ConnectOne Bancorp, Inc. 10-K

ConnectOne Bancorp, Inc. Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One)   ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.   For the Fiscal Year Ended December 31 , 2021   OR   ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.   For the Transition Period from          to        Commission File Number: 000-11486   ConnectOne Bancorp, Inc. (Exact name of registrant as specified in its charter) New Jersey 52-1273725 (State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification Number) 301 Sylvan Avenue Englewood Cliffs , New Jersey   07632 (Address of Principal Executive Offices) (Zip Code) 201 - 816-8900 (Registrant’s Telephone Number, Including Area Code)   Securities registered pursuant to Section 12(b) of the Exchange Act: Title of each class Trading Symbol Name of each exchange on which registered Common Stock, no par value CNOB NASDAQ Depositary Shares (each representing a 1/40 th interest in a share of 5.25% Series A Non-Cumulative, perpetual preferred stock) CNOBP NASDAQ   Securities registered pursuant to Section 12(g) of the Exchange Act: None Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant has required to submit and post such files.) Yes ☒ No ☐ Table of Contents Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting company or emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934. Large Accelerated Filer ☒ Accelerated Filer ☐ Non-Accelerated ☐ Small Reporting Company ☐   Emerging Growth Company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared its audit report. Yes ☒ No ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐ No ☒ The aggregate market value of the voting and nonvoting common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold or the average bid and ask price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter - $ 968.8 million. Shares Outstanding on February 25, 2022 Common Stock, no par value: 39,605,913 shares   DOCUMENTS INCORPORATED BY REFERENCE Definitive proxy statement in connection with the 2022 Annual Stockholders Meeting to be filed with the Commission pursuant to Regulation 14A will be incorporated by reference in Part III Table of Contents CONNECTONE BANCORP, INC. TABLE OF CONTENTS Page PART I Item 1. Business 5 Item 1A. Risk Factors 16 Item 1B. Unresolved Staff Comments 24 Item 2. Properties 25 Item 3. Legal Proceedings 25 Item 4. Mine Safety Disclosures 25 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 26 Item 6. Selected Financial Data 27 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 47 PART II Item 8. Financial Statements and Supplementary Data: 48 Report of Independent Registered Public Accounting Firm 49 Consolidated Statements of Financial Condition 52 Consolidated Statements of Income 53 Consolidated Statements of Comprehensive Income 54 Consolidated Statements of Changes in Stockholders’ Equity 55 Consolidated Statements of Cash Flows 56 Notes to Consolidated Financial Statements 57 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 110 Item 9A. Controls and Procedures 110 Item 9B. Other Information 110 PART III Item 10. Directors, Executive Officers and Corporate Governance 111 Item 11. Executive Compensation 111 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 111 Item 13. Certain Relationships and Related Transactions, and Director Independence 111 Item 14. Principal Accounting Fees and Services 111 PART IV Item 15. Exhibits, Financial Statements Schedules 112 Signatures 115 Information included in or incorporated by reference in this Annual Report on Form 10-K, other filings with the Securities and Exchange Commission, the Company’s press releases or other public statements, contain or may contain forward looking statements. Please refer to a discussion of the Company’s forward-looking statements and associated risks in “Item 1 - Business – Forward Looking Statements” and “Item 1A - Risk Factors” in this Annual Report on Form 10-K. Table of Contents CONNECTONE BANCORP, INC. FORM 10-K PART I Item 1. Business Forward Looking Statements This report, in Item 1, Item 7 and elsewhere, includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. These forward-looking statements concern the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp, Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) the impact of the COVID-19 pandemic and the government’s response to the pandemic on our operations as well as those of our clients and on the economy generally and in our market area specifically, (2) competitive pressures among depository institutions may increase significantly; (3) changes in the interest rate environment may reduce interest margins; (4) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (5) general economic conditions may be less favorable than expected; (6) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (7) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp, Inc. is engaged; (8) changes and trends in the securities markets may adversely impact ConnectOne Bancorp, Inc.; (9) a delayed or incomplete resolution of regulatory issues could adversely impact our planning; (10) difficulties in integrating any businesses that we may acquire, which may increase our expenses and delay the achievement of any benefits that we may expect from such acquisitions; (11) the impact of reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; and (12) the outcome of any future regulatory and legal investigations and proceedings may not be anticipated. Further information on other factors that could affect the financial results of ConnectOne Bancorp, Inc. are included in Item 1A of this Annual Report on Form 10-K and in ConnectOne Bancorp’s other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission’s website at http://www.sec.gov and/or from ConnectOne Bancorp, Inc. ConnectOne Bancorp, Inc. assumes no obligation to update forward-looking statements at any time. Historical Development of Business ConnectOne Bancorp, Inc., (the “Company” and with ConnectOne Bank, “we” or “us”) a one-bank holding company, was incorporated in the State of New Jersey on November 12, 1982 as Center Bancorp, Inc. and commenced operations on May 1, 1983 upon the acquisition of all outstanding shares of capital stock of Union Center National Bank, its then principal subsidiary. On January 20, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ConnectOne Bancorp, Inc., a New Jersey corporation (“Legacy ConnectOne”). Effective July 1, 2014, the Company completed the merger contemplated by the Merger Agreement (the “Merger”) with Legacy ConnectOne merging with and into the Company, with the Company as the surviving corporation. Also, at closing, the Company changed its name to “ConnectOne Bancorp, Inc.” and changed its NASDAQ trading symbol to “CNOB”. Immediately following the consummation of the Merger, Union Center National Bank merged with and into ConnectOne Bank, a New Jersey-chartered commercial bank (“ConnectOne Bank” or the “Bank”) and a wholly-owned subsidiary of Legacy ConnectOne, with ConnectOne Bank continuing as the surviving bank. On July 11, 2018, the Company entered into an Agreement and Plan of Merger with Greater Hudson Bank (“GHB”), under which GHB merged with and into ConnectOne Bank, with ConnectOne Bank as the surviving bank. This transaction was consummated effective January 2, 2019. As part of this merger, the Company acquired approximately $0.4 billion in loans, assumed approximately $0.4 billion in deposits and acquired seven branch offices located in Rockland, Orange and Westchester, Counties, New York. On May 31, 2019, the Company, through the Bank, completed its purchase of New York/Boston-based BoeFly, LLC (“BoeFly”). BoeFly’s online business lending marketplace helps connect small- to medium-size businesses, primarily franchisors and franchisees, with professional loan brokers and lenders across the United States. BoeFly operates as an independent brand and subsidiary of the Bank. - 5 - Table of Contents On January 2, 2020, the Company completed its in-market merger with Bergen County, New Jersey based Bancorp of New Jersey, Inc. (“BNJ”), pursuant to which BNJ merged with and into the Company, and BNJ’s bank subsidiary, Bank of New Jersey, merged with and into the Bank. All of BNJ’s offices were located in Bergen County, New Jersey. As part of this merger, the Company acquired approximately $0.8 billion in loans and assumed approximately $0.8 billion in deposits. The Company’s primary activity, at this time, is to act as a holding company for the Bank and its other subsidiaries. As used herein, the term “Parent Corporation” shall refer to the Company on an unconsolidated basis. The Company owns 100% of the voting shares of Center Bancorp, Inc. Statutory Trust II, through which it issued trust preferred securities. The trust exists for the exclusive purpose of (i) issuing trust securities representing undivided beneficial interests in the assets of the trust; (ii) investing the gross proceeds of the trust securities in $5.2 million of junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with Financial Accounting Standards Board (“FASB”) ASC 810-10 “Consolidation of Variable Interest Entities.” Distributions on the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income. See Note 9 of the Notes to Consolidated Financial Statements. Except as described above, the Company’s wholly-owned subsidiaries are all included in the Company’s consolidated financial statements. These subsidiaries include BoeFly, an advertising subsidiary, an insurance subsidiary, and various investment subsidiaries which hold, maintain and manage investment assets for the Company. The Company’s subsidiaries also include a Real Estate Investment trust (the “REIT”) which holds a portion of the Company’s real estate loan portfolio. All subsidiaries mentioned above are directly or indirectly wholly owned by the Company, except that the Company owns less than 100% of the preferred stock of the REIT. A REIT trust must have 100 or more shareholders. The REIT has issued less than 20% of its outstanding non-voting preferred stock to individuals, primarily Bank personnel and directors. SEC Reports and Corporate Governance The Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto available on its website at https://www.connectonebank.com without charge as soon as reasonably practicable after filing or furnishing them to the SEC. Also available on the website are the Company’s corporate code of conduct that applies to all of the Company’s employees, including principal officers and directors, and charters for the Audit/Risk Committee, Nominating and Corporate Governance Committee and Compensation Committee and the Company’s Corporate Governance Guidelines.. Additionally, the Company will provide without charge, a copy of its Annual Report on Form 10-K to any shareholder by mail. Requests should be sent to ConnectOne Bancorp, Inc., Attention: Investor Relations, 301 Sylvan Avenue, Englewood Cliffs, New Jersey 07632. Narrative Description of the Business ConnectOne Bancorp, Inc. is a modern financial services company with over $8.1 billion in assets. It operates through its bank subsidiary, ConnectOne Bank and the Bank’s fintech subsidiary Boefly. ConnectOne Bank is a high-performing commercial bank offering a full suite of deposit and loan products and services to the general public primarily, to small and mid-sized businesses, local professionals and individuals residing, working and conducting business in the Northern New Jersey the New York Metropolitan area and the South Florida market served by our West Palm Beach Office. The bank's continuous investments in technology coupled with top talent allow ConnectOne to operate a "branch-lite" model, making for a highly efficient operating environment. BoeFly, a wholly owned subsidiary of Connectone Bank, is a fintech marketplace that connects borrowers in the franchise space with funding solutions through a network of partner banks. Our Market Area ConnectOne Bank's offices are located primarily in the New York metro market and span New Jersey, New York City, Long Island, and the Hudson Valley, including Rockland, Orange, and Westchester counties. Through high tech tools and service, ConnectOne Bank is able to extend its reach supporting clients as they move into new markets, such as South Florida where we recently opened an office in West Palm Beach. Our market area includes some of the most affluent markets in the United States. The Bank's goal is to continue to expand and do business to support our clients as they grow. Advances in technology have created new delivery channels that allow us to service clients and maintain business relationships with a reduced-branch model, establishing regional offices that serve as business hubs. The Bank's experience has shown that the key to client acquisition and retention is attracting quality business relationship officers who will frequently go to the client, rather than having the client come to us. - 6 - Table of Contents BoeFly operates out of its main offices in Boston, Massachusetts and New York, and has a nationwide presence through its digital business marketplace. Products and Services We derive a majority of our revenue from net interest income (i.e., the difference between the interest we receive on our loans and securities and the interest we pay on deposits and borrowings). We offer a broad range of deposit and loan products. In addition, to attract the business of consumer and business clients, we provide a broad array of other banking services. Products and services provided include personal and business checking accounts, retirement accounts, money market accounts, time and savings accounts, credit cards, wire transfers, access to automated teller services, internet banking, Treasury Direct, Automated Clearing House (“ACH”) origination, and mobile banking by phone. In addition, we offer safe deposit boxes. The Bank also offers remote deposit capture banking for business clients, providing the ability to electronically scan and transmit checks for deposit, reducing time and cost. Non-interest demand deposit products include “Totally Free Checking” and “Simply Better Checking” for Consumer clients and “Small Business Checking” and “Analysis Checking” for commercial clients. Interest-bearing checking accounts require minimum balances for both Consumer and commercial clients and include “Consumer Interest Checking” and “Business Interest Checking”. Money market accounts consist of products that provide a market rate of interest to depositors. Our savings accounts consist of statement type accounts. Time deposits consist of certificates of deposit, including those held in IRA accounts, generally with initial maturities ranging from 31 days to 60 months and brokered certificates of deposit, which we use for asset liability management purposes and to supplement other sources of funding. CDARS/ICS Reciprocal deposits are offered based on the Bank’s participation in the IntraFi Network LLC network, formerly known as Promontory Interfinancial Network. Clients, who are Federal Deposit Insurance Corporation (“FDIC”) insurance sensitive, are able to place large dollar deposits with the Company and the Company utilizes CDARS to place those funds into certificates of deposit issued by other banks in the Network. This occurs in increments of less than the FDIC insurance limits so that both the principal and interest are eligible for FDIC insurance coverage in amounts larger than the insured dollar amount. Unless certain conditions are satisfied, the FDIC considers these funds as brokered deposits. Deposits serve as the primary source of funding for our interest-earning assets, but also generate noninterest revenue through insufficient funds fees, stop payment fees, wire transfer fees, safe deposit rental fees, debit card income, including foreign ATM fees and credit and debit card interchange, and other miscellaneous fees. In addition, the Bank generates additional noninterest revenue associated with residential, commercial and Small Business Administration (“SBA”) loan originations and sales, loan servicing, late fees and merchant services. We offer consumer and commercial business loans on a secured and unsecured basis, revolving lines of credit, commercial mortgage loans, and residential mortgages on both primary and secondary residences, home equity loans, bridge loans and other personal purpose loans. However, we are not and have not historically been a participant in the sub-prime lending market. Commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, inventory and equipment, and mortgages filed on commercial and residential real estate. Commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include loans secured by first liens on completed commercial properties, including multi-family properties, to purchase or refinance such properties. Residential mortgages include loans secured by first liens on 1-4 family residential real estate and are generally made to existing clients of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences. Consumer loans are made to individuals who qualify for auto loans, cash reserve, credit cards and installment loans. During 2020 and 2021, we participated in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) created under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP provided funds to guarantee forgivable loans originated by depository institutions to eligible small businesses through the SBA’s 7(a) loan guaranty program. These loans are 100% federally guaranteed (principal and interest) and currently not subject to any allocation of allowance for credit losses. An eligible business could apply under the PPP during the applicable covered period and receive a loan up to 2.5 times its average monthly “payroll costs” limited to a loan amount of $10.0 million. The proceeds of the loan could be used for payroll (excluding individual employee compensation over $100,000 per year), mortgage, interest, rent, insurance, utilities and other qualifying expenses. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term (or five-year loan term for loans made after June 5, 2020) to maturity; and (c) principal and interest payments deferred until the date on which the SBA remits the loan forgiveness amount to the borrower’s lender or, alternatively, notifies the lender no loan forgiveness is allowed. If the borrower did not submit a loan forgiveness application to the lender within 10 months following the end of the 24-week loan forgiveness covered period (or the 8-week loan forgiveness covered period with respect to loans made prior to June 5, 2020 if such covered period is elected by the borrower), the borrower would begin paying principal and interest on the PPP loan immediately after the 10-month period. - 7 - Table of Contents On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law. Among other things, the Economic Aid Act extended the PPP through March 31, 2021 and allocated additional funds for new PPP loans, to be guaranteed by the SBA. The extension included an authorization to make new PPP loans to existing PPP loan borrowers, and to make loans to parties that did not previously obtain a PPP loan. The Company participated in the extended PPP. Loans originated under the extended PPP have substantially the same terms as under the original PPP. As of December 31, 2021, the Company had $93.1 million in total PPP loans outstanding and not yet forgiven. The Board of Directors has approved a credit policy granting designated lending authorities to specific officers of the Bank. Those officers are comprised of the Chief Executive Officer, President, Chief Credit Officer, Senior Lending Officer, Team Leaders and the Consumer Loan Officers. All loan approvals require the signatures of a minimum of two officers. The Senior Lending Group (Chief Executive Officer, President, Chief Credit Officer and Senior Lending Officer) can approve loans up to $35 million in aggregate loan exposure with no policy exceptions and up to $30 million with policy exceptions. Furthermore, the Senior Lending Group has authority to approve unsecured loan amounts without policy exceptions up to $10 million and up to $5 million with an exception. Loans to insiders must be approved by the entire Board. The Bank’s lending policies generally provide for lending within our primary trade area. However, the Bank will make loans to persons outside of our primary trade area when we deem it prudent to do so. To promote a high degree of asset quality, the Bank focuses primarily upon offering secured loans. However, the Bank does make short-term unsecured loans to borrowers with higher net worth and income profiles. The Bank generally requires loan clients to maintain deposit accounts with the Bank. In addition, the Bank generally provides for a minimum required rate of interest in its variable rate loans. The Bank’s legal lending limit to any one borrower is 15% of the Bank’s capital base (defined as tangible equity plus the allowance for credit losses) for most loans ($145.9 million) and 25% of the capital base for loans secured by readily marketable collateral ($243.2 million). As of December 31, 2021, the Bank’s largest committed relationship (to several affiliated borrowers) was $103.2 million and single largest loan outstanding was $70.5 million. Our business model includes using industry best practices for community banks, including personalized service, state-of-the-art technology and extended hours. We believe that this will generate deposit accounts with somewhat larger average balances than are found at many other financial institutions. We also use pricing techniques in our efforts to attract banking relationships having larger than average balances. Competition The banking business is highly competitive. We face substantial immediate competition and potential future competition both in attracting deposits and in originating loans. We compete with numerous commercial banks, savings banks and savings and loan associations, many of which have assets, capital and lending limits larger than those that we have. Other competitors include money market mutual funds, mortgage bankers, insurance companies, stock brokerage firms, regulated small loan companies, credit unions and issuers of commercial paper and other securities. In addition, the banking industry in general faces competition for deposit, credit and money management products from non-bank technology firms, or fintech companies, which may offer products independently or through relationships with insured depository institutions. Our larger competitors have greater financial resources to finance wide-ranging advertising campaigns. Additionally, we endeavor to compete for business by providing high quality, personal service to clients, client access to our decision-makers and competitive interest rates and fees. We seek to hire and retain quality employees who desire greater responsibility than may be available working for a larger employer. Employees and Human Capital Resources Our employees are one of our greatest assets and we believe they provide us with an advantage over our competitors. We believe we have a talented, diverse team of financial experts and relationship specialists who understand the demands of a successful business and are prepared to meet them. As of December 31, 2021, we had 434 full-time employees, and 4 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good. We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development are advanced through ongoing performance and development conversations with employees, internally developed training programs, customized corporate training engagements and educational reimbursement programs. We leverage a combination of customized content and external resources to address required banking compliance, skills training for new roles, and development of people management skills. We continuously assess any skill gaps and are gearing learning for the banking positions of the future. - 8 - Table of Contents The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through our technology and teamwork, we were able to transition, over a short period of time, substantially all of our non-branch employees to a remote working environment while still servicing the needs of our clients. Branch locations have operated in a variety of ways: closed to lobby traffic, in person banking by appointment only, curbside banking and always with COVID safety protocols at the forefront. When we were able to resume substantial in office employee participation, we took a number of steps to protect the health and safety of our employees, including adhering to CDC and state guidelines for in office work (limiting occupancy in the buildings, social distancing, mask requirements, limiting in person meetings) We also developed COVID-19 protocols as a resources for all employees in the event someone was exposed. Currently, the Company is operating under a Company-wide “return-to-work” policy, and remains in compliance with any and all government requirements related to the pandemic. Employee retention helps us operate efficiently and is key to our ability to compete against larger competitors. We focus on promoting employees from within and leveraging their knowledge of the organization as we continue to grow our Bank. In 2021, 66 employees were promoted into new roles. SUPERVISION AND REGULATION The banking industry is highly regulated. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to deploy assets and maximize income. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the Company or the Bank. It is intended only to briefly summarize some material provisions. Bank Holding Company Regulation The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “Holding Company Act”). As a bank holding company, the Company is supervised by the Board of Governors of the Federal Reserve System (“FRB”) and is required to file reports with the FRB and provide such additional information as the FRB may require. The Company and its subsidiaries are subject to examination by the FRB. The Holding Company Act prohibits the Company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks, except that it may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking “as to be a proper incident thereto.” The Holding Company Act requires prior approval by the FRB of the acquisition by the Company of more than 5% of the voting stock of any other bank. Satisfactory capital ratios and Community Reinvestment Act ratings and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The policy of the FRB, embodied in FRB regulations, provides that a bank holding company is expected to act as a source of financial and managerial strength to its subsidiary bank(s) and to commit resources to support the subsidiary bank(s) in circumstances in which it might not do so absent that policy. As a New Jersey-charted commercial bank and an FDIC-insured institution, acquisitions by the Bank require approval of the New Jersey Department of Banking and Insurance (the “Banking Department”) and the FDIC, an agency of the federal government. The Holding Company Act does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. The Gramm-Leach-Bliley Act, discussed below, allows the Company to expand into insurance, securities, merchant banking activities, and other activities that are financial in nature, in certain circumstances. Regulation of Bank Subsidiary The operations of the Bank are subject to requirements and restrictions under federal law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted, and limitations on the types of investments that may be made and the types of services which may be offered. Various consumer laws and regulations also affect the operations of the Bank. There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, which govern the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding company’s non-bank subsidiaries and affiliates. Under federal law, a bank subsidiary may only make loans or extensions of credit to, or invest in the securities of, its parent or the non-bank subsidiaries of its parent (other than direct subsidiaries of such bank which are not financial subsidiaries) or to any affiliate, or take their securities as collateral for loans to any borrower, upon satisfaction of various regulatory criteria, including specific collateral loan to value requirements. - 9 - Table of Contents The Dodd-Frank Act The Dodd-Frank Act, adopted in 2010, will continue to have a broad impact on the financial services industry, as a result of the significant regulatory and compliance changes made by the Dodd-Frank Act, including, among other things, (i) enhanced resolution authority over troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the FRB, the Office of the Comptroller of the Currency and the FDIC. A summary of certain provisions of the Dodd-Frank Act is set forth below: • Minimum Capital Requirements. The Dodd-Frank Act required capital rules and the application of the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies. In addition to making bank holding companies subject to the same capital requirements as their bank subsidiaries, these provisions (often referred to as the Collins Amendment to the Dodd-Frank Act) were also intended to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. The Dodd-Frank Act also requires banking regulators to seek to make capital standards countercyclical, so that the required levels of capital increase in times of economic expansion and decrease in times of economic contraction. See “Capital Adequacy Guidelines” for a description of capital requirements adopted by U.S. federal banking regulators in 2013 and the treatment of trust preferred securities under such rules. • The Consumer Financial Protection Bureau (“Bureau”). The Dodd-Frank Act created the Bureau. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against state-chartered institutions. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Institutions with $10 billion or less in assets, such as the Bank, will continue to be examined for compliance with the consumer laws by their primary bank regulators. • Deposit Insurance. The Dodd-Frank Act made permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revised the assessment base against which an insured depository institution’s deposit insurance premium paid to the Deposit Insurance Fund (“DIF”) will be calculated. Under the amendments, the assessment base is no longer based on the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. The FDIC has set the designated reserve ratio at 2.0%. • Shareholder Votes . The Dodd-Frank Act requires publicly traded companies like the Company to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments in certain circumstances. The Dodd-Frank Act also authorizes the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy materials. The SEC has not yet adopted such rules. Although a significant number of the rules and regulations mandated by the Dodd-Frank Act have been finalized, many of the requirements called for have yet to be fully implemented and will likely be subject to implementing regulations over the course of several years. In addition, some of the requirements of the Dodd-Frank Act that were implemented have already been revised. See “Economic Growth, Regulatory Relief and Consumer Protection Act” below. Given the uncertainty associated with the way the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements (which, in turn, could require the Company and the Bank to seek additional capital) or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements. - 10 - Table of Contents Economic Growth, Regulatory Relief and Consumer Protection Act. The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), adopted in May of 2018, was intended to provide regulatory relief to midsized and regional banks. While many of its provisions are aimed at larger institutions, such as raising the threshold to be considered a systemically important financial institution to $250 billion in assets from $50 billion in assets, many of its provisions will provide regulatory relief to those institutions with $10 billion or more in assets, as well as to those institutions with less than $10 billion in assets. Among other things, the EGRRCPA increased the asset threshold for depository institutions and holding companies to perform stress tests required under Dodd Frank from $10 billion to $250 billion, exempted institutions with less than $10 billion in consolidated assets from the Volcker Rule, raised the threshold for the requirement that publicly traded holding companies have a risk committee from $10 billion in consolidated assets to $50 billion in consolidated assets, directed the federal banking agencies to adopt a “community bank leverage ratio”, applicable to institutions and holding companies with less than $10 billion in assets, and to provide that compliance with the new ratio would be deemed compliance with all capital requirements applicable to the institution or holding company (See “-Capital Adequacy Guidelines”), and provided that residential mortgage loans meeting certain criteria and originated by institutions with less than $10 billion in total assets will be deemed to meet the “ability to repay rule” under the Truth in Lending Act. In addition, the EGRRCPA limited the definition of loans that would be subject to the higher risk weighting applicable to High Volatility Commercial Real Estate. Certain of the regulations needed to implement the EGRRCPA have yet to be promulgated by the federal banking agencies, and others have not been fully implemented or enforced and so it is still uncertain how full implementation of the EGRRCPA will affect the Company and the Bank. Regulation W Regulation W codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions. Affiliates of a bank include, among other entities, the bank’s holding company and companies that are under common control with the bank. The Company is considered to be an affiliate of the Bank. In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates: • to an amount equal to 10% of the bank’s capital and surplus, in the case of covered transactions with any one affiliate; and • to an amount equal to 20% of the bank’s capital and surplus, in the case of covered transactions with all affiliates. In addition, a bank and its subsidiaries may engage in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the bank or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A “covered transaction” includes: • a loan or extension of credit to an affiliate; • a purchase of, or an investment in, securities issued by an affiliate; • a purchase of assets from an affiliate, with some exceptions; • the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; and • the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. Further, under Regulation W: • a bank and its subsidiaries may not purchase a low-quality asset from an affiliate; • covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and • with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by certain types of collateral with a market value ranging from 100% to 130% of the loan value, depending on the type of collateral, of the amount of the loan or extension of credit. Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the FRB decides to treat these subsidiaries as affiliates. FDICIA Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), each federal banking agency has promulgated regulations, specifying the levels at which an insured depository institution such as the Bank would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution. To qualify to engage in financial activities under the Gramm-Leach-Bliley Act, all depository institutions must be “well capitalized.” - 11 - Table of Contents The FDIC’s regulations implementing these provisions of FDICIA provide that an institution will be classified as “well capitalized” if it (i) has a total risk-based capital ratio of at least 10.0%, (ii) has a Tier 1 risk-based capital ratio of at least 8.0%, (iii) has a Tier 1 leverage ratio of at least 5.0%, (iv) has a common equity Tier 1 capital ratio of at least 6.5%, and (v) meets certain other requirements. An institution will be classified as “adequately capitalized” if it (i) has a total risk-based capital ratio of at least 8.0%, (ii) has a Tier 1 risk-based capital ratio of at least 6.0%, (iii) has a Tier 1 leverage ratio of at least 4.0%, has a common equity Tier 1 capital ratio of at least 4.5%, and (v) does not meet the definition of “well capitalized.” An institution will be classified as “undercapitalized” if it (i) has a total risk-based capital ratio of less than 8.0%, (ii) has a Tier 1 risk-based capital ratio of less than 6.0%, (iii) has a Tier 1 leverage ratio of less than 4.0%, or (iv) has a common equity Tier 1 capital ratio of less than 4.5%. An institution will be classified as “significantly undercapitalized” if it (i) has a total risk-based capital ratio of less than 6.0%, (ii) has a Tier 1 risk-based capital ratio of less than 4.0%, (iii) has a Tier 1 leverage ratio of less than 3.0%, or (iv) has a common equity Tier 1 capital ratio of less 3.0%. An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets ratio that is equal to or less than 2.0%. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination rating. In addition, significant provisions of FDICIA required federal banking regulators to impose standards in a number of other important areas to assure bank safety and soundness, including internal controls, information systems and internal audit systems, credit underwriting, asset growth, compensation, loan documentation and interest rate exposure. Capital Adequacy Guidelines In December 2010 and January 2011, the Basel Committee on Banking Supervision (the “Basel Committee”) published the final texts of reforms on capital and liquidity generally referred to as “Basel III.” In July 2013, the FRB, the FDIC and the Comptroller of the Currency adopted final rules (the “New Rules”), which implement certain provisions of Basel III and the Dodd-Frank Act. The New Rules replaced the existing general risk-based capital rules of the various banking agencies with a single, integrated regulatory capital framework. The New Rules require higher capital cushions and more stringent criteria for what qualifies as regulatory capital. The New Rules were effective for the Bank and the Company on January 1, 2015. Under the New Rules, the Company and the Bank are required to maintain the following minimum capital ratios, expressed as a percentage of risk-weighted assets: · Common Equity Tier 1 Capital Ratio of 4.5% (the “CET1”); · Tier 1 Capital Ratio (CET1 capital plus “Additional Tier 1 capital”) of 6.0%; and · Total Capital Ratio (Tier 1 capital plus Tier 2 capital) of 8.0%. In addition, the Company and the Bank will be subject to a leverage ratio of 4% (calculated as Tier 1 capital to average consolidated assets as reported on the consolidated financial statements). The New Rules also require a “capital conservation buffer.” Under this provision, the Company and the Bank are required to maintain a 2.5% capital conservation buffer, which is composed entirely of CET1, on top of the minimum risk-weighted asset ratios described above, resulting in the following minimum capital ratios: · CET1 of 7%; · Tier 1 Capital Ratio of 8.5%; and · Total Capital Ratio of 10.5%. The purpose of the capital conservation buffer is to absorb losses during periods of economic stress. Banking institutions with a CET1, Tier 1 Capital Ratio and Total Capital Ratio above the minimum set forth above but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level, and it increased by 0.625% on each subsequent January 1 until it was fully phased in at 2.5% on January 1, 2019. The New Rules provide for several deductions from and adjustments to CET1. For example, mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in common equity issued by nonconsolidated financial entities must be deducted from CET1 to the extent that any one of those categories exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. - 12 - Table of Contents Under the New Rules, banking organizations such as the Company and the Bank may make a one-time permanent election regarding the treatment of accumulated other comprehensive income items in determining regulatory capital ratios. Effective as of January 1, 2015, the Company and the Bank elected to exclude accumulated other comprehensive income items for purposes of determining regulatory capital. While the New Rules generally require the phase-out of non-qualifying capital instruments such as trust preferred securities and cumulative perpetual preferred stock, holding companies with less than $15 billion in total consolidated assets as of December 31, 2009, such as the Company, may permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in Additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature. The New Rules prescribe a standardized approach for calculating risk-weighted assets. Depending on the nature of the assets, the risk categories generally range from 0% for U.S. Government and agency securities, to 600% for certain equity exposures, and result in higher risk weights for a variety of asset categories. In addition, the New Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation. Consistent with the Dodd-Frank Act, the New Rules adopt alternatives to credit ratings for calculating the risk-weighting for certain assets. In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”). Under the CARES Act, the effective date for the implementation of ASU No. 2016-13 was delayed until the earlier of the end of the health crises caused by the COVID-19 Pandemic or December 31, 2020. The Economic Aid Act then further delayed implementation until the earlier of the end of the health crises caused by the COVID-19 Pandemic or January 1, 2022. The final rule also provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. The Company adopted the CECL standard effective January 1, 2021. On September 17, 2019, the federal banking agencies issued a final rule providing simplified capital requirements for certain community banking organizations (banks and holding companies) with less than $10 billion in total consolidated assets, implementing provisions of EGRRCPA discussed above. Under the rule, a qualifying community banking organization would be eligible to elect the community bank leverage ratio framework or continue to measure capital under the existing Basel III requirements set forth in the New Rules. The new rule took effect January 1, 2020, and qualifying community banking organizations could elect to opt into the new community bank leverage ratio (“CBLR”) in their call report for the first quarter of 2020. A qualifying community banking organization (“QCBO”) is defined as a bank, a savings association, a bank holding company or a savings and loan holding company with: · a leverage capital ratio of greater than 9.0%; · total consolidated assets of less than $10.0 billion; · total off-balance sheet exposures (excluding derivatives other than credit derivatives and unconditionally cancelable commitments) of 25% or less of total consolidated assets; and · total trading assets and trading liabilities of 5% or less of total consolidated assets. A QCBO opting into the CBLR must maintain a CBLR of 9.0%, subject to a two-quarter grace period to come back into compliance, provided that the QCBO maintains a leverage ratio of more than 8.0% during the grace period. A QCBO failing to satisfy these requirements must comply with the Basel III requirements as implemented by the New Rules. The numerator of the CBLR is Tier 1 capital, as calculated under present rules. The denominator of the CBLR is the QCBO’s average assets, calculated in accordance with the QCBO’s Call Report instructions and less assets deducted from Tier 1 capital. The Company and the Bank have elected not to opt into the CBLR. Federal Deposit Insurance and Premiums Substantially all the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The assessment base for deposit insurance premiums is an institution’s average consolidated total assets minus average tangible equity. In connection with adopting this assessment base calculation, the FDIC lowered total base assessment rates to between 2.5 and 9 basis points for banks in the lowest risk category, and 30 to 45 basis points for banks in the highest risk category. The Company paid $2.9 million and $4.0 million in total FDIC assessments in 2021 and 2020, respectively. - 13 - Table of Contents The FDIC has a designated reserve ratio (DRR), that is, the ratio of the DIF to insured deposits, of 1.35%. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “Modernization Act”): · allows bank holding companies meeting management, capital, and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than previously was permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies, if the bank holding company elects to become a financial holding company. Thereafter it may engage in certain financial activities without further approvals; · allows insurers and other financial services companies to acquire banks; · removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and · establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. The Modernization Act also modified other financial laws, including laws related to financial privacy and community reinvestment. The Company has elected not to become a financial holding company. Community Reinvestment Act Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, an insured depository institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examination of every bank, to assess the bank’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such bank. USA PATRIOT Act The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) gives the federal government powers to address terrorist threats through domestic security measures, surveillance powers, information sharing, and anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, the USA PATRIOT Act encourages information-sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of the USA PATRIOT Act impose affirmative obligations on a broad range of financial institutions, including banks, thrift institutions, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, the USA PATRIOT Act imposes the following requirements with respect to financial institutions: · All financial institutions must establish anti-money laundering programs that include, at a minimum: (i) internal policies, procedures, and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; and (iv) an independent audit function to test the anti-money laundering program. · The Secretary of the Department of Treasury, in conjunction with other bank regulators, is authorized to issue regulations that provide for minimum standards with respect to client identification at the time new accounts are opened. · Financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) are required to establish appropriate, specific and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. - 14 - Table of Contents · Financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain record keeping obligations with respect to correspondent accounts of foreign banks. · Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications. The United States Treasury Department has issued a number of implementing regulations which address various requirements of the USA PATRIOT Act and are applicable to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their clients. Loans to Related Parties The Company’s authority to extend credit to its directors and executive officers, as well as to entities controlled by such persons, is currently governed by the requirements of the Sarbanes-Oxley Act of 2002 and Regulation O promulgated by the FRB. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. In addition, the Bank’s Board of Directors must approve all extensions of credit to insiders. Dividend Restrictions The Parent Corporation is a legal entity separate and distinct from the Bank. Virtually all the revenue of the Parent Corporation available for payment of dividends on its capital stock will result from amounts paid to the Parent Corporation by the Bank. All such dividends are subject to the laws of the State of New Jersey, the Banking Act, the Federal Deposit Insurance Act (“FDIA”) and the regulation of the Banking Department and of the FDIC. Under the New Jersey Corporation Act, the Parent Corporation is permitted to pay cash dividends provided that the payment does not leave us insolvent. As a bank holding company under the BHCA, we would be prohibited from paying cash dividends if we are not in compliance with any capital requirements applicable to us, including our required capital conservation buffer. However, as a practical matter, for so long as our major operations consist of ownership of the Bank, the Bank will remain our source of dividend payments, and our ability to pay dividends will be subject to any restrictions applicable to the Bank. The Parent Corporation has outstanding a series of perpetual preferred stock, our 5.25% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series A. The rights of the preferred stockholders to receive dividends are senior to the rights of our common holders, although the preferred dividend rights are non-cumulative. Therefore, unless all dividends due on our outstanding preferred stock have been declared and paid for the most recent dividend period, we may not pay a dividend on our common stock or repurchase shares of our common stock. Under the New Jersey Banking Act of 1948, as amended, dividends may be paid by the Bank only if, after the payment of the dividend, the capital stock of the Bank will be unimpaired and either the Bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the Bank’s surplus. The payment of dividends is also dependent upon the Bank’s ability to maintain adequate capital ratios pursuant to applicable regulatory requirements. The FRB has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the FRB’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. FRB regulations also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized, and under regulations implementing the Basel III accord, a bank holding company’s ability to pay cash dividends may be impaired if it fails to satisfy certain capital buffer requirements. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions. - 15 - Table of Contents Item 1A. Risk Factors An investment in our securities involves risks. Stockholders should carefully consider the risks described below, together with all other information contained in this Annual Report on Form 10-K, before making any purchase or sale decisions regarding our securities. If any of the following risks actually occur, our business, financial condition or operating results may be harmed. In that case, the trading price of our securities may decline, and stockholders may lose part or all of their investment in our securities. Risks Applicable to Our Business: The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict. Global health concerns relating to the COVID-19 outbreak and its variants and related government actions taken to reduce the spread of the virus, including the initial closure of non-essential business and stay at home orders, and continuing restrictions on certain businesses, such as bars restaurants and gyms, have been weighing on the macroeconomic environment in our New Jersey/New York metropolitan market trade area, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures, even as certain of them have been eased, have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act and the Economic Aid Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion. The outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers, clients and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, clients or business partners, including but not limited: o to credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy and retail industries, but across other industries as well. As of December 31, 2021, the Bank had 1 loan on deferral for $0.5 million. Although nearly all of the loans receiving deferrals during 2021 have returned to normal repayment cycles, we can give you no assurance that these borrowers will be able to sustain repayment of their credits, or that other borrowers will not need/seek payment deferrals; o declines in collateral values; o third party disruptions, including outages at network providers and other suppliers; o increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and o operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions. These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided. The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, new variants of the virus, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in this “Risk Factors” section. - 16 - Table of Contents Our growth-oriented business strategy could be adversely affected if we are not able to attract and retain skilled employees or if we lose the services of our senior management team. We may not be able to successfully manage our business as a result of the strain on our management and operations that may result from growth. Our ability to manage growth will depend upon our ability to continue to attract, hire and retain skilled employees. The loss of members of our senior management team, including those officers named in the summary compensation table of our proxy statement, could have a material adverse effect on our results or operations and ability to execute our strategic goals. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational and other systems, to manage multiple, concurrent client relationships and to hire, train and manage our employees. We may need to raise additional capital to execute our growth-oriented business strategy. In order to continue our growth, we will be required to maintain our regulatory capital ratios at levels higher than the minimum ratios set by our regulators. We can offer you no assurances that we will be able to raise capital in the future, or that the terms of any such capital will be beneficial to our existing security holders. In the event we are unable to raise capital in the future, we may not be able to continue our growth strategy. We have a significant concentration in commercial real estate loans. Our loan portfolio is made up largely of commercial real estate loans. These types of loans generally expose a lender to a higher degree of credit risk of non-payment and loss than do residential mortgage loans because of several factors, including dependence on the successful operation of a business or a project for repayment, and loan terms with a balloon payment rather than full amortization over the loan term. In addition, commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to four-family residential mortgage loans. Underwriting and portfolio management activities cannot completely eliminate all risks related to these loans. Any significant failure to pay on time by our clients or a significant default by our clients would materially and adversely affect us. As of December 31, 2021, we had $5.3 billion of commercial real estate loans (nonowner-occupied, owner-occupied and multifamily), including commercial construction loans, which represented 77.3% of loans receivable. Concentrations in commercial real estate are also monitored by regulatory agencies and subject to scrutiny. Guidance from these regulatory agencies includes all commercial real estate loans, including commercial construction loans, in calculating our commercial real estate concentration, but excludes owner-occupied commercial real estate loans. Based on this regulatory definition, our commercial real estate loans represented 468% of the Bank’s Tier 1 capital plus the allowance for credit losses on loans. Loans secured by owner-occupied real estate are reliant on the operating businesses to provide cash flow to meet debt service obligations, and as a result may be more susceptible to the general impact on the economic environment affecting those operating companies as well as the real estate. The impact of the COVID-19 pandemic on the metropolitan New York area commercial real estate market is uncertain, causing volatility in rents in certain core urban markets. Many other factors, including the exchange rate for the U.S. dollar, potential international trade tariffs, and changes in federal tax laws affecting the deductibility of state and local taxes and mortgage interest could negatively impact our local economy and real estate market. Accordingly, it may be more difficult for commercial real estate borrowers to repay their loans in a timely manner, as commercial real estate borrowers’ ability to repay their loans frequently depends on the successful development of their properties. The deterioration of one or a few of our commercial real estate loans could cause a material increase in our level of nonperforming loans, which would result in a loss of revenue from these loans and could result in an increase in the provision for credit losses and/or an increase in charge-offs, all of which could have a material adverse impact on our net income. We also may incur losses on commercial real estate loans due to declines in occupancy rates and rental rates, which may decrease property values and may decrease the likelihood that a borrower may find permanent financing alternatives. Any weakening of the commercial real estate market may increase the likelihood of default of these loans, which could negatively impact our loan portfolio’s performance and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, we could incur material losses. Any of these events could increase our costs, require management time and attention, and materially and adversely affect us. Federal banking agencies have issued guidance regarding high concentrations of commercial real estate loans within bank loan portfolios. The guidance requires financial institutions that exceed certain levels of commercial real estate lending compared with their total capital to maintain heightened risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. If there is any deterioration in our commercial real estate portfolio or if our regulators conclude that we have not implemented appropriate risk management practices, it could adversely affect our business, and could result in the requirement to maintain increased capital levels. Such capital may not be available at that time and may result in our regulators requiring us to reduce our concentration in commercial real estate loans. - 17 - Table of Contents If we are limited in our ability to originate loans secured by commercial real estate, we may face greater risk in our loan portfolio. If, because of our concentration of commercial real estate loans, or for any other reasons, we are limited in our ability to originate loans secured by commercial real estate, we may incur greater risk in our loan portfolio. For example, we are and may continue to seek to further increase our growth rate in commercial and industrial loans, including both secured and unsecured commercial and industrial loans. Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’ businesses and personal guarantees. Secured commercial and industrial loans are generally collateralized by accounts receivable, inventory, equipment or other assets owned by the borrower and typically include a personal guaranty of the business owner. Compared to real estate, that type of collateral is more difficult to monitor, its value is harder to ascertain, it may depreciate more rapidly, and it may not be as readily saleable if repossessed. Therefore, we may be exposed to greater risk of loss on these credits. The nature and growth rate of our commercial loan portfolio may expose us to increased lending risks. Given the significant growth in our loan portfolio, many of our commercial real estate loans are unseasoned, meaning that they were originated relatively recently. As of December 31, 2021, we had $4.7 billion in commercial real estate loans outstanding. Approximately 58.5% of the loans, or $2.8 billion, had been originated in the past three years. As a result, it may be difficult to predict the future performance of our loan portfolio. These loans may have delinquency or charge-off levels above our expectations, which could negatively affect our performance. Our portfolio of loans secured by New York City taxi medallions could expose us to credit losses. We maintain a credit exposure ($26.2 million carrying value as of December 31, 2021) of loans secured by New York City taxi medallions. The taxi industry in New York City is facing significant competition and pressure from technology-based ride share companies such as Uber and Lyft, as well as from the impact of the COVID-19 pandemic and the trend toward working from home as a mitigant to the pandemic. This has resulted in volatility in the pricing of medallions, and has impacted the earnings of many medallion holders, including our borrowers. Any further deterioration in the value of New York City taxi medallions, or in the medallion taxi industry in New York City, could expose us to additional losses through additional write downs on these loans. The small-to medium-sized businesses that the Bank lends to may have fewer resources to weather a downturn in the economy, which may impair a borrower’s ability to repay a loan to the Bank that could materially harm our operating results. The Bank targets its business development and marketing strategy primarily to serve the banking and financial services needs of small-to medium-sized businesses. These small-to medium-sized businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience significant volatility in operating results. Any one or more of these factors may impair the borrower’s ability to repay a loan. In addition, the success of a small-to medium-sized business often depends on the management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay a loan. Economic downturns and other events that negatively impact our market areas could cause the Bank to incur substantial credit losses that could negatively affect our results of operations and financial condition. Our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance. Our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our clients and caring about our clients and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected. Anti-takeover provisions in our corporate documents and in New Jersey corporate law may make it difficult and expensive to remove current management. Anti-takeover provisions in our corporate documents and in New Jersey law may render the removal of our existing board of directors and management more difficult. Consequently, it may be difficult and expensive for our stockholders to remove current management, even if current management is not performing adequately. - 18 - Table of Contents Competition in originating loans and attracting deposits may adversely affect our profitability. We face substantial competition in originating loans. This competition currently comes principally from other banks, savings institutions, mortgage banking companies, credit unions and other lenders, including online “fintech” companies. Many of our competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income by decreasing the number and size of loans that we originate and the interest rates we may charge on these loans. In attracting deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. We have also been active in competing for New York and New Jersey governmental and municipal deposits. As of December 31, 2021, governmental and municipal deposits accounted for approximately $691.9 million in deposits. The governor of New Jersey has proposed that the state form and own a bank in which governmental and municipal entities would deposit their excess funds, with the state-owned bank then financing small businesses and municipal projects in New Jersey. Although this proposal is in the very early stages, should this proposal be adopted and a state-owned bank formed, it could impede our ability to attract and retain governmental and municipal deposits. Increased deposit competition could adversely affect our ability to generate the funds necessary for lending operations, which may increase our cost of funds. We also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, insurance companies and governmental organizations, which may offer more favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our operations. As a result, such non-bank competitors may have advantages over us in providing certain products and services. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our earnings and financial condition. In addition, the banking industry in general faces competition for deposit, credit and money management products from non-bank technology firms, or fintech companies, which may offer products independently or through relationships with insured depository institutions. External factors, many of which we cannot control, may result in liquidity concerns for us. Liquidity risk is the potential that the Bank may be unable to meet its obligations as they come due, capitalize on growth opportunities as they arise, or pay regular dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is required to fund various obligations, including credit commitments to borrowers, mortgage and other loan originations, withdrawals by depositors, repayment of borrowings, operating expenses, capital expenditures and dividend payments to shareholders. Liquidity is derived primarily from deposit growth and retention; principal and interest payments on loans; prepayment and maturities of loans; principal and interest payments on investment securities; sale, maturity and prepayment of investment securities; net cash provided from operations, and access to other funding sources. In addition, in recent periods we have substantially increased our use of alternate deposit origination channels, such as brokered deposits, including reciprocal deposit services, and internet listing services. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to market factors or an adverse regulatory action against us. In addition, our ability to use alternate deposit origination channels could be substantially impaired if we fail to remain “well capitalized”. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition. - 19 - Table of Contents Declines in the value of our investment securities portfolio may adversely impact our results. As of December 31, 2021, we had approximately $534.5 million in investment securities, available-for-sale. We may be required to record impairment charges on our investment securities if they suffer a decline in value below their amortized cost basis that is considered credit related. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information on investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough, it could affect the ability of the Bank to upstream dividends to the Company, which could have a material adverse effect on our liquidity and our ability to pay dividends to shareholders and could also negatively impact our regulatory capital ratios. The Bank’s ability to pay dividends is subject to regulatory limitations, which, to the extent that the Company requires such dividends in the future, may affect the Company’s ability to honor its obligations and pay dividends. As a bank holding company, the Company is a separate legal entity from the Bank and its subsidiaries and does not have significant operations. We currently depend on the Bank’s cash and liquidity to pay our operating expenses and to fund dividends to shareholders. We cannot assure you that in the future the Bank will have the capacity to pay the necessary dividends and that we will not require dividends from the Bank to satisfy our obligations. Various statutes and regulations limit the availability of dividends from the Bank. It is possible, depending upon our and the Bank’s financial condition and other factors, that bank regulators could assert that payment of dividends or other payments by the Bank are an unsafe or unsound practice. In the event that the Bank is unable to pay dividends, we may not be able to service our obligations, as they become due, or pay dividends on our capital stock. Consequently, the inability to receive dividends from the Bank could adversely affect our financial condition, results of operations, cash flows and prospects. In addition, as described under “Capital Adequacy Guidelines,” banks and bank holding companies are be required to maintain a capital conservation buffer on top of minimum risk-weighted asset ratios. The capital conservation buffer is 2.5%. Banking institutions which do not maintain capital in excess of the capital conservation buffer will face constraints on the payment of dividends, equity repurchases, and compensation based on the amount of the shortfall. Accordingly, if the Bank fails to maintain the applicable minimum capital ratios and the capital conservation buffer, distributions to the Company may be prohibited or limited. We may not be able to pay dividends on our common stock if we have not made required dividend payments on our outstanding, noncumulative preferred stock. We have outstanding a series of perpetual preferred stock, our 5.25% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series A. The rights of the preferred stockholders to receive dividends are senior to the rights of our common holders, although the preferred dividend rights are non-cumulative. Therefore, unless all dividends due on our outstanding preferred stock have been declared and paid for the most recent dividend period provided for under the terms of the preferred stock, we may not pay a dividend on our common stock or repurchase shares of our common stock. We may incur impairment to goodwill. We review our goodwill at least annually. Significant negative industry or economic trends, reduced estimates of future cash flows or disruptions to our business, could indicate that goodwill might be impaired. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. We operate in a competitive environment and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis results in an impairment to our goodwill, we would be required to record a non-cash charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such charge could have a material adverse effect on our results of operations. We have grown and may continue to grow through acquisitions. Since January 1, 2019, we have acquired GHB, BoeFly and BNJ. To be successful as a larger institution, we must successfully integrate the operations and retain the clients of acquired institutions, attract and retain the management required to successfully manage larger operations, and control costs. Future results of operations will depend in large part on our ability to successfully integrate the operations of the acquired institutions and retain the clients of those institutions. If we are unable to successfully manage the integration of the separate cultures, client bases and operating systems of the acquired institutions, and any other institutions that may be acquired in the future, our results of operations may be adversely affected. In addition, to successfully manage substantial growth, we may need to increase noninterest expenses through additional personnel, leasehold and data processing costs, among others. In order to successfully manage growth, we may need to adopt and effectively implement policies, procedures and controls to maintain credit quality, control costs and oversee our operations. No assurance can be given that we will be successful in this strategy. - 20 - Table of Contents We may be challenged to successfully manage our business as a result of the strain on management and operations that may result from growth. The ability to manage growth will depend on our ability to continue to attract, hire and retain skilled employees. Success will also depend on the ability of officers and key employees to continue to implement and improve operational and other systems, to manage multiple, concurrent client relationships and to hire, train and manage employees. Finally, substantial growth may stress regulatory capital levels, and may require us to raise additional capital. No assurance can be given that we will be able to raise any required capital, or that it will be able to raise capital on terms that are beneficial to stockholders. Attractive acquisition opportunities may not be available to us in the future. We expect that other banking and financial service companies, many of which have significantly greater resources than us, will compete with us in acquiring other target companies if we pursue such acquisitions. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among other things, our regulators will consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock. Hurricanes or other adverse weather or health related events could negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations. Hurricanes and other weather events can disrupt our operations, result in damage to our properties and negatively affect the local economies in which we operate. In addition, these weather events may result in a decline in value or destruction of properties securing our loans and an increase in delinquencies, foreclosures and credit losses. Finally, health related events, such as a viral pandemic, could adversely affect the business of our clients and our local economies, thereby adversely affecting our results of operations. - 21 - Table of Contents The Company will be subject to heightened regulatory requirements if total assets exceed $10 billion. The Company’s total assets were $8.1 billion as of December 31, 2021. Banks with assets in excess of $10 billion are subject to requirements imposed by the Dodd-Frank Act and its implementing regulations, including: the examination authority of the Consumer Financial Protection Bureau to assess compliance with Federal consumer financial laws, imposition of higher FDIC premiums, and reduced debit card interchange fees all of which increase operating costs and reduce earnings. As the Company approaches $10 billion in total consolidated assets, additional costs have been incurred to prepare for the implementation of these imposed requirements. The Company may be required to invest more significant management attention and resources to evaluate and continue to make any changes necessary to comply with the new statutory and regulatory requirements under the Dodd-Frank Act. Further, Federal financial regulators may require accelerated actions and investments to prepare for compliance before $10 billion in total consolidated assets is exceeded, and may suspend or delay certain regulatory actions, such as approving a proposed merger, if preparations are deemed inadequate. Upon reaching this threshold, the Company faces the risk of failing to meet these requirements, which may negatively impact results of operations and financial condition. Reforms to and uncertainty regarding LIBOR may adversely affect the business. In 2017, a committee of private-market derivative participants and their regulators convened by the Federal Reserve, the Alternative Reference Rates Committee, or “ARRC”, was created to identify an alternative reference interest rate to replace LIBOR. The ARRC announced Secured Overnight Financing Rate, or “SOFR”, a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, as its preferred alternative to LIBOR. The U.S. bank regulatory agencies have directed U.S. insured depository institutions to cease using LIBOR in new loan or other financial agreements effective December 31, 2021. Certain LIBOR maturity rates will no longer be published after December 31, 2021, with publication of the remaining maturity rates ending in 2023.The Federal Reserve Bank commenced publication of SOFR rates on April 2, 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR at this time is uncertain. The uncertainty as to the nature and effect of such reforms and actions and the political discontinuance of LIBOR may adversely affect the value of and return on the Company’s financial assets and liabilities that are based on or are linked to LIBOR, the Company’s results of operations or financial condition. In addition, these reforms may also require extensive changes to the contracts that govern these LIBOR based products, as well as the Company’s systems and processes. Risks Applicable to the Banking Industry Generally: Our allowance for credit losses may not be adequate to cover actual losses. Like all financial institutions, we maintain an allowance for credit losses and to provide for loan defaults and nonperformance. The process for determining the amount of the allowance is critical to our financial results and condition. It requires difficult, subjective and complex judgments about the future, including the impact of national and regional economic conditions on the ability of our borrowers to repay their loans. If our judgment proves to be incorrect, our allowance may not be sufficient to cover losses in our loan portfolio. Further, state and federal regulatory agencies, as an integral part of their examination process, review our loans and allowance and may require an increase in our allowance for credit losses. Further increases to the allowance could adversely affect our earnings. Changes in interest rates may adversely affect our earnings and financial condition. Our net income depends primarily upon our net interest income. Net interest income is the difference between interest income earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and borrowed funds. The level of net interest income is primarily a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the Federal Reserve Board of Governors (the “FOMC”), and market interest rates. A sustained increase in market interest rates could adversely affect our earnings if our cost of funds increases more rapidly than our yield on our earning assets and compresses our net interest margin. In addition, the economic value of portfolio equity would decline if interest rates increase. For example, we estimate that as of December 31, 2021, a 200-basis point increase in interest rates would have resulted in our economic value of portfolio equity increasing by approximately $2.9 million or 0.24%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensitivity Analysis.” Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically experience gaps in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income. Likewise, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could reduce our net interest income. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, deflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets. - 22 - Table of Contents We also attempt to manage risk from changes in market interest rates, in part, by controlling the mix of interest rate sensitive assets and interest rate sensitive liabilities. However, interest rate risk management techniques are not exact. A rapid increase or decrease in interest rates could adversely affect our results of operations and financial performance. The banking business is subject to significant government regulations. We are subject to extensive governmental supervision, regulation and control. These laws and regulations are subject to change and may require substantial modifications to our operations or may cause us to incur substantial additional compliance costs. In addition, future legislation and government policy could adversely affect the commercial banking industry and our operations. Such governing laws can be anticipated to continue to be the subject of future modification. Our management cannot predict what effect any such future modifications will have on our operations. In addition, the primary focus of Federal and state banking regulation is the protection of depositors and not the shareholders of the regulated institutions. For example, the Dodd-Frank Act may result in substantial new compliance costs. The Dodd-Frank Act was signed into law on July 21, 2010. Generally, the Dodd-Frank Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the law, many of which will not become effective until various Federal regulatory agencies have promulgated rules implementing the statutory provisions. Ultimately, final implementation the Dodd-Frank Act could have a material adverse impact either on the financial services industry as a whole, or on our business, results of operations and financial condition. The following aspects of the financial reform and consumer protection act are related to the operations of the Bank: · A new independent consumer financial protection bureau was established within the Federal Reserve, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. However, financial institutions with less than $10.0 billion in total assets, like the Bank, are subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws. · The act also imposes new obligations on originators of residential mortgage loans, such as the Bank. Among other things, originators must make a reasonable and good faith determination based on documented information that a borrower has a reasonable ability to repay a particular mortgage loan over the long term. If the originator cannot meet this standard, the loan may be unenforceable in foreclosure proceedings. The act contains an exception from this ability to repay rule for “qualified mortgages”, which are deemed to satisfy the rule, but does not define the term, and left authority to the Consumer Financial Protection Bureau (“CFPB”) to adopt a definition. A rule issued by the CFPB sets forth specific underwriting criteria for a loan to qualify as a Qualified Mortgage Loan. The criteria generally exclude loans that are interest-only, have excessive upfront points or fees, have negative amortization features or balloon payments, or have terms in excess of 30 years. The underwriting criteria also impose a maximum debt to income ratio of 43%. If a loan meets these criteria and is not a “higher priced loan” as defined in FRB regulations, the CFPB rule establishes a safe harbor preventing a consumer from asserting as a defense to foreclosure the failure of the originator to establish the consumer’s ability to repay. However, this defense will be available to a consumer for all other residential mortgage loans. Finally, residential mortgage loans originated by an institution with less than $10 billion in total assets meeting certain other criteria are also deemed Qualified Mortgage Loans. Although the majority of residential mortgages historically originated by the Bank would qualify as Qualified Mortgage Loans, the Bank has also made, and may continue to make in the future, residential mortgage loans that will not qualify as Qualified Mortgage Loans. These loans may expose the Bank to greater losses, loan repurchase obligations, or litigation related expenses and delays in taking title to collateral real estate, if these loans do not perform and borrowers challenge whether the Bank satisfied the ability to repay rule on originating the loan. · Tier 1 capital treatment for “hybrid” capital items like trust preferred securities is eliminated subject to various grandfathering and transition rules. · The prohibition on payment of interest on demand deposits was repealed, effective July 21, 2011. · Deposit insurance is permanently increased to $250,000. · The deposit insurance assessment base calculation now equals the depository institution’s total assets minus the sum of its average tangible equity during the assessment period. · The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35% of estimated annual insured deposits or assessment base; however, the FDIC is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion. - 23 - Table of Contents In addition, in order to implement Basel III and certain additional capital changes required by the Dodd-Frank Act, on July 9, 2013, the Federal banking agencies, including the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency, approved, as an interim final rule, the regulatory capital requirements for U.S. insured depository institutions and their holding companies. This regulation requires financial institutions to maintain higher capital levels and more equity capital. These provisions, as well as any other aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, may impact the profitability of our business activities and may change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations in order to comply and could therefore also materially and adversely affect our business, financial condition and results of operations. Our management is actively reviewing the provisions of the Dodd-Frank Act, many of which are to be phased-in over the next several months and years and assessing the probable impact on our operations. However, the ultimate effect of certain of these changes on the financial services industry in general, and us in particular, is uncertain at this time. The laws that regulate our operations are designed for the protection of depositors and the public, not our shareholders. The federal and state laws and regulations applicable to our operations give regulatory authorities extensive discretion in connection with their supervisory and enforcement responsibilities, and generally have been promulgated to protect depositors and the Deposit Insurance Fund and not for the purpose of protecting shareholders. These laws and regulations can materially affect our future business. Laws and regulations now affecting us may be changed at any time, and the interpretation of such laws and regulations by bank regulatory authorities is also subject to change. We can give no assurance that future changes in laws and regulations or changes in their interpretation will not adversely affect our business. Legislative and regulatory changes may increase our cost of doing business or otherwise adversely affect us and create competitive advantages for non-bank competitors. The potential impact of changes in monetary policy and interest rates may negatively affect our operations. Our operating results may be significantly affected (favorably or unfavorably) by market rates of interest that, in turn, are affected by prevailing economic conditions, by the fiscal and monetary policies of the United States government and by the policies of various regulatory agencies. Our earnings will depend significantly upon our interest rate spread (i.e., the difference between the interest rate earned on our loans and investments and the interest raid paid on our deposits and borrowings). Like many financial institutions, we may be subject to the risk of fluctuations in interest rates, which, if significant, may have a material adverse effect on our operations. We cannot predict how changes in technology will impact our business; increased use of technology may expose us to service interruptions or breaches in security. The financial services market, including banking services, is increasingly affected by advances in technology, including developments in: · Telecommunications; · Data processing; · Automation; · Internet-based banking, including personal computers, mobile phones and tablets; · Debit cards and so-called “smart cards”; · Remote deposit capture; · Cryptocurrency; and · Use of Blockchain. Our ability to compete successfully in the future will depend, to a certain extent, on whether we can anticipate and respond to technological changes. We offer electronic banking services for our consumer and business clients via our website, www.cnob.com, including Internet banking and electronic bill payment, as well as mobile banking by phone. We also offer check cards, ATM cards, credit cards, and automatic and ACH transfers. The successful operation and further development of these and other new technologies will likely require additional capital investments in the future. In addition, increased use of electronic banking creates opportunities for interruptions in service or security breaches, which could expose us to claims by clients or other third parties and damage our reputation. We cannot assure you that we will have sufficient resources or access to the necessary proprietary technology to remain competitive in the future, or that we will be able to maintain a secure electronic environment. Item 1B. Unresolved Staff Comments None. - 24 - Table of Contents Item 2. Properties The Bank operates eight banking offices in Bergen County, NJ, in Fort Lee, Englewood Cliffs, Englewood, Hackensack, Cresskill, Haworth, Ridgewood and Saddle River; five banking offices in Union County, NJ, consisting of two offices in Union Township, and one office each in Springfield Township, Berkeley Heights, and Summit; one banking office in Morristown in Morris County, NJ; one office in Newark in Essex County, NJ; one office in West New York in Hudson County, NJ; one office in Holmdel in Monmouth County, one banking office in the borough of Manhattan in New York City, one office in Melville, Nassau County on Long Island, one in Astoria, Queens and five branches in the Hudson Valley, including in White Plains and Tarrytown, in Westchester County, New York, Bardonia and Blauvelt, in Rockland County, New York and in Middletown, in Orange County, New York, and one financial center in West Palm Beach in Palm Beach County, FL. The Bank’s principal office is located at 301 Sylvan Avenue, Englewood Cliffs, NJ. The principal office is a three-story leased building constructed in 2008. The following table sets forth certain information regarding the Bank’s leased operating locations. Banking Office Location Term 301 Sylvan Avenue, Englewood Cliffs, NJ Term expires November 2028 12 East Palisade Avenue, Englewood, NJ Term expires July 2022 156 Piermont Rd, Cresskill, NJ Term expires July 2022 899 Palisade Avenue, Fort Lee, NJ Term expires August 2022 142 John Street, Hackensack, NJ Term expires December 2026 171 East Ridgewood Avenue, Ridgewood, NJ Term expires April 2024 71 East Allendale Road, Saddle River, NJ Term expires May 2032 356 Chestnut Street, Union, NJ Term expires May 2027 545 Morris Avenue, Summit, NJ Term expires February 2024 217 Chestnut Street, Newark, NJ Term expires December 2024 5914 Park Avenue, West New York, NJ Term expires September 2023 963 Holmdel Road, Holmdel, NJ Term expires September 2026 551 Madison Avenue, Suite 202, NY, NY Term expires October 2028 48 South Service Rd, 2 nd Fl, Melville, NY Term Expires July 2025 36-19 Broadway, Astoria, NY Term Expires August 2028 485 Schutt Rd, Middletown, NY Term Expires October 2025 715 Route 304, Bardonia NY Term Expires August 2028 567 North Broadway, White Plains NY Term Expires December 2028 155 White Plains Rd., Tarrytown NY Term Expires December 2026 170 East Erie St, Blauvelt NY Term Expires February 2028 Item 3. Legal Proceedings There are no significant pending legal proceedings involving the Company other than those arising out of routine operations. None of these matters would have a material adverse effect on the Company or its results of operations if decided adversely to the Company. Item 4. Mine Safety Disclosures Not applicable. - 25 - Table of Contents PART II Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Security Market Information The common stock of the Company is traded on the NASDAQ Global Select Market under the symbol “CNOB”. As of December 31, 2021, the Company had 686 stockholders of record, excluding beneficial owners for whom Cede & Company or others act as nominees. Share Repurchase Program Historically, repurchases have been made from time to time as, in the opinion of management, market conditions warranted, in the open market or in privately negotiated transactions. In March 2019, the Board of Directors of the Company approved a share repurchase program for up to 1,200,000 shares. In September 2021, the Board of Directors had authorized the repurchase of up to an additional 2,000,000 shares. The Company may repurchase shares from time to time in the open market, in privately negotiated share purchases or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission and applicable federal securities laws. The share repurchase plan does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company's discretion. During the year ended December 31, 2021, the Company repurchased a total of 330,541 shares. As of December 31, 2021, shares remaining for repurchase under the program were 2,274,748. The following table details share repurchases for the year 2021: Shares Authorized Total Number of Shares Purchased Average Price Paid per Share Cumulative Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 605,289 First quarter 2021 - 93,629 $ 25.72 688,340 511,660 Second quarter 2021 - - - 688,340 511,660 Third quarter 2021 2,000,000 196,069 28.71 884,409 2,315,591 Fourth quarter 2021 - 40,843 33.22 925,252 2,274,748 Dividends Federal laws and regulations contain restrictions on the ability of the Parent Corporation and the Bank to pay dividends. For information regarding restrictions on dividends, see Part I, Item 1, “Business” and Part II, Item 8, “Financial Statements and Supplementary Data”, Note 18 and Note 21 of the Notes to Consolidated Financial Statements.” Stockholders Return Comparison Set forth on the following page is a line graph presentation comparing the cumulative stockholder return on the Parent Corporation’s common stock, on a dividend reinvested basis, against the cumulative total returns of the NASDAQ Composite and the KBW Bank Index for the period from December 31, 2016 through December 31, 2021. - 26 - Table of Contents COMPARE 5-YEAR CUMULATIVE TOTAL RETURN AMONG CONNECTONE BANCORP INC. NASDAQ AND KBW BANK INDEX Assumes $100 Invested on December 31, 2016, with Dividends Reinvested Year Ended December 31, 2021 COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS Fiscal Year Ending Company/Index/Market 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 ConnectOne Bancorp, Inc. 100.00 100.47 72.91 103.18 81.09 136.12 NASDAQ 100.00 129.73 126.08 172.41 250.08 305.63 KBW Bank Index 100.00 128.51 152.41 125.42 170.72 171.55 Item 6. Selected Financial Data The following tables set forth selected consolidated financial data as of the dates and for the periods presented. The selected consolidated statement of financial condition data as of December 31, 2021 and 2020 and the selected consolidated summary of income data for the years ended December 31, 2021, 2020 and 2019 have been derived from our audited consolidated financial statements and related notes that we have included elsewhere in this Annual Report. The selected consolidated statement of financial condition data as of December 31, 2019 and the selected consolidated summary of income data have been derived from audited consolidated financial statements that are not presented in this Annual Report. The selected historical consolidated financial data as of any date and for any period are not necessarily indicative of the results that may be achieved as of any future date or for any future period. You should read the following selected statistical and financial data in conjunction with the more detailed information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes that we have presented elsewhere in this Annual Report. - 27 - Table of Contents SUMMARY OF SELECTED STATISTICAL INFORMATION AND FINANCIAL DATA As of and for the years ended December 31, ($ in thousands except per share amounts) 2021 2020 2019 Selected Statement of Financial Condition Data Total assets $ 8,129,480 $ 7,547,339 $ 6,174,032 Loans receivable 6,828,622 6,236,307 5,113,527 Allowance for credit losses - loans 78,773 79,226 38,293 Investment securities 534,507 487,955 404,701 Goodwill and other intangible assets 217,369 219,349 168,034 Borrowings 468,193 425,954 500,293 Subordinated debt (net of issuance costs) 152,951 202,648 128,885 Deposits 6,332,953 5,959,224 4,767,542 Tangible common stockholders’ equity (1) 795,916 695,961 563,156 Total stockholders’ equity 1,124,212 915,310 731,190 Average total assets 7,735,228 7,453,474 6,014,535 Average common stockholders’ equity 965,995 880,720 705,496 Common Dividends Cash dividends paid on common stock $ 17,493 $ 14,317 $ 12,160 Common dividend payout ratio 13.60 % 20.08 % 16.57 % Cash dividends per common share $ 0.48 $ 0.27 $ 0.36 Selected Statement of Income Data Interest income $ 301,738 $ 308,200 $ 271,484 Interest expense (38,860 ) (70,209 ) (85,165 ) Net interest income 262,878 237,991 186,319 Reversal of (Provision for) credit losses 5,500 (41,000 ) (8,100 ) Net interest income after provision for credit losses 268,378 196,991 178,219 Noninterest income 15,691 14,400 8,035 Noninterest expense (109,011 ) (121,001 ) (92,228 ) Income before income tax expense 175,058 90,390 94,026 Income tax expense (44,705 ) (19,101 ) (20,631 ) Net income 130,353 71,289 73,395 Preferred stock dividends 1,717 - - Net income available to common stockholders $ 128,636 $ 71,289 $ 73,395 (1) This measure is not recognized under generally accepted accounting principles in the United States (“GAAP”) and is therefore considered to be a non-GAAP financial measure. See –“Non-GAAP Reconciliation Table” for a reconciliation of this measure to its most comparable GAAP measure. - 28 - Table of Contents As of and for the years ended December 31, 2021 2020 2019 Per Common Share Data Basic earnings per share $ 3.24 $ 1.80 $ 2.08 Diluted earnings per share 3.22 1.79 2.07 Book value per common share 25.61 23.01 20.85 Tangible book value per common share (1) 20.12 17.49 16.06 Selected Performance Ratios Return on average assets 1.69 % 0.96 % 1.22 % Return on average common stockholders’ equity 13.32 8.09 10.40 Return on average tangible common equity (1) 17.21 10.80 13.61 Net interest margin 3.66 3.46 3.35 Selected Asset Quality Ratios As a % of Loans Receivable: Nonaccrual loans (excluding loans held-for-sale) 0.90 % 0.99 % 0.97 % Loans 90 days or greater past due and still accruing 0.20 0.21 0.06 Performing TDRs 0.64 0.38 0.42 Allowance for credit losses - loans 1.15 1.27 0.75 Nonperforming assets (2) to total assets 0.76 % 0.82 % 0.80 % Allowance for credit losses for loans to nonaccrual loans 127.7 128.4 77.4 Net loan charge-offs to average loans 0.03 0.00 0.09 Company Capital Ratios Leverage ratio 11.65 % 9.51 % 9.54 % Common equity Tier 1 risk-based ratio 10.64 10.79 9.95 Risk-based Tier 1 capital ratio 12.19 10.87 10.04 Risk-based capital ratio 15.26 15.08 12.96 Tangible common equity to tangible assets (1) 10.06 9.50 9.38 __________________________ (1) These measures are not measures recognized under generally accepted accounting principles in the United States (“GAAP”) and are therefore considered to be non-GAAP financial measures. See –“Non-GAAP Reconciliation Table” for a reconciliation of these measurers to their most comparable GAAP measures. (2) Nonperforming assets are defined as nonaccrual loans and other real estate owned. - 29 - Table of Contents Non-GAAP Reconciliation Table ($ in thousands, except per share amounts) As of December 31, 2021 2020 2019 Tangible common equity and tangible common equity/tangible assets Stockholders equity $ 1,124,212 $ 915,310 $ 731,190 Less: Preferred stock 110,927 - - Common stockholders equity $ 1,013,285 $ 915,310 $ 731,190 Less: Goodwill and other intangible assets 217,369 219,349 168,034 Tangible common stockholders’ equity $ 795,916 $ 695,961 $ 563,156 Total assets $ 8,129,480 $ 7,547,339 $ 6,174,032 Less: goodwill and other intangible assets 217,369 219,349 168,034 Tangible assets $ 7,912,111 $ 7,327,990 $ 6,005,998 Tangible common equity ratio 10.06 % 9.50 % 9.38 % Tangible book value per common share Book value per common share $ 25.61 $ 23.01 $ 20.85 Less: goodwill and other intangible assets 5.49 5.52 4.79 Tangible book value per common share $ 20.12 $ 17.49 $ 16.06 Return on average tangible common equity Net income available to common stockholders $ 128,636 $ 71,289 $ 73,395 Average stockholders’ equity $ 1,007,023 $ 880,720 $ 705,496 Less: average preferred stock 41,028 - - Average common stockholders’ equity 965,995 880,720 705,496 Less: goodwill and other intangible assets 218,417 220,570 166,116 Average tangible common stockholders’ equity $ 747,578 $ 660,150 $ 539,380 Return on average common stockholders’ equity 13.32 % 8.09 % 10.40 % Return on average tangible common stockholders’ equity 17.21 % 10.80 % 13.61 % - 30 - Table of Contents Item 7. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document. Cautionary Statement Concerning Forward-Looking Statements See Item 1 of this Annual Report on Form 10-K for information regarding forward-looking statements. Critical Accounting Policies and Estimates Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Accounting policies considered critical to our financial results include the allowance for credit losses and related provision and income taxes. For information on our significant accounting policies, see Note 1a in the Notes to Consolidated Financial Statements. Allowance for Credit Losses and Related Provision The allowance for credit losses is an estimate of current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial assets necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The loan portfolio also represents the largest asset type on the Company’s Consolidated Statements of Condition. Expected credit losses of financial assets are measured on a collective (pool) basis when similar risk characteristic(s) exist. If the Company determines that a financial asset does not share risk characteristics with other financial assets, the Company shall evaluate the financial asset for expected credit losses on an individual basis. Financial assets are assessed once, either through collective assessments or individual assessments. Standard expected losses are evaluated on a collective, or pool, basis when financial assets share similar risk characteristics. For pooled loan segments, utilizing a quantitative analysis, the Company calculates estimated credit losses using a probability of default and loss given default methodology, the results of which are applied to the aggregated discounted cash flow of each individual loan within the segment. The point in time probability of default and loss given default are then conditioned by macroeconomic scenarios to incorporate reasonable and supportable forecasts that affect the collectability of the reported amount. Financial assets may be segmented based on one characteristic, or a combination of characteristics. Examples of risk characteristics relevant to the Company’s evaluation included, but were not limited to: (1) internal or external credit scores or credit ratings, (2) risk ratings or classifications, (3) financial asset type, (4) collateral type, (5) size, (6) effective interest rate, (7) term, (8) geographical location, (9) industry of the borrower and (10) vintage. Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for credit losses. Such agencies may require us to make additional provisions for credit losses based upon information available to them at the time of their examination. All of the factors considered in the analysis of the adequacy of the allowance for credit losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for credit losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 1a of the Notes to Consolidated Financial Statements. Income Taxes The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of operations. Note 1 (under the caption “Use of Estimates”) and Note 10 of the Notes to Consolidated Financial Statements include additional discussion on the accounting for income taxes. - 31 - Table of Contents Overview and Strategy We serve as a holding company for the Bank, which is our primary asset and only operating subsidiary. We follow a business plan that emphasizes the delivery of customized banking services in our market area to clients who desire a high level of personalized service and responsiveness. The Bank conducts a traditional banking business, making commercial loans, consumer loans and residential and commercial real estate loans. In addition, the Bank offers various non-deposit products through non-proprietary relationships with third party vendors. The Bank relies upon deposits as the primary funding source for its assets. The Bank offers traditional deposit products. Many of our clients relationships start with referrals from existing clients. We then seek to cross sell our products to clients to grow the client relationship. For example, we will frequently offer an interest rate concession on credit products for clients that maintain a noninterest-bearing deposit account at the Bank. This strategy has helped maintain our funding costs and the growth of our interest expense even as we have substantially increased our total deposits. It has also helped fuel our significant loan growth. We believe that the Bank’s significant growth and increasing profitability demonstrate the need for and success of our brand of banking. Our results of operations depend primarily on our net interest income, which is the difference between the interest earned on our interest-earning assets and the interest paid on funds borrowed to support those assets, primarily deposits. Net interest margin is the difference between the weighted average rate received on interest-earning assets and the weighted average rate paid to fund those interest-earning assets, which is also affected by the average level of interest-earning assets as compared with that of interest-bearing liabilities. Net income is also affected by the amount of noninterest income and noninterest expenses. General The following discussion and analysis present the more significant factors affecting the Company’s financial condition as of December 31, 2021 and 2020 and results of operations for each of the years in the three-year period ended December 31, 2021. The MD&A should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and other information contained in this report. Operating Results Overview Net income available to common stockholders for the year ended December 31, 2021 was $128.6 million, an increase of $57.3 million, or 80.4%, compared to net income of $71.3 million for 2020. Diluted earnings per share were $3.22 for 2021, a 79.9% increase from $1.79 for 2020. The change in net income from 2020 to 2021 was attributable to the following: · Decreased provision for credit losses of $46.5 million. The decrease was primarily due to elevated provision for loan losses during 2020 due to the economic uncertainties surrounding COVID-19 pandemic. · Increase in net interest income of $24.9 million. · Increase in noninterest income of $1.3 million, primarily due to increases in net gains on loans held for sale of $1.7 million, gain on sale of branches of $0.7 million and net gains on sale/redemption of investment securities of $0.2 million, offset by decreases in deposit, loan and other income of $0.5 million, income on bank owned life insurance of $0.2 million and net gains on equity securities of $0.6 million. The increase in net gains on loans held-for-sale resulted from mortgage loan sales, SBA loan sales and elevated commercial loan sales. The increase in gain on sale of branches was the result of the Bank selling two branches during the first quarter of 2021 related to the BNJ acquisition. · Decrease in noninterest expenses of $12.0 million, primarily due to decreases in merger expenses of $14.6 million, change in value of acquisition price of $2.3 million, occupancy and equipment of $2.2 million, and FDIC insurance of $1.3 million, partially offset by increases in salaries and employee benefits of $5.5 million, other expenses of $2.6 million and professional and consulting of $0.9 million. · Increase in income tax expense of $25.6 million resulting primarily from a higher percentage of income being derived from taxable sources. Net income for the year ended December 31, 2020 was $71.3 million, a decrease of $2.1 million, or 2.9%, compared to net income of $73.4 million for 2019. Diluted earnings per share were $1.79 for 2020, a 13.5% decrease from $2.07 for 2019. The change in net income from 2019 to 2020 was attributable to the following: · Increased provision for credit losses of $32.9 million was primarily due to the continued economic uncertainties associated with the COVID-19 pandemic. · Increase in noninterest expenses of $28.8 million, primarily due to an increase in salaries and employee benefits of $9.9 million, merger expenses of $5.7 million, occupancy and equipment expense of $4.2 million and professional and consulting expenses of $1.9 million. These increases are mainly attributable to the acquisition of BNJ. Additionally, the Company saw an increase in value of acquisition price of $2.3 million related to its BoeFly acquisition. - 32 - Table of Contents · Increased net interest income of $51.7 million primarily due to the acquisition of BNJ and an 11-basis point widening of the net interest margin. · Increase in noninterest income of $6.4 million primarily resulting from an increase in deposit, loan, and other income, increase in bank owned life insurance and net gains on sale of loans held-for-sale. · Decrease in income tax expense of $1.5 million resulting primarily from a decrease in income from taxable sources. Net Interest Income Fully taxable equivalent net interest income for 2021 totaled $264.7 million, an increase of $24.8 million, or 10.3%, from 2020. The increase in net interest income was due to an increase in average interest-earning assets, which grew by 4.2% to $7.2 billion and a widening of 20 basis-points in the net interest margin. The widening of the net interest margin was mainly attributable to lower cost of funds, offset by higher average cash balances and lower yields on loans and securities. Average total loans, which includes loans held-for-sale, increased by 3.6% to $6.4 billion in 2021 from $6.2 billion in 2020. The increase in average total loans is primarily attributable to higher, non PPP, loan originations. Fully taxable equivalent net interest income for 2020 totaled $239.9 million, an increase of $51.9 million, or 27.6%, from 2019. The increase in net interest income was due to an increase in average interest-earning assets, which grew by 23.6% to $6.9 billion and a widening of 11 basis-points in the net interest margin. The widening of the net interest margin was mainly attributable to lower cost of funds, offset by higher average cash balances and lower yields on loans and securities. Average total loans, which includes loans held-for-sale, increased by 22.8% to $6.2 billion in 2020 from $5.0 billion in 2019. The increase in average total loans is primarily attributable to the acquisition of BNJ. - 33 - Table of Contents Average Balance Sheets The following table sets forth certain information relating to our average assets and liabilities for the years ended December 31, 2021, 2020 and 2019 and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Years Ended December 31, 2021 2020 2019 (Tax-Equivalent Basis) Average Balance Income/ Expense Yield/ Rate Average Balance Income/ Expense Yield/ Rate Average Balance Income/ Expense Yield/ Rate (dollars in thousands) ASSETS Interest-earning assets: Investment securities (1) (2) $ 464,342 $ 7,455 1.61 % $ 444,070 $ 9,996 2.25 % $ 478,478 $ 13,885 2.90 % Loans receivable and loans held-for-sale (2) (3) (4) 6,419,610 294,686 4.59 % 6,198,753 297,756 4.80 % 5,049,458 256,299 5.08 % Federal funds sold and interest-earning deposits with banks 322,692 405 0.13 % 267,824 694 0.22 % 55,819 1,167 2.09 % Restricted investment in bank stocks 20,797 971 4.67 % 27,185 1,642 6.04 % 27,389 1,778 6.49 % Total interest-earning assets 7,227,441 303,517 4.20 % 6,937,832 310,088 4.47 % 5,611,144 273,129 4.87 % Noninterest-earning assets: Allowance for credit losses (79,863 ) (59,271 ) (37,433 ) Noninterest-earning assets 587,650 574,913 440,824 Total assets $ 7,735,228 $ 7,453,474 $ 6,014,535 LIABILITIES & STOCKHOLDERS’ EQUITY Time deposits $ 1,300,270 14,813 1.14 % $ 1,792,568 34,813 1.94 % $ 1,549,700 37,177 2.40 % Other interest-bearing deposits 3,451,765 9,955 0.29 % 2,819,908 17,573 0.62 % 2,267,812 28,393 1.25 % Total interest-bearing deposits 4,752,035 24,768 0.52 % 4,612,476 52,386 1.14 % 3,817,512 65,570 1.72 % Borrowings 318,700 5,300 1.66 % 537,773 8,435 1.57 % 502,314 12,079 2.40 % Subordinated debentures 153,199 8,669 5.66 % 169,139 9,254 5.47 % 128,708 7,371 5.73 % Capital lease obligation 2,041 123 6.03 % 2,233 134 6.00 % 2,414 145 6.01 % Total interest-bearing liabilities 5,225,975 38,860 0.74 % 5,321,621 70,209 1.32 % 4,450,948 85,165 1.91 % Noninterest-bearing deposits 1,454,148 1,195,547 819,917 Other liabilities 48,082 55,586 38,174 Stockholders’ equity 1,007,023 880,720 705,496 Total liabilities and stockholders’ equity $ 7,735,228 $ 7,453,474 $ 6,014,535 Net interest income/interest rate spread (5) 264,657 3.46 % 239,879 3.15 % 187,964 2.96 % Tax-equivalent adjustment (1,779 ) (1,888 ) (1,645 ) Net interest income as reported $ 262,878 $ 237,991 $ 186,319 Net interest margin (6) 3.66 % 3.46 % 3.35 % (1) Average balances are based on amortized cost. (2) Interest income is presented on a tax equivalent basis using 21% federal tax rate. (3) Includes loan fee income and accretion of purchase accounting adjustments. (4) Loans include nonaccrual loans. (5) Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax equivalent basis. (6) Represents net interest income on a tax equivalent basis divided by average total interest-earning assets. - 34 - Table of Contents Rate/Volume Analysis The following table presents, by category, the major factors that contributed to the changes in net interest income. Changes due to both volume and rate have been allocated in proportion to the relationship of the dollar amount change in each. 2021/2020 Increase (Decrease) Due to Change in: 2020/2019 Increase (Decrease) Due to Change in: Average Volume Average Rate Net Change Average Volume Average Rate Net Change (dollars in thousands) Interest income: Investment securities: $ 325 $ (2,866 ) $ (2,541 ) $ (775 ) $ (3,114 ) $ (3,889 ) Loans receivable and loans held-for-sale 10,138 (13,208 ) (3,070 ) 55,206 (13,749 ) 41,457 Federal funds sold and interest-earnings deposits with banks 69 (358 ) (289 ) 549 (1,022 ) (473 ) Restricted investment in bank stocks (298 ) (373 ) (671 ) (12 ) (124 ) (136 ) Total interest income: $ 10,234 $ (16,805 ) $ (6,571 ) $ 54,968 $ (18,009 ) $ 36,959 Interest expense: Savings, NOW, money market, interest checking $ 1,822 $ (9,440 ) $ (7,618 ) $ 3,441 $ (14,261 ) $ (10,820 ) Time deposits (5,608 ) (14,392 ) (20,000 ) 4,717 (7,081 ) (2,364 ) Borrowings and subordinated debentures (4,545 ) 825 (3,720 ) 2,768 (4,529 ) (1,761 ) Capital lease obligation (12 ) 1 (11 ) (11 ) - (11 ) Total interest expense: $ (8,343 ) $ (23,006 ) $ (31,349 ) $ 10,915 $ (25,871 ) $ (14,956 ) Net interest income: $ 18,577 $ 6,201 $ 24,778 $ 44,053 $ 7,862 $ 51,915 Provision for (Reversal of) Credit Losses In determining the provision for credit losses, management considers national and local economic trends and conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; effects of changes in lending policies, trends in volume and terms of loans; levels and trends in delinquencies, impaired loans and net charge-offs and the results of independent third party loan review. The Bank adopted CECL beginning on January 1, 2021. Provision expense may therefore become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance. See Note 1b to our audited financial statements included herein. For the year ended December 31, 2021, the (reversal of) provision for credit losses was ($5.5) million, a decrease of $46.5 million, compared to the provision for loan losses of $41.0 million for the year ended December 31, 2020. The elevated provision for loan losses for the year ended December 31, 2020 was due to the economic uncertainties of the COVID-19 pandemic, including consideration of related borrower payment deferrals requested and/or granted. The release of allowance for credit losses during the year ended December 31, 2021 was the result of the continually improving macro-economic outlook during the course of 2021. For the year ended December 31, 2020, the provision for credit losses was $41.0 million, an increase of $32.9 million, compared to the provision for credit losses of $8.1 million for 2019. The increase was due to the continued economic uncertainties associated with the COVID-19 pandemic and increases to specific reserves within our commercial portfolio. - 35 - Table of Contents Noninterest Income Noninterest income for the full-year 2021 increased by $1.3 million, or 9.0%, to $15.7 million from $14.4 million in 2020. The increase was primarily due to increases in net gains on loans held for sale of $1.7 million, gain on sale of branches of $0.7 million and net gains on sale/redemption of investment securities of $0.2 million, partially offset by decreases in deposit, loan and other income of $0.5 million, income on bank owned life insurance of $0.2 million and net gains on equity securities of $0.6 million. The increase in net gains on loans held-for-sale resulted from mortgage loan sales, SBA loan sales and elevated commercial loan sales. The increase in gain on sale of branches was the result of the Bank selling two branches during the first quarter of 2021 related to the BNJ acquisition. Noninterest income for the full-year 2020 increased by $6.4 million, or 79.2%, to $14.4 million from $8.0 million in 2019. The increase was primarily the result of a $3.0 million increase in deposit, loan and other income. This increase was largely attributable to loan referral fee income of $2.3 million generated by BoeFly as a result of its participation in the PPP program. Additionally, increases in net gains on sale of loans held-for-sale of $1.6 million and increases in bank owned life insurance of $1.5 million contributed to the overall increase in noninterest income. Noninterest Expense Noninterest expenses for the full-year 2021 decreased by $12.0 million, or 9.9%, to $109.0 million from $121.0 million in 2020. The decrease was primarily due to decreases in merger expenses of $14.6 million, change in value of acquisition price of $2.3 million, occupancy and equipment of $2.2 million, and FDIC insurance of $1.3 million, partially offset by increases in salaries and employee benefits of $5.5 million, other expenses of $2.6 million and professional and consulting of $0.9 million. Excluding the impact on expenses related to mergers costs, expense increases were mainly attributable to increased levels of business. Noninterest expenses for the full-year 2020 increased by $28.8 million, or 31.2%, to $121.0 million from $92.2 million in 2019. The increase was primarily attributable to increases in salaries and employee benefits of $9.9 million, merger expenses of $5.7 million, occupancy and equipment of $4.2 million, increase in value of acquisition price of $2.3 million, FDIC insurance expense of $2.0 million, professional and consulting of $1.9 million and amortization of core deposit intangibles of $1.1 million. These increases were mainly the result of the acquisition of BNJ. Income Taxes Income tax expense was $44.7 million for 2021 compared to $19.1 million for 2020 and $20.6 million for 2019. The increase in income tax expense in 2021 when compared to 2020 was primarily the result of higher taxable income. The slight decrease in income tax expense in 2020 when compared to 2019 was primarily the result of lower taxable income. The effective tax rates were 25.5% in 2021, 21.1% in 2020 and 21.9% for 2019. The higher effective tax rate during 2021 when compared to 2020 and 2019, was the result of a higher percentage of income being derived from taxable sources. The Company expects its effective tax rate to increase in 2022, as a result of the Company’s revenue growth in existing and new markets. For a more detailed description of income taxes see Note 10 of the Notes to Consolidated Financial Statements. Financial Condition Overview As of December 31, 2021, the Company’s total assets were $8.1 billion, an increase of $0.6 billion from December 31, 2020. Total loans (including loans held-for-sale) were $6.8 billion, an increase of $0.6 billion from December 31, 2020. Deposits were $6.3 billion, an increase of $0.4 billion from December 31, 2020. As of December 31, 2020, the Company’s total assets were $7.5 billion, an increase of $1.4 billion from December 31, 2019. Total loans (including loans held-for-sale) were $6.2 billion, an increase of $1.1 billion from December 31, 2019. Deposits were $6.0 billion, an increase of $1.2 billion from December 31, 2019. These increases were primarily the result of the acquisition of BNJ. Loan Portfolio The Bank’s lending activities are generally oriented to small-to-medium sized businesses, high net worth individuals, professional practices and consumer and retail clients living and working in the Bank’s metropolitan, New York market area, consisting of Bergen, Union, Morris, Essex, Hudson, Mercer and Monmouth counties, New Jersey, as well as NYC’s five boroughs, Nassau, Rockland, Orange and Westchester counties, in New York. The Bank has not made loans to borrowers outside of the United States. The Bank believes that its strategy of high-quality client service, competitive rate structures and selective marketing have enabled it to gain market share. Commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, inventory and equipment and liens on commercial and residential real estate. Commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include loans secured by first liens on completed commercial properties, including multi-family properties, to purchase or refinance such properties. Residential mortgages include loans secured by first liens on residential real estate and are generally made to existing clients of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences. Consumer loans are made to individuals who qualify for auto loans, cash reserve, credit cards and installment loans. - 36 - Table of Contents Gross loans as of December 31, 2021 totaled $6.8 billion, an increase of $0.6 billion, or 9.5%, over gross loans as of December 31, 2020 of $6.3 billion. The largest component of the gross loan portfolio as of December 31, 2021 and December 31, 2020 was commercial real estate loans. Commercial real estate loans as of December 31, 2021 totaled $4.7 billion, an increase of $958.0 million, or 25.3%, compared to commercial real estate loans as of December 31, 2020 of $3.8 billion. The main component contributing to the increase in commercial real estate loans is an increase in the multifamily loans. Commercial loans totaled $1.3 billion as of December 31, 2021, a decrease of $222.5 million, or 14.6%, compared to commercial loans as of December 31, 2020 of $1.5 billion. Included in commercial loans were PPP loans of $93.1 million as of December 31, 2021 and $397.5 million as of December 31, 2020. The decrease in commercial loans was mainly attributable to accelerated forgiveness of the outstanding PPP loans. Commercial construction loans as of December 31, 2021 totaled $540.2 million, a decrease of $77.6 million, or 12.6%, compared to construction loans as of December 31, 2020 of $617.8 million. Residential real estate loans totaled $255.3 million as of December 31, 2021, a decrease of $67.3 million, or 20.9%, compared to residential real estate loans as of December 31, 2020 of $322.6 million. Consumer loans as of December 31, 2021 and December 31, 2020 totaled $1.9 million. The following table sets forth the classification of our loans by loan portfolio segment for the periods presented. December 31, 2021 December 31, 2020 December 31, 2019 Commercial (1) $ 1,299,428 $ 1,521,967 $ 1,129,661 Commercial real estate 4,741,590 3,783,550 3,041,959 Commercial construction 540,178 617,747 623,326 Residential real estate 255,269 322,564 320,020 Consumer 1,886 1,853 3,328 Gross loans 6,838,351 6,247,681 5,118,294 Net deferred (fees) costs (9,729 ) (11,374 ) (4,767 ) Loans receivable 6,828,622 6,236,307 5,113,527 Allowance for credit losses (78,773 ) (79,226 ) (38,293 ) Net loans receivable $ 6,749,849 $ 6,157,081 $ 5,075,234 (1) Included in commercial loans were PPP loans of $93.1 million and $397.5 million as of December 31, 2021 and December 31, 2020, respectively. - 37 - Table of Contents The following table sets forth the classification of our gross loans by loan portfolio segment and by fixed and adjustable rate loans as of December 31, 2021 by remaining contractual maturity. As of December 31, 2021, Maturing In One Year or Less After One Year through Five Years After Five Years through Fifteen Years After Fifteen Years Total Commercial $ 582,103 $ 256,805 $ 323,171 $ 137,349 $ 1,299,428 Commercial real estate 399,352 1,114,270 2,998,632 229,336 4,741,590 Commercial construction 425,835 114,343 - - 540,178 Residential real estate 2,552 21,547 45,966 185,204 255,269 Consumer 1,695 155 20 16 1,886 Total $ 1,411,537 $ 1,507, 120 $ 3,367,789 $ 551,905 $ 6,838,351 Loans with: Fixed rates $ 443,332 $ 1,027,257 $ 997,116 $ 329,483 $ 2,797,188 Variable rates 968,205 479,863 2,370,673 222,422 $ 4,041,163 Total $ 1,411,537 $ 1,507,120 $ 3,367,789 $ 551,905 $ 6,838,351 For additional information regarding loans, see Note 4 of the Notes to the Consolidated Financial Statements Asset Quality General. One of our key objectives is to maintain a high level of asset quality. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by sending late notices, as well as making personal contact with the borrower. Typically, late notices are sent approximately 10 days after the date the payment is due, followed up by direct contact with the borrower approximately 15 days after payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed, and additional efforts are made to collect the deficiency. Total loans delinquent 30 days or more are reported to the board of directors of the Bank on a monthly basis. On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases (“nonaccrual” loans). Except for loans that are well-secured and in the process of collection, it is our policy to discontinue accruing additional interest and reverse any interest accrued on any loan that is 90 days or greater past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to the borrower’s ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt. Typically, a nonaccrual loan may return to accrual status if the borrower makes the loan current, and then makes six consecutive payments as scheduled. Real estate acquired as a result of foreclosure is classified as other real estate owned (“OREO”) until sold. OREO is recorded at the lower of cost or fair value less estimated selling costs. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of OREO are charged to operations, as incurred. The Company evaluates individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. The Company evaluates the pooling methodology at least annually. Loans 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 Company 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 the Company 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 troubled debt restructurings (“TDR”) and are individually analyzed if carrying value is $250,000 or higher. Additionally, nonaccrual loans that are $250,000 or higher are also individually analyzed. All PCD loans are individually analyzed. For loans designated as TDR or nonaccrual with balances less than $250,000, these loans 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. Asset Classification. Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special mention.” - 38 - Table of Contents When an insured institution classifies one or more assets, or portions thereof, as “substandard” or “doubtful,” it is required that a general valuation allowance for credit losses must be established in an amount deemed prudent by management. General valuation allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as “loss,” it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. A bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for credit losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Our management believes that, based on information currently available, our allowance for credit losses is maintained at a level which covers all known and probable incurred losses in the portfolio at each reporting date. However, actual losses are dependent upon future events and, as such, further additions to the level of allowances for credit losses may become necessary. The table below sets forth information on our classified loans and loans designated as special mention (excluding loans held-for-sale) as of the dates presented: 2021 2020 (dollars in thousands) Classified Loans: Substandard $ 157,434 $ 119,710 Doubtful - 215 Loss - - Total classified loans 157,434 119,925 Special Mention Loans 72,286 79,868 Total classified and special mention loans $ 229,720 $ 199,793 During the year ended December 31, 2021, “substandard” loans and “doubtful” loans, which include lower credit quality loans which possess higher risk characteristics than “special mention” loans, increased to $157.4 million, or 2.3% of loans receivable, as of December 31, 2021 from $119.9 million, or 1.9% of loans receivable, as of December 31, 2020. The increase of $37.7 million is primarily attributable to loans migrating to substandard that have recently come off deferment status. During the year ended December 31, 2021, “special mention” loans were $72.3 million, or 1.0% of loans receivable, while “special mention” loans as of December 31, 2020 were $79.9 million, or 1.3% of loans receivable. As of December 31, 2021, deferred loans were $0.5 million. Nonaccrual Loans, Performing Troubled Debt Restructurings, OREO and Loans 90 Days or Greater Past Due and Still Accruing Nonperforming loans include nonaccrual loans. Nonaccrual loans represent loans on which interest accruals have been suspended. The Company considers charging off loans, or a portion thereof, when they become contractually past due ninety days or more as to interest or principal payments or when other internal or external factors indicate that collection of principal or interest is doubtful. Performing troubled debt restructurings represent loans on which a concession was granted to a borrower, such as a reduction in interest rate to a rate lower than the current market rate for new debt with similar risks, and which are currently performing in accordance with the modified terms. For additional information regarding loans, see Note 4 of the Notes to the Consolidated Financial Statements. - 39 - Table of Contents The following table sets forth, as of the dates indicated, the amount of the Company’s nonaccrual loans, other real estate owned (“OREO”), performing troubled debt restructurings (“TDRs”) and loans past due 90 days or greater and still accruing: December 31, December 31, December 31, 2021 2020 2019 Nonaccrual loans $ 61,700 $ 61,696 $ 49,481 OREO - - - Total nonperforming assets $ 61,700 $ 61,696 $ 49,481 Performing TDRs $ 43,587 $ 23,655 $ 21,410 Loans 90 days or greater past due and still accruing $ 13,531 $ 12,821 $ 3,107 Nonaccrual loans to loans receivable 0.90 % 0.99 % 0.97 % Nonperforming assets to total assets 0.76 % 0.82 % 0.80 % Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to total loans 1.74 % 1.57 % 1.44 % Allowance for Credit Losses and Related Provision The allowance for credit losses is a reserve established through charges to earnings in the form of a provision for credit losses. We maintain an allowance for credit losses at a level considered adequate to provide for all known and probable incurred losses in the portfolio. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited. Our officers analyze risks within the loan portfolio on a continuous basis and through an external independent loan review function, and the results of the loan review function are also reviewed by our Audit Committee. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly and, as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to our allowance for credit losses. As of December 31, 2021, the allowance for credit losses for loans was $78.8 million, a decrease of $0.5 million, or 0.6%, from $79.2 million as of December 31, 2020. The Bank adopted CECL as of January 1, 2021. As a result of the adoption, the Bank recorded a “Day 1” CECL adjustment on January 1, 2021 of $6.5 million that increased the allowance for credit losses for loans. This increase was offset by a release of provision for credit losses of $5.5 million as well as $2.0 million in net charge-offs during the year ended December 31, 2021. The $5.5 million release of provision for credit losses during the year ended December 31, 2021 was the result of a continued improvement in the macroeconomic outlook during 2021. Included in the $2.0 million net charge-offs for the year ended December 31, 2021 was a $1.4 million charge-off of a commercial real estate loan that previously had a specific credit reserve. The allowance for credit losses for loans as a percentage of loans receivable was 1.15% as of December 31, 2021 and 1.27% as of December 31, 2020. Excluding PPP loans receivable, which are 100% federally guaranteed, the allowance for credit losses as a percentage of loans receivable was 1.17% as of December 31, 2021. - 40 - Table of Contents Three-Year Statistical Allowance for Credit Losses for Loans The following table reflects the relationship of loan volume, the provision and allowance for credit losses for loans and net charge-offs for the periods presented. December 31, 2021 December 31, 2020 December 31, 2019 Balance as of January 1, $ 79,226 $ 38,293 $ 34,954 CECL Day 1 Adjustment 6,557 - - Balance as of January 1, as adjusted for changes in accounting principal 85,783 38,293 34,954 Charge-offs: Commercial (1) 382 552 1,029 Commercial real estate 1,780 - 3,470 Residential real estate 235 341 557 Consumer - 7 20 Total charge-offs 2,397 900 5,076 Recoveries: Commercial 289 4 265 Commercial real estate 85 802 30 Residential real estate 20 23 3 Consumer 11 4 17 Total recoveries 405 833 315 Net charge-offs 1,992 67 4,761 (Release of) provision for credit losses for loans (5,018 ) 41,000 8,100 Balance at end of year $ 78,773 $ 79,226 $ 38,293 Ratio of net charge-offs during the year to average loans receivable outstanding during the year 0.03 % 0.00 % 0.09 % Allowance for credit losses for loans as a percentage of loans receivable 1.15 % 1.27 % 0.75 % (1) For the years ended December 31, 2019 the loan charge-offs within the commercial loan segment included $1.0 million related to the taxi medallion portfolio. For additional information regarding loans, see Note 4 of the Notes to the Consolidated Financial Statements. Implicit in the lending function is the fact that credit losses will be experienced and that the risk of loss will vary with the type of loan being made, the creditworthiness of the borrower and prevailing economic conditions. The allowance for credit losses has been allocated in the table below according to the estimated amount deemed to be reasonably and supportably necessary to provide for the possibility of either lifetime expected losses or losses being incurred within the following categories of loans as of December 31, for each of the past three years. The table below shows, for three types of loans, the amounts of the allowance allocable to such loans and the percentage of such loans to gross loans, along with the amount of the unallocated allowance. Commercial loan type shown below includes commercial, commercial real estate and commercial construction loans. Commercial Residential Real Estate Consumer Unallocated Amount of Allowance Loans to Gross Loans Amount of Allowance Loans to Gross Loans Amount of Allowance Loans to Gross Loans Amount of Allowance Total Allowance (dollars in thousands) 2021 $ 75,138 95.4 % $ 3,628 4.6 % $ 7 0.1 % $ - $ 78,773 2020 75,967 94.8 % 2,687 5.2 % 4 0.0 % 568 79,226 2019 36,506 93.7 % 1,685 6.3 % 3 0.1 % 99 38,293 - 41 - Table of Contents Investments For the year ended December 31, 2021, the average volume of investment securities, including equity securities, increased by $20.3 million to approximately $464.3 million or 6.4% of average earning assets, from $444.1 million, or 6.4% of average earning assets, for the year ended December 31, 2020. As of December 31, 2021, the principal components of the investment portfolio are U.S. Treasury and Government Agency Obligations, Federal Agency Obligations including mortgage-backed securities, Obligations of U.S. States and Political Subdivisions, Corporate Bonds and other debt and equity securities. During the year ended December 31, 2021, rate related factors decreased investment revenue by $2.8 million, while volume related factors increased investment revenue by $0.3 million. The tax-equivalent yield on investments decreased by 64 basis points to 1.61% from a yield of 2.25% during the year ended December 31, 2020. This was primarily due to overall declines in prevailing interest rates over the course of 2021. Securities available-for-sale are a part of the Company’s interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. The Company continues to reposition the investment portfolio as part of an overall corporate-wide strategy to produce reasonable and consistent margins where feasible, while attempting to limit risks inherent in the Company’s Consolidated Statement of Condition. As of December 31, 2021, net unrealized gains on securities available-for-sale, which are carried as a component of accumulated other comprehensive income (loss) and included in stockholders’ equity, net of tax, amounted to $0.5 million as compared with net unrealized gains of $7.9 million as of December 31, 2020. The decrease in unrealized gains is predominately attributable to changes in market conditions and interest rates. For additional information regarding the Company’s investment portfolio, see Note 3, Note 15 and Note 20 of the Notes to the Consolidated Financial Statements. During 2021, there were no sales from the Company’s available-for-sale portfolio, as compared with $19.6 million in sales in 2020 and $183.7 million in 2019. The gross realized gains (losses) on securities sold, called or matured mounted to approximately $195 thousand in 2021, $29 thousand in 2020 and $(280) thousand in 2019, while there were no impairment charges in 2021, 2020 and 2019. The table below illustrates the maturity distribution and weighted average yield on a tax-equivalent basis for amortized cost of our investment securities, excluding equity securities, as of December 31, 2021, on a contractual maturity basis. Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 10 years Due after 10 years Total Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Market Value (dollars in thousands) Investment Securities Available-for-Sale Federal Agency Obligations $ - - % $ - - % $ - - % $ 50,336 2.38 % $ 50,336 2.38 % $ 50,360 Residential Mortgage Pass-through Securities 3 3.57 442 2.56 3,535 3.29 313,131 1.63 317,111 1.65 316,095 Commercial Mortgage Pass-through Securities - - - - 4,079 1.52 6,735 1.62 10,814 1.58 10,469 Obligations of U.S. States and Political Subdivisions 395 4.11 4,216 4.15 4,275 4.18 136,159 3.31 145,045 3.36 145,625 Corporate Bonds and Notes 2,500 3.28 5,987 2.05 481 7.33 - - 8,968 2.68 9,049 Asset-backed Securities - - - - 380 0.76 2,183 0.93 2,563 0.90 2,564 Certificates of Deposit 150 1.54 - - - - - - 150 1.54 150 Other Securities 195 0.25 - - - - - - 195 0.25 195 Total Investment Securities $ 3,243 3.12 % $ 10,645 2.90 % $ 12,750 3.10 % $ 508,544 2.15 % $ 535,182 2.19 % $ 534,507 For information regarding the carrying value of the investment portfolio, see Note 3, Note 15 and Note 20 of the Notes to the Consolidated Financial Statements. The securities listed in the table above are either rated investment grade by Moody’s and/or Standard and Poor’s or have shadow credit ratings from a credit agency supporting an investment grade and conform to the Company’s investment policy guidelines. There were no municipal securities, or corporate securities, of any single issuer exceeding 10% of stockholders’ equity as of December 31, 2021. Other securities do not have a contractual maturity and are included in the “Due in 1 year or less” maturity in the table above. - 42 - Table of Contents The following table sets forth the carrying value of the Company’s investment securities, as of December 31 for each of the last three years. 2021 2020 2019 (dollars in thousands) Investment Securities Available-for-Sale: Federal agency obligations $ 50,360 $ 38,458 $ 28,237 Residential mortgage pass-through securities 316,095 270,884 200,496 Commercial mortgage pass-through securities 10,469 6,922 4,997 Obligations of U.S. States and political subdivisions 145,625 142,808 136,519 Corporate bonds and notes 9,049 25,095 28,382 Asset-backed securities 2,564 3,480 5,780 Certificates of deposit 150 151 150 Other securities 157 157 140 Total $ 534,507 $ 487,955 $ 404,701 For other information regarding the Company’s investment securities portfolio, see Note 3, Note 15 and Note 20 of the Notes to the Consolidated Financial Statements. Interest Rate Sensitivity Analysis The principal objective of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”). The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates. We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of December 31, 2021, and December 31, 2020, the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and Bank’s management. The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates. Based on our model, which was run as of December 31, 2021, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.35%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.64%. As of December 31, 2020, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 0.70%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.18%. Based on our model, which was run as of December 31, 2021, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 9.77%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 10.41%. As of December 31, 2020, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.89%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 8.56%. An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of December 31, 2021, would increase by 0.24% with an instantaneous rate shock of up 200 basis points, and decline by 5.20% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2020, would decline by 7.76% with an instantaneous rate shock of up 200 basis points, and increase by 5.70% with an instantaneous rate shock of down 100 basis points. - 43 - Table of Contents The following table illustrates the most recent results for EVE and NII as of December 31, 2021. Interest Rates Estimated Estimated Change in EVE Interest Rates Estimated Estimated Change in NII (basis points) EVE Amount % (basis points) NII Amount % +300 $ 1,191,457 $ (18,961 ) (1.57 ) +300 $ 275,470 $ 12,565 4.78 +200 1,213,269 2,851 0.24 +200 271,700 8,795 3.35 +100 1,220,872 10,454 0.86 +100 267,500 4,595 1.75 0 1,210,418 - 0.0 0 262,905 - 0.0 -100 1,147,448 (62,970 ) (5.20 ) -100 248,081 (14,824 ) (5.64 ) Estimates of Fair Value The estimation of fair value is significant to certain assets of the Company, including available-for-sale investment securities. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, expected cash flows, credit quality, discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. See Note 20 of the Notes to Consolidated Financial Statements for additional discussion. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Impact of Inflation and Changing Prices The financial statements and notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the operations; unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Liquidity Liquidity is a measure of a bank’s ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. As of December 31, 2021, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of December 31, 2021, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $742.1 million, which represented 9.1% of total assets and 10.9% of total deposits and borrowings, compared to $697.4 million as of December 31, 2020, which represented 9.2% of total assets and 10.9% of total deposits and borrowings on such date. The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of December 31, 2021, had the ability to borrow $1.9 billion. In addition, as of December 31, 2021, the Bank had borrowing capacity of $25 million through correspondent banks. The Bank also has a credit facility established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral of $1.8 million. As of December 31, 2021, the Bank had aggregate available and unused credit of approximately $894.0 million, which represents the aforementioned facilities totaling $1.9 billion net of $1.0 billion in outstanding borrowings and letters of credit. As of December 31, 2021, outstanding commitments for the Bank to extend credit were $1.2 billion. - 44 - Table of Contents Cash and cash equivalents totaled $265.5 million as of December 31, 2021, decreasing by $38.2 million from $303.8 million as of December 31, 2020. Operating activities provided $202.3 million in net cash. Investing activities used $689.9 million in net cash, primarily reflecting an increase in loans. Financing activities provided $449.4 million in net cash, primarily reflecting a net increase in deposits of $376.0 million, net proceeds raised from the issuance of preferred stock of $110.9 million, a decrease of $50.0 million from the redemption of subordinate debt and an increase in net borrowings of $42.3 million. Deposits Deposits are our primary source of funds. Average total deposits increased by $0.4 billion, or 6.9%, to $6.2 billion in 2021 from $5.8 billion in 2020 and increased $1.2 million, or 25.3%, to $5.8 billion in 2020 from $4.6 billion in 2019. The increase in total average deposits in 2021 was attributable to organic growth, while the increase in 2020 was attributable to both the acquisition of BNJ and organic growth. The following table sets forth the year-to-date average balances and weighted average rates for various types of deposits for 2021, 2020 and 2019. 2021 2020 2019 Balance Rate Balance Rate Balance Rate (dollars in thousands) Demand, noninterest-bearing $ 1,454,148 - $ 1,195,547 - $ 819,917 - Demand, interest-bearing & NOW 3,081,899 0.29 % 2,583,590 0.66 % 2,102,274 1.33 % Savings 369,866 0.31 % 236,318 0.27 % 165,538 0.24 % Time 1,300,270 1.14 % 1,792,568 1.94 % 1,549,700 2.40 % Average Total Deposits $ 6,206,183 0.52 % $ 5,808,023 0.90 % $ 4,637,429 1.41 % The following table sets forth the distribution of total deposit accounts, by account types for each of the dates indicated. December 31, 2021 December 31, 2020 Amount % of total Amount % of total (dollars in thousands) Demand, noninterest-bearing $ 1,617,049 25.5 % $ 1,339,108 22.5 % Demand, interest-bearing & NOW 3,127,350 49.4 % 2,861,820 48.0 % Savings 438,445 6.9 % 294,163 4.9 % Time 1,150,109 18.2 % 1,464,133 24.6 % Total Deposits $ 6,332,953 100.0 % $ 5,959,224 100.0 % As of December 31, 2021, we held $250.5 million of time deposits that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit, which was a decrease of $117.8 million from $368.3 million as of December 31, 2020. The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit as of December 31, 2021 and 2020: December 31, December 31, 2021 2020 (dollars in thousands) 3 months or less $ 71,293 $ 100,654 Over 3 to 6 months 69,394 101,487 Over 6 to 12 months 63,549 95,061 Over 12 months 46,288 71,079 Total $ 250,524 $ 368,281 - 45 - Table of Contents Federal Home Loan Bank Advances Federal Home Loan Bank advances are secured, under the terms of a blanket collateral agreement, primarily by commercial mortgage loans. As of December 31, 2021, the Company had a gross carrying value of $468.3 million, excluding a net fair value discount of $120 thousand, in notes outstanding at a weighted average interest rate of 0.73%. As of December 31, 2020, the Company had a gross carrying value of $426.0 million, excluding a net fair value discount of $84 thousand, in notes outstanding at a weighted average interest rate of 1.07%. Contractual Obligations and Other Commitments The following table summarizes contractual obligations as of December 31, 2021 and the effect such obligations are expected to have on liquidity and cash flows in future periods. Total Less than 1 year 1 – 3 years 4 – 5 years Over 5 years December 31, 2021 (dollars in thousands) Contractual obligations: Operating lease obligations $ 13,579 $ 2,807 $ 4,651 $ 3,441 $ 2,680 Other long-term liabilities/long-term debt: Time Deposits, gross sub-total 1,149,993 745,411 273,245 131,337 - Federal Home Loan Bank advances and repurchase agreements, gross 468,313 390,549 50,000 27,050 714 Finance lease 1,935 321 676 706 232 Subordinated debentures, net of debt issuance costs 152,951 - - - 152,951 Total other long-term liabilities/long-term debt 1,773,192 1,136,281 323,921 159,093 153,897 Other commercial commitments – off balance sheet: Commitments under commercial loans and lines of credit 647,971 408,664 187,544 47,253 4,510 Home equity and other revolving lines of credit 53,180 8,736 13,758 11,270 19,416 Outstanding commercial mortgage loan commitments 514,473 136,136 358,486 350 19,501 Standby letters of credit 25,271 22,738 2,533 - - Overdraft protection lines 973 472 42 152 307 Total off-balance sheet arrangements and contractual obligations 1,241,868 576,746 562,363 59,025 43,734 Total contractual obligations and other commitments $ 3,028,639 $ 1,715,834 $ 890,935 $ 221,559 $ 200,311 Capital The maintenance of a solid capital foundation continues to be a primary goal for the Company. Accordingly, capital plans, stock repurchases, and dividend policies are monitored on an ongoing basis. The most important objective of the capital planning process is to balance effectively the retention of capital to support future growth and the goal of providing stockholders with an attractive long-term return on their investment. The Company’s Tier 1 leverage capital (defined as tangible stockholders’ equity for common stock and Trust Preferred Capital Securities) as of December 31, 2021 amounted to $909.6 million or 11.7% of average total assets. As of December 31, 2020, the Company’s Tier 1 leverage capital amounted to $694.9 million or 9.5% of average total assets. The increase in Tier 1 capital reflects the Company’s retained earnings during 2021, and the issuance of $ 115 million in aggregate Tier 1 qualifying fixed-rate non-cumulative perpetual preferred stock . United States bank regulators have issued guidelines establishing minimum capital standards related to the level of assets and off balance-sheet exposures adjusted for credit risk. Specifically, these guidelines categorize assets and off balance-sheet items into risk-weightings and require banking institutions to maintain a minimum ratio of capital to risk-weighted assets. As of December 31, 2021, the Company’s CET 1, Tier 1 and total risk-based capital ratios were 10.64%, 12.19% and 15.26%, respectively. For information on risk-based capital and regulatory guidelines for the Parent Corporation and its bank subsidiary, see Note 15 to the Consolidated Financial Statements. The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the bank regulators regarding capital components, risk weightings, and other factors. - 46 - Table of Contents 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 December 31, 2021 was 2.98%. During September 2020, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 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 had a stated maturity of July 1, 2025, and bore interest until the maturity date or early redemption date at a variable rate equal to the then current three-month LIBOR rate plus 393 basis points. As of December 31, 2020, the variable interest rate was 4.16% and all costs related to 2015 issuance have been amortized. The 2015 Notes were redeemed in full on January 1, 2021. 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 depositary shares, each representing a 1/40th interest in a share of the Company’s 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. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Interest Sensitivity Market Risk Interest rate risk management is our primary market risk. See “Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operation- Interest Rate Sensitivity Analysis” herein for a discussion of our management of our interest rate risk. - 47 - Table of Contents PART II Item 8. Financial Statements and Supplementary Data All Financial Statements: The following financial statements are filed as part of this report under Item 8 - “Financial Statements and Supplementary Data.” Page Report of Independent Registered Public Accounting Firm 49 Consolidated Statements of Financial Condition 52 Consolidated Statements of Income 53 Consolidated Statements of Comprehensive Income 54 Consolidated Statements of Changes in Stockholders’ Equity 55 Consolidated Statements of Cash Flows 56 Notes to Consolidated Financial Statements 57 - 48 - Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 173 ) The Board of Directors and Stockholders of ConnectOne Bancorp, Inc. and Subsidiaries Englewood Cliffs, New Jersey Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statements of financial condition of ConnectOne Bancorp, Inc. and Subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Explanatory Paragraph – Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of ASC 326. The adoption of ASC 326 and its subsequent application is also communicated as a critical audit matter below. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. - 49 - Table of Contents Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses – Loans The Company adopted ASC 326, Financial Instruments – Credit Losses on January 1, 2021, using the modified retrospective method. Upon adoption the Company recorded a decrease to retained earnings of $2,925,000, net of tax, for the cumulative effect of adopting ASC 326, as noted in the Consolidated Statements of Changes in Stockholders’ Equity. As of December 31, 2021, the allowance for credit losses (“ACL”) on loans was $78,773,000 inclusive of reversal of credit losses on loans of $5,018,000 for the year then ended. The Company has disclosed the impact of adoption in Note 1b (see change in accounting principle explanatory paragraph above) to the consolidated financial statements and the allowance for credit losses on loans as of December 31, 2021 in Notes 1b and 4. ASC 326 requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost at the reporting date. The measurement is based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organizations portfolio. Management employs a process and methodology to estimate the ACL on pooled loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors includes pooling loans into portfolio segments for loan that share similar characteristics. Pooled loan portfolio segments include commercial, commercial real estate, commercial construction, residential real estate, and consumer loans. For pooled loans, the Company utilizes a discounted cash flow (”DCF”) methodology to estimate credit losses over the expected life of the loan. The DCF methodology combines probability of default, the loss given default, maturity date and prepayment speed assumptions to estimate a reserve for each loan. The quantitative loss rates are adjusted by macroeconomic scenarios and reverts, on a straight-line basis, to average historical losses after the forecasted periods. The sum of all the loan level reserves are aggregated for each portfolio segment and a quantitative loss factor is derived. The quantitative factors are also supplemented by certain qualitative loss factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. Qualitative loss factors, for each loan segment within the portfolio, incorporates consideration for a minimum to maximum range for qualitative loss factor derived from either the Company’s historical loss experience or peer group historical loss experience. Changes in these assumptions could have a material effect on the Company’s financial results. We identified auditing the ACL on pooled loans as a critical audit matter because the methodology to determine the estimate of credit losses significantly changes upon adoption of ASC 326, including the application of new accounting policies, the use of subjective judgments for both the quantitative and qualitative calculations and overall changes made to the loss estimation models. Performing audit procedures to evaluate the implementation and subsequent application of ASC 326 for loans involved a high degree of auditor judgment and required significant effort, including the need to involve more experienced audit personnel and valuation specialists. - 50 - Table of Contents The primary procedures we performed to address this critical audit matter included: • Testing the design and operating effectiveness of controls over the evaluation of the ACL on pooled loans, including controls addressing: ○ The selection and application of new accounting policies.   ○ Data inputs, judgments and calculations used to determine the loss factors.   ○ Information technology general controls and application controls.   ○ Problem loan identification and delinquency monitoring.   ○ Management’s evaluation of qualitative loss factors.   • Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the ACL on pooled loans, which included: ○ Evaluating the appropriateness of the Company’s accounting policies, judgments and elections involved in adoption of ASC 326.   ○ Testing the mathematical accuracy of the calculation.   ○ Utilizing internal specialists to perform procedures to assist in evaluating the relevance of the macroeconomic loss drivers.   ○ Utilizing internal specialists to assist in testing the mathematical accuracy of the underlying peer data used to calculated probability of the default and loss given default rates used within the discounted cash flow model.   ○ Evaluating the reasonableness of management’s judgments related to the probability of default, loss given default, including evaluating the use of peer data used to estimate these metrics in the absence of relevant and reliable internal data.   ○ Evaluating the reasonableness of management’s judgments related to qualitative adjustments to determine if they are calculated to conform with management’s policies and were consistently applied from the point of adoption to year end.     /s/ Crowe LLP   We have served as the Company's auditor since 2014.   Livingston, New Jersey February 25, 2022 - 51 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2021 2020 (in thousands, except share data) ASSETS Cash and due from banks $ 54,352 $ 63,637 Interest-bearing deposits with banks   211,184   240,119 Cash and cash equivalents 265,536 303,756   Investment securities 534,507 487,955 Equity securities 13,794 13,387   Loans held-for-sale 250 4,710   Loans receivable 6,828,622 6,236,307 Less: Allowance for credit losses - loans   78,773   79,226 Net loans receivable 6,749,849 6,157,081   Investment in restricted stock, at cost 27,826 25,099 Bank premises and equipment, net 29,032 30,108 Accrued interest receivable 34,152 35,317 Bank owned life insurance 195,731 165,960 Right of use operating lease assets 11,017 16,159 Goodwill 208,372 208,372 Core deposit intangibles 8,997 10,977 Other assets   50,417   88,458 Total assets $ 8,129,480 $ 7,547,339 LIABILITIES Deposits: Noninterest-bearing $ 1,617,049 $ 1,339,108 Interest-bearing   4,715,904   4,620,116 Total deposits 6,332,953 5,959,224 Borrowings 468,193 425,954 Subordinated debentures, net of debt issuance costs 152,951 202,648 Operating lease liabilities 12,417 18,026 Other liabilities   38,754   26,177 Total liabilities   7,005,268   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 December 31, 2021 and - 0 - shares as of December 31, 2020; outstanding 115,000 shares as of December 31, 2021 and - 0 - shares as of December 31, 2020 110,927 - Common stock, no par value: Authorized 100,000,000 shares; issued 42,557,264 shares as of December 31, 2021 and 42,444,031 shares as of December 31, 2020; outstanding 39,568,090 shares as of December 31, 2021 and 39,785,398 as of December 31, 2020 586,946 586,946 Additional paid-in capital 27,246 23,887 Retained earnings 440,169 331,951 Treasury stock, at cost ( 2,989,174 shares as of December 31, 2021 and 2,658,633 shares as of December 31, 2020) ( 39,672 ) ( 30,271 ) Accumulated other comprehensive (loss) income   ( 1,404 )   2,797 Total stockholders’ equity   1,124,212   915,310 Total liabilities and stockholders’ equity $ 8,129,480 $ 7,547,339 See the accompanying notes to the consolidated financial statements. - 52 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2021 2020 2019 (dollars in thousands, except for per share data) Interest income: Interest and fees on loans $ 293,546 $ 296,611 $ 255,479 Interest and dividends on investment securities: Taxable 4,413 6,456 9,131 Tax-exempt 2,403 2,797 3,929 Dividends 971 1,642 1,778 Interest on federal funds sold and other short-term investments   405   694   1,167 Total interest income   301,738   308,200   271,484 Interest expense: Deposits 24,768 52,386 65,570 Borrowings   14,092   17,823   19,595 Total interest expense   38,860   70,209   85,165 Net interest income 262,878 237,991 186,319 (Reversal of) provision for credit losses   ( 5,500 )   41,000   8,100 Net interest income after provision for credit losses   268,378   196,991   178,219 Noninterest income: Deposit, loan and other income 6,617 7,077 4,025 Income on bank owned life insurance 4,771 5,007 3,484 Net gains on sale of loans held-for-sale 3,807 2,085 512 Gain on sale of branches 674 - - Net (losses) gains on equity securities   ( 373 )   202   294 Net gains (losses) on sale/redemption of investment securities   195   29   ( 280 ) Total noninterest income 15,691 14,400 8,035 Noninterest expense: Salaries and employee benefits 64,341 58,877 49,021 Occupancy and equipment 11,638 13,882 9,712 FDIC insurance 2,665 4,002 2,011 Professional and consulting 8,286 7,383 5,506 Marketing and advertising 1,318 1,200 1,353 Data processing 6,265 6,008 4,503 Merger expenses - 14,640 8,955 Loss on extinguishment of debt - - 1,047 Amortization of core deposit intangible 1,981 2,559 1,408 Other components of net periodic pension (income) expense ( 269 ) ( 119 ) 114 Increase in value of acquisition price - 2,333 - Other expenses   12,786   10,236   8,598 Total noninterest expenses   109,011   121,001   92,228 Income before income tax expense 175,058 90,390 94,026 Income tax expense   44,705   19,101   20,631 Net income 130,353 71,289 73,395 Preferred dividends 1,717 - - Net income available to common stockholders $ 128,636 $ 71,289 $ 73,395 Earnings per common share: Basic $ 3.24 $ 1.80 $ 2.08 Diluted 3.22 1.79 2.07 See the accompanying notes to the consolidated financial statements. - 53 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2021 2020 2019 (dollars in thousands)   Net income $ 130,353 $ 71,289 $ 73,395 Other comprehensive income: Unrealized gains and losses: Unrealized holding (losses) gains on available-for-sale securities arising during the period ( 11,109 ) 7,005 11,286 Tax effect   2,914   ( 1,847 )   ( 2,923 ) Net of tax   ( 8,195 )   5,158   8,363 Reclassification adjustment for realized (gains) losses included in net income ( 195 ) ( 29 ) 280 Tax effect   48   6   ( 79 ) Net of tax   ( 147 )   ( 23 )   201 Unrealized gains (losses) on cash flow hedges 3,593 ( 3,423 ) ( 755 ) Tax effect   ( 1,012 )   962   213 Net of tax   2,581   ( 2,461 )   ( 542 ) Reclassification adjustment for losses (gains) arising during this period 1,873 1,577 ( 677 ) Tax effect   ( 528 )   ( 443 )   190 Net of tax   1,345   1,134   ( 487 ) Unrealized pension plan (losses) gains: Unrealized pension plan losses before reclassifications - ( 112 ) ( 209 ) Tax effect   -   31   59 Net of tax   -   ( 81 )   ( 150 ) Reclassification adjustment for realized losses included in net income 299 301 358 Tax effect   ( 84 )   ( 84 )   ( 101 ) Net of tax   215   217   257 Total other comprehensive (loss) income   ( 4,201 )   3,944   7,642 Total comprehensive income $ 126,152 $ 75,233 $ 81,037 See the accompanying notes to the consolidated financial statements. - 54 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY     Preferred Stock     Common Stock     Additional Paid In Capital     Retained Earnings     Treasury Stock     Accumulated Other Comprehensive Income (Loss)     Total Stockholders’ Equity   (in thousands, except share and per share data)                                                         Balance as of January 1, 2019   $ -     $ 412,546     $ 15,542     $ 211,345     $ ( 16,717 )   $ ( 8,789 )   $ 613,927   Net income     -       -       -       73,395       -       -       73,395   Other comprehensive income, net of tax     -       -       -       -       -       7,642       7,642   Cash dividends declared on common stock ($ 0.36 per share)     -       -       -       ( 12,958 )     -       -       ( 12,958 ) Repurchase of stock ( 540,018 shares)     -       -       -       -       ( 12,643 )     -       ( 12,643 ) Net shares issued in satisfaction of restricted stock units earned ( 4,904 shares)     -       -       -       -       -       -       -   Exercise of stock options ( 38,937 shares)     -       -       360       -       -       -       360   Restricted stock, net of forfeitures ( 56,772 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of performance units earned ( 31,425 shares)     -       -       196       -       -       -       196   Stock issued ( 3,032,496 shares) in acquisition of GHB     -       56,025       -       -       -       -       56,025   Stock issued ( 119,008 shares) in acquisition of BoeFly, LLC - - 2,500 - - - 2,500 Stock-based compensation expense   -   -   2,746   -   -   -   2,746 Balance as of December 31, 2019   $ -     $ 468,571     $ 21,344     $ 271,782     $ ( 29,360 )   $ ( 1,147 )   $ 731,190   Net income     -       -       -       71,289       -       -       71,289   Other comprehensive income, net of tax     -       -       -       -       -       3,944       3,944   Cash dividends declared on common stock ($ 0.27 per share)     -       -       -       ( 11,120 )     -       -       ( 11,120 ) Repurchase of stock ( 54,693 shares)     -       -       -       -       ( 911 )     -       ( 911 ) Net shares issued in satisfaction of restricted stock units earned ( 16,541 shares)     -       -       -       -       -       -       -   Exercise of stock options ( 35,413 shares)     -       -       233       -       -       -       233   Restricted stock grants, net of forfeitures ( 89,879 shares)     -       -       -       -       -       -       -   Stock grants issued ( 1,340 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of performance units earned ( 22,402 shares)     -       -       -       -       -       -       -   Share redemption for tax withholdings on performance units and restricted stock units earned     -       -       ( 639 )     -       -       -       ( 639 ) Stock issued ( 4,602,450 shares) in acquisition of Bancorp of New Jersey​​ - 118,375 - - - - 118,375 Stock-based compensation expense   -   -   2,949   -   -   -   2,949 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     -       -       -       130,353       -       -       130,353   Other comprehensive loss, net of tax     -       -       -       -       -       ( 4,201 )     ( 4,201 ) Cash dividends declared on preferred stock ($ 0.371875 per share)     -       -       -       ( 1,717 )     -       -       ( 1,717 ) Cash dividends declared on common stock ( 0.48 per share)     -       -       -       ( 17,493 )     -     -       ( 17,493 ) Exercise of stock options ( 14,247 shares)     -       -       106       -       -       -       106   Restricted stock grants, net of forfeitures ( 44,836 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 stock ( 330,541 shares) - - - - ( 9,401 ) - ( 9,401 ) Proceeds from preferred stock issuance, net of costs ( 115,000 shares) 110,927 - - - - - 110,927 Stock-based compensation expense   -   -   4,536   -   -   -   4,536 Balance as of December 31, 2021   $ 110,927     $ 586,946     $ 27,246     $ 440,169     $ ( 39,672 )   $ 1,404     $ 1,124,212   See the accompanying notes to the consolidated financial statements. - 55 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS     Years Ended December 31,   (dollars in thousands)   2021     2020     2019   Cash flows from operating activities                         Net income   $ 130,353     $ 71,289     $ 73,395   Adjustments to reconcile net income to net cash provided by operating activities:                       Depreciation and amortization of premises and equipment     3,757       4,244       3,053   (Reversal) of provision for credit losses     ( 5,500 )     41,000       8,100   Amortization of intangibles     1,980       2,559       1,408   Net accretion of loans     ( 5,350 )     ( 6,687 )     ( 5,056 ) Accretion on bank premises     ( 73 )     ( 90 )     ( 86 ) Accretion on deposits     ( 2,224 )     ( 4,301 )     ( 1,149 ) (Accretion) amortization on borrowings     ( 36 )     ( 183 )     209   Net deferred income tax (benefit) expense     16     ( 7,495 )     104   Stock-based compensation     4,536       2,949       2,942   Losses (gains) on sales/redemptions of investment securities, net     ( 195 )     ( 29 )     280   Change in fair value of equity securities, net     373     ( 202 )     ( 294 ) Gains (losses) on sale of loans held-for-sale, net     ( 3,807 )     ( 2,085 )     ( 512 ) Gain on sale of branches     ( 674 )     -     - Net losses on disposition of other fixed assets     65       -       -   Gain on sale of other real estate owned     ( 18 )     -       -   Loans originated for resale     ( 51,669 )     ( 63,114 )     ( 20,499 ) Loss on extinguishment of debt     -       -       1,047 Proceeds from sale of loans held-for-sale     72,233     80,323     21,011 Net gains on disposition of premises and equipment     -       -       ( 8 ) Net gains on sale of other real estate owned     -       -       ( 8 ) Increase in cash surrender value of bank owned life insurance     ( 4,771 )     ( 4,793 )     ( 3,484 ) Amortization of premiums and accretion of discounts on investments securities, net     5,966       5,506       4,299   Amortization of subordinated debt issuance costs     303     323     329 Increase (decrease) in accrued interest receivable     1,165     ( 11,458 )     ( 301 ) Net change in operating leases     ( 769 )     41       1,312   Decrease (increase) in other assets     46,086       ( 22,498 )     ( 22,619 ) Increase (decrease) in other liabilities     10,526       ( 4,174 )     ( 2,785 ) Net cash provided by operating activities     202,273     81,125     60,688 Cash flows from investing activities                   Investment securities available-for-sale:                 Purchases     ( 349,500 )     ( 338,087 )     ( 225,853 ) Sales     -     19,624     183,728   Maturities, calls and principal repayments     285,873       256,782       178,116   Net (purchases)/redemptions of restricted investment in bank stocks     ( 2,727 )     5,362       3,739   Purchases of equity securities     ( 780 )     ( 2,000 )     - Sales of equity securities     -     -     569 Loans held-for-sale payments     38     1,186     47 Net increase in loans     ( 596,389 )     ( 329,210 )     ( 243,430 ) Purchases of premises and equipment     ( 2,783 )     ( 2,199 )     ( 1,527 ) Purchases of bank owned life insurance     ( 25,000 )     ( 25,000 )     ( 10,000 ) Proceeds from life insurance death benefits     -       1,794       -   Proceeds from sale of branches     1,087     -     - Proceeds from sale of premises and equipment     -       -       18   Cash and cash equivalents acquired in acquisitions, net     -       87,391       11,211   Proceeds from sale of other real estate owned     321       992       915   Net cash used in investing activities     ( 689,860 )     ( 323,365 )     ( 102,467 ) Cash flows from financing activities             Net increase in deposits     375,953     410,605     260,489 (Repayment of) increase in subordinated debt     ( 50,000 )     73,440     - Advances of FHLB borrowings     340,000       1,526,489       2,597,000   Repayments of FHLB borrowings     ( 297,725 )     ( 1,650,387 )     ( 2,762,150 )   Cash dividends paid on preferred stock     ( 1,717 )     -       -   Cash dividends paid on common stock     ( 17,493 )     ( 14,317 )     ( 12,160 )   Proceeds from preferred stock offering     110,927       -       -   Purchase of treasury stock     ( 9,401 )     ( 911 )     ( 12,643 )   Proceeds from exercise of stock options   106     233     360   Share redemption for tax withholdings on performance units and restricted stock units earned     ( 1,283 )     ( 639 )     -   Net cash provided by financing activities     449,367       344,513       70,896     Net change in cash and cash equivalents   ( 38,220 )   102,273     29,117   Cash and cash equivalents at beginning of period   303,756     201,483     172,366   Cash and cash equivalents at end of period   $ 265,536     $ 303,756     $ 201,483   Supplemental disclosures of cash flow information: Cash payments for:                   Interest paid   $ 41,787     $ 74,701     $ 88,522   Income taxes paid   45,431     26,548     18,497   Supplemental disclosures of noncash investing activities:                   Transfer of loans to other real estate owned   $ 304     $ -     $ 907   Transfer of loans held-for-sale to loans held-for-investment     4,293       10,995       -   Transfer of loans held-for-investment to loans held-for-sale   16,628     26,548     33,297   See the accompanying notes to the consolidated financial statements. - 56 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies 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-four 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. Basis of Presentation and Principals of Consolidation The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. The consolidated financial statements of the Parent Corporation are prepared on an accrual basis and include the accounts of the Parent Corporation and the Company. All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements. Segments FASB ASC 28, “Segment Reporting,” requires companies to report certain information about operating segments. The Company is managed as one segment: a community bank. All decisions including but not limited to loan growth, deposit funding, interest rate risk, credit risk and pricing are determined after assessing the effect on the totality of the organization. For example, loan growth is dependent on the ability of the organization to fund this growth through deposits or other borrowings. As a result, the Company is managed as one operating segment. 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. 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 clients, 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. - 57 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) 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. Federal Reserve reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company's financial condition and results of operations in future periods. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including the determination of the allowance for credit losses, fair value of financial instruments, impairment of goodwill and other intangible assets and income taxes. Cash and Cash Equivalents Cash and cash equivalents include cash, deposits with other financial institutions with maturities of less than 90 days , and federal funds sold. Net cash flows are reported for client loan and deposit transactions, interest-bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements. Investment Securities Effective January 1, 2021, the Company accounts for its investment securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320-10-05. Investments are classified into the following categories: (1) held-to-maturity securities, for which the Company has both the positive intent and ability to hold until maturity, which are reported at amortized cost; (2) trading securities, which are purchased and held principally for the purpose of selling in the near term and are reported at fair value with unrealized gains and losses included in earnings; and (3) available-for-sale securities, which do not meet the criteria of the other two categories and which management believes may be sold prior to maturity due to changes in interest rates, prepayment risk, liquidity or other factors, and are reported at fair value, with unrealized gains and losses, net of applicable income taxes, reported as a component of accumulated other comprehensive income, which is included in stockholders’ equity and excluded from earnings. Investment securities are adjusted for amortization of premiums and accretion of discounts as adjustments to interest income, which are recognized on a level yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Investment securities gains or losses are determined using the specific identification method. 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. 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 allowance for credit losses 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 allowance for credit loss is recognized in other comprehensive income, net of tax. The Company elected the practical expedient of zero loss estimates for securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rate by major agencies and have a long history of no credit losses. Prior to January 1, 2021, securities were evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FASB ASC 320-10-65 clarifies the interaction of the factors that were considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management assessed whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps were done before assessing whether the entity will recover the cost basis of the investment. In instances when - 58 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FASB ASC 320-10-65 changed the presentation and amount of the other-than-temporary impairment recognized in the Consolidated Statement of Income. The other-than-temporary impairment was separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss was recognized through earnings. The amount of the total other-than-temporary impairment related to all other factors was recognized through other comprehensive income. Equity Securities The Company’s investments in equity securities are recorded at fair value, with unrealized gains and losses included in earnings. 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. Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. Fair value on 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. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, purchase premium and discounts and an allowance for credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Loan segments are defined as a group of loans, which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Company has five segments of loans: commercial, commercial real estate, commercial construction, residential real estate (including home equity) and consumer. Loans that are 90 days past due are placed on nonaccrual and previously accrued interest is reversed and charged against interest income unless the loans are both well-secured and in the process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans 90 days or greater past due and still accruing include both smaller balance homogeneous loans that are collectively evaluated for credit losses and loans individually evaluated for credit losses. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The policy of the Company is to generally grant commercial, residential and consumer loans to residents and businesses within its New Jersey and New York market area. The borrowers’ abilities to repay their obligations are dependent upon various factors including the borrowers’ income and net worth, cash flows generated by the borrowers’ underlying collateral, value of the underlying collateral, and priority of the lender’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the control of the Company. The Company is therefore subject to risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for credit losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for a large majority of the Company’s loans. - 59 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Allowance for Credit Losses The allowance for credit losses is an estimate of current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial assets necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and investment securities measured at amortized cost. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. Loan losses are charged against the allowance for credit losses when the Company believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. The allowance is established through a provision for credit losses that is charged against income. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The expected credit loss for unfunded loan commitments is reported on the consolidated statement of financial condition in other liabilities. For financial assets, the allowance for credit losses is a valuation account that is deducted from, or added to, the amortized cost basis of the financial assets to present the net amount expected to be collected on the financial assets. The Company 's methodology to estimate the allowance for credit losses has two components: (i) a collective reserve component for estimated lifetime expected credit losses for pools of loans that share common risk characteristics and (ii) an individual reserve component for loans that do not share common risk characteristics. The Company maintains an allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial letters of credit. Information relevant to establishing an estimate of current expected credit losses includes historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. The Company reports in net income (as a credit loss expense) the amount necessary to adjust the allowance for credit losses and liabilities for credit losses on off-balance-sheet credit exposures for the current estimate of expected credit losses. Expected credit losses of financial assets are measured on a collective (pool) basis when similar risk characteristic(s) exist. If the Company determines that a financial asset does not share risk characteristics with other financial assets, the Company shall evaluate the financial asset for expected credit losses on an individual basis. Financial assets are assessed once, either through collective assessments or individual assessments. Standard expected losses are evaluated on a collective, or pool, basis when financial assets share similar risk characteristics. For pooled loan segments, utilizing a quantitative analysis, the Company calculates estimated credit losses using a probability of default and loss given default methodology, the results of which are applied to the aggregated discounted cash flow of each individual loan within the segment. In the absence of relevant and reliable internal data, probability of default and loss given default rates are determined using peer data. The point in time probability of default and loss given default are then conditioned by macroeconomic scenarios to incorporate reasonable and supportable forecasts that affect the collectability of the reported amount. Financial assets may be segmented based on one characteristic, or a combination of characteristics. Examples of risk characteristics relevant to the Company’s evaluation included, but were not limited to: (1) Internal or external credit scores or credit ratings, (2) Risk ratings or classifications, (3) Financial asset type, (4) Collateral type, (5) Size, (6) Effective interest rate, (7) Term, (8) Geographical location, (9) Industry of the borrower and (10) Vintage. The Company’s quantitative analysis also considers relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts. The Company evaluates a variety of factors including third party economic forecasts, industry trends and other available published economic information in arriving at its forecasts. After the reasonable and supportable forecast period, the Company reverts, on a straight-line basis, to average historical losses. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Included in the allowance for credit losses are qualitative reserves to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Each qualitative loss factor, for each loan segment within the portfolio, incorporates consideration for a minimum to maximum range for loss factors derived from either the Company’s historical loss experience, or peer group historical charge-off experience. These qualitative factor adjustments may increase or decrease the Company’s estimate of expected credit losses and are applied to each loan segment. The Bank evaluates individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. The Company evaluates the pooling methodology at least annually. Loans 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 Company 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 the Company in determining individual analysis include payment status and the probability of collecting scheduled principal and interest payments. - 60 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) when due. Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties are troubled debt restructurings (“TDR”) and are individually analyzed if carrying value is $ 250,000 or higher. Additionally, nonaccrual loans that are $ 250,000 or higher are also individually analyzed. All PCD loans are individually analyzed. For loans designated as TDR or nonaccrual with balances less than $ 250,000 , these loans 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 allowance for credit losses is determined on a loan level basis using the fair value of the collateral as of the reporting date, less estimated disposition costs (“net fair value”), which will ensure that the credit loss is not delayed until the time at which the actual foreclosure takes place. In the event that this fair value is less the then amortized cost basis of these specific loans, the Company will recognize the difference between the net fair value at the reporting date and the amortized cost basis in the allowance for credit losses. If the fair value of the collateral has increased as of the evaluation date, the increase in the fair value of the collateral is reflected through a reduction in the allowance for credit losses. 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. Purchased Credit-Deteriorated Loans Loans acquired in a business combination that have experienced a more-than-significant deterioration in credit quality since origination are considered PCD loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that were current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium, which is recognized through interest income on a level-yield basis over the lives of the related loans. All loans considered to be PCI prior to the adoption of ASU 2016-13 were converted to PCD upon adoption. PCD loans that met the criteria for nonaccrual may be considered performing, regardless of whether the client is contractually delinquent, if management can reasonably estimate the timing and amount of the expected cash flows on such loans and if management expects to fully collect the new carrying value of the loans. As such, management may no longer consider the loans to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. Derivatives The Company records cash flow hedges at the inception of the derivative contract based on the Company’s intentions and belief as to likely effectiveness as a hedge. Cash flow hedges represent a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. The changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest income. - 61 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged. The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings. Restricted Stock The Bank is a member of the Federal Home Loan Bank (“FHLB”) of New York. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends on the stock are reported as income. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Premises and Equipment Land is carried at cost and premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 4 to 30 years. Leasehold improvements are depreciated using the straight-line method over the terms of the respective leases, or the estimated useful lives of the improvements, whichever is shorter. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years. Leases Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease team. The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term. The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The Company has elected not to recognize leases with original terms of 12 months or less on the consolidated balance sheet. - 62 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Other Real Estate Owned Other real estate owned (“OREO”), representing property acquired through foreclosure and held-for-sale, is initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequently, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs relating to holding the assets are charged to expenses. Employee Benefit Plans The Company has a noncontributory pension plan that covered all eligible employees up until September 30, 2007, at which time the Company froze its defined benefit pension plan. As such, all future benefit accruals in this pension plan were discontinued and all retirement benefits that employees would have earned as of September 30, 2007 were preserved. The Company’s policy is to fund at least the minimum contribution required by the Employee Retirement Income Security Act of 1974. The costs associated with the plan are accrued based on actuarial assumptions and included in salaries and employee benefits expense. The Company accounts for its defined benefit pension plan in accordance with FASB ASC 715-30. FASB ASC 715-30 requires that the funded status of defined benefit postretirement plans be recognized on the Company’s statement of financial condition and changes in the funded status be reflected in other comprehensive income. FASB ASC 715-30 also requires companies to measure the funded status of the plan as of the date of its fiscal year-end. The Company maintains a 401(k)-employee savings plan to provide for defined contributions which covers substantially all employees of the Company. Employee 401(k) and profit-sharing plan expense is the amount of matching contributions. Stock-Based Compensation Stock compensation accounting guidance (FASB ASC 718, “Compensation-Stock Compensation”) requires that the compensation cost related to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. Stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. See Note 18 of the Notes to Consolidated Financial Statements for a further discussion. Treasury Stock Subject to limitations applicable to the Parent Corporation, treasury stock purchases may be made from time to time as, in the opinion of management, market conditions warrant, in the open market or in privately negotiated transactions. Shares repurchased are added to the corporate treasury and will be used for future stock dividends and other issuances. The repurchased shares are recorded as treasury stock, which results in a decrease in stockholders’ equity. Treasury stock is recorded using the cost method and accordingly is presented as a reduction of stockholders’ equity. During the year ended December 31, 2021 and December 31, 2020, the Parent Corporation repurchased 330,541 and 54,693 shares, respectively, under a board-approved share repurchase program. Goodwill Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized but tested for impairment annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected December 31 as the date to perform the annual impairment test. No impairment charge was deemed necessary as of the years ended December 31, 2021, 2020 and 2019. - 63 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Other Intangible Assets Other intangible assets consist of core deposit intangibles arising from business combinations that are amortized over their estimated useful lives to their estimated residual value. Comprehensive Income Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from nonowner sources. The Company’s other comprehensive income (loss) is comprised of unrealized holding gains and losses on securities available-for-sale, unrecognized actuarial gains and losses of the Company’s defined benefit pension plan and unrealized gains and losses on cash flow hedges, net of taxes. Restrictions on Cash Cash on hand or on deposit with the Federal Reserve Bank is required to meet regulatory reserve and clearing requirements. Dividend Restriction Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Parent Corporation or by the Parent Corporation to the stockholders. Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Bank Owned Life Insurance The Company invests in Bank Owned Life Insurance (“BOLI”) to help offset the cost of employee benefits. The change in the cash surrender value of the BOLI is recorded as a component of noninterest income. Income Taxes Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 % likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Advertising Costs The Company recognizes its marketing and advertising cost as incurred. Reclassifications Certain reclassifications have been made in the consolidated financial statements and footnotes for 2020 and 2019 to conform to the classifications presented in 2021. Such reclassifications had no impact on net income or stockholders’ equity. - 64 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Statement of Condition Tax Effect Change to Retained Earnings 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. 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 statement. 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. ASU 2021-01 “Reference Rate Reform (Topic 848)” In January 2021 the Financial Accounting Standards Board (the “FASB”), issued ASU 2021-01 to clarify the scope of ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. ASU 2020-04 provides temporary, optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships that reference the London Interbank Offered Rate or another reference rate that is expected to be discontinued. The ASU addresses questions about whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting, or contract price alignment that is expected to be modified as a result of reference rate reform, commonly referred to as the “discounting transition”. The amendments clarify that certain optional expedients and exceptions in Topic 848 do apply to derivatives that are affected by the discounting transition. The amendments in ASU 2021-01 are effective immediately for all entities. The amendments do not apply to contract modifications made after December 31, 2022; new hedging relationships entered into after December 31, 2022; and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship, including periods after December 31, 2022. The Company adopted ASU 2021-01 in January 2021, and its adoption did not have a significant impact on the Company’s audited consolidated financial statements. - 65 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1b – Authoritative Accounting Guidance – (continued) Newly Issued, But Not Yet Effective Accounting Standards In November 2020, federal and state banking regulators issued the “Interagency Policy Statement on Reference Rates for Loans" to reiterate that a specific replacement rate for loans impacted by reference rate reform has not been endorsed and entities may utilize any replacement reference rate determined to be appropriate based on its funding model and customer needs. As discussed in the “Interagency Policy Statement on Reference Rates for Loans," fallback language should be included in lending contracts to provide for use of a robust fallback rate if the initial reference rate is discontinued. Additionally, federal banking regulators issued the "Interagency Statement on LIBOR Transition" acknowledging that the administrator of USD London Interbank Offered Rate (LIBOR) benchmarks has announced it will consult on its intention to cease the publication of the one week and two month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. On March 5, 2021, the administrator of USD LIBOR benchmarks confirmed these dates and will cease publication of USD LIBOR tenors accordingly. As discussed in the "Interagency Statement on LIBOR Transition," regulators encouraged banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, in order to facilitate an orderly, safe and sound LIBOR transition. The Company continues to monitor efforts and evaluate the impact of reference rate reform on its consolidated financial statements; however, the impact is not expected to be significant. 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: Years Ended December 31, 2021 2020 2019 (in thousands, except per share amounts) Net income available to common stockholders $ 128,636 $ 71,289 $ 73,395 Earnings allocated to participating securities   ( 313 )   ( 356 )   ( 295 ) Income attributable to common stock $ 128,323 $ 70,933 $ 73,100 Weighted average common shares outstanding, including participating securities 39,723 39,643 35,289 Weighted average participating securities   ( 97 )   ( 131 )   ( 84 ) Weighted average common shares outstanding 39,626 39,512 35,205 Incremental shares from assumed conversions of options, restricted stock units, performance units and restricted stock   260   132   88 Weighted average common and equivalent shares outstanding   39,886   39,644   35,293 Earnings per common share: Basic $ 3.24 $ 1.80 $ 2.08 Diluted 3.22 1.79 2.07 There were no antidilutive common share equivalents as of December 31, 2021, 2020 and 2019. - 66 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities The Company’s investment securities are classified as available-for-sale as of December 31, 2021 and December 31, 2020. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in stockholders’ equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value as of December 31, 2021 and December 31, 2020. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 20 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 December 31, 2021 and 2020. Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in thousands) December 31, 2021 Investment securities available-for-sale Federal agency obligations $ 50,336 $ 649 $ ( 625 ) $ 50,360 Residential mortgage pass-through securities 317,111 1,868 ( 2,884 ) 316,095 Commercial mortgage pass-through securities 10,814 118 ( 463 ) 10,469 Obligations of U.S. states and political subdivisions​​ 145,045 1,562 ( 982 ) 145,625 Corporate bonds and notes 8,968 81 - 9,049 Asset-backed securities 2,563 3 ( 2 ) 2,564 Certificates of deposit 150 - - 150 Other securities   195   -   -   195 Total securities available-for-sale $ 535,182 $ 4,281 $ ( 4,956 ) $ 534,507 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in thousands) December 31, 2020 Investment securities available-for-sale Federal agency obligations $ 37,015 $ 1,508 $ ( 65 ) $ 38,458 Residential mortgage pass-through securities 266,114 4,811 ( 41 ) 270,884 Commercial mortgage pass-through securities 6,906 203 ( 187 ) 6,922 Obligations of U.S. states and political subdivisions​​ 138,539 4,269 - 142,808 Corporate bonds and notes 24,925 222 ( 52 ) 25,095 Asset-backed securities 3,521 - ( 41 ) 3,480 Certificates of deposit 149 2 - 151 Other securities   157   -   -   157 Total securities available-for-sale $ 477,326 $ 11,015 $ ( 386 ) $ 487,955 - 67 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities – (continued) Investment securities having a carrying value of approximately $ 71.2 million and $ 107.6 million as of December 31, 2021 and December 31, 2020, respectively, were pledged to secure public deposits, borrowings, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law. As of December 31, 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 December 31, 2021, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer. Securities not due at a single maturity date are shown separately. December 31, 2021 Amortized Cost Fair Value (dollars in thousands) Investment Securities Available-for-Sale: Due in one year or less $ 3,045 $ 3,051 Due after one year through five years 10,203 10,280 Due after five years through ten years 5,136 5,338 Due after ten years 188,678 189,079 Residential mortgage pass-through securities 317,111 316,095 Commercial mortgage pass-through securities 10,814 10,469 Other securities   195   195 Total securities available-for-sale $ 535,182 $ 534,507 Gross gains and losses from the sales and redemptions of investment securities for the years ended December 31, 2021, 2020 and 2019 were as follows: Years Ended December 31, 2021 2020 2019 (dollars in thousands) Proceeds $ 5,185 $ 19,624 $ 183,728 Gross gains on sales/redemptions of investment securities $ 195 $ 29 $ 401 Gross losses on sales/redemptions of investment securities   -   -   ( 681 ) Net gains (losses) on sales/redemptions of investment securities​​   195   29   ( 280 ) Tax provision on net gains   ( 48 )   ( 6 )   79 Net gains (losses) on sales/redemptions of investment securities, after tax​​ $ 147 $ 23 $ ( 201 ) - 68 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 December 31, 2021 and December 31, 2020. December 31, 2021 Total Less than 12 Months 12 Months or Longer Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (dollars in thousands) Investment Securities Available-for-Sale: Federal agency obligation $ 28,974 $ ( 625 ) $ 28,974 $ ( 625 ) $ - $ - Residential mortgage pass-through securities 246,396 ( 2,884 ) 214,701 ( 2,111 ) 31,695 ( 773 ) Commercial mortgage pass-through securities 8,370 ( 463 ) 4,682 ( 75 ) 3,688 ( 388 ) Obligations of U.S. states and political subdivisions 89,473 ( 982 ) 89,473 ( 982 ) - - Asset-backed securities   802   ( 2 )   802   ( 2 )   -   - Total Temporarily Impaired Securities $ 374,015 $ ( 4,956 ) $ 338,632 $ ( 3,795 ) $ 35,383 $ ( 1,161 ) December 31, 2020 Total Less than 12 Months 12 Months or Longer Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (dollars in thousands) Investment Securities Available-for-Sale: Federal agency obligation $ 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 ) 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 December 31, 2021. The Company has elected to exclude accrued interest from the amortized cost of its investment securities available-for-sale. Accrued interest receivable for investment securities available for sale as of December 31, 2021 and December 31, 2020, totaled $ 1.6 million and $ 1.7 million, respectively. - 69 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities – (continued) 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 December 31, 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. - 70 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses Loans Receivable : The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of December 31, 2021 and December 31, 2020: 2021 2020 (dollars in thousands) Commercial (1) $ 1,299,428 $ 1,521,967 Commercial real estate 4,741,590 3,783,550 Commercial construction 540,178 617,747 Residential real estate 255,269 322,564 Consumer   1,886   1,853 Gross loans 6,838,351 6,247,681 Net deferred fees   ( 9,729 )   ( 11,374 ) Loans receivable $ 6,828,622 $ 6,236,307   (1) Included in commercial loans as of December 31, 2021 and December 31, 2020 were Paycheck Protection Program (“PPP”) loans of $ 93.1 million and $ 397.5 million, respectively. These loans are 100% federally guaranteed and currently not subject to any allocation of allowance for credit losses. As of December 31, 2021, and 2020, loan balances of approximately $ 2.5 billion and $ 2.7 billion, respectively, were pledged to secure borrowings from the Federal Home Loan Bank. The loan segments in the above table have unique risk characteristics with respect to credit quality: • The repayment of commercial loans is generally dependent on the creditworthiness and cash flow of borrowers, and if applicable, guarantors, which may be negatively impacted by adverse economic conditions. While the majority of these loans are secured, collateral type, marketing, coverage, valuation and monitoring is not as uniform as in other portfolio classes and recovery from liquidation of such collateral may be subject to greater variability. • Payment on commercial mortgages is driven principally by operating results of the managed properties or underlying business and secondarily by the sale or refinance of such properties. Both primary and secondary sources of repayment, and value of the properties in liquidation, may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. • Properties underlying construction, land and land development loans often do not generate sufficient cash flows to service debt and thus repayment is subject to ability of the borrower and, if applicable, guarantors, to complete development or construction of the property and carry the project, often for extended periods of time. As a result, the performance of these loans is contingent upon future events whose probability at the time of origination is uncertain. • The ability of borrowers to service debt in the residential and consumer loan portfolios is generally subject to personal income which may be impacted by general economic conditions, such as increased unemployment levels. These loans are predominately collateralized by first and/or second liens on single family properties. If a borrower cannot maintain the loan, the Company’s ability to recover against the collateral in sufficient amount and in a timely manner may be significantly influenced by market, legal and regulatory conditions. • The Company considers loan classes and loan segments to be one and the same. - 71 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) Loans Held-For-Sale : The following table presents loans held-for-sale by loan segment as of December 31, 2021 and December 31, 2020: 2021 2020 (dollars in thousands) Commercial $ - $ - Commercial real estate   -   1,990 Residential mortgage   250   2,720 Total carrying amount $ 250 $ 4,710 Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an allowance for credit loss (“ACL”) as of December 31, 2021 and nonaccrual loans without an ACL as of December 31, 2021: December 31, 2021 Nonaccrual loans with ACL Nonaccrual loans without ACL Total Nonaccrual loans (dollars in thousands) Commercial $ 28,746 $ 1,316 $ 30,062 Commercial real estate 15,362 10,031 25,393 Commercial construction - 3,150 3,150 Residential real estate 1,239 1,856 3,095 Consumer - - - Total $ 45,347 $ 16,353 $ 61,700 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. - 72 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) 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. 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 December 31, 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 2021 2020 2019 2018 2017 Prior Loans Gross Loans Commercial Pass $ 403,203     $ 58,534     $ 54,485 $ 60,409 $ 95,727 $ 86,556 $ 471,588 $ 1,230,502 Special mention - - - - 1 4,045 4,266 8,312 Substandard 170 - 1,842 13,298 9,740 21,024 14,540 60,614 Doubtful - - - - - - - - Total Commercial $ 403,373 $ 58,534 $ 56,327 $ 73,707 $ 105,468 $ 111,625 $ 490,394 $ 1,299,428   Commercial Real Estate Pass $ 1,692,098 $ 533,315 $ 420,995 $ 452,262 $ 497,065 $ 842,244 $ 170,721 $ 4,608,700 Special mention - - - - 5,142 50,438 6,601 62,181 Substandard 1,968 9,039 4,006 20,624 - 26,108 8,964 70,709 Doubtful - - - - - - - - Total Commercial Real Estate $ 1,694,066 $ 542,354 $ 425,001 $ 472,886 $ 502,207 $ 918,790 $ 186,286 $ 4,741,590   Commercial Construction Pass $ 8,018 $ 7,370 $ 12,625 $ 2,600 $ 2,339 $ - $ 490,119 523,071 Special mention - - - - 350 - 1,443 1,793 Substandard - - - - - - 15,314 15,314 Doubtful - - - - - - - - Total Commercial Construction $ 8,018 $ 7,370 $ 12,625 $ 2,600 $ 2,689 $ - $ 506,876 $ 540,178   Residential Real Estate Pass $ 27,081 $ 29,539 $ 23,611 $ 25,070 $ 28,701 $ 66,249 $ 44,221 $ 244,472 Special mention - - - - - - - - Substandard - - - - - 7,262 3,535 10,797 Doubtful - - - - - - - - Total Residential Real Estate $ 27,081 $ 29,539 $ 23,611 $ 25,070 $ 28,701 $ 73,511 $ 47,756 $ 255,269   Consumer Pass $ 1,594 $ 85 $ 39 $ 21 $ 28 $ ( 4 ) $ 123 $ 1,886 Special mention - - - - - - - - Substandard - - - - - - - - Doubtful - - - - - - - - Total Consumer $ 1,594 $ 85 $ 39 $ 21 $ 28 $ ( 4 ) $ 123 $ 1,886   Total Pass $ 2,131,994 $ 628,843 $ 511,755 $ 540,362 $ 623,860 $ 995,045 $ 1,176,772 $ 6,608,631 Special mention - - - - 5,493 54,483 12,310 72,286 Substandard 2,138 9,039 5,848 33,922 9,740 54,394 42,353 157,434 Doubtful - - - - - - - - Grand Total $ 2,134,132 $ 637,882 $ 517,603 $ 574,284 $ 639,093 $ 1,103,922 $ 1,231,435 $ 6,838,351 - 73 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – 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 December 31, 2021: December 31, 2021     Real Estate     Other     Total     (dollars in thousands) Commercial   $ 6,385     $ 26,182     $ 32,567   Commercial real estate     55,244       -       55,244   Commercial construction     13,196     -     13,196 Residential real estate   8,856     -     8,856 Consumer - - - Total $ 83,681 $ 26,182 $ 109,863 - 74 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – 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 twelve months ended December 31, 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 No Related Allowance Recorded Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized (dollars in thousands) Commercial $ 11,325 $ 11,835 - $ 11,627 $ 203 Commercial real estate 13,105 13,449 - 13,215 287 Commercial construction 24,284 24,907 - 21,279 377 Residential real estate 5,378 5,723 - 4,733 104 Consumer   -   -   -   -   - Total $ 54,092 $ 55,914   - $ 50,854 $ 971   With An Allowance Recorded Commercial $ 23,736 $ 69,122 $ 12,985 $ 23,625 $ - Commercial real estate 2,722 2,722 1,329 2,722 - Total $ 26,458 $ 71,844 $ 14,314 $ 26,347 $ -   Total Commercial $ 35,061 $ 80,957 $ 12,985 $ 35,252 $ 203 Commercial real estate 15,827 16,171 1,329 15,937 287 Commercial construction 24,284 24,907 - 21,279 377 Residential real estate 5,378 5,723 - 4,733 104 Consumer   -   -   -   -   - Total (including related allowance) $ 80,550 $ 127,758 $ 14,314 $ 77,201 $ 971 - 75 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – 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 December 31, 2021 and December 31, 2020 (dollars in thousands): December 31, 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 $ 4,305 $ 729 $ 4,457 $ 30,062 $ 39,553 $ 1,259,875 $ 1,299,428 Commercial real Estate 1,622 1,009 5,935 25,393 33,959 4,707,631 4,741,590 Commercial construction - - - 3,150 3,150 537,028 540,178 Residential real Estate 1,437 292 3,139 3,095 7,963 247,306 255,269 Consumer   - - - - -   1,886   1,886 Total $ 7,364 $ 2,030 $ 13,531 $ 61,700 $ 84,625 $ 6,753,726 $ 6,838,351 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-impaired loans, net of fair value marks, which accrete income per the valuation at date of acquisition. - 76 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – 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 allowance for credit losses for loans that are allocated to each loan portfolio segment. “Prior to January 1, 2021, the allowance for loan losses is based on a calculation methodology disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.”     December 31, 2021       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer           Total       (dollars in thousands)   Allowance for credit losses - loans Individually evaluated   $ 15,131 $ 955 $ -     $ 131     $ -         $ 16,217   Collectively evaluated     8,561       42,713       3,580       3,497       7             58,358   Acquired with deteriorated credit quality individually analyzed​​     2,277       1,921       -       -       -             4,198   Total   $ 25,969     $ 45,589     $ 3,580     $ 3,628     $ 7         $ 78,773   Gross loans Individually evaluated   $ 33,726     $ 49,310     $ 13,196     $ 5,717     $ -   $ 101,949   Collectively evaluated   1,260,537     4,686,346     526,982     246,413     $ 1,886   $ 6,722,164   Acquired with deteriorated credit quality individually analyzed​​     5,165       5,934       -       3,139       -     14,238   Total   $ 1,299,428     $ 4,741,590     $ 540,178     $ 255,269     $ 1,886             $ 6,838,351       December 31, 2020       Commercial     Commercial real estate     Commercial construction     Residential 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   - 77 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) A summary of the activity in the allowance for credit losses for loans by loan segment is as follows: Commercial Commercial real estate Commercial construction Residential real estate Consumer Unallocated Total (dollars in thousands) Balance as of January 1, 2021 $ 28,443 $ 39,330 $ 8,194 $ 2,687 $ 4 $ 568 $ 79,226 Day 1 Adjustment CECL ( 4,225 ) 9,605 ( 961 ) 2,697 9 ( 568 ) 6,557 Balance as of January 1, 2021 24,218 48,935 7,233 5,384 13 - 85,783 Loan charge-offs ( 382 ) ( 1,780 ) - ( 235 ) - - ( 2,397 ) Recoveries 289 85 - 20 11 - 405   Provision for (reversal of) credit losses   1,844   ( 1,651 )   ( 3,653 )   ( 1,541 )   ( 17 )   -   ( 5,018 ) Balance as of December 31, 2021 $ 25,969 $ 45,589 $ 3,580 $ 3,628 $ 7 $ - $ 78,773 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 allowance for credit losses. 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 allowance for credit losses for loans of $ 6.6 million, which did not impact our consolidated income statement. Commercial Commercial real estate Commercial construction Residential real estate Consumer Unallocated Total (dollars in thousands) Balance as of January 1, 2020 $ 8,349 $ 20,853 $ 7,304 $ 1,685 $ 3 $ 99 $ 38,293 Loan charge-offs ( 552 ) - - ( 341 ) ( 7 ) - ( 900 ) Recoveries 4 802 - 23 4 - 833   Provision for loan losses   20,642   17,675   890   1,320   4   469   41,000 Balance as of December 31, 2020 $ 28,443 $ 39,330 $ 8,194 $ 2,687 $ 4 $ 568 $ 79,226     Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Unallocated     Total       (dollars in thousands)   Balance as of January 1, 2019   $ 9,875     $ 18,847     $ 4,519     $ 1,266     $ 2     $ 445     $ 34,954   Loan charge-offs     ( 1,029 )     ( 3,470 )     -       ( 557 )     ( 20 )     -       ( 5,076 ) Recoveries     265       30       -       3       17       -       315     Provision for loan losses     ( 762 )       5,446       2,785       973       4       ( 346 )     8,100   Balance as of December 31, 2019   $ 8,349     $ 20,853     $ 7,304     $ 1,685     $ 3     $ 99     $ 38,293   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 December 31, 2021, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in a TDR. - 78 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) As of December 31, 2021, TDRs totaled $ 79.5 million, of which $ 35.9 million were on nonaccrual status and $ 43.6 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 $ 10.4 million and $- 0 - of specific allowance related to TDRs as of December 31, 2021 and December 31, 2020, respectively. There were no TDRs for which there was a payment default within twelve months following the modification during the year ended December 31, 2021, 2020 and 2019. The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2021: Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment (dollars in thousands) Troubled debt restructurings: Commercial 4 $ 1,276 $ 1,276 Commercial real estate 11 35,635 35,635 Commercial construction 1 1,641 1,641 Residential real estate 3 1,758 1,758   Total   19 $ 40,310 $ 40,310 The loans modified as TDRs during the year ended December 31, 2021 included maturity extensions and interest rate reductions. The following table presents loans by class modified as TDRs that occurred during year ended December 31, 2020 Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment (dollars in thousands) Troubled debt restructurings: Commercial 1 $ 188 $ 188 Commercial real estate 1 93 93 Commercial construction 1 4,021 4,021 Residential real estate 2 2,184 2,184   Total   5 $ 6,486 $ 6,486 The five loan modifications during the year ended December 31, 2020 were maturity extensions: The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2019: Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment (dollars in thousands) Troubled debt restructurings: Commercial 11 $ 14,558 $ 14,558 Commercial real estate 3 5,863 5,863 Commercial construction 3 5,630 5,630   Total   17 $ 26,051 $ 26,051 - 79 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) Included in the commercial loan segment of the troubled debt restructurings is one taxi medallion loan totaling $ 0.3 million. This taxi medallion loan was on nonaccrual status prior to modification and will remain on nonaccrual status post-modification. All loan modifications during the year ended December 31, 2019 included interest rate reductions and/or maturity extensions. 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 clients 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 December 31, 2021, the Bank had 1 deferred loan outstanding totaling $ 0.5 million, compared to 113 deferred loans totaling $ 207.1 million as of December 31, 2020 that were not considered TDRs. Allowance for Credit Losses 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 allowance for credit losses for unfunded commitments for the year ended December 31, 2021 (dollars in thousands): Year Ended December 31, 2021 Balance as of beginning of period $ - Day 1 Effect of CECL 2,833 Provision for (reversal of) credit losses - unfunded commitments ( 482 ) Balance as of end of period $ 2,351 Components of (Reversal of) Provision for Credit Losses The following table summarizes the provision for (reversal of) provision for credit losses for the year ended December 31, 2021 (dollars in thousands): Year Ended December 31, 2021 Provision for (reversal of) credit losses - loans $ 5,018 Provision for (reversal of) credit losses - unfunded commitments ( 482 ) Provision for (reversal of) credit losses $ ( 5,500 ) - 80 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 – Premises and Equipment Premises and equipment are summarized as follows: Estimated Useful Life (Years) 2021 2020 (dollars in thousands) Land - $ 7,232 $ 7,232 Buildings 10 - 25 10,509 15,159 Furniture, fixtures and equipment 3 - 7 24,137 40,930 Leasehold improvements 10 - 20   27,343   28,860 Subtotal 69,221 92,181 Less: accumulated depreciation, amortization and fair value adjustments   40,189   62,073 Total premises and equipment, net $ 29,032 $ 30,108 Depreciation and amortization expense of premises and equipment was $ 3.8 million, $ 4.2 million and $ 3.1 million for 2021, 2020 and 2019, respectively. Finance Leases : The Company acquired a lease agreement for a building under a finance lease. The lease arrangement requires monthly payments through 2028. The Company has included this lease in premises and equipment as follows:     2021     2020       (dollars in thousands)   Capital Lease   $ 3,423     $ 3,408   Less: accumulated amortization     2,224       2,038       $ 1,199     $ 1,370   The following is a schedule by year of future minimum lease payments under the finance lease, together with the present value of net minimum lease payments as of December 31, 2021 (dollars in thousands): 2022 $ 321 2023 323 2024 353 2025 353 2026 353 Thereafter   676 Total minimum lease payments 2,379   Less amount representing interest   444 Present value of net minimum lease payments $ 1,935 - 81 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 – Premises and Equipment – (continued) The Company leases certain premises and equipment under operating leases. As of December 31, 2021, the Company had lease liabilities totaling $12.4 million and right-of-use assets totaling $11.0 million. As of December 31, 2021, the weighted average remaining lease term for operating leases was 5.8 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.8 %. Total lease costs for the year ended December 31, 2021 was $ 3.2 million. A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows: December 31, 2021 (dollars in thousands) Lease payments due: Less than 1 year $ 2,807 1 year through less than 2 years 2,586 2 years through less than 3 years 2,065 3 years through less than 4 years 1,773 4 years through 5 years 1,668 After 5 years 2,680 Total undiscounted cash flows 13,579 Impact of discounting ( 1,162 ) Total lease liability $ 12,417 Note 6 – Goodwill and Other Intangible Assets A goodwill impairment test is required under ASC 350, Intangibles – Goodwill and Other, and the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment,” allowing an initial qualitative assessment of goodwill commonly known as step zero impairment testing. In general, the step zero test allows an entity to first assess qualitative factors to determine whether it is more likely than not (i.e., more than 50%) that the fair value of a reporting unit is less than its carrying value. If a step zero impairment test results in the conclusion that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, then no further testing is required. Based upon management’s review through December 31, 2021, the Company’s goodwill was not impaired. Management concludes that the ASC 350 goodwill step zero test has been passed, and no further testing is required. Goodwill The change in goodwill during the year is as follows: 2021 2020 (dollars in thousands) Balance, January 1 $ 208,372 $ 162,574 Acquired goodwill -   45,798 Impairment   -   - Balance, December 31 $ 208,372 $ 208,372 - 82 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 – Goodwill and Other Intangible Assets – (continued) Acquired Intangible Assets The table below provides information regarding the carrying amounts and accumulated amortization of total amortized intangible assets as of the dates set forth below. Gross Carrying Amount Accumulated Amortization Net Carrying Amount (dollars in thousands) Core deposit intangibles   December 31, 2021 $ 18,515 $ ( 9,518 ) $ 8,997   Core deposit intangibles   December 31, 2020 $ 18,515 $ ( 7,538 ) $ 10,977   Aggregate amortization expense was approximately $2.0 million, $2.6 million and $1.4 million for 2021, 2020 and 2019, respectively. Estimated amortization expense for each of the next five years (dollars in thousands): 2022 $ 1,684 2023 1,438 2024 1,235 2025 1,116 2026 1,050 Note 7 – Deposits Time Deposits As of December 31, 2021, and 2020, the Company's total time deposits were $ 1.2 billion and $ 1.5 billion, respectively. Included in time deposits were nonreciprocal brokered time deposits of $ 215.2 million and $ 217.5 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021, the contractual maturities of these time deposits were as follows (dollars in thousands): 2022 $ 745,411 2023 176,351 2024 45,678 2025   51,216 2026   105,342 2027 25,995 Sub-Total $ 1,149,993 Fair value premium 116 Total $ 1,150,109 The amount of time deposits with balances in excess of $250,000 were $ 250.5 million and $ 368.3 million as of December 31, 2021 and 2020, respectively. - 83 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 – FHLB Borrowings The Company’s FHLB borrowings and weighted average interest rates are summarized below: December 31, 2021 December 31, 2020 Amount Rate Amount Rate (dollars in thousands) By remaining period to maturity: Less than 1 year $ 390,549 0.56 % $ 297,570 0.84 1 year through less than 2 years 50,000 1.84 % 75,644 1.42 2 years through less than 3 years - n/a 50,000 1.84 3 years through less than 4 years 25,000 1.00 - n/a 4 years through 5 years   2,050 2.23   - n/a After 5 Years   714 2.91 %   2,824 2.42 FHLB borrowings - gross 468,313 0.73 % 426,038 1.07 % Fair value (discount) premium ( 120 ) ( 84 ) Total FHLB borrowings $ 468,193 $ 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 have fixed rates. The advances as of December 31, 2021 were primarily collateralized by approximately $ 1.9 billion of commercial mortgage and residential loans, net of required over collateralization amounts, under a blanket lien arrangement. As of December 31, 2021, the Company had remaining borrowing capacity of approximately $ 867.3 million at the FHLB. - 84 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 – Subordinated Debentures During 2003, the Company formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $ 5.0 million of MMCapS capital securities to investors due on January 23, 2034 . The capital securities presently qualify as Tier I capital. The trust loaned the proceeds of this offering to the Company and received in exchange $ 5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or in part prior to maturity. The floating interest rate on the subordinate debentures is three-month LIBOR plus 2.85 % and reprices quarterly. The rate as of December 31, 2021 was 2.98 %. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with FASB ASC 810-10. Distributions on the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income. The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of December 31, 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 On June 10, 2020, the Parent Corporation issued $ 75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes bear interest at 5.75 % annually from, and including, the date of initial issuance to, but excluding, June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2020. From and including June 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points , payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero. On January 11, 2018, the Parent Corporation issued $ 75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2018 Notes”). The 2018 Notes bear interest at 5.20 % annually from, and including, the date of initial issuance to, but excluding, February 1, 2023 , payable semi-annually in arrears. From and including February 1, 2023 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 284 basis points ( 2.84 %) payable quarterly in arrears. If three-month LIBOR is not available for any reason, then the rate for that interest period will be determined by such alternate method as provided in the Supplemental Indenture. Interest on the 2018 Notes will be paid on February 1, and August 1, commencing August 1, 2018 to but not including February 1, 2023, and from and including February 1, 2023, on February 1, May 1, August 1, and November 1, of each year to but excluding the stated maturity date, unless in any case previously redeemed. During June 2015, the Parent Corporation issued $ 50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2015 Notes”). As of December 31, 2020, the 2015 Notes had a stated maturity of July 1, 2025 , and bore interest until the maturity date or early redemption date at a variable rate equal to the then current three-month LIBOR rate plus 393 basis points . As of December 31, 2021, 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. - 85 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 – Income Taxes The current and deferred amounts of income tax expense for December 2021, 2020 and 2019 are as follows (dollars in thousands):     2021     2020     2019   Current:                         Federal   $ 32,364     $ 19,590     $ 15,509   State     12,325       7,006       5,018   Subtotal     44,689       26,596       20,527   Deferred:                         Federal     ( 110 )     ( 3,881 )     916   State     126     ( 3,614 )     ( 812 ) Subtotal     16     ( 7,495 )     104   Income tax expense   $ 44,705     $ 19,101     $ 20,631   On July 1, 2018 New Jersey Governor Phil Murphy signed Assembly Bill 4202 (“the Bill”) into law. The legislation imposes a temporary surtax on corporations earning New Jersey allocated income in excess of $ 1 million of 2.5 % for tax years beginning on or after January 1, 2018 through December 31, 2019, and of 1.5 % for tax years beginning on or after January 1, 2020 through December 31, 2021. However, in 2020, this surtax was extended through December 31, 2023, at the 2.5% level. The legislation also requires combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019, changing New Jersey’s current status as a separate return state, and limits the deductibility of dividends received. Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory federal tax rate for the following reasons (dollars in thousands) December 31,     2021     2020     2019   Income before income tax expense   $ 175,058     $ 90,390     $ 94,026   Federal sta