | 46,973 |  |  | $ | 43,587 |
Loans 90 days or greater past due and still accruing (non PCD) |  | $ | - |  |  | $ | - |
Loans 90 days or greater past due and still accruing (PCD) |  | $ | 10,068 |  |  | $ | 13,531 |

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

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

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Investment Securities

As of September 30, 2022, the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations of U.S. states and political subdivisions, corporate bonds and notes, asset-backed securities and equity securities. For the three-months ended September 30, 2022, average securities increased $280.8 million to approximately $740.4 million, or 8.7% of average total interest-earning assets, from approximately $459.6 million, or 6.3% of average interest-earning assets, compared to September 30, 2021.

As of September 30, 2022, net unrealized losses on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included in stockholders’ equity, net of tax, amounted to $67.7 million as compared with net unrealized losses of $0.5 million as of December 31, 2021. The increase in unrealized losses is predominately attributable to changes in market conditions and interest rates. Unrealized losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. This also resulted in a $27.2 million increase in deferred tax assets, attributable to the decline in fair value on securities available-for-sale since December 31, 2021. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. The Company did not record an allowance for credit losses for available-for-sale as of September 30, 2022.

Interest Rate Sensitivity Analysis

The principal objective of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”). The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.

We currently utilize net interest income 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, 2022 and December 31, 2021, the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and the Bank’s management.

The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates.

Based on our model, which was run as of September 30, 2022, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 0.28%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 1.51%. As of December 31, 2021, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.35%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.64%.

Based on our model, which was run as of September 30, 2022, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 1.87%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 3.27%. As of December 31, 2021, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 9.77%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 10.41%.

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

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

Interest Rates |  |  | Estimated |  |  | Estimated Change in EVE |  |  | Interest Rates |  |  | Estimated |  |  | Estimated Change in NII |
(basis points) |  |  | EVE |  |  | Amount |  |  | % |  |  | (basis points) |  |  | NII |  |  | Amount |  |  | % |
+300 |  |  | $ | 1,237,824 |  |  |  | (135,382 | ) |  |  | (9.86 | ) |  |  | +300 |  |  | $ | 313,916 |  |  | $ | (831 | ) |  |  | (0.26 | )
+200 |  |  |  | 1,297,091 |  |  |  | (76,115 | ) |  |  | (5.54 | ) |  |  | +200 |  |  |  | 315,615 |  |  |  | 868 |  |  |  | 0.28 |
+100 |  |  |  | 1,353,613 |  |  |  | (19,593 | ) |  |  | (1.43 | ) |  |  | +100 |  |  |  | 317,301 |  |  |  | 2,554 |  |  |  | 0.81 |
0 |  |  |  | 1,373,206 |  |  |  | - |  |  |  | - |  |  |  | 0 |  |  |  | 314,747 |  |  |  | - |  |  |  | - |
-100 |  |  |  | 1,360,103 |  |  |  | (13,103 | ) |  |  | (0.95 | ) |  |  | -100 |  |  |  | 310,005 |  |  |  | (4,742 | ) |  |  | (1.51 | )
-200 |  |  |  | 1,285,872 |  |  |  | (87,334 | ) |  |  | (6.36 | ) |  |  | -200 |  |  |  | 297,606 |  |  |  | (17,141 | ) |  |  | (5.45 | )

Estimates of Fair Value

The estimation of fair value is significant to a number of the Company’s assets, including loans held-for-sale and securities available-for-sale. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available-for-sale securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto presented elsewhere herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations; unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Liquidity

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

As of September 30, 2022, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of September 30, 2022, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $796.9 million, which represented 8.4% of total assets and 9.8% of total deposits and borrowings, compared to $742.1 million as of December 31, 2021, which represented 9.1% of total assets and 10.9% of total deposits and borrowings.

The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of September 30, 2022, had the ability to borrow $2.0 billion. In addition, as of September 30, 2022, the Bank had in place borrowing capacity of $325 million through correspondent banks and other unsecured borrowing lines. As of September 30, 2022, the Bank had aggregate available and unused credit of approximately $0.9 billion, which represents the aforementioned facilities totaling $2.3 billion net of $1.4 billion in outstanding borrowings and letters of credit. As of September 30, 2022, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.

Cash and cash equivalents totaled $333.8 million as of September 30, 2022, increasing by $68.3 million from $265.5 million as of December 31, 2021. Operating activities provided $94.9 million in net cash. Investing activities used $1.3 billion in net cash, primarily reflecting an increase in loans and investment securities. Financing activities provided $1.3 billion in net cash, primarily reflecting an increase in deposits of $978.2 million and an increase in net borrowings of $361.7 million.

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Deposits

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

|  | September 30, 2022 |  |  | December 31, 2021 |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Amount |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Increase/ |
|  | Amount |  |  | % |  |  | Amount |  |  | % |  |  | (Decrease) |
|  | (dollars in thousands) |
Demand, noninterest-bearing |  | $ | 1,665,658 |  |  |  | 22.8 | % |  | $ | 1,617,049 |  |  |  | 25.5 | % |  | $ | 48,609 |
Demand, interest-bearing and NOW |  |  | 3,335,187 |  |  |  | 45.6 |  |  |  | 3,127,350 |  |  |  | 49.4 |  |  |  | 207,837 |
Savings |  |  | 388,430 |  |  |  | 5.3 |  |  |  | 438,445 |  |  |  | 6.9 |  |  |  | (50,015 | )
Time |  |  | 1,921,235 |  |  |  | 26.3 |  |  |  | 1,150,109 |  |  |  | 18.2 |  |  |  | 771,126 |
Total deposits |  | $ | 7,310,510 |  |  |  | 100.0 | % |  | $ | 6,332,953 |  |  |  | 100.0 | % |  | $ | 977,557 |

Subordinated Debentures

During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part prior to maturity. The floating interest rate on the subordinated debentures is three month LIBOR plus 2.85% and re-prices quarterly. The rate as of September 30, 2022 was 5.63%.

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

During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2018 Notes”) to certain accredited investors. The net proceeds from the sale of the 2018 Notes were used for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity in the first quarter of 2018. The 2018 Notes are non-callable for five years, have a stated maturity of February 1, 2028 and bear interest at a fixed rate of 5.20% per year, from and including January 17, 2018 to, but excluding February 1, 2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points.

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Stockholders’ Equity

The Company’s stockholders’ equity was $1.1 billion as of September 30, 2022, an increase of $24.1 million from December 31, 2021. The increase in stockholders’ equity was primarily attributable to retained earnings, in addition to an increase in additional paid-in capital, partially offset by a decrease in accumulated other comprehensive income, reflecting the after-tax decline in the fair value of investment securities net of unrealized hedge gains recorded in other assets, and an increase in treasury stock. As of September 30, 2022, the Company’s tangible common equity ratio and tangible book value per share were 8.87% and $20.93, respectively. As of December 31, 2021, the tangible common equity ratio and tangible book value per share were 10.06% and $20.12, respectively. Total goodwill and other intangible assets were approximately $216.1 million and $217.4 million, as of September 30, 2022 and December 31, 2021, respectively.

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

|  | September 30, 2022 |  |  | December 31, 2021 |
|  | (dollars in thousands, except for share and per share data) |
Common equity |  | $ | 1,037,368 |  |  | $ | 1,013,285 |
Less: intangible assets |  |  | (216,093 | ) |  |  | (217,369 | )
Tangible common stockholders’ equity |  | $ | 821,275 |  |  | $ | 795,916 |
Total assets |  | $ | 9,478,252 |  |  | $ | 8,129,480 |
Less: intangible assets |  |  | (216,093 | ) |  |  | (217,369 | )
Tangible assets |  | $ | 9,262,159 |  |  | $ | 7,912,111 |
Common stock outstanding at period end |  |  | 39,243,123 |  |  |  | 39,568,090 |
Tangible common equity ratio (1) |  |  | 8.87 | % |  |  | 10.06 | %
Book value per common share |  | $ | 26.43 |  |  | $ | 25.61 |
Less: intangible assets |  |  | 5.50 |  |  |  | 5.49 |
Tangible book value per common share |  | $ | 20.93 |  |  | $ | 20.12 |

(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, 2022 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution (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, 2022 |  | (dollars in thousands) |
Tier 1 leverage capital |  | $ | 970,240 |  |  |  | 10.95 | % |  | $ | 354,560 |  |  |  | 4.00 | % |  |  | NA |  |  |  | NA |
CET I risk-based ratio |  |  | 854,158 |  |  |  | 10.20 |  |  |  | 376,969 |  |  |  | 4.50 |  |  |  | NA |  |  |  | NA |
Tier 1 risk-based capital |  |  | 970,240 |  |  |  | 11.58 |  |  |  | 502,626 |  |  |  | 6.00 |  |  |  | NA |  |  |  | NA |
Total risk-based capital |  |  | 1,210,745 |  |  |  | 14.45 |  |  |  | 670,168 |  |  |  | 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, 2022 |  |  |  |  |  |  |  |  |  | (dollars in thousands) |  |  |  |  |  |  |  |  |
Tier 1 leverage capital |  | $ | 966,014 |  |  |  | 10.91 | % |  | $ | 354,314 |  |  |  | 4.00 | % |  |  | 442,892 |  |  |  | 5.00 | %
CET I risk-based ratio |  |  | 966,014 |  |  |  | 11.53 |  |  |  | 376,962 |  |  |  | 4.50 |  |  |  | 544,500 |  |  |  | 6.50 |
Tier 1 risk-based capital |  |  | 966,014 |  |  |  | 11.53 |  |  |  | 502,616 |  |  |  | 6.00 |  |  |  | 670,154 |  |  |  | 8.00 |
Total risk-based capital |  |  | 1,088,769 |  |  |  | 13.00 |  |  |  | 670,154 |  |  |  | 8.00 |  |  |  | 837,693 |  |  |  | 10.00 |

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

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Item 3. Qualitative and Quantitative Disclosures about Market Risks

Market Risk

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

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Item 4. Controls and Procedures

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

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

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1a. Risk Factors

There have been no material changes to the risks inherent in our business from those described under Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021.

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

Share Repurchase Program

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

During the quarter ended September 30, 2022, the Company did not repurchase any shares. As of September 30, 2022, shares remaining for repurchase under the program were 1,827,640.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5 Other Information

Not applicable

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Item 6. Exhibits

Exhibit No. |  | Description
31.1 |  | Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 |  | Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 |  | Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 |  | Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS |  | Inline XBRL Instance Document
101.SCH |  | Inline XBRL Taxonomy Extension Schema Document.
101.CAL |  | Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF |  | Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB |  | Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE |  | Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104 |  | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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SIGNATURES

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

CONNECTONE BANCORP, INC.

(Registrant)

By: | /s/ Frank Sorrentino III |  | By: | /s/ William S. Burns
| Frank Sorrentino III |  |  | William S. Burns
| Chairman and Chief Executive Officer |  |  | Senior Executive Vice President and Chief Financial Officer
| Date: November 4, 2022 |  |  | Date: November 4, 2022

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