What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-06 · 333 added, 317 removed, 378 unchanged (63% of the section changed)

2 unchanged sentences

with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and

financial condition as of June 30, 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.

financial condition as of September 30, 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

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Financial Statements.

Business Combinations :

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.

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.

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

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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

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.

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payment for an initial period of time ranging from 30 to 120 days.

As of June 30, 2021, the Company has 79 deferred loans with a total

outstanding loan balance of $100.0 million.

As of September 30, 2021, the Company has 10 deferred loans with a

total outstanding loan balance of $10.2 million.

As provided for under the CARES Act, these short-term deferrals are not considered troubled

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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 June 30, 2021, PPP loans were

$326.8 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 June 30, 2021.

Should those circumstances

change, the Company could be required to establish additional provisions for credit loss expense charged to earnings.

PPP loans originated prior to September 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 September 5, 2020 have a five-year

term, and the loans bear interest at 1%, along with an origination fee payable from the SBA to the Company.

The Company believes that

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

As of September 30, 2021,

PPP loans were $177.8 million.

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

government and, as such, the Company has not included the PPP loans in calculation of the ACL as of September 30, 2021.

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

As of September 30, 2021, remaining deferred and unrecognized PPP fees were $6.0 million.

We currently anticipate recognizing a majority

of this balance by December 31, 2022, reflecting the expected timing of PPP loan forgiveness granted by the Small Business Administration.

Operating Results Overview

Net income for the three months ended June 30, 2021

was $32.2 million, compared to $14.8 million for the comparable three-month period ended June 30, 2020.

The Company’s diluted earnings

per share were $0.81 for the three months ended June 30, 2021, compared with diluted earnings per share of $0.37 for the comparable three-month

period ended June 30, 2020.

The increase in net income and diluted earnings per share was attributable to a decrease in provision for

credit losses of $16.6 million, a decrease in noninterest expenses of $6.8 million, and an increase in net interest income of $2.2 million,

offset by an increase in income tax expense of $8.1 million.

The decrease in provision for credit losses was due to the impact of an improved

Net income for the three months

ended September 30, 2021 was $32.1 million, compared to $24.8 million for the three-month period ended September 30, 2020.

The Company’s

diluted earnings per share were $0.80 for the three months ended September 30, 2021, compared with diluted earnings per share of $0.62

for the three-month period ended September 30, 2020.

The increase in net income and diluted earnings per share was attributable

to an increase in net interest income of $7.7 million, a decrease in provision for credit losses of $3.9 million, and an increase in noninterest

income of $0.5 million, partially offset by an increase in noninterest expenses of $1.7 million and an increase in income tax expense

of $3.1 million.

The decrease in provision for credit losses, to $1.1 million, was due to the impact of an improved

economic outlook on the current expected credit losses (“CECL”) accounting standard, compared with a $5.0 million provision

in the second quarter of 2020.

Net income for the six months ended June 30, 2021 was

$65.2 million compared to $20.9 million for the comparable six-month period ended June 30, 2020.

The Company’s diluted earnings

per share were $1.63 for the six months ended June 30, 2021, compared with diluted earnings per share of $0.52 for the comparable six-month

period ended June 30, 2020.

The increase in net income and diluted earnings per share was primarily attributable to a decrease in provision

for credit losses of $38.4 million, a decrease in noninterest expenses of $15.4 million, and an increase in net interest income of $8.1

million, offset by an increase in income tax expense of $18.0 million.

The decrease in provision for loan losses was due to the impact

of an improved economic outlook on the CECL accounting standard, compared with a $31.0 million provision in the six months ended June

in the third quarter of 2020.

Net income for the nine months ended September 30, 2021

was $97.3 million compared to $45.6 million for the comparable nine-month period ended September 30, 2020.

The Company’s diluted

earnings per share were $2.43 for the nine months ended September 30, 2021, compared with diluted earnings per share of $1.15 for the

comparable nine-month period ended September 30, 2020.

The increase in net income and diluted earnings per share were primarily attributable

to an increase in net interest income of $15.8 million, a decrease in provision for credit losses of $42.3 million, a decrease in noninterest

expenses of $13.7 million and an increase in noninterest income of $1.0 million, partially offset by an increase in income tax expense

of $21.1 million.

The $6.3 million reversal of provision for loan losses was due to the impact of an improved economic outlook on the

CECL accounting standard, compared with a $36.0 million provision in the nine months ended September 30, 2020, which reflected the impact

of the pandemic estimated under the incurred loss method.

Net Interest Income and Margin

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

taxable equivalent net interest income for the three months ended September 30, 2021 increased by $7.8 million, or 12.7%, from the comparable

three-month period ended September 30, 2020.

The increase from the third quarter of 2020 resulted primarily from a 24 basis-point widening

of the net interest margin to 3.73% from 3.49%, and an increase of 5.2% in average interest-earning assets.

The widening of the

net interest margin resulted from a 60 basis-point reduction in the cost of interest-bearing liabilities, partially offset by 24 basis-points

reduction in the yield on average interest-earning assets.

Fully taxable equivalent net

interest income for the three months ended June 30, 2021 increased by $2.2 million, or 3.5%, from the comparable three-month period ended

June 30, 2020.

The increase from the second quarter of 2020 resulted primarily from a 16 basis-point widening of the net interest margin

to 3.60% from 3.44%, offset by a 1.5% decrease in average interest-earning assets, largely due to higher levels of PPP originations during

the second quarter of 2020.

The widening of the net interest margin resulted from a 53 basis-point reduction in the cost of interest-bearing

liabilities, partially offset by a 27 basis-point reduction in the yield on average interest-earning assets.

Fully taxable equivalent net interest income

for the six months ended June 30, 2021 increased by $8.0 million, or 6.8%, from the comparable six-month period ended June 30, 2020, resulting

from an increase in average interest-earning assets of 2.4%, largely due to PPP originations, and a 16 basis-point widening of the net

interest margin to 3.58% from 3.42%.

The widening of the net interest margin resulted from a 64 basis-point reduction in the cost of interest-bearing

liabilities, partially offset by a 37 basis-point reduction in the yield on average interest-earning assets.

The following tables, “Average Statements of

Condition with Interest and Average Rates”, present for the three and six months ended June 30, 2021 and 2020, the Company’s

average assets, liabilities and stockholders’ equity.

The Company’s net interest income, net interest spread and net interest

margin are also reflected.

interest income for the nine months ended September 30, 2021 increased by $15.8 million, or 8.8%, from the comparable nine-month period

ended September 30, 2020, resulting from an increase in average interest-earning assets of 3.3%, largely due to PPP originations, and

a 19 basis-point widening of the net interest margin to 3.63% from 3.44%.

The widening of the net interest margin resulted from a 62 basis-point

reduction in the cost of interest-bearing liabilities, partially offset by a 33 basis-point reduction in the yield on average interest-earning

The following tables, “Average Statements of Condition

with Interest and Average Rates”, present for the three and nine months ended September 30, 2021 and 2020, the Company’s average

assets, liabilities and stockholders’ equity.

The Company’s net interest income, net interest spread and net interest margin

are also reflected.

Average Statements of Condition with Interest and

Average Rates

Three Months Ended June

Three Months Ended September

(dollars in thousands)

Interest-earning assets:

securities (1) (2)

Investment securities (1)

Total loans (2) (3) (4)

Federal funds sold and interest-bearing

Restricted investment in bank stocks

Total interest-earning assets

Restricted investment in bank

interest-earning assets

Allowance for credit losses

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Time deposits

Other interest-bearing deposits

Total interest-bearing deposits

Subordinated debentures, net of capitalized costs

Other interest-bearing

interest-bearing deposits

Subordinated debentures, net

of capitalized costs

Capital lease obligation

Total interest-bearing liabilities

Noninterest-bearing demand deposits

interest-bearing liabilities

Noninterest-bearing demand

Other liabilities

Total noninterest-bearing liabilities

noninterest-bearing liabilities

Stockholders’ equity

Total liabilities and stockholders’

Total liabilities

and stockholders’ equity

Net interest income (tax-equivalent basis)

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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.

Average balances are based on amortized

cost and include equity securities.

Interest income is presented on a tax-equivalent basis

using an assumed tax rate of 21%.

Includes loan fee income and

accretion of purchase accounting adjustments.

Total loans include loans held-for-sale and nonaccrual

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.

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Average Rates

Six Months Ended June

Nine Months Ended September

(dollars in thousands)

Interest-earning assets:

securities (1) (2)

Investment securities (1)

Total loans (2) (3) (4)

Federal funds sold and interest-bearing

Restricted investment in bank stocks

Total interest-earning assets

Federal funds sold and interest-bearing deposits

Restricted investment in bank

interest-earning assets

Allowance for credit losses

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Time deposits

Other interest-bearing deposits

Total interest-bearing deposits

Subordinated debentures, net of capitalized costs

Other interest-bearing

interest-bearing deposits

Subordinated debentures, net

of capitalized costs

Capital lease obligation

Total interest-bearing liabilities

Noninterest-bearing demand deposits

interest-bearing liabilities

Noninterest-bearing demand

Other liabilities

Total noninterest-bearing liabilities

noninterest-bearing liabilities

Stockholders’ equity

Total liabilities and stockholders’

Total liabilities

and stockholders’ equity

Net interest income (tax-equivalent basis)

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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.

Average balances are based on amortized

cost and include equity securities.

Interest income is presented on a tax-equivalent basis

using an assumed tax rate of 21%.

Includes loan fee income and

accretion of purchase accounting adjustments.

Total loans include loans held-for-sale and nonaccrual

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 $4.5 million for

the three months ended June 30, 2021, compared with $4.6 million for the comparable three-month period ended June 30, 2020.

noninterest income for the three months ended June 30, 2021 and June 30, 2020 were $0.7 million and $2.3 million, respectively, of PPP

loan referral fee income generated by BoeFly.

Also included in noninterest income for the three months ended June 30, 2021 was a $0.2

million gain on sale/redemption of investment securities.

Excluding these items, noninterest income increased $1.2 million when compared

to the comparable three-month period ended June 30, 2020.

The increase was primarily attributable to increases in net gains on loans held-for-sale

of $0.6 million and increases in deposit, loan and other income of $0.6 million, which includes a $0.3 million increase in BoeFly core

Noninterest income totaled $4.0 million for the

three months ended September 30, 2021, compared with $3.5 million for the comparable three-month period ended September 30, 2020.

increase of $0.5 million in noninterest income when compared to the third quarter of 2020 was attributable to increases in sale of loans

held-for-sale of $0.5 million and deposit, loan and other income of $0.4 million, partially offset by a decrease in BOLI of $0.3 million

and a net loss on equity securities of $0.1 million.

Noninterest income totaled $11.9 million for

the six months ended June 30, 2021, compared with $7.5 million for the comparable six-month period ended June 30, 2020.

Included in noninterest

income for the six months ended June 30, 2021 and June 30, 2020 were $0.7 million and $2.3 million, respectively, of PPP loan referral

fee income generated by BoeFly.

Also included in noninterest income for the six months ended June 30, 2021 was $0.7 million on a gain

on sale of branches and a $0.2 million gain on sale/redemption of investment securities.

Excluding these items, noninterest income increased

$1.1 million when compared to the comparable six-month period ended June 30, 2020.

The increase was primarily attributable to increases

in net gains on loans held-for-sale of $0.9 million, increases in deposit, loan and other income of $0.4 million, and an increase in income

on bank owned life insurance of $0.2 million, offset by a decrease in net gains on equity securities of $0.4 million.

the nine months ended September 30, 2021, compared with $11.0 million for the comparable nine-month period ended September 30, 2020.

in noninterest income for the nine months ended September 30, 2021 and September 30, 2020 were $0.9 million and $2.3 million, respectively,

of PPP loan referral fee income generated by BoeFly.

Also included in noninterest income for the nine months ended September 30, 2021

was $0.7 million on a gain on sale of branches and a $0.2 million gain on sale/redemption of investment securities.

Excluding these items,

noninterest income increased by $1.8 million when compared to the comparable nine-month period ended September 30, 2020.

was primarily attributable to an increase in net gains on sale of loans held-for-sale of $1.4 million and an increase in deposit, loan

and other income of $1.0 million, partially offset by decreases in BOLI income of $0.2 million and an increase in net losses on equity

securities of $0.5 million.

Noninterest Expenses

Noninterest expenses totaled $26.3 million for the

three months ended June 30, 2021, compared with $33.1 million for the comparable three-month period ended June 30, 2020.

Included in noninterest

expenses for the three months ended June 30, 2020 were $5.1 million in merger and restructuring expenses and $2.3 million in expenses

related to the BoeFly acquisition.

Excluding these items, noninterest expenses increased $0.7 million when compared to the comparable

three-month period ended June 30, 2020.

The increase was primarily attributable to increases in salaries and employee benefits of $0.8

million, increases in professional and consulting expenses of $0.4 million and increases in other expenses of $0.2 million, partially

offset by decreases in FDIC insurance expense of $0.5 million, decreases in marketing and advertising of $0.1 million and decreases in

amortization of core deposit intangibles of $0.1 million.

Noninterest expenses totaled $52.7 million for the

six months ended June 30, 2021, compared with $68.1 million for the comparable six-month period ended June 30, 2020.

Included in noninterest

expenses for the six months ended June 30, 2020 were $14.6 million in merger and restructuring expenses and $2.3 million in expenses related

to the BoeFly acquisition.

Excluding these items, noninterest expenses increased $1.6 million when compared to the comparable six-month

period ended June 30, 2020.

The increase was primarily attributable to increases in salaries and employee benefits of $1.8 million and

increases in professional and consulting expenses of $0.8 million, partially offset by decreases in FDIC insurance expense of $0.4 million,

decreases in amortization of core deposit intangibles of $0.3 million and decreases in marketing and advertising of $0.2 million.

Income tax expense was $10.7 million for the

three months ended June 30, 2021, compared to $2.5 million for the comparable three-month period ended June 30, 2020.

The increase in

income tax expense was the result of higher income before taxes.

The effective tax rate for the three months ended June 30, 2021 and June

30, 2020 was 24.8% and 14.5%, respectively.

The higher effective tax rate during the second quarter 2021 when compared to the second quarter

of 2020 resulted from a lower proportion of income from non-taxable sources.

Income tax expense was $21.5 million for the

six months ended June 30, 2021, compared to $3.6 million for comparable six-month period ended June 30, 2020.

The increase in income tax

expense was the result of higher income before taxes.

The effective tax rate for the six months ended June 30, 2021 was 24.8% versus 14.6%

for the prior-year period.

The higher effective tax rate during the first half of 2021 when compared to the first half of 2020 resulted

from a lower proportion of income from non-taxable sources.

Noninterest expenses totaled $28.2 million for the three

months ended September 30, 2021, compared with $26.5 million for the comparable three-month period ended September 30, 2020.

expenses increased $1.7 million when compared to the comparable three-month period ended September 30, 2020.

The increase was primarily

attributable to increases in salaries and employee benefits of $1.6 million, other expenses of $1.2 million, professional and consulting

expenses of $0.3 million, marketing and advertising $0.1 million and data processing expenses of $0.1 million, partially offset by decreases

in occupancy and equipment expenses of $0.9 million, FDIC insurance expense of $0.6 million and amortization of core deposit intangibles

of $0.1 million.

Noninterest expenses totaled $80.9 million for the nine

months ended September 30, 2021, compared with $94.6 million for the comparable nine-month period ended September 30, 2020.

noninterest expenses for the nine months ended September 30, 2020 were $14.6 million in merger and restructuring expenses and $2.3 million

in expenses related to the BoeFly acquisition.

Excluding these items, noninterest expenses increased $3.3 million when compared to the

comparable nine-month period ended September 30, 2020.

The increase was primarily attributable to increases in salaries and employee benefits

of $3.5 million, other expenses of $1.5 million, professional and consulting expenses of $1.1 million and data processing expenses of

$0.2 million, partially offset by decreases in occupancy and equipment expense of $1.3 million, FDIC insurance expense of $1.0 million,

amortization of core deposit intangibles of $0.4 million and marketing and advertising expense of $0.1 million.

tax expense was $10.9 million for the three months ended September 30, 2021, compared to $7.8 million for the comparable three-month period

ended September 30, 2020.

The increase in income tax expense was the result of higher income before taxes.

The effective tax rate for

the three months ended September 30, 2021 and September 30, 2020 was 25.3% and 23.9%, respectively.

higher effective tax rate during the third quarter 2021 when compared to the third quarter of 2020 resulted from a lower proportion of

income from non-taxable sources.

Income tax expense was $32.4 million for the nine months

ended September 30, 2021, compared to $11.3 million for comparable nine-month period ended September 30, 2020.

The increase in income

tax expense was the result of higher income before taxes.

The effective tax rate for the nine months ended September 30, 2021 was 25.0%

versus 19.9% for the prior-year period.

The higher effective tax rate during the third quarter of

2021 when compared to the third quarter of 2020 resulted from a lower proportion of income from non-taxable sources.

Financial Condition

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loan portfolio, excluding loans held-for-sale and unearned net origination fees and costs, by loan segment at the periods indicated.

June 30, 2021

December 31, 2020

(dollars in thousands)

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Residential real estate

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, gross loans totaled $6.4 billion,

in commercial loans as of September 30, 2021 and December 31, 2020 were PPP loans of $177.8 million and $397.5 million, respectively.

As of September 30, 2021, gross loans totaled $6.6 billion,

an increase of $340.2 million, or 5.4%, as compared to December 31, 2020.

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accounting standard.

As of June 30, 2021, the Company’s ACL for loans was $78.7 million, a decrease of $0.5 million from $79.2 million

December 31, 2020.

The decrease was attributable to a release of credit losses of approximately $7.0 million, offset by an increase in

provision of $6.6 million resulting from the “Day 1” effect of the adoption of the CECL accounting.

The (reversal of) provision for credit losses, which

includes provision for unfunded commitments, for the three and six months ended June 30, 2021 was $(1.6) million and $(7.4) million, respectively,

compared to $15.0 million and $31.0 million, for the three and six months ended June 30, 2020, respectively.

The decrease in provision

for credit losses was the result of an improved macro-economic outlook as of June 30, 2021 when compared to January 1, 2021, the day the

Company adopted CECL.

The prior year provision in the three and six months ended June 30, 2020, was primarily due to the significant economic

slowdown due to the COVID 19 pandemic.

There were $0.2 million and $0.1 million in net charge-offs

for the three and six months ended June 30, 2021, compared with $0.4 million and $0.6 million in net charge-offs for the three and six

months ended June 30, 2020 respectively.

The ACL as a percentage of loans receivable amounted to 1.23% as of June 30, 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 1.29% as of June 30, 2021, compared to 1.36% as of December 31, 2020 allowance for loan losses.

PPP loans do not have

allowance for credit losses attributable to them, as they are fully guaranteed by the SBA.

As of September 30, 2021, the Company’s ACL for loans was $78.0 million, a decrease of $1.2 million from $79.2

million December 31, 2020.

The decrease was attributable to a release of credit losses of approximately $6.0 million, net charge-offs

of $1.8 million, partially offset by a provision of $6.6 million resulting from the “Day 1” effect of the adoption of the

CECL accounting.

The provision for (reversal of) credit losses, which

includes provision for unfunded commitments, for the three and nine months ended September 30, 2021 was $1.1 million and $(6.3) million,

respectively, compared to $5.0 million and $36.0 million, for the three and nine months ended September 30, 2020, respectively.

in provision for credit losses was the result of an improved macroeconomic outlook as of September 30, 2021 when compared to January 1,

2021, the day the Company adopted CECL.

The prior year provision in the three and nine months ended September 30, 2020, was primarily

due to the significant economic slowdown due to the COVID-19 pandemic.

There were $1.6 million and $1.8 million in net loan

charge-offs during the three and nine months ended September 30, 2021, compared with $(0.5) million and $-0- in net loan recoveries during

the three and nine months ended September 30, 2020, respectively.

The current quarter included a $1.4 million charge-off of a commercial

real estate loan that previously had a specific credit reserve.

The ACL as a percentage of loans receivable was to 1.19% as of September

30, 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 is 1.22% as of September 30, 2021, compared to 1.36% as of December 31, 2020.

PPP loans do not have allowance

for credit losses attributable to them, as they are assumed to be fully guaranteed by the SBA.

The level of the ACL for the respective periods of 2021

2021 and allowance for loan losses for 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.

In management’s view, the level of the

ACL as of June 30, 2021 is adequate to cover expected credit losses inherent in the loan portfolio.

and allowance for loan losses for 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.

In management’s view, the level of the ACL

as of September 30, 2021 is adequate to cover expected credit losses inherent in the loan portfolio.

Management’s judgment regarding

2 unchanged sentences

in establishing the allowance.

Changes in the ACL are presented in the following

table for the periods indicated.

Changes in the ACL are presented in the following table

for the periods indicated.

Three Months Ended

September 30,

(dollars in thousands)

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Commercial real estate

Residential real estate

Total recoveries

Net recoveries (charge-offs)

(Reversal of) provision for credit losses (loans)

Net loan (charge-offs) recoveries

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

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

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

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Total recoveries

Net recoveries (charge-offs)

Net loan 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

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

The ACL for the prior periods was calculated based on the incurred loan loss model.

(1) The ACL for the prior periods was calculated based

on the incurred loan loss model.

Asset Quality

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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.

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

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.

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.

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,

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(“TDRs”) and loans past due 90 days or greater and still accruing:

September 30,

(dollars in thousands)

Nonaccrual loans

nonperforming assets (1)

Performing TDRs

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

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Nonperforming assets are defined as nonaccrual loans and OREO.

Nonaccrual loans to total

loans receivable

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

Nonperforming

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

During the nine months ended September 30, 2021, the

Bank designated approximately $40.7 million as TDRs.

The increase in that designation was mainly attributable to maturity extensions and

interest rate reductions in the commercial real estate segment.

The majority of these loans were previously on deferment, and were subsequently

designated TDRs once the deferral periods ended.

Investment Securities

As of June 30, 2021, the

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

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

For the three months ended June

30, 2021, average securities increased by $1.2 million to approximately $444.5 million, or 6.3% of average total interest-earning assets,

from approximately $443.3 million, or 6.2% of average interest-earning assets, for the comparable period in 2020.

As of June 30, 2021, net

unrealized gains on securities available-for-sale, which are carried as a component of accumulated other comprehensive income 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

As of September 30, 2021,

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

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

For the three months ended

September 30, 2021, average securities increased by $39.2 million to approximately $459.6 million, or 6.3% of average total interest-earning

assets, from approximately $420.4 million, or 6.0% of average interest-earning assets, for the comparable period in 2020.

As of September 30, 2021,

net unrealized gains on securities available-for-sale, which are carried as a component of accumulated other comprehensive income and

included in stockholders’ equity, net of tax, amounted to $1.5 million as compared with net unrealized gains of $7.9 million as

of December 31, 2020.

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

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

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 ACL for available-for-sale as of June 30, 2021.

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 ACL for available-for-sale as of September 30,

Interest Rate Sensitivity Analysis

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borrowings, and current market conditions and interest rates.

We currently utilize net

interest income (“NII”) simulation and economic value of equity (“EVE”) models to measure the potential impact

to the Bank of future changes in interest rates.

As of June 30, 2021 and December 31, 2020, the results of the models were within guidelines

We currently utilize net interest

income (“NII”) simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank

of future changes in interest rates.

As of September 30, 2021 and December 31, 2020, the results of the models were within guidelines

prescribed by our Board of Directors.

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Based on our model, which

was run as of June 30, 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 2.94%, while a 100 basis-point instantaneous decrease in interest rates would

decrease net interest income by 6.04%.

was run as of September 30, 2021, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general

level of interest rates would increase our net interest income by 3.23%, while a 100 basis-point instantaneous decrease in interest rates

would decrease net interest income by 5.80%.

As of December 31, 2020, we estimated that over the next one-year period a 200 basis-point

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Based on our model, which

was run as of June 30, 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 8.60%, while a 100 basis-point instantaneous decrease

in interest rates would decrease net interest income by 10.90%.

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

was run as of September 30, 2021, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous

increase in the general level of interest rates would increase our net interest income by 9.39%, while a 100 basis-point instantaneous

decrease in interest rates would decrease net interest income by 10.72%.

As of December 31, 2020, we estimated that over the next three

years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest

income by 3.89%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 8.56%.

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

Our EVE as of June 30, 2021, would

Our EVE as of September 30, 2021, would

decline by 0.61% with an instantaneous rate shock of up 200 basis points, and decrease by 1.30% with an instantaneous rate shock of down

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The following table illustrates

the most recent results for EVE and one-year NII sensitivity as of June 30, 2021.

the most recent results for EVE and one-year NII sensitivity as of September 30, 2021.

Change in EVE

Change in NII

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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 June 30, 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’

Liquidity is a measure of a bank’s ability

to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner.

Our principal sources of funds

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

While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments

are greatly influenced by general interest rates, economic conditions and competition.

As of September 30, 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 June 30, 2021, liquid assets (cash and

due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $724.1 million, which represented 9.4%

As of September 30, 2021, liquid assets (cash

and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $800.4 million, which represented

10.1% of total assets and 12.0% 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 June 30, 2021, had the ability to borrow $2.0 billion.

The Bank is a member of the Federal Home Loan Bank of

New York and, based on available qualified collateral as of September 30, 2021, had the ability to borrow $2.0 billion.

In addition, as

of June 30, 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 September 30, 2021, the Bank had in place borrowing capacity of $25.0 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 $3.1 million.

As of June 30, 2021, the Bank had aggregate available and unused credit of approximately $1.2 billion, which represents

As of September 30, 2021, the Bank had aggregate available and unused credit of approximately $1.2 billion, which represents

the aforementioned facilities totaling $2.0 billion net of $760.3 million in outstanding borrowings and letters of credit.

As of September

30, 2021, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.

Cash and cash equivalents totaled $413.2 million as

of June 30, 2021, increasing by $45.7 million from $303.8 million as of December 31, 2020.

Operating activities provided $119.5 million

Investing activities used $174.3 million in net cash, primarily reflecting an increase in loans and securities purchases.

Financing activities provided $100.5 million in net cash, primarily reflecting a net increase in deposits of $234.5 million and a decrease

in net borrowings of $72.5 million.

of September 30, 2021, increasing by $109.4 million from $303.8 million as of December 31, 2020.

Operating activities provided

$154.6 million in net cash.

Investing activities used $352.7 million in net cash, primarily reflecting an increase in loans.

activities provided $307.5 million in net cash, primarily reflecting a net increase in deposits of $440.9 million, net proceeds raised

from the issuance of preferred stock of $110.9 million and a decrease in net borrowings of $172.7 million.

The following table sets forth the composition of our

deposit base by the periods indicated.

June 30, 2021

December 31, 2020

(dollars in thousands)

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

as of June 30, 2021 was 3.04%.

During June 2020,

as of September 30, 2021 was 2.98%.

During September

2020, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020

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

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

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

The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding, September

15, 2025 or the date of earlier redemption, payable semi-annually in arrears on September 15 and December 15 of each year, commencing

December 15, 2020.

From and including September 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly

to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental

Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing

on September 15, 2025.

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

During January 2018, the Parent Corporation issued $75

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284 basis points.

During June 2015, the Parent Corporation issued $50

During September 2015, the Parent Corporation issued

$50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2015 Notes”).

As of December

2020, the 2015 Notes had a stated maturity of July 1, 2025, and bore 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.

31, 2020, the 2015 Notes had a stated maturity of July 1, 2025, and bore 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.

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The Company’s stockholders’ equity

was $965.0 million as of June 30, 2021, an increase of $49.7 million from December 31, 2020.

The increase in stockholders’ equity

was primarily attributable to retained earnings during the period.

As of June 30, 2021, the Company’s tangible common equity

was $1.1 billion as of September 30, 2021, an increase of $183.1 million from December 31, 2020.

In August 2021, the Company raised $110.9

million, net of estimated issuance expenses, from the issuance of $115 million in 5.25% fixed rate, non-cumulative, perpetual preferred

This issuance is primarily reason for the overall increase in stockholders’ equity, coupled with increases in retained earnings

of $82.0 million and additional paid-in capital of $2.0 million, partially offset by a decrease in accumulated other comprehensive income

of $3.8 million and an increase in treasury stock of $8.0 million.

As of September 30, 2021, the Company’s tangible common equity

ratio and tangible book value per share were 9.95% and $19.43, respectively.

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Total goodwill and other intangible assets were approximately $217.9

million and $219.3 million as of June 30, 2021 and December 31, 2020, respectively.

(dollars in thousands, except for

share and per

million as of September 30, 2021 and $219.3 million as of December 31, 2020.

September 30,

(dollars in thousands,

except for share and per share data)

Common equity

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Common stock outstanding as of period end

Tangible common

equity ratio (1)

Tangible common equity ratio (1)

Book value per common share

intangible assets

Tangible book value per common share

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.

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.

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 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 June 30, 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.

ConnectOne Bancorp, Inc.

and ratios as of September 30, 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.

Bancorp, Inc.

For Capital Adequacy

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Prompt Corrective Action

As of June 30, 2021

As of September 30, 2021

(dollars in thousands)

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Total risk-based capital

ConnectOne Bank

For Capital Adequacy

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Prompt Corrective Action

As of June 30, 2021

of September 30, 2021

(dollars in thousands)

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- not applicable

As of June 30, 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 2.67% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital

Ratio which was 3.57% above the minimum buffer ratio.

of September 30, 2021, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them.

lowest ratio as measured against the capital conservation buffers, at the Company was the CET1 Risk Based Ratio, which was 3.73% above

the minimum buffer ratio, and, at the Bank was the Total Risk Based Capital Ratio, which was 3.11% above the minimum buffer ratio.

Qualitative and Quantitative Disclosures

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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 2. Management’s Discussion and Analysis