What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-01 compared with 2020-03-02 · 492 added, 471 removed, 1717 unchanged (36% of the section changed)

21 unchanged sentences

Integrated Framework:

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.

24 unchanged sentences

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved especially challenging, subjective, or complex judgments.

The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses –

1 unchanged sentence

The allowance for loan losses represents management’s estimate of probable incurred credit losses inherent in the loan portfolio.

As described in Notes 1 and 5 to the consolidated financial statements, the Company’s consolidated allowance for loan losses was $38,293,000 at December 31, 2019, which consisted of the allowance for loans losses allocated to 1) loans individually evaluated for impairment, representing $1,267,000, 2) loans collectively evaluated for impairment (“general component”), representing $35,685,000, and 3) loans acquired, representing $1,242,000, as well as an unallocated allowance for loan losses of $99,000.

As described in Notes 1a and 5 to the consolidated financial statements, the Company’s consolidated allowance for loan losses was $79,226,000 at December 31, 2020, which consisted of the allowance for loans losses allocated to 1) loans individually evaluated for impairment, representing $14,314,000, 2) loans collectively evaluated for impairment (“general component”), representing $58,504,000, and 3) loans acquired, representing $5,840,000, as well as an unallocated allowance for loan losses of $568,000.

The general component can be further broken down as the general component related to the commercial, commercial real estate, and commercial construction loan segments of $56,572,000 and the general component related to the residential real estate and consumer segments of $1,932,000.

18 unchanged sentences

Testing the effectiveness of controls over the evaluation of the exogenous factors used to estimate the general component for the commercial, commercial real estate, and commercial construction loan segments, including controls addressing:

Management’s review of the completeness and accuracy of data used as the basis for the adjustments relating to exogenous factors;

Management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative reserve factors and the resulting allocation to the allowance allocated to loans collectively evaluated for impairment;

Management’s review of the exogenous factor reserve for mathematical accuracy.

Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the exogenous factors used to estimate the general component for the commercial, commercial real estate, and commercial construction loan segments which included:

 Evaluation of the completeness and accuracy of data used as a basis for the adjustments relating to exogenous factors;

and,  

Management’s review of the exogenous factor reserve for mathematical accuracy.  

Substantively testing management’s process, including evaluating their judgments and significant assumptions, for developing the exogenous factors used to estimate the general component for the commercial, commercial real estate, and commercial construction loan segments which included:

Evaluation of the completeness and accuracy of data used as a basis for the adjustments relating to exogenous factors;  

Evaluation of the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of exogenous factors and the resulting allocation to the allowance allocated to loans collectively evaluated for impairment.

Among other procedures, our evaluation considered actual charge offs, loan portfolio performance and third-party data, and whether such assumptions were applied consistently period over period;

Analytically evaluating the exogenous factor allocation year over year for reasonableness;

Recalculation of the exogenous factor reserve.

and,  

Recalculation of the exogenous factor reserve.  

- 51 -

1 unchanged sentence

Fair Value of Acquired Non-Credit-Impaired Loans

As described in Note 2 to the consolidated financial statements, on January 2, 2019 the Company completed its acquisition of Greater Hudson Bank.

As described in Note 2 to the consolidated financial statements, on January 2, 2020 the Company completed its acquisition of Bancorp of New Jersey, Inc.

The business combination was accounted under the acquisition method of accounting, with assets acquired and liabilities assumed recorded at fair value as of the acquisition date.

The fair value of loans acquired in the acquisition totaled $774,720,000, which included $763,020,000 of non-credit-impaired loans and $11,700,000 of credit-impaired loans.

The fair values of loans acquired were estimated based on the value of the expected cash flows, which were projected based on the contractual terms of loans, including both maturity and contractual amortization.

The fair values of non-credit-impaired loans acquired were estimated based on the value of the expected cash flows, which were projected based on the contractual terms of loans, including both maturity and contractual amortization.

Projected cash flows were adjusted for expected losses and prepayments, where appropriate.

4 unchanged sentences

The primary audit procedures we performed to address this critical audit matter included:

Testing the effectiveness of controls over the judgments, assumptions and data used to estimate the fair value of acquired non-credit-impaired loans, including controls addressing:

Testing the effectiveness of controls over the judgments, significant assumptions and data used to estimate the fair value of acquired non-credit-impaired loans, including controls addressing:

Management’s evaluation of the reasonableness of the judgments and assumptions used to estimate fair value;

Management’s review of the completeness and accuracy of the data used.

and,  

Management’s review of the completeness and accuracy of the data used.  

Substantively testing management’s process, including evaluating their judgments and assumptions, for estimating the fair value of acquired non-credit-impaired loans which included:

Evaluation of the reasonableness of judgments and assumptions used by management;

Evaluation of the completeness and accuracy of the data used;

Utilization of a valuation specialist to evaluate the appropriateness of the judgments, assumptions and data used and overall reasonableness of the fair values.

and,  

Utilization of an internal valuation specialist to assist with the evaluation of the appropriateness of assumptions, judgments and data used and overall reasonableness of the fair values.  

- 52 -

Goodwill Impairment

Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

As described in Notes 1a and 7 to the consolidated financial statements, the Company’s consolidated goodwill balance was $208,372,000 at December 31, 2020.

Goodwill is tested annually for impairment in the fourth quarter, or more frequently if events and circumstances exist that indicate it is more likely than not impairment has occurred.

During the quarter ended June 30, 2020, the Company determined a triggering event had occurred and performed a quantitative goodwill impairment evaluation using both income and market approaches to estimate the fair value of the Company and based on results of evaluation, no goodwill impairment was recorded.

The goodwill impairment evaluation involved significant estimates and subjective assumptions, which required a high degree of management judgment.

Significant estimates and subjective assumptions included discount rate, prospective financial information, earnings retention rate and peer group market data.

Changes in these estimates and assumptions could have a significant impact on the conclusions reached regarding whether impairment occurred and the amount of impairment.

We identified auditing the goodwill impairment evaluation as a critical audit matter as it involved especially subjective auditor judgment.

The primary audit procedures we performed to address this critical audit matter included:

Testing the effectiveness of controls over the judgments, assumptions and data used to estimate the fair value of the Company, including controls addressing:

Management’s review of the reasonableness and accuracy of the Company’s prospective financial information used in the income approach.  

Management’s evaluation of significant assumptions used, including valuation methodologies, discount rate, earnings retention rate and peer group market data.  

Substantively testing management’s process, including evaluating their judgments and significant assumptions, for estimating the fair value of the Company which included:

Evaluation of key financial data for accuracy.  

Evaluation of management’s ability to reasonably forecast cash flows.  

Utilization of an internal valuation specialist to assist with the evaluation of the appropriateness of valuation methodologies, discount rate, earnings retention rate, peer group market data and overall reasonableness of the fair value.  

/s/ Crowe LLP

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Operating lease liabilities

Subordinated debentures

Subordinated debentures, net of debt issuance costs

Other liabilities

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Authorized 50,000,000 shares;

issued 37,676,006 shares at December 31, 2019 and 34,392,464 shares at December 31, 2018;

outstanding 35,072,066 shares at December 31, 2019 and 32,328,542 at December 31, 2018

issued 42,444,031 shares as of December 31, 2020 and 37,676,006 shares as of December 31, 2019;

outstanding 39,785,398 shares as of December 31, 2020 and 35,072,066 as of December 31, 2019

Additional paid-in capital

Retained earnings

Treasury stock, at cost ( 2,603,940 shares at December 31, 2019 and 2,063,922 shares at December 31, 2018)

Accumulated other comprehensive loss

Treasury stock, at cost ( 2,658,633 shares as of December 31, 2020 and 2,603,940 shares as of December 31, 2019)

Accumulated other comprehensive income (loss)

Total stockholders’

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Noninterest income:

Annuity and insurance commissions

Income on bank owned life insurance

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Net gains (losses) on equity securities

Net (losses) gains on sale of investment securities

Net gains (losses) on sale of investment securities

Total noninterest income

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Amortization of core deposit intangible

Other components of net periodic pension expense

Increase in valuation allowance, loans held-for-sale

Other components of net periodic pension (income) expense

Increase in value of acquisition price

Other expenses

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

Reclassification adjustment for realized losses (gains) included in net income

Reclassification adjustment for realized (gains) losses included in net income

Unrealized (losses) gains on cash flow hedges

Reclassification adjustment for (gains) losses arising during this period

Reclassification adjustment for losses (gains) arising during this period

Unrealized pension plan (losses) gains:

Unrealized pension plan gains (losses) before reclassifications

Unrealized pension plan (losses) gains before reclassifications

Reclassification adjustment for realized losses included in net income

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Balance as of December 31, 2017

Other comprehensive loss, net of taxes

Cash dividends declared on common stock ($ 0.30 per share)

Issuance costs of common stock

Exercise of stock options ( 66,389 shares)

Restricted stock, net of forfeitures ( 57,164 shares)

Stock-based compensation expense

Balance as of December 31, 2017

Reclassification of stranded tax effects (ASU 2018-02) (see Note 17)

Reclassification of stranded tax effects (ASU 2018-02) (see

Cumulative effect of adopting ASU 2016-01 (see Note 16)

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Balance as of December 31, 2019

Other comprehensive income, net of tax

Cash dividends declared on common stock ($ 0.27 per share)

Repurchase of treasury stock ( 54,693 shares)

Net shares issued in satisfaction of restricted stock units

earned ( 16,541 shares)

Exercise of stock options ( 35,413 shares)

Restricted stock grants, net of forfeitures ( 89,879 shares)

Stock grants issued ( 1,340 shares)

Net shares issued in satisfaction of performance units earned

( 22,402 shares)

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

Stock issued ( 4,602,450 shares) in acquisition of Bancorp of New Jersey

Stock-based compensation expense

Balance as of December 31, 2020

See the accompanying notes to the consolidated financial statements.

9 unchanged sentences

Provision for loan losses

Increase to valuation allowance, loans held-for-sale

Amortization of intangibles

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Accretion on deposits

Amortization (accretion) on borrowings

(Accretion) amortization on borrowings

Net deferred income tax expense

2 unchanged sentences

Change in fair value of equity securities, net

Gains on sale of loans held-for-sale, net

Gains (losses) on sale of loans held-for-sale, net

Loans originated for resale

8 unchanged sentences

Net change in operating leases

(Increase) decrease in other assets

Increase in other assets

(Decrease) increase in other liabilities

4 unchanged sentences

Net redemptions (purchases) of restricted investment in bank stocks

Purchases of equity securities

Sales of equity securities

11 unchanged sentences

Increase in subordinated debt

Advances of FHLB borrowings

Repayments of FHLB borrowings

Advances of borrowings

Repayments of borrowings

( 1,650,387 )

1 unchanged sentence

( 1,803,000 )

Repayment of repurchase agreement

Cash dividends paid on common stock

Issuance cost of common stock

Purchase of treasury stock

Tax benefit of options exercised

Proceeds from exercise of stock options

Net shares issued in satisfaction of performance units earned

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

Net cash provided by financing activities

12 unchanged sentences

Fair value of net assets acquired, net of cash and cash equivalents

Fair value of liabilities assumed

See the accompanying notes to the consolidated financial statements.

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a - Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies

Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies

ConnectOne Bancorp, Inc.

4 unchanged sentences

(a New Jersey investment company), Twin Bridge Investment Co.

(a Delaware investment company), ConnectOne Preferred Funding Corp.

(a New Jersey 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.

2 unchanged sentences

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 thirty other banking offices.

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-seven other banking offices.

Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate.

1 unchanged sentence

business, real estate rental and consumer wages.

Basis of Financial Statement Presentation

Principals of Consolidation

The consolidated financial statements of the Parent Corporation are prepared on an accrual basis and include the accounts of the Parent Corporation and the Company.

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Actual results could differ significantly from those estimates.

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 spread throughout the United States and around 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.

Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses.

COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the New Jersey/New York metropolitan area in which the Company primarily operates.

Although the Company has been able to continue operations while taking steps to ensure the safety of employees and customers, COVID-19 could also potentially create widespread business continuity issues for the Company.

- 59 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Federal Reserve reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company's financial condition and results of operations in future periods.

It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company.

It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including the determination of the allowance for loan losses, fair value of financial instruments, impairment of goodwill and other intangible assets and income taxes.

Cash and Cash Equivalents

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equity and excluded from earnings.

- 55 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a - Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Investment securities are adjusted for amortization of premiums and accretion of discounts as adjustments to interest income, which are recognized on a level yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated.

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Recognition and Measurement of Financial Assets and Financial Liabilities.

Prior to January 1, 2018, unrealized gains and losses on equity securities were excluded from earnings and reported in other comprehensive income (loss), net of tax.

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method.

Loans Held-for-Sale

1 unchanged sentence

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.

- 60 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value.

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Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

- 56 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a - Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

The policy of the Company is to generally grant commercial, residential and consumer loans to residents and businesses within its New Jersey and New York market area.

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A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.

Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties are considered troubled debt restructurings (“TDR”) and are classified as impaired.

Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties (other than with regard to loans meeting the requirements of the CARES Act or regulatory guidance regarding mitigating the impact of the COVID-19 pandemic) are considered troubled debt restructurings (“TDR”) and are classified as impaired.

The impairment of a loan can be measured at (1) the fair value of the collateral less costs to sell, if the loan is collateral dependent, (2) at the value of expected future cash flows using the loan’s effective interest rate, or (3) at the loan’s observable market price.

3 unchanged sentences

Loans with balances less than $250,000 are collectively evaluated for impairment, and accordingly, are not separately identified for impairment disclosures.

- 61 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.

22 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a - Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Purchased Credit-Impaired Loans

27 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a - Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Restricted Stock

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Employee 401(k) and profit-sharing plan expense is the amount of matching contributions.

Stock-Based Compensation

Stock compensation accounting guidance (FASB ASC 718, “Compensation-Stock Compensation”) requires that the compensation cost related to share-based payment transactions be recognized in financial statements.

That cost will be measured based on the grant date fair value of the equity or liability instruments issued.

The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.

- 64 -

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a - Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Stock-Based Compensation

That cost will be measured based on the grant date fair value of the equity or liability instruments issued.

Stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’

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Treasury stock is recorded using the cost method and accordingly is presented as a reduction of stockholders’

During the year ended December 31, 2019, the Parent Corporation repurchased 540,018 shares under a board-approved share repurchase program.

During the years ended December 31, 2018 and 2017, the Parent Corporation did not purchase any of its shares.

During the year ended December 31, 2020 and December 31, 2019, the Parent Corporation repurchased 54,693 and 540,018 shares under a board-approved share repurchase program.

During the year ended December 31, 2018, the Parent Corporation did not repurchase any of its shares.

1 unchanged sentence

The Company has selected December 31 as the date to perform the annual impairment test.

No impairment charge was deemed necessary for the years ended December 31, 2019, 2018 and 2017.

No impairment charge was deemed necessary as of the years ended December 31, 2020, 2019 and 2018.

Other Intangible Assets

7 unchanged sentences

Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Parent Corporation or by the Parent Corporation to the stockholders.

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note.

Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.

Changes in assumptions or in market conditions could significantly affect the estimates.

- 65 -

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a - Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note.

Changes in assumptions or in market conditions could significantly affect the estimates.

Bank Owned Life Insurance

14 unchanged sentences

Such reclassifications had no impact on net income or stockholders’

Note 1b –Authoritative Accounting Guidance

Adoption of New Accounting Standards

Effective January 1, 2019, the Company implemented ASU No.

2016-02, “Leases (Topic 842)”

(modified by ASU 2018-01 –

Leases (Topic 842):

Land Easement Practical Expedient for Transition to Topic 842) and ASU 2018-20 –

Leases (Topic 842) Narrow –

Scope Improvements for Lessors).

ASU 206-02 requires the recognition of a right of use asset and related lease liability by lessees for leases classified as operating leases under current GAAP.

See Note 6 for further information regarding leases.

Effective January 1, 2018, the Company implemented ASU 2016-01, “

Financial Instruments –

Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities .”

The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments.

The guidance also resulted in separate classification of equity securities previously included in available-for-sale securities on the consolidated statements of condition with changes in the fair value of the equity securities now being captured in the Consolidated Statement of Income.

As a result, the Company recorded a cumulative-effect adjustment to the Consolidated Statement of Condition.

See Note 17 - Comprehensive Income for further information.

See Note 1 for the Company’s accounting policy on Equity Securities.

Adoption of the standard also resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis in the Consolidated Statements of Condition.

See Note 22 for further information regarding the valuation of these loans.

Effective January 1, 2018, the Company implemented ASU 2018-02, “

Income Statement –

Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income .”

Under ASU 2018-02, the FASB amended existing guidance to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from The Tax Cuts and Jobs Act of 2017.

Please see Note 17 for further information.

Effective January 1, 2018, the Company implemented ASU 2017-07, “

Retirement Benefits (Topic 715):

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost .”

Under ASU 2017-07, the FASB requires employers to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period.

The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.

See Note 18 for further information.

- 61 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Authoritative Accounting Guidance –

Effective January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO.

Please see Note 25 for further information.

Newly Issued, But Not Yet Effective Accounting Standards

Note 1b –

Authoritative Accounting Guidance

Adoption of New Accounting Standards in 2021

2016-13, “Financial Instruments –

5 unchanged sentences

For SEC filers that are not smaller reporting companies, the amendments in this update are effective for the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The Company will adopt Topic 326, as required, on January 1, 2020.

The Company’s CECL implementation efforts are continuing to focus on completion of model validation, developing new disclosures, establishing formal policies and procedures and other governance and control documentation.

Based on the Company’s portfolio balances, including the level of acquired loans and nonaccretable credit marks on PCI loans, and forecasted economic conditions as of January 1, 2020, management believes the adoption of the CECL standard will result in a material increase to its total current reserves.

However, the ultimate amount of the increase will be contingent upon continued validation of our model, testing and refinement of the model methodologies and judgments utilized to determine the estimate.

Based on implementation progress to date, the Company believes the capital adequacy requirements to which it and the Bank are subject to, and its business strategies and practices, will not be materially impacted following the adoption on January 1, 2020.

2017-08, “

Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities .”

2017-08 shortens the amortization period for certain callable debt securities held at a premium.

Specifically, the amendments require the premium to be amortized to the earliest call date.

The amendments do not require an accounting change for securities held at a discount;

the discount continues to be amortized to maturity.

ASU 2017-08 will be effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

ASU 2018-15, “

Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.

These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).

The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments.

ASU 2018-15 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019.

We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

- 62 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Authoritative Accounting Guidance –

In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’

implementation of ASU No.

2016-13, Financial Instruments –

Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“CECL”).

Under the CARES Act, the effective date for the implementation of ASU No.

2016-13 was delayed until the earlier of the end of the health crises caused by the COVID-19 Pandemic or December 31, 2020.

The Economic Aid Act then further delayed implementation until the earlier of the end of the health crises caused by the COVID-19 Pandemic or December 31, 2022.

The Company is adopting Topic 326, as of January 1, 2021.

While the Company has not finalized the impact of implementing CECL, the Company expects to recognize a one-time cumulative effect adjustment to the allowance and beginning retained earnings, net of tax, upon adoption.

The future impact of CECL on the Company’s allowance for credit losses and provision expense subsequent to the initial adoption will depend on changes in the loan portfolio, economic conditions and refinements to key assumptions including forecasting and qualitative factors.

The Company measured its allowance under its current incurred loan loss model as of December 31, 2020.

ASU 2018-14, “

2 unchanged sentences

These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

ASU 2018-14 is effective for fiscal years ending after December 15, 2020.

We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

ASU 2018-13, “

Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement .”

The amendments in this update modify disclosure requirements on fair value measurements by removing, modifying and adding certain disclosure requirements.

The amendments primarily pertain to Level 3 fair value measurements and depending on the amendment are applied either prospectively or retrospectively.

ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

ASU 2018-14 went effective for the Company as of January 1, 2021 and did not have a significant impact on our consolidated financial statements.

Adoption of New Accounting Standards in 2020

2017-04, “Intangibles –

7 unchanged sentences

An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets and still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019.

Although management continues to evaluate the potential impact of ASU 2017-04 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

Business Combinations

Greater Hudson Bank (“GHB”)

On July 11, 2018, the Company entered into an Agreement and Plan of Merger with GHB, under which GHB would merge with and into ConnectOne Bank, with ConnectOne Bank as the surviving bank.

This transaction was completed effective January 2, 2019 (“Merger date”).

As part of this merger, the Company acquired seven branch offices located in Rockland, Orange and Westchester Counties, New York.

Pursuant to the merger agreement, holders of GHB common stock received 0.245 shares of common stock of ConnectOne with cash paid in lieu of fractional shares.

The acquisition of GHB was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date.

The application of the acquisition method of accounting resulted in the recognition of goodwill of $ 10.3 million and a core deposit intangible of $ 5.1 million.

The assets acquired and liabilities assumed and consideration paid in the acquisition of GHB were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition.

ASU 2017-04 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.

- 66 -

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business Combinations –

Note 1b –

Authoritative Accounting Guidance –

2017-08, “

Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities .”

2017-08 shortens the amortization period for certain callable debt securities held at a premium.

Specifically, the amendments require the premium to be amortized to the earliest call date.

The amendments do not require an accounting change for securities held at a discount;

the discount continues to be amortized to maturity.

ASU 2017-08 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.

ASU 2018-13, “

Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement .”

The amendments in this update modify disclosure requirements on fair value measurements by removing, modifying and adding certain disclosure requirements.

The amendments primarily pertain to Level 3 fair value measurements and depending on the amendment are applied either prospectively or retrospectively.

ASU 2018-03 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.

ASU 2018-15, “

Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.

The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments.

ASU 2018-15 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.

Note 2 –

Business Combination

On January 2, 2020, Bancorp of New Jersey, Inc.

(“BNJ”) merged with and into the Company, with the Company as the surviving entity.

As a result of the merger, the Company acquired nine branch offices all located in Bergen County, New Jersey.

Subject to the allocation and proration procedures set forth in the merger agreement, holders of BNJ common stock had the right to elect, with respect to each share of BNJ common stock, to receive either (i) $ 16.25 in cash or (ii) 0.780 of a share of Company common stock (plus cash in lieu of any fractional shares of Company common stock to which such holder would otherwise be entitled).

The allocation and proration procedures set forth in the merger agreement required that approximately 20 % of the shares of BNJ common stock be converted into cash and the remaining approximately 80 % of BNJ common shares be converted into shares of the Company’s common stock.

- 67 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 –

Business Combination –

The acquisition of BNJ was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at their estimated fair values as of the acquisition date.

The application of the acquisition method of accounting resulted in the recognition of goodwill of $ 45.8 million and a core deposit intangible of $ 8.1 million.

The assets acquired and liabilities assumed, and consideration paid in the acquisition of BNJ were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition.

In connection with the acquisition, the consideration paid, and the fair value of identifiable assets acquired, and liabilities assumed as of the date of acquisition are summarized in the following table:

Estimated FairValue at

January 2, 2020

2 unchanged sentences

Common stock issued in acquisition

Cash paid in acquisition

Total consideration paid:

Assets acquired :

1 unchanged sentence

Securities available-for-sale

Commercial loans, net

Commercial real estate loans, net

Construction loans, net

Residential loans, net

Consumer loans, net

Premises and equipment, net

7 unchanged sentences

Goodwill recorded in acquisition

The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired by ConnectOne and reflects the economies of scale, increased market share and lending capabilities, greater access to best-in-class banking technology, and related synergies that are expected to result from the acquisition.

Loans acquired in the GHB acquisition were recorded at fair value, and there was no carryover related allowance for loan losses.

The fair values of loans acquired from GHB were estimated based on the value of the expected cash flows, which were projected based on the contractual terms of the loans, including both maturity and contractual amortization.

The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired by the Company and reflects the economies of scale, increased market share and lending capabilities, greater access to best-in-class banking technology, and related synergies that are expected to result from the acquisition.

Loans acquired in the BNJ acquisition were recorded at fair value, and there was no carryover related allowance for loan losses.

The fair values of loans acquired from BNJ were estimated based on the value of the expected cash flows, which were projected based on the contractual terms of the loans, including both maturity and contractual amortization.

The monthly principal and interest cash flows were adjusted for expected losses and prepayments, where appropriate.

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business Combinations –

The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the GHB acquisition as of the Merger date:

Note 2 –

Business Combination –

The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the BNJ acquisition as of the Merger date:

Estimated FairValue at

January 2, 2020

4 unchanged sentences

Interest component of expected cash flows (accretable discount)

Fair value of purchased credit –

impaired loans

Goodwill related to GHB is not amortized for book purposes;

Fair value of acquired loans

Goodwill related to BNJ is not amortized for book purposes;

however, it is reviewed at least annually for impairment and is not deductible for tax purposes.

2 unchanged sentences

The fair value of borrowed funds was estimated by discounting the future cash flows using market rates for similar borrowings.

Direct acquisition and integration costs of the GHB acquisition were expensed as incurred.

These items were recorded as merger-related expenses on the consolidated statement of income.

Merger expenses related to the GHB acquisition were $ 7.6 million for the year ended December 31, 2019.

On May 31, 2019, ConnectOne Bank, through a wholly owned subsidiary, completed the acquisition of certain assets of New York/Boston-based BoeFly, LLC, which operates an online business lending marketplace connecting small- to medium-sized businesses, largely related to the franchise business sector, with lenders and professional loan brokers across the United States.

The business operates as BoeFly, Inc., a wholly owned subsidiary of ConnectOne Bank, and generates fee income and small business lending opportunities for the Bank.

The consideration exchanged was a combination of cash, restricted stock and a potential cash earn-out based on predefined business origination targets.

The Company recorded $ 6.3 million as goodwill on its consolidated statement of condition as of the acquisition date.

The acquisition of the assets of BoeFly, LLC were not material to the results of operations or financial condition of the Company.

Direct acquisition and integration costs of the BoeFly, LLC acquisition were expensed as incurred.

These items were recorded as merger-related expenses on the consolidated statement of income.

Merger expenses related to the BoeFly, LLC acquisition were $ 0.3 million for the year ended December 31, 2019.

- 65 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Direct acquisition and integration costs of the BNJ acquisition were expensed as incurred.

These items were recorded as merger expenses on the consolidated statement of income.

During the year ended December 31, 2020, merger expenses related to the BNJ acquisition were $ 11.6 million.

Note 3 –

Earnings per Common Share

20 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Investment Securities

The Company’s investment securities are classified as available-for-sale at December 31, 2019 and December 31, 2018.

Note 4 –

Investment Securities

The Company’s investment securities are classified as available-for-sale as of December 31, 2020 and December 31, 2019.

Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in stockholders’

3 unchanged sentences

See Note 21 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 at December 31, 2019 and 2018.

The following tables present information related to the Company’s portfolio of securities available-for-sale as of December 31, 2020 and 2019.

(dollars in thousands)

5 unchanged sentences

Obligations of U.S.

states and political subdivisions

Corporate bonds and notes

3 unchanged sentences

Total securities available-for-sale

December 31, 2018

(dollars in thousands)

December 31, 2019

Investment securities available-for-sale

3 unchanged sentences

Obligations of U.S.

states and political subdivisions

Corporate bonds and notes

7 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Investment Securities –

Investment securities having a carrying value of approximately $ 111.5 million and $ 151.5 million at December 31, 2019 and December 31, 2018, 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 December 31, 2019 and December 31, 2018, there were no holdings of securities of any one issuer, other than the U.S.

Note 4 –

Investment Securities –

Investment securities having a carrying value of approximately $ 107.6 million and $ 111.5 million as of December 31, 2020 and December 31, 2019, respectively, were pledged to secure public deposits, borrowings, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law.As of December 31, 2020, and December 31, 2019, 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’

The following table presents information for investments in securities available-for-sale at December 31, 2019, based on scheduled maturities.

The following table presents information for investments in securities available-for-sale as of December 31, 2020, based on scheduled maturities.

Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

16 unchanged sentences

Gross losses on sales of investment securities

Net (losses) gains on sales of investment securities

Net gains (losses) on sales of investment securities

Tax provision on net gains

Net (losses) gains on sales of investment securities, after tax

Net gains (losses) on sales of investment securities, after tax

- 71 -

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Investment Securities –

Note 4 –

Investment Securities –

Other-than-Temporarily Impaired Investments

21 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Investment Securities –

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at December 31, 2019 and 2018.

Note 4 –

Investment Securities –

There were no investments held-to-maturity as of December 31, 2020 and 2019.

2 unchanged sentences

12 Months or Longer

Unrealized Losses

(dollars in thousands)

3 unchanged sentences

Commercial mortgage pass-through securities

Obligations of U.S.

states and political subdivisions

Corporate bonds and notes

18 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses

Note 5 –

Loans and the Allowance for Loan Losses

Loans Receivable :

1 unchanged sentence

(dollars in thousands)

Commercial (1)

Commercial real estate

3 unchanged sentences

Loans receivable

At December 31, 2019 and 2018, loan balances of approximately $ 2.5 billion and $ 2.3 billion, respectively, were pledged to secure borrowings from the Federal Home Loan Bank.

Included in commercial loans as of December 31, 2020 were PPP loans of $ 397.5 million.

As of December 31, 2020, and 2019, loan balances of approximately $ 2.7 billion and $ 2.5 billion, respectively, were pledged to secure borrowings from the Federal Home Loan Bank.

The loan segments in the above table have unique risk characteristics with respect to credit quality:

13 unchanged sentences

Commercial real estate

Residential mortgage

Total carrying amount

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses –

Note 5 –

Loans and the Allowance for Loan Losses –

Purchased Credit-Impaired Loans :

3 unchanged sentences

Commercial real estate

Residential real estate

Total carrying amount

1 unchanged sentence

No allowances for loan losses were reversed during 2020 and 2019.

The accretable yield, or income expected to be collected, on the purchased credit-impaired loans above is as follows as of December 31, 2019 and December 31, 2018.

The accretable yield, or income expected to be collected, on the purchased credit-impaired loans above is as follows for the years presented:

(dollars in thousands)

Balance at January 1,

Balance as of January 1,

New loans purchased

Accretion of income

Balance at December 31,

Balance as of December 31,

Loans Receivable on Nonaccrual Status :

10 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses –

Note 5 –

Loans and the Allowance for Loan Losses –

Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable.

15 unchanged sentences

All loans past due 90 days or greater and all impaired loans are included in the appropriate category below.

The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) at December 31, 2019 and December 31, 2018:

The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) as of December 31, 2020 and December 31, 2019:

December 31, 2020

12 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses –

Note 5 –

Loans and the Allowance for Loan Losses –

The following table provides an analysis of the impaired loans by class as of and for the years ended December 31, 2020, 2019 and 2018.

1 unchanged sentence

No Related Allowance Recorded

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

(dollars in thousands)

3 unchanged sentences

With An Allowance Recorded

Commercial construction

Residential real estate

Commercial real estate

Commercial construction

Residential real estate

Total (including related allowance)

Total (including related

December 31, 2019

No Related Allowance Recorded

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

(dollars in thousands)

3 unchanged sentences

With An Allowance Recorded

Commercial real estate

Commercial construction

Residential real estate

2 unchanged sentences

Residential real estate

Total (including related allowance)

Total (including related

- 77 -

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses –

Note 5 –

Loans and the Allowance for Loan Losses –

December 31, 2018

No Related Allowance Recorded

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

(dollars in thousands)

4 unchanged sentences

Commercial real estate

Residential real estate

Commercial real estate

2 unchanged sentences

Total (including related allowance)

Included in impaired loans at December 31, 2019 and December 31, 2018 are loans that are deemed troubled debt restructurings.

Included in impaired loans as of December 31, 2020 and December 31, 2019 are loans that are deemed troubled debt restructurings.

Cash basis interest and interest income recognized on accrual basis approximate each other.

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses –

Note 5 –

Loans and the Allowance for Loan Losses –

Aging Analysis :

The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due at December 31, 2019 and December 31, 2018 (dollars in thousands):

The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due as of December 31, 2020 and December 31, 2019 (dollars in thousands):

December 31, 2020

90 Days or Greater Past Due

and Still Accruing

Total Past Due and

30-59 Days Past Due

60-89 Days Past Due

90 Days or Greater Past Due and Still Accruing

Total Past Due and Nonaccrual

Total Loans Receivable

16 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses –

Note 5 –

Loans and the Allowance for Loan Losses –

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 loan losses that are allocated to each loan portfolio segment:

13 unchanged sentences

Acquired with deteriorated credit quality

Included in the commercial loans collectively evaluated for impaired are PPP loans of $ 397.5 million as of December 31, 2020.

PPP loans receivable are guaranteed by the Federal government and have no allocation of the allowance for loan losses.

December 31, 2019

Commercial real estate

Commercial construction

Residential real estate

(dollars in thousands)

12 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses –

Note 5 –

Loans and the Allowance for Loan Losses –

The Company’s allowance for loan losses is analyzed quarterly.

5 unchanged sentences

(dollars in thousands)

Balance at January 1, 2019

Balance as of January 1, 2020

Loan charge-offs

Provision for loan losses

Balance at December 31, 2019

Balance as of December 31, 2020

Commercial real estate

Commercial construction

Residential real estate

(dollars in thousands)

Balance at January 1, 2018

Balance as of January 1, 2019

Loan charge-offs

Provision for loan losses

Balance at December 31, 2018

Balance as of December 31, 2019

(dollars in thousands)

Balance at January 1, 2017

Balance as of January 1, 2018

Loan charge-offs

Provision for loan losses

Balance at December 31, 2017

Balance as of December 31, 2018

For the year ended December 31, 2018, the loan charge-offs within the commercial loan segment were primarily made up of $ 17.0 million in charge-offs related to the taxi medallion portfolio.

Troubled Debt Restructurings

Loans are considered to have been modified in a troubled debt restructuring (“TDRs”) when due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider.

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.

2 unchanged sentences

If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status.

At December 31, 2019, 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 December 31, 2020, 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.

- 81 -

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses –

Note 5 –

Loans and the Allowance for Loan Losses –

As of December 31, 2020, TDRs totaled $ 49.4 million, of which $ 25.7 million were on nonaccrual status and $ 23.7 million were performing under their restructured terms.

As of December 31, 2019, TDRs totaled $ 52.0 million, of which $ 30.6 million were on nonaccrual status and $ 21.4 million were performing under their restructured terms.

The Company has allocated $ 1.3 million and $- 0 - million of specific allowance as of December 31, 2019 and December 31, 2018, respectively.

The Company has allocated $- 0 - and $ 1.3 million of specific allowance as of December 31, 2020 and December 31, 2019, respectively.

There were no charge-offs in connection with a loan modification at the time of modification during the year ended December 31, 2020, 2019 and 2018.

There were no TDRs for which there was a payment default within twelve months following the modification during the year ended December 31, 2019.

The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2019:

There were no TDRs for which there was a payment default within twelve months following the modification during the year ended December 31, 2020, 2019 and 2018.

The following table presents loans by class modified as TDRs that occurred during year ended December 31, 2020:

Pre-Modification

4 unchanged sentences

Commercial construction

Included in the commercial loan segment of the troubled debt restructurings is one taxi medallion loan totaling $ 0.3 million.

This taxi medallion loan was on nonaccrual status prior to modification, and will remain on nonaccrual status post-modification.

All loan modifications during the year ended December 31, 2019 included interest rate reductions and/or maturity extensions.

Residential real estate

The five loan modifications during the year ended December 31, 2020 were maturity extensions.

The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2019

2 unchanged sentences

(dollars in thousands)

Troubled debt restructurings:

Commercial real estate

Commercial construction

Residential real estate

Included in the commercial loan segment of the troubled debt restructurings are 27 taxi medallion loans totaling $ 11.2 million.

All 27 taxi medallion loans included above were on nonaccrual status prior to modification, and remain on nonaccrual status post-modification.

Included in the commercial loan segment of the troubled debt restructurings is one taxi medallion loan totaling $ 0.3 million.

This taxi medallion loan was on nonaccrual status prior to modification and will remain on nonaccrual status post-modification.

All loan modifications during the year ended December 31, 2019 included interest rate reductions and/or maturity extensions.

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Loans and the Allowance for Loan Losses –

Note 5 –

Loans and the Allowance for Loan Losses –

The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2018:

5 unchanged sentences

Residential real estate

Included in the commercial loan segment of the troubled debt restructurings are 27 taxi medallion loans totaling $ 11.2 million.

All 27 taxi medallion loans included above were on nonaccrual status prior to modification and remain on nonaccrual status post-modification.

All loan modifications during the year ended December 31, 2018 included interest rate reductions and/or maturity extensions.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19.

The interagency statement was effective immediately and impacted accounting for loan modifications.

The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs.

This includes short-term (e.g., three to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

Provisions of the CARES Act largely mirrored the provisions of the interagency statement, providing that modified loans would not be considered TDR’s if they were performing at year-end 2019, and the other conditions set forth in the interagency statement were met.

Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented or at year-end 2019.

As of December 31, 2020, the Bank had 113 deferred loans totaling approximately $207.1 million.

The majority of these loans were deferred between 90 and 120 days.

The following table sets forth the composition of these loans by loan segments as of December 31, 2020:

(dollars in thousands)

Commercial real estate

Residential real estate

As of December 31, 2020, there were no deferred loans that were delinquent or on nonaccrual status.

As of December 31, 2020, $ 40.3 million of deferred loans were risk rated “special mention”

The Company evaluates its deferred loans after the initial deferral period and will either return the deferred loans to its original loan terms or the loan will be reassessed at that time to determine if a further deferment should be granted and if a downgrade in risk rating is appropriate.

- 83 -

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 - Premises and Equipment

Note 6 –

Premises and Equipment

Premises and equipment are summarized as follows:

10 unchanged sentences

(dollars in thousands)

Finance Lease

Capital Lease

accumulated amortization

The following is a schedule by year of future minimum lease payments under the finance lease, together with the present value of net minimum lease payments at December 31, 2019 (dollars in thousands):

The following is a schedule by year of future minimum lease payments under the finance lease, together with the present value of net minimum lease payments as of December 31, 2020 (dollars in thousands):

Total minimum lease payments

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 - Premises and Equipment –

Note 6 –

Premises and Equipment –

The Company leases certain premises and equipment under operating leases.

At December 31, 2019, the Company had lease liabilities totaling $ 16.4 million and right-of-use assets totaling $15.1 million.

As of December 31, 2020, the Company had lease liabilities totaling $ 18.0 million and right-of-use assets totaling $16.2 million.

As of December 31, 2020, the weighted average remaining lease term for operating leases was 6.0 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.9 %.

Total lease costs for the year ended December 31, 2020 was $ 4.3 million.

Rent expense for both the years ended December 31, 2018 and 2017 prior to adoption of ASU 2016-02, was $ 2.3 million.

As of December 31, 2019, the Company had lease liabilities totaling $ 16.4 million and right-of-use assets totaling $15.1 million.

As of December 31, 2019, the weighted average remaining lease term for operating leases was 7.2 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.0 %.

Total lease costs for the year ended December 31, 2019 was $ 3.1 million.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:

10 unchanged sentences

Total lease liability

Note 7 - Goodwill and Other Intangible Assets

Note 7 –

Goodwill and Other Intangible Assets

A goodwill impairment test is required under ASC 350, Intangibles –

4 unchanged sentences

If a step zero impairment test results in the conclusion that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, then no further testing is required.

Step zero impairment testing is an assessment of qualitative factors that affect the likelihood of impairment.

Based upon management’s review, the Company’s intangible assets were not impaired and there has been no impairment through December 31, 2019 Management concludes that the ASC 350 goodwill step zero test has been passed, and no further testing is required.

In accordance with ASC 350, the Company performs goodwill impairment test at least annually, or more frequently if triggering event occurs.

In the second quarter of 2020, the impact of COVID-19, prompted the Company to quantitively evaluate goodwill for impairment.

The Company engaged an independent third-party to evaluate the fair value of the Company compared to its carrying value.

To estimate the fair value of the Company, the third-party relied on a weighted discounted cash flow method, guideline public company method, and transaction method.

The results concluded that the fair value of the Company exceeded its current carrying value and goodwill impairment did not exist as of June 30, 2020.

Based upon management’s review through December 31, 2020, the Company’s goodwill was not impaired.

Management concludes that the ASC 350 goodwill step zero test has been passed, and no further testing is required.

The change in goodwill during the year is as follows:

7 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 - Goodwill and Other Intangible Assets –

Note 7 –

Goodwill and Other Intangible Assets –

Acquired Intangible Assets

10 unchanged sentences

As of December 31, 2020, and 2019, the Company’s total time deposits were $ 1.5 billion and $ 1.6 billion, respectively.

Included in time deposits were brokered time deposits of $ 399.2 million and $ 405.6 million as of December 31, 2019 and 2018, respectively.

Included in time deposits were nonreciprocal brokered time deposits of $ 217.5 million and $ 399.2 million as of December 31, 2020 and 2019, respectively.

As of December 31, 2020, the contractual maturities of these time deposits were as follows (dollars in thousands):

1 unchanged sentence

The amount of time deposits with balances of $250,000 or more was $ 409.3 million and $ 331.6 million as of December 31, 2020 and 2019, respectively.

Included in time deposits with balances of $250,000 or more were brokered time deposits with balances of $250,000 or more of $- 0 - million and $ 8.8 million as of December 31, 2019 and 2018, respectively.

- 86 -

23 unchanged sentences

All FHLB advances are fixed rates.

The advances at December 31, 2019 were primarily collateralized by approximately $ 1.9 billion of commercial mortgage and residential loans, net of required over collateralization amounts, under a blanket lien arrangement.

At December 31, 2019 the Company had remaining borrowing capacity of approximately $ 1.0 billion at FHLB.

Note 10 –

Securities Sold under Agreements to Repurchase

The Company has entered into agreements under which it has sold securities subject to an obligation to repurchase the same or similar securities.

Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets.

The obligation to repurchase the securities is reflected as a liability in the Company’s Consolidated Statement of Condition, while the securities underlying the securities sold under agreements to repurchase remain in the respective asset accounts and are delivered to and held as collateral by third party trustees.

Repurchase agreements are secured borrowings.

The Company pledges investment securities to secure those borrowings.

Information concerning repurchase agreements is summarized as follows (dollars in thousands):

Average daily balance during the year

Average interest rate during the year

Maximum month-end balance during the year

Weighted average interest rate during the year

The advances as of December 31, 2020 were primarily collateralized by approximately $ 2.0 billion of commercial mortgage and residential loans, net of required over collateralization amounts, under a blanket lien arrangement.

As of December 31, 2020, the Company had remaining borrowing capacity of approximately $ 1.0 billion at the FHLB.

- 87 -

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 - Subordinated Debentures

Note 10 –

Subordinated Debentures

During 2003, the Company formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust;

2 unchanged sentences

On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $ 5.0 million of MMCapS capital securities to investors due on January 23, 2034 .

The capital securities presently qualify as Tier 1 capital.

The capital securities presently qualify as Tier I capital.

The trust loaned the proceeds of this offering to the Company and received in exchange $ 5.2 million of the Parent Corporation’s subordinated debentures.

1 unchanged sentence

The floating interest rate on the subordinate debentures is three-month LIBOR plus 2.85 % and reprices quarterly.

The rate at December 31, 2019 was 4.79 %.

The rate as of December 31, 2020 was 3.06 %.

These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with FASB ASC 810-10.

Distributions on the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income.

The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II at December 31, 2019 and December 31, 2018.

The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of December 31, 2020 and December 31, 2019.

Issuance Date

Securities Issued

Liquidation Value

Redeemable by

Issuer Beginning

Redeemable by Issuer Beginning

$1,000 per Capital Security

Floating 3-month LIBOR + 285 Basis Points

In June 2015, the Parent Corporation issued $ 50.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”).

The Notes are non-callable for five years , have a stated maturity of July 1, 2025 , and bear interest at a fixed rate of 5.75 % per year, from and including June 30, 2015 to, but excluding July 1, 2020.

From and including July 1, 2020 to 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 393 basis points .

As of December 31, 2019, unamortized costs related to the debt issuance were approximately $ 0.1 million.

On June 10, 2020, the Parent Corporation issued $ 75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”).

The 2020 Notes bear interest at 5.75 % annually from, and including, the date of initial issuance to, but excluding, June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2020.

From and including June 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points , payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025.

Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.

On January 11, 2018, the Parent Corporation issued $ 75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2018 Notes”).

3 unchanged sentences

Interest on the 2018 Notes will be paid on February 1, and August 1, commencing August 1, 2018 to but not including February 1, 2023, and from and including February 1, 2023, on February 1, May 1, August 1, and November 1, of each year to but excluding the stated maturity date, unless in any case previously redeemed.

As of December 31, 2019, unamortized costs related to this debt issuance were approximately $ 1.2 million.

Note 12 - Income Taxes

During June 2015, the Parent Corporation issued $ 50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2015 Notes”).

As of December 31, 2020, the 2015 Notes have a stated maturity of July 1, 2025 , and bear interest until the maturity date or early redemption date at a variable rate equal to the then current three-month LIBOR rate plus 393 basis points .

As of December 31, 2020, the variable interest rate was 4.16 % and all costs related to 2015 issuance have been amortized.

The 2015 Notes were redeemed in full on January 1, 2021.

- 88 -

Note 11 –

The current and deferred amounts of income tax expense for 2020, 2019 and 2018 are as follows (dollars in thousands):

Income tax expense

- 85 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 - Income Taxes –

On July 1, 2018 New Jersey Governor Phil Murphy signed Assembly Bill 4202 (“the Bill”) into law.

The legislation imposes a temporary surtax on corporations earning New Jersey allocated income in excess of $ 1 million of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and of 1.5 % for tax years beginning on or after January 1, 2020 through December 31, 2021.

However, in 2020, this surtax was extended through December 31, 2023, at the 2.5 % level.

The legislation also requires combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019, changing New Jersey’s current status as a separate return state, and limits the deductibility of dividends received.

These changes are not temporary.

Although regulations implementing the legislative changes have not yet been issued, it is possible that the Company will lose the benefit of at least certain of its tax management strategies, and, if so, our total tax expense will likely increase.

As a result of the Bill the Company recorded a net tax benefit of $ 0.6 million primarily due to a re-measurement of deferred tax assets and liabilities.

Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory federal tax rate for the following reasons (dollars in thousands):

5 unchanged sentences

Impact of the Tax Cuts and Jobs Act 2017

Impact of “the Bill”

Impact of the “the Bill”

Bank owned life insurance

2 unchanged sentences

Income tax expense

The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability at December 31, 2019 and 2018 are presented in the following table:

- 89 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 –

Income Taxes –

The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability as of December 31, 2020 and 2019 are presented in the following table:

(dollars in thousands)

12 unchanged sentences

Employee benefit plans

Purchase accounting

Pension actuarial gains

4 unchanged sentences

Net deferred tax assets

- 86 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 - Income Taxes –

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized.

5 unchanged sentences

The Company’s state income tax returns are generally open from the 2015 and later tax return years based on individual state statutes of limitations.

- 90 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 –

18 unchanged sentences

Interest rate swaps

- 91 -

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 - Commitments, Contingencies and Concentrations of Credit Risk

Note 13 –

Commitments, Contingencies and Concentrations of Credit Risk

In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as standby and commercial letters of credit, unused portions of lines of credit and commitments to extend various types of credit.

7 unchanged sentences

Accordingly, the collectability of a substantial portion of the loan portfolio of the Bank is susceptible to changes in the metropolitan New York real estate market.

The following table provides a summary of financial instruments with off-balance sheet risk at December 31, 2019 and 2018:

The following table provides a summary of financial instruments with off-balance sheet risk as of December 31, 2020 and 2019:

(dollars in thousands)

12 unchanged sentences

Balance, December 31

Deposits from principal officers, directors, and their affiliates at December 31, 2019 and 2018 were $ 24.5 million and $ 39.7 million respectively.

Deposits from principal officers, directors, and their affiliates as of December 31, 2020 and 2019 were $ 55.4 million and $ 24.5 million respectively.

The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal stockholders, their immediate families and affiliated companies (commonly referred to as related parties).

6 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 - Stockholders’

Note 15 –

Stockholders’

Equity and Regulatory Requirements

3 unchanged sentences

Failure to meet capital requirements can initiate regulatory action.

The final rules implementing the Basel Committee on Banking Supervisions’

capital guidelines for U.S.

banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased on by January 1, 2019.

The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.

22 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 - Stockholders’

Note 15 –

Stockholders’

Equity and Regulatory Requirements –

9 unchanged sentences

Risk-Based Capital:

The new Basel III rules require a “capital conservation buffer,”

for both the Company and the Bank.

As of January 1, 2019, the Company and the Bank are required to maintain a 2.5 % capital conservation buffer, above and beyond the capital levels otherwise required under applicable regulation.

Under this guidance banking institutions with a CET1, Tier 1 Capital Ratio and Total Risk Based Capital Ratio above the minimum regulatory adequate capital ratios but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall.

As of December 31, 2020, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them.

4 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17 - Comprehensive Income

Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from nonowner sources.

The Company’s other comprehensive income (loss) is comprised of unrealized holding gains and losses on securities available-for-sale, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, net of taxes.

Note 16 –

Comprehensive Income

Total comprehensive 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 and 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) income for the periods presented:

Details about Accumulated Other

4 unchanged sentences

Statements of Income

For the Year Ended

(dollars in thousands)

Sale of investment securities available-for-sale

Net (losses) gains on sale of securities available-for-sale

Income tax benefit (expense)

Net interest income (expense) on swaps

Net gains (losses) on sale of investment securities

Income tax expense

Net interest (expense) income on swaps

Interest expense

Income tax expense (benefit)

Income tax expense

Amortization of pension plan net actuarial losses

Other components of net periodic pension expense

Salaries and employee benefits

Income tax benefit

Total reclassification

Accumulated other comprehensive loss at December 31, 2019 and 2018 consisted of the following:

Accumulated other comprehensive income (loss) as of December 31, 2020 and 2019 consisted of the following:

(dollars in thousands)

5 unchanged sentences

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”

Under ASU 2018-02, the FASB amended existing guidance to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Act.

In order to comply with this new ASU, the Company recorded an adjustment to the Consolidated Statement of Condition on January 1, 2018 of approximately $ 709 thousand that increased retained earnings and increased accumulated other comprehensive loss.

8 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18 - Pension and Other Benefits

Note 17 –

Pension and Other Benefits

Defined Benefit Plans

4 unchanged sentences

Payments may be made under the Pension Plan once attaining the normal retirement age of 65 and are generally equal to 44% of a participant’s highest average compensation over a 5-year period.

The following table sets forth changes in projected benefit obligation, changes in fair value of plan assets, funded status, and amounts recognized in the consolidated statements of condition for the Company’s pension plans at December 31, 2019 and 2018.

(dollars in thousands)

Change in Benefit Obligation:

Projected benefit obligation at January 1,

Projected benefit obligation as of January 1,

Interest cost

Actuarial (gain) loss

Actuarial loss

Benefits paid

Projected benefit obligation at December 31,

Projected benefit obligation as of December 31,

Change in Plan Assets:

Fair value of plan assets at January 1,

Fair value of plan assets as of January 1,

Actual return on plan assets

1 unchanged sentence

Benefits paid

Fair value of plan assets at December 31,

Fair value of plan assets as of December 31,

Funded status

1 unchanged sentence

Amounts recognized as a component of accumulated other comprehensive loss as of year-end that have not been recognized as a component of the net periodic pension expense for the plan are presented in the following table.

The Company expects to recognize approximately $ 301,000 of the net actuarial loss reported in the following table as of December 31, 2019 as a component of net periodic pension expense during 2020.

The Company expects to recognize approximately $ 0.3 million of the net actuarial loss reported in the following table as of December 31, 2020 as a component of net periodic pension expense during 2021.

(dollars in thousands)

12 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18 - Pension and Other Benefits –

Effective January 1, 2018, the Company implemented ASU 2017-07, “

Retirement Benefits (Topic 715):

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost .”

If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed.

The table above details the affected line items within the Consolidated Statements of Income related to the net periodic pension costs for the following periods.

This ASU is also required to be applied retrospectively to all periods presented.

The following table summarizes the impact of retrospective application to the Consolidated Statement of Condition for the period presented:

Other components of net periodic pension expense

As previously reported

As reported under the new guidance

Salaries and employee benefits

As previously reported

As reported under the new guidance

The following table presents the weighted average assumptions used to determine the pension benefit obligations at December 31, for the following three years.

Note 17 –

Pension and Other Benefits –

The following table presents the weighted average assumptions used to determine the pension benefit obligations as of December 31, for the following periods:

Discount rate

1 unchanged sentence

The following table presents the weighted average assumptions used to determine net periodic pension cost for the following three years:

(dollars in thousands)

Discount rate

2 unchanged sentences

The process of determining the overall expected long-term rate of return on plan assets begins with a review of appropriate investment data, including current yields on fixed income securities, historical investment data, historical plan performance and forecasts of inflation and future total returns for the various asset classes.

This data forms the basis for the construction of a best-estimate range of real investment return for each asset class.

This data forms the basis for the construction of a best-estimate range of real investment returns for each asset class.

An average weighted real-return range is computed reflecting the plan’s expected asset mix, and that range, when combined with an expected inflation range, produces an overall best-estimate expected return range.

4 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18 - Pension and Other Benefits –

Note 17 –

Pension and Other Benefits –

The general investment policy of the Pension Trust is for the fund to experience growth in assets that will allow the market value to exceed the value of benefit obligations over time.

10 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18 - Pension and Other Benefits –

The fair values of the Company’s pension plan assets at December 31, 2019 and 2018, by asset class, are as follows:

Note 17 –

Pension and Other Benefits –

The fair values of the Company’s pension plan assets as of December 31, 2020 and 2019, by asset class, are as follows:

Fair Value Measurements at Reporting Date Using

20 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18 - Pension and Other Benefits –

Note 17 –

Pension and Other Benefits –

Fair Value of Plan Assets

24 unchanged sentences

Each SERP is a non-qualified plan which provides supplemental retirement benefits to the participating officers of the Company.

SERP compensation expense was $ 0.3 million for the year ended December 31, 2019.

SERP compensation expense was $ 0.4 million and $ 0.3 million for the years ended December 31, 2020 and December 31, 2019 respectively.

- 100 -

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19 - Stock Based Compensation

Note 18 –

Stock Based Compensation

The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017.

16 unchanged sentences

Intrinsic Value

Outstanding at December 31, 2018

Outstanding as of December 31, 2019

Forfeited/cancelled/expired

Outstanding at December 31, 2019

Exercisable at December 31, 2019

Outstanding as of December 31, 2020

Exercisable as of December 31, 2020

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 December 31, 2020 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 December 31, 2020.

1 unchanged sentence

Activity under the Company’s restricted shares for year ended December 31, 2020 was as follows:

Nonvested at December 31, 2018

Nonvested as of December 31, 2019

Forfeited/cancelled/expired

4 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19 - Stock-Based Compensation –

Note 18 –

Stock-Based Compensation –

As of December 31, 2020, there was approximately $ 1.3 million of total unrecognized compensation cost related to nonvested restricted shares granted.

2 unchanged sentences

Average Grant

Unearned at December 31, 2018

Unearned as of December 31, 2019

Change in estimate

Unearned at December 31, 2019

At December 31, 2019, the specific number of shares related to performance units that were expected to vest was 90,097, 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.

Vested shares

Unearned as of December 31, 2020

As of December 31, 2020, the specific number of shares related to performance units that were expected to vest was 147,636 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.

At December 31, 2019 the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 120,212.

A total of 21,083 shares were netted from the vested shares to satisfy tax obligations.

As of December 31, 2020, the maximum number of shares related to performance units that ultimately could vest if performance targets were exceeded is 206,744.

During the year ended December 31, 2020, 37,337 shares vested.

A total of 14,935 shares were netted from the vested shares to satisfy employee tax obligations.

The net shares issued from vesting of performance units during the year ended December 31, 2020 were 22,402 shares.

At December 31, 2019, compensation cost of approximately $ 0.8 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.7 years.

As of December 31, 2020, compensation cost of approximately $ 1.0 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.7 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:

Average Grant

Unearned at December 31, 2018

Unearned at December 31, 2019

Unearned as of December 31, 2019

Vested shares

Unearned as of December 31, 2020

Any forfeitures would result in previously recognized expense being reversed.

A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient.

During the year ended December 31, 2019, a total of 4,904 shares were netted out to satisfy tax obligations, resulting in net issuance of 4,904 shares.

At December 31, 2019, compensation cost of approximately $ 1.2 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.9 years.

Note 20 - Dividends and Other Restrictions

During the year ended December 31, 2020, 27,626 shares vested.

A total of 11,085 shares were netted from the vested shares to satisfy employee tax obligations.

The net shares issued from vesting of restricted stock units during the year ended December 31, 2020 were 16,541 shares.

As of December 31, 2020, 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 1.8 years.

Note 19 –

Dividends and Other Restrictions

Certain restrictions, including capital requirements, exist on the availability of undistributed net profits of the Bank for the future payment of dividends to the Parent Corporation.

A dividend may not be paid if it would impair the capital of the Bank.

At December 31, 2019, approximately $ 259.6 million was available for payment of dividends based on regulatory guidelines.

As of December 31, 2020, approximately $ 253.5 million was available for payment of dividends based on regulatory guidelines.

- 102 -

6 unchanged sentences

The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

Interest rate swaps were entered into on April 13, 2017 and August 24, 2015, each with a respective notional amount of $ 25.0 million and were designated as a cash flow hedge of a Federal Home Loan Bank advance.

In addition, interest rate swaps were entered into on June 4, 2019 and August 6, 2019, each with a respective notional amount of $ 50.0 million and were designated as a cash flow hedge of a Federal Home Loan Bank advance.

Interest rate swaps were entered into on April 13, 2017, January 27, 2020 and March 3, 2020 each with a respective notional amount of $ 25.0 million and were designated as a cash flow hedge of a Federal Home Loan Bank (“FHLB”) advance.

The swaps were determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income.

46 unchanged sentences

There were no net gains (losses) recorded in accumulated other comprehensive income or in the Consolidated Statement of Income relating to cash flow derivative instruments for the years ended December 31, 2020, December 31, 2019 and December 31, 2018.

Note 22 - Fair Value Measurements and Fair Value of Financial Instruments

Note 21 –

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.

13 unchanged sentences

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 at December 31, 2019 and December 31, 2018:

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 December 31, 2020 and December 31, 2019:

Securities Available-for-Sale:

10 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 22 - Fair Value Measurements and Fair Value of Financial Instruments –

Note 21 –

Fair Value Measurements and Fair Value of Financial Instruments –

The fair value of derivatives are based on valuation models using observable market data as of the measurement date (level 2).

3 unchanged sentences

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 at December 31, 2019 and December 31, 2018 are as follows:

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 December 31, 2020 and December 31, 2019 are as follows:

December 31, 2020

23 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 22 - Fair Value Measurements and Fair Value of Financial Instruments –

Note 21 –

Fair Value Measurements and Fair Value of Financial Instruments –

December 31, 2019

17 unchanged sentences

Equity securities

There were no transfers between Level 1 and Level 2 during the years ended December 31, 2018 and 2017.

Assets Measured at Fair Value on a Non-Recurring Basis

1 unchanged sentence

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 non-recurring basis at December 31, 2019 and December 31, 2018:

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis as of December 31, 2020 and December 31, 2019:

- 106 -

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 22 - Fair Value Measurements and Fair Value of Financial Instruments –

Note 21 –

Fair Value Measurements and Fair Value of Financial Instruments –

Impaired Loans:

5 unchanged sentences

Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the market place and are also based on Level 3 inputs.

For assets measured at fair value on a non-recurring basis, the fair value measurements at December 31, 2019 and December 31, 2018 are as follows:

For assets measured at fair value on a nonrecurring basis, the fair value measurements as of December 31, 2020 and December 31, 2019 are as follows:

Fair Value Measurements at Reporting Date Using

2 unchanged sentences

(dollars in thousands)

Commercial construction

Commercial real estate

Fair Value Measurements at Reporting Date Using

2 unchanged sentences

(dollars in thousands)

Commercial real estate

Impaired Loans - Collateral dependent impaired loans at December 31, 2019 that required a valuation allowance were $ 3.8 million with a related valuation allowance of $ 1.3 million, compared to $ 1.7 million with a related valuation allowance of $ 36 thousand at December 31, 2018.

Commercial construction

Impaired loans - Collateral dependent impaired loans as of December 31, 2020 that required a valuation allowance were $ 26.5 million with a related valuation allowance of $ 14.3 million compared to $ 3.8 million with a related valuation allowance of $ 1.3 million as of December 31, 2019.

- 107 -

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 22 - Fair Value Measurements and Fair Value of Financial Instruments –

Note 21 –

Fair Value Measurements and Fair Value of Financial Instruments –

Assets Measured With Significant Unobservable Level 3 Inputs

9 unchanged sentences

Ending balance, December 31, 2019

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 at December 31, 2019 and December 31, 2018.

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 December 31, 2020 and December 31, 2019.

The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.

15 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 22 - Fair Value Measurements and Fair Value of Financial Instruments –

Note 21 –

Fair Value Measurements and Fair Value of Financial Instruments –

Non-recurring basis

5 unchanged sentences

Impaired loans:

Commercial construction

Market approach (100%)

Average transfer price as a price to unpaid principal balance

48 - 53  ( 49 )

Appraisals of collateral value

Comparable sales

0 % - 5 % ( 3 %)

Adjustment for comparable sales

1 % to 5 % (+ 2 %)

Commercial real estate

Appraisals of collateral value

Comparable sales

2 % - 14 % ( 9 %)

Adjustment for comparable sales

- 25 % to + 20 % (- 8 %)

December 31, 2019

2 unchanged sentences

Impaired loans:

Commercial real estate

Commercial construction

Appraisals of collateral value

10 unchanged sentences

Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Company for the purposes of this disclosure.

- 109 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 21 –

Fair Value Measurements and Fair Value of Financial Instruments –

Fair values for financial instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments.

6 unchanged sentences

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

- 105 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 22 - Fair Value Measurements and Fair Value of Financial Instruments –

The fair value of portfolio loans, net is determined using an exit price methodology.

12 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 22 - Fair Value Measurements and Fair Value of Financial Instruments –

Note 21 –

Fair Value Measurements and Fair Value of Financial Instruments –

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2020 and December 31, 2019:

29 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 22 - Fair Value Measurements and Fair Value of Financial Instruments –

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.

Note 21 –

Fair Value Measurements and Fair Value of Financial Instruments –

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, considering 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.

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This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

Note 23 - Parent Corporation Only Financial Statements

Note 22 –

Parent Corporation Only Financial Statements

The Parent Corporation operates its wholly-owned subsidiary, the Bank.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 23 - Parent Corporation Only Financial Statements –

Note 22 –

Parent Corporation Only Financial Statements –

Condensed financial statements of the Parent Corporation only are as follows:

Condensed Statements of Condition

At December 31,

As of December 31,

(dollars in thousands)

3 unchanged sentences

Securities available-for-sale

Equity securities

LIABILITIES AND STOCKHOLDERS’

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 23 - Parent Corporation Only Financial Statements –

Note 22 –

Parent Corporation Only Financial Statements –

Condensed Statements of Cash Flows

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Sales of equity securities

Payment of short-term borrowing

Capital infusion to subsidiary

3 unchanged sentences

Cash dividends on common stock

Secondary offering and issuance of common stock

Repurchase of stock

2 unchanged sentences

(Decrease) increase in cash and cash equivalents

Cash and cash equivalents at January 1,

Cash and cash equivalents at December 31,

Cash and cash equivalents as of January 1,

Cash and cash equivalents as of December 31,

- 114 -

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 24 - Quarterly Financial Information of ConnectOne Bancorp, Inc.

Note 23 –

Quarterly Financial Information of ConnectOne Bancorp, Inc.

(dollars in thousands, except per share data)

19 unchanged sentences

Due to rounding, quarterly earnings per share may not sum to reported annual earnings per share.

Other expenses for the first quarter of 2019 includes merger expenses related to the acquisition of GHB.

The provision for loan losses for the first quarter 2018 was a notable increase that was mainly attributable to specific allocations to the taxi medallion loans and concurrent partial charge-off of $17.0 million.

- 115 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income.

The following table presents the Company’s sources of noninterest income for the year ended December 31, 2019 and 2018.

Items outside of ASC 606 are noted as such.

(dollars in thousands)

Noninterest income

Service charges on deposits

Overdraft fees

Interchange income

Net gains on sales of loans (1)

Net gains on equity securities (1)

Net gains on sales of available-for-sale securities (1)

Wire transfer fees (1)

Loan servicing fees (1)

Bank owned life insurance (1)

Total noninterest income

Not within scope of ASC 606.

- 112 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition –

A description of the Company’s revenue streams accounted for under ASC 606 is as follows:

Service Charges on Deposit Accounts :

The Company earns fees from deposit customers for transaction-based, account maintenance, and overdraft services.

Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in the time the Company fulfills the customer’s request.

Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation.

Overdraft fees are recognized at the point in time that the overdraft occurs.

Service charges on deposits are withdrawn from the customer’s account balance.

Interchange Income :

The Company earns interchange fees from debit and credit card holder transactions conducted through various payment networks.

Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided by the cardholder.

Gains/Losses on Sales of OREO :

The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.

When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether the collectability of the transaction prices is probable.

Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

Note 26 –

Subsequent Event

On January 2, 2019, Bancorp of New Jersey, Inc.

merged with and into ConnectOne Bank, with ConnectOne Bank as the surviving bank.

As a result of the merger, the Company acquired approximately $ 0.8 billion in loans, assumed approximately $ 0.8 billion in deposits and acquired nine branch offices all located in Bergen County, New Jersey.

Subject to the allocation and proration procedures set forth in the merger agreement, shareholders of BNJ common stock had the right to elect, with respect to each share of BNJ common stock, to receive either (i) $ 16.25 in cash or (ii) 0.780 of a share of CNOB common stock (plus cash in lieu of any fractional shares of CNOB common stock to which such holder would otherwise be entitled).

Given the initial accounting for this business combination is incomplete, management is not yet able to disclose the preliminary fair value of the assets acquired and liabilities assumed.

- 113 -

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data