What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-25 compared with 2021-03-01 · 571 added, 653 removed, 1556 unchanged (44% of the section changed)

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 173 )

The Board of Directors and Stockholders of

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(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

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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 Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses –

Exogenous Factors Related to Commercial, Commercial Real Estate, and Commercial Construction Loan Segments

The allowance for loan losses represents management’s estimate of probable incurred credit losses inherent in the loan portfolio.

As described in Notes 1a and 5 to the consolidated financial statements, the Company’s consolidated allowance for loan losses was $79,226,000 at December 31, 2020, which consisted of the allowance for loans losses allocated to 1) loans individually evaluated for impairment, representing $14,314,000, 2) loans collectively evaluated for impairment (“general component”), representing $58,504,000, and 3) loans acquired, representing $5,840,000, as well as an unallocated allowance for loan losses of $568,000.

The general component can be further broken down as the general component related to the commercial, commercial real estate, and commercial construction loan segments of $56,572,000 and the general component related to the residential real estate and consumer segments of $1,932,000.

The general component is based on historical loss experience adjusted for current factors.

This actual loss experience is supplemented with exogenous factor adjustments based on the risks present for each loan category.

Changes in these exogenous factor adjustments related to the commercial, commercial real estate, and commercial construction loan segments could have a material impact on the Company’s financial results.

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The general component of the Company’s allowance for loan losses involves consideration of the following exogenous factors:

concentrations of credit;

delinquency and nonaccrual trends;

economic and business conditions including evaluation of the national and regional economies and industries with significant loan concentrations;

external factors including legal, regulatory or competitive pressures that may impact the loan portfolio;

changes in the experience, ability, or size of the lending staff, management, or board of directors that may impact the loan portfolio;

changes in underwriting standards, collection procedures, charge-off practices, or other changes in lending policies and procedures that may impact the loan portfolio;

loss and recovery trends;

changes in portfolio size and mix;

and trends in problem loans.

The consideration of these factors contributes significantly to the general component of the allowance for loan losses for the commercial, commercial real estate, and commercial construction loan segments.

Management’s analysis of these exogenous factors requires significant judgment, and management’s allocation of exogenous factors relies on a qualitative analysis to determine the quantitative impact the exogenous factors have on the general component for the commercial, commercial real estate, and commercial construction loan segments.

We identified auditing management’s analysis and allocation of the exogenous factors to the general component of the allowance for loan losses for the commercial, commercial real estate, and commercial construction loan segments as a critical audit matter as it involved especially subjective auditor judgment.

The primary audit procedures we performed to address this critical audit matter included:

Testing the effectiveness of controls over the evaluation of the exogenous factors used to estimate the general component for the commercial, commercial real estate, and commercial construction loan segments, including controls addressing:

Management’s review of the completeness and accuracy of data used as the basis for the adjustments relating to exogenous factors;  

Management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative reserve factors and the resulting allocation to the allowance allocated to loans collectively evaluated for impairment;

and,  

Management’s review of the exogenous factor reserve for mathematical accuracy.  

Substantively testing management’s process, including evaluating their judgments and significant assumptions, for developing the exogenous factors used to estimate the general component for the commercial, commercial real estate, and commercial construction loan segments which included:

Evaluation of the completeness and accuracy of data used as a basis for the adjustments relating to exogenous factors;  

Evaluation of the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of exogenous factors and the resulting allocation to the allowance allocated to loans collectively evaluated for impairment.

Among other procedures, our evaluation considered actual charge offs, loan portfolio performance and third-party data, and whether such assumptions were applied consistently period over period;  

Analytically evaluating the exogenous factor allocation year over year for reasonableness;

and,  

Recalculation of the exogenous factor reserve.  

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Business Combinations –

Fair Value of Acquired Non-Credit-Impaired Loans

As described in Note 2 to the consolidated financial statements, on January 2, 2020 the Company completed its acquisition of Bancorp of New Jersey, Inc.

The business combination was accounted under the acquisition method of accounting, with assets acquired and liabilities assumed recorded at fair value as of the acquisition date.

The fair value of loans acquired in the acquisition totaled $774,720,000, which included $763,020,000 of non-credit-impaired loans and $11,700,000 of credit-impaired loans.

The fair values of non-credit-impaired loans acquired were estimated based on the value of the expected cash flows, which were projected based on the contractual terms of loans, including both maturity and contractual amortization.

Projected cash flows were adjusted for expected losses and prepayments, where appropriate.

Expected losses assumptions were developed using peer group loss data.

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

Changes in these estimates and assumptions could have a significant impact on the fair values of the acquired non-credit-impaired loans.

We identified auditing the fair value of acquired non-credit-impaired loans as a critical audit matter as it involved especially subjective auditor judgment.

The primary audit procedures we performed to address this critical audit matter included:

Testing the effectiveness of controls over the judgments, significant assumptions and data used to estimate the fair value of acquired non-credit-impaired loans, including controls addressing:

Management’s evaluation of the reasonableness of the judgments and assumptions used to estimate fair value;

and,  

Management’s review of the completeness and accuracy of the data used.  

Substantively testing management’s process, including evaluating their judgments and assumptions, for estimating the fair value of acquired non-credit-impaired loans which included:

Evaluation of the reasonableness of judgments and assumptions used by management;  

Evaluation of the completeness and accuracy of the data used;

and,  

Utilization of an internal valuation specialist to assist with the evaluation of the appropriateness of assumptions, judgments and data used and overall reasonableness of the fair values.  

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 –

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’

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.

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Goodwill Impairment

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.

As described in Notes 1a and 7 to the consolidated financial statements, the Company’s consolidated goodwill balance was $208,372,000 at December 31, 2020.

Goodwill is tested annually for impairment in the fourth quarter, or more frequently if events and circumstances exist that indicate it is more likely than not impairment has occurred.

During the quarter ended June 30, 2020, the Company determined a triggering event had occurred and performed a quantitative goodwill impairment evaluation using both income and market approaches to estimate the fair value of the Company and based on results of evaluation, no goodwill impairment was recorded.

The goodwill impairment evaluation involved significant estimates and subjective assumptions, which required a high degree of management judgment.

Significant estimates and subjective assumptions included discount rate, prospective financial information, earnings retention rate and peer group market data.

Changes in these estimates and assumptions could have a significant impact on the conclusions reached regarding whether impairment occurred and the amount of impairment.

We identified auditing the goodwill impairment evaluation as a critical audit matter as it involved especially subjective auditor judgment.

The primary audit procedures we performed to address this critical audit matter included:

Testing the effectiveness of controls over the judgments, assumptions and data used to estimate the fair value of the Company, including controls addressing:

Management’s review of the reasonableness and accuracy of the Company’s prospective financial information used in the income approach.  

Management’s evaluation of significant assumptions used, including valuation methodologies, discount rate, earnings retention rate and peer group market data.  

Substantively testing management’s process, including evaluating their judgments and significant assumptions, for estimating the fair value of the Company which included:

Evaluation of key financial data for accuracy.  

Evaluation of management’s ability to reasonably forecast cash flows.  

Utilization of an internal valuation specialist to assist with the evaluation of the appropriateness of valuation methodologies, discount rate, earnings retention rate, peer group market data and overall reasonableness of the fair value.  

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.

New York, New York

March 1, 2021

We have served as the Company's auditor since 2014.

Livingston, New Jersey

February 25, 2022

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Cash and cash equivalents

Securities available-for-sale

Investment securities

Equity securities

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Loans receivable

Allowance for loan losses

Allowance for credit losses - loans

Net loans receivable

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Total deposits

Operating lease liabilities

Subordinated debentures, net of debt issuance costs

Operating lease liabilities

Other liabilities

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STOCKHOLDERS’

Preferred Stock:

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

Common stock, no par value:

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Treasury stock, at cost ( 2,989,174 shares as of December 31, 2021 and 2,658,633 shares as of December 31, 2020)

Accumulated other comprehensive income (loss)

Accumulated other comprehensive (loss) income

Total stockholders’

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Net interest income

Provision for loan losses

Net interest income after provision for loan losses

(Reversal of) provision for credit losses

Net interest income after provision for credit losses

Noninterest income:

Deposit, loan and other income

Income on bank owned life insurance

Net gains on sale of loans held-for-sale

Deposit, loan and other income

Net gains (losses) on equity securities

Net gains (losses) on sale of investment securities

Gain on sale of branches

Net (losses) gains on equity securities

Net gains (losses) on sale/redemption of investment securities

Total noninterest income

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Income tax expense

Preferred dividends

Net income available to common stockholders

Earnings per common share:

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Unrealized gains and losses:

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

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

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

Unrealized (losses) gains on cash flow hedges

Unrealized gains (losses) on cash flow hedges

Reclassification adjustment for losses (gains) arising during this period

Unrealized pension plan (losses) gains:

Unrealized pension plan (losses) gains before reclassifications

Unrealized pension plan losses before reclassifications

Reclassification adjustment for realized losses included in net income

Total other comprehensive income (loss)

Total other comprehensive (loss) income

Total comprehensive income

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’

Comprehensive

Income (Loss)

Stockholders’

Preferred Stock

Additional Paid In Capital

Retained Earnings

Treasury Stock

Accumulated Other Comprehensive Income (Loss)

Total Stockholders’

(in thousands, except share and per share data)

Balance as of December 31, 2017

Reclassification of stranded tax effects (ASU 2018-02) (see

Cumulative effect of adopting ASU 2016-01 (see Note 16)

Other comprehensive loss, net of tax

Cash dividends declared on common stock ($ 0.30 per share)

Exercise of stock options ( 189,992 shares)

Restricted stock, net of forfeitures ( 24,018 shares)

Net shares issued in satisfaction of performance units earned ( 42,672 shares)

Stock-based compensation expense

Balance as of December 31, 2018

Balance as of January 1, 2019

Other comprehensive income, net of tax

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

Repurchase of treasury stock ( 54,693 shares)

Repurchase of stock ( 54,693 shares)

Net shares issued in satisfaction of restricted stock units

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

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

Stock-based compensation expense

Balance as of December 31, 2020

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

“Authoritative Accounting Guidance Presentation”), net of tax

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

Other comprehensive loss, net of tax

Cash dividends declared on preferred stock ($ 0.371875 per share)

Cash dividends declared on common stock ( 0.48 per share)

Exercise of stock options ( 14,247 shares)

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

Repurchase of stock ( 330,541 shares)

Proceeds from preferred stock issuance, net of costs ( 115,000 shares)

Stock-based compensation expense

Balance as of December 31, 2021

See the accompanying notes to the consolidated financial statements.

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Depreciation and amortization of premises and equipment

Provision for loan losses

(Reversal) of provision for credit losses

Amortization of intangibles

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(Accretion) amortization on borrowings

Net deferred income tax expense

Net deferred income tax (benefit) expense

Stock-based compensation

Losses (gains) on sales of investment securities, net

Losses (gains) on sales/redemptions of investment securities, net

Change in fair value of equity securities, net

Gains (losses) on sale of loans held-for-sale, net

Gain on sale of branches

Net losses on disposition of other fixed assets

Gain on sale of other real estate owned

Loans originated for resale

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Proceeds from sale of loans held-for-sale

Net (gains) losses on disposition of premises and equipment

Net (gains) losses on sale of other real estate owned

Net gains on disposition of premises and equipment

Net gains on sale of other real estate owned

Increase in cash surrender value of bank owned life insurance

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Amortization of subordinated debt issuance costs

Increase in accrued interest receivable

Increase (decrease) in accrued interest receivable

Net change in operating leases

Increase in other assets

(Decrease) increase in other liabilities

Decrease (increase) in other assets

Increase (decrease) in other liabilities

Net cash provided by operating activities

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Maturities, calls and principal repayments

Net redemptions (purchases) of restricted investment in bank stocks

Net (purchases)/redemptions of restricted investment in bank stocks

Purchases of equity securities

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Proceeds from life insurance death benefits

Proceeds from sale of branches

Proceeds from sale of premises and equipment

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Net increase in deposits

Increase in subordinated debt

Advances of borrowings

Repayments of borrowings

( 1,650,387 )

( 2,762,150 )

(Repayment of) increase in subordinated debt

Advances of FHLB borrowings

Repayments of FHLB borrowings

( 2,762,150 )

Cash dividends paid on preferred stock

Cash dividends paid on common stock

Proceeds from preferred stock offering

Purchase of treasury stock

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Transfer of loans to other real estate owned

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

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

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

Business combinations :

Fair value of net assets acquired, net of cash and cash equivalents

See the accompanying notes to the consolidated financial statements.

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Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies

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.

(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”

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

(a New Jersey online business lending marketplace).

(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-seven other banking offices.

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

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

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business, real estate rental and consumer wages.

Principals of Consolidation

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.

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.

FASB ASC 28, “Segment Reporting,”

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Risks and Uncertainties

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

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

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

The COVID-19 pandemic has adversely affected, and continues to adversely affect economic activity globally, nationally and locally.

Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses.

COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the New Jersey/New York metropolitan area in which the Company primarily operates.

Although the Company has been able to continue operations while taking steps to ensure the safety of employees and customers, COVID-19 could also potentially create widespread business continuity issues for the Company.

Although economic activity has accelerated in 2021, and the United States continues to implement a COVID-19 vaccination program, COVID-19, 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.

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Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies –

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

It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including the determination of the allowance for credit losses, 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 customer loan and deposit transactions, interest-bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements.

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

The Company accounts for its investment securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320-10-05.

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:

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Investment securities gains or losses are determined using the specific identification method.

Securities are 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 should be considered when determining whether a debt security is other-than-temporarily impaired.

For debt securities, management must assess 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 are done before assessing whether the entity will recover the cost basis of the investment.

In instances when 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 is 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 is recognized through earnings.

The amount of the total other-than-temporary impairment related to all other factors is recognized through other comprehensive income.

Equity Securities

The Company’s equity securities are recorded at fair value, with unrealized gains and losses included in earnings beginning January 1, 2018 after adoption of Accounting Standards Update No.

2016-01, “Financial Instruments –

Recognition and Measurement of Financial Assets and Financial Liabilities.

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.

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

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Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies –

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

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 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 loan losses.

Interest income is accrued on the unpaid principal balance.

6 unchanged sentences

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 impairment and loans individually evaluated for impairment.

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

8 unchanged sentences

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 loan losses are provided for all known and inherent risks.

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.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses.

Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Subsequent recoveries, if any, are credited to the allowance.

Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components.

The specific component relates to loans that are individually classified as impaired.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.

Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties (other than with regard to loans meeting the requirements of the CARES Act or regulatory guidance regarding mitigating the impact of the COVID-19 pandemic) are considered troubled debt restructurings (“TDR”) and are classified as impaired.

The impairment of a loan can be measured at (1) the fair value of the collateral less costs to sell, if the loan is collateral dependent, (2) at the value of expected future cash flows using the loan’s effective interest rate, or (3) at the loan’s observable market price.

Generally, the Bank measures impairment of such loans by reference to the fair value of the collateral less costs to sell.

Loans of $ 250,000 and over are individually evaluated for impairment.

If a loan is identified as impaired and the individual test results in an impairment, a portion of the allowance is allocated so that the loan is reported, net, at the fair value of collateral less costs to sell if repayment is expected solely from the collateral or at the present value of estimated future cash flows using the loan’s existing rate if the loan is dependent on cash flow.

Loans with balances less than $250,000 are collectively evaluated for impairment, and accordingly, are not separately identified for impairment disclosures.

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3 unchanged sentences

Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception.

If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral.

For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors.

The historical loss experience, the primary factor, is determined by loan segment and is based on the actual loss history experienced by the Bank over an actual three-year rolling calculation.

This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.

This actual loss experience is supplemented with the exogenous factor adjustments based on the risks present for each loan category.

These exogenous factors (nine total) include consideration of the following:

concentrations of credit;

delinquency & nonaccrual trends;

economic & business conditions including evaluation of the national and regional economies and industries with significant loan concentrations;

external factors including legal, regulatory or competitive pressures that may impact the loan portfolio;

changes in the experience, ability, or size of the lending staff, management, or board of directors that may impact the loan portfolio;

changes in underwriting standards, collection procedures, charge-off practices, or other changes in lending policies and procedures that may impact the loan portfolio;

loss and recovery trends;

changes in portfolio size and mix;

and trends in problem loans.

Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies –

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.

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Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Purchased Credit-Impaired Loans

The Company acquires groups of loans in conjunction with mergers, some of which have shown evidence of credit deterioration since origination.

These purchased credit-impaired loans are recorded at their estimated fair value, such that there is no carryover of the seller’s allowance for loan losses.

After acquisition, losses are recognized by an increase in the allowance for loan losses.

Such purchased credit-impaired loans (“PCI”) are identified on an individual basis.

The Company estimates the amount and timing of expected cash flows for each loan and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield).

The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

A PCI loan may be resolved either through a sale of the loan, by working with the customer and obtaining partial or full repayment, by short sale of the collateral, or by foreclosure.

A gain or loss on resolution would be recognized based on the difference between the proceeds received and the carrying amount of the loan.

PCI loans that met the criteria for nonaccrual may be considered performing, regardless of whether the customer 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.

Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies –

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.

4 unchanged sentences

Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest income.

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CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a –

Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies –

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged.

7 unchanged sentences

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.

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CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Restricted Stock

18 unchanged sentences

The Company has elected not to recognize leases with original terms of 12 months or less on the consolidated balance sheet.

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CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a –

Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies –

Other Real Estate Owned

12 unchanged sentences

Employee 401(k) and profit-sharing plan expense is the amount of matching contributions.

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CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Stock-Based Compensation

11 unchanged sentences

Treasury stock is recorded using the cost method and accordingly is presented as a reduction of stockholders’

During the year ended December 31, 2020 and December 31, 2019, the Parent Corporation repurchased 54,693 and 540,018 shares under a board-approved share repurchase program.

During the year ended December 31, 2018, the Parent Corporation did not repurchase any of its shares.

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.

2 unchanged sentences

No impairment charge was deemed necessary as of the years ended December 31, 2021, 2020 and 2019.

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CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a –

Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies –

Other Intangible Assets

7 unchanged sentences

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.

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CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1a –

Nature of Business, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies –

Fair Value of Financial Instruments

18 unchanged sentences

Such reclassifications had no impact on net income or stockholders’

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CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1b –

1 unchanged sentence

Adoption of New Accounting Standards in 2021

2016-13, “Financial Instruments –

Credit Losses (Topic 326):

Assets Measured at Amortized Cost.”

(modified by ASU 2018-19, ASU 2019-04 and ASU 2019-05).

ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates and affects loans, debt securities, trade receivables, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.

For SEC filers that are not smaller reporting companies, the amendments in this update are effective for the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

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 December 31, 2022.

The Company is adopting Topic 326, as of January 1, 2021.

While the Company has not finalized the impact of implementing CECL, the Company expects to recognize a one-time cumulative effect adjustment to the allowance and beginning retained earnings, net of tax, upon adoption.

The future impact of CECL on the Company’s allowance for credit losses and provision expense subsequent to the initial adoption will depend on changes in the loan portfolio, economic conditions and refinements to key assumptions including forecasting and qualitative factors.

The Company measured its allowance under its current incurred loan loss model as of December 31, 2020.

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

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

or the “CECL Standard”).

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

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

In addition, the CECL Standard changes the accounting for investment securities classified as 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

Change to Retained Earnings from Adoption of CECL

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

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

Total ACL –

ACL (unfunded credit commitments)

Total impact of CECL adoption

(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.

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, “

2 unchanged sentences

These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

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

Adoption of New Accounting Standards in 2020

2017-04, “Intangibles –

Goodwill and Other (Topic 350).”

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

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

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

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

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

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

An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets and still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

ASU 2017-04 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.

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.

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4 unchanged sentences

Authoritative Accounting Guidance –

2017-08, “

Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities .”

2017-08 shortens the amortization period for certain callable debt securities held at a premium.

Specifically, the amendments require the premium to be amortized to the earliest call date.

The amendments do not require an accounting change for securities held at a discount;

the discount continues to be amortized to maturity.

ASU 2017-08 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.

ASU 2018-13, “

Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement .”

The amendments in this update modify disclosure requirements on fair value measurements by removing, modifying and adding certain disclosure requirements.

The amendments primarily pertain to Level 3 fair value measurements and depending on the amendment are applied either prospectively or retrospectively.

ASU 2018-03 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.

ASU 2018-15, “

Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.

These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).

The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments.

ASU 2018-15 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statement disclosures.

Note 2 –

Business Combination

On January 2, 2020, Bancorp of New Jersey, Inc.

(“BNJ”) merged with and into the Company, with the Company as the surviving entity.

As a result of the merger, the Company acquired nine branch offices all located in Bergen County, New Jersey.

Subject to the allocation and proration procedures set forth in the merger agreement, holders of BNJ common stock had the right to elect, with respect to each share of BNJ common stock, to receive either (i) $ 16.25 in cash or (ii) 0.780 of a share of Company common stock (plus cash in lieu of any fractional shares of Company common stock to which such holder would otherwise be entitled).

The allocation and proration procedures set forth in the merger agreement required that approximately 20 % of the shares of BNJ common stock be converted into cash and the remaining approximately 80 % of BNJ common shares be converted into shares of the Company’s common stock.

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CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 –

Business Combination –

The acquisition of BNJ was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at their estimated fair values as of the acquisition date.

The application of the acquisition method of accounting resulted in the recognition of goodwill of $ 45.8 million and a core deposit intangible of $ 8.1 million.

The assets acquired and liabilities assumed, and consideration paid in the acquisition of BNJ were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition.

In connection with the acquisition, the consideration paid, and the fair value of identifiable assets acquired, and liabilities assumed as of the date of acquisition are summarized in the following table:

Estimated FairValue at

January 2, 2020

(in thousands)

Consideration paid:

Common stock issued in acquisition

Cash paid in acquisition

Total consideration paid:

Assets acquired :

Cash and cash equivalents

Securities available-for-sale

Premises and equipment, net

Accrued interest receivable

Core deposit intangibles

Total assets acquired

Liabilities assumed :

Other liabilities

Total liabilities assumed

Net assets acquired

Goodwill recorded in acquisition

The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired by the Company and reflects the economies of scale, increased market share and lending capabilities, greater access to best-in-class banking technology, and related synergies that are expected to result from the acquisition.

Loans acquired in the BNJ acquisition were recorded at fair value, and there was no carryover related allowance for loan losses.

The fair values of loans acquired from BNJ were estimated based on the value of the expected cash flows, which were projected based on the contractual terms of the loans, including both maturity and contractual amortization.

The monthly principal and interest cash flows were adjusted for expected losses and prepayments, where appropriate.

Expected losses assumptions were developed using peer group loss data.

- 68 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 –

Business Combination –

The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the BNJ acquisition as of the Merger date:

Estimated FairValue at

January 2, 2020

(in thousands)

Contractually required principal and interest acquisition

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

Expected cash flows at acquisition

Interest component of expected cash flows (accretable discount)

Fair value of acquired loans

Goodwill related to BNJ is not amortized for book purposes;

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

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

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

The fair value of borrowed funds was estimated by discounting the future cash flows using market rates for similar borrowings.

Direct acquisition and integration costs of the BNJ acquisition were expensed as incurred.

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

During the year ended December 31, 2020, merger expenses related to the BNJ acquisition were $ 11.6 million.

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 –

62 unchanged sentences

Investment Securities –

Investment securities having a carrying value of approximately $ 107.6 million and $ 111.5 million as of December 31, 2020 and December 31, 2019, 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, 2020, and December 31, 2019, there were no holdings of securities of any one issuer, other than the U.S.

Investment securities having a carrying value of approximately $ 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’

13 unchanged sentences

Total securities available-for-sale

Gross gains and losses from the sales, calls, and maturities of investment securities for the years ended December 31, 2020, 2019 and 2018 were as follows:

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,

(dollars in thousands)

Gross gains on sales of investment securities

Gross losses on sales of investment securities

Net gains (losses) on sales of investment securities

Gross gains on sales/redemptions of investment securities

Gross losses on sales/redemptions of investment securities

Net gains (losses) on sales/redemptions of investment securities

Tax provision on net gains

Net gains (losses) on sales of investment securities, after tax

- 71 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 –

Investment Securities –

Other-than-Temporarily Impaired Investments

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

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

This could include credit rating downgrades.

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

Temporarily Impaired Investments

The Company does not believe that any of the unrealized losses, which were comprised of 21 and 53 securities as of December 31, 2020 and December 31, 2019, respectively, represent an other-than-temporary impairment (“OTTI”).

The gross unrealized losses associated with U.S.

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

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

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

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

The Company believes the securities portfolio is prudently diversified.

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

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

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

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

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

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

Net gains (losses) on sales/redemptions of investment securities, after tax

- 68 -

4 unchanged sentences

Investment Securities –

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position as of December 31, 2020 and 2019.

There were no investments held-to-maturity as of December 31, 2020 and 2019.

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

9 unchanged sentences

Commercial mortgage pass-through securities

Corporate bonds and notes

Obligations of U.S.

states and political subdivisions

Asset-backed securities

8 unchanged sentences

Commercial mortgage pass-through securities

Obligations of U.S.

states and political subdivisions

Corporate bonds and notes

1 unchanged sentence

Total Temporarily Impaired Securities

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 -

3 unchanged sentences

Note 3 –

Loans and the Allowance for Loan Losses

Investment Securities –

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 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 –

Loans and the Allowance for Credit Losses

Loans Receivable :

7 unchanged sentences

Loans receivable

Included in commercial loans as of December 31, 2020 were PPP loans of $ 397.5 million.

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.

10 unchanged sentences

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

Loans Held-For-Sale :

The following table presents loans held-for-sale by loan segment as of December 31, 2020 and December 31, 2019:

(dollars in thousands)

Commercial real estate

Residential mortgage

Total carrying amount

- 71 -

3 unchanged sentences

Note 4 –

Loans and the Allowance for Loan Losses –

Purchased Credit-Impaired Loans :

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

The carrying amount of those loans is as follows as of December 31, 2020 and December 31, 2019.

Loans and the Allowance for Credit Losses –

Loans Held-For-Sale :

The following table presents loans held-for-sale by loan segment as of December 31, 2021 and December 31, 2020:

(dollars in thousands)

Commercial real estate

Residential real estate

Residential mortgage

Total carrying amount

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the years ended December 31, 2020 and 2019.

No allowances for loan losses were reversed during 2020 and 2019.

The accretable yield, or income expected to be collected, on the purchased credit-impaired loans above is as follows for the years presented:

(dollars in thousands)

Balance as of January 1,

New loans purchased

Accretion of income

Balance as of December 31,

Loans Receivable on Nonaccrual Status :

The following tables present nonaccrual loans included in loans receivable by loan class as of December 31, 2020 and December 31, 2019:

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)

2 unchanged sentences

Residential real estate

Total loans receivable on nonaccrual status

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 real estate

Commercial construction

Residential real estate

Total nonaccrual loans

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.

4 unchanged sentences

Note 4 –

Loans and the Allowance for Loan Losses –

Loans and the Allowance for Credit Losses –

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

1 unchanged sentence

Credit quality is monitored by reviewing certain credit quality indicators.

Assets classified “Pass”

Assets classified as “Pass”

are deemed to possess average to superior credit quality, requiring no more than normal attention.

3 unchanged sentences

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 “Substandard”

if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention.

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.

3 unchanged sentences

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

All loans past due 90 days or greater and all impaired loans are included in the appropriate category below.

The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) as of December 31, 2020 and December 31, 2019:

December 31, 2020

(dollars in thousands)

Commercial real estate

Commercial construction

Residential real estate

December 31, 2019

(dollars in thousands)

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

Special mention

Total Commercial

Commercial Real Estate

Special mention

Total Commercial Real Estate

Commercial Construction

Special mention

Total Commercial Construction

Residential Real Estate

Special mention

Total Residential Real Estate

Special mention

Total Consumer

Special mention

- 73 -

3 unchanged sentences

Note 4 –

Loans and the Allowance for Loan Losses –

The following table provides an analysis of the impaired loans by class as of and for the years ended December 31, 2020, 2019 and 2018.

Loans and the Allowance for Credit Losses –

The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) as of December 31, 2020:

December 31, 2020

No Related Allowance Recorded

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

Special Mention

(dollars in thousands)

2 unchanged sentences

Residential real estate

With An Allowance Recorded

Commercial real estate

Commercial construction

Residential real estate

Total (including related

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

No Related Allowance Recorded

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

(dollars in thousands)

2 unchanged sentences

Residential real estate

With An Allowance Recorded

Commercial construction

Residential real estate

Commercial real estate

Commercial construction

Residential real estate

Total (including related

- 74 -

3 unchanged sentences

Note 4 –

Loans and the Allowance for Loan Losses –

Loans and the Allowance for Credit Losses –

Impaired loans - Impaired loans disclosures presented below as of December 31, 2020 and as of and for the three and 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

11 unchanged sentences

Commercial real estate

Residential real estate

Commercial real estate

1 unchanged sentence

Residential real estate

Total (including related allowance)

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

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

Total (including related

- 75 -

3 unchanged sentences

Note 4 –

Loans and the Allowance for Loan Losses –

Aging Analysis :

The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due as of December 31, 2020 and December 31, 2019 (dollars in thousands):

Loans and the Allowance for Credit Losses –

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

December 31, 2021

3 unchanged sentences

Total Past Due and Nonaccrual

Total Loans Receivable

Commercial real Estate

1 unchanged sentence

Residential real Estate

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

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

90 Days or Greater Past Due

and Still Accruing

Total Past Due and

30-59 Days Past Due

60-89 Days Past Due

90 Days or Greater Past Due and Still Accruing

Total Past Due and Nonaccrual

Total Loans Receivable

2 unchanged sentences

Residential real estate

Included in the 90 days or greater past due and still accruing category as of December 31, 2019 are purchased credit-impaired loans, net of fair value marks, which accretes income per the valuation at date of acquisition.

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 -

3 unchanged sentences

Note 4 –

Loans and the Allowance for Loan Losses –

The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for loan losses that are allocated to each loan portfolio segment:

Loans and the Allowance for Credit Losses –

The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for credit losses 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

3 unchanged sentences

(dollars in thousands)

Allowance for loan losses

Individually evaluated for impairment

Collectively evaluated for impairment

Acquired portfolio

Acquired with deteriorated credit quality

Individually evaluated for impairment

Collectively evaluated for impairment

Acquired portfolio

Acquired with deteriorated credit quality

Included in the commercial loans collectively evaluated for impaired are PPP loans of $ 397.5 million as of December 31, 2020.

PPP loans receivable are guaranteed by the Federal government and have no allocation of the allowance for loan losses.

Allowance for credit losses - loans

Individually evaluated

Collectively evaluated

Acquired with deteriorated credit quality individually analyzed

Individually evaluated

Collectively evaluated

Acquired with deteriorated credit quality individually analyzed

December 31, 2020

17 unchanged sentences

Note 4 –

Loans and the Allowance for Loan Losses –

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

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

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

Loans and the Allowance for Credit Losses –

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

Commercial real estate

3 unchanged sentences

Balance as of January 1, 2021

Day 1 Adjustment CECL

Balance as of January 1, 2021

Loan charge-offs

Provision for loan losses

Provision for (reversal of) credit losses

Balance as of December 31, 2021

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

6 unchanged sentences

Balance as of December 31, 2020

Commercial real estate

Commercial construction

Residential real estate

(dollars in thousands)

3 unchanged sentences

Balance as of December 31, 2019

For the year ended December 31, 2018, the loan charge-offs within the commercial loan segment were primarily made up of $ 17.0 million in charge-offs related to the taxi medallion portfolio.

Troubled Debt Restructurings

Loans are considered to have been modified in a troubled debt restructuring (“TDRs”) 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, 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 troubled debt restructuring remains on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan.

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, 2020, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in troubled debt restructurings.

As of 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 -

3 unchanged sentences

Note 4 –

Loans and the Allowance for Loan Losses –

As of December 31, 2020, TDRs totaled $ 49.4 million, of which $ 25.7 million were on nonaccrual status and $ 23.7 million were performing under their restructured terms.

As of December 31, 2019, TDRs totaled $ 52.0 million, of which $ 30.6 million were on nonaccrual status and $ 21.4 million were performing under their restructured terms.

The Company has allocated $- 0 - and $ 1.3 million of specific allowance as of December 31, 2020 and December 31, 2019, respectively.

There were no charge-offs in connection with a loan modification at the time of modification during the year ended December 31, 2020, 2019 and 2018.

Loans and the Allowance for Credit Losses –

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:

Pre-Modification

Post-Modification

(dollars in thousands)

Troubled debt restructurings:

Commercial real estate

Commercial construction

Residential real estate

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

14 unchanged sentences

Commercial construction

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.

- 79 -

3 unchanged sentences

Note 4 –

Loans and the Allowance for Loan Losses –

The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2018:

Pre-Modification

Post-Modification

(dollars in thousands)

Commercial real estate

Commercial construction

Residential real estate

Included in the commercial loan segment of the troubled debt restructurings are 27 taxi medallion loans totaling $ 11.2 million.

All 27 taxi medallion loans included above were on nonaccrual status prior to modification and remain on nonaccrual status post-modification.

Loans and the Allowance for Credit Losses –

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 customers affected by COVID-19.

The interagency statement was effective immediately and impacted accounting for loan modifications.

The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs.

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

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, 2020, the Bank had 113 deferred loans totaling approximately $207.1 million.

The majority of these loans were deferred between 90 and 120 days.

The following table sets forth the composition of these loans by loan segments as of December 31, 2020:

(dollars in thousands)

Commercial real estate

Residential real estate

As of December 31, 2020, there were no deferred loans that were delinquent or on nonaccrual status.

As of December 31, 2020, $ 40.3 million of deferred loans were risk rated “special mention”

The Company evaluates its deferred loans after the initial deferral period and will either return the deferred loans to its original loan terms or the loan will be reassessed at that time to determine if a further deferment should be granted and if a downgrade in risk rating is appropriate.

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

Provision for (reversal of) credit losses - unfunded commitments

Balance as of end of period

Components of (Reversal of) Provision for Credit Losses

The following table summarizes the 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

Provision for (reversal of) credit losses - unfunded commitments

Provision for (reversal of) credit losses

- 80 -

32 unchanged sentences

Total lease costs for the year ended December 31, 2021 was $ 3.2 million.

As of December 31, 2019, the Company had lease liabilities totaling $ 16.4 million and right-of-use assets totaling $15.1 million.

As of December 31, 2019, the weighted average remaining lease term for operating leases was 7.2 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.0 %.

Total lease costs for the year ended December 31, 2019 was $ 3.1 million.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:

18 unchanged sentences

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.

In accordance with ASC 350, the Company performs goodwill impairment test at least annually, or more frequently if triggering event occurs.

In the second quarter of 2020, the impact of COVID-19, prompted the Company to quantitively evaluate goodwill for impairment.

The Company engaged an independent third-party to evaluate the fair value of the Company compared to its carrying value.

To estimate the fair value of the Company, the third-party relied on a weighted discounted cash flow method, guideline public company method, and transaction method.

The results concluded that the fair value of the Company exceeded its current carrying value and goodwill impairment did not exist as of June 30, 2020.

Based upon management’s review through December 31, 2021, the Company’s goodwill was not impaired.

14 unchanged sentences

(dollars in thousands)

As of December 31, 2020

Core deposit intangibles

As of December 31, 2019

December 31, 2021

Core deposit intangibles

December 31, 2020

Aggregate amortization expense was approximately $2.0 million, $2.6 million and $1.4 million for 2021, 2020 and 2019, respectively.

2 unchanged sentences

Time Deposits

As of December 31, 2020, and 2019, the Company’s total time deposits were $ 1.5 billion and $ 1.6 billion, respectively.

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.

1 unchanged sentence

Fair value premium

The amount of time deposits with balances of $250,000 or more was $ 409.3 million and $ 331.6 million as of December 31, 2020 and 2019, respectively.

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 -

8 unchanged sentences

(dollars in thousands)

Total FHLB borrowings

By remaining period to maturity:

5 unchanged sentences

After 5 Years

Total FHLB borrowings

FHLB borrowings - gross

Fair value (discount) premium

FHLB borrowings, net

Total FHLB borrowings

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

1 unchanged sentence

Advances are payable at stated maturity, with a prepayment penalty for fixed rate advances.

All FHLB advances are fixed rates.

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, 2020, the Company had remaining borrowing capacity of approximately $ 1.0 billion at the FHLB.

As of December 31, 2021, the Company had remaining borrowing capacity of approximately $ 867.3 million at the FHLB.

- 84 -

32 unchanged sentences

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

As of December 31, 2020, the 2015 Notes have a stated maturity of July 1, 2025 , and bear interest until the maturity date or early redemption date at a variable rate equal to the then current three-month LIBOR rate plus 393 basis points .

As of December 31, 2020, the 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.

1 unchanged sentence

- 85 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10 –

The current and deferred amounts of income tax expense for 2020, 2019 and 2018 are as follows (dollars in thousands):

The current and deferred amounts of income tax expense for December 2021, 2020 and 2019 are as follows (dollars in thousands):

Income tax expense

3 unchanged sentences

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):

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,

Income before income tax expense

3 unchanged sentences

State tax, net of federal tax benefit

Impact of the Tax Cuts and Jobs Act 2017

Impact of the “the Bill”

Bank owned life insurance

11 unchanged sentences

Deferred tax assets

Allowance for loan losses

Purchase accounting

Allowance for credit losses

Pension actuarial losses

1 unchanged sentence

Deferred compensation

Unrealized losses on securities and swaps

Unrealized loss on AFS

Deferred loan costs, net of fees

5 unchanged sentences

Purchase accounting

Pension actuarial gains

Prepaid expenses

15 unchanged sentences

Note 11 –

Offsetting Assets and Liabilities

Certain financial instrument-related assets and liabilities may be eligible for offset on the consolidated statements of condition because they are subject to master netting agreements or similar agreements.

However, the Company does not elect to offset such arrangements on the consolidated financial statements.

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

For additional detail regarding interest rate swap agreements refer to Note 20 within this section.

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

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

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

Gross Amounts Not Offset

Gross Amounts

Offset in the

Presented in the

(dollars in thousands)

December 31, 2020

Interest rate swaps

December 31, 2019

Interest rate swaps

- 91 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Note 12 –

5 unchanged sentences

The Company controls the credit risk of these financial instruments through credit approvals, limits and monitoring procedures.

To minimize potential credit risk, the Company generally requires collateral and other credit-related terms and conditions from the customer.

To minimize potential credit risk, the Company generally requires collateral and other credit-related terms and conditions from the client.

In the opinion of management, the financial condition of the Company will not be materially affected by the final outcome of these commitments and contingent liabilities.

10 unchanged sentences

Based upon the information currently available in connection with such claims, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse impact on the consolidated financial position, results of operations, or liquidity of the Company.

- 88 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 –

9 unchanged sentences

For these transactions, the expenses are not significant to the operations of the Company.

- 92 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 –

13 unchanged sentences

There are no conditions or events since that notification that management believes have changed the institution’s category.

- 89 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 –

Stockholders’

Equity and Regulatory Requirements –

The following is a summary of the Bank’s and the Parent Corporation’s actual capital amounts and ratios as of December 31, 2021 and 2020, compared to the FRB and FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a well-capitalized institution.

10 unchanged sentences

Risk-Based Capital:

- 93 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15 –

Stockholders’

Equity and Regulatory Requirements –

Minimum Capital

9 unchanged sentences

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

The lowest ratio at the Company is the Tier 1 Ratio which was 2.37 % above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 3.50 % above the minimum buffer ratio.

The lowest ratio at the Company is the CET 1 Ratio which was 3.64 % above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 2.94 % above the minimum buffer ratio.

- 90 -

21 unchanged sentences

Income tax expense

Amortization of pension plan net actuarial losses

Amortization of pension plan net actuarial gains/(losses)

Salaries and employee benefits

1 unchanged sentence

Total reclassification

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

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

(dollars in thousands)

2 unchanged sentences

Defined benefit pension and post-retirement plans, net of tax

Effective January 1, 2018, the Company implemented ASU 2018-02, “Income Statement –

Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”

Under ASU 2018-02, the FASB amended existing guidance to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from The Tax Cuts and Jobs Act of 2017.

In order to comply with this new ASU, the Company recorded an adjustment to the Consolidated Statement of Condition on January 1, 2018 of approximately $ 709 thousand that increased retained earnings and increased accumulated other comprehensive loss.

Effective January 1, 2018, the Company implemented ASU 2016-01, “Financial Instruments –

Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities.”

Under ASU 2016-01, equity securities, with certain exceptions, are to be measured at fair value with changes in fair value recognized in net income.

In order to comply with this new ASU, the Company recorded a cumulative-effect adjustment to the Consolidated Statement of Condition of approximately $ 55 thousand.

- 91 -

27 unchanged sentences

Amounts recognized as a component of accumulated other comprehensive loss as of year-end that have not been recognized as a component of the net periodic pension expense for the plan are presented in the following table.

The Company expects to recognize approximately $ 0.3 million of the net actuarial loss reported in the following table as of December 31, 2020 as a component of net periodic pension expense during 2021.

The Company expects to recognize approximately $ 0.1 of the net actuarial loss reported in the following table as of December 31, 2021 as a component of net periodic pension expense during 2022.

(dollars in thousands)

25 unchanged sentences

Specific factors such as the plan’s investment policy, reinvestment risk and investment volatility are taken into consideration during the construction of the best estimate real return range, as well as in the selection of the final return assumption from within the range.

- 97 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17 –

Pension and Other Benefits –

The general investment policy of the Pension Trust is for the fund to experience growth in assets that will allow the market value to exceed the value of benefit obligations over time.

61 unchanged sentences

Supplemental Executive Retirement Plan (“SERP”)

During 2019 the Company adopted supplemental executive retirement plans (“SERP’s”) for the benefit of several of its executive officers.

During 2019 and in 2021, the Company adopted supplemental executive retirement plans (“SERP’s”) for the benefit of several of its executive officers.

Each SERP is a non-qualified plan which provides supplemental retirement benefits to the participating officers of the Company.

47 unchanged sentences

Vested shares

Forfeited/cancelled/expired

Unearned as of December 31, 2021

1 unchanged sentence

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

As of December 31, 2020, the maximum number of shares related to performance units that ultimately could vest if performance targets were exceeded is 206,744.

As of December 31, 2021, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 218,835.

During the year ended December 31, 2021, 29,421 shares vested.

6 unchanged sentences

Vested shares

Forfeited/cancelled/expired

Unearned as of December 31, 2021

18 unchanged sentences

The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

Interest rate swaps were entered into on April 13, 2017, January 27, 2020 and March 3, 2020 each with a respective notional amount of $ 25.0 million and were designated as a cash flow hedge of a Federal Home Loan Bank (“FHLB”) advance.

In addition, interest rate swaps were entered into on June 4, 2019 and August 6, 2019, each with a respective notional amount of $ 50.0 million and were designated as a cash flow hedge of a FHLB advance.

Interest rate swaps were entered into on April 13, 2017, January 1, 2020 and March 3, 2020 each with a respective notional amount of $ 25.0 million and were designated as a cash flow hedge of a Federal Home Loan Bank advance We are required to pay fixed-rates of interest ranging from 0.88 % to 1.93 % and receive variable rates of interest that reset quarterly based on three-month LIBOR.

Expiration dates for the swaps range from January 2022 to April 2022 .

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

2 unchanged sentences

The Company expects the hedges to remain fully effective during the remaining term of the swaps.

Summary information about the interest rate swap designated as a cash flow hedges as of year-end is as follows:

(dollars in thousands)

Notional amount

Weighted average pay rates

Weighted average receive rates

Weighted average maturity

In addition, during 2021, the Company entered into 9 forward starting pay fixed-rate interest rate swaps, with a total notional amount of $ 400 million, which are also designated as a cash flow hedge of a future Federal Home Loan Bank advance.

We are required to pay fixed rates of interest ranging from 0.631 % to 1.23 % and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”).

The forward starting swaps have commencing payment dates ranging from October 2021 to August 2022, with expiration dates ranging from December 2025 to March 2028 .

Interest expense recorded on these swap transactions totaled approximately $( 1.9 ) million, $( 1.6 ) million, and $( 0.7 ) million during 2021, 2020, and 2019 is reported as a component of interest expense on FHLB Advances.

35 unchanged sentences

Derivatives –

There were no net gains (losses) recorded in accumulated other comprehensive income or in the Consolidated Statement of Income relating to cash flow derivative instruments for the years ended December 31, 2020, December 31, 2019 and December 31, 2018.

Note 20 –

55 unchanged sentences

Equity securities

Total liabilities

There were no transfers between Level 1 and Level 2 during the years ended December 31, 2021 and 2020.

24 unchanged sentences

Equity securities

Total liabilities

Assets Measured at Fair Value on a Non-Recurring Basis

8 unchanged sentences

Fair Value Measurements and Fair Value of Financial Instruments –

Impaired Loans:

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

Collateral Dependent Loans :

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

These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with GAAP.

2 unchanged sentences

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

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

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

For assets measured at fair value on a nonrecurring basis, the fair value measurements as of December 31, 2021 and December 31, 2020 are as follows:

1 unchanged sentence

Assets measured at fair value on a nonrecurring basis:

Impaired loans:

Collateral dependent loans:

(dollars in thousands)

Commercial real estate

Residential real estate

Fair Value Measurements at Reporting Date Using

2 unchanged sentences

(dollars in thousands)

Commercial construction

Impaired loans - Collateral dependent impaired loans as of December 31, 2020 that required a valuation allowance were $ 26.5 million with a related valuation allowance of $ 14.3 million compared to $ 3.8 million with a related valuation allowance of $ 1.3 million as of December 31, 2019.

Commercial real estate

Collateral dependent loans - Collateral dependent loans as of December 31, 2021 that required a valuation allowance were $ 54.1 million with a related valuation allowance of $ 17.8 million.

Impaired loans - Collateral dependent impaired loans as of December 31, 2020 that required a valuation allowance were $ 26.5 million with a valuation allowance of $ 14.3 million.

- 102 -

6 unchanged sentences

Recurring basis

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

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

(dollars in thousands)

32 unchanged sentences

Range (weighed average)

Impaired loans:

Market approach (100%)

Average transfer price as a price to unpaid principal balance

48 - 53  ( 49 )

48 % to 73 % ( 49 %)

Appraisals of collateral value

5 unchanged sentences

- 20 % to + 15 % (- 6 %)

Residential real estate

Appraisals of collateral value

Adjustment for comparable sales

- 15 % to + 39 % ( 5 %)

December 31, 2020

2 unchanged sentences

Impaired loans:

Commercial construction

Appraisals of collateral value

Comparable sales

Market approach (100%)

Average transfer price as a price to unpaid principal balance

48 - 53 ( 49 )

Appraisals of collateral value

Comparable sales

2 % - 14 % ( 9 %)

Fair Value of Financial Instruments

FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities.

For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10.

Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.

It is also the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-sale and investment securities available-for-sale.

Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Company for the purposes of this disclosure.

Adjustment for comparable sales

1 % to + 5 % (+ 2 %)

Commercial Real Estate

Appraisals of collateral value

Adjustment for comparable sales

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

- 104 -

4 unchanged sentences

Fair Value Measurements and Fair Value of Financial Instruments –

Fair Value of Financial Instruments

FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities.

For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10.

Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.

Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Company for the purposes of this disclosure.

Fair values for financial instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments.

49 unchanged sentences

Accrued interest payable

Cash and due from banks

- 106 -

23 unchanged sentences

Dividends payable by the Bank to the Parent Corporation are restricted under supervisory regulations (see Note 18 of the Notes to Consolidated Financial Statements).

- 112 -

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 22 –

Parent Corporation Only Financial Statements –

Condensed financial statements of the Parent Corporation only are as follows:

4 unchanged sentences

Investment in subsidiaries

Receivable due from subsidiaries

Securities available-for-sale

Investment securities

Equity securities

LIABILITIES AND STOCKHOLDERS’

Other liabilities

Subordinated debentures

Subordinated debentures, net

Stockholders’

Total liabilities and stockholders’

Condensed Statements of Income

For Years Ended December 31,

(dollars in thousands)

Dividend income from subsidiaries

Income before equity in undistributed earnings of subsidiaries

Equity in undistributed earnings of subsidiaries

- 107 -

4 unchanged sentences

Parent Corporation Only Financial Statements –

Condensed Statements of Income

For Years Ended December 31,

(dollars in thousands)

Dividend income from subsidiaries

Income before equity in undistributed earnings of subsidiaries

Equity in undistributed earnings of subsidiaries

Preferred dividends

Net income available to common stockholders

Condensed Statements of Cash Flows

6 unchanged sentences

Amortization of subordinated debt issuance costs

(Increase) decrease in other assets

Decrease (increase) in other assets

(Decrease) increase in other liabilities

Net cash provided by operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities:

1 unchanged sentence

Sales of available-for-sale securities

Sales of equity securities

Payment of short-term borrowing

Purchase of equity securities

Sale of equity securities

Repayment of short-term borrowing

Capital infusion to subsidiary

Net cash provided by (used) in investing activities

Net cash (used in) provided by investing activities

Cash flows from financing activities:

Proceeds from subordinated debt

Cash dividends on common stock

Repurchase of stock

(Repayment of) proceeds from subordinated debt

Cash dividends paid on preferred stock

Cash dividends paid on common stock

Purchase of treasury stock

Proceeds from preferred stock offering

Proceeds from exercise of stock options

Net cash (used in) provided by financing activities

(Decrease) increase in cash and cash equivalents

Net cash provided by (used in) financing activities

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents as of January 1,

10 unchanged sentences

Net interest income

Provision for loan losses

Provision for credit losses

Total other income, net of securities gains

2 unchanged sentences

Income tax expense

Preferred dividends

Net income available to common stockholders

Earnings per share:

3 unchanged sentences

Net interest income

Provision for loan losses

Provision for credit losses

Total other income, net of securities gains

5 unchanged sentences

- 109 -

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

Changes in and Disagreements with

Accountants on Accounting and Financial Disclosures

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data