ConnectOne Bancorp, Inc. 10-Q

Item 1. Financial Statements CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION     September 30,     December 31, (in thousands, except for share data)   2021     2020     (unaudited)           ASSETS                 Cash and due from banks   $ 49,626     $ 63,637   Interest-bearing deposits with banks     363,569       240,119   Cash and cash equivalents     413,195     303,756     Investment securities     462,884     487,955   Equity securities     13,700     13,387     Loans held-for-sale     5,596       4,710     Loans receivable     6,576,439       6,236,307   Less: Allowance for credit losses – loans     77,986       79,226   Net loans receivable     6,498,453       6,157,081     Investment in restricted stock, at cost     18,106       25,099   Bank premises and equipment, net     29,635       30,108   Accrued interest receivable     33,610       35,317   Bank owned life insurance     194,487       165,960   Right of use operating lease assets     11,002       16,159   Goodwill     208,372     208,372   Core deposit intangibles     9,480     10,977   Other assets     50,994       88,458   Total assets   $ 7,949,514     $ 7,547,339   LIABILITIES             Deposits:             Noninterest-bearing   $ 1,500,754     $ 1,339,108   Interest-bearing     4,897,584       4,620,116   Total deposits     6,398,338     5,959,224   Borrowings     253,225     425,954   Subordinated debentures, net     152,875     202,648   Operating lease liabilities 12,437 18,026 Other liabilities     34,206       26,177   Total liabilities     6,851,081       6,632,029     COMMITMENTS AND CONTINGENCIES               STOCKHOLDERS’ EQUITY             Preferred Stock, no par value;             $ 1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of September 30, 2021 and - 0 - shares as of December 31, 2020; outstanding 115,000 shares as of September 30, 2021 and - 0 - shares as of December 31, 2020     110,927     -   Common stock, no par value:             Authorized 100,000,000 shares; issued 42,550,530 shares as of September 30, 2021 and 42,444,031 shares as of December 31, 2020; outstanding 39,602,199 shares as of September 30, 2021 and 39,785,398 as of December 31, 2020     586,946     586,946   Additional paid-in capital     25,851     23,887   Retained earnings     413,996     331,951   Treasury stock, at cost 2,948,331 common shares as of September 30, 2021 and 2,658,633 as of December 31, 2020     ( 38,314 )   ( 30,271 ) Accumulated other comprehensive (loss) income     ( 973 )     2,797 Total stockholders’ equity     1,098,433       915,310   Total liabilities and stockholders’ equity   $ 7,949,514     $ 7,547,339   See accompanying notes to unaudited consolidated financial statements. 3 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except for per share data) 2021 2020 2021 2020 Interest income Interest and fees on loans $ 75,092   $ 74,755 $ 216,655   $ 223,488 Interest and dividends on investment securities:             Taxable   1,065   1,305   3,148   5,083 Tax-exempt   511   688   1,885   2,148 Dividends   245   426   764   1,268 Interest on federal funds sold and other short-term investments   113     47     246     625 Total interest income   77,026     77,221     222,698     232,612 Interest expense                 Deposits   5,478   11,947   19,487   42,756 Borrowings   3,303     4,725   10,794     13,236 Total interest expense   8,781     16,672   30,281     55,992 Net interest income   68,245   60,549     192,417   176,620 Provision for (reversal of) credit losses   1,100   5,000     ( 6,315 )   36,000 Net interest income after provision for credit losses   67,145     55,549     198,732     140,620 Noninterest income                 Deposit, loan and other income   1,702   1,278   5,092   5,777 Income on bank owned life insurance   1,278   1,598   3,527   3,693 Net gains on sale of loans held-for-sale   1,114   614   2,668   1,244 Gain on sale of branches   -   -   674   - Net (losses) gains on equity securities   ( 78 ) ( 7 )   ( 242 ) 215 Net gains on sales/redemption of investment securities   -     -   195     29 Total noninterest income   4,016     3,483   11,914     10,958 Noninterest expenses                     Salaries and employee benefits   16,807   15,144   47,790   44,266 Occupancy and equipment   2,656   3,566   8,876   10,193 FDIC insurance   525   1,105   2,040   3,054 Professional and consulting   2,217   1,926   6,290   5,173 Marketing and advertising   345   214   864   944 Data processing   1,541   1,470   4,680   4,529 Merger and restructuring expenses   -   -   -   14,640 Amortization of core deposit intangibles   483   627   1,498   1,931 Increase in value of acquisition price   -   -   -   2,333 Other components of net periodic pension expense   ( 67 ) ( 30 )   ( 201 ) ( 89 ) Other expenses   3,676   2,456   9,090   7,625 Total noninterest expenses   28,183     26,478   80,927     94,599 Income before income tax expense   42,978   32,554   129,719   56,979 Income tax expense   10,881     7,768   32,404     11,331 Net income $ 32,097   $ 24,786 $ 97,315   $ 45,648 Earnings per common share:             Basic $ 0.81   $ 0.62 $ 2.45   $ 1.15 Diluted   0.80   0.62   2.43   1.15 See accompanying notes to unaudited consolidated financial statements. 4 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)     Three Months Ended   Nine Months Ended     September 30,   September 30, (in thousands)   2021   2020   2021   2020 Net income   $ 32,097     $ 24,786     $ 97,315     $ 45,648                               Other comprehensive income (loss):                                                         Unrealized gains and losses:                             Unrealized holding (losses) gains on available-for-sale securities arising during the period     ( 3,228 )     703     ( 8,397 )     5,532 Tax effect     796     ( 160 )     2,160     ( 1,459 ) Net of tax     ( 2,432 )     543     ( 6,237 )     4,073                               Reclassification adjustment for realized gains included in net income     -     -     ( 195 )     ( 29 ) Tax effect     -       -       48       6 Net of tax     -     -     ( 147 )     ( 23 )                               Unrealized gains (losses) on cash flow hedges     1,890     ( 82 )     1,872     ( 3,397 ) Tax effect     ( 533 )     42       ( 529 )     955 Net of tax     1,357     ( 40 )     1,343     ( 2,442 )                               Reclassification adjustment for realized losses on cash flow hedges included in net income     328     631     1,543     942 Tax effect     ( 90 )     ( 196 )     ( 434 )     ( 265 ) Net of tax     238     435     1,109     677                               Reclassification adjustment for pension plan amortization included in net income     75       75       225       226 Tax effect     ( 21 )     ( 21 )     ( 63 )     ( 63 ) Net of tax     54       54       162       163                               Total other comprehensive (loss) income     ( 783 )     992     ( 3,770 )     2,448                               Total comprehensive income   $ 31,314     $ 25,778     $ 93,545     $ 48,096 See accompanying notes to unaudited consolidated financial statements. 5 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)     Nine Months Ended September 30, 2021   (dollars in thousands, except for per share data)   Preferred Stock   Common Stock   Additional Paid-In Capital   Retained Earnings   Treasury Stock   Accumulated Other Comprehensive (Loss) Income   Total Stockholders’ Equity   Balance as of December 31,   2020   $ -   $ 586,946   $ 23,887   $ 331,951     $ ( 30,271 )   $ 2,797     $ 915,310   Cumulative effect of change in accounting principle (see note 1b. “Authoritative Accounting Guidance Presentation”), net of tax     -     -     -     ( 2,925 )     -       -       ( 2,925 )   Balance as of January 1, 2021, as adjusted for changes in accounting principle     -     586,946     23,887     329,026       ( 30,271 )     2,797       912,385     Net income     -     -     -     97,315       -       -       97,315     Other comprehensive loss,  net of tax     -     -     -     -       -       ( 3,770 )     ( 3,770 )   Cash dividends declared on common stock  ($ 0.31 per share)     -     -     -     ( 12,345 )     -       -       ( 12,345 )   Exercise of stock options  ( 5,449 shares)     -     -     45     -       -       -       45     Restricted stock grants, net of forfeitures  ( 46,900 shares)     -     -     -     -       -       -       -     Stock grants ( 4,981 shares)     -     -     -     -       -       -       -     Net shares issued in satisfaction of restricted stock units earned ( 14,711 shares)     -     -     -     -       -       -       -     Net shares issued in satisfaction of performance units earned  ( 34,458 shares)     -     -     -     -       -       -       -     Share redemption for tax withholdings on performance units and restricted stock units earned     -     -     ( 1,283 )   -       -       -       ( 1,283 )   Repurchase of treasury stock ( 289,698 shares)     -     -     -     -       ( 8,043 )     -       ( 8,043 )   Proceeds from preferred stock issuance, net of costs ( 115,000 shares)     110,927     -     -     -       -     -       110,927   Stock-based compensation expense     -     -     3,202     -       -       -       3,202         Balance as of September 30,   2021   $ 110,927   $ 586,946   $ 25,851   $ 413,996     $ ( 38,314 )   $ ( 973 )   $ 1,098,433         Three Months Ended September 30, 2021           Accumulated     (dollars in thousands, except for per share data)   Preferred Stock   Common Stock   Additional Paid-In Capital   Retained Earnings   Treasury Stock   Other Comprehensive (Loss) Income   Total Stockholders’ Equity   Balance as of June 30, 2021 ​​   $ -   $ 586,946   $ 24,606     $ 386,280     $ ( 32,682 )   $ ( 190 )   $ 964,960     Net income     -     -     -       32,097       -       -       32,097     Other comprehensive loss, net of tax     -     -     -       -       -       ( 783 )     ( 783 )   Cash dividends declared on common stock ($ 0.11 per share)     -     -     -       ( 4,381 )     -       -       ( 4,381 )   Restricted stock grants, net of forfeitures ( 1,082 shares)     -     -     -       -     -       -       -   Stock grants ( 4,535 shares) - - - - - - - Repurchase of treasury stock ( 196,069 shares) - - - - ( 5,632 ) - ( 5,632 ) Proceeds from preferred stock issuance, net of costs ( 115,000 shares) 110,927 - - - - - 110,927 Stock-based compensation expense     -     -     1,245       -       -       -       1,245       Balance as of September 30,   2021   $ 110,927   $ 586,946   $ 25,851     $ 413,996     $ ( 38,314 )   $ ( 973 )   $ 1,098,433     6 Table of Contents (continued)     Nine Months Ended September 30, 2020 (dollars in thousands, except for per share data)   Preferred Stock   Common Stock   Additional Paid-In Capital   Retained Earnings   Treasury Stock   Accumulated Other Comprehensive (Loss) Income   Total Stockholders’ Equity Balance as of December 31,   2019   $ -   $ 468,571   $ 21,344   $ 271,782     $ ( 29,360 )   $ ( 1,147 )   $ 731,190   Net income     -     -     -     45,648       -       -       45,648   Other comprehensive income,  net of tax     -     -     -     -       -       2,448       2,448   Cash dividends declared on common stock  ($ 0.18 per share)     -     -     -     ( 7,537 )     -       -       ( 7,537 ) Exercise of stock options  ( 25,413 shares)     -     -     163     -       -       -       163   Restricted stock grants, net of forfeitures ( 68,531 shares)     -     -     -     -       -       -       -   Stock grants issued ( 1,340 shares)     -     -     -     -       -       -       -   Net shares issued in satisfaction of restricted stock units earned  ( 16,541 shares)     -     -     -     -       -       -       -   Net shares issued in satisfaction of performance units earned  ( 22,402 shares)     -     -     -     -       -       -       -   Share redemption for tax withholdings on performance units and restricted stock units earned     -     -     ( 639 )   -       -       -       ( 639 ) Repurchase of treasury stock ( 54,693 shares)     -     -     -     -       ( 911 )     -       ( 911 ) Stock issued ( 4,602,450 shares) in acquisition of Bancorp of New Jersey     -     118,375     -     -       -       -       118,375   Stock-based compensation expense     -     -     1,999     -       -       -       1,999     Balance as of September 30,   2020   $ -   $ 586,946   $ 22,867   $ 309,893     $ ( 30,271 )   $ 1,301     $ 890,736     Three Months Ended September 30, 2020 (dollars in thousands, except for per share data)   Preferred Stock   Common Stock   Additional Paid-In Capital   Retained Earnings   Treasury Stock   Accumulated Other Comprehensive (Loss) Income   Total Stockholders’ Equity   Balance as of June 30, 2020 ​ ​   $ -   $ 586,946   $ 22,069     $ 288,688     $ ( 30,271 )   $ 309     $ 867,741     Net income     -     -     -       24,786       -       -       24,786     Other comprehensive income, net of tax     -     -     -       -       -       992     992   Cash dividends declared on common stock ($ 0.09 per share)     -     -     -       ( 3,581 )     -       -       ( 3,581 )   Restricted stock grants, net of forfeitures ( 1,018 shares)     -     -     -       -     -       -       -   Stock-based compensation expense     -     -     798       -       -       -       798       Balance as of September 30,   2020   $ -   $ 586,946   $ 22,867     $ 309,893     $ ( 30,271 )   $ 1,301     $ 890,736     See accompanying notes to unaudited consolidated financial statements. 7 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)     Nine Months Ended     September 30, (dollars in thousands)   2021   2020 Cash flows from operating activities                 Net income   $ 97,315     $ 45,648   Adjustments to reconcile net income to net cash provided by operating activities:                 Depreciation and amortization of premises and equipment     2,832       3,102   (Reversal of) provision for credit losses     ( 6,315 )     36,000   Amortization of intangibles     1,498       1,931   Net accretion of loans     ( 4,130 )     ( 5,225 ) Accretion on bank premises     ( 61 )     ( 68 ) Accretion on deposits     ( 1,762 )     ( 3,568 ) Accretion on borrowings, net     ( 43 )     ( 139 ) Stock-based compensation     3,202       1,999   Gains on sales/redemptions of securities available-for-sale, net     ( 195 )     ( 29 ) Losses (gains) on equity securities, net     242     ( 215 ) Gain on sale of branches     ( 674 )     - Net losses on disposition of fixed assets     65     - Gains on sales of loans held-for-sale, net     ( 2,668 )     ( 1,244 ) Loans originated for resale     ( 43,676 )     ( 34,328 ) Proceeds from sale of loans held-for sale     57,674       51,367   Gain on sale of other real estate owned     ( 18 )     -   Increase in cash surrender value of bank owned life insurance     ( 3,527 )     ( 3,693 ) Amortization of premiums and accretion of discounts on securities available-for-sale, net     4,677       4,000   Amortization of subordinated debentures issuance costs     227       247   Decrease (increase) in accrued interest receivable     1,707     ( 10,467 ) Net change in operating leases     ( 734 )     2,071 Decrease in other assets     43,319       18,117   Increase (decrease) in other liabilities     5,689     ( 5,750 ) Net cash provided by operating activities     154,644       99,756     Cash flows from investing activities                 Investment securities available-for-sale:                 Purchases     ( 203,534 )     ( 222,062 ) Sales     -       19,624 Maturities, calls and principal repayments     215,531       175,729 Purchases of equity securities     ( 555 )     ( 2,000 ) Net redemptions of restricted investment in bank stocks     6,993     1,748 Net increase in loans     ( 345,098 )     ( 348,861 ) Purchases of bank owned life insurance     ( 25,000 )     ( 25,000 ) Purchases of premises and equipment     ( 2,473 )     ( 894 ) Payments on loans held-for-sale 32 204 Proceeds from life insurance death benefits - 978 Proceeds from sale of branches     1,087     - Proceeds from sale of other real estate owned     321       992 Cash and cash equivalents acquired in acquisition, net     -     87,391 Net cash used in investing activities     ( 352,696 )     ( 312,151 )   Cash flows from financing activities                 Net increase in deposits     440,876     249,404 (Repayment of) increase in subordinated debentures     ( 50,000 )     73,420 Advances of borrowings     100,000       1,476,489 Repayments of borrowings     ( 272,686 )     ( 1,520,160 ) Repurchase of common stock to treasury     ( 8,043 )     ( 911 ) Net proceeds from the issuance of preferred stock 110,927 - Cash dividends paid on common stock     ( 12,345 )     ( 10,735 ) Proceeds from exercise of stock options     45       163 Share redemption for tax withholdings on performance units and restricted stock units earned     ( 1,283 )     ( 639 ) Net cash provided by financing activities     307,491       267,031 Net change in cash and cash equivalents     109,439       54,636 Cash and cash equivalents at beginning of period     303,756       201,483   Cash and cash equivalents at end of period   $ 413,195     $ 256,119   8 Table of Contents (continued) Supplemental disclosures of cash flow information                 Cash payments for:                 Interest paid on deposits and borrowings   $ 32,664     $ 59,231   Income taxes     35,809     19,117       Supplemental disclosures of noncash activities                 Investing :                 Transfer of loans from held-for-investment to other real estate owned   $ 304     $ -   Transfer of loans from held-for-investment to held-for-sale   14,211       10,995   Transfer of loans from held-for-sale to held-for-investment   1,963       19,738       Business combinations :                 Fair value of assets acquired   $ -     $ 949,282 Fair value of liabilities assumed     -     852,729 See accompanying notes to unaudited consolidated financial statements. 9 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 1a. Nature of Operations, Principles of Consolidation and Risk and Uncertainties Nature of Operations ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Parent Corporation’s business currently consists of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”). The Bank’s subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a New Jersey investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), NJCB Spec-1, LLC (a New Jersey limited liability company), Port Jervis Holdings, LLC (a New Jersey limited liability company), BONJ Special Properties, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey financial technology company). The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its twenty-five other banking offices. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’ business, real estate rental and consumer wages. The preceding unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 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. Basis of Presentation The consolidated financial statements have been prepared in conformity with GAAP. Some items in the prior year consolidated financial statements were reclassified to conform to current presentation. Reclassifications had no effect on prior year net income or stockholders’ equity. Use of Estimates In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates. Risks and Uncertainties As previously disclosed, on March 11, 2020 the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to impact the United States and the world. On March 27, 2020, the  Coronavirus Aid, Relief, and   Economic Security Act  (CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The COVID-19 pandemic has adversely affected, and continues to adversely affect economic activity globally, nationally and locally. 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, 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 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 credit losses on loans, fair value of financial instruments, impairment of goodwill and other intangible assets and income taxes. 10 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 1b. Authoritative Accounting Guidance Adoption of New Accounting Standards in 2021 Effective January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) 2016-13 “ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaced the prior incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL” or the “CECL Standard”). The measurement of expected credit losses under the CECL Standard is applicable to financial assets measured at amortized cost, including portfolio loans and investment securities classified as held-to-maturity (“HTM”). It also applies to off-balance sheet credit exposures including loan commitments, standby letters of credit, financial guarantees and other similar instruments. In addition, the CECL Standard changes the accounting for investment securities classified as available-for-sale (“AFS”), including a requirement that estimated credit losses on AFS securities be presented as an allowance rather than as a direct write-down of the carrying balance of securities which we do not intend to sell, or believe that it is more likely than not, that we will be required to sell. The Company adopted the CECL Standard using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. As discussed further below, purchased credit deteriorated assets were measured on a prospective basis in accordance with the CECL Standard and all purchased 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 thousands): Change in Consolidated Change to Retained Earnings Statement of Condition Tax Effect from Adoption of CECL Allowance for credit losses (“ACL”) (loans) $ 1,350 $ 406 $ 944 Adjustment related to purchased credit-impaired loan marks (1) 5,207 - - Total ACL – loans 6,557 406 944 ACL (unfunded credit commitments) 2,833 852 1,981   Total impact of CECL adoption $ 9,390 $ 1,258 $ 2,925     (1) This amount represents a gross-up of the balance sheet related to nonaccretable credit marks of purchased credit-impaired loans resulting from adoption of CECL on January 1, 2021. Loans designated as purchased credit impaired loans (“PCI”) and accounted for under Accounting Standards Codification (“ASC”) 310-30 were designated as purchased with credit deterioration loans (“PCD”). In accordance with the CECL Standard, the Company did not reassess whether PCI loans met the criteria of PCD loans as of the date of adoption and determined all PCI loans were PCD loans. The Company recorded an increase to the balance of PCD loans and an increase to the ACL for loans of $5.2 million, which represented the expected credit losses for PCD loans. The remaining non-credit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021 over the remaining estimated life of the loans. Also, in accordance with the CECL Standard, the Company did not reassess whether modifications to individual acquired financial assets were troubled debt restructurings (“TDRs”) as of the date of adoption. ACL for loans : The ACL for loans is a valuation account that is deducted from the amortized cost basis of portfolio loans to present the net amount expected to be collected on portfolio loans over their contractual life. Loans are charged-off against the allowance when we believe the uncollectibility of a loan balance has been confirmed, and the expected recoveries do not exceed the aggregate of amounts previously charged-off or expected to be charged-off. 11 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 1b. Authoritative Accounting Guidance – (continued) The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company currently utilizes a one-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan. The measurement of expected credit loss under the CECL methodology is applicable to financial assets measured at amortized cost, including loans 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. Generally, for all other loan types, the estimated expected credit loss is also calculated at the loan level and pool assignments are only utilized for aggregating the allowance estimates of similar loan types for financial statement disclosure purposes. Loan segments have unique risk characteristics with respect to credit quality and are as follows: ● The repayment of commercial loans is generally dependent on the creditworthiness and cash flow of borrowers, and if applicable, guarantors, which may be negatively impacted by adverse economic conditions. While the majority of these loans are secured, collateral type, marketing, coverage, valuation and monitoring are not as uniform as in other portfolio classes and recovery from liquidation of such collateral may be subject to greater variability. ● Payment on commercial mortgages is driven principally by operating results of the managed properties or underlying business and secondarily by the sale or refinance of such properties. Both primary and secondary sources of repayment, and value of the properties in liquidation, may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. ● Properties underlying construction, land and land development loans often do not generate sufficient cash flows to service debt and thus repayment is subject to 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. ● The ability of borrowers to service debt in the residential and consumer loan portfolios is generally subject to personal income which may be impacted by general economic conditions, such as increased unemployment levels. These loans are predominately collateralized by first and/or second liens on single family properties. If a borrower cannot maintain the loan, the Company’s ability to recover against the collateral in sufficient amount and in a timely manner may be significantly influenced by market, legal and regulatory conditions. ● The Company considers loan classes and loan segments to be one and the same. Individually Analyzed Loans : The Company will evaluate individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. Loans will transition from defined segments for individual analysis when credit characteristics, or risk traits, change in a material manner. A loan is considered for individual analysis when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining individual analysis include payment status and the probability of collecting scheduled principal and interest payments when due. Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties are considered TDRs and are classified as individually analyzed. Loans considered to be TDRs can be categorized as nonaccrual or performing. All PCD loans will be considered as individually analyzed. Generally, individually analyzed loans consist of nonaccrual loans and performing TDRs. Of this group of loans, loans of $ 250,000 and over are individually evaluated, while loans with balances less than $ 250,000 are collectively evaluated, and, accordingly, are not separately identified for analysis or disclosures. Instruments will not be included in both collective and individual analysis. Individual analysis will establish a specific reserve for instruments in scope. For collateral dependent loans, when it is determined that a foreclosure is probable, the ACL will be determined on a loan level basis using the fair value of the collateral as of the reporting date, less estimated disposition costs (“net fair value”), which will ensure that the credit loss is not delayed until the time at which the actual foreclosure takes place. In the event that this fair value is less than the amortized cost basis of these specific loans, we will recognize the difference between the net fair value at the reporting date and the amortized cost basis in the ACL.  If the fair value of the collateral has increased as of the ACL evaluation date, the increase in the fair value of the collateral is reflected through a reduction in the ACL. ACL adjustments for estimated disposition costs are not appropriate when the repayment of a collateral-dependent loan is expected from the operation of the collateral.  If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as the allowance for credit losses. The effective interest rate used to discount expected cash flows is adjusted to incorporate expected prepayments, if applicable. 12 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 1b. Authoritative Accounting Guidance – (continued) For charge-offs and recoveries we will generally charge-off a loan balance after an analysis is completed which indicates that the collectability of the full principal is in doubt. Charge-offs are charged against the allowance in the period in which the loans are deemed to be uncollectible.  Any expected future recoveries of amounts which were previously charged-off or expected to be charged-off will be included in the ACL, as the recoveries represent a component of the net amount expected to be collected. Expected recoveries in the ACL shall not exceed amounts previously charged-off or expected to be charged-off. Investment Securities : Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in comprehensive income, net of tax. Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are generally amortized using the level-yield method without estimating prepayments, except for mortgage-backed securities, where prepayment rates are estimated. Premiums on callable investment securities are amortized to their earliest call date. Gains and losses on sales of securities are recorded on the trade date and determined using the specific identification method. ACL - on investment securities classified as available-for-sale : For available-for-sale investment securities which are in an unrealized loss position, the Company will first assess whether we intend to sell, or it is more likely than not, that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria is met, the amortized cost basis of the security is written down to fair value through income. For available-for-sale investment securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from an actual or estimated credit loss event or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, changes to the rating of the security, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss is likely, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, an ACL is recorded for the estimated credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income. Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when we believe the uncollectibility of an available-for-sale security has been confirmed or if either of the criteria regarding intent or requirement to sell is met. ASU No. 2021-03, “ Intangibles – Goodwill and Other (Topic 350) .” ASU 2021-03 requires an entity to identify and evaluate goodwill impairment triggering events when they occur to determine whether it is more likely than not that the fair value of a reporting unit (or entity, if the entity has elected the accounting alternative for amortizing goodwill and chosen that option) is less than its carrying amount. If an entity determines that it is more likely than not that the goodwill is impaired. It must test goodwill for impairment using the triggering event date as the measurement date. An entity is required to disclose the amount assigned to goodwill in total and by major business combination, or by reorganization event resulting in fresh-start reporting. Also, the entity must disclose the weighted average amortization period in total and the amortization period by major business combination, or by reorganization event resulting in fresh-start reporting. ASU 2021-03 was effective for the Company on January 1, 2021 and did not have a significant impact on our consolidated financial statements. ASU 2018-14, “ Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. ” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 was effective for the Company as of January 1, 2021 and did not have a significant impact on our consolidated financial statements. 13 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 2. Earnings per Common Share Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”).  The restricted stock awards granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities.  The two-class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities. Earnings per common share have been computed based on the following: Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except for per share data) 2021 2020 2021 2020 Net income $ 32,097 $ 24,786 $ 97,315 $ 45,648 Earnings allocated to participating securities ( 76 ) ( 133 ) ( 250 ) ( 218 ) Income attributable to common stock $ 32,021 $ 24,653 $ 97,065 $ 45,430   Weighted average common shares outstanding, including participating securities 39,741 39,656 39,770 39,624 Weighted average participating securities ( 95 ) ( 119 ) ( 102 ) ( 125 ) Weighted average common shares outstanding 39,646 39,537 39,668 39,499 Incremental shares from assumed conversions of options, performance units and non-participating restricted shares 223 117 220 111 Weighted average common and equivalent shares outstanding 39,869 39,654 39,888 39,610   Earnings per common share: Basic $ 0.81 $ 0.62 $ 2.45 $ 1.15 Diluted 0.80 0.62 2.43 1.15 There were no antidilutive share equivalents as of September 30, 2021 and September 30, 2020. 14 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 3. Investment Securities The Company’s investment securities are all classified as available-for-sale as of September 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 September 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 September 30, 2021 and December 31, 2020. Allowance for Gross Gross Investment Amortized Unrealized Unrealized Fair Credit Cost Gains Losses Value Losses September 30, 2021 (dollars in thousands) Securities available-for-sale Federal agency obligations $ 50,016 $ 1,032 $ - $ 51,048 $ - Residential mortgage pass-through securities 255,488 2,640 ( 2,073 ) 256,055 - Commercial mortgage pass-through securities 10,859 135 ( 468 ) 10,526 - Obligations of U.S. states and political subdivisions 129,632 1,693 ( 1,051 ) 130,274 - Corporate bonds and notes 10,965 124 - 11,089 - Asset-backed securities 2,718 6 ( 2 ) 2,722 - Certificates of deposit 149 1 -   150 - Other securities 1,020 - - 1,020 - Total securities available-for-sale​​ $ 460,847 $ 5,631 $ ( 3,594 ) $ 462,884 $ -   December 31, 2020 Securities available-for-sale Federal agency obligations $ 37,015 $ 1,508 $ ( 65 ) $ 38,458 $ N/A Residential mortgage pass-through securities 266,114 4,811 ( 41 ) 270,884 N/A Commercial mortgage pass-through securities 6,906 203 ( 187 ) 6,922 N/A Obligations of U.S. states and political subdivisions 138,539 4,269 - 142,808 N/A Corporate bonds and notes 24,925 222 ( 52 ) 25,095 N/A Asset-backed securities 3,521 - ( 41 ) 3,480 N/A Certificates of deposit 149 2 - 151 N/A Other securities   157   -   -   157 N/A Total securities available-for-sale​​ $ 477,326 $ 11,015 $ ( 386 ) $ 487,955 $ N/A 15 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 3. Investment Securities – (continued) Investment securities having a carrying value of approximately $ 88.1 million and $ 107.6 million as of September 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 September 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’ equity. The following table presents information for investments in securities available-for-sale as of September 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. September 30, 2021 Amortized Fair Cost Value (dollars in thousands) Securities available-for-sale: Due in one year or less $ 4,439 $ 4,451 Due after one year through five years 9,911 10,024 Due after five years through ten years 7,777 8,029 Due after ten years 171,353 172,779 Residential mortgage pass-through securities 255,488 256,055 Commercial mortgage pass-through securities 10,859 10,526 Other securities 1,020 1,020 Total securities available-for-sale $ 460,847 $ 462,884 Gross gains and losses from the sales and redemptions of securities for periods presented were as follows:     Three Months Ended September 30,     Nine Months Ended September 30,         (dollars in thousands)       2021   2020     2021   2020   Proceeds   $ -     $ -     $ 5,185     $ 19,624                                     Gross gains on sales/redemption of securities     -       -       195       29   Gross losses on sales/redemptions of securities     -       -       -       -   Net gains on sales/redemptions of securities     -       -       195       29   Less: tax provision on net gains     -     -     ( 48 )     ( 6 ) Net gains on sales/redemptions of securities, after tax   $ -     $ -     $ 147     $ 23   16 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 3. Investment Securities – (continued) Impairment Analysis of Available-for-Sale Debt Securities The following tables indicate 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 September 30, 2021 and December 31, 2020. September 30, 2021 Total Less than 12 Months 12 Months or Longer Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses (dollars in thousands) Investment Securities   Available-for-Sale:   Residential mortgage pass-through securities $ 171,592 $ ( 2,073 ) $ 171,592 $ ( 2,073 ) $ - $ - Commercial mortgage pass-through securities 6,349 ( 468 ) 2,658 ( 67 ) 3,691 ( 401 ) Obligations of U.S. states and political subdivisions 71,938 ( 1,051 ) 71,938 ( 1,051 ) - - Asset-backed securities 1,389 ( 2 ) 840 - 549 ( 2 ) Total temporarily impaired securities $ 251,268 $ ( 3,594 ) $ 247,028 $ ( 3,191 ) $ 4,240 $ ( 403 ) December 31, 2020 Total Less than 12 Months 12 Months or Longer Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses (dollars in thousands) Investment Securities   Available-for-Sale:   Federal agency obligations $ 8,978 $ ( 65 ) $ 8,975 $ ( 65 ) $ 3 $ -   Residential mortgage pass-through securities 20,895 ( 41 ) 20,886 ( 41 ) 9 - Commercial mortgage pass-through securities 3,954 ( 187 ) 3,954 ( 187 ) - -   Corporate bonds and notes 3,928 ( 52 ) 3,928 ( 52 ) - - Asset-backed securities 3,083 ( 41 ) 622 - 2,461 ( 41 ) Total Temporarily Impaired Securities $ 40,838 $ ( 386 ) $ 38,365 $ ( 345 ) $ 2,473 $ ( 41 ) 17 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 3. Investment Securities – (continued) On January 1, 2021, the Company adopted ASU 2016-13 and implemented the CECL methodology for allowance for credit losses on its investment securities available-for-sale. The new CECL methodology replaces the other-than-temporary impairment model that previously existed. The Company did not have a CECL day 1 impact attributable to its investment securities portfolio and did not have an allowance for credit losses as of September 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 September 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. If one of the criteria is met, the security’s amortized cost basis is written down to fair value through current earnings. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value resulted from credit losses or other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Unrealized losses on asset backed securities and state and municipal securities have not been recognized into income because the issuers are of high credit quality, we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery.  The decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale securities was recorded as of September 30, 2021. Federal agency obligations, residential mortgage-backed pass-through securities and commercial mortgage-backed pass-through securities are issued by U.S. Government agencies and U.S. Government sponsored enterprises. Although a government guarantee exists on these investments, these entities are not legally backed by the full faith and credit of the federal government, and the current support they receive is subject to a cap as part of the agreement entered into in 2008. Nonetheless, at this time we do not foresee any set of circumstances in which the government would not fund its commitments on these investments as the issuers are an integral part of the U.S. housing market in providing liquidity and stability. Therefore, we concluded that a zero-allowance approach for these investment securities is appropriate. Note 4. Derivatives The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. 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 We are required to pay fixed-rates of interest ranging from 0.88 % to 1.93 % and receive variable rates of interest that reset quarterly based on three-month LIBOR. Expiration dates for the swaps range from January 2022 to April 2022 . The swaps were determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps. In addition, during the three months ended September 30, 2021, the company entered into 5 forward starting pay fixed-rate interest rate swaps, with a total notional amount of $ 200 million, which are also designated as a cash flow hedge of a future Federal Home Loan Bank advance. We are required to pay fixed rates of interest ranging from 0.631 % to 0.955 % and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”). The forward starting swaps have commencing payment dates ranging from October 2021 to April 2022, with expiration dates ranging from March 2026 to January 2028 . 18 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 4. Derivatives – (continued) Interest expense recorded on these swap transactions totaled approximately $ 0.3 million and $ 1.5 million during the three and nine months ended September 30, 2021, respectively, compared to $ 0.6 million and $ 0.9 million during the three and nine months ended September 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 September 30, 2021 Amount of (loss) Amount of loss Amount of gain gain recognized (gain) reclassified recognized in other in OCI (Effective from OCI to Noninterest income Portion) interest income (Ineffective Portion) (dollars in thousands) Interest rate contracts $ 1,890 $ 328 $ - Three Months Ended September 30, 2020 Amount of (loss) Amount of loss Amount of gain gain recognized (gain) reclassified recognized in other in OCI (Effective from OCI to Noninterest income Portion) interest income (Ineffective Portion) (dollars in thousands) Interest rate contracts $ ( 82 ) $ 631 $ - 19 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 4. Derivatives – (continued) Nine Months Ended September 30, 2021 Amount of (loss) Amount of loss Amount of gain gain recognized (gain) reclassified recognized in other in OCI (Effective from OCI to Noninterest income Portion) interest income (Ineffective Portion) (dollars in thousands) Interest rate contracts $ 1,872 $ 1,543 $ - Nine Months Ended September 30, 2020 Amount of (loss) Amount of loss Amount of gain gain recognized (gain) reclassified recognized in other in OCI (Effective from OCI to Noninterest income Portion) interest income (Ineffective Portion) (dollars in thousands) Interest rate contracts $ ( 3,397 ) $ 942 $ - The following table reflects the cash flow hedges included in the consolidated statements of condition as of September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 Notional Notional Amount Fair Value Amount Fair Value (dollars in thousands) Interest rate swaps related to FHLB advances included in liabilities $ 275,000 $ 1,295 $ 175,000 $ ( 2,119 ) 20 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses 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. Accordingly, some of the information presented is not comparable from period to period. See Note 1b. “Authoritative Accounting Guidance - Adoption of New Accounting Standards” for additional information. The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of September 30, 2021 and December 31, 2020: September 30, December 31, 2021 2020 (dollars in thousands) Commercial (1) $ 1,325,488 $ 1,521,967 Commercial real estate 4,436,626 3,783,550 Commercial construction 552,896 617,747 Residential real estate 270,793 322,564 Consumer 2,093   1,853 Gross loans 6,587,896 6,247,681 Net deferred loan fees ( 11,457 )   ( 11,374 ) Total loans receivable $ 6,576,439 $ 6,236,307   (1) Included 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 each of September 30, 2021 and December 31, 2020, loan balances of approximately $ 2.6 billion, were pledged to secure borrowings from the FHLB of New York. Loans held-for-sale - The following table sets forth the composition of the Company’s loans held-for-sale portfolio as of September 30, 2021 and December 31, 2020: September 30, December 31, 2021 2020 (dollars in thousands) Commercial real estate $ 4,876 $ 1,990 Residential real estate 720   2,720 Total carrying amount $ 5,596 $ 4,710 Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL as of September 30, 2021 and nonaccrual loans without an ACL as of September 30, 2021: September 30, 2021 Nonaccrual loans with ACL Nonaccrual loans without ACL Total Nonaccrual loans (dollars in thousands) Commercial $ 27,993 $ 2,486 $ 30,479 Commercial real estate 11,668 16,910 28,578 Commercial construction - 3,336 3,336 Residential real estate -   3,566 3,566 Consumer -   - - Total $ 39,661 $ 26,298 $ 65,959 21 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses – (continued) The following tables present total nonaccrual loans included in loans receivable by loan class as of December 31, 2020 (dollars in thousands): December 31, 2020 Commercial $ 33,019 Commercial real estate 10,111 Commercial construction 14,015 Residential real estate   4,551 Consumer   - Total nonaccrual loans $ 61,696 Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment. Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified as “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date. Assets are classified as “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified as special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. 22 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses – (continued) We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP. Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below. As of September 30, 2021, our loans based on year of origination and risk designation are as follows (dollars in thousands):   Term loans amortized cost basis by origination year     Revolving     Total Gross 2021     2020     2019     2018     2017     Prior Loans Loans Commercial Pass $ 362,839 $ 78,941 $ 73,202 $ 60,881 $ 98,178 $ 118,326 $ 465,494 $ 1,257,861 Special mention - - 225 904 5,653 4,198 13,787 24,767 Substandard 176 - 1,619 12,779 4,101 21,147 3,038 42,860 Doubtful - - - - - - - - Total Commercial $ 363,015 $ 78,941 $ 75,046 $ 74,564 $ 107,932 $ 143,671 $ 482,319 $ 1,325,488   Commercial Real Estate Pass $ 1,178,056 $ 587,923 $ 446,299 $ 479,741 $ 514,973 $ 944,052 $ 171,963 $ 4,323,007 Special mention - - 3,364 1,875 4,335 26,550 6,633 42,757 Substandard 1,942 4,500 657 18,861 - 36,112 8,790 70,862 Doubtful - - - - - - - - Total Commercial Real Estate $ 1,179,998 $ 592,423 $ 450,320 $ 500,477 $ 519,308 $ 1,006,714 $ 187,386 $ 4,436,626   Commercial Construction Pass $ 1,405 $ 7,370 $ 37,492 $ 2,600 $ 2,247 $ 490 $ 486,404 $ 538,008 Special mention - - - - - - - - Substandard - - - - - - 14,888 14,888 Doubtful - - - - - - - - Total Commercial Construction $ 1,405 $ 7,370 $ 37,492 $ 2,600 $ 2,247 $ 490 $ 501,292 $ 552,896   Residential Real Estate Pass $ 18,387 $ 30,704 $ 25,544 $ 29,503 $ 30,577 $ 77,427 $ 46,227 $ 258,369 Special mention - - - - - - - - Substandard - - - 199 - 8,492 3,733 12,424 Doubtful - - - - - - - - Total Residential Real Estate $ 18,387 $ 30,704 $ 25,544 $ 29,702 $ 30,577 $ 85,919 $ 49,960 $ 270,793   Consumer Pass $ - $ 96 $ 50 $ 26 $ 35 $ 1,761 $ 125 $ 2,093 Special mention - - - - - - - - Substandard - - - - - - - - Doubtful - - - - - - - - Total Consumer $ - $ 96 $ 50 $ 26 $ 35 $ 1,761 $ 125 $ 2,093   Total Pass $ 1,560,687 $ 705,034 $ 582,587 $ 572,751 $ 646,010 $ 1,142,056 $ 1,170,213 $ 6,379,338 Special mention - - 3,589 2,779 9,988 30,748 20,420 67,524 Substandard 2,118 4,500 2,276 31,839 4,101 65,751 30,449 141,034 Doubtful - - - - - - - - Grand Total $ 1,562,805 $ 709,534 $ 588,452 $ 607,369 $ 660,099 $ 1,238,555 $ 1,221,082 $ 6,587,896 23 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses – (continued) The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) as of December 31, 2020: December 31, 2020 Pass Special Mention Substandard Doubtful Total (dollars in thousands) Commercial $ 1,447,097 $ 30,725 $ 43,930 $ 215 $ 1,521,967 Commercial real estate 3,700,498 49,143 33,909 - 3,783,550 Commercial construction 587,266 - 30,481 - 617,747 Residential real estate 311,174 - 11,390 - 322,564 Consumer 1,853 - - - 1,853 Gross loans $ 6,047,888 $ 79,868 $ 119,710 $ 215 $ 6,247,681 Collateral Dependent Loans : Loans which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses. The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date. The following table presents collateral dependent loans that were individually evaluated for impairment as of September 30, 2021: September 30, 2021 Real Estate Other Total (dollars in thousands) Commercial $ 6,778 $ 26,175 $ 32,953 Commercial real estate 56,622 - 56,622 Commercial construction 12,582 - 12,582 Residential real estate 10,258 - 10,258 Consumer - - - Total $ 86,240 $ 26,175 $ 112,415 24 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses – (continued) Impaired loans - Impaired loans disclosures presented below as of December 31, 2020 and as of and for the three and nine months ended September 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 Unpaid Recorded Principal Related Investment Balance Allowance No related allowance recorded (dollars in thousands) Commercial $ 11,325 $ 11,835 Commercial real estate 13,105 13,449 Commercial construction 24,284 24,907 Residential real estate 5,378 5,723 Consumer - - Total (no related allowance) $ 54,092 $ 55,914   With an allowance recorded   Commercial $ 23,736 $ 69,122 $ 12,985 Commercial real estate 2,722 2,722 1,329 Total (with allowance) $ 26,458 $ 71,844 $ 14,314   Total Commercial $ 35,061 $ 80,957 $ 12,985 Commercial real estate 15,827 16,171 1,329 Commercial construction 24,284 24,907 - Residential real estate 5,378 5,723 - Consumer - - - Total $ 80,550 $ 127,758 $ 14,314 25 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses – (continued) 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 nine months ended September 30, 2020 (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2020 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Impaired loans (no allowance)   Commercial $ 12,266 $ 50 $ 12,100 $ 150 Commercial real estate 12,460 74 12,415 229 Commercial construction 21,297 91 21,149 262 Residential real estate 4,011 16 3,761 16   Total $ 50,034 $ 231 $ 49,425 $ 657   Impaired loans (allowance):   Commercial $ 23,024 $ - $ 23,195 $ - Commercial real estate 2,722 - 2,722 - Commercial construction 2,934 - 2,934 - Residential real estate 261 5 262 5   Total $ 28,941 $ 5 $ 29,113 $ 5   Total impaired loans: Commercial $ 35,290 $ 50 $ 35,295 $ 150 Commercial real estate 15,182 74 15,137 229 Commercial construction 24,231 91 24,083 262 Residential real estate 4,272 21 4,023 21   Total $ 78,975 $ 236 $ 78,538 $ 662 26 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses – (continued) Aging Analysis - The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due as of September 30, 2021 and December 31, 2020 (dollars in thousands): September 30, 2021 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due and Still Accruing Nonaccrual Total Past Due and Nonaccrual Current Gross Loans Commercial $ 391 $ 417 $ 4,463 $ 30,479 $ 35,750 $ 1,289,738 $ 1,325,488 Commercial real Estate - 1,694 1,860 28,578 32,132 4,404,494 4,436,626 Commercial construction - - - 3,336 3,336 549,560 552,896 Residential real Estate 338 - 8,360 3,566 12,264 258,529 270,793 Consumer - - - - - 2,093 2,093 Total $ 729 $ 2,111 $ 14,683 $ 65,959 $ 83,482 $ 6,504,414 $ 6,587,896 90 days or greater past due and still accruing category reflects purchased credit-deteriorated loans, net of fair value marks, which accrete income per the valuation at date of acquisition. December 31, 2020 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due and Still Accruing Nonaccrual Total Past Due and Nonaccrual Current Total Loans Receivable Commercial $ 1,445 $ 558 $ 3,182 $ 33,019 $ 38,204 $ 1,483,763 $ 1,521,967 Commercial real estate 13,258 4,140 5,555 10,111 33,064 3,750,486 3,783,550 Commercial construction 2,472 - - 14,015 16,487 601,260 617,747 Residential real estate 1,367 241 4,084 4,551 10,243 312,321 322,564 Consumer   2   -   -   -   2   1,851   1,853 Total $ 18,544 $ 4,939 $ 12,821 $ 61,696 $ 98,000 $ 6,149,681 $ 6,247,681 90 days or greater past due and still accruing category reflects purchased credit-deteriorated loans, net of fair value marks, which accrete income per the valuation at date of acquisition. 27 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses – (continued) The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the ACL that are allocated to each loan portfolio segment: September 30, 2021 Commercial Commercial Residential Commercial real estate construction real estate Consumer Total (dollars in thousands) ACL Individually evaluated for impairment $ 14,630 $ 1,199 $ - $ 66 $ - $ 15,895 Collectively evaluated for impairment 9,487 40,222 3,702 3,302 8 56,721 Acquired with deteriorated credit quality individually analyzed 3,219 1,921 - 230 - 5,370 Total $ 27,336 $ 43,342 $ 3,702 $ 3,598 $ 8 $ 77,986   Gross loans Individually evaluated for impairment $ 33,970 $ 50,642 $ 12,582 $ 6,017 $ - $ 103,211 Collectively evaluated for impairment 1,286,337 4,380,004 540,314 260,536 2,093 6,469,284 Acquired with deteriorated credit quality individually analyzed 5,181 5,980 - 4,240 - 15,401 Total $ 1,325,488 $ 4,436,626 $ 552,896 $ 270,793 $ 2,093 $ 6,587,896 December 31, 2020 Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) Allowance for loan losses Individually evaluated for impairment $ 12,985 $ 1,329 $ - $ - $ - $ - $ 14,314 Collectively evaluated for impairment   15,412   33,373   7,787   1,928   4 568   59,072 Acquired portfolio   46   4,628   407   759   - -   5,840 Acquired with deteriorated credit quality -   -   -   -   - -   - Total $ 28,443 $ 39,330 $ 8,194 $ 2,687 $ 4 $ 568 $ 79,226   Gross loans Individually evaluated for impairment $ 35,061 $ 15,827 $ 24,284 $ 5,378 $ -   $ 80,550 Collectively evaluated for impairment   1,414,626   2,959,978   574,118   241,925   1,627     5,192,274 Acquired portfolio   68,402   802,190   19,345   71,177   226     961,340 Acquired with deteriorated credit quality   3,878   5,555   -   4,084   -     13,517 Total $ 1,521,967 $ 3,783,550 $ 617,747 $ 322,564 $ 1,853   $ 6,247,681 28 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses – (continued) Activity in the Company’s ACL for loans for the three and nine months ended September 30, 2021 is summarized in the table below. Day 1 effect of CECL presented in the nine-months table below reflect 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 September 30, 2021 Commercial Commercial Residential   Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) Balance as of June 30, 2021 $ 25,567 $ 43,815 $ 4,927 $ 4,366 $ 9 $ - $ 78,684       Charge-offs ( 254 ) ( 1,473 ) - - - - ( 1,727 )   Recoveries 1 85 - 20 7 - 113     (Reversal of) provision for credit losses - loans 2,022 915 ( 1,225 ) ( 788 ) ( 8 ) - 916 Balance as of September 30, 2021 $ 27,336 $ 43,342 $ 3,702 $ 3,598 $ 8 $ - $ 77,986   Nine Months Ended September 30, 2021 Commercial Commercial Residential   Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) Balance as of December 31, 2020 $ 28,443 $ 39,330 $ 8,194 $ 2,687 $ 4 $ 568 $ 79,226       Day 1 effect of CECL ( 4,225 ) 9,605 ( 961 ) 2,697 9 ( 568 ) 6,557   Balance as of January 1, 2021 as adjusted for changes in accounting principle 24,218 48,935 7,233 5,384 13 - 85,783     Charge-offs ( 304 ) ( 1,628 ) - ( 7 ) - - ( 1,939 )   Recoveries 74 85 - 20 9 - 188   Provision for (reversal of) credit losses - loans 3,348 ( 4,050 ) ( 3,531 ) ( 1,799 ) ( 14 ) - ( 6,046 ) Balance as of September 30, 2021 $ 27,336 $ 43,342 $ 3,702 $ 3,598 $ 8 $ - $ 77,986   On January 1, 2021, the Company adopted CECL, which replaced the incurred loss method we used in prior periods for determining the provision for credit losses and the ACL. Under CECL, we record an expected loss of all cash flows we do not expect to collect at the inception of the loan. The adoption of CECL resulted in an increase in our ACL for loans of $ 6.6 million, which did not impact our consolidated income statement. 29 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses – (continued) Three Months Ended September 30, 2020 Commercial Commercial Residential   Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) Balance as of June 30, 2020 $ 9,345 $ 22,655 $ 8,026 $ 1,690 $ 5 $ 27,003 $ 68,724     Charge-offs ( 48 ) - - ( 209 ) - - ( 257 )   Recoveries - 800 - - - - 800     Provision for (reversal of) credit losses - loans 14,861 16,623 ( 1,044 ) 1,019 ( 2 ) ( 26,457 ) 5,000     Balance as of September 30, 2020 $ 24,158 $ 40,078 $ 6,982 $ 2,500 $ 3 $ 546 $ 74,267       Nine Months Ended September 30, 2020             Commercial   Commercial   Residential                           Commercial   real estate   construction   real estate   Consumer   Unallocated   Total     (dollars in thousands) Balance as of December 31, 2019   $ 8,349     $ 20,853     $ 7,304   $ 1,685     $ 3     $ 99   $ 38,293     Charge-offs     ( 552 )     -     -     ( 278 )     ( 3 )     -     ( 833 )   Recoveries     2       802       -     -       3       -     807     Provision for (reversal of) credit losses - loans     16,359     18,423       ( 322 )   1,093     -     447     36,000     Balance as of September 30, 2020   $ 24,158     $ 40,078     $ 6,982   $ 2,500     $ 3     $ 546   $ 74,267   30 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses – (continued) Troubled Debt Restructurings Loans are considered to have been modified in a troubled debt restructuring (“TDR”) when, except as discussed below, due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, maturity extensions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a TDR remains on nonaccrual status for a period of nine months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status. As of September 30, 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 a TDR. As of September 30, 2021, TDRs totaled $ 79.7 million, of which $ 38.5 million were on nonaccrual status and $ 41.2 million were classified as accruing and 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 classified as accruing and were performing under their restructured terms. The Company has allocated $ 10.5 million and $ 4.4 million of specific allowance related to TDRs as of September 30, 2021 and September 30, 2020, respectively. The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2021: Pre-Modification Outstanding Post-Modification Outstanding Number of Loans Recorded Investment Recorded Investment Troubled debt restructurings: (dollars in thousands) Commercial 4 $ 1,276 $ 1,276 Commercial real estate 10 35,595 35,595 Commercial construction 1 1,641 1,641 Residential real estate 3 1,758 1,758 Total 18 $ 40,270 $ 40,270 The loans modified as TDRs during the nine months ended September 30, 2021 included maturity extensions and interest rate reductions. There were no loans modified as TDRs during the nine months ended September 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 nine months ended September 30, 2021 and September 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. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., three to nine 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 September 30, 2021, the Bank had 10 deferred loans totaling $10.3 million, compared to 113 deferred loans totaling $ 207.0 million as of December 31, 2020 that are not considered TDRs. 31 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses – (continued) The following table sets forth the composition of these loans by loan segments as of September 30, 2021: Unpaid Number of Loans Principal Balance (dollars in thousands) Commercial 4 $ 309 Commercial real estate 6 9,988 Total 10 $ 10,297 As of September 30, 2021, there were no deferred loans that were delinquent or on nonaccrual status. As of September 30, 2021, $ 5.5 million of deferred loans were risk rated “special mention” or worse. The Company evaluates its deferred loans after the initial deferral period and will either return the deferred loan to its original loan terms or the loan will be reassessed at that time to determine if a further deferment should be granted and if a downgrade in risk rating is appropriate. ACL for Unfunded Commitments The Company has recorded an ACL for unfunded credit commitments, which was recorded in other liabilities. The provision is recorded within the (reversal of) provision for credit losses on the Company’s income statement. The following table presents the ACL for unfunded commitments for the three and nine months ended September 30, 2021 (dollars in thousands): Three Months Ended September 30, 2021   Balance as of beginning of period $ 2,380 Provision for (reversal of) credit losses - unfunded commitments 184 Balance as of end of period $ 2,564 Nine Months Ended September 30, 2021   Balance as of beginning of period $ - Day 1 Effect of CECL 2,833 Provision for (reversal of) credit losses - unfunded commitments ( 269 ) Balance as of end of period $ 2,564 Components of (Reversal of) Provision for Credit Losses The following table summarizes the provision for (reversal of) provision for credit losses for the three and nine months ended September 30, 2021 (dollars in thousands): Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021   Provision for (reversal of) credit losses - loans $ 916 $ ( 6,046 ) Provision for (reversal of) credit losses - unfunded commitments 184 ( 269 ) Provision for (reversal of) credit losses $ 1,100 $ ( 6,315 ) 32 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 6. Fair Value Measurements and Fair Value of Financial Instruments Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The following sets forth the hierarchy of valuation techniques used to determine fair value: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity). An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020: Securities Available-for-Sale and Equity Securities : Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class. Derivatives : The fair value of derivatives is based on valuation models using observable market data as of the measurement date (level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. 33 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued) For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of September 30, 2021 and December 31, 2020 are as follows:           September 30, 2021           Fair Value Measurements at Reporting Date Using     Total Fair Value   Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (dollars in thousands)                         Recurring fair value measurements:                         Assets                         Investment securities :                         Available-for-sale :                         Federal agency obligations   $ 51,048   $ -   $ 51,048   $ - Residential mortgage pass-through securities     256,055     -     256,055     - Commercial mortgage pass-through securities     10,526     -     10,526     - Obligations of U.S. states and political subdivision     130,274     -     121,638     8,636 Corporate bonds and notes     11,089     -     11,089     - Asset-backed securities     2,722     -     2,722     - Certificates of deposit     150     -     150     - Other securities     1,020     1,020     -     - Total available-for-sale   $ 462,884   $ 1,020   $ 453,228   $ 8,636                           Equity securities     13,700     11,709     1,991     - Derivatives   1,296   -   1,296   - Total assets $ 477,880 $ 12,729   $ 456,515 $ 8,636 34 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued) December 31, 2020 Fair Value Measurements at Reporting Date Using Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (dollars in thousands) Recurring fair value measurements: Assets Investment securities : Available-for-sale : Federal agency obligations $ 38,458 $ - $ 38,458 $ - Residential mortgage pass-through securities 270,884 - 270,884 - Commercial mortgage pass-through securities 6,922 - 6,922 - Obligations of U.S. states and political subdivision 142,808 - 133,964 8,844 Corporate bonds and notes 25,095 - 25,095 - Asset-backed securities 3,480 - 3,480 - Certificates of deposit 151 - 151 - Other securities   157   157   -   - Total available-for-sale 487,955 $ 157 $ 478,954 $ 8,844   Equity securities 13,387 13,387 - - Total assets $ 501,342 $ 13,544 $ 478,954 $ 8,844   Liabilities Derivatives $ ( 2,119 ) $ - $ ( 2,119 ) $ - Total liabilities $ ( 2,119 ) $ - $ ( 2,119 ) $ - There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2021 and during the year ended December 31, 2020. Assets Measured at Fair Value on a Nonrecurring Basis The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020. Loans Held-for-Sale : Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. Management obtains quotes or bids on all or parts of these loans directly from the purchasing financial institutions (Level 2). Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. Fair value of these loans is determined based on the terms of the loan, such as interest rate, maturity date, reset term, as well as sales of similar assets (Level 3). 35 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued) Collateral Dependent Loans : The Company may record adjustments to the carrying value of loans based on fair value measurements, either as specific reserves or as partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with GAAP. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and are also based on Level 3 inputs. For assets measured at fair value on a nonrecurring basis, the fair value measurements as of September 30, 2021 and December 31, 2020 are as follows: Fair Value Measurements at Reporting Date Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets measured at fair value on a nonrecurring September 30, Assets Inputs Inputs basis: 2021 (Level 1) (Level 2) (Level 3) Collateral dependent loans : (dollars in thousands) Commercial $ 12,966 $ - $ - $ 12,966 Commercial real estate 16,407 - - 16,407 Residential real estate 2,251 - - 2,251 Collateral dependent loans – Collateral dependent loans as of September 30, 2021 that required a valuation allowance were $ 48.2 million with a related valuation allowance of $ 16.6 million. Fair Value Measurements at Reporting Date Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets measured at fair value on a nonrecurring December 31, Assets Inputs Inputs basis: 2020 (Level 1) (Level 2) (Level 3) Impaired loans : (dollars in thousands) Commercial $ 10,751 $ - $ - $ 10,751 Commercial real estate 1,393 - - 1,393 Impaired loans – Impaired loans as of December 31, 2020 that required a valuation allowance were $ 26.5 million with a related valuation allowance of $ 14.3 million 36 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued) Assets Measured With Significant Unobservable Level 3 Inputs Recurring basis The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2021 and for the year ended December 31, 2020: Municipal Securities (dollars in thousands) Balance as of December 31, 2020 $ 8,844 Principal paydowns ( 208 ) Balance as of September 30, 2021 $ 8,636 Municipal Securities (dollars in thousands) Balance as of December 31, 2019 $ 9,114 Principal paydowns ( 270 )   Balance as of December 31, 2020 $ 8,844 The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy. September 30, 2021 Valuation Unobservable Fair Value Techniques Input Rate Securities available-for-sale: (dollars in thousands) Municipal securities $ 8,636 Discounted cash flows Discount rate 2.9 % December 31, 2020 Valuation Unobservable Fair Value Techniques Input Rate Securities available-for-sale: (dollars in thousands) Municipal securities $ 8,844 Discounted cash flows Discount rate 2.9 % 37 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued) Nonrecurring basis : The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy. September 30, 2021 Valuation Unobservable (dollars in thousands) Fair Value Techniques Input Range (weighted average) Collateral dependent : Commercial $ 780 Appraisals of collateral value Comparable sales 0 % - 5 % ( 2 %)   Commercial $ 12,186 Market approach (100) Average transfer price as a price to unpaid principal balance 48 – 53 ( 49 )   Commercial real estate $ 16,407 Appraisals of collateral value Comparable sales 0 % - 25 % ( 8 %)   Residential real estate $ 2,251 Appraisals of collateral value Comparable sales 1 % - 15 % ( 6 %)   December 31, 2020 Valuation Unobservable (dollars in thousands) Fair Value Techniques Input Range (weighed average) Impaired loans : Commercial $ 10,524 Market approach (100%) Average transfer price as a price to unpaid principal balance 48 - 53 ( 49 )   Commercial $ 227 Appraisals of collateral value Adjustment for comparable sales 1 % to + 5 % (+ 2 %)   Commercial real estate $ 1,393 Appraisals of collateral value Adjustment for comparable sales - 25 % to + 20 % (- 8 %) 38 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued) As of September 30, 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 September 30, 2021 and December 31, 2020: Fair Value Measurements Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Carrying Fair Assets Inputs Inputs Amount Value (Level 1) (Level 2) (Level 3) (dollars in thousands) September 30, 2021 Financial assets: Cash and due from banks $ 413,195 $ 413,195 $ 413,195 $ - $ - Securities available-for-sale 462,884 462,884 1,020 453,228 8,636 Investment in restricted stocks 18,106 n/a n/a n/a n/a Equity securities 13,700 13,700 11,709 1,991 - Net loans 6,498,453 6,567,363 - - 6,567,363 Derivatives 1,296 1,296 - 1,296 - Accrued interest receivable 33,610 33,610 - 1,356 32,254   Financial liabilities: Noninterest-bearing deposits 1,500,754 1,500,754 1,500,754 - - Interest-bearing deposits 4,897,584 4,899,141 3,675,673 1,223,468 - Borrowings 253,225 255,099 - 255,099 - Subordinated debentures 152,875 164,378 - 164,378 - Accrued interest payable 2,879 2,879 - 2,879 -   December 31, 2020 Financial assets: Cash and due from banks $ 303,756 $ 303,756 $ 303,756 $ - $ - Investment securities available-for-sale 487,955 487,955 157 478,954 8,844 Restricted investment in bank stocks 25,099 n/a n/a n/a n/a Equity securities 13,387 13,387 13,387 - - Net loans 6,157,081 6,244,037 - - 6,244,037 Accrued interest receivable 35,317 35,317 - 1,764 33,553   Financial liabilities: Noninterest-bearing deposits 1,339,108 1,339,108 1,339,108 - - Interest-bearing deposits 4,620,116 4,633,961 3,155,983 1,477,978 - Borrowings 425,954 429,671 - 429,671 - Subordinated debentures 202,648 214,113 - 214,113 - Derivatives 2,119 2,119 - 2,119 - Accrued interest payable 3,687 3,687 - 3,687 - 39 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued) The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, 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. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above. Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Note 7. Comprehensive Income Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s other comprehensive income is comprised of unrealized holding gains and losses on securities available-for-sale, unrealized gains (losses) on cash flow hedges, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, each net of taxes. The following table represents the reclassification out of accumulated other comprehensive (loss) income for the periods presented: Details about Accumulated Other Comprehensive Income Components Amounts Reclassified from Accumulated Other Comprehensive Income Affected Line item in the Statement Where Net Income is Presented Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Sale of investment securities $ - $ - $ 195 $ 29 Net (losses) gains on sales of securities available-for-sale Income tax expense available-for-sale - - ( 48 ) ( 6 ) $ - $ - $ 147 $ 23   Net interest income on swaps $ ( 328 ) $ ( 631 ) $ ( 1,543 ) $ ( 942 ) Interest expense 90 196 434 265 Income tax expense $ ( 238 ) $ ( 435 ) $ ( 1,109 ) $ ( 677 )   Amortization of pension plan net $ ( 75 ) $ ( 75 ) $ ( 225 ) $ ( 226 ) Other components of net periodic pension expense actuarial losses 21 21 63 63 Income tax benefit $ ( 54 ) $ ( 54 ) $ ( 162 ) $ ( 163 )   Total reclassification $ ( 292 ) $ ( 489 ) $ ( 1,124 ) $ ( 817 ) 40 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 7. Comprehensive Income – (continued) Accumulated other comprehensive income (loss) as of September 30, 2021 and December 31, 2020 consisted of the following: September 30, December 31, 2021 2020 (dollars in thousands) Investment securities available-for-sale, net of tax $ 1,475 $ 7,859   Cash flow hedge, net of tax 932 ( 1,520 ) Defined benefit pension plan, net of tax ( 3,380 ) ( 3,542 ) Total $ ( 973 ) $ 2,797   Note 8. Stock Based Compensation The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of September 30, 2021. The maximum number of shares of common stock or equivalents which may be issued under the Plan, is 750,000 . Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, restricted share units or performance units. Shares available for grant and issuance under the Plan as of September 30, 2021 are approximately 329,175 . 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 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-in-control. All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the awards vesting. Restricted shares have the same dividend and voting rights as common stock, while options, performance units and restricted stock units do not. All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are recorded as incurred. Stock-based compensation expense for the three and nine months ended September 30, 2021 was $ 1.2 million and $3.2 million, respectively. Stock-based compensation expense for the three and nine months ended September 30, 2020 was $ 0.8 million and $2.0 million, respectively. Activity in the Company’s options for the nine months ended September 30, 2021 was as follows: Number of Stock Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Outstanding as of December 31, 2020 38,013 $ 9.03 Granted - - Exercised ( 5,449 ) 8.34 Forfeited/cancelled/expired - - Outstanding as of September 30, 2021 32,564 $ 9.15 1.0 $ 554,374   Exercisable as of September 30, 2021 32,564 $ 9.15 1.0 $ 554,374 The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on September 30, 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 September 30, 2021. This amount changes based on the fair market value of the Company’s stock. 41 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 8. Stock Based Compensation – (continued) Activity in the Company’s restricted shares for the nine months ended September 30, 2021 was as follows: Weighted- Average Nonvested Grant Date Shares Fair Value Nonvested as of December 31, 2020 113,114 $ 18.17 Granted 49,971 25.33 Vested ( 68,142 ) 17.16 Forfeited/cancelled/expired ( 3,071 ) 23.76 Nonvested September 30, 2021 91,872 $ 22.62 As of September 30, 2021, there was approximately $ 1.4 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 1.2 years. A summary of the status of unearned performance unit awards and the change during the period is presented in the table below: Weighted Average Grant Units Units Date Fair (expected) (maximum) Value Unearned as of December 31, 2020 147,636 $ 17.29 Awarded 37,543 25.24 Change in estimate 37,184 15.57 Vested shares ( 29,421 ) 31.35 Forfeited/cancelled/expired ( 11,153 ) 17.06 Unearned as of September 30, 2021 181,789 233,638 $ 16.32 As of September 30, 2021, the specific number of shares related to performance units that were expected to vest was 181,789, determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed. As of September 30, 2021 the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 233,638. During the nine months ended September 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 nine months ended September 30, 2021 were 14,711 shares. As of September 30, 2021, compensation cost of approximately $ 1.4 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.6 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: Weighted Units Average Grant (expected) Date Fair Value Unearned as of December 31, 2020 169,313 $ 14.07 Awarded 45,027 25.24 Vested shares ( 68,916 ) 16.29 Forfeited/cancelled/expired ( 8,476 ) 15.83 Unearned as of September 30, 2021 136,948 $ 16.52 Any forfeitures would result in previously recognized expense being reversed. A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient. During the nine months ended September 30, 2021, 68,916 shares vested. A total of 34,458 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of restricted stock units during the nine months ended September 30, 2021 were 34,458 shares. As of September 30, 2021, compensation cost of approximately $ 1.4 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.3 years. 42 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 9. Components of Net Periodic Pension Cost The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until September 30, 2007, at which time the Company froze the plan. The following table sets forth the net periodic pension cost of the Company’s pension plan for the periods indicated. Three Months Ended September 30, Affected Line Item in the Consolidated Statements of Income     2021   2020     (dollars in thousands) Service cost   $ -     $ -   Interest cost     71       91   Other components of net periodic pension expense   Expected return on plan assets     ( 213 )     ( 196 ) Other components of net periodic pension expense Net amortization     75       75   Other components of net periodic pension expense                   Total periodic pension income   $ ( 67 )   $ ( 30 ) Nine Months Ended September 30, Affected Line Item in the Consolidated Statements of Income     2021   2020     (dollars in thousands) Service cost   $ -     $ -   Interest cost     213       273   Other components of net periodic pension expense   Expected return on plan assets     ( 639 )     ( 588 ) Other components of net periodic pension expense Net amortization     225       226   Other components of net periodic pension expense                   Total periodic pension income   $ ( 201 )   $ ( 89 ) Contributions The Company did not contribute to the Pension Trust during the nine months ended September 30, 2021. The Company does not plan on contributing amounts to the Pension Trust for the remainder of 2021. The trust is established to provide retirement and other benefits for eligible employees and their beneficiaries. No part of the trust assets may be applied to any purpose other than providing benefits under the plan and for defraying expenses of administering the plan and the trust. 43 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 10. FHLB Borrowings The Company’s FHLB borrowings and weighted average interest rates are summarized below: September 30, 2021 December 31, 2020 Amount Rate Amount Rate (dollars in thousands) Total FHLB borrowings $ 253,225 1.23 % $ 425,954 1.07 %   By remaining period to maturity: Less than 1 year $ 168,213 1.00 % $ 297,570 0.84 % 1 year through less than 2 years 57,360 1.93 % 75,644 1.42 % 2 years through less than 3 years - - 50,000 1.84 % 3 years through less than 4 years 25,000 1.00 % - - 4 years through 5 years 2,050 2.23 %   - - After 5 years 729 2.91 %   2,824 2.42 % Total FHLB borrowings 253,352 1.23 % 426,038 1.07 % Fair value discount ( 127 ) ( 84 ) FHLB borrowings, net $ 253,225 $ 425,954 The FHLB borrowings are secured by pledges of certain collateral including, but not limited to, U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans. Advances are payable at stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances are fixed rates. The advances as of September 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 September 30, 2021 the Company had remaining borrowing capacity of approximately $ 1.2 billion at FHLB and $ 75 million of the less than 1 year FHLB advances were hedged with interest rate swaps, see Note 4 for additional details. Note 11. Subordinated Debentures During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly owned subsidiary of the Parent Corporation issued $ 5.0 million of MMCapS capital securities to investors due on January 23, 2034 . The trust loaned the proceeds of this offering to the Company and received in exchange $ 5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85 % and re-prices quarterly. The rate as of September 30, 2021 was 2.98 %. The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of September 30, 2021 and December 31, 2020. Issuance Date Securities Issued Liquidation Value Coupon Rate Maturity Redeemable by Issuer Beginning 12/19/2003 $ 5,000,000 $1,000 per Capital Security Floating 3-month LIBOR + 285 Basis Points 01/23/2034 01/23/2009   44 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 11. Subordinated Debentures – (continued) During September 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, 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 to be zero. During January 2018, the Parent Corporation issued $ 75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain accredited investors. The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included the Parent Corporation contributing $ 65 million of the net proceeds to the Bank in the form of debt and common equity. The Notes are non-callable for five years, have a stated maturity of February 1, 2028 and bear interest at a fixed rate of 5.20 % per year, from and including January 17, 2018 to, but excluding February 1, 2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points . 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 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.   Note 12. Preferred Stock On August 19, 2021, the Company completed an underwritten public offering of 115,000 shares, or $ 115 million in aggregate liquidation preference, of its 5.25 % Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A, no par value, with a liquidation preference of $ 1,000 per share. The net proceeds received from the issuance of preferred stock at the time of closing were $ 110.9 million.   45 Table of Contents