What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-08-06 compared with 2021-05-07 · 345 added, 622 removed, 961 unchanged (50% of the section changed)

7 unchanged sentences

Cash and cash equivalents

Securities available-for-sale

Investment securities

Equity securities

13 unchanged sentences

Subordinated debentures, net

Lease liabilities

Operating lease liabilities

Other liabilities

6 unchanged sentences

Authorized 50,000,000 shares;

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

issued 42,547,077 shares as of June 30, 2021 and 42,444,031 shares as of December 31, 2020;

outstanding 39,794,815 shares as of June 30, 2021 and 39,785,398 as of December 31, 2020

Additional paid-in capital

Retained earnings

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

Treasury stock, at cost 2,752,262 common shares as of June 30, 2021 and 2,658,633 as of December 31, 2020

Accumulated other comprehensive (loss) income

6 unchanged sentences

Three Months Ended

(dollars in thousands, except for per share data)

Six Months Ended

(in thousands, except for per share data)

Interest income

7 unchanged sentences

(Reversal of) provision for credit losses

Net interest income after provision for credit losses

Net interest income after (reversal of) provision for credit losses

Noninterest income

2 unchanged sentences

Net gains on sale of loans held-for-sale

Net gains on sale of investment securities

Gain on sale of branches

Net (losses) gains on equity securities

Net gains (losses) on equity securities

Net gains on sales/redemption of securities available-for-sale

Total noninterest income

6 unchanged sentences

Data processing

Merger expenses

Merger and restructuring expenses

Amortization of core deposit intangibles

Increase in value of acquisition price

Other components of net periodic pension expense

9 unchanged sentences

Three Months Ended

(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

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

Total other comprehensive (loss) income

Six Months Ended

(in thousands)

Other comprehensive income (loss):

Unrealized gains and losses:

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

Reclassification adjustment for realized gains included in net income

Unrealized losses on cash flow hedges

Reclassification adjustment for realized losses on cash flow hedges included in net income

Reclassification adjustment for pension plan amortization included in net income

Total other comprehensive income (loss)

Total comprehensive income

3 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’

(dollars in thousands, except

Six Months Ended June 30, 2021

(dollars in thousands, except for per share data)

Comprehensive

(Loss) Income

Stockholders’

for per share data)

Balance as of December 31,  

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  ($ 0.20 per share)

Exercise of stock options  ( 5,449 shares)

Restricted stock grants, net of forfeitures  ( 47,982 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 expense

Balance as of June 30,  

Three Months Ended June 30, 2021

(dollars in thousands, except for per share data)

(Loss) Income

Balance as of December 31, 2019

Stockholders’

Comprehensive

Balance as of March 31, 2021

Other comprehensive income, net of tax

Cash dividends declared on common stock ($ 0.11 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)

Restricted stock grants, net of forfeitures ( 21,213 shares)

Stock-based compensation expense

Balance as of June 30,  

Six Months Ended June 30, 2020

(dollars in thousands, except for per share data)

Comprehensive

(Loss) Income

Stockholders’

Balance as of December 31,  

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  ( 68,853 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)

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

1 unchanged sentence

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

Stock-based compensation

Stock-based compensation expense

Balance as of June 30,  

Three Months Ended June 30, 2020

(dollars in thousands, except for per share data)

Comprehensive

(Loss) Income

Stockholders’

Comprehensive

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)

Exercise of stock options ( 5,449 shares)

Cash dividends adjustment

Restricted stock grants ( 48,169 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 March 31, 2021

Share redemption for tax withholdings on performance units

Stock-based compensation expense

Balance as of June 30,  

See accompanying notes to unaudited consolidated financial statements.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended

Six Months Ended

(dollars in thousands)

7 unchanged sentences

Accretion on deposits

(Accretion) amortization on borrowings, net

Accretion on borrowings, net

Stock-based compensation

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

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

Losses (gains) on equity securities, net

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

Gain on sale of branches

Net losses on disposition of fixed assets

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

Loans originated for resale

Proceeds from sale of loans held-for sale

Gain on sale of branches

Net losses on disposition of other premises and equipment

Payments on loans held-for-sale

Gain on sale of other real estate owned

Increase in cash surrender value of bank owned life insurance

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

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

Amortization of subordinated debentures issuance costs

5 unchanged sentences

Cash flows from investing activities

Securities available-for-sale:

Investment securities available-for-sale:

Maturities, calls and principal repayments

Net purchases (redemptions) of restricted investment in bank stocks

Purchases of equity securities

Payments on loans held-for-sale

Net redemptions of restricted investment in bank stocks

Net increase in loans

4 unchanged sentences

Cash and cash equivalents acquired in acquisition, net

Net cash provided by (used) in investing activities

Net cash used in investing activities

Cash flows from financing activities

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

Net increase in deposits

(Repayment of) increase in subordinated debentures

Advances of borrowings

Repayments of borrowings

Repurchase of treasury stock

Cash dividends paid on common stock

Proceeds from exercise of stock options

Net cash (used in) provided by financing activities

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

Net cash provided by financing activities

Net change in cash and cash equivalents

5 unchanged sentences

Supplemental disclosures of noncash activities

Transfer of loans from held-for-investment 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 :

16 unchanged sentences

(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).

(a New Jersey financial technology company).

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

5 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 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.

Operating results for the three and six months ended June 30, 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.

11 unchanged sentences

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.

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

Although the Company has been able to 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.

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

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

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 credit losses on loans, fair value of financial instruments, impairment of goodwill and other intangible assets and income taxes.

CONNECTONE BANCORP, INC.

10 unchanged sentences

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.

As discussed further below, purchased 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 purchased 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):

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

Change in Consolidated

5 unchanged sentences

Total ACL - loans

(unfunded credit commitments)

ACL (unfunded credit commitments)

Total impact of CECL adoption

14 unchanged sentences

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 measurement of expected credit loss under the CECL methodology is applicable to financial assets measured at amortized cost, including loans and 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.

5 unchanged sentences

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.

Properties underlying construction, land and land development loans often do not generate sufficient cash flows to service debt and thus repayment is subject to the 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.

21 unchanged sentences

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

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Authoritative Accounting Guidance –

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.

8 unchanged sentences

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 :

31 unchanged sentences

Three Months Ended

(dollars in thousands, except for per share data)

Six Months Ended

(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 restricted shares

performance units and non-participating restricted shares

Weighted average common and equivalent shares outstanding

Earnings per common share:

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

There were no antidilutive share equivalents as of June 30, 2021 and June 30, 2020.

CONNECTONE BANCORP, INC.

2 unchanged sentences

Securities Available-for-Sale

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

The Company’s investment securities are all classified as available-for-sale as of June 30, 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 March 31, 2021 and December 31, 2020.

Accordingly, the carrying value of such securities reflects their fair value as of June 30, 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 March 31, 2021 and December 31, 2020.

March 31, 2021

The following tables present information related to the Company’s portfolio of securities available-for-sale as of June 30, 2021 and December 31, 2020.

June 30, 2021

(dollars in thousands)

26 unchanged sentences

Securities Available-for-Sale –

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.

Investment securities having a carrying value of approximately $ 178.0 million and $ 107.6 million as of June 30, 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 June 30, 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 March 31, 2021, based on scheduled maturities.

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

March 31, 2021

June 30, 2021

(dollars in thousands)

8 unchanged sentences

Total securities available-for-sale

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):

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

Three Months Ended

Gross gains on sales of securities

Gross losses on sales of securities

Net gains on sales of securities

tax provision on net gains

Net gains on sales of securities, after tax

Six Months Ended

(dollars in thousands)

Gross gains on sales/redemption of securities

Gross losses on sales/redemptions of securities

Net gain on sales/redemptions of securities

tax provision on net gain

Net gain on sales/redemptions of securities, after tax

CONNECTONE BANCORP, INC.

3 unchanged sentences

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

The following tables indicate gross unrealized losses 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 June 30, 2021 and December 31, 2020.

June 30, 2021

Less than 12 Months

3 unchanged sentences

Available-for-Sale:

Federal agency obligation

Federal agency obligations

Residential mortgage pass-through securities

11 unchanged sentences

Available-for-Sale:

Federal agency obligation

Federal agency obligations

Residential mortgage pass-through securities

9 unchanged sentences

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 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 June 30, 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.

Accrued interest receivable for investment securities available for sale as of June 30, 2021 and December 31, 2020, totaled $ 1.4 million and $ 1.7 million, respectively.

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

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

7 unchanged sentences

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.

No allowance for credit losses for available-for-sale securities was recorded as of June 30, 2021.

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

9 unchanged sentences

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.

In addition, an interest rate swap was entered into on August 6, 2019, with a notional amount of $ 50.0 million and was designated as a cash flow hedge of a Federal Home Loan Bank advance.

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

6 unchanged sentences

Derivatives –

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.

Summary information about the interest rate swaps designated as cash flow hedges as of June 30, 2021, December 31, 2020 and June 30, 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 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.

Interest expense recorded on these swap transactions totaled approximately $ 584 thousand and $ 1.2 million during the three and six months ended June 30, 2021, respectively, compared to $ 318 thousand and $ 311 thousand during the three and six months ended June 30, 2020, respectively, 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:

Three Months Ended March 31, 2021

Amount of gain

Amount of (gain)

Three Months Ended June 30, 2021

Amount of (loss)

Amount of loss

Amount of gain

(loss) recognized

loss reclassified

gain recognized

(gain) reclassified

recognized in other

5 unchanged sentences

Interest rate contracts

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

Amount of (loss)

Amount of loss

Amount of gain

gain recognized

(gain) reclassified

recognized in other

in OCI (Effective

Noninterest income

interest income

(Ineffective Portion)

(dollars in thousands)

Interest rate contracts

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Derivatives –

Six Months Ended June 30, 2021

Amount of (loss)

Amount of loss

Amount of gain

gain recognized

(gain) reclassified

recognized in other

in OCI (Effective

Noninterest income

interest income

(Ineffective Portion)

(dollars in thousands)

Interest rate contracts

Six Months Ended June 30, 2020

Amount of (loss)

Amount of loss

Amount of gain

(loss) recognized

loss reclassified

gain recognized

(gain) reclassified

recognized in other

5 unchanged sentences

Interest rate contracts

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

The following table reflects the cash flow hedges included in the consolidated statements of condition as of June 30, 2021 and December 31, 2020:

June 30, 2021

December 31, 2020

(dollars in thousands)

Interest rate swaps related to FHLB advances included in assets

Interest rate swaps related to FHLB advances included in liabilities

CONNECTONE BANCORP, INC.

2 unchanged sentences

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.

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

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

2 unchanged sentences

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:

The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of June 30, 2021 and December 31, 2020:

(dollars in thousands)

5 unchanged sentences

Total loans receivable

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:

Included in commercial loans as of June 30, 2021 and December 31, 2020 were PPP loans of $ 326.8 million and $ 397.5 million, respectively.

As of June 30, 2021 and December 31, 2020, loan balances of approximately $ 2.7 , 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 June 30, 2021 and December 31, 2020:

(dollars in thousands)

2 unchanged sentences

Total carrying amount

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 Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL as of June 30, 2021 and nonaccrual loans without an ACL as of June 30, 2021:

Loans with an

4 unchanged sentences

Residential real estate

Total nonaccrual loans

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Credit Losses –

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

4 unchanged sentences

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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Credit Losses –

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

20 unchanged sentences

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):

As of June 30, 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

12 unchanged sentences

Total Consumer

Special mention

CONNECTONE BANCORP, INC.

12 unchanged sentences

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

March 31, 2021

The following table presents collateral dependent loans individually evaluated for impairment as of June 30, 2021:

June 30, 2021

(dollars in thousands)

2 unchanged sentences

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:

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Credit Losses –

Impaired loans - Impaired loans disclosures presented below as of December 31, 2020 and as of and for the three and six months ended June 30, 2020 represent requirements prior to the adoption of CECL on January 1, 2021.

The following table provides an analysis of the impaired loans by class as of the year ended December 31, 2020:

December 31, 2020

15 unchanged sentences

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

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 and six months ended June 30, 2020 (dollars in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Impaired loans (no allowance)

Commercial real estate

1 unchanged sentence

Residential real estate

Impaired loans with an allowance recorded

Impaired loans (allowance):

Commercial real estate

5 unchanged sentences

Residential real estate

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

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Credit 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 June 30, 2021 and December 31, 2020 (dollars in thousands):

June 30, 2021

30-59 Days Past Due

2 unchanged sentences

Total Past Due and Nonaccrual

(dollars in thousands)

Commercial real Estate

1 unchanged sentence

Residential real Estate

Included in the 90 days or greater past due and still accruing category as of June 30, 2021 were $ 16.4 million in purchased credit-deteriorated loans, net of fair value marks, which accrete income per the valuation at date of acquisition.

December 31, 2020

3 unchanged sentences

Residential real estate

Included in the 90 days or greater past due and still accruing category as of December 31, 2020 are purchased credit-impaired loans, net of fair value marks, which accrete income per the valuation at date of acquisition.

The 90 days or greater past due and still accruing category as of December 31, 2020 were purchased credit-impaired loans, net of fair value marks, which accrete income per the valuation at date of acquisition.

CONNECTONE BANCORP, INC.

2 unchanged sentences

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

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 ACL that are allocated to each loan portfolio segment:

June 30, 2021

(dollars in thousands)

20 unchanged sentences

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.

Activity in the Company’s ACL for loans for the three months ended and six months ended June 30, 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

Three Months Ended June 30, 2021

(dollars in thousands)

Balance as of March 31, 2021

(Reversal of) provision for credit losses - loans

Balance as of June 30, 2021

Six Months Ended June 30, 2021

(dollars in thousands)

Balance as of December 31, 2020

1 unchanged sentence

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

Provision for (reversal of) credit losses - loans

Balance as of June 30, 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.

1 unchanged sentence

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

We recorded a reversal of credit losses for loans of $ 1.7 million and $ 7.0 million during the three and six months ended June 30, 2021, respectively, utilizing the CECL methodology, which was the result of an improved macroeconomic environment from January 1, 2021, the day of adoption.

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans and the Allowance for Credit Losses –

Three Months Ended June 30, 2020

(dollars in thousands)

Balance as of December 31, 2019

(Reversal of) provision for credit losses (loans)

Balance as of March 31, 2020

Provision for credit losses - loans

Balance as of June 30, 2020

Six Months Ended June 30, 2020

(dollars in thousands)

Balance as of December 31, 2019

Balance as of June 30, 2020

CONNECTONE BANCORP, INC.

8 unchanged sentences

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

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 June 30, 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 June 30, 2021, TDRs totaled $ 62.4 million, of which $ 29.4 million were on nonaccrual status and $ 33.0 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 $ 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:

The Company has allocated $ 9.2 million and $ 47 thousand of specific allowance related to TDRs for the six months ended June 30, 2021 and June 30, 2020, respectively.

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

Pre-Modification Outstanding

6 unchanged sentences

Commercial real estate

Commercial construction

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.

The ten loans modified as TDRs during the six months ended June 30, 2021 included nine (9) maturity extensions and, one commercial real estate loan which was a recast of a nonaccrual credit.

There were no loans modified as TDRs during the six months ended June 30, 2020.

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

2 unchanged sentences

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

Additionally, the statement allows for the Company to extend deferrals for an additional term at the option of the Company.

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

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

As of 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.

As of June 30, 2021, the Bank had 79 deferred loans totaling approximately $100 million, compared to 113 deferred loans totaling approximately $ 207 million as of December 31, 2020.

CONNECTONE BANCORP, INC.

2 unchanged sentences

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:

The following table sets forth the composition of these loans by loan segments as of June 30, 2021:

Number of Loans

2 unchanged sentences

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”

As of June 30, 2021, there were no deferred loans that were delinquent or on nonaccrual status.

As of June 30, 2021, $ 62.0 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.

2 unchanged sentences

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):

The following table presents the ACL for unfunded commitments for the three and six months ended June 30, 2021 (dollars in thousands):

Three Months Ended

March 31, 2021

Balance at beginning of period

June 30, 2021

Balance as of beginning of period

Provision for credit losses - unfunded commitments

Balance as of end of period

Six Months Ended

June 30, 2021

Balance as of beginning of period

Day 1 Effect of CECL

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

Balance at end of period

Reversal of credit losses - unfunded commitments

Balance as of 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

The following table summarizes the (reversal of) provision for credit losses for the three and six months ended June 30, 2021 (dollars in thousands):

Three Months Ended

June 30, 2021

Six Months Ended

June 30, 2021

(Reversal of) provision for credit losses - loans

1 unchanged sentence

(Reversal of) provision for credit losses

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 –

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 June 30, 2021 and December 31, 2020:

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.

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

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 June 30, 2021 and December 31, 2020 are as follows:

June 30, 2021

Fair Value Measurements at Reporting Date Using

41 unchanged sentences

Total liabilities

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.

There were no transfers between Level 1 and Level 2 during the six months ended June 30, 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 March 31, 2021 and 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 nonrecurring basis as of June 30, 2021 and December 31, 2020.

Loans Held-for-Sale :

14 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 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:

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 June 30, 2021 and December 31, 2020 are as follows:

Fair Value Measurements at Reporting Date Using

11 unchanged sentences

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.

Collateral dependent loans as of June 30, 2021 that required a valuation allowance were $ 40.0 million with a related valuation allowance of $ 20.6 million compared to $ 26.5 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 three months ended March 31, 2021 and for the year ended December 31, 2020:

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 six months ended June 30, 2021 and for the year ended December 31, 2020:

(dollars in thousands)

Beginning balance, December 31, 2020

Balance as of December 31, 2020

Principal paydowns

Ending balance, March 31, 2021

Balance as of June 30, 2021

(dollars in thousands)

Beginning balance, December 31, 2019

Balance as of December 31, 2019

Principal paydowns

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.

Balance as of 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 June 30, 2021 and December 31, 2020.

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

March 31, 2021

June 30, 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.

March 31, 2021

June 30, 2021

(dollars in thousands)

17 unchanged sentences

(dollars in thousands)

Range (weighted average)

Range (weighed average)

Impaired loans :

13 unchanged sentences

Fair Value Measurements and Fair Value of Financial Instruments –

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:

As of June 30, 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 June 30, 2021 and December 31, 2020:

Fair Value Measurements

(dollars in thousands)

March 31, 2021

June 30, 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, taking into account 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, considering the remaining terms of the agreements and the present creditworthiness of the counterparties.

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

12 unchanged sentences

Details about Accumulated Other

Amounts Reclassified from Accumulated

Affected Line item in the

Comprehensive Loss Components

Amounts Reclassified from Accumulated

Other Comprehensive Income (Loss)

Amounts Reclassified from Accumulated

Other Comprehensive Income (Loss)

Affected Line item in the

Statement Where Net Income is Presented

Three Months Ended

Six Months Ended

(dollars in thousands)

Sale of investment securities

Net losses on sale of securities available-for-

Net gains on sale of securities available-for-saleavailable Income tax expense

available for sale

sale Income tax benefit

Net interest income on swaps

1 unchanged sentence

Amortization of pension plan net

Other components of net periodic pension

Other components of net periodic pension expense

actuarial losses

expense Income tax benefit

Income tax benefit

Total reclassification

3 unchanged sentences

Comprehensive Income –

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

Accumulated other comprehensive income (loss) as of June 30, 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 March 31, 2021.

The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of June 30, 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 March 31, 2021 are approximately 353,841 .

Shares available for grant and issuance under the Plan as of June 30, 2021 are approximately 332,628 .

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

Restricted stock, options and restricted stock units typically have a three-year vesting period starting one year after the date of grant with one-third vesting each year.

Restricted stock, options and restricted stock units typically have a three-year vesting period starting one year after the date of grant with one-third vesting each year or upon a change in control.

The options generally expire ten years from the date of grant.

Restricted stock granted to new employees and board members may be granted with shorter vesting periods.

Grants of performance units typically have a cliff vesting after three years or upon a change of control.

Grants of performance units typically have a cliff vesting after three years or upon a change in control.

All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the awards vesting.

3 unchanged sentences

Forfeiture rates are not estimated but are recorded as incurred.

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:

Stock-based compensation expense for the three and six months ended June 30, 2021 was $ 1.0 million and $2.0 million, respectively.

Stock-based compensation expense for the three and six months ended June 30, 2020 was $ 0.7 million and $1.2 million, respectively.

Activity in the Company’s options for the six months ended June 30, 2021 was as follows:

Intrinsic Value

1 unchanged sentence

Forfeited/cancelled/expired

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.

Outstanding as of June 30, 2021

Exercisable as of June 30, 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 June 30, 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 June 30, 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 three months ended March 31, 2021 was as follows:

Activity in the Company’s restricted shares for the six months ended June 30, 2021 was as follows:

Nonvested as of December 31, 2020

Forfeited/cancelled/expired

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.

Nonvested June 30, 2021

As of June 30, 2021, there was approximately $ 1.8 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 1.4 years.

4 unchanged sentences

Vested shares

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.

Unearned as of June 30, 2021

As of June 30, 2021, the specific number of shares related to performance units that were expected to vest was 173,576, 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 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.

As of June 30, 2021 the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 233,638.

During the six months ended June 30, 2021, 29,421 shares vested.

A total of 14,710 shares were netted from the vested shares to satisfy employee tax obligations.

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.

The net shares issued from vesting of performance units during the six months ended June 30, 2021 were 14,711 shares.

As of June 30, 2021, compensation cost of approximately $ 1.7 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.8 years.

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

2 unchanged sentences

Vested shares

Unearned as of March 31, 2021

Unearned as of June 30, 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 three months ended March 31, 2021, 68,916 shares vested.

During the six months ended June 30, 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 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.

The net shares issued from vesting of restricted stock units during the six months ended June 30, 2021 were 34,458 shares.

As of June 30, 2021, compensation cost of approximately $ 2.0 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 2.1 years.

CONNECTONE BANCORP, INC.

15 unchanged sentences

Total periodic pension income

Six 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

Other components of net periodic pension expense

Total periodic pension income

Contributions

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

The Company did not contribute to the Pension Trust during the six months ended June 30, 2021.

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

1 unchanged sentence

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 FHLB borrowings and weighted average interest rates are summarized below:

March 31, 2021

June 30, 2021

December 31, 2020

15 unchanged sentences

All FHLB advances are fixed rates.

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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The advances as of June 30, 2021 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 June 30, 2021 the Company had remaining borrowing capacity of approximately $ 1.2 billion at FHLB.

Subordinated Debentures

3 unchanged sentences

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.

The rate as of June 30, 2021 was 3.04 %.

The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of June 30, 2021 and December 31, 2020.

Issuance Date

4 unchanged sentences

Floating 3-month LIBOR + 285 Basis Points

Subordinated Debentures –

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

10 unchanged sentences

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

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Offsetting Assets and Liabilities

Certain financial instrument-related assets and liabilities may, under GAAP, be offset on the consolidated statements of condition because they are subject to master netting agreements or similar agreements, although the Company has elected to disclose such arrangements on a gross basis on its consolidated financial statements.

The Company enters into interest rate swap agreements with financial institution counterparties.

For additional detail regarding interest rate swap agreements refer to Note 4 within this section.

In the event of default on, or termination of, any one contract, both parties have the right to net settle multiple contracts.

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 March 31, 2021 and December 31, 2020:

Gross Amounts Not Offset

Gross Amounts

Offset in the

Presented in the

(dollars in thousands)

March 31, 2021

Interest rate swaps

December 31, 2020

Interest rate swaps

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 March 31, 2021 and December 31, 2020.

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

Cautionary Statement Concerning Forward-Looking Statements

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties.

This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp Inc.

and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,”

“expects,”

“anticipates,”

“plans,”

“trend,”

“objective,”

“continue,”

“remain,”

“pattern”

or similar expressions or future or conditional verbs such as “will,”

“would,”

“should,”

“could,”

“might,”

“can,”

“may”

or similar expressions.

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements.

Factors that might cause such a difference include, but are not limited to:

(1) competitive pressures among depository institutions may increase significantly;

(2) changes in the interest rate environment may reduce interest margins;

(3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period;

(4) general economic conditions may be less favorable than expected;

(5) political developments, sovereign debt problems, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions;

(6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp is engaged;

(7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp;

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

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

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

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

of ConnectOne Bancorp’s Annual Report on Form 10-K as amended and updated in ConnectOne Bancorp’s other filings with the Securities and Exchange Commission.

These documents are available free of charge at the Commission’s website at http://www.sec.gov and/or from ConnectOne Bancorp, Inc.

Critical Accounting Policies and Estimates

The accounting and reporting policies followed by ConnectOne Bancorp, Inc.

and its subsidiaries (collectively, the “Company”) conform, in all material respects, to GAAP.

In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the consolidated statements of income.

Actual results could differ significantly from those estimates.

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

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

Additional information on these policies is provided below.

Allowance for Credit Losses and Related Provision :

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

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

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

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

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

ability to pay.

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

Loss estimates for specified problem loans are also detailed.

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

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

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

Business Combinations :

We account for business combinations under the acquisition method of accounting.

Using this method, assets acquired, liabilities assumed and consideration paid are recorded at their estimated fair values as of the acquisition date.

The application of this method of accounting requires the use of significant estimates and assumptions.

The application of the acquisition method of accounting usually results in the recognition of goodwill and a core deposit intangible (if the acquiree has deposits).

The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired, including any identifiable intangibles, if applicable.

Goodwill is not amortized for book purposes;

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

The assets acquired and liabilities assumed and consideration paid in the acquisition are 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.

Our estimates are based upon assumptions that we believe to be reasonable and the Company may use an outside service provider to assist with the valuations.

The Company adopted the provisions of FASB ASC 350-10, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but rather tested for impairment annually or more frequently if impairment indicators arise.

The Company performs an annual goodwill impairment test in the fourth quarter of each year, or more often if events or circumstances warrant.

We will continue to monitor and evaluate the impact of COVID-19 and its impact on our market capitalization, overall economic conditions and any other potential triggering events that may indicate an impairment of goodwill in the future.

In the event we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings.

Such a charge would have no impact on tangible capital or our regulatory capital ratios.

Income Taxes :

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

Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns.

Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of operations.

Note 11 of the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2020 includes additional discussion on the accounting for income taxes.

Impact of COVID-19

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

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

As 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.

PPP loans originated prior to June 5, 2020 have a two-year term, which may be extended to five years with the consent of the Company, and those originated on or after June 5, 2020 have a five year term, and the loans bear interest at 1%, along with an origination fee payable from the SBA to the Company.

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

As of 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 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 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 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 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.

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 March 31,

(dollars in thousands)

Interest-earning assets:

Securities (1) (2)

Total loans (2) (3) (4)

Federal funds sold and interest-bearing with banks

Restricted investment in bank stocks

Total interest-earning assets

Noninterest-earning assets:

Allowance for credit losses

Other noninterest-earning assets

Interest-bearing liabilities:

Interest-bearing deposits:

Time deposits

Other interest-bearing deposits

Total interest-bearing deposits

Subordinated debentures

Finance lease

Total interest-bearing liabilities

Demand deposits

Other liabilities

Total noninterest-bearing liabilities 

Stockholders’

Total liabilities and stockholders’

equity

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 and accretion of purchase accounting adjustments.

Total loans include 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.

Noninterest Income

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 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

Loan Portfolio

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

March 31, 2021

December 31, 2020

(dollars in thousands)

Commercial (1)

Commercial real estate

Commercial construction

Residential real estate

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.

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”

under the Private Securities Litigation Reform Act of 1995.

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

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

Three Months Ended

(dollars in thousands)

Average loans receivable at end of period

Analysis of the ACL:

Balance - beginning of quarter

CECL Day 1 Adjustment

Balance –

beginning of quarter (as adjusted)

Total charge-offs

Total recoveries

Net recoveries (charge-offs)

(Reversal of) provision for credit losses (loans)

Balance - end of period

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

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 credit losses at all times.

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

When a loan is placed on nonaccrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income.

Payments received on nonaccrual loans are generally applied against principal.

A loan may be restored to an accruing basis when all past due amounts have been collected.

Loans past due 90 days or more which are both well-secured and in the process of collection may remain on an accrual basis.

Nonperforming assets include nonaccrual loans and other real estate owned.

Nonaccrual loans represent loans on which interest accruals have been suspended.

In general, it is the policy of management to consider the charge-off of uncollectible amounts of loans at the point they become past due 90 days.

Performing troubled debt restructured loans represent loans to borrowers experiencing financial difficulties on which a concession was granted, such as a reduction in interest rate below the current market rate for new debt with similar risks or modified repayment terms, and are performing under the restructured terms.

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

(dollars in thousands)

Nonaccrual loans

Total nonperforming assets (1)

Performing TDRs

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

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 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 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

The principal objective of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts;

determine the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements;

establish prudent asset concentration guidelines;

and manage the risk consistent with Board approved guidelines.

We seek to reduce the vulnerability of our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”).

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

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

As of 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 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 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%.

An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points.

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

Our EVE as of 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 March 31, 2021.

Interest Rates

Estimated Change in

Interest Rates

Estimated Change in NII

(basis points)

Estimates of Fair Value

The estimation of fair value is significant to a number of the Company’s assets, including loans held-for-sale and securities available-for-sale.

These are all recorded at either fair value or the lower of cost or fair value.

Fair values are volatile and may be influenced by a number of factors.

Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates.

Fair values for most available-for-sale securities are based on quoted market prices.

If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors.

These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.

Changes in assumptions could significantly affect the estimates.

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto presented elsewhere herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation.

The impact of inflation is reflected in the increased cost of operations;

unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary.

As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation.

Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Liquidity is a measure of a bank’s ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner.

Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations.

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

As of 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 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 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 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.

March 31, 2021

December 31, 2020

(dollars in thousands)

Demand, noninterest-bearing

Demand, interest-bearing

Total deposits

Subordinated Debentures

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

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

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

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

The rate as of 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.

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

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

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

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.

Stockholders’

The Company’s stockholders’

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 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 $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.

(dollars in thousands, except for share and per

Common equity

intangible assets

Tangible common stockholders’

intangible assets

Tangible assets

Common stock outstanding at period end

Tangible common equity ratio (1)

Book value per common share

intangible assets

Tangible book value per common share

Tangible common equity ratio is a non-GAAP measure.

Regulatory Capital and Capital Adequacy

The maintenance of a solid capital foundation is a primary goal for the Company.

Accordingly, capital plans, stock repurchases and dividend policies are monitored on an ongoing basis.

The Company’s objective with respect to the capital planning process is to effectively balance the retention of capital to support future growth with the goal of providing stockholders with an attractive long-term return on their investment.

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

The following is a summary of regulatory capital amounts and ratios as of 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)

Leverage (Tier 1) capital

Risk-based Capital:

Common Equity Tier 1

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

Risk-based Capital:

Common Equity Tier 1

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.

Qualitative and Quantitative Disclosures about Market Risks

Interest rate risk management is our primary market risk.

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

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

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