What changed in this filing

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Item 1. Financial Statements

2021-05-07 compared with 2020-11-06 · 592 added, 793 removed, 991 unchanged (58% of the section changed)

3 unchanged sentences

CONSOLIDATED STATEMENTS OF CONDITION

September 30,

(in thousands, except for share data)

6 unchanged sentences

Loans receivable

Allowance for loan losses

Allowance for credit losses (loans)

Net loans receivable

8 unchanged sentences

Total deposits

Operating lease liabilities

Subordinated debentures, net of debt issuance costs

Subordinated debentures, net

Lease liabilities

Other liabilities

6 unchanged sentences

Authorized 50,000,000 shares;

issued 42,412,684 shares as of September 30, 2020 and 37,676,006 shares as of December 31, 2019;

outstanding 39,754,051 shares as of September 30, 2020 and 35,072,067 as of December 31, 2019

issued 42,525,864 shares as of March 31, 2021 and 42,444,031 shares as of December 31, 2020;

outstanding 39,773,602 shares as of March 31, 2021 and 39,785,398 as of December 31, 2020

Additional paid-in capital

Retained earnings

Treasury stock, at cost 2,658,633 common shares as of September 30, 2020 and 2,603,940 as of December 31, 2019

Accumulated other comprehensive income (loss)

Treasury stock, at cost 2,752,262 common shares as of March 31, 2021 and 2,658,633 as of December 31, 2020

Accumulated other comprehensive (loss) income

Total stockholders’

5 unchanged sentences

Three Months Ended

September 30,

Nine Months Ended

September 30,

(in thousands, except for per share data)

(dollars in thousands, except for per share data)

Interest income

6 unchanged sentences

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

(Reversal of) provision for credit losses

Net interest income after provision for credit losses

Noninterest income

Deposit, loan and other income

Income on bank owned life insurance

Net gains on sale of loans held-for-sale

Deposit, loan and other income

Net gains on sale of investment securities

Gain on sale of branches

Net (losses) gains on equity securities

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

Total noninterest income

6 unchanged sentences

Data processing

Merger and restructuring expenses

Loss on extinguishment of debt

Merger expenses

Amortization of core deposit intangibles

Increase in value of acquisition price

Other components of net periodic pension (income) expense

Other components of net periodic pension expense

Other expenses

8 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

Other comprehensive income (loss):

Unrealized gains and losses:

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

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

Unrealized losses on cash flow hedges

(dollars in thousands)

Other comprehensive income:

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

Reclassification adjustment for realized gains on securities included in net income

Unrealized gains (losses) on cash flow hedge

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

Unrealized pension plan gains and losses:

Unrealized pension plan losses before reclassifications

Reclassification adjustment for amortization included in net income

Total other comprehensive income

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

Total other comprehensive (loss) income

Total comprehensive income

3 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’

Nine Months Ended September 30, 2020

(dollars in thousands, except for per share data)

(dollars in thousands, except

Comprehensive

(Loss) Income

Stockholders’

Balance as of December 31,  

Other comprehensive income,  net of tax

Cash dividends declared on common stock  ($ 0.18 per share)

Exercise of stock options  ( 25,413 shares)

Restricted stock grants, net of forfeitures

 ( 68,531 shares)

Stock grants issued ( 1,340 shares)

Net shares issued in satisfaction of restricted stock units earned  ( 16,541 shares)

Net shares issued in satisfaction of performance units earned  ( 22,402 shares)

for per share data)

(Loss) Income

Balance as of December 31, 2019

Other comprehensive income, net of tax

Cash dividends declared on common stock ($ 0.090 per share)

Exercise of stock options ( 25,413 shares)

Restricted stock grants ( 20,684 shares)

Net shares issued in satisfaction of restricted stock units earned ( 16,599 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

2 unchanged sentences

Stock-based compensation

Balance as of September 30, 2020

Three Months Ended September 30, 2020

(dollars in thousands, except for per share data)

(Loss) Income

Stockholders’

Balance as of June 30, 2020

Other comprehensive income, net of tax

Balance as of March 31, 2020

Balance as of December 31, 2020

Cumulative effect of change in accounting principle (see note 1b.

“Authoritative Accounting Guidance Presentation”), net of tax

Balance as of January 1, 2021 as adjusted for changes in accounting principle

Other comprehensive loss, net of tax

Cash dividends declared on common stock ($ 0.11 per share)

Restricted stock grants, net of forfeitures ( 1,018 shares)

Stock-based compensation

Balance as of September 30, 2020

Nine Months Ended September 30, 2019

(dollars in thousands, except for per share data)

Preferred Stock

Additional Paid-In Capital

Retained Earnings

Treasury Stock

Comprehensive

(Loss) Income

Total Stockholders’

Balance as of December 31,  

Other comprehensive income,  net of tax

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

Exercise of stock options  ( 28,937 shares)

Restricted stock grants  ( 64,459 shares)

Net shares issued in satisfaction of restricted stock units earned  ( 4,904 shares)

Repurchase of stock  ( 240,018 shares)

Net shares issued in satisfaction of performance units earned  ( 26,517 shares)

Stock issued ( 3,032,496 shares) in acquisition of Greater Hudson Bank

Restricted stock issued ( 119,008 shares) in acquisition of BoeFly, LLC

Exercise of stock options ( 5,449 shares)

Restricted stock grants ( 26,769 shares)

Stock grants ( 446 shares)

Net shares issued in satisfaction of restricted stock units earned ( 14,711 shares)

Net shares issued in satisfaction of performance units earned ( 34,458 shares)

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

Repurchase of treasury stock ( 93,629 shares)

Stock-based compensation

Balance as of September 30, 2019

Three Months Ended September 30, 2019

(dollars in thousands, except for per share data)

Preferred Stock

Additional Paid-In Capital

Retained Earnings

Treasury Stock

Comprehensive

(Loss) Income

Total Stockholders’

Balance as of June 30, 2019

Other comprehensive income,  net of tax

Cash dividends declared on common stock ($ 0.09 per share)

Restricted stock grants  ( 11,979 shares)

Stock-based compensation expense

Balance as of September 30, 2019

Balance as of March 31, 2021

See accompanying notes to unaudited consolidated financial statements.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended

September 30,

Three Months Ended

(dollars in thousands)

2 unchanged sentences

Depreciation and amortization of premises and equipment

Provision for loan losses

(Reversal of) provision for credit losses

Amortization of intangibles

4 unchanged sentences

Stock-based compensation

(Gains) losses on sales of securities available-for-sale, net

Gains on equity securities, net

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

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

Losses (gains) on equity securities, net

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

Loans originated for resale

Proceeds from sale of loans held-for-sale

Loss on extinguishment of debt

Gain on sale of branches

Net losses on disposition of other premises and equipment

Increase in cash surrender value of bank owned life insurance

Amortization of premiums and accretion of discounts on securities available-for-sale, net

Amortization of premiums and accretion of discounts on securities available-for-sale

Amortization of subordinated debentures issuance costs

Increase in accrued interest receivable

Decrease increase in accrued interest receivable

Net change in operating leases

Decrease in other assets

Decrease in other liabilities

Increase (decrease) in other liabilities

Net cash provided by operating activities

Cash flows from investing activities

Investment securities available-for-sale:

Securities available-for-sale:

Maturities, calls and principal repayments

Net purchases (redemptions) of restricted investment in bank stocks

Purchases of equity securities

Sales of equity securities

Net redemptions (purchases) of restricted investment in bank stocks

Payments on loans held-for-sale

2 unchanged sentences

Purchases of premises and equipment

Proceeds from life insurance death benefits

Proceeds from sale of branches

Proceeds from sale of OREO

Cash and cash equivalents acquired in acquisition

Cash consideration paid in acquisition

Net cash used in investing activities

Cash and cash equivalents acquired in acquisition, net

Net cash provided by (used) in investing activities

Cash flows from financing activities

Net increase in deposits

Increase in subordinated debentures

Advances of borrowings

Repayments of borrowings

Repurchase of treasury stock

Net decrease in deposits

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

Repayments of FHLB borrowings

Decrease in subordinated debt

Cash dividends paid on common stock

Repurchase of treasury stock

Proceeds from exercise of stock options

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

Net cash provided by financing activities

Net cash (used in) provided by financing activities

Net change in cash and cash equivalents

5 unchanged sentences

Supplemental disclosures of noncash activities

Transfer of loans to other real estate owned

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

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

Business combinations :

15 unchanged sentences

(a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc.

(a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), NJCB Spec-1, LLC (a New Jersey limited liability company), Port Jervis Holdings, LLC (a New Jersey limited liability company), BONJ Special Properties, LLC (a New Jersey limited liability company) and BoeFly, Inc.

(a New Jersey online business lending marketplace).

The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005.

The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its twenty-seven 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-five other banking offices.

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

3 unchanged sentences

However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020, or for any other interim period.

Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2021, or for any other interim period.

The Company’s 2020 Annual Report on Form 10-K should be read in conjunction with these consolidated financial statements.

Principals of Consolidation

Basis of Presentation

The consolidated financial statements have been prepared in conformity with GAAP.

5 unchanged sentences

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.

As previously disclosed, on March 11, 2020 the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to impact the United States and the world.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic.

1 unchanged sentence

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.

Although economic activity has accelerated in 2021, and the United States continues to implement a COVID-19 vaccination program, COVID-19 and actions taken to mitigate the spread of it have had and may in the future have an adverse impact on the economies and financial markets of many countries and parts of the United States, including the New Jersey/New York metropolitan area in which the Company primarily operates.

Although the Company has been able to continue operations while taking steps to ensure the safety of employees and customers, COVID-19 could impact the Company’s operations in the future.

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.

Although state and local governments have lifted many restrictions on conducting business, it is possible that additional restrictions could be reimposed.

It is therefore unknown how long COVID-19 may continue to impact the economy 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.

4 unchanged sentences

Adoption of New Accounting Standards in 2021

2017-04, “Intangibles –

Goodwill and Other (Topic 350).”

ASU 2017-04 aims to simplify the subsequent measurement of goodwill.

Under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;

however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment.

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.

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.

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.

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

Newly Issued, But Not Yet Effective Accounting Standards

In June 2016, the FASB issued guidance related to credit losses on financial instruments.

This update, commonly referred to as the current expected credit losses methodology (“CECL”), will change the accounting for credit losses on loans and debt securities.

Under the new guidance, the Company’s measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

For loans, this measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter.

This differs significantly from the “incurred loss”

model previously required, but still permitted, under GAAP, which delays recognition until it is probable a loss has been incurred.

ASU 2016-13 was effective, subject to optional delay discussed below, for the Company on January 1, 2020.

In accordance with the accounting relief provisions of the CARES Act, as it currently stands, the Company elected to delay the adoption of FASB’s new standard covering the CECL until the earlier of the termination date of the national emergency declared by President Trump on March 13, 2020 under the National Emergencies Act, related to the outbreak of COVID-19, and December 31, 2020.

Management reached this decision due to the complexities of CECL loan loss forecasting exacerbated by the quickly changing economic environment resulting from the COVID-19 pandemic.

Once the delay provision has been terminated, adoption will be retroactive to January 1, 2020.

During 2019, the Company implemented the CECL methodology and ran it concurrently with the historical incurred method.

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 September 30, 2020.

Effective January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) 2016-13 “ASU 2016-13 Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments”, which replaced the prior incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”

or the “CECL Standard”).

The measurement of expected credit losses under the CECL Standard is applicable to financial assets measured at amortized cost, including portfolio loans and investment securities classified as held-to-maturity (“HTM”).

It also applies to off-balance sheet credit exposures including loan commitments, standby letters of credit, financial guarantees and other similar instruments.

In addition, the CECL Standard changes the accounting for investment securities classified as ("AFS"), including a requirement that estimated credit losses on AFS securities be presented as an allowance rather than as a direct write-down of the carrying balance of securities which we do not intend to sell, or believe that it is more likely than not, that we will be required to sell.

The Company adopted the CECL Standard using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures.

As discussed further below, purchase credit deteriorated assets were measured on a prospective basis in accordance with the CECL Standard and all purchase credit impaired loans as of December 31, 2020 were considered purchase credit deteriorated loans upon adoption.

Results for reporting periods beginning after January 1, 2021 are presented under the CECL Standard while prior period amounts continue to be reported in accordance with previously applicable accounting guidance.

The adoption of the CECL Standard resulted in the following adjustments to our financial statements as of January 1, 2021 (dollars in thousand):

Change in Consolidated

Change to Retained Earnings

Statement of Condition

from Adoption of CECL

Allowance for credit losses (“ACL”) (loans)

Adjustment related to purchased credit-impaired loan marks (1)

Total ACL - loans

(unfunded credit commitments)

Total impact of CECL adoption

This amounts represents a gross-up of the balance sheet related to nonaccretable credit marks of purchased credit-impaired loans resulting from adoption of CECL on January 1, 2021.

Loans designated as purchased credit impaired loans (“PCI”) and accounted for under Accounting Standards Codification (“ASC”) 310-30 were designated as purchased with credit deterioration loans (“PCD”).

In accordance with the CECL Standard, the Company did not reassess whether PCI loans met the criteria of PCD loans as of the date of adoption and determined all PCI loans were PCD loans.

The Company recorded an increase to the balance of PCD loans and an increase to the ACL for loans of $5.2 million, which represented the expected credit losses for PCD loans.

The remaining non-credit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021 over the remaining estimated life of the loans.

Also, in accordance with the CECL Standard, the Company did not reassess whether modifications to individual acquired financial assets were troubled debt restructurings (“TDRs”) as of the date of adoption.

ACL for loans :

The ACL for loans is a valuation account that is deducted from the amortized cost basis of portfolio loans to present the net amount expected to be collected on portfolio loans over their contractual life.

Loans are charged-off against the allowance when we believe the uncollectibility of a loan balance has been confirmed, and the expected recoveries do not exceed the aggregate of amounts previously charged-off or expected to be charged-off.

CONNECTONE BANCORP, INC.

2 unchanged sentences

Authoritative Accounting Guidance –

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

The Company currently utilizes a one-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan.

The measurement of expected credit loss under the CECL methodology is applicable to financial assets measured at amortized cost, including loans, held to maturity investments and it also applies to certain off-balance sheet credit exposures.

The ACL for loans is measured on a collective (pool) basis when similar risk characteristics exist.

Generally, for all other loan types, the estimated expected credit loss is also calculated at the loan level and pool assignments are only utilized for aggregating the allowance estimates of similar loan types for financial statement disclosure purposes.

Loan segments have unique risk characteristics with respect to credit quality and are as follows:

The repayment of commercial loans is generally dependent on the creditworthiness and cash flow of borrowers, and if applicable, guarantors, which may be negatively impacted by adverse economic conditions.

While the majority of these loans are secured, collateral type, marketing, coverage, valuation and monitoring is not as uniform as in other portfolio classes and recovery from liquidation of such collateral may be subject to greater variability.

Payment on commercial mortgages is driven principally by operating results of the managed properties or underlying business and secondarily by the sale or refinance of such properties.

Both primary and secondary sources of repayment, and value of the properties in liquidation, may be affected to a greater extent by adverse conditions in the real estate market or the economy in general.

Properties underlying construction, land and land development loans often do not generate sufficient cash flows to service debt and thus repayment is subject to ability of the borrower and, if applicable, guarantors, to complete development or construction of the property and carry the project, often for extended periods of time.

As a result, the performance of these loans is contingent upon future events whose probability at the time of origination is uncertain.

The ability of borrowers to service debt in the residential and consumer loan portfolios is generally subject to personal income which may be impacted by general economic conditions, such as increased unemployment levels.

These loans are predominately collateralized by first and/or second liens on single family properties.

If a borrower cannot maintain the loan, the Company’s ability to recover against the collateral in sufficient amount and in a timely manner may be significantly influenced by market, legal and regulatory conditions.

The Company considers loan classes and loan segments to be one and the same.

Individually Analyzed Loans :

The Company will evaluate individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis.

Loans will transition from defined segments for individual analysis when credit characteristics, or risk traits, change in a material manner.

A loan is considered for individual analysis 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.

Factors considered by management in determining individual analysis include payment status and the probability of collecting scheduled principal and interest payments when due.

Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties are considered TDRs and are classified as individually analyzed.

Loans considered to be TDRs can be categorized as nonaccrual or performing.

All PCD loans will be considered as individual analyzed.

Generally, individually analyzed loans consist of nonaccrual loans and performing troubled debt restructurings.

Of this group of loans, loans of $ 250,000 and over are individually evaluated, while loans with balances less than $ 250,000 are collectively evaluated, and, accordingly, are not separately identified for analysis or disclosures.

Instruments will not be included in both collective and individual analysis.

Individual analysis will establish a specific reserve for instruments in scope.

For collateral dependent loans, when it is determined that a foreclosure is probable, the ACL will be determined on a loan level basis using the fair value of the collateral as of the reporting date, less estimated disposition costs (“net fair value”), which will ensure that the credit loss is not delayed until the time at which the actual foreclosure takes place.

In the event that this fair value is less the then amortized cost basis of these specific loans, we will recognize the difference between the net fair value at the reporting date and the amortized cost basis in the ACL.

If the fair value of the collateral has increased as of the ACL evaluation date, the increase in the fair value of the collateral is reflected through a reduction in the ACL.

ACL adjustments for estimated disposition costs are not appropriate when the repayment of a collateral-dependent loan is expected from the operation of the collateral.

If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as the allowance for credit losses.

The effective interest rate used to discount expected cash flows is adjusted to incorporate expected prepayments, if applicable.

For charge-off and recoveries we will generally charge-off a loan balance after an analysis is completed which indicates that the collectability of the full principal is in doubt.

Charge-offs are charged against the allowance in the period in which the loans are deemed to be uncollectible.

Any expected future recoveries of amounts which were previously charged-off or expected to be charged-off will be included in the ACL, as the recoveries represent a component of the net amount expected to be collected.

Expected recoveries in the ACL shall not exceed amounts previously charged-off or expected to be charged-off.

Investment Securities :

Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in comprehensive income, net of tax.

Interest income includes amortization of purchase premiums or discounts.

Premiums and discounts on securities are generally amortized using the level-yield method without estimating prepayments, except for mortgage-backed securities, where prepayment rates are estimated.

Premiums on callable investment securities are amortized to their earliest call date.

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

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Authoritative Accounting Guidance –

ACL - on investment securities classified as available-for-sale :

For available-for-sale investment securities which are in an unrealized loss position, the Company first assess whether we intend to sell, or it is more likely than not, that we will be required to sell the security before recovery of the amortized cost basis.

If either of the criteria is met, the amortized cost basis of the security is written down to fair value through income.

For available-for-sale investment securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from an actual or estimated credit loss event or other factors.

In making this assessment, we consider the extent to which fair value is less than amortized cost, changes to the rating of the security, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss is likely, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of the cash flows expected to be collected is less than the amortized cost basis, an ACL is recorded for the estimated credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.

Changes in the ACL are recorded as provision for (or reversal of) credit loss expense.

Losses are charged against the allowance when we believe the uncollectibility of an available-for-sale security has been confirmed or if either of the criteria regarding intent or requirement to sell is met.

2021-03, “Intangibles –

Goodwill and Other (Topic 350).”

ASU 2021-03 requires an entity to identify and evaluate goodwill impairment triggering events when they occur to determine whether it is more likely than not that the fair value of a reporting unit (or entity, if the entity has elected the accounting alternative for amortizing goodwill and chosen that option) is less than its carrying amount.

If an entity determines that it is more likely than not that the goodwill is impaired.

It must test goodwill for impairment using the triggering event date as the measurement date.

An entity is required to disclose the amount assigned to goodwill in total and by major business combination, or by reorganization event resulting in fresh-start-start reporting.

Also, the weighted average amortization period in total and the amortization period by major business combination, or by reorganization event resulting in fresh-start reporting.

ASU 2021-03 was effective for the Company on January 1, 2021 and did not have a significant impact on our consolidated financial statement.

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.

Business Combination

Bancorp of New Jersey, Inc.

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.

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 and are subject to adjustment for up to one year after the closing date of the acquisition.

While the fair values are not expected to be materially different from the estimates, accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period, which runs through January 2, 2021, in the measurement period in which the adjustment amounts are determined.

The acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.

The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition.

As of September 30, 2020 there were no material changes to the provisional fair value adjustments recorded on January 2, 2020.

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business Combinations –

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 Fair

January 2, 2020

(in thousands)

Consideration paid:

Common stock issued in acquisition

Cash paid in acquisition

Total consideration paid:

Assets acquired:

Cash and cash equivalents

Securities available-for-sale

Premises and equipment, net

Accrued interest receivable

Core deposit intangibles

Total assets acquired

Liabilities assumed:

Other liabilities

Total liabilities assumed

Net assets acquired

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 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.

Projected cash flows were then discounted to present value using a discount rate developed based on the relative risk of the cash flows, considering the loan type, liquidity risk, the maturity of the loans, servicing costs and a required return on capital.

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 Fair

January 2, 2020

(in thousands)

Contractually required principal and interest acquisition

Contractual cash flows not expected to be collected (non-accretable discount)

Expected cash flows at acquisition

Interest component of expected cash flows (accretable discount)

Fair value of acquired loans

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

CONNECTONE BANCORP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business Combinations –

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.

The fair value of retail demand and interest-bearing deposit accounts was assumed to approximate the carrying value as those accounts have no stated maturity and are payable on demand.

The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities.

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 BNJ acquisition were expensed as incurred.

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

During the three and nine months ended September 30, 2020, merger expenses related to the BNJ acquisition were $- 0 - and $ 11.6 million, respectively.

Earnings per Common Share

5 unchanged sentences

Three Months Ended

September 30,

Nine Months Ended

September 30,

(in thousands, except for per share data)

(dollars in thousands, except for per share data)

Earnings allocated to participating securities

4 unchanged sentences

Incremental shares from assumed conversions of options,

performance units and non-participating restricted shares

performance units and restricted shares

Weighted average common and equivalent shares outstanding

Earnings per common share:

There were no antidilutive share equivalents as of September 30, 2020 and September 30, 2019.

There were no antidilutive share equivalents as of March 31, 2021 and March 31, 2020.

CONNECTONE BANCORP, INC.

2 unchanged sentences

Securities Available-for-Sale

The Company’s investment securities are all classified as available-for-sale as of September 30, 2020 and December 31, 2019.

The Company’s investment securities are classified as available-for-sale as of March 31, 2021 and December 31, 2020.

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

equity, net of tax.

Accordingly, the carrying value of such securities reflects their fair value as of September 30, 2020 and December 31, 2019.

Accordingly, the carrying value of such securities reflects their fair value as of March 31, 2021 and December 31, 2020.

Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value.

See Note 6 of the Notes to Consolidated Financial Statements for a further discussion.

The following tables present information related to the Company’s portfolio of securities available-for-sale as of September 30, 2020 and December 31, 2019.

September 30, 2020

The following tables present information related to the Company’s portfolio of securities available-for-sale as of March 31, 2021 and December 31, 2020.

March 31, 2021

(dollars in thousands)

9 unchanged sentences

Other securities

Total securities available-for-sale

December 31, 2020

(dollars in thousands)

Securities available-for-sale

8 unchanged sentences

Other securities

Total securities available-for-sale

CONNECTONE BANCORP, INC.

2 unchanged sentences

Securities Available-for-Sale –

Investment securities available-for-sale having a carrying value of approximately $ 107.1 million and $ 111.5 million as of September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits, borrowings, repurchase agreements, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law.

As of September 30, 2020 and December 31, 2019, there were no holdings of securities of any one issuer, other than the U.S.

Investment securities having a carrying value of approximately $ 112.2 million and $ 107.6 million as of March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020, 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 as of September 30, 2020, based on scheduled maturities.

The following table presents information for investments in securities available-for-sale as of March 31, 2021, based on scheduled maturities.

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

Securities not due at a single maturity date are shown separately.

September 30, 2020

March 31, 2021

(dollars in thousands)

8 unchanged sentences

Total securities available-for-sale

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

We had no gross gains or losses from the sale of securities for three months ended March 31, 2021.

Gross gains and losses for three months ended March 31, 2020 from the sales of securities for periods presented were as follows (dollars in thousands):

Three Months Ended

September 30,

Nine Months Ended

September 30,

(dollars in thousands)

Gross gains on sales of securities

Gross losses on sales of securities

Net losses on sales of securities

tax provision on net losses

Net losses on sales of securities, after tax

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities Available-for-Sale –

Other-than-Temporarily Impaired Investments

The Company reviews all securities for potential recognition of other-than-temporary impairment.

The Company maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review.

This could include credit rating downgrades.

The Company’s assessment of whether an impairment in the portfolio is other-than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced a restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed deteriorating financial condition or sustained significant losses.

Temporarily Impaired Investments

The Company does not believe that any of the unrealized losses, which were comprised of 32 and 53 securities as of September 30, 2020 and December 31, 2019, respectively, represent an other-than-temporary impairment (“OTTI”).

The gross unrealized losses associated with U.S.

Treasury and agency securities, federal agency obligations, mortgage-backed securities, corporate bonds, tax-exempt securities, and asset-backed securities are not considered to be other-than-temporary because these unrealized losses are related to changes in interest rates and credit spreads and do not affect the expected cash flows of the underlying collateral or issuer.

Factors which may contribute to unrealized losses include credit risk, market risk, changes in interest rates, economic cycles, and liquidity risk.

The magnitude of any unrealized loss may be affected by the relative concentration of the Company’s investment in any one issuer or industry.

The Company has established policies to reduce exposure through diversification of the securities portfolio including limits on concentrations to any one issuer.

The Company believes the securities portfolio is prudently diversified.

The unrealized losses included in the tables below are primarily related to changes in interest rates and credit spreads.

All of the Company’s securities are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions.

These are largely intermediate duration holdings and, in certain cases, monthly principal payments can further reduce loss exposure resulting from an increase in rates.

In determining whether or not securities are OTTI, the Company must exercise considerable judgment.

Accordingly, there can be no assurance that the actual results will not differ from the Company’s judgments and that such differences may not require the future recognition of OTTI charges that could have a material effect on the Company’s financial position and results of operations.

In addition, the value of, and the realization of any loss on, a security is subject to numerous risks as cited above.

Net gains on sales of securities

tax provision on net gains

Net gains on sales of securities, after tax

CONNECTONE BANCORP, INC.

2 unchanged sentences

Securities Available-for-Sale –

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 as of September 30, 2020 and December 31, 2019.

September 30, 2020

Impairment Analysis of Available--for-sale Debt Securities

The following tables indicate gross unrealized losses in an unrealized loss position for which an ACL has not been recorded, aggregated by investment category and by the length of continuous time individual securities have been in an unrealized loss position as of March 31, 2021 and December 31, 2020.

March 31, 2021

Less than 12 Months

20 unchanged sentences

Commercial mortgage pass-through securities

Obligations of U.S.

states and political subdivisions

Corporate bonds and notes

1 unchanged sentence

Total Temporarily Impaired Securities

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities Available-for-Sale –

On January 1, 2021, the Company adopted ASU 2016-13 and implemented the CECL methodology for allowance for credit losses on its investment securities available-for-sale.

The new CECL methodology replaces the other-than-temporary impairment model that previously existed.

The Company did not have a CECL day 1 impact attributable to its investment securities portfolio and did not have an allowance for credit losses as of March 31, 2021.

The Company has elected to exclude accrued interest from the amortized cost of its investment securities available-for-sale.

Accrued interest receivable for investment securities available for sale as of March 31, 2021 and December 31, 2020, totaled $ 1.6 million and $ 1.7 million, respectively.

The Company evaluates securities in unrealized loss position for impairment related to credit losses on at least a quarterly basis.

Securities in unrealized loss positions are first assessed as to whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis.

If one of the criteria is met, the security’s amortized cost basis is written down to fair value through current earnings.

For securities that do not meet these criteria, the Company evaluates whether the decline in fair value resulted from credit losses or other factors.

If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis.

Unrealized losses on asset backed securities and state and municipal securities have not been recognized into income because the issuers are of high credit quality, we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery.

The decline in fair value is largely due to changes in interest rates and other market conditions.

The issuers continue to make timely principal and interest payments on the securities.

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes.

No allowance for credit losses for available-for-sale securities was recorded as of March 31, 2021.

Federal agency obligations, residential mortgage backed pass-through securities and commercial mortgage back pass-through securities are issued by U.S.

Government agencies and U.S.

Government sponsored enterprises.

Although a government guarantee exists on these investments, these entities are not legally backed by the full faith and credit of the federal government, and the current support they receive is subject to a cap as part of the agreement entered into in 2008.

Nonetheless, at this time we do not foresee any set of circumstances in which the government would not fund its commitments on these investments as the issuers are an integral part of the U.S.

housing market in providing liquidity and stability.

Therefore, we concluded that a zero-allowance approach for these investment securities is appropriate.

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position.

1 unchanged sentence

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, 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.

Interest rate swaps were entered into on April 13, 2017, January 1, 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 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.

7 unchanged sentences

Derivatives –

Summary information about the interest rate swaps designated as cash flow hedges as of September 30, 2020, December 31, 2019 and September 30, 2019 are presented in the following table.

September 30,

Summary information about the interest rate swaps designated as cash flow hedges as of March 31, 2021, December 31, 2020 and March 31, 2020 are presented in the following table.

(dollars in thousands)

3 unchanged sentences

Weighted average maturity

Interest expense recorded on these swap transactions totaled approximately $ 631 thousand and $ 942 thousand during the three and nine months ended September 30, 2020, respectively, compared to $( 204 ) thousand and $( 563 ) thousand during the three and nine months ended September 30, 2019, respectively, and is reported as a component of interest expense on FHLB Advances.

Interest expense recorded on these swap transactions totaled approximately $ 631 thousand during the three months ended March 31, 2021 compared to $( 7 ) thousand during the three months ended March 31, 2020 and is reported as a component of interest expense on FHLB Advances.

Cash Flow Hedge

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

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

Amount of gain

10 unchanged sentences

Interest rate contracts

Nine Months Ended September 30, 2019

Three Months Ended March 31, 2020

Amount of gain

10 unchanged sentences

Interest rate contracts

The following table reflects the cash flow hedges included in the consolidated statements of condition as of September 30, 2020 and December 31, 2019:

September 30, 2020

The following table reflects the cash flow hedges included in the consolidated statements of condition as of March 31, 2021 and December 31, 2020:

March 31, 2021

December 31, 2020

4 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Loan Losses

Loans Receivable - The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of September 30, 2020 and December 31, 2019:

September 30,

Loans and the Allowance for Credit Losses

Loans Receivable - As of and prior to December 31, 2020, loans receivable was accounted for under the incurred loss model.

As of January 1, 2021, portfolio loans are accounted for under the expected loss model.

Accordingly, some of the information presented is not comparable from period to period.

“Authoritative Accounting Guidance - Adoption of New Accounting Standards”

for additional information.

The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of March 31, 2021 and December 31, 2020:

(dollars in thousands)

5 unchanged sentences

Total loans receivable

 Includes Paycheck Protection Program ("PPP") loans of $ 474 million as of September 30, 2020.

As of September 30, 2020 and December 31, 2019, loan balances of approximately $ 2.7 billion and $ 2.5 billion, respectively, were pledged to secure borrowings from the FHLB of New York.

Loans held-for-sale - The following table sets forth the composition of the Company’s loans held-for-sale portfolio as of September 30, 2020 and December 31, 2019:

September 30,

Included in commercial loans as of March 31, 2021 and December 31, 2020 are PPP loans of $ 522.3 million and $ 397.5 million, respectively.

As of March 31, 2021 and December 31, 2020, loan balances of approximately $ 2.6 billion and $ 2.7 billion, respectively, were pledged to secure borrowings from the FHLB of New York.

Loans held-for-sale - The following table sets forth the composition of the Company’s loans held-for-sale portfolio as of March 31, 2021 and December 31, 2020:

(dollars in thousands)

2 unchanged sentences

Total carrying amount

Purchased Credit-Impaired Loans - The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected.

The recorded investment of those loans is as follows as of September 30, 2020 and December 31, 2019.

September 30,

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

Loans with an

loans without

(dollars in thousands)

1 unchanged sentence

Commercial construction

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during either the three months and nine months ended September 30, 2020 or September 30, 2019.

There were no reversals from the allowance for loan losses during the three and nine months ended September 30, 2020 or September 30, 2019.

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Loan Losses –

The following table presents the accretable yield, or income expected to be collected, on the purchased credit-impaired loans for the three and nine months ended September 30, 2020 and September 30, 2019:

September 30,

(dollars in thousands)

Balance at June 30

Accretion of income

Balance as of September 30

September 30,

(dollars in thousands)

Balance as of December 31

New loans acquired

Accretion of income

Balance as of September 30

Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans included in loans receivable by loan class as of September 30, 2020 and December 31, 2019:

September 30,

(dollars in thousands)

Residential real estate

Total nonaccrual loans

The following tables present total nonaccrual loans included in loans receivable by loan class as of December 31, 2020 (dollars in thousands):

Commercial real estate

2 unchanged sentences

Total nonaccrual loans

Nonaccrual loans and loans 90 days or greater past due and still accruing included both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.

Nonaccrual loans and loans 90 days or greater past due and still accruing include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.

CONNECTONE BANCORP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Loan Losses –

Loans and the Allowance for Credit Losses –

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

14 unchanged sentences

that a degree of loss will occur if the inadequacies are not corrected.

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) as of September 30, 2020 and December 31, 2019:

September 30, 2020

(dollars in thousands)

Commercial real estate

Commercial construction

Residential real estate

December 31, 2019

(dollars in thousands)

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Credit Losses –

We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP.

Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below.

As of March 31, 2021, our loans based on year of origination and risk designation is as follows (dollars in thousands):

Term loans amortized cost basis by origination year

Special mention

Total Commercial

Commercial Real Estate

Special mention

Total Commercial Real Estate

Commercial Construction

Special mention

Total Commercial Construction

Residential Real Estate

Special mention

Total Residential Real Estate

Special mention

Total Consumer

CONNECTONE BANCORP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Loan Losses –

The following table provides an analysis of the impaired loans by class as of September 30, 2020 and December 31, 2019.

September 30, 2020

No related allowance recorded

Loans and the Allowance for Credit Losses –

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:

December 31, 2020

Special Mention

(dollars in thousands)

2 unchanged sentences

Residential real Estate

Total (no related allowance)

With an allowance recorded

Commercial real estate

Commercial construction

Residential real estate

Total (with allowance)

Collateral Dependent Loans :

Loans which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses.

The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date.

March 31, 2021

(dollars in thousands)

Commercial real estate

1 unchanged sentence

Residential real estate

Total (no related allowance)

Impaired loans - Impaired loans disclosures presented below as of December 31, 2020 and as of and for the three months ended March 31, 2020 represent requirements prior to the adoption of CECL on January 1, 2021.

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:

December 31, 2020

6 unchanged sentences

With an allowance recorded

Commercial construction

Residential real estate

Commercial real estate

Total (with allowance)

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Loan Losses –

The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by segment as of and for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended September 30,

Nine Months Ended September 30,

(dollars in thousands)

Impaired loans (no allowance)

Loans and the Allowance for Credit Losses –

The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by class as of and for the three months ended March 31, 2020 (dollars in thousands):

March 31,2020

Impaired loans with no related allowance recorded

Commercial real estate

1 unchanged sentence

Residential real estate

Impaired loans (allowance):

Impaired loans with an allowance recorded

Commercial real estate

5 unchanged sentences

Residential real estate

Included in impaired loans as of September 30, 2020 and December 31, 2019 are loans that are deemed troubled debt restructurings.

The recorded investment in loans include accrued interest receivable and other capitalized costs such as real estate taxes paid on behalf of the borrower and loan origination fees, net, when applicable.

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

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 as of September 30, 2020 and December 31, 2019:

September 30, 2020

Due and Still

Aging Analysis - The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due as of March 31, 2021 and December 31, 2020:

March 31, 2021

30-59 Days Past Due

60-89 Days Past Due

90 Days or Greater Past Due and Still Accruing

Total Past Due and Nonaccrual

(dollars in thousands)

2 unchanged sentences

Residential real Estate

Included in the 90 days or greater past due and still accruing category as of September 30, 2020 are purchased credit-impaired loans, net of fair value marks, which accrete income per the valuation at date of acquisition.

December 31, 2020

7 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

September 30, 2020

Loans and the Allowance for Credit 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 credit losses that are allocated to each loan portfolio segment:

March 31, 2021

(dollars in thousands)

1 unchanged sentence

Collectively evaluated for impairment

Acquired portfolio

Acquired with deteriorated credit quality

Acquired with deteriorated credit quality individually analyzed

Individually evaluated for impairment

Collectively evaluated for impairment

Acquired portfolio

Acquired with deteriorated credit quality

Acquired with deteriorated credit quality individually analyzed

December 31, 2020

12 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Loan Losses –

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

Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit.

A summary of the activity in the allowance for loan losses by loan segment is as follows:

Three Months Ended September 30, 2020

(dollars in thousands)

Balance as of June 30, 2020

Balance as of September 30, 2020

Three Months Ended September 30, 2019

(dollars in thousands)

Balance as of June 30, 2019

Balance as of September 30, 2019

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Loan Losses –

Nine Months Ended September 30, 2020

Loans and the Allowance for Credit Losses –

Activity in the Company’s ACL for loans for the three months ended March 31, 2021 is summarized in the table below.

The CECL Day 1 row presents adjustments recorded through retained earnings to adopt the CECL standard and the increase to the ACL for loans associated with nonaccretable purchase accounting marks on loans that were classified as PCI as of December 31, 2020.

Three Months Ended March 31, 2021

(dollars in thousands)

Balance as of December 31, 2020

Balance as of September 30, 2020

Nine Months Ended September 30, 2019

Day 1 effect of CECL

Balance as of January 1, 2021 as adjusted for changes in accounting principle

(Reversal of) provision for credit losses (loans)

Balance as of March 31, 2021

On January 1, 2021, the Company adopted CECL, which replaced the incurred loss method we used in prior periods for determining the provision for credit losses and the ACL.

Under CECL, we record an expected loss of all cash flows we do not expect to collect at the inception of the loan.

The adoption of CECL resulted in an increase in our ACL for loans of $ 6.6 million, which did not impact our consolidated income statement.

We recorded a reversal of credit losses for loans of $ 5.3 million during the three months ended March 31, 2021 utilizing the CECL methodology, which was the result of an improved macroeconomic environment from January 1, 2021, the day of adoption.

Three Months Ended March 31, 2020

(dollars in thousands)

Balance as of December 31, 2019

Balance as of September 30, 2019

(Reversal of) provision for credit losses (loans)

Balance as of March 31, 2020

CONNECTONE BANCORP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Loan Losses –

Loans and the Allowance for Credit Losses –

Troubled Debt Restructurings

4 unchanged sentences

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

As of September 30, 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.

As of September 30, 2020, TDRs totaled $ 47.8 million, of which $ 29.5 million were on nonaccrual status and $ 18.3 million were performing under their restructured terms.

As of March 31, 2021, 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 March 31, 2021, TDRs totaled $ 53.0 million, of which $ 27.5 million were on nonaccrual status and $ 25.5 million were performing under their restructured terms.

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.

The Company has allocated $ 4.4 million and $ 23 thousand of specific allowance as of September 30, 2020 and December 31, 2019, respectively for its TDRs.

The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2020:

Number of

Pre-Modification

Post-Modification

Troubled debt restructurings:

(dollars in thousands)

Commercial real estate

The two loan modifications during the nine months ended September 30, 2020 were maturity extensions.

There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2020.

The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2019:

Number of

Pre-Modification

Post-Modification

The Company has allocated $ 10.0 million and $ 47 thousand of specific allowance related to TDRs for the three months ended March 31, 2021 and March 31, 2020, respectively.

The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2021:

Pre-Modification Outstanding

Post-Modification Outstanding

Number of Loans

Recorded Investment

Troubled debt restructurings:

(dollars in thousands)

Commercial real estate

Commercial construction

The 13 loan modifications during the nine months ended September 30, 2019 were maturity extensions.

There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2019.

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Loan Losses –

Residential real estate

The two residential real estate loans modified as TDRs during the three months ended March 31, 2021 were maturity extensions, while the one commercial real estate loan was a recast of a nonaccrual credit.

There were no loans modified as TDRs during the three months ended March 31, 2020.

There were no TDRs for which there was a payment default within twelve months following the modification during the three months ended March 31, 2021 and March 31, 2020.

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.

4 unchanged sentences

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 September 30, 2020, the Bank had 199 deferred loans totaling approximately $355.2 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 September 30, 2020:

(dollars in thousands)

Commercial real estate

Commercial construction

Residential real estate

As of March 31, 2021, the Bank had 102 deferred loans totaling approximately $204.2 million, compared to 113 deferred loans totaling approximately $ 207.1 million as of December 31, 2020.

CONNECTONE BANCORP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Credit Losses –

The following table sets forth the composition of these loans by loan segments as of March 31, 2021:

Number of Loans

Principal Balance

(dollars in thousands)

Commercial real estate

Commercial construction

As of March 31, 2021, there were no deferred loans that were delinquent or on nonaccrual status.

As of March 31, 2021, $ 44.1 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 loan 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.

ACL for Unfunded Commitments

The Company has recorded an ACL for unfunded credit commitments, which was recorded in other liabilities.

The provision is recorded within the (reversal of) provision for credit losses on the Company’s income statement.

The following table presents the ACL for unfunded commitments for the three months ended March 31, 2021 (dollars in thousands):

Three Months Ended

March 31, 2021

Balance at beginning of period

Day 1 Effect of CECL

(Reversal of) provision for credit losses (unfunded commitments)

Balance at end of period

Components of (Reversal of) Provision for Credit Losses

The following table summarizes the (Reversal of) provision for credit losses as March 31, 2021 (dollars in thousands):

March 31, 2021

(Reversal of) provision for credit losses (loans)

(Reversal of) provision for credit losses (unfunded commitments)

(Reversal of) provision for credit losses

Fair Value Measurements and Fair Value of Financial Instruments

7 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 as of September 30, 2020 and 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 as of March 31, 2021 and December 31, 2020:

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements and Fair Value of Financial Instruments –

Securities Available-for-Sale and Equity Securities :

12 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.

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements and Fair Value of Financial Instruments –

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of September 30, 2020 and December 31, 2019 are as follows:

September 30, 2020

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 March 31, 2021 and December 31, 2020 are as follows:

March 31, 2021

Fair Value Measurements at Reporting Date Using

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Total liabilities

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2020 and during the year ended December 31, 2019.

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2021 and during the year ended December 31, 2020.

Assets Measured at Fair Value on a Nonrecurring 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 nonrecurring basis as of September 30, 2020 and 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 nonrecurring basis as of March 31, 2021 and December 31, 2020.

Loans Held-for-Sale :

8 unchanged sentences

Fair Value Measurements and Fair Value of Financial Instruments –

Impaired Loans :

Collateral Dependent Loans :

The Company may record adjustments to the carrying value of loans based on fair value measurements, generally as partial charge-offs of the uncollectible portions of these loans.

3 unchanged sentences

However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs.

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

For assets measured at fair value on a nonrecurring basis, the fair value measurements as of September 30, 2020 and December 31, 2019 are as follows:

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 nonrecurring basis, the fair value measurements as of March 31, 2021 and December 31, 2020 are as follows:

Fair Value Measurements at Reporting Date Using

Assets measured at fair value on a nonrecurring

September 30,

Impaired loans:

Collateral dependent loans :

(dollars in thousands)

6 unchanged sentences

(dollars in thousands)

Commercial construction

Impaired loans –

Collateral dependent impaired loans as of September 30, 2020 that required a valuation allowance were $ 28.9 million with a related valuation allowance of $ 11.3 million compared to $ 3.8 million with a related valuation allowance of $ 1.3 million as of December 31, 2019.

Commercial real estate

Collateral dependent loans –

Collateral dependent loans as of March 31, 2021 that required a valuation allowance were $ 40.5 million with a related valuation allowance of $ 20.7 million compared to $ 24.4 million with a related valuation allowance of $ 14.3 million as of December 31, 2020.

CONNECTONE BANCORP, INC.

4 unchanged sentences

Recurring basis

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2020 and for the year ended December 31, 2019:

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2021 and for the year ended December 31, 2020:

(dollars in thousands)

Balance as of December 31, 2019

Beginning balance, December 31, 2020

Principal paydowns

Balance as of September 30, 2020

Ending balance, March 31, 2021

(dollars in thousands)

Balance as of December 31, 2018

Beginning balance, December 31, 2019

Principal paydowns

Balance as of 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 as of September 30, 2020 and December 31, 2019.

Ending balance, December 31, 2020

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 March 31, 2021 and December 31, 2020.

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

September 30, 2020

March 31, 2021

Securities available-for-sale:

16 unchanged sentences

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

September 30, 2020

March 31, 2021

(dollars in thousands)

Range (weighed average)

Impaired loans:

Range (weighted average)

Collateral dependent :

Appraisals of collateral value

Comparable sales

0 % - 5 % ( 2 %)

Market approach (100)

Average transfer price as a price to unpaid principal balance

62 - 68 ( 63 )

Commercial real estate

Appraisals of collateral value

Adjustment for comparable sales

- 25 % to 20 % (- 8 %)

Commercial Construction

Comparable sales

0 % - 25 % ( 8 %)

Appraisals of collateral value

Adjustment for comparable sales

- 13 % to + 6 % (- 3 %)

Comparable sales

Appraisals of collateral value

Adjustment for comparable sales

- 3 % to + 11 % ( 0 %)

Comparable sales

1 % - 15 % ( 6 %)

December 31, 2020

(dollars in thousands)

Range (weighed average)

Range (weighted average)

Impaired loans :

Commercial construction

Appraisals of collateral value

Comparable sales

Market approach (100%)

Average transfer price as a price to unpaid principal balance

48 - 53 ( 49 )

Appraisals of collateral value

Comparable sales

2 % - 14 % ( 9 %)

Adjustment for comparable sales

1 % to + 5 % (+ 2 %)

Commercial real estate

Appraisals of collateral value

Adjustment for comparable sales

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

CONNECTONE BANCORP, INC.

2 unchanged sentences

Fair Value Measurements and Fair Value of Financial Instruments –

As of September 30, 2020 the fair value measurements presented are consistent with Topic 820, Fair Value Measurement , in which fair value represents exit price.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2020 and December 31, 2019:

As of March 31, 2021 the fair value measurements presented are consistent with Topic 820, Fair Value Measurement , in which fair value represents exit price.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2021 and December 31, 2020:

Fair Value Measurements

(dollars in thousands)

September 30, 2020

March 31, 2021

Financial assets:

25 unchanged sentences

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.

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.

For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

11 unchanged sentences

The following table represents the reclassification out of accumulated other comprehensive (loss) income for the periods presented:

Details about Accumulated Other Comprehensive Loss Components

Amounts Reclassified from Accumulated Other Comprehensive Income

Affected Line item in the Statement Where Net Income is Presented

Details about Accumulated Other

Amounts Reclassified from Accumulated

Affected Line item in the

Comprehensive Loss Components

Other Comprehensive Income (Loss)

Statement Where Net Income is Presented

Three Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

Sale of investment securities

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

Net losses on sale of securities available-for-

available for sale

Income tax expense

sale Income tax benefit

Net interest income on swaps

Interest expense

Income tax expense

Amortization of pension plan net

Other components of net periodic pension expense

Other components of net periodic pension

actuarial losses

Income tax expense

expense Income tax benefit

Total reclassification

3 unchanged sentences

Comprehensive Income –

Accumulated other comprehensive income (loss) as of September 30, 2020 and December 31, 2019 consisted of the following:

September 30,

Accumulated other comprehensive (loss) income as of March 31, 2021 and December 31, 2020 consisted of the following:

(dollars in thousands)

4 unchanged sentences

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

The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of September 30, 2020.

The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of March 31, 2021.

The maximum number of shares of common stock or equivalents which may be issued under the Plan, is 750,000 .

Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, restricted share units or performance units.

Shares available for grant and issuance under the Plan as of September 30, 2020 are approximately 313,054 .

Shares available for grant and issuance under the Plan as of March 31, 2021 are approximately 353,841 .

The Company intends to issue all shares under the Plan in the form of newly issued shares.

8 unchanged sentences

Forfeiture rates are not estimated but are recorded as incurred.

Stock-based compensation expense for the three months and nine months ended September 30, 2020 and September 30, 2019 were $ 0.8 million and $ 2.0 million, respectively.

Activity under the Company’s options for the nine months ended September 30, 2020 was as follows:

Stock-based compensation expense for the three months ended March 31, 2021 and March 31, 2020 was $ 1.0 million and $ 0.5 million, respectively.

Activity under the Company’s options for the three months ended March 31, 2021 was as follows:

Intrinsic Value

1 unchanged sentence

Forfeited/cancelled/expired

Outstanding as of September 30, 2020

Exercisable as of September 30, 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 September 30, 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 September 30, 2020.

Outstanding as of March 31, 2021

Exercisable as of March 31, 2021

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 March 31, 2021 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 March 31, 2021.

This amount changes based on the fair market value of the Company’s stock.

3 unchanged sentences

Stock Based Compensation –

Activity under the Company’s restricted shares for the nine months ended September 30, 2020 was as follows:

Activity under the Company’s restricted shares for the three months ended March 31, 2021 was as follows:

Nonvested as of December 31, 2020

Forfeited/cancelled/expired

Nonvested September 30, 2020

As of September 30, 2020, there was approximately $ 1.2 million of total unrecognized compensation cost related to nonvested restricted shares granted.

Nonvested March 31, 2021

As of March 31, 2021, there was approximately $ 1.5 million of total unrecognized compensation cost related to nonvested restricted shares granted.

The cost is expected to be recognized over a weighted average period of 1.5 years.

4 unchanged sentences

Vested shares

Unearned as of September 30, 2020

As of September 30, 2020, the specific number of shares related to performance units that were expected to vest was 137,829, 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.

Unearned as of March 31, 2021

As of March 31, 2021, the specific number of shares related to performance units that were expected to vest was 171,626, determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period.

Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed.

As of September 30, 2020 the maximum number of shares related to performance units that ultimately could vest if performance targets were exceeded is 206,744 .

During the nine months ended September 30, 2020, 37,337 shares vested.

As of March 31, 2021, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 230,713.

During the three months ended March 31, 2021, 29,421 shares vested.

A total of 14,711 shares were netted from the vested shares to satisfy employee tax obligations.

The net shares issued from vesting of performance units during the nine months ended September 30, 2020 were 22,402 shares.

As of September 30, 2020, compensation cost of approximately $ 1.1 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.9 years.

The net shares issued from vesting of performance units during the three months ended March 31, 2021 were 14,711 shares.

As of March 31, 2021, compensation cost of approximately $ 2.0 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.9 years.

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

2 unchanged sentences

Vested shares

Unearned as of September 30, 2020

Unearned as of March 31, 2021

Any forfeitures would result in previously recognized expense being reversed.

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

During the nine months ended September 30, 2020, 27,626 shares vested.

During the three months ended March 31, 2021, 68,916 shares vested.

A total of 34,458 shares were netted from the vested shares to satisfy employee tax obligations.

The net shares issued from vesting of restricted stock units during the nine months ended September 30, 2020 were 16,541 shares.

As of September 30, 2020, compensation cost of approximately $ 1.8 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 2.0 years.

The net shares issued from vesting of restricted stock units during the three months ended March 31, 2021 were 34,458 shares.

As of March 31, 2021, compensation cost of approximately $ 2.3 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 2.3 years.

CONNECTONE BANCORP, INC.

4 unchanged sentences

The following table sets forth the net periodic pension cost of the Company’s pension plan for the periods indicated.

September 30, 2020

September 30, 2019

(dollars in thousands)

Interest cost

Expected return on plan assets

Net amortization

Total periodic pension (income) cost

September 30, 2020

September 30, 2019

Three Months Ended

Affected Line Item in the Consolidated

Statements of Income

(dollars in thousands)

Interest cost

Other components of net periodic pension expense

Expected return on plan assets

Other components of net periodic pension expense

Net amortization

Total periodic pension (income) cost

Other components of net periodic pension expense

Total periodic pension income

Contributions

The Company did not contribute to the Pension Trust during the nine months ended September 30, 2020, and does not plan on contributing any amounts for the remainder of 2020.

The Company did not make a contribution to the Pension Trust during the three months ended March 31, 2021.

The Company does not plan on contributing amounts to the Pension Trust for the remainder of 2021.

The trust is established to provide retirement and other benefits for eligible employees and their beneficiaries.

No part of the trust assets may be applied to any purpose other than providing benefits under the plan and for defraying expenses of administering the plan and the trust.

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FHLB Borrowings

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

September 30, 2020

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

March 31, 2021

December 31, 2020

10 unchanged sentences

Fair value premium (discount)

Total borrowings

FHLB borrowings, net

The FHLB borrowings are secured by pledges of certain collateral including, but not limited to, U.S.

2 unchanged sentences

All FHLB advances are fixed rates.

The advances as of September 30, 2020 were primarily collateralized by approximately $ 2.0 billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement.

As of September 30, 2020 the Company had remaining borrowing capacity of approximately $ 1.1 billion at FHLB.

Subordinated Debentures

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

(ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Company;

and (iii) engaging in only those activities necessary or incidental thereto.

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

The capital securities presently qualify as Tier I capital.

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

The subordinated debentures are redeemable in whole or in part prior to maturity.

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

The rate as of September 30, 2020 was 3.19 %.

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 advances as of March 31, 2021 were primarily collateralized by approximately $ 1.9 billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement.

As of March 31, 2021 the Company had remaining borrowing capacity of approximately $ 1.1 billion at FHLB.

CONNECTONE BANCORP, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Subordinated Debentures –

The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of September 30, 2020 and December 31, 2019.

Subordinated Debentures

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

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

The subordinated debentures are redeemable in whole or part.

The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85 % and re-prices quarterly.

The rate as of March 31, 2021 was 3.06 %.

The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of March 31, 2021 and December 31, 2020.

Issuance Date

5 unchanged sentences

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

The 2015 Notes may now be redeemed by the Company, 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 September 30, 2020 the variable interest rate was 4.23 % and all costs related to 2015 issuance have been amortized.

Management currently anticipates that these notes will be redeemed, in full, during the first half of 2021.

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

The 2018 Notes bear interest at 5.20 % annually from, and including, the date of initial issuance to, but excluding, February 1, 2023 , payable semi-annually in arrears.

From and including February 1, 2023 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 284 basis points ( 2.84 %) payable quarterly in arrears.

If three-month LIBOR is not available for any reason, then the rate for that interest period will be determined by such alternate method as provided in the Supplemental Indenture.

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 September 30, 2020, unamortized costs related to this debt issuance were approximately $ 1.1 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.

1 unchanged sentence

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

As of September 30, 2020, unamortized costs related to this debt issuance were approximately $ 1.5 million.

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

The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included the Parent Corporation contributing $ 65 million of the net proceeds to the Bank in the form of debt and common equity.

The Notes are non-callable for five years, have a stated maturity of February 1, 2028 and bear interest at a fixed rate of 5.20 % per year, from and including January 17, 2018 to, but excluding February 1, 2023.

From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points .

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.

CONNECTONE BANCORP, INC.

7 unchanged sentences

Also, certain interest rate swap agreements may require the Company to receive or pledge cash or financial instrument collateral based on the contract provisions.

The following table presents information about financial instruments that are eligible for offset as of September 30, 2020 and December 31, 2019:

The following table presents information about financial instruments that are eligible for offset as of March 31, 2021 and December 31, 2020:

Gross Amounts Not Offset

4 unchanged sentences

(dollars in thousands)

September 30, 2020

March 31, 2021

Interest rate swaps

3 unchanged sentences

Interest rate swaps

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 quantitatively 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 September 30, 2020 the Company reassessed the prior quarter’s conclusion and, finding no material changes to our previous methodology, assumptions or results, concluded there was no impairment.

As of September 30, 2020 and December 31, 2019, goodwill was $208.4 million and $162.6 million, respectively.

Subsequent Event

On October 26, 2020, the Company announced it had entered into a purchase and assumption agreement to sell two of the Bank’s leased branch offices in Warwick, NY and Monroe, NY and the deposit accounts associated with the two branches.

Under the terms of the purchase and assumption agreement, the acquiring bank will assume the remaining lease and deposit obligations held at each branch.

The total right of use asset and lease liability as of September 30, 2020 for both branches was $ 0.2 million and $ 0.2 million, respectively.

Additionally, under the terms of the purchase and assumption agreement, a portion of the deposits at each branch will be acquired at a set premium, while the remaining deposits will be acquired at no premium or discount.

We anticipate the gain on the deposits with a premium will not have a material impact on our financial statements.

The transaction is expected to close in the first quarter of 2021, subject to regulatory approvals and satisfaction of customary closing conditions.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of September 30, 2020 and December 31, 2019.

In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

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(8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp;

(9) the impact on reputation risk created by the developments discussed herein on such matters as business generation and retention, funding and liquidity could be significant;

(10) the outcome of regulatory and legal investigations and proceedings may not be anticipated, (11) the risk that the businesses of BNJ and ConnectOne Bancorp will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected;

expected revenue synergies and cost savings from the acquisition of BNJ may not be fully realized within the expected timeframe;

revenues following the acquisition of BNJ may be lower than expected;

and customer and employee relationships and business operations may be disrupted by the acquisition of BNJ;

and (12) the impact of the COVID-19 pandemic on our employees and operations, and those of our customers.

(9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant;

(10) the outcome of regulatory and legal investigations and proceedings may not be anticipated, and (11) the impact of the COVID-19 pandemic on our employees and operations, and those of our customers.

Further information on other factors that could affect the financial results of ConnectOne Bancorp is included in Item 1a.

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The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations.

The Company has identified the determination of the allowance for loan losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available.

The Company has identified the determination of the allowance for credit losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available.

Additional information on these policies is provided below.

Allowance for Loan Losses and Related Provision :

The allowance for loan losses (“ALLL”) represents management’s estimate of probable incurred credit losses inherent in the loan portfolio.

Determining the amount of the ALLL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, individual credit situation and consideration of current economic trends and conditions, all of which may be susceptible to significant change.

The loan portfolio also represents the largest asset type on the consolidated statements of condition.

The evaluation of the adequacy of the ALLL includes, among other factors, an analysis of historical loss rates by loan segment applied to current loan totals.

However, actual loan losses may be higher or lower than historical trends, which vary.

Allowance for Credit Losses and Related Provision :

The allowance for credit losses (“ACL”) represents management’s estimate of current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial asset(s).

Determining the amount of the ACL is considered a critical accounting estimate because it requires significant judgment and the use of estimates including reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

The evaluation of the adequacy of the ACL includes, among other factors, an analysis of historical loss rates by loan segment applied to current loan totals.

However, actual credit losses may be higher or lower than historical trends, which vary.

Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.

The ALLL is established through a provision for loan losses charged to expense.

Management believes that the current ALLL will be adequate to absorb loan losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio.

The ACL is established through a provision for credit losses charged to expense.

Management believes that the current ACL will be adequate to absorb credit losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio.

The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers’

ability to pay.

The evaluation also details historical losses by loan segment and the resulting loan loss rates which are projected for current loan total amounts.

Loss estimates for specified problem

loans are also detailed.

All of the factors considered in the analysis of the adequacy of the ALLL may be subject to change.

To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that could materially adversely impact earnings in future periods.

The evaluation also details historical losses by loan segment and the resulting credit loss rates which are projected for current loan total amounts.

Loss estimates for specified problem loans are also detailed.

All of the factors considered in the analysis of the adequacy of the ACL may be subject to change.

To the extent actual outcomes differ from management estimates, additional provisions for credit losses may be required that could materially adversely impact earnings in future periods.

Additional information can be found in Note 6 of the Notes to Consolidated Financial Statements.

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COVID-19 continues to impact the Company’s operations and financial results, as well as those of our customers.

More specifically, the impact of COVID-19 resulted in a significant increase to loan loss reserves.

In response to the COVID-19 pandemic, the Company has temporarily closed certain branch locations and is directing those branch customers affected to drive-thru windows and online banking services.

The Company has also offered temporary relief to effected customers, deferring either their full loan payment, the principal component or the interest component of their loan payment for an initial period of time ranging from 30 to 120 days.

As of September 30, 2020, the Company has 199 deferred loans with a total outstanding loan balance of $355.2 million.

In response to the COVID-19 pandemic, the Company continued to offer temporary relief to effected customers, deferring either their full loan payment, the principal component or the interest component of their loan payment for an initial period of time ranging from 30 to 120 days.

As of March 31, 2021, the Company has 102 deferred loans with a total outstanding loan balance of $204.2 million.

As provided for under the CARES act, these short-term deferrals are not considered troubled debt restructurings, provided that the modification is related to COVID-19, executed on a loan that was not more than 30 days past due as of December 31, 2019 or the date of the deferral, and executed between March 1, 2020 and January 1, 2022, or the date that is 60 days after the termination date of the national emergency declared by the president on March 13, 2020, under the National Emergencies Act related to the outbreak of COVID-19.

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company was an active participant in assisting its customers with applications for resources through the program.

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The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

As of September 30, 2020, PPP loans were $474.4 million.

As of March 31, 2021, PPP loans were $522.3 million.

It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S.

government and, as such, the Company has not included the PPP loans in calculation of the allowance for loan losses as of September 30, 2020.

Should those circumstances change, the Company could be required to establish an additional allowance for loan loss through additional provisions for loan loss expense charged to earnings.

Additionally, management has elected to participate in the Federal Reserve Bank’s PPP Lending Facility ("PPPLF") and as of June 30, 2020 had funded $206.6 million in PPP loans via the PPPLF.

During the third quarter of 2020, the Company elected to pay off the entire PPPLF balance which was previously outstanding as of June 30, 2020.

government and, as such, the Company has not included the PPP loans in calculation of the ACL as of March 31, 2021.

Should those circumstances change, the Company could be required to establish additional provisions for loan loss expense charged to earnings.

Operating Results Overview

Net income for the three months ended September 30, 2020 was $24.8 million compared to $21.7 million for the comparable three-month period ended September 30, 2019.

The Company’s diluted earnings per share were $0.62 for the three months ended September 30, 2020 as compared with diluted earnings per share of $0.61 for the comparable three-month period ended September 30, 2019.

The increase in net income and diluted earnings per share was primarily attributable to an increase net interest income and noninterest income, offset by increases in provision for loan losses and noninterest expenses.

The increase in net interest income, was primarily attributable to an increase in interest and fees on loans, due to the acquisition of Bancorp of NJ (“BNJ”) and a decrease in interest expense largely due to reductions in interest rates related to deposits.

The increase in provision for loan losses was primarily attributable to provisioning related to the economic uncertainties surrounding COVID-19 for the three months ended September 30, 2020.

Net income for the nine months ended September 30, 2020 was $45.6 million compared to $52.6 million for the comparable nine-month period ended September 30, 2019.

The Company’s diluted earnings per share were $1.15 for the nine months ended September 30, 2020 as compared with diluted earnings per share of $1.48 for the comparable nine-month period ended September 30, 2019.

The decrease in net income and diluted earnings per share was primarily attributable to an increase in provision for loan losses and noninterest expenses, partially offset by an increase in net interest income, an increase in noninterest income and a decrease in income tax expense.

The increase in provision for loan losses was primarily attributable to provisioning related to the economic uncertainties surrounding COVID-19 for the nine months ended September 30, 2020.

The increase in net interest income was primarily attributable to an increase in interest and fees on loans, due to the acquisition of BNJ, and decreases in interest expense largely due to reductions in interest rates related to deposits.

Net income for the three months ended March 31, 2021 was $33.0 million compared to $6.0 million for the comparable three-month period ended March 31, 2020.

The Company’s diluted earnings per share were $0.82 for the three months ended March 31, 2021 as compared with diluted earnings per share of $0.15 for the comparable three-month period ended March 31, 2020.

The increase in net income and diluted earnings per share was primarily due to a $5.8 million recapture of credit loss reserves in the current quarter reflecting the impact of the improved economic outlook on the current expected credit losses (“CECL”) accounting standard, compared with a $16.0 million provision in the first quarter of 2020.

Net Interest Income and Margin

Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets.

Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (primarily interest earned on obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues.

Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (primarily interest earned on obligations of state and local political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues.

Net interest margin is defined as net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.

Fully taxable equivalent net interest income for the three months ended September 30, 2020 increased by $12.1 million, or 24.7%, from the comparable three-month period ended September 30, 2019, resulting from an increase in average interest-earning assets of 23.3%, primarily resulting from the BNJ acquisition, and a widening of the net interest margin of 5 basis-points to 3.49% from 3.44%.

Fully taxable equivalent net interest income for the three months ended March 31, 2021 increased by $5.8 million, or 10.4%, from the comparable three-month period ended March 31, 2020.

The increase from the first quarter of 2021 resulted primarily from a 6.4% increase in average interest-earning assets, largely due to PPP originations, and a 15 basis-point widening of the net interest margin to 3.56% from 3.41%.

The widening of the net interest margin resulted from a 75 basis-points reduction in the cost of funding interest-earning assets, partially offset by a 49 basis-point reduction in the rate of average interest-earning assets.

Fully taxable equivalent net interest income for the nine months ended September 30, 2020 increased by $37.5 million, or 26.7%, from the comparable nine-month period ended September 30, 2019, resulting from an increase in average interest-earning assets of 26.1%, primarily resulting from the BNJ acquisition, and a widening of the net interest margin of 8 basis-points to 3.44% from 3.36%.

The widening of the net interest margin resulted primarily from the favorable impact the Fed’s first quarter 2020 interest rate reductions had on our funding costs, which more than offset declines in our interest-earning asset yields.

Included in interest income in the nine months ended September 30, 2020 was PPP fee income of approximately $7.2 million.

The benefit to the nine months ended September 30, 2020 net interest margin attributable to the PPP was offset by additional liquidity on the Bank’s balance sheet.

The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three and nine months ended September 30, 2020 and 2019, the Company’s average assets, liabilities and stockholders’

The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three months ended March 31, 2021 and 2020, the Company’s average assets, liabilities and stockholders’

The Company’s net interest income, net interest spread and net interest margin are also reflected.

Average Statements of Condition with Interest and Average Rates

Three Months Ended September 30,

(dollars in thousands)

Interest-earning assets:

Investment securities (1) (2)

Total loans (2) (3) (4)

Federal funds sold and interest-bearing deposits with banks

Restricted investment in bank stocks

Total interest-earning assets

Noninterest-earning assets:

Allowance for loan losses

Other noninterest-earning assets

Interest-bearing liabilities:

Time deposits

Other interest-bearing deposits

Total interest-bearing deposits

Subordinated debentures, net of debt issuance costs

Capital lease obligation

Total interest-bearing liabilities

Noninterest-bearing demand deposits

Other liabilities

Total noninterest-bearing liabilities

Stockholders’

Total liabilities and stockholders’

Net interest income (tax-equivalent basis)

Net interest spread (5)

Net interest margin (6)

Tax-equivalent adjustment

Net interest income

Average balances are based on amortized cost and include equity securities.

Interest income is presented on a tax-equivalent basis using 21%.

Includes loan fee income.

Total loans includes loans held-for-sale and nonaccrual loans.

Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis.

Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.

Rates are annualized.

Average Statements of Condition with Interest and Average Rates

Nine Months Ended September 30,

Three Months Ended March 31,

(dollars in thousands)

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Total loans (2) (3) (4)

Federal funds sold and interest-bearing with banks

Restricted investment in bank stocks

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Noninterest-earning assets:

Allowance for loan losses

Allowance for credit losses

Other noninterest-earning assets

Interest-bearing liabilities:

Interest-bearing deposits:

Time deposits

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Total interest-bearing deposits

Subordinated debentures, net of debt issuance costs

Capital lease

Subordinated debentures

Finance lease

Total interest-bearing liabilities

Noninterest-bearing demand deposits

Demand deposits

Other liabilities

Total noninterest-bearing liabilities

Stockholders’

Total liabilities and stockholders’

equity

Net interest income (tax-equivalent basis)

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Interest income is presented on a tax-equivalent basis using 21%.

Includes loan fee income.

Includes loan fee income and accretion of purchase accounting adjustments.

Total loans include loans held-for-sale and nonaccrual loans.

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Noninterest Income

Noninterest income totaled $3.5 million for the three months ended September 30, 2020, compared with $2.1 million for the three months ended September 30, 2019.

The increase in noninterest income of $1.4 million from the three months ended September 30, 2019 was primarily attributable to increases in income on bank owned life insurance of $0.7 million, mainly resulting from a death benefit of $0.5 million, net gains on sale of loans held-for-sale, primarily commercial real estate, of $0.3 million and net gains on sale of securities available-for-sale of $0.3 million.

Noninterest income totaled $11.0 million for the nine months ended September 30, 2020, compared with $5.8 million for the nine months ended September 30, 2019.

The increase in noninterest income of $5.2 million from the nine months ended September 30, 2019 was primarily attributed to increases in deposit, loan and other income of $3.0 million, which included $2.3 million of loan referral fee income generated by BoeFly as a result of its participation in the PPP program.

Additional increases were in income on bank owned life insurance of $1.1 million and net gains on sale of loans held-for-sale of $0.9 million.

The increases in net gains on sale of loans held-for-sale was attributable to sales of commercial real estate loans originated for sale during the first and third quarters of 2020.

Noninterest income totaled $3.4 million for the three months ended March 31, 2021, compared with $2.9 million for the three months ended March 31, 2020.

During the first quarter of 2021, the Bank completed the sale of two branches, resulting in a gain of $0.7 million, which was included in noninterest income.

Total noninterest income, excluding the branch sales, decreased $0.1 million from the first quarter of 2020.

The decrease was primarily attributable to a decrease in net gains on sale of securities of $0.4 million, partially offset by an increase in net gains on sale of loans held-for-sale of $0.3 million.

Noninterest Expenses

Noninterest expenses totaled $26.5 million for the three months ended September 30, 2020, compared with $21.4 million for the three months ended September 30, 2019.

Noninterest expenses increased by $6.1 million from the three months ended September 30, 2019, primarily attributable to increases in salaries and employee benefits of $2.7 million, FDIC insurance of $1.5 million, occupancy and equipment expenses of $1.1 million, and increases in data processing of $0.4 million.

The increases in salaries and employee expenses, occupancy and equipment expenses and data processing were mainly attributable to the acquisition of BNJ.

The increase in FDIC insurance expense was primarily the result of a third-quarter 2019 non-recurring FDIC assessment credit of $1.3 million.

Noninterest expenses totaled $94.6 million for the nine months ended September 30, 2020, compared with $70.0 million for the nine months ended September 30, 2019.

Included in noninterest expenses were merger and restructuring expense charges totaling $14.6 million and $8.1 million during the nine months ended September 30, 2020 and 2019, respectively.

Excluding merger and restructuring expense charges, noninterest expenses increased by $18.0 million from the nine months ended June 30, 2019, primarily attributable to increases in salaries and employee benefits of $8.1 million, occupancy and equipment of $2.9 million, FDIC insurance of $1.8 million, data processing of $1.2 million, professional and consulting of $1.1 million, other expenses of $1.1 million, partially offset by a $1.0 million loss on extinguishment of debt that took place during the second quarter of 2019.

There was no extinguishment of debt in the current period.

Also contributing to the increase was an additional $2.3 million in expenses related to the BoeFly acquisition.

The increases in salaries and employee expenses, occupancy and equipment, data processing, professional and consulting and other expenses are mainly attributable to the acquisition of BNJ.

The increase in FDIC insurance was primarily the result of the aforementioned FDIC assessment credit of $1.3 million in 2019.

Income tax expense was $7.8 million for the three months ended September 30, 2020, compared to $6.4 million for the three months ended September 30, 2019.

The increase in income tax expense was the result of an increase in taxable income.

The effective tax rate for the three months ended September 30, 2020 and September 30, 2019 was 23.9% and 22.7%, respectively.

Income tax expense was $11.3 million for the nine months ended September 30, 2020, compared to $14.4 million for the nine months ended September 30, 2019.

The effective tax rate for the nine months ended September 30, 2019 was 19.9% versus 21.5% for the comparable prior-year period.

Noninterest expenses totaled $26.5 million for the three months ended March 31, 2021, compared to $35.1 million for the three months ended March 31, 2020.

Noninterest expenses decreased by $8.6 million from the prior year first quarter due primarily to a decrease of $9.5 million in merger expenses resulting from the acquisition of Bancorp of New Jersey (“BNJ”)in 2020.

Excluding merger-related expenses, noninterest expenses increased by $0.9 million from the first quarter of 2020 due primarily to increases in salaries and employee benefits of $1.0 million, and professional and consulting of $0.4 million, and was partially offset by decreases in other expenses of $0.3 million and amortization of core deposit intangible of $0.1 million.

Income tax expense was $10.9 million for the three months ended March 31, 2021, compared to $1.0 million for the three months ended March 31, 2020.

The effective tax rate for the three months ended March 31, 2021 and March 31, 2020 was 24.8% and 14.8%, respectively.

The effective tax rate for the first quarter of 2020 was lower compared to March 31, 2021 due to different proportions of income from non-taxable sources.

Financial Condition

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

September 30, 2020

March 31, 2021

December 31, 2020

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Residential real estate

Includes PPP loans of $474 million as of September 30, 2020.

As of September 30, 2020, gross loans totaled $6.3 billion, an increase of $1.1 billion, or 22.4%, as compared to December 31, 2019.

Net loan growth was primarily attributable to the BNJ acquisition and the origination of PPP loans.

As of September 30, 2020, acquired loans within the loan portfolio totaled $1.1 billion, compared to $0.5 billion as of December 31, 2019.

The increase was attributable to the BNJ acquisition.

Allowance for Loan Losses and Related Provision

In accordance with the accounting relief provisions of the CARES Act and regulatory guidance, the Company has postponed the adoption of the current expected credit losses (“CECL”) accounting standards.

Management reached this decision due to the complexities of CECL loan loss forecasting exacerbated by the quickly changing economic environment resulting from the COVID-19 pandemic.

The Company measured its allowance under its current incurred loan loss model as of September 30, 2020.

As of September 30, 2020, the ALLL was $74.3 million as compared to $38.3 million as of December 31, 2019.

The provision for loan losses for the three and nine months ended September 30, 2020 was $5.0 million and $36.0 million, respectively, compared to $2.0 million and $7.6 million for the three and nine months ended September 30, 2019, respectively.

The increase in the provision for loan losses was for both the three and nine months ended September 30, 2020 was primarily attributable to the economic uncertainties caused by the COVID-19 pandemic.

There were $(0.5) million and $-0- in net (recoveries) charge-offs for the three and nine months ended September 30, 2020, compared with $0.9 million and $3.8 million in net charge-offs for the three and nine months ended September 30, 2019, respectively.

During the third quarter of 2020, the Bank received a $0.8 million recovery on a previously charged-off commercial real estate credit.

The ALLL as a percentage of loans receivable amounted to 1.19% as of September 30, 2020 compared to 0.75% as of December 31, 2019 and 0.76 % as of September 30, 2019.

Excluding the impact of PPP loans in the calculation of the ALLL as a percentage of loans receivable, the ratio increases to 1.29% as of September 30, 2020.

As of March 31, 2021, gross loans totaled $6.3 billion, an increase of $47.8 million, or 0.8%, as compared to December 31, 2020.

Net loan growth was primarily attributable to the PPP loans.

Included in commercial loans as of March 31, 2021 and December 31, 2020 are PPP loans of $522.3 million and $397.5 million, respectively.

Allowance for Credit Losses and Related Provision

As of January 1, 2021, the Company adopted the CECL accounting standard.

As of March 31, 2021, the Company’s allowance for credit losses for loans was $80.6 million, an increase of $1.4 million from $79.2 million as of December 31, 2020.

The increase was attributable to the “Day 1”

effect of the adoption of the CECL accounting standard, which was $6.6 million, offset by a $5.8 million recapture of credit loss reserves during the first quarter of 2021.

The (reversal of) provision for credit losses was $(5.8) million for the first quarter of 2021, and $16.0 million for the first quarter of 2020.

The decrease in provision for credit losses during the first quarter of 2021 when compared to the first quarter of 2020 was the result of an improved macro-economic outlook when compared to January 1, 2021, the day the Company adopted CECL.

As of March 31, 2021, the ACL was $80.6 million as compared to $79.2 million as of December 31, 2020.

The level of the allowance for the respective periods of 2021 and 2020 reflects the credit quality within the loan portfolio, loan growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors.

There were $0.1 million net recoveries for the three months ended March 31, 2021, compared with $0.1 million net charge-offs for the three months ended March 31, 2020.

The ACL as a percentage of loans receivable amounted to 1.28% as of March 31, 2021 compared to 1.27% as of December 31, 2020.

Excluding the impact of PPP loans in the calculation of the ACL as a percentage of loans receivable, the ratio increases to 1.40% as of March 31, 2021, compared to 1.36% as of December 31, 2020.

PPP loans do not have allowance for loan losses attributable to them, as they are fully guaranteed by the SBA.

Additionally, the higher allowance for loan losses for 2020 is a result of the impact of the COVID-19 pandemic.

In management’s view, the level of the ALLL as of September 30, 2020 is adequate to cover losses inherent in the loan portfolio.

In management’s view, the level of the ACL as of March 31, 2021 is adequate to cover losses inherent in the loan portfolio.

Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement”

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Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.

Changes in the ALLL are presented in the following table for the periods indicated.

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

Three Months Ended

September 30,

(dollars in thousands)

Average loans receivable at end of period

Average loans held-for-sale at end of period

Average total loans at end of period

Analysis of the ALLL:

Analysis of the ACL:

Balance - beginning of quarter

Commercial real estate

Residential real estate

CECL Day 1 Adjustment

Balance –

beginning of quarter (as adjusted)

Total charge-offs

Commercial real estate

Total recoveries

Net recoveries (charge-offs)

Provision for loan and losses

Balance - end of period

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

Loans receivable

ALLL as a percentage of loans receivable

Nine Months Ended

September 30,

(dollars in thousands)

Average loans at end of period

Average loans held-for-sale at end of period

Average total loans at end of period

Analysis of the ALLL:

Balance - beginning of quarter

Commercial real estate

Residential real estate

Total charge-offs

Commercial real estate

Residential real estate

Total recoveries

Net charge-offs

Provision for loan and losses

(Reversal of) provision for credit losses (loans)

Balance - end of period

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

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

Loans receivable

ALLL as a percentage of loans receivable

ACL as a percentage of loans receivable

Asset Quality

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix.

The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for loan losses at all times.

It is generally the Company’s policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of ninety days.

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

September 30,

(dollars in thousands)

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Performing TDRs

Loans 90 days or greater past due and still accruing (non-PCI)

Loans 90 days or greater past due and still accruing (PCI)

     Nonperforming assets are defined as nonaccrual loans and OREO.

Nonaccrual loans to loans receivable

Loans 90 days or greater past due and still accruing (non-PCD)

Loans 90 days or greater past due and still accruing (PCD)

Nonperforming assets are defined as nonaccrual loans and OREO.

Nonaccrual loans to total loans receivable

Nonperforming assets to total assets

Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable

The above table does not include deferred loans, which totaled approximately $355.2 million as of September 30, 2020.

These deferred loans could migrate to nonperforming loans sometime in the future but have not as of September 30, 2020.

Investment Securities

As of September 30, 2020, the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations of U.S.

Securities Available-For-Sale

As of March 31, 2021, the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations of U.S.

states and political subdivisions, corporate bonds and notes, asset-backed securities and equity securities.

For the three months ended September 30, 2020, average securities decreased $25.1 million to approximately $420.4 million, or 6.0% of average total interest-earning assets, from approximately $445.5 million, or 7.9% of average interest-earning assets, for the comparable period in 2019.

As of September 30, 2020, net unrealized gains on securities available-for-sale, which are carried as a component of accumulated other comprehensive income and included in stockholders’

For the quarter ended March 31, 2021, average securities increased $12.7 million to approximately $473.2 million, or 6.8% of average total interest-earning assets, from approximately $460.5 million, or 6.5% of average interest-earning assets, compared to December 31, 2020.

As of March 31, 2021, net unrealized losses on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included in stockholders’

equity, net of tax, amounted to $3.9 million as compared with net unrealized gains of $7.9 million as of December 31, 2020.

The increase in unrealized gains is predominately attributable to changes in market conditions and interest rates.

The gross unrealized losses associated with agency securities and federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other-than-temporary because their unrealized losses are related to changes in interest rates and credit spreads and do not affect the expected cash flows of the underlying collateral or issuer.

The increase in unrealized losses is predominately attributable to changes in market conditions and interest rates.

Unrealized losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely that we will not be required to sell the securities prior to their anticipated recovery.

The decline in fair value is largely due to changes in interest rates and other market conditions.

The issuers continue to make timely principal and interest payments on the securities.

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes.

The Company did not record an allowance for credit losses for available-for-sale as of March 31, 2021.

Interest Rate Sensitivity Analysis

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The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.

We currently utilize net interest income (“NII”) simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates.

As of September 30, 2020 and December 31, 2019, the results of the models were within guidelines prescribed by our Board of Directors.

We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates.

As of March 31, 2021 and December 31, 2020, the results of the models were within guidelines prescribed by our Board of Directors.

If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and the Bank’s management.

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

Based on our model, which was run as of September 30, 2020, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 1.13%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 4.48%.

Based on our model, which was run as of March 31, 2021, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 1.89%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.91%.

As of December 31, 2020, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 0.70%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.18%.

Based on our model, which was run as of September 30, 2020, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.60%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 7.37%.

Based on our model, which was run as of March 31, 2021, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 6.97%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 10.57%.

As of December 31, 2020, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.89%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 8.56%.

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The economic value of equity is likely to be different as interest rates change.

Our EVE as of September 30, 2020, would decline by 9.97% with an instantaneous rate shock of up 200 basis points, and increase by 7.50% with an instantaneous rate shock of down 100 basis points.

Our EVE as of March 31, 2021, would decline by 8.01% with an instantaneous rate shock of up 200 basis points, and increase by 5.59% with an instantaneous rate shock of down 100 basis points.

Our EVE as of December 31, 2020, would decline by 7.76% with an instantaneous rate shock of up 200 basis points, and increase by 5.70% with an instantaneous rate shock of down 100 basis points.

The following table illustrates the most recent results for EVE and one-year NII sensitivity as of September 30, 2020.

The following table illustrates the most recent results for EVE and one year NII sensitivity as of March 31, 2021.

Interest Rates

Estimated Change

Estimated Change in

Interest Rates

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While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

As of September 30, 2020, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’

As of March 31, 2021, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’

withdrawal requirements, and other operational and client credit needs could be satisfied.

As of September 30, 2020, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $615.3 million, which represented 8.3% of total assets and 9.8% of total deposits and borrowings, compared to $506 million as of December 31, 2019, which represented 8.2% of total assets and 9.6% of total deposits and borrowings.

The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of September 30, 2020, had the ability to borrow $2.0 billion.

In addition, as of September 30, 2020, the Bank had in place borrowing capacity of $25 million through correspondent banks.

As of March 31, 2021, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $601.1 million, which represented 8.1% of total assets and 9.5% of total deposits and borrowings, compared to $697.4 million as of December 31, 2020, which represented 9.2% of total assets and 10.9% of total deposits and borrowings.

The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of March 31, 2021, had the ability to borrow $1.9 billion.

In addition, as of March 31, 2021, the Bank had in place borrowing capacity of $25 million through correspondent banks.

The Bank also has a credit facility established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral of $3.2 million.

As of September 30, 2020, the Bank had aggregate available and unused credit of approximately $1.0 billion, which represents the aforementioned facilities totaling $2.0 billion net of $1.0 billion in outstanding borrowings and letters of credit.

As of September 30, 2020, outstanding commitments for the Bank to extend credit were approximately $0.9 billion.

Cash and cash equivalents totaled $256.1 million as of September 30, 2020, increasing by $54.6 million from $201.5 million as of December 31, 2019.

As of March 31, 2021, the Bank had aggregate available and unused credit of approximately $1.1 billion, which represents the aforementioned facilities totaling $1.9 billion net of $0.8 billion in outstanding borrowings and letters of credit.

As of March 31, 2021, outstanding commitments for the Bank to extend credit were approximately $970 million.

Cash and cash equivalents totaled $260.1 million as of March 31, 2021, decreasing by $43.7 million from $303.8 million as of December 31, 2020.

Operating activities provided $80.1 million in net cash.

Investing activities used $312.2 million in net cash, primarily reflecting an increase in loans, securities purchases, cash flows acquired from BNJ, and cash consideration for the BNJ acquisition.

Financing activities provided $267.0 million in net cash, primarily reflecting a net increase in deposits of $249.4 million and an increase in subordinated debentures of $73.4 million, partially offset by net borrowings of $43.7 million.

Investing activities provided $5.6 million in net cash, primarily reflecting an increase in securities partially offset by an increase in loans.

Financing activities used $129.4 million in net cash, primarily reflecting a repayment of FHLB borrowings and subordinated debentures of approximately $66.2 million and $50.0 million, respectively.

Total deposits decreased by $7.9 million, or 0.1%, to $6.0 billion as of March 31, 2021 from December 31, 2020.

The decrease was primarily due to decreases in time deposits partially offset by increases in demand, interest bearing, non-interest bearing and savings.

The following table sets forth the composition of our deposit base by the periods indicated.

September 30, 2020

March 31, 2021

December 31, 2020

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Total deposits

Total deposits increased by $1.0 billion, or 21.6%, to $5.8 billion as of September 30, 2020 from December 31, 2019.

The increase was primarily attributable the acquisition of BNJ.

Subordinated Debentures

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The floating interest rate on the subordinated debentures is three month LIBOR plus 2.85% and re-prices quarterly.

The rate as of September 30, 2020 was 3.19%.

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

The net proceeds from the sale of the Notes were used by the Parent Corporation to contribute $35.0 million of common equity to the Bank and to repay $11.25 million of SBLF preferred stock issued to the U.S.

Treasury on March 11, 2016.

Remaining funds were used for general corporate purposes.

The Notes may now be redeemed by the Company, have a stated maturity of July 1, 2025, and bear interest until the maturity date or early redemption date at a variable rate of interest, which will reset quarterly, equal to the then current three-month LIBOR rate plus 393 basis points.

As of September 30, 2020 the variable interest rate was 4.23% and all costs related to 2015 issuance have been amortized.

Management currently anticipates that these notes will be redeemed, in full, during the first half of 2021.

The rate as of March 31, 2021 was 3.06%.

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

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

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

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

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

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

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

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.

Stockholders’

The Company’s stockholders’

equity was $891 million as of September 30, 2020, an increase of $160 million from December 31, 2019.

equity was $935.6 million as of March 31, 2021, an increase of $20.3 million from December 31, 2020.

The increase in stockholders’

equity was primarily attributable to the acquisition of BNJ, which increased capital by $118 million and retained earnings, which increased capital $38 million.

As of September 30, 2020, the Company’s tangible common equity ratio and tangible book value per share were 9.28% and $16.87, respectively.

equity was primarily attributable retained earnings.

As of March 31, 2021, the Company’s tangible common equity ratio and tangible book value per share were 9.91% and $18.02, respectively.

As of December 31, 2020, the tangible common equity ratio and tangible book value per share were 9.50% and $17.49, respectively.

Total goodwill and other intangible assets were approximately $220 million as of September 30, 2020 and $168 million as of December 31, 2019.

Total goodwill and other intangible assets were approximately $219 million as of March 31, 2021 and December 31, 2020.

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

September 30,

(dollars in thousands, except for share and

per share data)

(dollars in thousands, except for share and per

Common equity

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Tangible book value per common share

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

Tangible common equity ratio is a non-GAAP measure.

Regulatory Capital and Capital Adequacy

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

The following is a summary of the Bank’s and the Parent Corporation’s actual capital amounts and ratios as of September 30, 2020, compared to the FRB and FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a well-capitalized institution.

For Classification Under Corrective

Capital Adequacy

as Well Capitalized

At September 30, 2020

The following is a summary of regulatory capital amounts and ratios as of March 31, 2021 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution.

To Be Well-Capitalized Under

For Capital Adequacy

Prompt Corrective Action

ConnectOne Bancorp, Inc.

As of March 31, 2021

(dollars in thousands)

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Common Equity Tier 1

At September 30, 2020

N/A - not applicable

To Be Well-Capitalized Under

For Capital Adequacy

Prompt Corrective Action

ConnectOne Bank

As of March 31, 2021

(dollars in thousands)

Leverage (Tier 1) capital

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Common Equity Tier 1

As of September 30, 2020, management believes that each of the Bank and the Company meet all capital adequacy requirements to which they are subject.

Basel III rules require a “capital conservation buffer”

for both the Company and the Bank.

Beginning January 1, 2019, the Company and the Bank were 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 Common Equity Tier 1 Capital Ratio, 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 September 30, 2020, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them.

As of March 31, 2021, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them.

The lowest ratio at the Company is the Tier 1 Risk Based Ratio which was 2.94% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 4.05% above the minimum buffer ratio.

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Interest rate risk management is our primary market risk.

See "Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity Analysis"

See “Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity Analysis”

herein for a discussion of our management of our interest rate risk.

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-Q

Item 1. Financial Statements