ConnectOne Bancorp, Inc. 10-K

Item 8. Financial Statements and Supplementary Data All Financial Statements: The following financial statements are filed as part of this report under Item 8 - “Financial Statements and Supplementary Data.” Page Report of Independent Registered Public Accounting Firm 49 Consolidated Statements of Financial Condition 52 Consolidated Statements of Income 53 Consolidated Statements of Comprehensive Income 54 Consolidated Statements of Changes in Stockholders’ Equity 55 Consolidated Statements of Cash Flows 56 Notes to Consolidated Financial Statements 57 - 48 - Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 173 ) The Board of Directors and Stockholders of ConnectOne Bancorp, Inc. and Subsidiaries Englewood Cliffs, New Jersey Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statements of financial condition of ConnectOne Bancorp, Inc. and Subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Explanatory Paragraph – Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of ASC 326. The adoption of ASC 326 and its subsequent application is also communicated as a critical audit matter below. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. - 49 - Table of Contents Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses – Loans The Company adopted ASC 326, Financial Instruments – Credit Losses on January 1, 2021, using the modified retrospective method. Upon adoption the Company recorded a decrease to retained earnings of $2,925,000, net of tax, for the cumulative effect of adopting ASC 326, as noted in the Consolidated Statements of Changes in Stockholders’ Equity. As of December 31, 2021, the allowance for credit losses (“ACL”) on loans was $78,773,000 inclusive of reversal of credit losses on loans of $5,018,000 for the year then ended. The Company has disclosed the impact of adoption in Note 1b (see change in accounting principle explanatory paragraph above) to the consolidated financial statements and the allowance for credit losses on loans as of December 31, 2021 in Notes 1b and 4. ASC 326 requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost at the reporting date. The measurement is based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organizations portfolio. Management employs a process and methodology to estimate the ACL on pooled loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors includes pooling loans into portfolio segments for loan that share similar characteristics. Pooled loan portfolio segments include commercial, commercial real estate, commercial construction, residential real estate, and consumer loans. For pooled loans, the Company utilizes a discounted cash flow (”DCF”) methodology to estimate credit losses over the expected life of the loan. The DCF methodology combines probability of default, the loss given default, maturity date and prepayment speed assumptions to estimate a reserve for each loan. The quantitative loss rates are adjusted by macroeconomic scenarios and reverts, on a straight-line basis, to average historical losses after the forecasted periods. The sum of all the loan level reserves are aggregated for each portfolio segment and a quantitative loss factor is derived. The quantitative factors are also supplemented by certain qualitative loss factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. Qualitative loss factors, for each loan segment within the portfolio, incorporates consideration for a minimum to maximum range for qualitative loss factor derived from either the Company’s historical loss experience or peer group historical loss experience. Changes in these assumptions could have a material effect on the Company’s financial results. We identified auditing the ACL on pooled loans as a critical audit matter because the methodology to determine the estimate of credit losses significantly changes upon adoption of ASC 326, including the application of new accounting policies, the use of subjective judgments for both the quantitative and qualitative calculations and overall changes made to the loss estimation models. Performing audit procedures to evaluate the implementation and subsequent application of ASC 326 for loans involved a high degree of auditor judgment and required significant effort, including the need to involve more experienced audit personnel and valuation specialists. - 50 - Table of Contents The primary procedures we performed to address this critical audit matter included: • Testing the design and operating effectiveness of controls over the evaluation of the ACL on pooled loans, including controls addressing: ○ The selection and application of new accounting policies.   ○ Data inputs, judgments and calculations used to determine the loss factors.   ○ Information technology general controls and application controls.   ○ Problem loan identification and delinquency monitoring.   ○ Management’s evaluation of qualitative loss factors.   • Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the ACL on pooled loans, which included: ○ Evaluating the appropriateness of the Company’s accounting policies, judgments and elections involved in adoption of ASC 326.   ○ Testing the mathematical accuracy of the calculation.   ○ Utilizing internal specialists to perform procedures to assist in evaluating the relevance of the macroeconomic loss drivers.   ○ Utilizing internal specialists to assist in testing the mathematical accuracy of the underlying peer data used to calculated probability of the default and loss given default rates used within the discounted cash flow model.   ○ Evaluating the reasonableness of management’s judgments related to the probability of default, loss given default, including evaluating the use of peer data used to estimate these metrics in the absence of relevant and reliable internal data.   ○ Evaluating the reasonableness of management’s judgments related to qualitative adjustments to determine if they are calculated to conform with management’s policies and were consistently applied from the point of adoption to year end.     /s/ Crowe LLP   We have served as the Company's auditor since 2014.   Livingston, New Jersey February 25, 2022 - 51 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2021 2020 (in thousands, except share data) ASSETS Cash and due from banks $ 54,352 $ 63,637 Interest-bearing deposits with banks   211,184   240,119 Cash and cash equivalents 265,536 303,756   Investment securities 534,507 487,955 Equity securities 13,794 13,387   Loans held-for-sale 250 4,710   Loans receivable 6,828,622 6,236,307 Less: Allowance for credit losses - loans   78,773   79,226 Net loans receivable 6,749,849 6,157,081   Investment in restricted stock, at cost 27,826 25,099 Bank premises and equipment, net 29,032 30,108 Accrued interest receivable 34,152 35,317 Bank owned life insurance 195,731 165,960 Right of use operating lease assets 11,017 16,159 Goodwill 208,372 208,372 Core deposit intangibles 8,997 10,977 Other assets   50,417   88,458 Total assets $ 8,129,480 $ 7,547,339 LIABILITIES Deposits: Noninterest-bearing $ 1,617,049 $ 1,339,108 Interest-bearing   4,715,904   4,620,116 Total deposits 6,332,953 5,959,224 Borrowings 468,193 425,954 Subordinated debentures, net of debt issuance costs 152,951 202,648 Operating lease liabilities 12,417 18,026 Other liabilities   38,754   26,177 Total liabilities   7,005,268   6,632,029   COMMITMENTS AND CONTINGENCIES - -   STOCKHOLDERS’ EQUITY Preferred Stock, no par value; $ 1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of December 31, 2021 and - 0 - shares as of December 31, 2020; outstanding 115,000 shares as of December 31, 2021 and - 0 - shares as of December 31, 2020 110,927 - Common stock, no par value: Authorized 100,000,000 shares; issued 42,557,264 shares as of December 31, 2021 and 42,444,031 shares as of December 31, 2020; outstanding 39,568,090 shares as of December 31, 2021 and 39,785,398 as of December 31, 2020 586,946 586,946 Additional paid-in capital 27,246 23,887 Retained earnings 440,169 331,951 Treasury stock, at cost ( 2,989,174 shares as of December 31, 2021 and 2,658,633 shares as of December 31, 2020) ( 39,672 ) ( 30,271 ) Accumulated other comprehensive (loss) income   ( 1,404 )   2,797 Total stockholders’ equity   1,124,212   915,310 Total liabilities and stockholders’ equity $ 8,129,480 $ 7,547,339 See the accompanying notes to the consolidated financial statements. - 52 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2021 2020 2019 (dollars in thousands, except for per share data) Interest income: Interest and fees on loans $ 293,546 $ 296,611 $ 255,479 Interest and dividends on investment securities: Taxable 4,413 6,456 9,131 Tax-exempt 2,403 2,797 3,929 Dividends 971 1,642 1,778 Interest on federal funds sold and other short-term investments   405   694   1,167 Total interest income   301,738   308,200   271,484 Interest expense: Deposits 24,768 52,386 65,570 Borrowings   14,092   17,823   19,595 Total interest expense   38,860   70,209   85,165 Net interest income 262,878 237,991 186,319 (Reversal of) provision for credit losses   ( 5,500 )   41,000   8,100 Net interest income after provision for credit losses   268,378   196,991   178,219 Noninterest income: Deposit, loan and other income 6,617 7,077 4,025 Income on bank owned life insurance 4,771 5,007 3,484 Net gains on sale of loans held-for-sale 3,807 2,085 512 Gain on sale of branches 674 - - Net (losses) gains on equity securities   ( 373 )   202   294 Net gains (losses) on sale/redemption of investment securities   195   29   ( 280 ) Total noninterest income 15,691 14,400 8,035 Noninterest expense: Salaries and employee benefits 64,341 58,877 49,021 Occupancy and equipment 11,638 13,882 9,712 FDIC insurance 2,665 4,002 2,011 Professional and consulting 8,286 7,383 5,506 Marketing and advertising 1,318 1,200 1,353 Data processing 6,265 6,008 4,503 Merger expenses - 14,640 8,955 Loss on extinguishment of debt - - 1,047 Amortization of core deposit intangible 1,981 2,559 1,408 Other components of net periodic pension (income) expense ( 269 ) ( 119 ) 114 Increase in value of acquisition price - 2,333 - Other expenses   12,786   10,236   8,598 Total noninterest expenses   109,011   121,001   92,228 Income before income tax expense 175,058 90,390 94,026 Income tax expense   44,705   19,101   20,631 Net income 130,353 71,289 73,395 Preferred dividends 1,717 - - Net income available to common stockholders $ 128,636 $ 71,289 $ 73,395 Earnings per common share: Basic $ 3.24 $ 1.80 $ 2.08 Diluted 3.22 1.79 2.07 See the accompanying notes to the consolidated financial statements. - 53 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2021 2020 2019 (dollars in thousands)   Net income $ 130,353 $ 71,289 $ 73,395 Other comprehensive income: Unrealized gains and losses: Unrealized holding (losses) gains on available-for-sale securities arising during the period ( 11,109 ) 7,005 11,286 Tax effect   2,914   ( 1,847 )   ( 2,923 ) Net of tax   ( 8,195 )   5,158   8,363 Reclassification adjustment for realized (gains) losses included in net income ( 195 ) ( 29 ) 280 Tax effect   48   6   ( 79 ) Net of tax   ( 147 )   ( 23 )   201 Unrealized gains (losses) on cash flow hedges 3,593 ( 3,423 ) ( 755 ) Tax effect   ( 1,012 )   962   213 Net of tax   2,581   ( 2,461 )   ( 542 ) Reclassification adjustment for losses (gains) arising during this period 1,873 1,577 ( 677 ) Tax effect   ( 528 )   ( 443 )   190 Net of tax   1,345   1,134   ( 487 ) Unrealized pension plan (losses) gains: Unrealized pension plan losses before reclassifications - ( 112 ) ( 209 ) Tax effect   -   31   59 Net of tax   -   ( 81 )   ( 150 ) Reclassification adjustment for realized losses included in net income 299 301 358 Tax effect   ( 84 )   ( 84 )   ( 101 ) Net of tax   215   217   257 Total other comprehensive (loss) income   ( 4,201 )   3,944   7,642 Total comprehensive income $ 126,152 $ 75,233 $ 81,037 See the accompanying notes to the consolidated financial statements. - 54 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY     Preferred Stock     Common Stock     Additional Paid In Capital     Retained Earnings     Treasury Stock     Accumulated Other Comprehensive Income (Loss)     Total Stockholders’ Equity   (in thousands, except share and per share data)                                                         Balance as of January 1, 2019   $ -     $ 412,546     $ 15,542     $ 211,345     $ ( 16,717 )   $ ( 8,789 )   $ 613,927   Net income     -       -       -       73,395       -       -       73,395   Other comprehensive income, net of tax     -       -       -       -       -       7,642       7,642   Cash dividends declared on common stock ($ 0.36 per share)     -       -       -       ( 12,958 )     -       -       ( 12,958 ) Repurchase of stock ( 540,018 shares)     -       -       -       -       ( 12,643 )     -       ( 12,643 ) Net shares issued in satisfaction of restricted stock units earned ( 4,904 shares)     -       -       -       -       -       -       -   Exercise of stock options ( 38,937 shares)     -       -       360       -       -       -       360   Restricted stock, net of forfeitures ( 56,772 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of performance units earned ( 31,425 shares)     -       -       196       -       -       -       196   Stock issued ( 3,032,496 shares) in acquisition of GHB     -       56,025       -       -       -       -       56,025   Stock issued ( 119,008 shares) in acquisition of BoeFly, LLC - - 2,500 - - - 2,500 Stock-based compensation expense   -   -   2,746   -   -   -   2,746 Balance as of December 31, 2019   $ -     $ 468,571     $ 21,344     $ 271,782     $ ( 29,360 )   $ ( 1,147 )   $ 731,190   Net income     -       -       -       71,289       -       -       71,289   Other comprehensive income, net of tax     -       -       -       -       -       3,944       3,944   Cash dividends declared on common stock ($ 0.27 per share)     -       -       -       ( 11,120 )     -       -       ( 11,120 ) Repurchase of stock ( 54,693 shares)     -       -       -       -       ( 911 )     -       ( 911 ) Net shares issued in satisfaction of restricted stock units earned ( 16,541 shares)     -       -       -       -       -       -       -   Exercise of stock options ( 35,413 shares)     -       -       233       -       -       -       233   Restricted stock grants, net of forfeitures ( 89,879 shares)     -       -       -       -       -       -       -   Stock grants issued ( 1,340 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of performance units earned ( 22,402 shares)     -       -       -       -       -       -       -   Share redemption for tax withholdings on performance units and restricted stock units earned     -       -       ( 639 )     -       -       -       ( 639 ) Stock issued ( 4,602,450 shares) in acquisition of Bancorp of New Jersey​​ - 118,375 - - - - 118,375 Stock-based compensation expense   -   -   2,949   -   -   -   2,949 Balance as of December 31, 2020   $ -     $ 586,946     $ 23,887     $ 331,951     $ ( 30,271 )   $ 2,797     $ 915,310   Cumulative effect of change in accounting principle (see note 1b. “Authoritative Accounting Guidance Presentation”), net of tax - - - ( 2,925 ) - - ( 2,925 ) Balance as of January 1, 2021, as adjusted for changes in accounting principle - 586,946 23,887 329,026 ( 30,271 ) 2,797 912,385 Net income     -       -       -       130,353       -       -       130,353   Other comprehensive loss, net of tax     -       -       -       -       -       ( 4,201 )     ( 4,201 ) Cash dividends declared on preferred stock ($ 0.371875 per share)     -       -       -       ( 1,717 )     -       -       ( 1,717 ) Cash dividends declared on common stock ( 0.48 per share)     -       -       -       ( 17,493 )     -     -       ( 17,493 ) Exercise of stock options ( 14,247 shares)     -       -       106       -       -       -       106   Restricted stock grants, net of forfeitures ( 44,836 shares)     -       -       -       -       -       -       -   Stock grants ( 4,981 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of restricted stock units earned ( 14,711 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of performance units earned ( 34,458 shares     -       -       -       -       -       -       -   Share redemption for tax withholdings on performance units and restricted stock units earned     -       -       ( 1,283 )     -       -       -       ( 1,283 ) Repurchase of stock ( 330,541 shares) - - - - ( 9,401 ) - ( 9,401 ) Proceeds from preferred stock issuance, net of costs ( 115,000 shares) 110,927 - - - - - 110,927 Stock-based compensation expense   -   -   4,536   -   -   -   4,536 Balance as of December 31, 2021   $ 110,927     $ 586,946     $ 27,246     $ 440,169     $ ( 39,672 )   $ 1,404     $ 1,124,212   See the accompanying notes to the consolidated financial statements. - 55 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS     Years Ended December 31,   (dollars in thousands)   2021     2020     2019   Cash flows from operating activities                         Net income   $ 130,353     $ 71,289     $ 73,395   Adjustments to reconcile net income to net cash provided by operating activities:                       Depreciation and amortization of premises and equipment     3,757       4,244       3,053   (Reversal) of provision for credit losses     ( 5,500 )     41,000       8,100   Amortization of intangibles     1,980       2,559       1,408   Net accretion of loans     ( 5,350 )     ( 6,687 )     ( 5,056 ) Accretion on bank premises     ( 73 )     ( 90 )     ( 86 ) Accretion on deposits     ( 2,224 )     ( 4,301 )     ( 1,149 ) (Accretion) amortization on borrowings     ( 36 )     ( 183 )     209   Net deferred income tax (benefit) expense     16     ( 7,495 )     104   Stock-based compensation     4,536       2,949       2,942   Losses (gains) on sales/redemptions of investment securities, net     ( 195 )     ( 29 )     280   Change in fair value of equity securities, net     373     ( 202 )     ( 294 ) Gains (losses) on sale of loans held-for-sale, net     ( 3,807 )     ( 2,085 )     ( 512 ) Gain on sale of branches     ( 674 )     -     - Net losses on disposition of other fixed assets     65       -       -   Gain on sale of other real estate owned     ( 18 )     -       -   Loans originated for resale     ( 51,669 )     ( 63,114 )     ( 20,499 ) Loss on extinguishment of debt     -       -       1,047 Proceeds from sale of loans held-for-sale     72,233     80,323     21,011 Net gains on disposition of premises and equipment     -       -       ( 8 ) Net gains on sale of other real estate owned     -       -       ( 8 ) Increase in cash surrender value of bank owned life insurance     ( 4,771 )     ( 4,793 )     ( 3,484 ) Amortization of premiums and accretion of discounts on investments securities, net     5,966       5,506       4,299   Amortization of subordinated debt issuance costs     303     323     329 Increase (decrease) in accrued interest receivable     1,165     ( 11,458 )     ( 301 ) Net change in operating leases     ( 769 )     41       1,312   Decrease (increase) in other assets     46,086       ( 22,498 )     ( 22,619 ) Increase (decrease) in other liabilities     10,526       ( 4,174 )     ( 2,785 ) Net cash provided by operating activities     202,273     81,125     60,688 Cash flows from investing activities                   Investment securities available-for-sale:                 Purchases     ( 349,500 )     ( 338,087 )     ( 225,853 ) Sales     -     19,624     183,728   Maturities, calls and principal repayments     285,873       256,782       178,116   Net (purchases)/redemptions of restricted investment in bank stocks     ( 2,727 )     5,362       3,739   Purchases of equity securities     ( 780 )     ( 2,000 )     - Sales of equity securities     -     -     569 Loans held-for-sale payments     38     1,186     47 Net increase in loans     ( 596,389 )     ( 329,210 )     ( 243,430 ) Purchases of premises and equipment     ( 2,783 )     ( 2,199 )     ( 1,527 ) Purchases of bank owned life insurance     ( 25,000 )     ( 25,000 )     ( 10,000 ) Proceeds from life insurance death benefits     -       1,794       -   Proceeds from sale of branches     1,087     -     - Proceeds from sale of premises and equipment     -       -       18   Cash and cash equivalents acquired in acquisitions, net     -       87,391       11,211   Proceeds from sale of other real estate owned     321       992       915   Net cash used in investing activities     ( 689,860 )     ( 323,365 )     ( 102,467 ) Cash flows from financing activities             Net increase in deposits     375,953     410,605     260,489 (Repayment of) increase in subordinated debt     ( 50,000 )     73,440     - Advances of FHLB borrowings     340,000       1,526,489       2,597,000   Repayments of FHLB borrowings     ( 297,725 )     ( 1,650,387 )     ( 2,762,150 )   Cash dividends paid on preferred stock     ( 1,717 )     -       -   Cash dividends paid on common stock     ( 17,493 )     ( 14,317 )     ( 12,160 )   Proceeds from preferred stock offering     110,927       -       -   Purchase of treasury stock     ( 9,401 )     ( 911 )     ( 12,643 )   Proceeds from exercise of stock options   106     233     360   Share redemption for tax withholdings on performance units and restricted stock units earned     ( 1,283 )     ( 639 )     -   Net cash provided by financing activities     449,367       344,513       70,896     Net change in cash and cash equivalents   ( 38,220 )   102,273     29,117   Cash and cash equivalents at beginning of period   303,756     201,483     172,366   Cash and cash equivalents at end of period   $ 265,536     $ 303,756     $ 201,483   Supplemental disclosures of cash flow information: Cash payments for:                   Interest paid   $ 41,787     $ 74,701     $ 88,522   Income taxes paid   45,431     26,548     18,497   Supplemental disclosures of noncash investing activities:                   Transfer of loans to other real estate owned   $ 304     $ -     $ 907   Transfer of loans held-for-sale to loans held-for-investment     4,293       10,995       -   Transfer of loans held-for-investment to loans held-for-sale   16,628     26,548     33,297   See the accompanying notes to the consolidated financial statements. - 56 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies Nature of Operations ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Parent Corporation’s business currently consists of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”). The Bank’s subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a New Jersey investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), NJCB Spec-1, LLC (a New Jersey limited liability company), Port Jervis Holdings, LLC (a New Jersey limited liability company), BONJ Special Properties, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey financial technology company). The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its twenty-four other banking offices. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’ business, real estate rental and consumer wages. Basis of Presentation and Principals of Consolidation The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. The consolidated financial statements of the Parent Corporation are prepared on an accrual basis and include the accounts of the Parent Corporation and the Company. All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements. Segments FASB ASC 28, “Segment Reporting,” requires companies to report certain information about operating segments. The Company is managed as one segment: a community bank. All decisions including but not limited to loan growth, deposit funding, interest rate risk, credit risk and pricing are determined after assessing the effect on the totality of the organization. For example, loan growth is dependent on the ability of the organization to fund this growth through deposits or other borrowings. As a result, the Company is managed as one operating segment. Use of Estimates In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates. Risks and Uncertainties As previously disclosed, on March 11, 2020 the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to impact the United States and the world. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The COVID-19 pandemic has adversely affected, and continues to adversely affect economic activity globally, nationally and locally. Although economic activity has accelerated in 2021, and the United States continues to implement a COVID-19 vaccination program, COVID-19, it’s variants and actions taken to mitigate the spread of it have had and may in the future have an adverse impact on the economies and financial markets of many countries and parts of the United States, including the New Jersey/New York metropolitan area in which the Company primarily operates. Although the Company has been able to continue operations while taking steps to ensure the safety of employees and clients, COVID-19 could impact the Company’s operations in the future. Federal Reserve reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company's financial condition and results of operations in future periods. Although state and local governments have lifted many restrictions on conducting business, it is possible that restrictions could be reimposed. - 57 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) It is therefore unknown how long COVID-19 may continue to impact the economy and what the complete financial effect will be to the Company. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including the determination of the allowance for credit losses on loans, fair value of financial instruments, impairment of goodwill and other intangible assets and income taxes. Federal Reserve reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company's financial condition and results of operations in future periods. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including the determination of the allowance for credit losses, fair value of financial instruments, impairment of goodwill and other intangible assets and income taxes. Cash and Cash Equivalents Cash and cash equivalents include cash, deposits with other financial institutions with maturities of less than 90 days , and federal funds sold. Net cash flows are reported for client loan and deposit transactions, interest-bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements. Investment Securities Effective January 1, 2021, the Company accounts for its investment securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320-10-05. Investments are classified into the following categories: (1) held-to-maturity securities, for which the Company has both the positive intent and ability to hold until maturity, which are reported at amortized cost; (2) trading securities, which are purchased and held principally for the purpose of selling in the near term and are reported at fair value with unrealized gains and losses included in earnings; and (3) available-for-sale securities, which do not meet the criteria of the other two categories and which management believes may be sold prior to maturity due to changes in interest rates, prepayment risk, liquidity or other factors, and are reported at fair value, with unrealized gains and losses, net of applicable income taxes, reported as a component of accumulated other comprehensive income, which is included in stockholders’ equity and excluded from earnings. Investment securities are adjusted for amortization of premiums and accretion of discounts as adjustments to interest income, which are recognized on a level yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Investment securities gains or losses are determined using the specific identification method. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in comprehensive income, net of tax. Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are generally amortized using the level-yield method without estimating prepayments, except for mortgage-backed securities, where prepayment rates are estimated. Premiums on callable investment securities are amortized to their earliest call date. Gains and losses on sales of securities are recorded on the trade date and determined using the specific identification method. For available-for-sale investment securities which are in an unrealized loss position, the Company will first assess whether we intend to sell, or it is more likely than not, that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria is met, the amortized cost basis of the security is written down to fair value through income. For available-for-sale investment securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from an actual or estimated credit loss event or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, changes to the rating of the security, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss is likely, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, an allowance for credit losses is recorded for the estimated credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit loss is recognized in other comprehensive income, net of tax. The Company elected the practical expedient of zero loss estimates for securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rate by major agencies and have a long history of no credit losses. Prior to January 1, 2021, securities were evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FASB ASC 320-10-65 clarifies the interaction of the factors that were considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management assessed whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps were done before assessing whether the entity will recover the cost basis of the investment. In instances when - 58 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FASB ASC 320-10-65 changed the presentation and amount of the other-than-temporary impairment recognized in the Consolidated Statement of Income. The other-than-temporary impairment was separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss was recognized through earnings. The amount of the total other-than-temporary impairment related to all other factors was recognized through other comprehensive income. Equity Securities The Company’s investments in equity securities are recorded at fair value, with unrealized gains and losses included in earnings. Loans Held-for-Sale Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. Fair value on these loans is determined based on the terms of the loan, such as interest rate, maturity date, reset term, as well as sales of similar assets. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, purchase premium and discounts and an allowance for credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Loan segments are defined as a group of loans, which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Company has five segments of loans: commercial, commercial real estate, commercial construction, residential real estate (including home equity) and consumer. Loans that are 90 days past due are placed on nonaccrual and previously accrued interest is reversed and charged against interest income unless the loans are both well-secured and in the process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans 90 days or greater past due and still accruing include both smaller balance homogeneous loans that are collectively evaluated for credit losses and loans individually evaluated for credit losses. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The policy of the Company is to generally grant commercial, residential and consumer loans to residents and businesses within its New Jersey and New York market area. The borrowers’ abilities to repay their obligations are dependent upon various factors including the borrowers’ income and net worth, cash flows generated by the borrowers’ underlying collateral, value of the underlying collateral, and priority of the lender’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the control of the Company. The Company is therefore subject to risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for credit losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for a large majority of the Company’s loans. - 59 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Allowance for Credit Losses The allowance for credit losses is an estimate of current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial assets necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and investment securities measured at amortized cost. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. Loan losses are charged against the allowance for credit losses when the Company believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. The allowance is established through a provision for credit losses that is charged against income. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The expected credit loss for unfunded loan commitments is reported on the consolidated statement of financial condition in other liabilities. For financial assets, the allowance for credit losses is a valuation account that is deducted from, or added to, the amortized cost basis of the financial assets to present the net amount expected to be collected on the financial assets. The Company 's methodology to estimate the allowance for credit losses has two components: (i) a collective reserve component for estimated lifetime expected credit losses for pools of loans that share common risk characteristics and (ii) an individual reserve component for loans that do not share common risk characteristics. The Company maintains an allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial letters of credit. Information relevant to establishing an estimate of current expected credit losses includes historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. The Company reports in net income (as a credit loss expense) the amount necessary to adjust the allowance for credit losses and liabilities for credit losses on off-balance-sheet credit exposures for the current estimate of expected credit losses. Expected credit losses of financial assets are measured on a collective (pool) basis when similar risk characteristic(s) exist. If the Company determines that a financial asset does not share risk characteristics with other financial assets, the Company shall evaluate the financial asset for expected credit losses on an individual basis. Financial assets are assessed once, either through collective assessments or individual assessments. Standard expected losses are evaluated on a collective, or pool, basis when financial assets share similar risk characteristics. For pooled loan segments, utilizing a quantitative analysis, the Company calculates estimated credit losses using a probability of default and loss given default methodology, the results of which are applied to the aggregated discounted cash flow of each individual loan within the segment. In the absence of relevant and reliable internal data, probability of default and loss given default rates are determined using peer data. The point in time probability of default and loss given default are then conditioned by macroeconomic scenarios to incorporate reasonable and supportable forecasts that affect the collectability of the reported amount. Financial assets may be segmented based on one characteristic, or a combination of characteristics. Examples of risk characteristics relevant to the Company’s evaluation included, but were not limited to: (1) Internal or external credit scores or credit ratings, (2) Risk ratings or classifications, (3) Financial asset type, (4) Collateral type, (5) Size, (6) Effective interest rate, (7) Term, (8) Geographical location, (9) Industry of the borrower and (10) Vintage. The Company’s quantitative analysis also considers relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts. The Company evaluates a variety of factors including third party economic forecasts, industry trends and other available published economic information in arriving at its forecasts. After the reasonable and supportable forecast period, the Company reverts, on a straight-line basis, to average historical losses. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Included in the allowance for credit losses are qualitative reserves to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Each qualitative loss factor, for each loan segment within the portfolio, incorporates consideration for a minimum to maximum range for loss factors derived from either the Company’s historical loss experience, or peer group historical charge-off experience. These qualitative factor adjustments may increase or decrease the Company’s estimate of expected credit losses and are applied to each loan segment. The Bank evaluates individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. The Company evaluates the pooling methodology at least annually. Loans transition from defined segments for individual analysis when credit characteristics, or risk traits, change in a material manner. A loan is considered for individual analysis when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by the Company in determining individual analysis include payment status and the probability of collecting scheduled principal and interest payments. - 60 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) when due. Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties are troubled debt restructurings (“TDR”) and are individually analyzed if carrying value is $ 250,000 or higher. Additionally, nonaccrual loans that are $ 250,000 or higher are also individually analyzed. All PCD loans are individually analyzed. For loans designated as TDR or nonaccrual with balances less than $ 250,000 , these loans are collectively evaluated, and, accordingly, are not separately identified for analysis or disclosures. Instruments will not be included in both collective and individual analysis. Individual analysis will establish a specific reserve for instruments in scope. For collateral dependent loans, when it is determined that a foreclosure is probable, the allowance for credit losses is determined on a loan level basis using the fair value of the collateral as of the reporting date, less estimated disposition costs (“net fair value”), which will ensure that the credit loss is not delayed until the time at which the actual foreclosure takes place. In the event that this fair value is less the then amortized cost basis of these specific loans, the Company will recognize the difference between the net fair value at the reporting date and the amortized cost basis in the allowance for credit losses. If the fair value of the collateral has increased as of the evaluation date, the increase in the fair value of the collateral is reflected through a reduction in the allowance for credit losses. Adjustments for estimated disposition costs are not appropriate when the repayment of a collateral-dependent loan is expected from the operation of the collateral. If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as the allowance for credit losses. The effective interest rate used to discount expected cash flows is adjusted to incorporate expected prepayments, if applicable. Purchased Credit-Deteriorated Loans Loans acquired in a business combination that have experienced a more-than-significant deterioration in credit quality since origination are considered PCD loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that were current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium, which is recognized through interest income on a level-yield basis over the lives of the related loans. All loans considered to be PCI prior to the adoption of ASU 2016-13 were converted to PCD upon adoption. PCD loans that met the criteria for nonaccrual may be considered performing, regardless of whether the client is contractually delinquent, if management can reasonably estimate the timing and amount of the expected cash flows on such loans and if management expects to fully collect the new carrying value of the loans. As such, management may no longer consider the loans to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. Derivatives The Company records cash flow hedges at the inception of the derivative contract based on the Company’s intentions and belief as to likely effectiveness as a hedge. Cash flow hedges represent a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. The changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest income. - 61 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged. The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings. Restricted Stock The Bank is a member of the Federal Home Loan Bank (“FHLB”) of New York. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends on the stock are reported as income. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Premises and Equipment Land is carried at cost and premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 4 to 30 years. Leasehold improvements are depreciated using the straight-line method over the terms of the respective leases, or the estimated useful lives of the improvements, whichever is shorter. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years. Leases Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease team. The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term. The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The Company has elected not to recognize leases with original terms of 12 months or less on the consolidated balance sheet. - 62 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Other Real Estate Owned Other real estate owned (“OREO”), representing property acquired through foreclosure and held-for-sale, is initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequently, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs relating to holding the assets are charged to expenses. Employee Benefit Plans The Company has a noncontributory pension plan that covered all eligible employees up until September 30, 2007, at which time the Company froze its defined benefit pension plan. As such, all future benefit accruals in this pension plan were discontinued and all retirement benefits that employees would have earned as of September 30, 2007 were preserved. The Company’s policy is to fund at least the minimum contribution required by the Employee Retirement Income Security Act of 1974. The costs associated with the plan are accrued based on actuarial assumptions and included in salaries and employee benefits expense. The Company accounts for its defined benefit pension plan in accordance with FASB ASC 715-30. FASB ASC 715-30 requires that the funded status of defined benefit postretirement plans be recognized on the Company’s statement of financial condition and changes in the funded status be reflected in other comprehensive income. FASB ASC 715-30 also requires companies to measure the funded status of the plan as of the date of its fiscal year-end. The Company maintains a 401(k)-employee savings plan to provide for defined contributions which covers substantially all employees of the Company. Employee 401(k) and profit-sharing plan expense is the amount of matching contributions. Stock-Based Compensation Stock compensation accounting guidance (FASB ASC 718, “Compensation-Stock Compensation”) requires that the compensation cost related to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. Stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. See Note 18 of the Notes to Consolidated Financial Statements for a further discussion. Treasury Stock Subject to limitations applicable to the Parent Corporation, treasury stock purchases may be made from time to time as, in the opinion of management, market conditions warrant, in the open market or in privately negotiated transactions. Shares repurchased are added to the corporate treasury and will be used for future stock dividends and other issuances. The repurchased shares are recorded as treasury stock, which results in a decrease in stockholders’ equity. Treasury stock is recorded using the cost method and accordingly is presented as a reduction of stockholders’ equity. During the year ended December 31, 2021 and December 31, 2020, the Parent Corporation repurchased 330,541 and 54,693 shares, respectively, under a board-approved share repurchase program. Goodwill Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized but tested for impairment annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected December 31 as the date to perform the annual impairment test. No impairment charge was deemed necessary as of the years ended December 31, 2021, 2020 and 2019. - 63 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Other Intangible Assets Other intangible assets consist of core deposit intangibles arising from business combinations that are amortized over their estimated useful lives to their estimated residual value. Comprehensive Income Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from nonowner sources. The Company’s other comprehensive income (loss) is comprised of unrealized holding gains and losses on securities available-for-sale, unrecognized actuarial gains and losses of the Company’s defined benefit pension plan and unrealized gains and losses on cash flow hedges, net of taxes. Restrictions on Cash Cash on hand or on deposit with the Federal Reserve Bank is required to meet regulatory reserve and clearing requirements. Dividend Restriction Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Parent Corporation or by the Parent Corporation to the stockholders. Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Bank Owned Life Insurance The Company invests in Bank Owned Life Insurance (“BOLI”) to help offset the cost of employee benefits. The change in the cash surrender value of the BOLI is recorded as a component of noninterest income. Income Taxes Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 % likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Advertising Costs The Company recognizes its marketing and advertising cost as incurred. Reclassifications Certain reclassifications have been made in the consolidated financial statements and footnotes for 2020 and 2019 to conform to the classifications presented in 2021. Such reclassifications had no impact on net income or stockholders’ equity. - 64 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1b – Authoritative Accounting Guidance Adoption of New Accounting Standards in 2021 Effective January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) 2016-13 “ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaced the prior incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL” or the “CECL Standard”). The measurement of expected credit losses under the CECL Standard is applicable to financial assets measured at amortized cost, including portfolio loans and investment securities classified as held-to-maturity (“HTM”). It also applies to off-balance sheet credit exposures including loan commitments, standby letters of credit, financial guarantees and other similar instruments. In addition, the CECL Standard changes the accounting for investment securities classified as available-for-sale (“AFS”), including a requirement that estimated credit losses on AFS securities be presented as an allowance rather than as a direct write-down of the carrying balance of securities which we do not intend to sell, or believe that it is more likely than not, that we will be required to sell. The Company adopted the CECL Standard using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. As discussed further below, purchased credit deteriorated assets were measured on a prospective basis in accordance with the CECL Standard and all purchased credit impaired loans as of December 31, 2020 were considered purchased credit deteriorated loans upon adoption. Results for reporting periods beginning after January 1, 2021 are presented under the CECL Standard while prior period amounts continue to be reported in accordance with previously applicable accounting guidance. The adoption of the CECL Standard resulted in the following adjustments to our financial statements as of January 1, 2021 (dollars in thousands): Change in Consolidated Statement of Condition Tax Effect Change to Retained Earnings from Adoption of CECL Allowance for credit losses (“ACL”) (loans) $ 1,350 $ 406 $ 944 Adjustment related to purchased credit-impaired loan marks (1) 5,207 - - Total ACL – loans 6,557 406 944 ACL (unfunded credit commitments) 2,833 852 1,981 Total impact of CECL adoption $ 9,390 $ 1,258 $ 2,925     ​ (1) This amount represents a gross-up of the balance sheet related to nonaccretable credit marks of purchased credit-impaired loans resulting from adoption of CECL on January 1, 2021. Loans designated as purchased credit impaired loans (“PCI”) and accounted for under Accounting Standards Codification (“ASC”) 310-30 were designated as purchased with credit deterioration loans (“PCD”). In accordance with the CECL Standard, the Company did not reassess whether PCI loans met the criteria of PCD loans as of the date of adoption and determined all PCI loans were PCD loans. The Company recorded an increase to the balance of PCD loans and an increase to the ACL for loans of $5.2 million, which represented the expected credit losses for PCD loans. The remaining non-credit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021 over the remaining estimated life of the loans. Also, in accordance with the CECL Standard, the Company did not reassess whether modifications to individual acquired financial assets were troubled debt restructurings (“TDRs”) as of the date of adoption. ASU No. 2021-03, “Intangibles – Goodwill and Other (Topic 350).” ASU 2021-03 requires an entity to identify and evaluate goodwill impairment triggering events when they occur to determine whether it is more likely than not that the fair value of a reporting unit (or entity, if the entity has elected the accounting alternative for amortizing goodwill and chosen that option) is less than its carrying amount. If an entity determines that it is more likely than not that the goodwill is impaired. It must test goodwill for impairment using the triggering event date as the measurement date. An entity is required to disclose the amount assigned to goodwill in total and by major business combination, or by reorganization event resulting in fresh-start reporting. Also, the entity must disclose the weighted average amortization period in total and the amortization period by major business combination, or by reorganization event resulting in fresh-start reporting. ASU 2021-03 was effective for the Company on January 1, 2021 and did not have a significant impact on our consolidated financial statement. ASU 2018-14, “ Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. ” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 was effective for the Company as of January 1, 2021 and did not have a significant impact on our consolidated financial statements. ASU 2021-01 “Reference Rate Reform (Topic 848)” In January 2021 the Financial Accounting Standards Board (the “FASB”), issued ASU 2021-01 to clarify the scope of ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. ASU 2020-04 provides temporary, optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships that reference the London Interbank Offered Rate or another reference rate that is expected to be discontinued. The ASU addresses questions about whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting, or contract price alignment that is expected to be modified as a result of reference rate reform, commonly referred to as the “discounting transition”. The amendments clarify that certain optional expedients and exceptions in Topic 848 do apply to derivatives that are affected by the discounting transition. The amendments in ASU 2021-01 are effective immediately for all entities. The amendments do not apply to contract modifications made after December 31, 2022; new hedging relationships entered into after December 31, 2022; and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship, including periods after December 31, 2022. The Company adopted ASU 2021-01 in January 2021, and its adoption did not have a significant impact on the Company’s audited consolidated financial statements. - 65 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1b – Authoritative Accounting Guidance – (continued) Newly Issued, But Not Yet Effective Accounting Standards In November 2020, federal and state banking regulators issued the “Interagency Policy Statement on Reference Rates for Loans" to reiterate that a specific replacement rate for loans impacted by reference rate reform has not been endorsed and entities may utilize any replacement reference rate determined to be appropriate based on its funding model and customer needs. As discussed in the “Interagency Policy Statement on Reference Rates for Loans," fallback language should be included in lending contracts to provide for use of a robust fallback rate if the initial reference rate is discontinued. Additionally, federal banking regulators issued the "Interagency Statement on LIBOR Transition" acknowledging that the administrator of USD London Interbank Offered Rate (LIBOR) benchmarks has announced it will consult on its intention to cease the publication of the one week and two month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. On March 5, 2021, the administrator of USD LIBOR benchmarks confirmed these dates and will cease publication of USD LIBOR tenors accordingly. As discussed in the "Interagency Statement on LIBOR Transition," regulators encouraged banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, in order to facilitate an orderly, safe and sound LIBOR transition. The Company continues to monitor efforts and evaluate the impact of reference rate reform on its consolidated financial statements; however, the impact is not expected to be significant. Note 2 – Earnings per Common Share Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). The restricted stock awards granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities. The two-class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities. Earnings per common share have been computed based on the following: Years Ended December 31, 2021 2020 2019 (in thousands, except per share amounts) Net income available to common stockholders $ 128,636 $ 71,289 $ 73,395 Earnings allocated to participating securities   ( 313 )   ( 356 )   ( 295 ) Income attributable to common stock $ 128,323 $ 70,933 $ 73,100 Weighted average common shares outstanding, including participating securities 39,723 39,643 35,289 Weighted average participating securities   ( 97 )   ( 131 )   ( 84 ) Weighted average common shares outstanding 39,626 39,512 35,205 Incremental shares from assumed conversions of options, restricted stock units, performance units and restricted stock   260   132   88 Weighted average common and equivalent shares outstanding   39,886   39,644   35,293 Earnings per common share: Basic $ 3.24 $ 1.80 $ 2.08 Diluted 3.22 1.79 2.07 There were no antidilutive common share equivalents as of December 31, 2021, 2020 and 2019. - 66 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities The Company’s investment securities are classified as available-for-sale as of December 31, 2021 and December 31, 2020. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in stockholders’ equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value as of December 31, 2021 and December 31, 2020. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 20 of the Notes to Consolidated Financial Statements for a further discussion. The following tables present information related to the Company’s portfolio of securities available-for-sale as of December 31, 2021 and 2020. Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in thousands) December 31, 2021 Investment securities available-for-sale Federal agency obligations $ 50,336 $ 649 $ ( 625 ) $ 50,360 Residential mortgage pass-through securities 317,111 1,868 ( 2,884 ) 316,095 Commercial mortgage pass-through securities 10,814 118 ( 463 ) 10,469 Obligations of U.S. states and political subdivisions​​ 145,045 1,562 ( 982 ) 145,625 Corporate bonds and notes 8,968 81 - 9,049 Asset-backed securities 2,563 3 ( 2 ) 2,564 Certificates of deposit 150 - - 150 Other securities   195   -   -   195 Total securities available-for-sale $ 535,182 $ 4,281 $ ( 4,956 ) $ 534,507 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in thousands) December 31, 2020 Investment securities available-for-sale Federal agency obligations $ 37,015 $ 1,508 $ ( 65 ) $ 38,458 Residential mortgage pass-through securities 266,114 4,811 ( 41 ) 270,884 Commercial mortgage pass-through securities 6,906 203 ( 187 ) 6,922 Obligations of U.S. states and political subdivisions​​ 138,539 4,269 - 142,808 Corporate bonds and notes 24,925 222 ( 52 ) 25,095 Asset-backed securities 3,521 - ( 41 ) 3,480 Certificates of deposit 149 2 - 151 Other securities   157   -   -   157 Total securities available-for-sale $ 477,326 $ 11,015 $ ( 386 ) $ 487,955 - 67 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities – (continued) Investment securities having a carrying value of approximately $ 71.2 million and $ 107.6 million as of December 31, 2021 and December 31, 2020, respectively, were pledged to secure public deposits, borrowings, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law. As of December 31, 2021, and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity. The following table presents information for investments in securities available-for-sale as of December 31, 2021, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer. Securities not due at a single maturity date are shown separately. December 31, 2021 Amortized Cost Fair Value (dollars in thousands) Investment Securities Available-for-Sale: Due in one year or less $ 3,045 $ 3,051 Due after one year through five years 10,203 10,280 Due after five years through ten years 5,136 5,338 Due after ten years 188,678 189,079 Residential mortgage pass-through securities 317,111 316,095 Commercial mortgage pass-through securities 10,814 10,469 Other securities   195   195 Total securities available-for-sale $ 535,182 $ 534,507 Gross gains and losses from the sales and redemptions of investment securities for the years ended December 31, 2021, 2020 and 2019 were as follows: Years Ended December 31, 2021 2020 2019 (dollars in thousands) Proceeds $ 5,185 $ 19,624 $ 183,728 Gross gains on sales/redemptions of investment securities $ 195 $ 29 $ 401 Gross losses on sales/redemptions of investment securities   -   -   ( 681 ) Net gains (losses) on sales/redemptions of investment securities​​   195   29   ( 280 ) Tax provision on net gains   ( 48 )   ( 6 )   79 Net gains (losses) on sales/redemptions of investment securities, after tax​​ $ 147 $ 23 $ ( 201 ) - 68 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities – (continued) Impairment Analysis of Available-for-Sale Debt Securities The following tables indicate gross unrealized losses for which an ACL has not been recorded, aggregated by investment category and by the length of continuous time individual securities have been in an unrealized loss position as of December 31, 2021 and December 31, 2020. December 31, 2021 Total Less than 12 Months 12 Months or Longer Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (dollars in thousands) Investment Securities Available-for-Sale: Federal agency obligation $ 28,974 $ ( 625 ) $ 28,974 $ ( 625 ) $ - $ - Residential mortgage pass-through securities 246,396 ( 2,884 ) 214,701 ( 2,111 ) 31,695 ( 773 ) Commercial mortgage pass-through securities 8,370 ( 463 ) 4,682 ( 75 ) 3,688 ( 388 ) Obligations of U.S. states and political subdivisions 89,473 ( 982 ) 89,473 ( 982 ) - - Asset-backed securities   802   ( 2 )   802   ( 2 )   -   - Total Temporarily Impaired Securities $ 374,015 $ ( 4,956 ) $ 338,632 $ ( 3,795 ) $ 35,383 $ ( 1,161 ) December 31, 2020 Total Less than 12 Months 12 Months or Longer Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (dollars in thousands) Investment Securities Available-for-Sale: Federal agency obligation $ 8,978 $ ( 65 ) $ 8,975 $ ( 65 ) $ 3 $ - Residential mortgage pass-through securities 20,895 ( 41 ) 20,886 ( 41 ) 9 - Commercial mortgage pass-through securities 3,954 ( 187 ) 3,954 ( 187 ) - - Corporate bonds and notes 3,928 ( 52 ) 3,928 ( 52 ) - - Asset-backed securities   3,083   ( 41 )   622   -   2,461   ( 41 ) Total Temporarily Impaired Securities $ 40,838 $ ( 386 ) $ 38,365 $ ( 345 ) $ 2,473 $ ( 41 ) On January 1, 2021, the Company adopted ASU 2016-13 and implemented the CECL methodology for allowance for credit losses on its investment securities available-for-sale. The new CECL methodology replaces the other-than-temporary impairment model that previously existed. The Company did not have a CECL day 1 impact attributable to its investment securities portfolio and did not have an allowance for credit losses as of December 31, 2021. The Company has elected to exclude accrued interest from the amortized cost of its investment securities available-for-sale. Accrued interest receivable for investment securities available for sale as of December 31, 2021 and December 31, 2020, totaled $ 1.6 million and $ 1.7 million, respectively. - 69 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities – (continued) The Company evaluates securities in an unrealized loss position for impairment related to credit losses on at least a quarterly basis. Securities in unrealized loss positions are first assessed as to whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If one of the criteria is met, the security’s amortized cost basis is written down to fair value through current earnings. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value resulted from credit losses or other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Unrealized losses on asset backed securities and state and municipal securities have not been recognized into income because the issuers are of high credit quality, we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale securities was recorded as of December 31, 2021. Federal agency obligations, residential mortgage-backed pass-through securities and commercial mortgage-backed pass-through securities are issued by U.S. Government agencies and U.S. Government sponsored enterprises. Although a government guarantee exists on these investments, these entities are not legally backed by the full faith and credit of the federal government, and the current support they receive is subject to a cap as part of the agreement entered into in 2008. Nonetheless, at this time we do not foresee any set of circumstances in which the government would not fund its commitments on these investments as the issuers are an integral part of the U.S. housing market in providing liquidity and stability. Therefore, we concluded that a zero-allowance approach for these investment securities is appropriate. - 70 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses Loans Receivable : The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of December 31, 2021 and December 31, 2020: 2021 2020 (dollars in thousands) Commercial (1) $ 1,299,428 $ 1,521,967 Commercial real estate 4,741,590 3,783,550 Commercial construction 540,178 617,747 Residential real estate 255,269 322,564 Consumer   1,886   1,853 Gross loans 6,838,351 6,247,681 Net deferred fees   ( 9,729 )   ( 11,374 ) Loans receivable $ 6,828,622 $ 6,236,307   (1) Included in commercial loans as of December 31, 2021 and December 31, 2020 were Paycheck Protection Program (“PPP”) loans of $ 93.1 million and $ 397.5 million, respectively. These loans are 100% federally guaranteed and currently not subject to any allocation of allowance for credit losses. As of December 31, 2021, and 2020, loan balances of approximately $ 2.5 billion and $ 2.7 billion, respectively, were pledged to secure borrowings from the Federal Home Loan Bank. The loan segments in the above table have unique risk characteristics with respect to credit quality: • The repayment of commercial loans is generally dependent on the creditworthiness and cash flow of borrowers, and if applicable, guarantors, which may be negatively impacted by adverse economic conditions. While the majority of these loans are secured, collateral type, marketing, coverage, valuation and monitoring is not as uniform as in other portfolio classes and recovery from liquidation of such collateral may be subject to greater variability. • Payment on commercial mortgages is driven principally by operating results of the managed properties or underlying business and secondarily by the sale or refinance of such properties. Both primary and secondary sources of repayment, and value of the properties in liquidation, may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. • Properties underlying construction, land and land development loans often do not generate sufficient cash flows to service debt and thus repayment is subject to ability of the borrower and, if applicable, guarantors, to complete development or construction of the property and carry the project, often for extended periods of time. As a result, the performance of these loans is contingent upon future events whose probability at the time of origination is uncertain. • The ability of borrowers to service debt in the residential and consumer loan portfolios is generally subject to personal income which may be impacted by general economic conditions, such as increased unemployment levels. These loans are predominately collateralized by first and/or second liens on single family properties. If a borrower cannot maintain the loan, the Company’s ability to recover against the collateral in sufficient amount and in a timely manner may be significantly influenced by market, legal and regulatory conditions. • The Company considers loan classes and loan segments to be one and the same. - 71 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) Loans Held-For-Sale : The following table presents loans held-for-sale by loan segment as of December 31, 2021 and December 31, 2020: 2021 2020 (dollars in thousands) Commercial $ - $ - Commercial real estate   -   1,990 Residential mortgage   250   2,720 Total carrying amount $ 250 $ 4,710 Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an allowance for credit loss (“ACL”) as of December 31, 2021 and nonaccrual loans without an ACL as of December 31, 2021: December 31, 2021 Nonaccrual loans with ACL Nonaccrual loans without ACL Total Nonaccrual loans (dollars in thousands) Commercial $ 28,746 $ 1,316 $ 30,062 Commercial real estate 15,362 10,031 25,393 Commercial construction - 3,150 3,150 Residential real estate 1,239 1,856 3,095 Consumer - - - Total $ 45,347 $ 16,353 $ 61,700 The following tables present total nonaccrual loans included in loans receivable by loan class as of December 31, 2020 (dollars in thousands): December 31, 2020 Commercial $ 33,019 Commercial real estate 10,111 Commercial construction 14,015 Residential real estate 4,551 Consumer - Total nonaccrual loans $ 61,696 Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment. - 72 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified as “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date. Assets are classified as “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified as special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP. Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below. As of December 31, 2021, our loans based on year of origination and risk designation are as follows (dollars in thousands): Term loans amortized cost basis by origination year Revolving Total 2021 2020 2019 2018 2017 Prior Loans Gross Loans Commercial Pass $ 403,203     $ 58,534     $ 54,485 $ 60,409 $ 95,727 $ 86,556 $ 471,588 $ 1,230,502 Special mention - - - - 1 4,045 4,266 8,312 Substandard 170 - 1,842 13,298 9,740 21,024 14,540 60,614 Doubtful - - - - - - - - Total Commercial $ 403,373 $ 58,534 $ 56,327 $ 73,707 $ 105,468 $ 111,625 $ 490,394 $ 1,299,428   Commercial Real Estate Pass $ 1,692,098 $ 533,315 $ 420,995 $ 452,262 $ 497,065 $ 842,244 $ 170,721 $ 4,608,700 Special mention - - - - 5,142 50,438 6,601 62,181 Substandard 1,968 9,039 4,006 20,624 - 26,108 8,964 70,709 Doubtful - - - - - - - - Total Commercial Real Estate $ 1,694,066 $ 542,354 $ 425,001 $ 472,886 $ 502,207 $ 918,790 $ 186,286 $ 4,741,590   Commercial Construction Pass $ 8,018 $ 7,370 $ 12,625 $ 2,600 $ 2,339 $ - $ 490,119 523,071 Special mention - - - - 350 - 1,443 1,793 Substandard - - - - - - 15,314 15,314 Doubtful - - - - - - - - Total Commercial Construction $ 8,018 $ 7,370 $ 12,625 $ 2,600 $ 2,689 $ - $ 506,876 $ 540,178   Residential Real Estate Pass $ 27,081 $ 29,539 $ 23,611 $ 25,070 $ 28,701 $ 66,249 $ 44,221 $ 244,472 Special mention - - - - - - - - Substandard - - - - - 7,262 3,535 10,797 Doubtful - - - - - - - - Total Residential Real Estate $ 27,081 $ 29,539 $ 23,611 $ 25,070 $ 28,701 $ 73,511 $ 47,756 $ 255,269   Consumer Pass $ 1,594 $ 85 $ 39 $ 21 $ 28 $ ( 4 ) $ 123 $ 1,886 Special mention - - - - - - - - Substandard - - - - - - - - Doubtful - - - - - - - - Total Consumer $ 1,594 $ 85 $ 39 $ 21 $ 28 $ ( 4 ) $ 123 $ 1,886   Total Pass $ 2,131,994 $ 628,843 $ 511,755 $ 540,362 $ 623,860 $ 995,045 $ 1,176,772 $ 6,608,631 Special mention - - - - 5,493 54,483 12,310 72,286 Substandard 2,138 9,039 5,848 33,922 9,740 54,394 42,353 157,434 Doubtful - - - - - - - - Grand Total $ 2,134,132 $ 637,882 $ 517,603 $ 574,284 $ 639,093 $ 1,103,922 $ 1,231,435 $ 6,838,351 - 73 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) as of December 31, 2020: December 31, 2020 Pass Special Mention Substandard Doubtful Total (dollars in thousands) Commercial $ 1,447,097     $ 30,725     $ 43,930 $ 215 $ 1,521,967 Commercial real estate 3,700,498 49,143 33,909 - 3,783,550 Commercial construction 587,266 - 30,481 - 617,747 Residential real estate 311,174 - 11,390 - 322,564 Consumer   1,853   -   -   -   1,853 Gross loans $ 6,047,888 $ 79,868 $ 119,710 $ 215 $ 6,247,681 Collateral Dependent Loans : Loans which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses. The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date. The following table presents collateral dependent loans that were individually evaluated for impairment as of December 31, 2021: December 31, 2021     Real Estate     Other     Total     (dollars in thousands) Commercial   $ 6,385     $ 26,182     $ 32,567   Commercial real estate     55,244       -       55,244   Commercial construction     13,196     -     13,196 Residential real estate   8,856     -     8,856 Consumer - - - Total $ 83,681 $ 26,182 $ 109,863 - 74 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) Impaired loans - Impaired loans disclosures presented below as of December 31, 2020 and as of and for the three and twelve months ended December 31, 2020 represent requirements prior to the adoption of CECL on January 1, 2021. The following table provides an analysis of the impaired loans by class as of the year ended December 31, 2020. December 31, 2020 No Related Allowance Recorded Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized (dollars in thousands) Commercial $ 11,325 $ 11,835 - $ 11,627 $ 203 Commercial real estate 13,105 13,449 - 13,215 287 Commercial construction 24,284 24,907 - 21,279 377 Residential real estate 5,378 5,723 - 4,733 104 Consumer   -   -   -   -   - Total $ 54,092 $ 55,914   - $ 50,854 $ 971   With An Allowance Recorded Commercial $ 23,736 $ 69,122 $ 12,985 $ 23,625 $ - Commercial real estate 2,722 2,722 1,329 2,722 - Total $ 26,458 $ 71,844 $ 14,314 $ 26,347 $ -   Total Commercial $ 35,061 $ 80,957 $ 12,985 $ 35,252 $ 203 Commercial real estate 15,827 16,171 1,329 15,937 287 Commercial construction 24,284 24,907 - 21,279 377 Residential real estate 5,378 5,723 - 4,733 104 Consumer   -   -   -   -   - Total (including related allowance) $ 80,550 $ 127,758 $ 14,314 $ 77,201 $ 971 - 75 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) Aging Analysis - The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due as of December 31, 2021 and December 31, 2020 (dollars in thousands): December 31, 2021 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due and Still Accruing Nonaccrual Total Past Due and Nonaccrual Current Gross Loans Commercial $ 4,305 $ 729 $ 4,457 $ 30,062 $ 39,553 $ 1,259,875 $ 1,299,428 Commercial real Estate 1,622 1,009 5,935 25,393 33,959 4,707,631 4,741,590 Commercial construction - - - 3,150 3,150 537,028 540,178 Residential real Estate 1,437 292 3,139 3,095 7,963 247,306 255,269 Consumer   - - - - -   1,886   1,886 Total $ 7,364 $ 2,030 $ 13,531 $ 61,700 $ 84,625 $ 6,753,726 $ 6,838,351 90 days or greater past due and still accruing category reflects purchased credit-deteriorated loans, net of fair value marks, which accrete income per the valuation at date of acquisition. December 31, 2020 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due and Still Accruing Nonaccrual Total Past Due and Nonaccrual Current Total Loans Receivable Commercial $ 1,445 $ 558 $ 3,182 $ 33,019 $ 38,204 $ 1,483,763 $ 1,521,967 Commercial real estate 13,258 4,140 5,555 10,111 33,064 3,750,486 3,783,550 Commercial construction 2,472 - - 14,015 16,487 601,260 617,747 Residential real estate 1,367 241 4,084 4,551 10,243 312,321 322,564 Consumer   2   -   -   -   2   1,851   1,853 Total $ 18,544 $ 4,939 $ 12,821 $ 61,696 $ 98,000 $ 6,149,681 $ 6,247,681 90 days or greater past due and still accruing category reflects purchased credit-impaired loans, net of fair value marks, which accrete income per the valuation at date of acquisition. - 76 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for credit losses for loans that are allocated to each loan portfolio segment. “Prior to January 1, 2021, the allowance for loan losses is based on a calculation methodology disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.”     December 31, 2021       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer           Total       (dollars in thousands)   Allowance for credit losses - loans Individually evaluated   $ 15,131 $ 955 $ -     $ 131     $ -         $ 16,217   Collectively evaluated     8,561       42,713       3,580       3,497       7             58,358   Acquired with deteriorated credit quality individually analyzed​​     2,277       1,921       -       -       -             4,198   Total   $ 25,969     $ 45,589     $ 3,580     $ 3,628     $ 7         $ 78,773   Gross loans Individually evaluated   $ 33,726     $ 49,310     $ 13,196     $ 5,717     $ -   $ 101,949   Collectively evaluated   1,260,537     4,686,346     526,982     246,413     $ 1,886   $ 6,722,164   Acquired with deteriorated credit quality individually analyzed​​     5,165       5,934       -       3,139       -     14,238   Total   $ 1,299,428     $ 4,741,590     $ 540,178     $ 255,269     $ 1,886             $ 6,838,351       December 31, 2020       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Unallocated     Total       (dollars in thousands)   Allowance for loan losses                                                         Individually evaluated for impairment   $ 12,985     $ 1,329     $ -     $ -     $ -     $ -     $ 14,314   Collectively evaluated for impairment     15,412       33,373       7,787       1,928       4       568       59,072   Acquired portfolio     46       4,628       407       759       -       -       5,840   Acquired with deteriorated credit quality     -       -       -       -       -       -       -   Total   $ 28,443     $ 39,330     $ 8,194     $ 2,687     $ 4     $ 568     $ 79,226       Gross loans                                                         Individually evaluated for impairment   $ 35,061     $ 15,827     $ 24,284     $ 5,378     $ -             $ 80,550   Collectively evaluated for impairment     1,414,626       2,959,978       574,118       241,925       1,627               5,192,274   Acquired portfolio     68,402       802,190       19,345       71,177       226               961,340   Acquired with deteriorated credit quality     3,878       5,555       -       4,084       -               13,517   Total   $ 1,521,967     $ 3,783,550     $ 617,747     $ 322,564     $ 1,853             $ 6,247,681   - 77 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) A summary of the activity in the allowance for credit losses for loans by loan segment is as follows: Commercial Commercial real estate Commercial construction Residential real estate Consumer Unallocated Total (dollars in thousands) Balance as of January 1, 2021 $ 28,443 $ 39,330 $ 8,194 $ 2,687 $ 4 $ 568 $ 79,226 Day 1 Adjustment CECL ( 4,225 ) 9,605 ( 961 ) 2,697 9 ( 568 ) 6,557 Balance as of January 1, 2021 24,218 48,935 7,233 5,384 13 - 85,783 Loan charge-offs ( 382 ) ( 1,780 ) - ( 235 ) - - ( 2,397 ) Recoveries 289 85 - 20 11 - 405   Provision for (reversal of) credit losses   1,844   ( 1,651 )   ( 3,653 )   ( 1,541 )   ( 17 )   -   ( 5,018 ) Balance as of December 31, 2021 $ 25,969 $ 45,589 $ 3,580 $ 3,628 $ 7 $ - $ 78,773 On January 1, 2021, the Company adopted CECL, which replaced the incurred loss method we used in prior periods for determining the provision for credit losses and the allowance for credit losses. Under CECL, we record an expected loss of all cash flows we do not expect to collect at the inception of the loan. The adoption of CECL resulted in an increase in our allowance for credit losses for loans of $ 6.6 million, which did not impact our consolidated income statement. Commercial Commercial real estate Commercial construction Residential real estate Consumer Unallocated Total (dollars in thousands) Balance as of January 1, 2020 $ 8,349 $ 20,853 $ 7,304 $ 1,685 $ 3 $ 99 $ 38,293 Loan charge-offs ( 552 ) - - ( 341 ) ( 7 ) - ( 900 ) Recoveries 4 802 - 23 4 - 833   Provision for loan losses   20,642   17,675   890   1,320   4   469   41,000 Balance as of December 31, 2020 $ 28,443 $ 39,330 $ 8,194 $ 2,687 $ 4 $ 568 $ 79,226     Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Unallocated     Total       (dollars in thousands)   Balance as of January 1, 2019   $ 9,875     $ 18,847     $ 4,519     $ 1,266     $ 2     $ 445     $ 34,954   Loan charge-offs     ( 1,029 )     ( 3,470 )     -       ( 557 )     ( 20 )     -       ( 5,076 ) Recoveries     265       30       -       3       17       -       315     Provision for loan losses     ( 762 )       5,446       2,785       973       4       ( 346 )     8,100   Balance as of December 31, 2019   $ 8,349     $ 20,853     $ 7,304     $ 1,685     $ 3     $ 99     $ 38,293   Troubled Debt Restructurings Loans are considered to have been modified in a troubled debt restructuring (“TDR”) when, except as discussed below, due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, maturity extensions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a TDR remains on nonaccrual status for a period of nine months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status. As of December 31, 2021, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in a TDR. - 78 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) As of December 31, 2021, TDRs totaled $ 79.5 million, of which $ 35.9 million were on nonaccrual status and $ 43.6 million were classified as accruing and were performing under their restructured terms. As of December 31, 2020, TDRs totaled $ 49.4 million, of which $ 25.7 million were on nonaccrual status and $ 23.7 million were classified as accruing and were performing under their restructured terms. The Company has allocated $ 10.4 million and $- 0 - of specific allowance related to TDRs as of December 31, 2021 and December 31, 2020, respectively. There were no TDRs for which there was a payment default within twelve months following the modification during the year ended December 31, 2021, 2020 and 2019. The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2021: Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment (dollars in thousands) Troubled debt restructurings: Commercial 4 $ 1,276 $ 1,276 Commercial real estate 11 35,635 35,635 Commercial construction 1 1,641 1,641 Residential real estate 3 1,758 1,758   Total   19 $ 40,310 $ 40,310 The loans modified as TDRs during the year ended December 31, 2021 included maturity extensions and interest rate reductions. The following table presents loans by class modified as TDRs that occurred during year ended December 31, 2020 Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment (dollars in thousands) Troubled debt restructurings: Commercial 1 $ 188 $ 188 Commercial real estate 1 93 93 Commercial construction 1 4,021 4,021 Residential real estate 2 2,184 2,184   Total   5 $ 6,486 $ 6,486 The five loan modifications during the year ended December 31, 2020 were maturity extensions: The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2019: Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment (dollars in thousands) Troubled debt restructurings: Commercial 11 $ 14,558 $ 14,558 Commercial real estate 3 5,863 5,863 Commercial construction 3 5,630 5,630   Total   17 $ 26,051 $ 26,051 - 79 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) Included in the commercial loan segment of the troubled debt restructurings is one taxi medallion loan totaling $ 0.3 million. This taxi medallion loan was on nonaccrual status prior to modification and will remain on nonaccrual status post-modification. All loan modifications during the year ended December 31, 2019 included interest rate reductions and/or maturity extensions. In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with clients affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., three to nine months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Additionally, the statement allows for the Company to extend deferrals for an additional term at the option of the Company. Provisions of the CARES Act largely mirrored the provisions of the interagency statement, providing that modified loans would not be considered TDR’s if they were performing at year-end 2019, and the other conditions set forth in the interagency statement were met. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented or at year-end 2019. As of December 31, 2021, the Bank had 1 deferred loan outstanding totaling $ 0.5 million, compared to 113 deferred loans totaling $ 207.1 million as of December 31, 2020 that were not considered TDRs. Allowance for Credit Losses for Unfunded Commitments The Company has recorded an ACL for unfunded credit commitments, which was recorded in other liabilities. The provision is recorded within the (reversal of) provision for credit losses on the Company’s income statement. The following table presents the allowance for credit losses for unfunded commitments for the year ended December 31, 2021 (dollars in thousands): Year Ended December 31, 2021 Balance as of beginning of period $ - Day 1 Effect of CECL 2,833 Provision for (reversal of) credit losses - unfunded commitments ( 482 ) Balance as of end of period $ 2,351 Components of (Reversal of) Provision for Credit Losses The following table summarizes the provision for (reversal of) provision for credit losses for the year ended December 31, 2021 (dollars in thousands): Year Ended December 31, 2021 Provision for (reversal of) credit losses - loans $ 5,018 Provision for (reversal of) credit losses - unfunded commitments ( 482 ) Provision for (reversal of) credit losses $ ( 5,500 ) - 80 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 – Premises and Equipment Premises and equipment are summarized as follows: Estimated Useful Life (Years) 2021 2020 (dollars in thousands) Land - $ 7,232 $ 7,232 Buildings 10 - 25 10,509 15,159 Furniture, fixtures and equipment 3 - 7 24,137 40,930 Leasehold improvements 10 - 20   27,343   28,860 Subtotal 69,221 92,181 Less: accumulated depreciation, amortization and fair value adjustments   40,189   62,073 Total premises and equipment, net $ 29,032 $ 30,108 Depreciation and amortization expense of premises and equipment was $ 3.8 million, $ 4.2 million and $ 3.1 million for 2021, 2020 and 2019, respectively. Finance Leases : The Company acquired a lease agreement for a building under a finance lease. The lease arrangement requires monthly payments through 2028. The Company has included this lease in premises and equipment as follows:     2021     2020       (dollars in thousands)   Capital Lease   $ 3,423     $ 3,408   Less: accumulated amortization     2,224       2,038       $ 1,199     $ 1,370   The following is a schedule by year of future minimum lease payments under the finance lease, together with the present value of net minimum lease payments as of December 31, 2021 (dollars in thousands): 2022 $ 321 2023 323 2024 353 2025 353 2026 353 Thereafter   676 Total minimum lease payments 2,379   Less amount representing interest   444 Present value of net minimum lease payments $ 1,935 - 81 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 – Premises and Equipment – (continued) The Company leases certain premises and equipment under operating leases. As of December 31, 2021, the Company had lease liabilities totaling $12.4 million and right-of-use assets totaling $11.0 million. As of December 31, 2021, the weighted average remaining lease term for operating leases was 5.8 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.8 %. Total lease costs for the year ended December 31, 2021 was $ 3.2 million. A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows: December 31, 2021 (dollars in thousands) Lease payments due: Less than 1 year $ 2,807 1 year through less than 2 years 2,586 2 years through less than 3 years 2,065 3 years through less than 4 years 1,773 4 years through 5 years 1,668 After 5 years 2,680 Total undiscounted cash flows 13,579 Impact of discounting ( 1,162 ) Total lease liability $ 12,417 Note 6 – Goodwill and Other Intangible Assets A goodwill impairment test is required under ASC 350, Intangibles – Goodwill and Other, and the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment,” allowing an initial qualitative assessment of goodwill commonly known as step zero impairment testing. In general, the step zero test allows an entity to first assess qualitative factors to determine whether it is more likely than not (i.e., more than 50%) that the fair value of a reporting unit is less than its carrying value. If a step zero impairment test results in the conclusion that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, then no further testing is required. Based upon management’s review through December 31, 2021, the Company’s goodwill was not impaired. Management concludes that the ASC 350 goodwill step zero test has been passed, and no further testing is required. Goodwill The change in goodwill during the year is as follows: 2021 2020 (dollars in thousands) Balance, January 1 $ 208,372 $ 162,574 Acquired goodwill -   45,798 Impairment   -   - Balance, December 31 $ 208,372 $ 208,372 - 82 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 – Goodwill and Other Intangible Assets – (continued) Acquired Intangible Assets The table below provides information regarding the carrying amounts and accumulated amortization of total amortized intangible assets as of the dates set forth below. Gross Carrying Amount Accumulated Amortization Net Carrying Amount (dollars in thousands) Core deposit intangibles   December 31, 2021 $ 18,515 $ ( 9,518 ) $ 8,997   Core deposit intangibles   December 31, 2020 $ 18,515 $ ( 7,538 ) $ 10,977   Aggregate amortization expense was approximately $2.0 million, $2.6 million and $1.4 million for 2021, 2020 and 2019, respectively. Estimated amortization expense for each of the next five years (dollars in thousands): 2022 $ 1,684 2023 1,438 2024 1,235 2025 1,116 2026 1,050 Note 7 – Deposits Time Deposits As of December 31, 2021, and 2020, the Company's total time deposits were $ 1.2 billion and $ 1.5 billion, respectively. Included in time deposits were nonreciprocal brokered time deposits of $ 215.2 million and $ 217.5 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021, the contractual maturities of these time deposits were as follows (dollars in thousands): 2022 $ 745,411 2023 176,351 2024 45,678 2025   51,216 2026   105,342 2027 25,995 Sub-Total $ 1,149,993 Fair value premium 116 Total $ 1,150,109 The amount of time deposits with balances in excess of $250,000 were $ 250.5 million and $ 368.3 million as of December 31, 2021 and 2020, respectively. - 83 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 – FHLB Borrowings The Company’s FHLB borrowings and weighted average interest rates are summarized below: December 31, 2021 December 31, 2020 Amount Rate Amount Rate (dollars in thousands) By remaining period to maturity: Less than 1 year $ 390,549 0.56 % $ 297,570 0.84 1 year through less than 2 years 50,000 1.84 % 75,644 1.42 2 years through less than 3 years - n/a 50,000 1.84 3 years through less than 4 years 25,000 1.00 - n/a 4 years through 5 years   2,050 2.23   - n/a After 5 Years   714 2.91 %   2,824 2.42 FHLB borrowings - gross 468,313 0.73 % 426,038 1.07 % Fair value (discount) premium ( 120 ) ( 84 ) Total FHLB borrowings $ 468,193 $ 425,954 The FHLB borrowings are secured by pledges of certain collateral including, but not limited to, U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans. Advances are payable at stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances have fixed rates. The advances as of December 31, 2021 were primarily collateralized by approximately $ 1.9 billion of commercial mortgage and residential loans, net of required over collateralization amounts, under a blanket lien arrangement. As of December 31, 2021, the Company had remaining borrowing capacity of approximately $ 867.3 million at the FHLB. - 84 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 – Subordinated Debentures During 2003, the Company formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $ 5.0 million of MMCapS capital securities to investors due on January 23, 2034 . The capital securities presently qualify as Tier I capital. The trust loaned the proceeds of this offering to the Company and received in exchange $ 5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or in part prior to maturity. The floating interest rate on the subordinate debentures is three-month LIBOR plus 2.85 % and reprices quarterly. The rate as of December 31, 2021 was 2.98 %. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with FASB ASC 810-10. Distributions on the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income. The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of December 31, 2021 and December 31, 2020. Issuance Date Securities Issued Liquidation Value Coupon Rate Maturity Redeemable by Issuer Beginning 12/19/2003 $ 5,000,000 $1,000 per Capital Security Floating 3-month LIBOR + 285 Basis Points 01/23/2034 01/23/2009 On June 10, 2020, the Parent Corporation issued $ 75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes bear interest at 5.75 % annually from, and including, the date of initial issuance to, but excluding, June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2020. From and including June 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points , payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero. On January 11, 2018, the Parent Corporation issued $ 75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2018 Notes”). The 2018 Notes bear interest at 5.20 % annually from, and including, the date of initial issuance to, but excluding, February 1, 2023 , payable semi-annually in arrears. From and including February 1, 2023 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 284 basis points ( 2.84 %) payable quarterly in arrears. If three-month LIBOR is not available for any reason, then the rate for that interest period will be determined by such alternate method as provided in the Supplemental Indenture. Interest on the 2018 Notes will be paid on February 1, and August 1, commencing August 1, 2018 to but not including February 1, 2023, and from and including February 1, 2023, on February 1, May 1, August 1, and November 1, of each year to but excluding the stated maturity date, unless in any case previously redeemed. During June 2015, the Parent Corporation issued $ 50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2015 Notes”). As of December 31, 2020, the 2015 Notes had a stated maturity of July 1, 2025 , and bore interest until the maturity date or early redemption date at a variable rate equal to the then current three-month LIBOR rate plus 393 basis points . As of December 31, 2021, the variable interest rate was 4.16 % and all costs related to 2015 issuance have been amortized. The 2015 Notes were redeemed in full on January 1, 2021. - 85 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 – Income Taxes The current and deferred amounts of income tax expense for December 2021, 2020 and 2019 are as follows (dollars in thousands):     2021     2020     2019   Current:                         Federal   $ 32,364     $ 19,590     $ 15,509   State     12,325       7,006       5,018   Subtotal     44,689       26,596       20,527   Deferred:                         Federal     ( 110 )     ( 3,881 )     916   State     126     ( 3,614 )     ( 812 ) Subtotal     16     ( 7,495 )     104   Income tax expense   $ 44,705     $ 19,101     $ 20,631   On July 1, 2018 New Jersey Governor Phil Murphy signed Assembly Bill 4202 (“the Bill”) into law. The legislation imposes a temporary surtax on corporations earning New Jersey allocated income in excess of $ 1 million of 2.5 % for tax years beginning on or after January 1, 2018 through December 31, 2019, and of 1.5 % for tax years beginning on or after January 1, 2020 through December 31, 2021. However, in 2020, this surtax was extended through December 31, 2023, at the 2.5% level. The legislation also requires combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019, changing New Jersey’s current status as a separate return state, and limits the deductibility of dividends received. Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory federal tax rate for the following reasons (dollars in thousands) December 31,     2021     2020     2019   Income before income tax expense   $ 175,058     $ 90,390     $ 94,026   Federal statutory rate     21 %     21 %     21 % Computed “expected” Federal income tax expense     36,762       18,982       19,745   State tax, net of federal tax benefit     9,127       1,913       3,436   Bank owned life insurance     ( 1,001 )     ( 1,052 )     ( 732 ) Tax-exempt interest and dividends     ( 1,405 )     ( 1,491 )     ( 2,519 ) Tax benefits from stock-based compensation     ( 261 )     157       ( 27 ) Other, net     1,483       592       728   Income tax expense   $ 44,705     $ 19,101     $ 20,631   - 86 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 – Income Taxes – (continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability as of December 31, 2021 and 2020 are presented in the following table:     2021     2020       (dollars in thousands)   Deferred tax assets                 Allowance for credit losses   $ 23,955     $ 23,399   Depreciation     205       -   Pension actuarial losses     1,301       1,385   New Jersey net operating loss     3,609       4,370   Deferred compensation     2,786       1,835   Unrealized loss on AFS     191       -   Deferred loan costs, net of fees     2,163       357   Capital lease     222       225   Nonaccrual interest     62       51   Other     3,703       4,519   Total deferred tax assets   $ 38,197     $ 36,141   Deferred tax liabilities                 Employee benefit plans   $ ( 2,289 )   $ ( 2,161 ) Purchase accounting     ( 925 )     ( 1,821 ) Depreciation     -     ( 187 ) Prepaid expenses     ( 288 )     ( 201 ) Market discount accretion     ( 437 )     ( 428 ) Unrealized gains on securities and swaps     ( 941 )     ( 2,171 ) Other     ( 1,562 )     -   Total deferred tax liabilities     ( 6,442 )     ( 6,969 ) Net deferred tax assets   $ 31,755     $ 29,172   In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets for state purposes is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible, while for Federal purposes the deferred tax assets can also be realized through tax carrybacks. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income, and tax planning strategies in making this assessment. During 2021 and 2020, based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company believes the net deferred tax assets are more likely than not to be realized. There are no unrecorded tax benefits and the Company does not expect the total amount of unrecognized income tax benefits to significantly increase in the next twelve months. The Company’s federal income tax returns are open and subject to examination from the 2018 tax return year and forward. The Company’s state income tax returns are generally open from the 2016 and later tax return years based on individual state statutes of limitations. - 87 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11 – 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 – Commitments, Contingencies and Concentrations of Credit Risk In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as standby and commercial letters of credit, unused portions of lines of credit and commitments to extend various types of credit. Commitments to extend credit and standby letters of credit generally do not exceed one year. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The commitment or contract amount of these financial instruments is an indicator of the Company’s level of involvement in each type of instrument as well as the exposure to credit loss in the event of nonperformance by the other party to the financial instrument. 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 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. A substantial portion of the Bank’s loans are secured by real estate located in New Jersey and New York. Accordingly, the collectability of a substantial portion of the loan portfolio of the Bank is susceptible to changes in the metropolitan New York real estate market. The following table provides a summary of financial instruments with off-balance sheet risk as of December 31, 2021 and 2020: 2021 2020 (dollars in thousands) Commitments under commercial loans and lines of credit $ 647,971 $ 525,606 Home equity and other revolving lines of credit 53,180 65,690 Outstanding commercial mortgage loan commitments 514,473 327,745 Standby letters of credit 25,271 28,738 Overdraft protection lines   973   1,020 Total $ 1,241,868 $ 948,799 The Company is subject to claims and lawsuits that arise in the ordinary course of business. 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 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13 – Transactions with Executive Officers, Directors and Principal Stockholders Loans to principal officers, directors, and their affiliates during the years ended December 31, 2021 and 2020 were as follows:     2021     2020       (dollars in thousands)   Balance, January 1   $ 21,534     $ 57,409   New loans     5,250       1,500   Repayments     ( 9,168 )     ( 37,375 ) Balance, December 31   $ 17,616     $ 21,534   Deposits from principal officers, directors, and their affiliates as of December 31, 2021 and 2020 were $ 59.5 million and $ 55.4 million respectively. The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal stockholders, their immediate families and affiliated companies (commonly referred to as related parties). The Company leases banking offices from related party entities. In addition, the Company also utilizes an advertising and public relations agency at which one of the Company’s directors is President and CEO and a principal owner. For these transactions, the expenses are not significant to the operations of the Company. Note 14 – Stockholders’ Equity and Regulatory Requirements Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of December 31, 2021, the Bank and the Parent Corporation meet all capital adequacy requirements to which they are subject. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is classified as adequately capitalized or lower, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is growth and expansion, and capital restoration plans are required. As of December 31, 2021, and 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. - 89 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14 – Stockholders’ Equity and Regulatory Requirements – (continued) 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. Minimum Capital Adequacy For Classification Under Corrective Action Plan as Well Capitalized Amount Ratio Amount     Ratio Amount Ratio The Bank           (dollars in thousands)           December 31, 2021 Leverage (Tier 1) capital $ 891,730 11.43 % $ 312,166 4.00 % $ 390,207 5.00 % Risk-Based Capital: CET 1 $ 891,730 11.96 % $ 335,641 4.50 % $ 484,815 6.50 % Tier 1 891,730 11.96 % 447,522 6.00 % 596,696 8.00 % Total 1,002,753 13.44 % 596,696 8.00 % 745,869 10.00 %   December 31, 2020 Leverage (Tier 1) capital $ 776,430 10.64 % $ 291,958 4.00 % $ 364,947 5.00 % Risk-Based Capital: CET 1 $ 776,430 12.24 % $ 285,473 4.50 % $ 412,349 6.50 % Tier 1 776,430 12.24 % 380,630 6.00 % 507,507 8.00 % Total 887,906 14.00 % 507,507 8.00 % 634,384 10.00 % Minimum Capital Adequacy For Classification as Well Capitalized   Amount Ratio Amount Ratio Amount Ratio The Company (dollars in thousands) December 31, 2021 Leverage (Tier 1) capital $ 909,577 11.65 % $ 312,194 4.00 % N/A N/A Risk-Based Capital: CET 1 $ 793,495 10.64 % $ 335,648 4.50 % N/A N/A Tier 1 909,577 12.19 % 447,531 6.00 % N/A N/A Total 1,138,350 15.26 % 596,708 8.00 % N/A N/A   December 31, 2020 Leverage (Tier 1) capital $ 694,895 9.51 % $ 292,349 4.00 % N/A N/A Risk-Based Capital: CET 1 $ 689,740 10.79 % $ 287,746 4.50 % N/A N/A Tier 1 694,895 10.87 % 383,661 6.00 % N/A N/A Total 964,121 15.08 % 511,548 8.00 % N/A N/A 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 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 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15 – Comprehensive Income Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s other comprehensive income is comprised of unrealized holding gains and losses on securities available-for-sale, unrealized gains and losses on cash flow hedges, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, each net of taxes. The following table represents the reclassification out of accumulated other comprehensive (loss) income for the periods presented: Details about Accumulated Other Comprehensive Income (Loss) Components Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Consolidated Statements of Income For the Year Ended December 31, (dollars in thousands) 2021 2020 2019 Sale of investment securities available-for-sale $ 195 $ 29 $ ( 280 ) Net gains (losses) on sale of investment securities   ( 48 )   ( 6 )   79 Income tax expense 147 23 ( 201 ) Net interest (expense)/income on swaps ( 1,873 ) ( 1,577 ) 677 Interest expense   528   443   ( 190 ) Income tax expense ( 1,345 ) ( 1,134 ) 487 Amortization of pension plan net actuarial gains/(losses) ( 299 ) ( 301 ) ( 358 ) Salaries and employee benefits   84   84   101 Income tax benefit   ( 215 )   ( 217 )   ( 257 ) Total reclassification $ ( 1,413 ) $ ( 1,328 ) $ 29 Accumulated other comprehensive (loss)/income as of December 31, 2021 and 2020 consisted of the following:     2021     2020       (dollars in thousands)   Investment securities available-for-sale, net of tax   $ ( 484 )   $ 7,859   Cash flow hedge, net of tax     2,406     ( 1,520 ) Defined benefit pension and post-retirement plans, net of tax     ( 3,326 )     ( 3,542 ) Total   $ ( 1,404 )   $ 2,797   - 91 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 – Pension and Other Benefits Defined Benefit Plans The Company maintains a frozen noncontributory pension plan covering employees of the Company prior to the merger with Legacy ConnectOne. The benefits are based on years of service and the employee’s compensation over the prior five-year period. The plan’s benefits are payable in the form of a ten-year certain and life annuity. The plan is intended to be a tax-qualified defined benefit plan under Section 401(a) of the Internal Revenue Code. Payments may be made under the Pension Plan once attaining the normal retirement age of 65 and are generally equal to 44% of a participant’s highest average compensation over a 5-year period. The following table sets forth changes in projected benefit obligation, changes in fair value of plan assets, funded status, and amounts recognized in the consolidated statements of condition for the Company’s pension plans as of December 31, 2021 and 2020.     2021     2020       (dollars in thousands)   Change in Benefit Obligation:                 Projected benefit obligation as of January 1,   $ 13,476     $ 12,533   Interest cost     284       364   Actuarial loss     1,584       1,300   Benefits paid     ( 700 )     ( 721 ) Projected benefit obligation as of December 31,   $ 14,644     $ 13,476   Change in Plan Assets:                 Fair value of plan assets as of January 1,   $ 15,868     $ 14,616   Actual return on plan assets     2,436       1,973   Employer contributions     -       -   Benefits paid     ( 700 )     ( 721 ) Fair value of plan assets as of December 31,   $ 17,604     $ 15,868   Funded status   $ 2,960     $ 2,392   The accumulated benefit obligation was $ 14.6 million and $ 13.5 million as of the year ended December 31, 2021 and 2020, respectively. 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 $ 0.1 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. 2021 2020 (dollars in thousands) Net actuarial loss recognized in accumulated other comprehensive income   $ 4,627     $ 4,926   The net periodic pension expense and other comprehensive income (before tax) for 2021, 2020 and 2019 includes the following: 2021 2020 2019 (dollars in thousands) Interest cost   $ 284     $ 364     $ 453   Expected return on plan assets ( 852 ) ( 784 ) ( 697 ) Net amortization   299   301   358 Total net periodic pension expense $ ( 269 ) $ ( 119 ) $ 114   Total gain recognized in other comprehensive income   ( 299 )   ( 190 )   ( 150 ) Total recognized in net periodic expense and other comprehensive income (before tax) $ ( 568 ) $ ( 309 ) $ ( 36 ) - 92 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 – Pension and Other Benefits – (continued) The following table presents the weighted average assumptions used to determine the pension benefit obligations as of December 31, for the following periods. 2021 2020 Discount rate 2.57 % 2.17 % Rate of compensation increase N/A N/A The following table presents the weighted average assumptions used to determine net periodic pension cost for the following three years: 2022 2021 2020 Discount rate 2.57 % 2.17 % 2.99 % Expected long-term return on plan assets 5.50 % 5.50 % 5.50 % Rate of compensation increase N/A N/A N/A The process of determining the overall expected long-term rate of return on plan assets begins with a review of appropriate investment data, including current yields on fixed income securities, historical investment data, historical plan performance and forecasts of inflation and future total returns for the various asset classes. This data forms the basis for the construction of a best-estimate range of real investment returns for each asset class. An average weighted real-return range is computed reflecting the plan’s expected asset mix, and that range, when combined with an expected inflation range, produces an overall best-estimate expected return range. 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. Plan Assets 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. The Company’s pension plan asset allocation as of December 31, 2021 and 2020, target allocation, and expected long-term rate of return by asset are as follows: Target Allocation % of Plan Assets – Year Ended 2021 % of Plan Assets – Year Ended 2020 Weighted Average Expected Long-Term Rate of Return Equity Securities                                 Domestic 45 % 59 % 55 % 3.2 % International 15 % 5 % 6 % 1.3 % Debt and/or fixed income securities 38 % 34 % 35 % 0.9 % Cash and other alternative investments, including real estate funds, commodity funds, hedge funds and equity structured notes   2 %   2 %   4 %   0.1 % Total   100 % $ 100 % $ 100 % $ 5.5 % - 93 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 – Pension and Other Benefits – (continued) The fair values of the Company’s pension plan assets as of December 31, 2021 and 2020, by asset class, are as follows: December 31, 2021 Fair Value Measurements at Reporting Date Using Asset Class Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (dollars in thousands) Cash   $ 178     $ 178     $ -     $ -   Equity securities: U.S. companies 10,551 10,551 - - International companies 897 897 - - Debt and/or fixed income securities 5,804 5,804 - - Commodity funds 111 111 - - Real estate funds   63   63   -   - Total $ 17,604 $ 17,604 $ - $ - December 31, 2020 Fair Value Measurements at Reporting Date Using Asset Class Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (dollars in thousands) Cash   $ 406     $ 406     $ -     $ -   Equity securities: U.S. companies 8,737 8,737 - - International companies 1,031 1,031 - - Debt and/or fixed income securities 5,522 5,522 - - Commodity funds 115 115 - - Real estate funds   57   57   -   - Total $ 15,868 $ 15,868 $ - $ - - 94 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 – Pension and Other Benefits – (continued) Fair Value of Plan Assets The Company used the following valuation methods and assumptions to estimate the fair value of assets held by the plan (for further information on fair value methods, see Note 20): Equity securities and real estate funds : The fair values for equity securities and real estate funds are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). Debt and fixed income securities : Certain debt securities are valued at the closing price reported in the active market in which the bond is traded (Level 1 inputs). Other debt securities are valued based upon recent bid prices or the average of recent bid and asked prices when available (Level 2 inputs) and, if not available, they are valued through matrix pricing models developed by sources considered by management to be reliable. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations. The investment manager is not authorized to purchase, acquire or otherwise hold certain types of market securities (subordinated bonds, real estate investment trusts, limited partnerships, naked puts, naked calls, stock index futures, oil, gas or mineral exploration ventures or unregistered securities) or to employ certain types of market techniques (margin purchases or short sales) or to mortgage, pledge, hypothecate, or in any manner transfer as security for indebtedness, any security owned or held by the Plan. Cash Flows Contributions The Bank does not expect to make a contribution in 2022. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, for the following years are as follows (dollars in thousands): 2022 $ 726 2023 708 2024 697 2025 697 2026 702 2027-2031 3,682 401(k) Plan The Company maintains a 401(k) plan to provide for defined contributions which covers substantially all employees of the Company. Beginning with the 2014 plan year, the 401(k) plan was amended to provide for a match of 50% of elective contributions, up to 6% of an employee’s contribution. In 2018, the 401 (k) plan was amended to provide for 100% matching of employee contributions up to 5% of employee contributions. For 2021, 2020 and 2019, employer contributions amounted to $ 1.6 million, $ 1.6 million and $ 1.3 million, respectively. Supplemental Executive Retirement Plan (“SERP”) 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. SERP compensation expense was $ 1.0 million and $ 0.4 million for the years ended December 31, 2021 and December 31, 2020, respectively. - 95 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Stock Based Compensation The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of December 31, 2021. The maximum number of shares of common stock or equivalents which may be issued under the Plan, is 750,000 . Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, restricted share units or performance units. Shares available for grant and issuance under the Plan as of December 31, 2021 are approximately 320,613 . The Company intends to issue all shares under the Plan in the form of newly issued shares. Restricted stock, options and restricted stock units typically have a three-year vesting period starting one year after the date of grant with one-third vesting each year. The options generally expire ten years from the date of grant. Restricted stock granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control. All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the awards vesting. Restricted shares have the same dividend and voting rights as common stock, while options, performance units and restricted stock units do not. All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are recorded as incurred. Stock-based compensation expense was $ 4.5 million, $ 2.9 million and $ 2.7 million for the years ended December 31, 2021, 2020 and 2019 respectively. Activity under the Company’s options for the year ended December 31, 2021 was as follows:     Number of Stock Options     Weighted- Average Exercise Price     Weighted- Average Remaining Contractual Term (in years)     Aggregate Intrinsic Value   Outstanding as of December 31, 2020     38,013     $ 9.03             Granted     -       -                   Exercised     ( 14,247 )     7.51                   Forfeited/cancelled/expired     -       -                   Outstanding as of December 31, 2021     23,766       9.94       0.6     $ 541,000                                     Exercisable as of December 31, 2021     23,766     $ 9.94       0.6     $ 541,000   The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on December 31, 2021 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2021. This amount changes based on the fair market value of the Company’s stock. Activity under the Company’s restricted shares for year ended December 31, 2021 was as follows:     Nonvested Shares     Weighted- Average Grant Date Fair Value   Nonvested as of December 31, 2020     113,114     $ 18.17   Granted     49,971       25.33   Vested     ( 75,257 )     18.82   Forfeited/cancelled/expired     ( 5,135 )     20.22   Nonvested December 31, 2021     82,693     $ 21.78   - 96 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Stock Based Compensation – (continued) As of December 31, 2021, there was approximately $ 1.0 million of total unrecognized compensation cost related to nonvested restricted shares granted. The cost is expected to be recognized over a weighted average period of 1.1 years. A summary of the status of unearned performance unit awards and the change during the period is presented in the table below: Units (expected) Units (maximum) Weighted Average Grant Date Fair Value Unearned as of December 31, 2020   147,636   $ 17.29   Awarded 37,543 25.24 Change in estimate 65,389 15.46 Vested shares   ( 29,421 ) 31.35 Forfeited/cancelled/expired   ( 11,153 )   17.06 Unearned as of December 31, 2021   209,994   233,638 $ 16.18 As of December 31, 2021, the specific number of shares related to performance units that were expected to vest was 216,575, determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed. As of 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. A total of 14,710 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of performance units during the year ended December 31, 2021 were 14,711 shares. As of December 31, 2021, compensation cost of approximately $ 1.2 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.6 years. A summary of the status of unearned restricted stock units and the changes in restricted stock units during the period is presented in the table below:     Units (expected)     Weighted Average Grant Date Fair Value   Unearned as of December 31, 2020 169,313 $ 14.07 Awarded 45,027 25.24 Vested shares   ( 68,916 ) 16.29 Forfeited/cancelled/expired ( 8,476 ) 15.83 Unearned as of December 31, 2021   136,948 $ 16.52 Any forfeitures would result in previously recognized expense being reversed. A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient. During the year ended December 31, 2021, 68,916 shares vested. A total of 34,458 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of restricted stock units during the year ended December 31, 2021 were 34,458 shares. As of December 31, 2021, compensation cost of approximately $ 1.1 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.3 years. Note 18 – Dividends and Other Restrictions Certain restrictions, including capital requirements, exist on the availability of undistributed net profits of the Bank for the future payment of dividends to the Parent Corporation. A dividend may not be paid if it would impair the capital of the Bank. As of December 31, 2021, approximately $ 256.9 million was available for payment of dividends based on regulatory guidelines. - 97 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 19 – Derivatives The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. Interest rate swaps were entered into on April 13, 2017, January 1, 2020 and March 3, 2020 each with a respective notional amount of $ 25.0 million and were designated as a cash flow hedge of a Federal Home Loan Bank advance We are required to pay fixed-rates of interest ranging from 0.88 % to 1.93 % and receive variable rates of interest that reset quarterly based on three-month LIBOR. Expiration dates for the swaps range from January 2022 to April 2022 . The swaps were determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps. In addition, during 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. Cash Flow Hedge The following table presents the net gains (losses), recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the years ended December 31: 2021 (dollars in thousands) Amount of gain (loss) recognized in OCI (Effective Portion) Amount of (gain) loss reclassified from OCI to interest expense Amount of gain (loss) recognized in other Noninterest income (Ineffective Portion) Interest rate contracts $ 3,593 $ 1,873 $ - 2020 (dollars in thousands) Amount of gain (loss) recognized in OCI (Effective Portion) Amount of (gain) loss reclassified from OCI to interest expense Amount of gain (loss) recognized in other Noninterest income (Ineffective Portion) Interest rate contracts $ ( 3,423 ) $ 1,577 $ - The following table reflects the cash flow hedges included in the Consolidated Statements of Condition as of December 31, 2021 and December 31, 2020: 2021 2020 (dollars in thousands) Notional Amount Fair Value Notional Amount Fair Value Included in other assets/(liabilities):                                 Interest rate swaps related to FHLB Advances $ 475,000 $ 3,347 $ 175,000 $ ( 2,119 ) - 98 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 19 – Derivatives – (continued) 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, 2021 and December 31, 2020. Note 20 – Fair Value Measurements and Fair Value of Financial Instruments Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820-10-05 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurements and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly. FASB ASC 820-10-05 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820-10-05 are as follows: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity). An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of December 31, 2021 and December 31, 2020: Securities Available-for-Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class. - 99 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) Derivatives: The fair value of derivatives are based on valuation models using observable market data as of the measurement date (level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of December 31, 2021 and December 31, 2020 are as follows: December 31, 2021 Fair Value Measurements at Reporting Date Using Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (dollars in thousands) Recurring fair value measurements:                                 Assets Investment securities : Available-for-sale : Federal agency obligations $ 50,360 $ - $ 50,360 $ - Residential mortgage pass-through securities 316,095 - 316,095 - Commercial mortgage pass-through securities 10,469 - 10,469 - Obligations of U.S. states and political subdivision 145,625 - 137,060 8,565 Corporate bonds and notes 9,049 - 9,049 - Asset-backed securities 2,564 - 2,564 - Certificates of deposit 150 - 150 - Other securities   195   195   -   - Total available-for-sale $ 534,507 $ 195 $ 525,747 $ 8,565   Equity securities 13,794 11,081 2,713 - Derivatives 3,347 - 3,347 - Total assets $ 551,648 $ 11,276 $ 531,807 $ 8,565 There were no transfers between Level 1 and Level 2 during the years ended December 31, 2021 and 2020. - 100 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) December 31, 2020 Fair Value Measurements at Reporting Date Using Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (dollars in thousands) Recurring fair value measurements:                                 Assets Investment securities : Available-for-sale : Federal agency obligations $ 38,458 $ - $ 38,458 $ - Residential mortgage pass-through securities 270,884 - 270,884 - Commercial mortgage pass-through securities 6,922 - 6,922 - Obligations of U.S. states and political subdivision 142,808 - 133,964 8,844 Corporate bonds and notes 25,095 - 25,095 - Asset-backed securities 3,480 - 3,480 - Certificates of deposit 151 - 151 - Other securities   157   157   -   - Total available-for-sale $ 487,955 $ 157 $ 478,954 $ 8,844   Equity securities 13,387 13,387 - - Total assets $ 501,343 $ 13,544 $ 478,954 $ 8,844   Liabilities Derivatives $ ( 2,119 ) $ - $ ( 2,119 ) $ - Total liabilities $ ( 2,119 ) $ - $ ( 2,119 ) $ - Assets Measured at Fair Value on a Non-Recurring Basis The Company may be required periodically to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis as of December 31, 2021 and December 31, 2020: - 101 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) Collateral Dependent Loans : The Company may record adjustments to the carrying value of loans based on fair value measurements, either as specific reserves or as partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with GAAP. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and are also based on Level 3 inputs. For assets measured at fair value on a nonrecurring basis, the fair value measurements as of December 31, 2021 and December 31, 2020 are as follows:           Fair Value Measurements at Reporting Date Using   Assets measured at fair value on a nonrecurring basis:   December 31, 2021     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Collateral dependent loans:   (dollars in thousands)   Commercial $ 13,399 $ - $ - $ 13,399 Commercial real estate 20,185 - - 20,185 Residential real estate 2,794 - - 2,794           Fair Value Measurements at Reporting Date Using   Assets measured at fair value on a nonrecurring basis:   December 31, 2020     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Impaired loans:   (dollars in thousands)   Commercial $ 10,751 $ - $ - $ 10,751 Commercial real estate 1,393 - - 1,393 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 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) Assets Measured With Significant Unobservable Level 3 Inputs Recurring basis The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2021 and year ended December 31, 2020:   Municipal Securities     (dollars in thousands)   Beginning balance, January 1, 2021 $ 8,844   Principal paydowns   ( 279 ) Ending balance, December 31, 2021 $ 8,565   Municipal Securities (dollars in thousands) Beginning balance, January 1, 2020 $ 9,114   Principal paydowns   ( 270 ) Ending balance, December 31, 2020 $ 8,844 The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of December 31, 2021 and December 31, 2020. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy. December 31, 2021 Fair Value Valuation Techniques Unobservable Input Range Securities available-for-sale:         (dollars in thousands)           Municipal securities $ 8,565 Discounted cash flows Discount rate 2.9 % December 31, 2020 Fair Value Valuation Techniques Unobservable Input Range   Securities available-for-sale:         (dollars in thousands)         Municipal securities 8,844 Discounted cash flows Discount rate 2.9 % - 103 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) Non-recurring basis The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy. December 31, 2021 (dollars in thousands)   Fair Value     Valuation Techniques   Unobservable Input   Range (weighed average) Commercial   $ 12,193     Market approach (100%)   Average transfer price as a price to unpaid principal balance   48 % to 73 % ( 49 %) Commercial   $ 1,206     Appraisals of collateral value   Adjustment for comparable sales   - 10 % to + 35 % (+ 6 %)                       Commercial real estate   $ 20,185     Appraisals of collateral value   Adjustment for comparable sales   - 20 % to + 15 % (- 6 %) Residential real estate $ 2,794 Appraisals of collateral value Adjustment for comparable sales - 15 % to + 39 % ( 5 %) December 31, 2020 (dollars in thousands)   Fair Value     Valuation Techniques   Unobservable Input   Range (weighed average) Impaired loans:                     Commercial   $ 10,524     Market approach (100%)   Average transfer price as a price to unpaid principal balance   48 - 53 ( 49 ) Commercial   $ 227     Appraisals of collateral value   Adjustment for comparable sales   1 % to + 5 % (+ 2 %)                       Commercial Real Estate   $ 1,393     Appraisals of collateral value   Adjustment for comparable sales   - 25 % to + 20 % (- 8 %) - 104 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) 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. Fair values for financial instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These estimates are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with ASC Topic 825 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs. Cash and cash equivalents. The carrying amounts of cash and short-term instruments approximate fair values. FHLB stock. It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability. Loans. The fair value of portfolio loans, net is determined using an exit price methodology. The exit price methodology continues to be based on a discounted cash flow analysis, in which projected cash flows are based on contractual cash flows adjusted for prepayments for certain loan types ( e.g. residential mortgage loans and multi-family loans) and the use of a discount rate based on expected relative risk of the cash flows. The discount rate selected considers loan type, maturity date, a liquidity premium, cost to service, and cost of capital, which is a Level 3 fair value estimate. Deposits. The carrying amounts of deposits with no stated maturities (i.e., non­interest-bearing, savings, NOW, and money market deposits) are assigned fair values equal to the carrying amounts payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for alternative funding sources of similar remaining maturity. Term Borrowings and Subordinated Debentures . The fair value of the Company’s long-term borrowings and subordinated debentures were calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities. Accrued Interest Receivable/Payable. The carrying amounts of accrued interest approximate fair value resulting in a level 2 or level 3 classification based on the level of the asset or liability with which the accrual is associated. - 105 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2021 and December 31, 2020: Fair Value Measurements Carrying Amount Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (dollars in thousands) December 31, 2021 Financial assets: Cash and due from banks $ 265,536 $ 265,536 $ 265,536 $ - $ - Investment securities available-for-sale 534,507 534,507 195 525,747 8,565 Restricted investment in bank stocks 27,826 n/a n/a n/a n/a Equity securities 13,794 13,794 11,081 2,713 - Net loans 6,749,849 6,800,287 - - 6,800,287 Derivatives 3,347 3,347 - 3,347 - Accrued interest receivable 34,152 34,152 - 1,554 32,598   Financial liabilities: Noninterest-bearing deposits 1,617,049 1,617,049 1,617,049 - - Interest-bearing deposits 4,715,904 4,716,358 3,565,795 1,150,563 - Borrowings 468,193 469,671 - 469,671 - Subordinated debentures 152,951 163,995 - 163,995 - Accrued interest payable 2,716 2,716 - 2,716 -   December 31, 2020                                         Financial assets: Cash and due from banks $ 303,756 $ 303,756 $ 303,756 $ - $ - Investment securities available-for-sale 487,955 487,955 157 478,954 8,844 Restricted investment in bank stocks 25,099 n/a n/a n/a n/a Equity securities 13,387 13,387 13,387 - - Net loans 6,157,081 6,244,037 - - 6,244,037 Accrued interest receivable 35,317 35,317 - 1,764 33,553   Financial liabilities: Noninterest-bearing deposits 1,339,108 1,339,108 1,339,108 - - Interest-bearing deposits 4,620,116 4,633,961 3,155,983 1,477,978 - Borrowings 425,954 429,671 - 429,671 - Subordinated debentures 202,648 214,113 - 214,113 - Derivatives 2,119 2,119 - 2,119 - Accrued interest payable 3,687 3,687 - 3,687 - Cash and due from banks $ 303,756 $ 303,756 $ 303,756 $ - $ - - 106 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, considering the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above. Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company’s core deposit base is required by FASB ASC 825-10. Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as the brokerage network, deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Note 21 – Parent Corporation Only Financial Statements The Parent Corporation operates its wholly-owned subsidiary, the Bank. The earnings of this subsidiary are recognized by the Parent Corporation using the equity method of accounting. Accordingly, earnings are recorded as increases in the Parent Corporation’s investment in the subsidiaries and dividends paid reduce the investment in the subsidiaries. The ability of the Parent Corporation to pay dividends will largely depend upon the dividends paid to it by the Bank. Dividends payable by the Bank to the Parent Corporation are restricted under supervisory regulations (see Note 18 of the Notes to Consolidated Financial Statements). Condensed financial statements of the Parent Corporation only are as follows: Condensed Statements of Condition As of December 31, 2021 2020 (dollars in thousands) ASSETS Cash and cash equivalents $ 133,648 $ 34,388 Investment in subsidiaries 1,111,520 1,001,998 Investment securities 32,405 32,405 Equity securities 725 - Other assets   699   51,288 Total assets $ 1,278,997 $ 1,120,079 LIABILITIES AND STOCKHOLDERS’ EQUITY Other liabilities $ 1,834 $ 2,121 Subordinated debentures, net 152,951 202,648 Stockholders’ equity   1,124,212   915,310 Total liabilities and stockholders’ equity $ 1,278,997 $ 1,120,079 - 107 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 21 – Parent Corporation Only Financial Statements – (continued) Condensed Statements of Income For Years Ended December 31, 2021 2020 2019 (dollars in thousands) Income:                         Dividend income from subsidiaries $ 24,071 $ 15,200 $ 30,050 Other income   1,627   1,683   1,652 Total Income 25,698 16,883 31,702 Expenses   ( 8,741 )   ( 9,263 )   ( 7,386 ) Income before equity in undistributed earnings of subsidiaries 16,957 7,620 24,316 Equity in undistributed earnings of subsidiaries   113,396   63,669   49,079 Net Income 130,353 71,289 73,395 Preferred dividends 1,717 - - Net income available to common stockholders $ 128,636 $ 71,289 $ 73,395 Condensed Statements of Cash Flows     For Years Ended December 31       2021     2020     2019       (dollars in thousands)   Cash flows from operating activities:                         Net income   $ 130,353     $ 71,289     $ 73,395   Adjustments to reconcile net income to net cash provided by operating activities:                         Equity in undistributed earnings of subsidiary     ( 113,396 )     ( 63,669 )     ( 49,079 ) Loss on equity securities, net     55       -       38   Amortization of subordinated debt issuance costs     303       323       329   Decrease (increase) in other assets     50,590     ( 50,001 )     -   (Decrease) increase in other liabilities     ( 287 )     ( 391 )     ( 1,509 ) Net cash provided by (used in) operating activities     67,618     ( 42,449 )     23,174                             Cash flows from investing activities:                         Purchase of available-for-sale securities     -       -       ( 2 ) Sales of available-for-sale securities     -       -       23   Purchase of equity securities ( 780 ) - - Sale of equity securities     -       -       569   Repayment of short-term borrowing     -     ( 3,000 )     -   Capital infusion to subsidiary     -       -       -   Net cash (used in) provided by investing activities     ( 780 )     ( 3,000 )     590                             Cash flows from financing activities:                         (Repayment of) proceeds from subordinated debt     ( 50,000 )     73,440       -   Cash dividends paid on preferred stock ( 1,717 ) - - Cash dividends paid on common stock     ( 17,493 )     ( 14,317 )     ( 12,160 ) Purchase of treasury stock     ( 9,401 )     ( 911 )     ( 12,643 ) Proceeds from preferred stock offering 110,927 - - Proceeds from exercise of stock options     106       233       360   Net cash provided by (used in) financing activities     32,422       58,445       ( 24,443 )                           Increase (decrease) in cash and cash equivalents     99,260       12,996       ( 679 ) Cash and cash equivalents as of January 1,     34,388       21,392       22,071   Cash and cash equivalents as of December 31,   $ 133,648     $ 34,388     $ 21,392   - 108 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 22 – Quarterly Financial Information of ConnectOne Bancorp, Inc. (unaudited) 2021 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter (dollars in thousands, except per share data) Total interest income $ 79,040 $ 77,026 $ 73,051 $ 72,621 Total interest expense   8,579   8,781   10,042   11,458 Net interest income 70,461 68,245 63,009 61,163 Provision for credit losses 815 1,100 ( 1,649 ) ( 5,766 ) Total other income, net of securities gains 3,777 4,016 4,472 3,426 Other expenses   28,084   28,183   26,259   26,485 Income before income taxes 45,339 42,978 42,871 43,870 Income tax expense   12,301   10,881   10,652   10,871 Net income 33,038 32,097 32,219 32,999 Preferred dividends 1,717 - - - Net income available to common stockholders $ 31,321 $ 32,097 $ 32,219 $ 32,999 Earnings per share: Basic $ 0.79 $ 0.81 $ 0.81 $ 0.83 Diluted 0.79 0.80 0.81 0.82 2020 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter (dollars in thousands, except per share data) Total interest income $ 75,588 $ 77,221 $ 78,677 $ 76,714 Total interest expense   14,217   16,672   17,887   21,433 Net interest income 61,371 60,549 60,790 55,281 Provision for credit losses 5,000 5,000 15,000 16,000 Total other income, net of securities gains 3,442 3,483 4,621 2,854 Other expenses   26,402   26,478   33,063   35,058 Income before income taxes 33,411 32,554 17,348 7,077 Income tax expense   7,770   7,768   2,516   1,047 Net income $ 25,641 $ 24,786 $ 14,832 $ 6,030 Earnings per share: Basic $ 0.64 $ 0.62 $ 0.37 $ 0.15 Diluted 0.64 0.62 0.37 0.15 Note: Due to rounding, quarterly earnings per share may not sum to reported annual earnings per share. - 109 - Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.