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Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-05 · 373 added, 527 removed, 184 unchanged (83% of the section changed)

Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader

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

financial condition as of September 30, 2021 and December 31, 2020.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

The purpose of this analysis is to provide the

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

and financial condition as of March 31, 2022 and December 31, 2021.

In order to fully understand this analysis, the reader is encouraged

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Cautionary Statement Concerning Forward-Looking Statements

This report includes forward-looking statements within

the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that

involve inherent risks and uncertainties.

This report includes forward-looking statements

within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended,

that involve inherent risks and uncertainties.

This report contains certain forward-looking statements with respect to the financial condition,

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(3) prepayment speeds, loan origination and sale volumes, charge-offs and

loan loss provisions may vary substantially from period to period;

credit loss provisions may vary substantially from period to period;

(4) general economic conditions may be less favorable than expected;

(5) political developments, sovereign debt problems, wars or other hostilities may disrupt or increase volatility in securities markets

or other economic conditions;

(6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne

Bancorp is engaged;

(7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp;

(8) a delayed or incomplete

resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp;

(9) the impact on reputation risk created by the

developments discussed above on such matters as business generation and retention, funding and liquidity could be significant;

outcome of regulatory and legal investigations and proceedings may not be anticipated, and (11) the impact of the COVID-19 pandemic on

our employees and operations, and those of our customers.

Further information on other factors that could affect the financial results

of ConnectOne Bancorp is included in Item 1a.

of ConnectOne Bancorp’s Annual Report on Form 10-K as amended and updated in ConnectOne

Bancorp’s other filings with the Securities and Exchange Commission.

These documents are available free of charge at the Commission’s

website at http://www.sec.gov and/or from ConnectOne Bancorp, Inc.

(5) political developments, sovereign debt problems, wars or other hostilities such as the ongoing conflict between Ukraine and Russia,

may disrupt or increase volatility in securities markets or other economic conditions;

(6) legislative or regulatory changes or actions

may adversely affect the businesses in which ConnectOne Bancorp is engaged;

(7) changes and trends in the securities markets may adversely

impact ConnectOne Bancorp;

(8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp;

(9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding

and liquidity could be significant;

(10) the outcome of regulatory and legal investigations and proceedings may not be anticipated, and

(11) the impact of the COVID-19 pandemic on our employees and operations, and those of our customers.

Further information on other factors

that could affect the financial results of ConnectOne Bancorp is included in Item 1a.

of ConnectOne Bancorp’s Annual Report on Form

10-K as amended and updated in ConnectOne Bancorp’s other filings with the Securities and Exchange Commission.

These documents are

available free of charge at the Commission’s website at http://www.sec.gov and/or from ConnectOne Bancorp, Inc.

Critical Accounting Policies and Estimates

The accounting and reporting policies followed by ConnectOne

Bancorp, Inc.

The accounting and reporting policies followed

by ConnectOne Bancorp, Inc.

and its subsidiaries (collectively, the “Company”) conform, in all material respects, to GAAP.

the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets

and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the consolidated statements

In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported

amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the consolidated

statements of income.

Actual results could differ significantly from those estimates.

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to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations.

The Company has identified the determination of the ACL, the other-than-temporary impairment evaluation of securities, the evaluation

of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or

complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available.

The Company has identified the determination of the allowance for credit losses, the other-than-temporary impairment evaluation of securities,

the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective

and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes

Additional information on these policies is provided below.

for Credit Losses and Related Provision :

The ACL represents management’s estimate of current expected credit losses considering

available information relevant to assessing collectability of cash flows over the contractual term of the financial asset(s).

the amount of the ACL is considered a critical accounting estimate because it requires significant judgment and the use of estimates including

reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial

Allowance for Credit Losses and Related

The allowance for credit losses (“ACL”) represents management’s estimate of current expected credit

losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial

Determining the amount of the ACL is considered a critical accounting estimate because it requires significant judgment and

the use of estimates including reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the

contractual term of the financial assets.

The evaluation of the adequacy of the ACL includes,

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a provision for credit losses charged to expense.

Management believes that the current ACL will be adequate to absorb current expected

credit losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio.

The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and

specific problem loans and current economic conditions which may affect the borrowers’ ability to pay.

The evaluation also details

historical losses by loan segment and the resulting credit loss rates which are projected for current loan total amounts.

Loss estimates

for specified problem loans are also detailed.

All of the factors considered in the analysis of the adequacy of the ACL may be subject

To the extent actual outcomes differ from management estimates, additional provisions for credit losses may be required that

could materially adversely impact earnings in future periods.

Additional information can be found in Note 5 of the Notes to Consolidated

Financial Statements.

Combinations :

We account for business combinations under the acquisition method of accounting.

Using this method, assets acquired,

liabilities assumed and consideration paid are recorded at their estimated fair values as of the acquisition date.

The application of

this method of accounting requires the use of significant estimates and assumptions.

The application of the acquisition method of accounting

usually results in the recognition of goodwill and a core deposit intangible (if the acquiree has deposits).

The amount of goodwill recorded

represents the excess purchase price over the estimated fair value of the net assets acquired, including any identifiable intangibles,

if applicable.

Goodwill is not amortized for book purposes;

however, it is reviewed at least annually for impairment and is usually not

deductible for tax purposes.

The assets acquired and liabilities assumed and consideration

paid in the acquisition are recorded at their estimated fair values based on management’s best estimates using information available

at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition.

Our estimates

are based upon assumptions that we believe to be reasonable and the Company may use an outside service provider to assist with the valuations.

The Company adopted the provisions of FASB ASC 350-10, which requires that goodwill be reported separate from other intangible assets

in the Consolidated Statements of Condition and not be amortized but rather tested for impairment annually or more frequently if impairment

indicators arise.

The Company performs an annual goodwill impairment test in the fourth quarter of each year, or more often if events

or circumstances warrant.

We will continue to monitor and evaluate the impact of COVID-19 and its impact on our market capitalization,

overall economic conditions and any other potential triggering events that may indicate an impairment of goodwill in the future.

event we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded

Such a charge would have no impact on tangible capital or our regulatory capital ratios.

Management believes that the current ACL will be adequate to absorb credit losses on

existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio.

The evaluation

takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem

loans and current economic conditions which may affect the borrowers’ ability to pay.

The evaluation also details historical losses

by loan segment and the resulting credit loss rates which are projected for current loan total amounts.

Loss estimates for specified problem

loans are also detailed.

All of the factors considered in the analysis of the adequacy of the ACL may be subject to change.

To the extent

actual outcomes differ from management estimates, additional provisions for credit losses may be required that could materially adversely

impact earnings in future periods.

Additional information can be found in Note 5 of the Notes to Consolidated Financial Statements.

Income Taxes :

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred

tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements

or tax returns.

Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s

consolidated financial statements or tax returns.

Fluctuations in the actual outcome of these future tax

consequences could impact the Company’s consolidated financial condition or results of operations.

Note 11 of the Notes

to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2020 includes additional

The objectives of accounting

for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets

for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.

is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial

statements or tax returns.

Fluctuations in the actual outcome of these future

tax consequences could impact the Company’s consolidated financial condition or results of operations.

Note 10 of the

Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2021 includes additional

discussion on the accounting for income taxes.

Impact of COVID-19

COVID-19 continues to impact the Company’s operations

and financial results, as well as those of our customers.

In response to the COVID-19 pandemic, the Company continued to offer temporary

relief to effected customers, deferring either their full loan payment, the principal component or the interest component of their loan

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

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

total outstanding loan balance of $10.2 million.

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

debt restructurings, provided that the modification is related to COVID-19, executed on a loan that was not more than 30 days past due

as of December 31, 2019 or the date of the deferral, and executed between March 1, 2020 and January 1, 2022, or the date that is 60 days

after the termination date of the national emergency declared by the President on March 13, 2020, under the National Emergencies Act related

to the outbreak of COVID-19.

COVID-19 continues to impact the Company’s

operations and financial results, as well as those of our customers.

In response to the COVID-19 pandemic, the Company continued to offer

temporary relief to effected customers, deferring either their full loan payment, the principal component or the interest component of

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

As of March 31, 2022, the Company has one deferred loan

with a total outstanding loan balance of $0.5 million.

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

troubled debt restructurings, provided that the modification is related to COVID-19, executed on a loan that was not more than 30 days

past due as of December 31, 2019 or the date of the deferral, and executed between March 1, 2020 and January 1, 2022, or the date that

is 60 days after the termination date of the national emergency declared by the president on March 13, 2020, under the National Emergencies

Act related to the outbreak of COVID-19.

With the passage of the Paycheck Protection Program

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its customers with applications for resources through the program.

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

which may be extended to five years with the consent of the Company, and those originated on or after September 5, 2020 have a five-year

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

The Company believes that

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

As of September 30, 2021,

PPP loans were $177.8 million.

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

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

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

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

We currently anticipate recognizing a majority

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

PPP loans originated prior to June 5, 2020 have a two-year term, which

may be extended to five years with the consent of the Company, and those originated on or after June 5, 2020 have a five-year term, and

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

The Company believes that the majority

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

As of March 31, 2022, PPP loans were

$54.3 million.

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

government and, as such, the Company has not included the PPP loans in calculation of the ACL as of March 31, 2022.

Should those circumstances

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

As of March 31,

2022 remaining deferred and unrecognized PPP fees were $2.6 million.

We currently anticipate recognizing a majority of this balance by

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

Operating Results Overview

Net income for the three months

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

The Company’s

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

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

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

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

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

of $3.1 million.

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

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

in the third quarter of 2020.

Net income for the nine months ended September 30, 2021

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

The Company’s diluted

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

comparable nine-month period ended September 30, 2020.

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

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

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

of $21.1 million.

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

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

of the pandemic estimated under the incurred loss method.

Net income available to common stockholders for

the three months ended March 31, 2022 was $29.9 million compared to $33.0 million for the comparable three-month period ended March 31,

The Company’s diluted earnings per share were $0.75 for the three months ended March 31, 2022 as compared with diluted earnings

per share of $0.82 for the comparable three-month period ended March 31, 2021.

The $3.1 million decrease in net income available to common

stockholders and $0.07 decrease in diluted earnings per share versus the first quarter of 2021 were due to a $7.2 million increase to

provision for credit losses, a $2.7 million increase in noninterest expenses, $1.5 million in preferred dividends, a $0.4 million decrease

in noninterest income and a $0.5 million increase in income tax expenses, partially offset by a $9.2 million increase in net interest

Net Interest Income and Margin

Net interest income is the difference between the interest

earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which

support these assets.

Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (primarily interest earned

on obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested

in taxable issues.

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

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

three-month period ended September 30, 2020.

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

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

The widening of the

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

reduction in the yield on average interest-earning assets.

Fully taxable equivalent net

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

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

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

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

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

The following tables, “Average Statements of Condition

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

Net interest income is the difference between the

interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings,

which support these assets.

Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (including interest

earned tax-free loans and on obligations of state and local political subdivisions) by the amount of income tax which would have been

paid had the assets been invested in taxable issues.

Net interest margin is defined as net interest income on a tax-equivalent basis as

a percentage of total average interest-earning assets.

Fully taxable equivalent net interest income for

the three months ended March 31, 2022 increased by $9.2 million, or 15.0%, from the comparable three-month period ended March 31, 2021.

The increase from the three months ended March 31, 2021 resulted primarily from a 10.1% increase in average loans and a 15 basis-point

widening of the net interest margin to 3.71% from 3.56%.

The widening of the net interest margin resulted from a 27 basis-point reduction

in the cost of interest-bearing liabilities, partially offset by an 8 basis-point reduction in the yield on average interest-earning assets.

The following tables, “Average Statements

of Condition with Interest and Average Rates”, present for the three months ended March 31, 2022 and 2021, the Company’s average

assets, liabilities and stockholders’ equity.

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are also reflected.

Average Statements of Condition with Interest and

Average Rates

Three Months Ended September

Average Statements of Condition with Interest

and Average Rates

Three Months Ended March 31,

(dollars in thousands)

Interest-earning assets:

Investment securities (1)

Securities (1) (2)

Total loans (2) (3) (4)

Federal funds sold and interest-bearing

Restricted investment in bank

interest-earning assets

Federal funds sold and interest-bearing with banks

Restricted investment in bank stocks

Total interest-earning assets

Noninterest-earning assets:

Allowance for credit losses

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Interest-bearing liabilities:

Time deposits

Other interest-bearing

Interest-bearing deposits:

Subordinated debentures, net

of capitalized costs

Capital lease obligation

interest-bearing liabilities

Noninterest-bearing demand

Other liabilities

noninterest-bearing liabilities

Stockholders’ equity

Total liabilities

and stockholders’ equity

Net interest income (tax-equivalent basis)

Net interest spread (5)

Net interest margin (6)

Tax-equivalent adjustment

Net interest income

Average balances are based on amortized

cost and include equity securities.

Interest income is presented on a tax-equivalent basis

using an assumed tax rate of 21%.

Includes loan fee income and

accretion of purchase accounting adjustments.

Total loans include loans held-for-sale and nonaccrual

Represents difference between the average yield on

interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis.

Represents net interest income on a tax-equivalent

basis divided by average total interest-earning assets.

Rates are annualized.

Average Statements of Condition with Interest and

Average Rates

Nine Months Ended September

(dollars in thousands)

Interest-earning assets:

Investment securities (1)

Total loans (2) (3) (4)

Federal funds sold and interest-bearing deposits

Restricted investment in bank

interest-earning assets

Allowance for credit losses

Other noninterest-earning assets

Interest-bearing liabilities:

Time deposits

Other interest-bearing

interest-bearing deposits

Subordinated debentures, net

of capitalized costs

Capital lease obligation

interest-bearing liabilities

Noninterest-bearing demand

Other interest-bearing deposits

Total interest-bearing deposits

Subordinated debentures

Finance lease

Total interest-bearing liabilities

Demand deposits

Other liabilities

noninterest-bearing liabilities

Total noninterest-bearing liabilities

Stockholders’ equity

Total liabilities

and stockholders’ equity

Total liabilities and stockholders’ equity

Net interest income (tax-equivalent basis)

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Net interest income

Average balances are based on amortized

cost and include equity securities.

Interest income is presented on a tax-equivalent basis

using an assumed tax rate of 21%.

Includes loan fee income and

accretion of purchase accounting adjustments.

Total loans include loans held-for-sale and nonaccrual

Represents difference between the average yield on

interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis.

Represents net interest income on a tax-equivalent

basis divided by average total interest-earning assets.

Average balances are based on amortized cost and include equity securities.

Interest income is presented on a tax-equivalent basis using 21%.

Includes loan fee income and accretion of purchase accounting adjustments.

Total loans include loans held-for-sale and nonaccrual loans.

Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis.

Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.

Rates are annualized.

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Noninterest income totaled $3.1 million for the

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

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

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

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

Noninterest income totaled $11.9 million for

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

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

of PPP loan referral fee income generated by BoeFly.

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

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

Excluding these items,

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

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

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

securities of $0.5 million.

three months ended March 31, 2022, compared with $3.4 million for the three months ended March 31, 2021.

Included in noninterest income

were net losses on equity securities of $0.6 million and $0.2 million for the three months ended March 31, 2022 and three months ended

2021, respectively, and a $0.7 million gain on the sale of branches in the first quarter 2021.

Excluding the aforementioned items, noninterest

income was $3.7 million and $2.9 million for the three months ended March 31, 2022 and three-month period ended March 31, 2021, respectively.

The $0.7 million increase in noninterest income excluding the items discussed above for the three months ended March 31, 2022 versus the

comparable three-month period ended March 31, 2021 was primarily due to increases in deposit, loan and other income of $0.4 million, BoeFly

income of $0.2 million and BOLI income of $0.1 million.

Noninterest Expenses

Noninterest expenses totaled $28.2 million for the three

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

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

The increase was primarily

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

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

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

of $0.1 million.

Noninterest expenses totaled $80.9 million for the nine

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

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

in expenses related to the BoeFly acquisition.

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

comparable nine-month period ended September 30, 2020.

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

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

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

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

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

ended September 30, 2020.

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

The effective tax rate for

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

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

income from non-taxable sources.

Income tax expense was $32.4 million for the nine months

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

The increase in income

tax expense was the result of higher income before taxes.

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

versus 19.9% for the prior-year period.

The higher effective tax rate during the third quarter of

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

Noninterest expenses totaled $29.2 million for

the three months ended March 31, 2022, compared to $26.5 million for the three months ended March 31, 2021.

The increase in noninterest

expenses of $2.7 million from the comparable three-month period ended period March 31, 2021 was primarily attributable to increases in

salaries and employee benefits of $3.1 million, a $0.7 million increase acquisition expenses related to BoeFly and increases in other

expenses of $0.6 million, and information technology and communications of $0.3 million, partially offset by decreases in occupancy and

equipment expenses of $1.5 million, which included a $0.9 million favorable dissolution of a merger lease obligation, FDIC insurance of

$0.3 million and professional and consulting of $0.2 million.

The increase in salaries and employee benefits from the prior year quarter

was attributable to new hires, a seasonal increase in payroll taxes, as well as higher incentive-based, stock compensation expense.

Income tax expense was $11.4 million for the three

months ended March 31, 2022, compared to $10.9 million for the three months ended March 31, 2021.

The effective tax rate for the three

months ended March 31, 2022 and March 31, 2021 was 26.6% and 24.8%, respectively.

The effective tax rate for the first quarter of 2022

was higher compared to March 31, 2021 due to different proportions of income from non-taxable sources.

Financial Condition

Loan Portfolio

The following table sets forth the composition of our

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

The following table sets forth the composition

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

March 31, 2022

December 31, 2021

(dollars in thousands)

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Residential real estate

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

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

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

Net loan growth was primarily attributable to increases in the

commercial real estate segment of $653.1 million, offset by decreases in the commercial segment of $196.5 million, which primarily resulted

from PPP loan forgiveness, decreases in commercial construction of $64.9 million and decreases in residential real estate of $51.8 million.

As of March 31, 2022, gross

loans totaled $7.0 billion, an increase of $149.6 million, or 2.2%, as compared to December 31, 2021.

Net loan growth was attributable

to organic loan originations.

(1 ) Included

in commercial loans as of March 31, 2022 and December 31, 2021 are PPP loans of $54.3 million

and $93.1 million, respectively.

Allowance for Credit Losses and Related Provision

As of January 1, 2021, the Company adopted the CECL

accounting standard.

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

million December 31, 2020.

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

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

CECL accounting.

The provision for (reversal of) credit losses, which

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

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

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

2021, the day the Company adopted CECL.

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

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

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

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

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

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

real estate loan that previously had a specific credit reserve.

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

30, 2021 compared to 1.27% as of December 31, 2020.

Excluding the impact of PPP loans in the calculation of the ACL as a percentage of

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

PPP loans do not have allowance

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

The level of the ACL for the respective periods of 2021

and allowance for loan losses for 2020 reflects the credit quality within the loan portfolio, loan growth, the changing composition of

the commercial and residential real estate loan portfolios and other related factors.

In management’s view, the level of the ACL

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

Management’s judgment regarding

the adequacy of the allowance constitutes a “Forward-Looking Statement” under the Private Securities Litigation Reform Act

Actual results could differ materially from management’s analysis, based principally upon the factors considered by management

in establishing the allowance.

Changes in the ACL are presented in the following table

for the periods indicated.

As of March 31, 2022, the Company’s allowance

for credit losses for loans was $80.1 million, an increase of $1.3 million from $78.8 million December 31, 2021.

The allowance for credit

losses for loans as of December 31, 2021 included a $6.6 million increase that was related to the “Day 1” CECL adjustment

resulting from adopting CECL as of January 1, 2021.

Excluding that increase, the allowance for credit losses for loans increased by $7.8

The increase was primarily attributable to an increase in provision for credit losses for loans of $6.6 million and a decrease

of $2.1 million in charge-offs, partially offset by a decrease of $0.4 million in recoveries.

The provision for (reversal of) credit losses was

$1.5 million for the three months ended March 31, 2022 and $(5.8) million for the three months ended March 31, 2021.

The provision for

credit losses during the three months ended March 31, 2022 reflected strong organic loan growth and stabilizing macroeconomic forecasts.

The reversal of provision for credit losses during the three months ended March 31, 2021 was the result of an improved macroeconomic forecast

when compared to January 1, 2021, the date of CECL implementation.

There were $0.2 million net charge-offs for the

three months ended March 31, 2022, compared with $0.1 million in net recoveries for the three months ended March 31, 2021.

a percentage of loans receivable amounted to 1.15% as of both March 31, 2022 and December 31, 2021.

Excluding the impact of PPP loans

in the calculation of the ACL as a percentage of loans receivable, the ratio increases to 1.16% as of March 31, 2022, compared to 1.17%

as of December 31, 2021.

PPP loans do not have allowance for credit losses attributable to them, as they are fully guaranteed by the SBA.

The level of the allowance for the respective periods

of 2022 and 2021 reflects the credit quality within the loan portfolio, loan growth, the changing composition of the commercial and residential

real estate loan portfolios and other related factors.

In management’s view, the level of the ACL as of March 31, 2022 is adequate

to cover credit losses inherent in the loan portfolio.

Management’s judgment regarding the adequacy of the allowance constitutes

a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially

from management’s analysis, based principally upon the factors considered by management in establishing the allowance.

Changes in the ACL are presented in the following

table for the periods indicated.

Three Months Ended

September 30,

(dollars in thousands)

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Analysis of the ACL:

Balance – beginning of period

Commercial real estate

Residential real estate

Total charge-offs

Commercial real estate

Residential real estate

Total recoveries

Net loan (charge-offs) recoveries

Provision for credit losses (loans)

Balance - end of period

Ratio of annualized net charge-offs during the period

to average loans receivable during the period

Loans receivable

ACL as a percentage of loans receivable

Nine Months Ended

September 30,

(dollars in thousands)

Average loans receivable at end of period

Analysis of the ACL:

Balance - beginning of quarter

CECL Day 1 Adjustment

Balance – January 1, 2021 (as adjusted)

Commercial real estate

Residential real estate

Balance – beginning of quarter (as adjusted)

Total charge-offs

Commercial real estate

Residential real estate

Total recoveries

Net loan charge-offs

(Reversal of) provision for credit losses (loans)

Net (charge-offs) recoveries

Provision for (reversal of) credit losses (loans)

Balance - end of period

Ratio of annualized net charge-offs during the period

to average loans receivable during the period

Ratio of annualized net charge-offs during the period to average loans receivable during the period

Loans receivable

ACL as a percentage of loans receivable

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

on the incurred loan loss model.

Asset Quality

The Company manages asset quality and credit risk by

maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination

of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix.

strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic

assessments of current collateral values and cash flows, and to maintain an adequate allowance for loan losses at all times.

The Company manages asset quality and credit risk

by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing

examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix.

The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based

on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for credit losses at all times.

It is generally the Company’s policy to discontinue

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Loans past due 90 days or more which are both well-secured and in the process of collection may remain on an accrual basis.

Nonperforming assets include nonaccrual

loans and other real estate owned.

Nonperforming assets include

nonaccrual loans and other real estate owned.

Nonaccrual loans represent loans on which interest accruals have been suspended.

In general, it is

the policy of management to consider the charge-off of uncollectible amounts of loans at the point they become past due 90 days.

troubled debt restructured loans represent loans to borrowers experiencing financial difficulties on which a concession was granted, such

as a reduction in interest rate below the current market rate for new debt with similar risks or modified repayment terms and are performing

under the restructured terms.

The following table sets forth, as of the dates indicated,

the amount of the Company’s nonaccrual loans, other real estate owned (“OREO”), performing troubled debt restructurings

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

September 30,

it is the policy of management to consider the charge-off of uncollectible amounts of loans at the point they become past due 90 days.

Performing troubled debt restructured loans represent loans to borrowers experiencing financial difficulties on which a concession was

granted, such as a reduction in interest rate below the current market rate for new debt with similar risks or modified repayment terms,

and are performing under the restructured terms.

The following table sets forth, as of the dates

indicated, the amount of the Company’s nonaccrual loans, other real estate owned (“OREO”), performing troubled debt

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

(dollars in thousands)

nonperforming assets (1)

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

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

Nonperforming assets are defined as nonaccrual loans and OREO.

loans to total loans receivable

Nonperforming assets to total assets

Nonaccrual loans

Total nonperforming assets (1)

Performing TDRs

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

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

(1) Nonperforming

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

During the nine months ended September 30, 2021, the

Bank designated approximately $40.7 million as TDRs.

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

interest rate reductions in the commercial real estate segment.

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

designated TDRs once the deferral periods ended.

assets are defined as nonaccrual loans and OREO.

Nonaccrual loans to total loans receivable

Nonperforming assets to total assets

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

Investment Securities

As of September 30, 2021,

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

of March 31, 2022, the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations

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

For the three months ended

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

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

As of September 30, 2021,

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

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

of December 31, 2020.

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

Unrealized losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell,

and it is likely that we will not be required to sell the securities prior to their anticipated recovery.

The decline in fair

value is largely due to changes in interest rates and other market conditions.

The issuers continue to make timely principal and interest

payments on the securities.

Any impairment that has not been recorded through an allowance for credit losses is recognized in other

comprehensive income, net of applicable taxes.

The Company did not record an ACL for available-for-sale as of September 30,

For the quarter ended

March 31, 2022, average securities increased $65.1 million to approximately $545.2 million, or 7.0% of average total interest-earning

assets, from approximately $480.1 million, or 6.4% of average interest-earning assets, compared to December 31, 2021.

As of March 31, 2022,

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

in stockholders’ equity, net of tax, amounted to $23.0 million as compared with net unrealized losses of $0.5 million as of December

The increase in unrealized losses is predominately attributable to changes in market conditions and interest rates.

losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely

that we will not be required to sell the securities prior to their anticipated recovery.

The decline in fair value is largely

due to changes in interest rates and other market conditions.

The issuers continue to make timely principal and interest payments on the

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive

income, net of applicable taxes.

The Company did not record an allowance for credit losses for available-for-sale as of March 31,

Interest Rate Sensitivity Analysis

The principal objective of

our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts;

The principal objective

of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts;

the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements;

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borrowings, and current market conditions and interest rates.

We currently utilize net interest

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

of future changes in interest rates.

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

prescribed by our Board of Directors.

If model results were to fall outside prescribed ranges, action, including additional monitoring

and reporting to the Board, would be required by the ALCO and the Bank’s management.

The net interest income simulation

model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative

basis, assuming certain changes in the general level of interest rates.

Based on our model, which

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

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

would decrease net interest income by 5.80%.

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

instantaneous increase in the general level of interest rates would increase our net interest income by 0.70%, while a 100 basis-point

instantaneous decrease in interest rates would decrease net interest income by 5.18%.

We currently utilize

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

future changes in interest rates.

As of March 31, 2022 and December 31, 2021, the results of the models were within guidelines prescribed

by our Board of Directors.

If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting

to the Board, would be required by the ALCO and the Bank’s management.

The net interest

income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year

period on a cumulative basis, assuming certain changes in the general level of interest rates.

model, which was run as of March 31, 2022, we estimated that over the next one-year period a 200 basis-point instantaneous increase in

the general level of interest rates would increase our net interest income by 3.60%, while a 100 basis-point instantaneous decrease in

interest rates would decrease net interest income by 6.28%.

As of December 31, 2021, we estimated that over the next one-year period

a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.35%, while

a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.64%.

Based on our model, which

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

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

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

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

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

was run as of March 31, 2022, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase

in the general level of interest rates would increase our net interest income by 9.20%, while a 100 basis-point instantaneous decrease

in interest rates would decrease net interest income by 10.89%.

As of December 31, 2021, we estimated that over the next three years,

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

income by 9.77%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 10.41%.

An EVE analysis is also used

to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down

100 basis points.

An EVE analysis is also

used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and

down 100 basis points.

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

Our EVE as of September 30, 2021, would

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

100 basis points.

Our EVE as of December 31, 2020, would decline by 7.76% with an instantaneous rate shock of up 200 basis

points, and increase by 5.70% with an instantaneous rate shock of down 100 basis points.

Our EVE as of March 31, 2022,

would increase by 0.65% with an instantaneous rate shock of up 200 basis points, and decline by 6.89% with an instantaneous rate shock

of down 100 basis points.

Our EVE as of December 31, 2021, would increase by 0.24% with an instantaneous rate shock of up 200

basis points, and decline by 5.20% with an instantaneous rate shock of down 100 basis points.

The following table illustrates

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

Change in EVE

Change in NII

the most recent results for EVE and one-year NII sensitivity as of March 31, 2022.

Interest Rates

Estimated Change in EVE

Interest Rates

Estimated Change in NII

(basis points)

Estimates of Fair Value

The estimation of fair value is significant to a number

of the Company’s assets, including loans held-for-sale and securities available-for-sale.

These are all recorded at either fair

value or the lower of cost or fair value.

The estimation of fair value is significant to

a number of the Company’s assets, including loans held-for-sale and securities available-for-sale.

These are all recorded at either

fair value or the lower of cost or fair value.

Fair values are volatile and may be influenced by a number of factors.

Circumstances that could

cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or

market interest rates.

Circumstances that

could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates,

or market interest rates.

Fair values for most available-for-sale securities are based on quoted market prices.

If quoted market prices are

not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics

If quoted market prices

are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics

of various financial instruments, and other factors.

3 unchanged sentences

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto

presented elsewhere herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating

results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation.

The consolidated financial statements and notes

thereto presented elsewhere herein have been prepared in accordance with GAAP, which requires the measurement of financial position and

operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due

to inflation.

The impact of inflation is reflected in the increased cost of operations;

unlike most industrial companies, nearly all of the Company’s

assets and liabilities are monetary.

As a result, interest rates have a greater impact on performance than do the effects of general levels

of inflation.

Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

unlike most industrial companies, nearly all of

the Company’s assets and liabilities are monetary.

As a result, interest rates have a greater impact on performance than do the

effects of general levels of inflation.

Interest rates do not necessarily move in the same direction or to the same extent as the prices

of goods and services.

Liquidity is a measure of a bank’s ability

4 unchanged sentences

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

As of September 30, 2021, the amount of liquid

assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’

As of March 31, 2022, the amount of liquid assets

remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’

withdrawal requirements, and other operational and client credit needs could be satisfied.

As of September 30, 2021, liquid assets (cash

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

As of March 31, 2022, liquid assets (cash and

due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $742.8 million, which represented 9.1%

of total assets and 10.9% of total deposits and borrowings, compared to $742.1 million as of December 31, 2021, which represented 9.1%

of total assets and 10.9% of total deposits and borrowings.

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

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

The Bank is a member of the Federal Home Loan Bank

of New York and, based on available qualified collateral as of March 31, 2022, had the ability to borrow $1.9 billion.

In addition, as

of September 30, 2021, the Bank had in place borrowing capacity of $25.0 million through correspondent banks.

The Bank also has a credit

facility established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral

of March 31, 2022, the Bank had in place borrowing capacity of $25 million through correspondent banks.

The Bank also has a credit facility

established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral

of $1.8 million.

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

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

As of September

As of March 31, 2022, the Bank had aggregate available and unused credit of approximately $1.0 billion, which represents

the aforementioned facilities totaling $1.9 billion net of $0.9 billion in outstanding borrowings and letters of credit.

As of March 31,

2022, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.

Cash and cash equivalents totaled $413.2 million as

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

Cash and cash equivalents totaled $311.5 million

as of March 31, 2022, increasing by $46.0 million from $265.5 million as of December 31, 2021.

Operating activities provided

1 unchanged sentence

Investing activities used $160.2 million in net cash, primarily reflecting an increase in loans.

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

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

The following table sets forth the composition of our

deposit base by the periods indicated.

Financing activities provided $160.4 million in net cash, primarily reflecting an increase in deposits, partially offset by net

repayment of FHLB borrowings of $56 million.

Total deposits increased by $227.5 million, or

3.6%, to $6.6 billion as of March 31, 2022 from December 31, 2021.

The increase was primarily due to increases in demand, interest-bearing

and NOW, savings, and demand, noninterest bearing deposits, partially offset by a decrease in time deposits.

The following table sets

forth the composition of our deposit base by the periods indicated.

March 31, 2022

December 31, 2021

(dollars in thousands)

Demand, noninterest-bearing

Demand, interest-bearing

Demand, interest-bearing and NOW

Total deposits

Subordinated Debentures

During December 2003, Center Bancorp Statutory Trust

II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities

During December 2003, Center Bancorp Statutory

Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities

to investors due on January 23, 2034.

3 unchanged sentences

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

as of September 30, 2021 was 2.98%.

During September

as of March 31, 2022 was 3.15%.

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

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

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

December 15, 2020.

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

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

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

on September 15, 2025.

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

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

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

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

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

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

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

During January 2018, the Parent Corporation issued

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284 basis points.

During September 2015, the Parent Corporation issued

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

As of December

31, 2020, the 2015 Notes had a stated maturity of July 1, 2025, and bore interest until the maturity date or early redemption date at

a variable rate equal to the then current three-month LIBOR rate plus 393 basis points.

As of December 31, 2020, the variable interest

rate was 4.16% and all costs related to 2015 issuance have been amortized.

The 2015 Notes were redeemed in full on January 1, 2021.

Stockholders’ Equity

The Company’s stockholders’ equity

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

In August 2021, the Company raised $110.9

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

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

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

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

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

was $1.1 billion as of March 31, 2022, an increase of $14.3 million from December 31, 2021.

The increase in stockholders’ equity

was primarily attributable to retained earnings, in addition to an increase in additional paid-in capital, partially offset by a decrease

in accumulated other comprehensive income, reflecting the after-tax decline in the fair value of investment securities net of unrealized

hedge gains recorded in other assets, and an increase in treasury stock.

As of March 31, 2022, the Company’s tangible common equity

ratio and tangible book value per share were 9.99% and $20.51, respectively.

2 unchanged sentences

Total goodwill and other intangible assets were approximately

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

September 30,

(dollars in thousands,

except for share and per share data)

$216.9 million and $217.4 million, as of March 31, 2022 and December 31, 2021, respectively.

The following table shows the reconciliation of

common equity to tangible common equity and the tangible common equity ratio.

(dollars in thousands, except for share and per share data)

Common equity

intangible assets

Tangible common stockholders’

Tangible common stockholders’ equity

intangible assets

Tangible assets

Common stock outstanding as of period end

Common stock outstanding at period end

Tangible common equity ratio (1)

1 unchanged sentence

intangible assets

book value per common share

Tangible book value per common share

(1) Tangible common equity ratio is a non-GAAP measure.

Regulatory Capital and Capital Adequacy

The maintenance of a solid capital foundation is a primary

goal for the Company.

The maintenance of a solid capital foundation is

a primary goal for the Company.

Accordingly, capital plans, stock repurchases and dividend policies are monitored on an ongoing basis.

The Company’s

objective with respect to the capital planning process is to effectively balance the retention of capital to support future growth with

the goal of providing stockholders with an attractive long-term return on their investment.

The Company and the Bank are subject to regulatory guidelines

establishing minimum capital standards that involve quantitative measures of assets, and certain off-balance sheet items, as risk-adjusted

assets under regulatory accounting practices.

The following is a summary of regulatory capital amounts

and ratios as of September 30, 2021 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory

requirements for classification as a well-capitalized depository institution.

Bancorp, Inc.

For Capital Adequacy

To Be Well-Capitalized Under

Prompt Corrective Action

As of September 30, 2021

The Company’s objective with respect to the capital planning process is to effectively balance the retention of capital to support

future growth with the goal of providing stockholders with an attractive long-term return on their investment.

The Company and the Bank are subject to regulatory

guidelines establishing minimum capital standards that involve quantitative measures of assets, and certain off-balance sheet items, as

risk-adjusted assets under regulatory accounting practices.

The following is a summary of regulatory capital

amounts and ratios as of March 31, 2022 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory

requirements for classification as a well-capitalized depository institution (for the Bank).

ConnectOne Bancorp, Inc.

For Capital Adequacy Purposes

To Be Well-Capitalized Under Prompt Corrective Action Provisions

As of March 31, 2022

(dollars in thousands)

3 unchanged sentences

Total risk-based capital

N/A - not applicable

ConnectOne Bank

For Capital Adequacy

1 unchanged sentence

Prompt Corrective Action

of September 30, 2021

As of March 31, 2022

(dollars in thousands)

3 unchanged sentences

Total risk-based capital

- not applicable

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

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

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

Qualitative and Quantitative Disclosures

about Market Risks

of March 31, 2022, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them.

The lowest ratio

at the Company is the CET I Risk Based Ratio which was 3.69% above the minimum buffer ratio and, at the Bank, the lowest ratio was the

Total Risk Based Capital Ratio which was 3.02% above the minimum buffer ratio.

Qualitative and Quantitative Disclosures about Market Risks

Interest rate risk management is our primary market

2 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis