ConnectOne Bancorp, Inc. 10-Q

Item 1. Financial Statements CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (unaudited)   (in thousands, except for share data)   June 30,     December 31,       2022     2021                     ASSETS                 Cash and due from banks   $ 58,807     $ 54,352   Interest-bearing deposits with banks     240,513       211,184   Cash and cash equivalents     299,320       265,536                     Investment securities     675,941       534,507   Equity securities     15,993       13,794                     Loans held-for-sale     3,182       250                     Loans receivable     7,274,573       6,828,622   Less: Allowance for credit losses - loans     82,739       78,773   Net loans receivable     7,191,834       6,749,849                     Investment in restricted stock, at cost     47,287       27,826   Bank premises and equipment, net     28,391       29,032   Accrued interest receivable     34,615       34,152   Bank owned life insurance     228,279       195,731   Right of use operating lease assets     10,809       11,017   Other real estate owned     316       -   Goodwill     208,372       208,372   Core deposit intangibles     8,130       8,997   Other assets     89,037       50,417   Total assets   $ 8,841,506     $ 8,129,480   LIABILITIES                 Deposits:                 Noninterest-bearing   $ 1,712,875     $ 1,617,049   Interest-bearing     4,904,724       4,715,904   Total deposits     6,617,599       6,332,953   Borrowings     874,964       468,193   Subordinated debentures, net     153,103       152,951   Operating lease liabilities     12,116       12,417   Other liabilities     40,577       38,754   Total liabilities     7,698,359       7,005,268                     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 June 30, 2022 and as of December 31, 2021; outstanding 115,000 shares as of June 30, 2022 and as of December 31, 2021     110,927       110,927   Common stock, no par value: Authorized 100,000,000 shares; issued 42,679,405 shares as of June 30, 2022 and 42,557,264 shares as of December 31, 2021; outstanding 39,243,123 shares as of June 30, 2022 and 39,568,090 as of December 31, 2021     586,946       586,946   Additional paid-in capital     27,536       27,246   Retained earnings     489,640       440,169   Treasury stock, at cost 3,436,282 common shares as of June 30, 2022 and 2,989,174 as of December 31, 2021     ( 52,799 )     ( 39,672 ) Accumulated other comprehensive loss     ( 19,103 )     ( 1,404 ) Total stockholders’ equity     1,143,147       1,124,212   Total liabilities and stockholders’ equity   $ 8,841,506     $ 8,129,480     See accompanying notes to unaudited consolidated financial statements.   3 Table of Contents     CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited)       Three Months Ended     Six Months Ended       June 30,     June 30,       2022     2021     2022     2021   (dollars in thousands, except for per share data)                                 Interest income                                 Interest and fees on loans   $ 81,285     $ 71,101     $ 157,310     $ 141,563   Interest and dividends on investment securities:                                 Taxable     2,551       995       4,424       2,083   Tax-exempt     916       608       1,625       1,374   Dividends     291       263       505       519   Interest on federal funds sold and other short-term investments     313       84       433       133   Total interest income     85,356       73,051       164,297       145,672   Interest expense                                 Deposits     5,709       6,424       10,719       14,009   Borrowings     4,056       3,618       7,629       7,491   Total interest expense     9,765       10,042       18,348       21,500   Net interest income     75,591       63,009       145,949       124,172   Provision for (reversal of) credit losses     3,000       ( 1,649 )     4,450       ( 7,415 ) Net interest income after provision for (reversal of) credit losses     72,591       64,658       141,499       131,587   Noninterest income                                 Deposit, loan and other income     1,866       2,222       3,609       3,390   Income on bank owned life insurance     1,342       1,185       2,548       2,249   Net gains on sale of loans held-for-sale     556       847       1,257       1,554   Gain on sale of branches     -       -       -       674   Net (losses) gains on equity securities     ( 405 )     23       ( 1,001 )     ( 164 ) Net gain on sales/redemptions of securities available-for-sale     -       195       -       195   Total noninterest income     3,359       4,472       6,413       7,898   Noninterest expenses                                 Salaries and employee benefits     19,662       15,351       38,445       30,983   Occupancy and equipment     2,733       3,187       4,662       6,591   FDIC insurance     725       580       1,331       1,515   Professional and consulting     2,124       2,117       3,916       4,073   Marketing and advertising     426       278       777       519   Information technology and communications     2,801       2,636       5,667       5,161   Amortization of core deposit intangibles     434       508       867       1,015   Other components of net periodic pension expense     ( 143 )     ( 67 )     ( 286 )     ( 134 ) Increase in value of acquisition price     833       -       1,516       -   Other expenses     2,108       1,669       4,038       3,021   Total noninterest expenses     31,703       26,259       60,933       52,744   Income before income tax expense     44,247       42,871       86,979       86,741   Income tax expense     11,889       10,652       23,240       21,523   Net income     32,358       32,219       63,739       65,218   Preferred dividends     1,509       -       3,018       -   Net income available to common stockholders   $ 30,849     $ 32,219     $ 60,721     $ 65,218   Earnings per common share                                 Basic   $ 0.78     $ 0.81     $ 1.54     $ 1.64   Diluted     0.78       0.81       1.53       1.63     See accompanying notes to unaudited consolidated financial statements.   4 Table of Contents     CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)       Three Months Ended     Six Months Ended       June 30,     June 30,   (dollars in thousands)   2022     2021     2022     2021   Net income   $ 32,358     $ 32,219     $ 63,739     $ 65,218   Other comprehensive income (loss):                                                                   Unrealized holding (losses) gains on available-for-sale securities arising during the period     ( 23,891 )     271       ( 54,516 )     ( 5,169 ) Tax effect     7,616       ( 68 )     15,755       1,364   Net of tax     ( 16,275 )     203       ( 38,761 )     ( 3,805 ) Reclassification adjustment for realized gains included in net income     -       ( 195 )     -       ( 195 ) Tax effect     -       48       -       48   Net of tax     -       ( 147 )     -       ( 147 )                                   Unrealized gains (losses) on cash flow hedges     8,284       ( 42 )     27,284       ( 18 ) Tax effect     ( 2,946 )     15       ( 8,287 )     4   Net of tax     5,338       ( 27 )     18,997       ( 14 ) Reclassification adjustment for realized losses on cash flow hedges included in net income     129       584       654       1,215   Tax effect     ( 37 )     ( 167 )     ( 184 )     ( 344 ) Net of tax     92       417       470       871                                     Unrealized gains on pension plan     -       -       2,187       -   Tax effect     -       -       ( 615 )     -   Net of tax     -       -       1,572       -   Reclassification adjustment for realized losses on pension plan included in net income     16       75       32       150   Tax effect     ( 5 )     ( 22 )     ( 9 )     ( 42 ) Net of tax     11       53       23       108                                     Total other comprehensive (loss) income     ( 10,834 )     499       ( 17,699 )     ( 2,987 )                                   Total comprehensive income   $ 21,524     $ 32,718     $ 46,040     $ 62,231     See accompanying notes to unaudited consolidated financial statements.   5 Table of Contents     CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY (unaudited)       Six Months Ended June 30, 2022                                               Accumulated                               Additional                     Other     Total       Preferred     Common     Paid-In     Retained     Treasury     Comprehensive     Stockholders’   (in thousands, except share data)   Stock     Stock     Capital     Earnings     Stock     (Loss) Income     Equity   Balance as of December 31, 2021   $ 110,927     $ 586,946     $ 27,246     $ 440,169     $ ( 39,672 )   $ ( 1,404 )   $ 1,124,212   Net income     -       -       -       63,739       -       -       63,739   Other comprehensive loss, net of tax     -       -       -       -       -       ( 17,699 )     ( 17,699 ) Cash dividend declared on preferred stock ($ 0.65625 per depositary share)     -       -       -       ( 3,018 )     -       -       ( 3,018 ) Cash dividends declared on common stock ($ 0.285 per share)     -       -       -       ( 11,250 )     -       -       ( 11,250 ) Exercise of stock options ( 15,086 shares)     -       -       124       -       -       -       124   Restricted stock grants, net of forfeitures ( 53,169 shares)     -       -       -       -       -       -       -   Stock grants ( 153 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of restricted stock units earned ( 31,383 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of performance units earned ( 22,350 shares)     -       -       -       -       -       -       -   Share redemption for tax withholdings on performance units and restricted stock units earned     -       -       ( 2,133 )     -       -       -       ( 2,133 ) Repurchase of treasury stock ( 447,108 shares)     -       -       -       -       ( 13,127 )     -       ( 13,127 ) Stock-based compensation expense     -       -       2,299       -       -       -       2,299                                                             Balance as of June 30, 2022   $ 110,927     $ 586,946     $ 27,536     $ 489,640     $ ( 52,799 )   $ ( 19,103 )   $ 1,143,147         Three Months Ended June 30, 2022                                               Accumulated                               Additional                     Other     Total       Preferred     Common     Paid-In     Retained     Treasury     Comprehensive     Stockholders’   (in thousands, except share data)   Stock     Stock     Capital     Earnings     Stock     (Loss) Income     Equity   Balance as of March 31, 2022   $ 110,927     $ 586,946     $ 28,484     $ 464,889     $ ( 44,458 )   $ ( 8,269 )   $ 1,138,519   Net income     -       -       -       32,358       -       -       32,358   Other comprehensive loss, net of tax     -       -       -       -       -       ( 10,834 )     ( 10,834 ) Cash dividends declared on preferred stock ($ 0.328125 per depositary share)     -       -       -       ( 1,509 )     -       -       ( 1,509 ) Cash dividends declared on common stock ($ 0.155 per share)     -       -       -       ( 6,098 )     -       -       ( 6,098 ) Exercise of stock options ( 6,312 shares)     -       -       33       -       -       -       33   Share redemption for tax withholdings on performance units and restricted stock units earned     -       -       ( 2,133 )     -       -       -       ( 2,133 ) Restricted stock grants, net of forfeitures ( 20,715 shares)     -       -       -       -       -       -       -   Repurchase of treasury stock ( 302,315 shares)     -       -       -       -       ( 8,341 )     -       ( 8,341 ) Stock-based compensation expense     -       -       1,152       -       -       -       1,152                                                             Balance as of June 30, 2022   $ 110,927     $ 586,946     $ 27,536     $ 489,640     $ ( 52,799 )   $ ( 19,103 )   $ 1,143,147     6 Table of Contents   (continued)       Six Months Ended June 30, 2021                                               Accumulated                               Additional                     Other     Total       Preferred     Common     Paid-In     Retained     Treasury     Comprehensive     Stockholders’   (in thousands, except share data)   Stock     Stock     Capital     Earnings     Stock     (Loss) Income     Equity   Balance as of December 31, 2020   $ -     $ 586,946     $ 23,887     $ 331,951     $ ( 30,271 )   $ 2,797     $ 915,310   Cumulative effect of change in accounting principle (see note 1b. “Authoritative Accounting Guidance Presentation”), net of tax     -       -       -       ( 2,925 )     -       -       ( 2,925 ) Balance as of January 1, 2021 as adjusted for changes in accounting principle     -       586,946       23,887       329,026       ( 30,271 )     2,797       912,385   Net income     -       -       -       65,218       -       -       65,218   Other comprehensive loss, net of tax     -       -       -       -       -       ( 2,987 )     ( 2,987 ) Cash dividends declared on common stock ($ 0.20 per share)     -       -       -       ( 7,964 )     -       -       ( 7,964 ) Exercise of stock options ( 5,449 shares)     -       -       45       -       -       -       45   Restricted stock grants, net of forfeitures ( 47,982 shares)     -       -       -       -       -       -       -   Stock grants ( 446 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of restricted stock units earned ( 14,711 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of performance units earned ( 34,458 shares)     -       -       -       -       -       -       -   Share redemption for tax withholdings on performance units and restricted stock units earned     -       -       ( 1,283 )     -       -       -       ( 1,283 ) Repurchase of treasury stock ( 93,629 shares)     -       -       -       -       ( 2,411 )     -       ( 2,411 ) Stock-based compensation expense     -       -       1,957       -       -       -       1,957                                                             Balance as of June 30, 2021   $ -     $ 586,946     $ 24,606     $ 386,280     $ ( 32,682 )   $ ( 190 )   $ 964,960         Three Months Ended June 30, 2021                                               Accumulated                               Additional                     Other     Total       Preferred     Common     Paid-In     Retained     Treasury     Comprehensive     Stockholders’   (in thousands, except share data)   Stock     Stock     Capital     Earnings     Stock     (Loss) Income     Equity   Balance as of March 31, 2021   $ -     $ 586,946     $ 23,621     $ 358,441     $ ( 32,682 )   $ ( 689 )   $ 935,637   Net income     -       -       -       32,219       -       -       32,219   Other comprehensive income, net of tax     -       -       -       -       -       499       499   Cash dividends declared on common stock ($ 0.11 per share)     -       -       -       ( 4,380 )     -       -       ( 4,380 ) Restricted stock grants, net of forfeitures ( 21,213 shares)     -       -       -       -       -       -       -   Stock-based compensation expense     -       -       985       -       -       -       985                                                             Balance as of June 30, 2021   $ -     $ 586,946     $ 24,606     $ 386,280     $ ( 32,682 )   $ ( 190 )   $ 964,960     See accompanying notes to unaudited consolidated financial statements.   7 Table of Contents     CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)       Six Months Ended       June 30,   (dollars in thousands)   2022     2021   Cash flows from operating activities                 Net income   $ 63,739     $ 65,218   Adjustments to reconcile net income to net cash provided by operating activities:                 Depreciation and amortization of premises and equipment     1,942       1,746   Provision for (reversal of) credit losses     4,450       ( 7,415 ) Amortization of intangibles     867       1,015   Net accretion of loans     ( 1,689 )     ( 2,803 ) Accretion on bank premises     ( 24 )     ( 45 ) Accretion on deposits     ( 518 )     ( 1,248 ) Amortization (accretion) on borrowings, net     14       ( 36 ) Stock-based compensation     2,299       1,957   Gains on sales/redemptions of securities available-for-sale, net     -       ( 195 ) Losses on equity securities, net     1,001       164   Gain on sale of branches     -       ( 674 ) Net losses on disposition of other premises and equipment     -       27   Gains on sale of loans held-for-sale, net     ( 1,257 )     ( 1,554 ) Loans originated for resale     ( 14,795 )     ( 30,600 ) Proceeds from sale of loans held-for-sale     16,302       40,043   Gain on sale of other real estate owned     -       ( 18 ) Increase in cash surrender value of bank owned life insurance     ( 2,548 )     ( 2,249 ) Amortization of premiums and accretion of discounts on securities available-for-sale     1,481       3,152   Amortization of subordinated debentures issuance costs     152       152   (Increase) decrease in accrued interest receivable     ( 463 )     1,316   Net change in operating leases     ( 93 )     ( 439 ) (Increase) decrease in other assets     ( 4,024 )     48,236   Increase in other liabilities     4,131       3,705   Net cash provided by operating activities     70,967       119,455                     Cash flows from investing activities                 Investment securities available-for-sale:                 Purchases     ( 296,254 )     ( 126,641 ) Maturities, calls and principal repayments     98,824       147,342   Purchases of equity securities     ( 3,200 )     -   Net (purchases) redemptions of restricted investment in bank stocks     ( 19,461 )     2,536   Payments on loans held-for-sale     2,390       18   Net increase in loans     ( 450,723 )     ( 173,384 ) Purchases of bank owned life insurance     ( 30,000 )     ( 25,000 ) Purchases of premises and equipment     ( 1,276 )     ( 541 ) Proceeds from sale of branches     -       1,087   Proceeds from sale of other real estate owned     -       321   Net cash used in investing activities     ( 699,700 )     ( 174,262 )                   Cash flows from financing activities                 Net increase in deposits     285,164       234,537   Increase in (repayment of) subordinated debentures     -       ( 50,000 ) Advances of borrowings     1,450,181       100,000   Repayments of borrowings     ( 1,043,424 )     ( 172,456 ) Cash dividends on preferred stock     ( 3,018 )     -   Repurchase of treasury stock     ( 13,127 )     ( 2,411 ) Cash dividends paid on common stock     ( 11,250 )     ( 7,964 ) Proceeds from exercise of stock options     124       45   Share redemption for tax withholdings on performance units and restricted stock units earned     ( 2,133 )     ( 1,283 ) Net cash provided by financing activities     662,517       100,468   Net change in cash and cash equivalents     33,784       45,661   Cash and cash equivalents at beginning of period     265,536       303,756                     Cash and cash equivalents at end of period   $ 299,320     $ 349,417     8 Table of Contents   (continued)   Supplemental disclosures of cash flow information                 Cash payments for:                 Interest paid on deposits and borrowings   $ 18,117     $ 23,236   Income taxes     20,832       20,299     Supplemental disclosures of noncash activities                 Investing:                 Transfer of loans from held-for-investment to other real estate owned   $ 316     $ 304   Transfer of loans from held-for-investment to held-for-sale     5,572       9,356     See accompanying notes to unaudited consolidated financial statements.   9 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 1a.   Nature of Operations, Principles of Consolidation and Risk and Uncertainties   Nature of Operations   ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Parent Corporation’s business currently consists primarily 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.   The preceding unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10 -Q and Rule 10 - 01 of Regulation S- X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022, or for any other interim period. The Company’s 2021 Annual Report on Form 10 -K should be read in conjunction with these consolidated financial statements.   Basis of Presentation   The consolidated financial statements have been prepared in conformity with GAAP. Some items in the prior year consolidated financial statements were reclassified to conform to current presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.      Use of Estimates   In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates.   10 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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 began to accelerate 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. The 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.       On July 27, 2017, the U.K. Financial Conduct Authority, which regulates London Interbank Offered Rate ("LIBOR"), announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the LIBOR administration after 2021. The announcement also indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, although banks have continued to submit rates for the calculation of LIBOR in 2022, at this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Similarly, banking regulators in the United States have required insured depository institutions in the United states to cease originating loans using LIBOR as a rate index as of December 31, 2021, and in March 2022 Congress adopted legislation providing for the replacement of LIBOR indexes in contracts without fall back language with the Secured Overnight Financing Rate ("SOFR"), and for the Federal Reserve to adopt regulation by September of 2022 implementing this change. Although the Bank ceased using LIBOR as an index for loans it originates, it is unclear at this time  what  effect these  changes may have  on the values of  loans and liabilities held or owed by the Bank whose interest rates are tied to LIBOR. Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our loans, and our investment securities.   11 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 1b. Authoritative Accounting Guidance   Newly Issued, But Not Yet Effective Accounting Standards   In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022 - 03, “Fair Value Measurement (Topic 820 ): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2022 - 03” ). ASU 2022 - 03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.  ASU 2022 - 03 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022 - 03 will have on its consolidated financial statements.   In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022 - 02, “Financial Instruments – Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022 - 02” ). ASU 2022 - 02 eliminates the accounting guidance for troubled debt restructurings (“TDRs”) in ASC 310 - 40, “Receivables - Troubled Debt Restructurings by Creditors” for entities that have adopted the current expected credit loss (“CECL”) model introduced by ASU 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments” (ASU 2016 - 13” ). ASU 2022 - 02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326 - 20, “Financial Instruments—Credit Losses—Measured at Amortized Cost”. ASU 2022 - 02 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022 - 02 will have on its consolidated financial statements.     Note 2.    Earnings per Common Share   Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 260 - 10 - 45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”).  The restricted stock awards granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities. The two -class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities.   Earnings per common share have been computed based on the following:       Three Months Ended     Six Months Ended       June 30,     June 30,   (dollars in thousands, except for per share data)   2022     2021     2022     2021   Net income available to common stockholders   $ 30,849     $ 32,219     $ 60,721     $ 65,218   Earnings allocated to participating securities     ( 70 )     ( 81 )     ( 150 )     ( 176 ) Income attributable to common stock   $ 30,779     $ 32,138     $ 60,571     $ 65,042                                     Weighted average common shares outstanding, including participating securities     39,379       39,781       39,469       39,786   Weighted average participating securities     ( 89 )     ( 100 )     ( 98 )     ( 107 ) Weighted average common shares outstanding     39,290       39,681       39,371       39,679   Incremental shares from assumed conversions of options, performance units and restricted shares     176       192       225       214   Weighted average common and equivalent shares outstanding     39,466       39,873       39,596       39,893                                     Earnings per common share:                                 Basic   $ 0.78     $ 0.81     $ 1.54     $ 1.64   Diluted     0.78       0.81       1.53       1.63     There were no antidilutive share equivalents as of   June 30, 2022 and June 30, 2021 .   12 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 3.    Investment Securities   The Company’s investment securities are classified as available-for-sale as of June 30, 2022 and December 31, 2021 . 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 June 30, 2022 and December 31, 2021 . Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 6 of the Notes to Consolidated Financial Statements for a further discussion.   The following tables present information related to the Company’s portfolio of securities available-for-sale as of June 30, 2022 and December 31, 2021 .                                       Allowance                                       for               Gross     Gross             Investment       Amortized     Unrealized     Unrealized     Fair     Credit       Cost     Gains     Losses     Value     Losses       (dollars in thousands)   June 30, 2022                                                                                   Securities available-for-sale                                         Federal agency obligations   $ 58,375     $ 3     $ ( 5,708 )   $ 52,670     $ -   Residential mortgage pass-through securities     480,445       718       ( 36,883 )     444,280       -   Commercial mortgage pass-through securities     25,627       -       ( 2,769 )     22,858       -   Obligations of U.S. states and political subdivisions     158,545       252       ( 10,766 )     148,031       -   Corporate bonds and notes     5,480       20       ( 9 )     5,491       -   Asset-backed securities     2,165       -       ( 48 )     2,117         Other securities     494       -       -       494       -   Total securities available-for-sale   $ 731,131     $ 993     $ ( 56,183 )   $ 675,941     $ -                                             December 31, 2021                                         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     $ -     13 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 3.    Investment Securities – (continued)   Investment securities having a carrying value of approximately $ 191.3  million and $ 71.2  million as of June 30, 2022 and December 31, 2021 , respectively, were pledged to secure public deposits, borrowings, repurchase agreements, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law. As of June 30, 2022 and December 31, 2021 , 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 June 30, 2022 , 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.       June 30, 2022       Amortized     Fair       Cost     Value       (dollars in thousands)   Securities available-for-sale:                 Due in one year or less   $ 3,450     $ 3,444   Due after one year through five years     4,876       4,880   Due after five years through ten years     3,765       3,788   Due after ten years     212,474       196,197   Residential mortgage pass-through securities     480,445       444,280   Commercial mortgage pass-through securities     25,627       22,858   Other securities     494       494   Total securities available-for-sale   $ 731,131     $ 675,941     Gross gains and losses from the sales and redemptions of securities for periods presented were as follows:                                         Three Months Ended     Six Months Ended       June 30,     June 30,       2022     2021     2022     2021       (dollars in thousands)   Proceeds   $ -     $ 5,185     $ -     $ 5,185                                     Gross gains on sales/redemptions of securities     -       195       -       195   Gross losses on sales/redemptions of securities     -       -       -       -   Net gain on sales/redemptions of securities     -       195       -       195   Less: tax provision on net gain     -       ( 48 )     -       ( 48 ) Net gain on sales/redemptions of securities, after taxes   $ -     $ 147     $ -     $ 147                                       14 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 3.    Investment Securities – (continued)   Impairment Analysis of Available--for-sale Debt Securities   The following tables indicate gross unrealized losses in an unrealized loss position for which an allowance for credit losses (“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 June 30, 2022 and December 31, 2021 .       June 30, 2022       Total     Less than 12 Months     12 Months or Longer       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized       Value     Losses     Value     Losses     Value     Losses       (dollars in thousands)   Securities available-for-sale:                                                 Federal agency obligations   $ 52,432     $ ( 5,708 )   $ 52,432     $ ( 5,708 )   $ -     $ -   Residential mortgage pass-through securities     379,001       ( 36,883 )     325,284       ( 28,304 )     53,717       ( 8,579 ) Commercial mortgage pass-through securities     22,858       ( 2,769 )     19,209       ( 1,731 )     3,649       ( 1,038 ) Obligations of U.S. states and political subdivisions     109,547       ( 10,766 )     99,802       ( 10,214 )     9,745       ( 552 ) Corporate bonds and notes     1,989       ( 9 )     1,989       ( 9 )     -       -   Asset-backed securities     2,117       ( 48 )     2,117       ( 48 )     -       -   Total temporarily impaired securities   $ 567,944     $ ( 56,183 )   $ 500,833     $ ( 46,014 )   $ 67,111     $ ( 10,169 )       December 31, 2021       Total     Less than 12 Months     12 Months or Longer       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized       Value     Losses     Value     Losses     Value     Losses       (dollars in thousands)   Securities available-for-sale:                                                 Federal agency obligations   $ 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 )   15 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 3.    Investment Securities – (continued)   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 June 30, 2022 and December 31, 2021 , totaled $ 2.6  million and $ 1.6  million, respectively.   The Company evaluates securities in 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   June 30, 2022 or 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.     Note 4. Derivatives   The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. The Company entered into nine  forward starting pay fixed-rate interest rate swaps, with a total notional amount of $ 400  million, eight  of which have since commenced. These are designated as cash flow hedges of current, or future, Federal Home Loan Bank advances. 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”). Payment dates on the one  remaining forward starting swap will commence in August 2022, with expiration dates on the nine  positions ranging from December 2025   to March 2028 . The swaps are 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 swap 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.    16 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 4. Derivatives – (continued)               Interest expense recorded on these swap transactions totaled approximately $ 0.1  million and $ 0.7  million during the three and six months ended June 30, 2022 , respectively, compared to $ 0.6  million and $ 1.2  million during the three and six months ended June 30, 2021 , respectively, and is reported as a component of interest expense on FHLB Advances.   Cash Flow Hedge   The following table presents the net losses recorded in other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the following periods:       Three Months Ended June 30, 2022       Amount of gain (loss) recognized in OCI (Effective Portion)     Amount of (gain) loss reclassified from OCI to interest income     Amount of gain recognized in other Noninterest income (Ineffective Portion)       (dollars in thousands)   Interest rate contracts   $ 8,284     $ 129     $ -         Three Months Ended June 30, 2021       Amount of gain (loss) recognized in OCI (Effective Portion)     Amount of gain (loss) reclassified from OCI to interest income     Amount of gain recognized in other Noninterest income (Ineffective Portion)       (dollars in thousands)   Interest rate contracts   $ ( 42 )   $ 584     $ -     17 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 4. Derivatives – (continued)     Six Months Ended June 30, 2022       Amount of gain (loss) recognized in OCI (Effective Portion)     Amount of (gain) loss reclassified from OCI to interest income     Amount of gain recognized in other Noninterest income (Ineffective Portion)       (dollars in thousands)   Interest rate contracts   $ 27,284     $ 654     $ -         Six Months Ended June 30, 2021       Amount of gain (loss) recognized in OCI (Effective Portion)     Amount of gain (loss) reclassified from OCI to interest income     Amount of gain recognized in other Noninterest income (Ineffective Portion)       (dollars in thousands)   Interest rate contracts   $ ( 18 )   $ 1,215     $ -     The following table reflects the cash flow hedges included in the consolidated statements of condition as of June 30, 2022 and December 31, 2021 :       June 30, 2022     December 31, 2021       Notional Amount     Fair Value     Notional Amount     Fair Value               (dollars in thousands)           Interest rate swaps related to FHLB advances included in assets   $ 400,000     $ 31,285     $ 475,000     $ 3,347     18 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses   Loans Receivable – The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of June 30, 2022 and December 31, 2021 :       June 30, 2022     December 31, 2021       (dollars in thousands)   Commercial (1)   $ 1,354,625     $ 1,299,428   Commercial real estate     5,107,382       4,741,590   Commercial construction     569,789       540,178   Residential real estate     249,379       255,269   Consumer     1,248       1,886   Gross loans     7,282,423       6,838,351   Net deferred loan fees     ( 7,850 )     ( 9,729 ) Total loans receivable   $ 7,274,573     $ 6,828,622       ( 1 ) Included in commercial loans as of June 30, 2022 and December 31, 2021 are PPP loans of $ 18.0  million and $ 93.1  million, respectively.   As of June 30, 2022  and December 31, 2021 , loan balances of approximately $ 2.5  billion, were pledged to secure borrowings from the FHLB of New York.   Loans held-for-sale - The following table sets forth the composition of the Company’s loans held-for-sale portfolio as of June 30, 2022 and December 31, 2021 :       June 30, 2022     December 31, 2021       (dollars in thousands)   Commercial real estate   $ 3,182     $ -   Residential real estate     -       250   Total carrying amount   $ 3,182     $ 250     Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL and nonaccrual loans without an ACL as of June 30, 2022 and December 31, 2021 :       June 30, 2022       Nonaccrual loans with ACL     Nonaccrual loans without ACL     Total Nonaccrual loans       (dollars in thousands)   Commercial   $ 27,875     $ 1,263     $ 29,138   Commercial real estate     10,162       19,021       29,183   Commercial construction     -       -       -   Residential real estate     895       1,540       2,435   Consumer     -       -       -   Total   $ 38,932     $ 21,824     $ 60,756     19 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)       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     Nonaccrual loans and loans 90 days or greater past due and still accruing include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.   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 “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 “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified 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.   20 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP. Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below. The following table presents loans by origination and risk designation as of June 30, 2022 (dollars in thousands):       Term loans amortized cost basis by origination year     Revolving     Total       2022     2021     2020     2019     2018     Prior     Loans     Gross Loans   Commercial                                                                 Pass   $ 168,961     $ 345,319     $ 52,681     $ 32,103     $ 51,661     $ 167,147     $ 470,129     $ 1,288,001   Special mention     -       -       -       -       -       9,618       3,317       12,935   Substandard     7,429       158       -       2,176       11,595       18,347       13,984       53,689   Doubtful     -       -       -       -       -       -       -       -   Total Commercial   $ 176,390     $ 345,477     $ 52,681     $ 34,279     $ 63,256     $ 195,112     $ 487,430     $ 1,354,625                                                                     Commercial Real Estate                                                                 Pass   $ 885,508     $ 1,619,792     $ 426,907     $ 373,166     $ 404,284     $ 1,099,266     $ 165,421     $ 4,974,344   Special mention     -       -       -       3,328       -       50,384       15,463       69,175   Substandard     -       1,949       4,500       10,520       20,274       18,411       8,209       63,863   Doubtful     -       -       -       -       -       -       -       -   Total Commercial Real Estate   $ 885,508     $ 1,621,741     $ 431,407     $ 387,014     $ 424,558     $ 1,168,061     $ 189,093     $ 5,107,382                                                                     Commercial Construction                                                                 Pass   $ 2,454     $ 7,914     $ 5,246     $ 6,508     $ 2,600     $ -     $ 537,890     $ 562,612   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       7,177       7,177   Doubtful     -       -       -       -       -       -       -       -   Total Commercial Construction   $ 2,454     $ 7,914     $ 5,246     $ 6,508     $ 2,600     $ -     $ 545,067     $ 569,789                                                                     Residential Real Estate                                                                 Pass   $ 20,431     $ 25,646     $ 26,598     $ 21,895     $ 20,702     $ 84,422     $ 42,760     $ 242,454   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       3,501       3,424       6,925   Doubtful     -       -       -       -       -       -       -       -   Total Residential Real Estate   $ 20,431     $ 25,646     $ 26,598     $ 21,895     $ 20,702     $ 87,923     $ 46,184     $ 249,379                                                                     Consumer                                                                 Pass   $ 1,109     $ -     $ 14     $ 1     $ 10     $ 2     $ 112     $ 1,248   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 1,109     $ -     $ 14     $ 1     $ 10     $ 2     $ 112     $ 1,248                                                                     Total                                                                 Pass   $ 1,078,463     $ 1,998,671     $ 511,446     $ 433,673     $ 479,257     $ 1,350,837     $ 1,216,312     $ 7,068,659   Special mention     -       -       -       3,328       -       60,002       18,780       82,110   Substandard     7,429       2,107       4,500       12,696       31,869       40,259       32,794       131,654   Doubtful     -       -       -       -       -       -       -       -   Grand Total   $ 1,085,892     $ 2,000,778     $ 515,946     $ 449,697     $ 511,126     $ 1,451,098     $ 1,267,886     $ 7,282,423     21 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   The following table presents loans by origination and risk designation as of December 31, 2021 (dollars in thousands):       Term loans amortized cost basis by origination year     Revolving     Total       2021     2020     2019     2018     8.5     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   $ 1,590     $ 85     $ 39     $ 21     $ 28     $ -     $ 123     $ 1,886   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 1,590     $ 85     $ 39     $ 21     $ 28     $ -     $ 123     $ 1,886                                                                     Total                                                                 Pass   $ 2,131,990     $ 628,843     $ 511,755     $ 540,362     $ 623,860     $ 995,049     $ 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   $ 2,134,128     $ 637,882     $ 517,603     $ 574,284     $ 639,093     $ 1,103,926     $ 1,231,435     $ 6,838,351        22 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   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 June 30, 2022 and December 31, 2021 :       June 30, 2022       Real Estate     Other     Total       (dollars in thousands)   Commercial   $ 6,333     $ 24,995     $ 31,328   Commercial real estate     65,507       -       65,507   Commercial construction     7,176       -       7,176   Residential real estate     5,364       -       5,364   Consumer     -       -       -   Total   $ 84,380     $ 24,995     $ 109,375         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     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 June 30, 2022 and December 31, 2021 :       June 30, 2022       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       (dollars in thousands)   Commercial   $ 16     $ 358     $ 4,403     $ 29,138     $ 33,915     $ 1,320,710     $ 1,354,625   Commercial real estate     -       2,894       5,761       29,183       37,838       5,069,544       5,107,382   Commercial construction     -       -       -       -       -       569,789       569,789   Residential real estate     674       -       -       2,435       3,109       246,270       249,379   Consumer     -       -       -       -       -       1,248       1,248   Total   $ 690     $ 3,252     $ 10,164     $ 60,756     $ 74,862     $ 7,207,561     $ 7,282,423         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       (dollars in thousands)   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     23 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   The following 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 that are allocated to each loan portfolio segment:       June 30, 2022       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Total       (dollars in thousands)   Allowance for credit losses - loans                                                 Individually evaluated impairment   $ 13,671     $ 2,505     $ -     $ 88     $ -     $ 16,264   Collectively evaluated impairment     12,187       43,136       3,413       3,537       4       62,277   Acquired with deteriorated credit quality individually analyzed     2,277       1,921       -       -       -       4,198   Total   $ 28,135     $ 47,562     $ 3,413     $ 3,625     $ 4     $ 82,739                                                     Gross loans                                                 Individually evaluated impairment   $ 32,163     $ 59,746     $ 7,177     $ 5,364     $ -     $ 104,450   Collectively evaluated impairment     1,317,400       5,041,875       562,612       244,015       1,248       7,167,150   Acquired with deteriorated credit quality individually analyzed     5,062       5,761       -       -       -       10,823   Total   $ 1,354,625     $ 5,107,382     $ 569,789     $ 249,379     $ 1,248     $ 7,282,423         December 31, 2021       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Total       (dollars in thousands)   Allowance for credit losses - loans                                                 Individually evaluated impairment   $ 15,131     $ 955     $ -     $ 131     $ -     $ 16,217   Collectively evaluated impairment     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 impairment   $ 33,726     $ 49,310     $ 13,196     $ 5,717     $ -     $ 101,949   Collectively evaluated impairment     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     24 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   Activity in the Company’s ACL for loans for the three and six months ended June 30, 2022 is summarized in the tables below.       Three Months Ended June 30, 2022       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Unallocated     Total       (dollars in thousands)   Balance as of March 31, 2022   $ 25,459     $ 47,868     $ 3,281     $ 3,455     $ 7     $ -     $ 80,070   Charge-offs     ( 292 )     ( 1 )     -       ( 9 )     -       -       ( 302 ) Recoveries     -       -       -       32       -       -       32   (Reversal of) provision for credit losses (loans)     2,968       ( 305 )     132       147       ( 3 )     -       2,939                                                             Balance as of June 30, 2022   $ 28,135     $ 47,562     $ 3,413     $ 3,625     $ 4     $ -     $ 82,739         Six Months Ended June 30, 2022       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Unallocated     Total       (dollars in thousands)   Balance as of December 31, 2021   $ 25,969     $ 45,589     $ 3,580     $ 3,628     $ 7     $ -     $ 78,773   Charge-offs     ( 341 )     ( 226 )     -       ( 9 )     -       -       ( 576 ) Recoveries     1       -       -       63       -       -       64   (Reversal of) provision for credit losses (loans)     2,506       2,199       ( 167 )     ( 57 )     ( 3 )     -       4,478                                                             Balance as of June 30, 2022   $ 28,135     $ 47,562     $ 3,413     $ 3,625     $ 4     $ -     $ 82,739     Activity in the Company’s ACL for loans for the  six months ended June 30, 2021 is summarized in the table below. The CECL Day 1 row presents adjustments recorded through retained earnings to adopt the CECL standard and the increase to the ACL for loans associated with nonaccretable purchase accounting marks on loans that were classified as PCI as of December 31, 2020 .       Three Months Ended June 30, 2021       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Unallocated     Total       (dollars in thousands)   Balance as of March 31, 2021   $ 26,435     $ 43,897     $ 5,521     $ 4,704     $ 11     $ -     $ 80,568   Charge-offs     ( 50 )     ( 155 )     -       ( 7 )     -       -       ( 212 ) Recoveries     13       -       -       -       1       -       14   (Reversal of) provision for credit losses - loans     ( 831 )     73       ( 594 )     ( 331 )     ( 3 )     -       ( 1,686 )                                                           Balance as of June 30, 2021   $ 25,567     $ 43,815     $ 4,927     $ 4,366     $ 9     $ -     $ 78,684     25 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)       Six Months Ended June 30, 2021       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Unallocated     Total       (dollars in thousands)   Balance as of December 31, 2020   $ 28,443     $ 39,330     $ 8,194     $ 2,687     $ 4     $ 568     $ 79,226   Day 1 effect of CECL     ( 4,225 )     9,605       ( 961 )     2,697       9       ( 568 )     6,557                                                             Balance as of January 1, 2021 as adjusted for changes in accounting principle     24,218       48,935       7,233       5,384       13       -       85,783                                                             Charge-offs     ( 50 )     ( 155 )     -       ( 7 )     -       -       ( 212 )                                                           Recoveries     73       -       -       -       2       -       75   (Reversal of) provision for credit losses - loans     1,326       ( 4,965 )     ( 2,306 )     ( 1,011 )     ( 6 )     -       ( 6,962 )                                                           Balance as of June 30, 2021   $ 25,567     $ 43,815     $ 4,927     $ 4,366     $ 9     $ -     $ 78,684     Troubled Debt Restructurings   Loans are considered to have been modified in a troubled debt restructuring (“TDRs”) when, except as discussed below, due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. 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 June 30, 2022 , there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in troubled debt restructurings.   As of June 30, 2022 , TDRs totaled $ 73.9  million, of which $ 27.5  million were on nonaccrual status and $ 46.4  million were performing under their restructured terms. As of December 31, 2021 , TDRs totaled $ 79.5  million, of which $ 35.9  million were on nonaccrual status and $ 43.6  million were performing under their restructured terms. The Company has allocated $ 9.1  million and $ 10.4   million of specific allowance related to TDRs as of June 30, 2022 and December 31, 2021 , respectively.   The following table presents loans by class modified as TDRs that occurred during the six months ended June 30, 2022 :               Pre-Modification     Post-Modification               Outstanding     Outstanding       Number of     Recorded     Recorded       Loans     Investment     Investment       (dollars in thousands)   Troubled debt restructurings:                         Commercial     1     $ 98     $ 98   Commercial real estate     1       8,751       8,251   Total     2     $ 8,849     $ 8,349     The commercial loan modified as a TDR during the six months ended June 30, 2022 was a maturity extension, while the commercial real estate loan modified as a TDR during the six months ended June 30, 2022 was an interest rate reduction, that was commensurate with a one -time $ 500,000  principal paydown.   26 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   There were no TDRs for which there was a payment default within twelve months following the modification during the three and six months ended June 30, 2022 and June 30, 2021 .   The following table presents loans by class modified as TDRs that occurred during the six months ended June 30, 2021:               Pre-Modification     Post-Modification               Outstanding     Outstanding       Number of     Recorded     Recorded       Loans     Investment     Investment       (dollars in thousands)   Troubled debt restructurings:                         Commercial     3     $ 631     $ 631   Commercial real estate     3       8,603       8,603   Commercial construction     1       1,641       1,641   Residential real estate     3       1,758       1,758   Total     10     $ 12,633     $ 12,633     The ten loans modified as TDRs during the six months ended June 30, 2021 included nine maturity extensions and, one commercial real estate loan which was a recast of a nonaccrual credit.    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 a rollforward of the allowance for credit losses for unfunded commitments for the  three and six months ended June 30, 2022 and 2021 :       Three Months Ended     Three Months Ended       June 30,     June 30,       2022     2021       (dollars in thousands)   Balance at beginning of period   $ 2,262     $ 2,343   Provision for credit losses - unfunded commitments     61       37   Balance at end of period   $ 2,323     $ 2,380         Six Months Ended     Six Months Ended       June 30,     June 30,       2022     2021       (dollars in thousands)   Balance at beginning of period   $ 2,351     $ -   Day 1 Effect of CECL     -       2,833   Reversal of credit losses - unfunded commitments     ( 28 )     ( 453 ) Balance at end of period   $ 2,323     $ 2,380     27 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   Components of (Reversal of) Provision for Credit Losses   The following table summarizes the (reversal of) provision for credit losses for the  three and six months ended June 30, 2022 and 2021  :       Three Months Ended     Three Months Ended       June 30,     June 30,       2022     2021       (dollars in thousands)   Provision for (reversal of) credit losses (loans)   $ 2,939     $ ( 1,686 ) (Reversal of) provision for credit losses - unfunded commitments     61       37   Provision for (Reversal of) credit losses   $ 3,000     $ ( 1,649 )       Six Months Ended     Six Months Ended       June 30,     June 30,       2022     2021       (dollars in thousands)   Provision for (reversal of) credit losses (loans)   $ 4,478     $ ( 6,962 ) Reversal of credit losses - unfunded commitments     ( 28 )     ( 453 ) Provision for (reversal of) credit losses   $ 4,450     $ ( 7,415 )     Note 6. Fair Value Measurements and Fair Value of Financial Instruments   Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.     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.   28 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)   Assets 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 June 30, 2022 and December 31, 2021 :   Securities Available-for-Sale and Equity Securities : Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.   Derivatives : The fair value of derivatives is based on valuation models using observable market data as of the measurement date (level 2 ). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third -party pricing services.   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 June 30, 2022 and December 31, 2021 are as follows:               June 30, 2022               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   $ 52,670     $ -     $ 52,670     $ -   Residential mortgage pass-through securities     444,280       -       444,280       -   Commercial mortgage pass-through securities     22,858       -       22,858       -   Obligations of U.S. states and political subdivision     148,031       -       139,609       8,422   Corporate bonds and notes     5,491       -       5,491       -   Asset-backed securities     2,117       -       2,117       -   Other securities     494       494       -       -   Total available-for-sale     675,941       494       667,025       8,422                                     Equity securities     15,993       14,053       1,940       -   Derivatives     31,285       -       31,285       -   Total assets   $ 723,219     $ 14,547     $ 700,250     $ 8,422     29 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments –  (continued)               December 31, 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 six months ended June 30, 2022 and during the year ended December 31, 2021 .   Assets Measured at Fair Value on a Nonrecurring Basis   The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis as of June 30, 2022 and December 31, 2021 .   Loans Held-for-Sale : Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. Management obtains quotes or bids on all or parts of these loans directly from the purchasing financial institutions (Level 2 ).   Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value.  Fair value of these loans is determined based on the terms of the loan, such as interest rate, maturity date, reset term, as well as sales of similar assets (Level 3 ).   30 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments –  (continued)   Collateral Dependent Loans : The Company may record adjustments to the carrying value of loans based on fair value measurements, generally 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 June 30, 2022 and December 31, 2021 are as follows:               Fair Value Measurements at Reporting Date Using   Assets measured at fair value on a nonrecurring basis:   Carrying Value as of June 30, 2022     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   $ 14,657     $ -     $ -     $ 14,657   Commercial real estate     15,630       -       -       15,630   Residential real estate     1,365       -       -       1,365                 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     Collateral dependent loans – Collateral dependent loans as of June 30, 2022 that required a valuation allowance were $ 48.6  million with a related valuation allowance of $ 17.0  million compared to $ 54.1  million with a related valuation allowance of $ 17.8  million as of December 31, 2021 .   31 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments –  (continued)   Assets Measured with Significant Unobservable Level 3 Inputs   Recurring basis   The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) for the six months ended June 30, 2022 and for the year ended December 31, 2021 :       Municipal Securities       (dollars in thousands)   Beginning balance, December 31, 2021   $ 8,565   Principal paydowns     ( 143 ) Ending balance, June 30, 2022   $ 8,422         Municipal Securities       (dollars in thousands)   Beginning balance, December 31, 2020   $ 8,844   Principal paydowns     ( 279 ) Ending balance, December 31, 2021   $ 8,565     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 June 30, 2022 and December 31, 2021 . The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.   June 30, 2022                           Fair Value   Valuation Techniques   Unobservable Input   Rate   Securities available-for-sale:         (dollars in thousands)             Municipal securities   $ 8,422   Discounted cash flows   Discount rate     2.9 %   December 31, 2021                           Fair Value   Valuation Techniques   Unobservable Input   Rate   Securities available-for-sale:         (dollars in thousands)             Municipal securities   $ 8,565   Discounted cash flows   Discount rate     2.9 %   32 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments –  (continued)   Nonrecurring basis : The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy of collateral dependent loans.   June 30, 2022                       (dollars in thousands)   Fair Value     Valuation Techniques Unobservable Input   Range (weighted average)   Commercial   $ 14,006     Market approach (100%) Average transfer price as a price to unpaid principal balance     58% –88% (60%)   Commercial   $ 651     Appraisals of collateral value Comparable sales   -10% to +35% (+8%)   Commercial real estate   $ 15,630     Appraisals of collateral value Comparable sales     -25% to 10% (-14%)   Residential real estate   $ 1,365     Appraisals of collateral value Comparable sales   +21% to +39% (+22%)     December 31, 2021                       (dollars in thousands)   Fair Value     Valuation Techniques Unobservable Input   Range (weighted 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%)     33 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments –  (continued)   As of June 30, 2022 the fair value measurements presented are consistent with Topic 820, Fair Value Measurement , in which fair value represents exit price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 2022 and December 31, 2021 :                        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)                                             June 30, 2022                                         Financial assets:                                         Cash and due from banks   $ 299,320     $ 299,320     $ 299,320     $ -     $ -   Securities available-for-sale     675,941       675,941       494       667,025       8,422   Restricted investments in bank stocks     47,287       0       n/a       n/a       n/a   Equity securities     15,993       15,993       14,053       1,940       -   Net loans     7,191,834       6,993,635       -       -       6,993,635   Derivatives     31,285       31,285       -       31,285       -   Accrued interest receivable     34,615       34,615       -       2,649       31,966                                             Financial liabilities:                                         Noninterest-bearing deposits     1,712,875       1,712,875       1,712,875       -       -   Interest-bearing deposits     4,904,724       4,871,665       3,619,315       1,252,350       -   Borrowings     874,964       872,176       -       872,176       -   Subordinated debentures     153,103       153,952       -       153,952       -   Accrued interest payable     3,120       3,120       -       3,120       -                                             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       -     34 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments –  (continued)   The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above.   Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.   Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.   Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.     Note 7. Comprehensive (Loss) Income      Total comprehensive (loss) income includes all changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s other comprehensive income is comprised of unrealized holding gains and losses on securities available-for-sale, unrealized gains (losses) on cash flow hedges, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, each net of taxes.   The following table represents the reclassification out of accumulated other comprehensive (loss) for the periods presented (dollars in thousands):   Details about Accumulated Other Comprehensive Income Components   Amounts Reclassified from Accumulated Other Comprehensive Income     Amounts Reclassified from Accumulated Other Comprehensive Income   Affected Line item in the Consolidated Statements of Income     Three Months Ended June 30,     Six Months Ended June 30,         2022     2021     2022     2021     Sale of investment securities available-for-sale   $ -     $ 195     $ -     $ 195   Net gains on sale of securities available-for-sale       -       ( 48 )     -       ( 48 ) Income tax expense     $ -     $ 147     $ -     $ 147                                         Net interest expense on swaps   $ ( 129 )   $ ( 584 )   $ ( 654 )   $ ( 1,215 ) Borrowings       37       167       184       344   Income tax benefit     $ ( 92 )   $ ( 417 )   $ ( 470 )   $ ( 871 )                                       Amortization of pension plan net actuarial losses   $ ( 16 )   $ ( 75 )   $ ( 32 )   $ ( 150 ) Other components of net periodic pension expense       5       22       9       42   Income tax benefit     $ ( 11 )   $ ( 53 )   $ ( 23 )   $ ( 108 )   Total reclassification   $ ( 103 )   $ ( 323 )   $ ( 493 )   $ ( 832 )     35 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 7.    Comprehensive (Loss) Income – (continued)     Accumulated other comprehensive (loss) as of June 30, 2022 and December 31, 2021 consisted of the following:       June 30, 2022     December 31, 2021       (dollars in thousands)   Investment securities available-for-sale, net of tax   $ ( 39,293 )   $ ( 484 ) Cash flow hedge, net of tax     21,873       2,406   Defined benefit pension and post-retirement plans, net of tax     ( 1,683 )     ( 3,326 ) Total   $ ( 19,103 )   $ ( 1,404 )     Note 8.    Stock-based Compensation     The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017 . The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of June 30, 2022 . 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 June 30, 2022  were approximately  222,593 . 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 and restricted stock units 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 is no longer employed prior to the award's vesting. Restricted stock have the same dividend and voting rights as common stock, while options, performance units and restricted stock units do not.   All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are recorded as incurred. Stock-based compensation expense for the three and six months ended June 30, 2022  was $ 1.2  million and $ 2.3  million, respectively.  Stock-based compensation expense for the three and six months ended June 30, 2021  was $ 1.0  million and $ 2.0  million, respectively.   Activity under the Company’s options for the six months ended June 30, 2022 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, 2021     23,766     $ 9.94                   Granted     -       -                   Exercised     ( 15,086 )     8.21                   Forfeited/cancelled/expired     -       -                   Outstanding as of June 30, 2022     8,680       12.95       0.79     $ 99,756   Exercisable as of June 30, 2022     8,680     $ 12.95       -     $ -     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 June 30, 2022 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 June 30, 2022 . This amount changes based on the fair market value of the Company’s stock.   36 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 8.    Stock-Based Compensation – (continued)     Activity under the Company’s restricted stock for the six months ended June 30, 2022 was as follows:       Nonvested Shares     Weighted Average Grant Date Fair Value   Nonvested as of December 31, 2021     82,693     $ 21.78   Granted     53,543       30.76   Vested     ( 38,697 )     25.47   Forfeited/cancelled/expired     ( 374 )     30.99   Nonvested as of June 30, 2022     97,165     $ 25.22     As of June 30, 2022 , there was approximately $ 1.8  million of total unrecognized compensation cost related to nonvested restricted stock granted. The cost is expected to be recognized over a weighted average period of 1.3  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, 2021     209,994             $ 16.18   Awarded     34,874               32.80   Vested shares     ( 49,604 )             20.79   Unearned as of June 30, 2022     195,264       221,541     $ 17.98     As of June 30, 2022 , the specific number of shares related to performance units that were expected to vest was 195,264 , 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 June 30, 2022 , the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 221,541 . During the six months ended June 30, 2022 , 49,604  shares vested. A total of 27,254  shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of performance units during the six months ended June 30, 2022 were 22,350  shares. As of June 30, 2022 , compensation cost of approximately $ 1.8  million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.9  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, 2021     136,948     $ 16.52   Awarded     52,312       32.80   Vested shares     ( 69,225 )     16.13   Unearned as of June 30, 2022     120,035     $ 23.84     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 six months ended June 30, 2022 , 69,225  shares vested. A total of 38,201  shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of restricted stock units during the six months ended June 30, 2022 were 31,383  shares. As of June 30, 2022 , compensation cost of approximately $ 2.0  million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.6  years.   37 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 9.    Components of Net Periodic Pension Cost   The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until June 30, 2007, at which time the Company froze the plan. The following table sets forth the net periodic pension cost of the Company’s pension plan for the periods indicated.       Three Months Ended   Affected Line Item in the Consolidated     June 30,   Statements of Income     2022     2021         (dollars in thousands)     Service cost   $ -     $ -     Interest cost     78       71   Other components of net periodic pension expense Expected return on plan assets     ( 237 )     ( 213 ) Other components of net periodic pension expense Net amortization     16       75   Other components of net periodic pension expense Total periodic pension income   $ ( 143 )   $ ( 67 )         Six Months Ended   Affected Line Item in the Consolidated     June 30,   Statements of Income     2022     2021         (dollars in thousands)     Service cost   $ -     $ -     Interest cost     156       142   Other components of net periodic pension expense Expected return on plan assets     ( 474 )     ( 426 ) Other components of net periodic pension expense Net amortization     32       150   Other components of net periodic pension expense Total periodic pension income   $ ( 286 )   $ ( 134 )     Contributions   The Company did not contribute to the Pension Trust during the six months ended June 30, 2022 . The Company does not plan on contributing amounts to the Pension Trust for the remainder of 2022 . The trust is established to provide retirement and other benefits for eligible employees and their beneficiaries. No part of the trust assets may be applied to any purpose other than providing benefits under the plan and for defraying expenses of administering the plan and the trust.     Note 10. FHLB Borrowings   The Company’s FHLB borrowings and weighted average interest rates are summarized below:       June 30, 2022     December 31, 2021       Amount     Rate     Amount     Rate       (dollars in thousands)   By remaining period to maturity:                                 Less than 1 year   $ 847,337       1.86 %   $ 390,549       0.56 % 1 year through less than 2 years     -       n/a       50,000       1.84 % 2 years through less than 3 years     25,000       1.00 %     -       n/a   3 years through less than 4 years     2,050       2.23 %     25,000       1.00 % 4 years through 5 years     -       n/a       2,050       2.23 % After 5 years     683       2.91 %     714       2.91 % FHLB borrowings - gross     875,070       1.84 %     468,313       0.73 % Fair value (discount)     ( 106 )             ( 120 )         Total FHLB borrowings   $ 874,964             $ 468,193             38 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 10. FHLB Borrowings – (continued)     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 bear fixed rates. The advances as of June 30, 2022 were primarily collateralized by approximately $ 2.0  billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement. As of June 30, 2022 the Company had remaining borrowing capacity of approximately $ 0.6  billion at FHLB.     Note 11. Subordinated Debentures   During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly owned subsidiary of the Parent Corporation issued $ 5.0  million of MMCapS capital securities to investors due on January 23, 2034 . The trust loaned the proceeds of this offering to the Company and received in exchange $ 5.2  million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is three -month LIBOR plus 2.85 % and re-prices quarterly. The rate as of June 30, 2022 was 4.14 %.   The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of June 30, 2022 and December 31, 2021 .   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   1/23/2034   1/23/2009   During June 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.   During January 2018, the Parent Corporation issued $ 75  million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain accredited investors. The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included the Parent Corporation contributing $ 65  million of the net proceeds to the Bank in the form of debt and common equity. The Notes are non-callable for five years, have a stated maturity of February 1, 2028  and bear interest at a fixed rate of 5.20 % per year, from and including January 17, 2018  to, but excluding February 1, 2023 . From and including February 1, 2023  to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three -month LIBOR rate plus 284  basis points.     Note 12. Preferred Stock   On August 19, 2021 , the Company completed an underwritten public offering of 115,000  shares, or $ 115.0  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.   39 Table of Contents     Item 2. 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 June 30, 2022 and December 31, 2021. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.   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 contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and 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 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. and its subsidiaries (collectively, the “Company”) conform, in all material respects, to GAAP. 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.   The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. 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 available. Additional information on these policies is provided below.   Allowance for Credit Losses and Related Provision : 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 asset(s). 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, among other factors, an analysis of historical loss rates by loan segment applied to current loan totals. However, actual credit losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.   40 Table of Contents   The ACL is established through a provision for credit losses charged to expense. 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 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 June 30, 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 (“PPP”), administered by the Small Business Administration (“SBA”), the Company was an active participant in assisting its customers with applications for resources through the program. 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 June 30, 2022, PPP loans were $18.0 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 June 30, 2022. Should those circumstances change, the Company could be required to establish additional provisions for credit loss expense charged to earnings. As of June 30, 2022 remaining deferred and unrecognized PPP fees were $0.3 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.   41 Table of Contents   Operating Results Overview   Net income available to common stockholders for the three months ended June 30, 2022 was $30.8 million compared to $32.2 million for the comparable three-month period ended June 30, 2021. The Company’s diluted earnings per share were $0.78 for the three months ended June 30, 2022 as compared with diluted earnings per share of $0.81 for the comparable three-month period ended June 30, 2021. The $1.4 million decrease in net income available to common stockholders and $0.03 decrease in diluted earnings per share versus the second quarter of 2021 were due to a $4.6 million increase to provision for credit losses, a $5.4 million increase in noninterest expenses, $1.5 million in preferred dividends, a $1.1 million decrease in noninterest income and a $1.2 million increase in income tax expenses, partially offset by a $12.6 million increase in net interest income.   Net income available to common stockholders for the six months ended June 30, 2022 was $60.7 million compared to $65.2 million for the comparable six-month period ended June 30, 2021. The Company’s diluted earnings per share were $1.53 for the six months ended June 30, 2022 as compared with diluted earnings per share of $1.63 for the comparable six-month period ended June 30, 2021. The $4.5 million decrease in net income available to common stockholders and $0.10 decrease in diluted earnings per share versus the first half of 2021 were due to a $11.9 million increase to provision for credit losses, a $8.2 million increase in noninterest expenses, $3.0 million in preferred dividends, a $1.5 million decrease in noninterest income and a $1.7 million increase in income tax expenses, partially offset by a $21.8 million increase in net interest income.   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 (including interest earned on 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 assets. 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 June 30, 2022 increased by $12.7 million, or 20.1%, from the comparable three-month period ended June 30, 2021. The increase from the second quarter of 2022  resulted primarily from a 12.1% increase in average loans and a 31 basis-point widening of the net interest margin to 3.91% from 3.60%.  The widening of the net interest margin resulted from a 24 basis-point increase in interest-earning assets and by a 7 basis-point reduction in the cost of interest-bearing liabilities.   Fully taxable equivalent net interest income for the six months ended June 30, 2022 increased by $22.0 million, or 17.6%, from the comparable six-month period ended June 30, 2021. The increase from the six months ended June 30, 2021 resulted primarily from a 11.0% increase in average loans and a 23 basis-point widening of the net interest margin to 3.81% from 3.58%. The widening of the net interest margin resulted from a 17 basis-point reduction in the cost of interest-bearing liabilities and 9 basis-point increase in yield on interest-earning assets.   42 Table of Contents   The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three months ended June 30, 2022 and 2021, the Company’s average assets, liabilities and stockholders’ equity. The Company’s net interest income, net interest spread and net interest margin are also reflected.   Average Statements of Condition with Interest and Average Rates     Three Months Ended June 30,     2022   2021           Interest               Interest           Average   Income/   Average   Average   Income/   Average     Balance   Expense   Rate (7)   Balance   Expense   Rate (7)     (dollars in thousands)   Interest-earning assets:                                     Securities (1) (2) $ 610,465   $ 3,710     2.44 % $ 444,461   $ 1,765     1.59 % Total loans (2) (3) (4)   7,008,174     81,597     4.67     6,252,212     71,348     4.58   Federal funds sold and interest-bearing with banks   157,201     312     0.80     341,885     84     0.10   Restricted investment in bank stocks   31,605     291     3.69     21,407     263     4.93   Total interest-earning assets   7,807,445     85,910     4.41     7,059,965     73,460     4.17   Noninterest-earning assets:                                     Allowance for credit losses   (81,012 )               (80,548 )             Other noninterest-earning assets   596,390                 587,259               Total assets $ 8,322,823               $ 7,566,676                                                     Interest-bearing liabilities:                                     Interest-bearing deposits:                                     Time deposits $ 1,103,418     2,179     0.79   $ 1,324,510     3,963     1.20   Other interest-bearing deposits   3,717,531     3,530     0.38     3,320,400     2,461     0.30   Total interest-bearing deposits   4,820,949     5,709     0.47     4,644,910     6,424     0.55                                         Borrowings   548,675     1,849     1.35     331,633     1,419     1.72   Subordinated debentures   153,053     2,178     5.71     152,750     2,168     5.69   Finance lease   1,865     28     6.02     2,066     31     6.02   Total interest-bearing liabilities   5,524,542     9,764     0.71     5,131,359     10,042     0.78                                         Demand deposits   1,607,465                 1,432,707               Other liabilities   47,719                 50,591               Total noninterest-bearing liabilities   1,655,184                 1,483,298               Stockholders’ equity   1,143,097                 952,019               Total liabilities and stockholders’ equity $ 8,322,823               $ 7,566,676               Net interest income (tax-equivalent basis)         76,146                 63,418         Net interest spread (5)               3.70 %               3.39 % Net interest margin (6)               3.91 %               3.60 % Tax-equivalent adjustment         (555 )               (409 )       Net interest income       $ 75,591               $ 63,009           (1) Average balances are based on amortized cost and include equity securities.   (2) Interest income is presented on a tax-equivalent basis using 21%.   (3) Includes loan fee income and accretion of purchase accounting adjustments.   (4) Total loans include loans held-for-sale and nonaccrual loans.   (5) Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis.   (6) Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.   (7) Rates are annualized.     43 Table of Contents       Six Months Ended June 30,     2022   2021           Interest             Interest           Average   Income/   Average   Average Income/   Average     Balance   Expense   Rate (7)   Balance Expense   Rate (7)     (dollars in thousands)   Interest-earning assets:                                   Securities (1) (2) $ 578,014   $ 6,481     2.26 % $ 458,741 $ 3,823     1.68 % Total loans (2 ) (3) (4)   6,940,203     157,917     4.59     6,249,630   142,031     4.58   Federal funds sold and interest-bearing with banks   234,284     433     0.37     305,911   133     0.09   Restricted investment in bank stocks   28,310     505     3.60     22,111   519     4.73   Total interest-earning assets   7,780,811     165,336     4.29     7,036,393   146,506     4.20   Noninterest-earning assets:                                   Allowance for credit losses   (80,391 )               (81,045)             Other noninterest-earning assets   592,847                 580,210             Total assets $ 8,293,267                 $ 7,535,558                                                 Interest-bearing liabilities:                                   Interest-bearing deposits:                                   Time deposits $ 1,113,958     4,333     0.78   $ 1,373,133   9,113     1.34   Other interest-bearing deposits   3,784,173     6,386     0.34     3,273,337   4,896     0.30   Total interest-bearing deposits   4,898,131     10,719     0.44     4,646,470   14,009     0.61                                       Borrowings   477,188     3,226     1.36     353,451   3,093     1.77   Subordinated debentures   153,016     4,346     5.73     153,541   4,335     5.69   Finance lease   1,891     57     6.08     2,091   63     6.08   Total interest-bearing liabilities   5,530,226     18,348     0.67     5,155,553   21,500     0.84                                       Demand deposits   1,577,427                 1,390,878             Other liabilities   48,052                 49,031             Total noninterest-bearing liabilities   1,625,479                 1,439,909             Stockholders’ equity   1,137,562                 940,096             Total liabilities and stockholders’ equity $ 8,293,267               $ 7,535,558             Net interest income (tax-equivalent basis)         146,988               125,006         Net interest spread (5)               3.62 %             3.36 % Net interest margin (6)               3.81 %             3.58 % Tax-equivalent adjustment         (1,039 )             (834 )       Net interest income       $ 145,949             $ 124,172             (1) Average balances are based on amortized cost and include equity securities.   (2) Interest income is presented on a tax-equivalent basis using 21%.   (3) Includes loan fee income and accretion of purchase accounting adjustments.   (4) Total loans include loans held-for-sale and nonaccrual loans.   (5) Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis.   (6) Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.   (7) Rates are annualized.   44 Table of Contents   Noninterest Income   Noninterest income totaled $3.4 million for the three months ended June 30, 2022, compared with $4.5 million for the comparable three-month period ended June 30, 2021.  Included in noninterest income for the three months ended June 30, 2022 and June 30, 2021 were net (losses) gains on equity securities of ($0.4) million and $23 thousand.  Also included in noninterest income for the three months ended June 30, 2021 was a $0.2 million gain on sale/redemption of investment securities.  Excluding these items, noninterest income decreased $0.5 million when compared to the comparable three-month period ended June 30, 2021.  The decrease was primarily attributable to decreases in deposit, loan and other income of $0.4 million and net gains on sale of loans held-for-sale of $0.3 million partially offset by an increase in income on bank owned life insurance of $0.2 million.   Noninterest income totaled $6.4 million for the six months ended June 30, 2022, compared with $7.9 million for the six months ended June 30, 2021. Included in noninterest income were net losses on equity securities of $1.0 million and $0.2 million for the  six months ended June 30, 2022 and six months ended June 2021, respectively, $0.7 million gain on the sale of branches and $0.2 million gain on sale/redemption of investment securities in the six months ended 2021. Excluding the aforementioned items, noninterest income was $7.4 million and $7.2 million for the six months ended June 30, 2022 and 2021, respectively. The $0.2 million increase in noninterest income excluding the items discussed above for the six months ended June 30, 2022 versus the comparable six-month period ended June 30, 2021 was primarily due to increases in deposit, loan and other income of $0.2 million, and BOLI income of $0.3 million, partially offset by a decrease in net gains on sale of loans held-for-sale of $0.3 million.   Noninterest Expenses   Noninterest expenses totaled $31.7 million for the three months ended June 30, 2022, compared with $26.3 million for the comparable three-month period ended June 30, 2021. Included in noninterest expenses for the three months ended June 30, 2022  was an increase in acquisition price related to the BoeFly acquisition of $0.8 million. Excluding this item, noninterest expenses increased $4.6 million when compared to the comparable three-month period ended June 30, 2021.  The increase was primarily attributable to increases in salaries and employee benefits of $4.3 million attributable to new hires, increases in information technology and communication expenses of $0.2 million and an increase in FDIC insurance of $0.1 million, partially offset by decreases in occupancy and equipment of $0.5 million, amortization of core deposit intangibles of $0.1 million and other expenses of $0.4 million.   Noninterest expenses totaled $60.9 million for the six months ended June 30, 2022, compared to $52.7 million for the six months ended June 30, 2021. Included in noninterest expenses for the six months ended June 30, 2022  was an increase in acquisition price related to the BoeFly acquisition of $1.5 million .Excluding this item, noninterest expenses increased $6.7 million when compared to the comparable six-month period ended June 30, 2021. The increase was primarily attributable to increases in salaries and employee benefits of $7.5 million attributable to new hires in both the revenue and back-office areas of the Bank, base-salary increases, and bonus accruals. Also, contributing to the increase were increases in information technology and communications of $0.5 million and marketing and advertising of $0.3 million, partially offset by decreases in occupancy of $1.9 million, FDIC insurance of $0.2 million, professional and consulting of $0.2 million and amortization of core deposit intangibles of $0.1 million.   Income Taxes   Income tax expense was $11.9 million for the three months ended June 30, 2022, compared to $10.7 million for the comparable three-month period ended June 30, 2021.  The increase in income tax expense was the result of higher income before taxes. The effective tax rate for the three months ended June 30, 2022 and June 30, 2021 was 26.9% and 24.8%, respectively.  The higher effective tax rate during the second quarter 2022 when compared to the second quarter of 2021 resulted from a lower proportion of income from non-taxable sources.    Income tax expense was $23.2 million for the six months ended June 30, 2022, compared to $21.5 million for the six months ended June 30, 2021. The effective tax rate for the three months ended June 30, 2022 and June 30, 2021 was 26.7% and 24.8%, respectively. The effective tax rate for the six months ended of 2022 was higher compared to June 30, 2021 due to different proportions of income from non-taxable sources.   45 Table of Contents   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.       June 30, 2022     December 31, 2021     Amount Increase/       Amount     %     Amount     %     (Decrease)       (dollars in thousands)   Commercial (1)   $ 1,354,625       18.6 %   $ 1,299,428       19.0 %   $ 55,197   Commercial real estate     5,107,382       70.1 %     4,741,590       69.3 %     365,792   Commercial construction     569,789       7.8 %     540,178       7.9 %     29,611   Residential real estate     249,379       3.4 %     255,269       3.7 %     (5,890 ) Consumer     1,248       0.1 %     1,886       0.1 %     (638 ) Gross loans   $ 7,282,423       100.0 %   $ 6,838,351       100.0 %   $ 444,072     As of June 30, 2022, gross loans totaled $7.3 billion, an increase of $444.1 million, or 6.5%, as compared to December 31, 2021. Net loan growth was attributable to organic loan originations.   (1) Included in commercial loans as of June 30, 2022 and December 31, 2021 are PPP loans of $18.0 million and $93.1 million, respectively.   Allowance for Credit Losses and Related Provision   As of June 30, 2022, the Company’s allowance for credit losses for loans was $82.7 million, an increase of $3.9 million from $78.8 million December 31, 2021. The increase was primarily attributable to an increase in provision for credit losses for loans of $4.5 million partially offset by an increase of $0.5 million in net charge-offs.   The provision for (reversal of) credit losses, which includes provision for unfunded commitments, for the three and six months ended June 30, 2022 was $3.0 million and  $4.5 million, respectively, compared to $(1.6) million and $(7.4) million, for the three and six months ended June 30, 2021, respectively. The increase in provision for credit losses reflected strong organic loan growth and forecasted macroeconomic conditions, which remained fairly stable for the three and six months ended June 30, 2022. The prior year provision in the three and six months ended June 30, 2021, was primarily the result of  an improved macro-economic forecast as of June 30, 2021 when compared to January 1, 2021, the day the Company adopted CECL.   There were $0.3 million  and $0.5 million in net charge-offs for the three months and six months ended June 30, 2022, compared with $0.2 million and $0.1 million in net charge-offs for the three and six months ended June 30, 2021, respectively. The ACL as a percentage of loans receivable amounted to 1.14% as of June 30, 2022 compared to 1.15% as of December 31, 2021. Excluding the impact of PPP loans in the calculation of the ACL as a percentage of loans receivable, the June 30, 2022 ratio remains the same at 1.14% as of June 30, 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 June 30, 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.     46 Table of Contents   Changes in the ACL are presented in the following table for the periods indicated.       Three Months Ended       June 30,       2022     2021       (dollars in thousands)   Average loans receivable   $ 7,007,207     $ 6,248,516   Analysis of the ACL:                 Balance - beginning of quarter   $ 80,070     $ 80,568   Charge-offs:                 Commercial     (292 )     (50 ) Commercial real estate     (1 )     (155 ) Residential real estate     (9 )     (7 ) Total charge-offs     (302 )     (212 ) Recoveries:                 Commercial     -       13   Commercial real estate     -       -   Residential real estate     4       -   Consumer     28       1   Total recoveries     32       14   Net (charge-offs) recoveries     (270 )     (198 ) Provision for (reversal of) loan losses (loans)     2,939       (1,686 ) Balance - end of period   $ 82,739     $ 78,684                     Ratio of annualized net charge-offs during the period to average loans receivable during the period     0.02 %     0.01 % Loans receivable   $ 7,274,573     $ 6,407,904   ACL as a percentage of loans receivable     1.14 %     1.23 %       Six Months Ended       June 30,       2022     2021       (dollars in thousands)   Average loans receivable   $ 6,939,527     $ 6,245,665   Analysis of the ACL:                 Balance - beginning of quarter   $ 78,773     $ 79,226   CECL Day 1 Adjustment     -       6,557   Balance – beginning of quarter (as adjusted)     78,773       85,783   Charge-offs:                 Commercial     (341 )     (50 ) Commercial real estate     (226 )     (155 ) Residential real estate     (9 )     (7 ) Consumer     -       -   Total charge-offs     (576 )     (212 ) Recoveries:                 Commercial     1       73   Commercial real estate     -       -   Residential real estate     63       -   Consumer     -       2   Total recoveries     64       75   Net (charge-offs) recoveries     (512 )     (137 ) Provision for (reversal of) credit losses (loans)     4,478       (6,962 ) Balance - end of period   $ 82,739     $ 78,684                     Ratio of annualized net charge-offs during the period to average loans receivable during the period     0.01 %     0.01 % Loans receivable   $ 7,274,573     $ 6,407,904   ACL as a percentage of loans receivable     1.14 %     1.23 %   47 Table of Contents   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. The Company strives to identify loans experiencing difficulty early on, 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 interest accruals once a loan is past due as to interest or principal payments for a period of ninety days. When a loan is placed on nonaccrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on nonaccrual loans are generally applied against principal. A loan may be restored to an accruing basis when all past due amounts have been collected. 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. 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. 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:       June 30, 2022     December 31, 2021       (dollars in thousands)   Nonaccrual loans   $ 60,756     $ 61,700   OREO     316       -   Total nonperforming assets (1)   $ 61,072     $ 61,700                     Performing TDRs   $ 46,368     $ 43,587   Loans 90 days or greater past due and still accruing (non PCD)   $ -     $ -   Loans 90 days or greater past due and still accruing (PCD)   $ 10,164     $ 13,531     (1) Nonperforming assets are defined as nonaccrual loans and OREO.   Nonaccrual loans to total loans receivable     0.84 %     0.90 %                   Nonperforming assets to total assets     0.69 %     0.76 % Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable     1.62 %     1.74 %   48 Table of Contents   Investment Securities   As of June 30, 2022, the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations of U.S. states and political subdivisions, corporate bonds and notes, asset-backed securities and equity securities. For the quarter ended June 30, 2022, average securities increased $166.0 million to approximately $610.5 million, or 7.8% of average total interest-earning assets, from approximately $444.5 million, or 6.3% of average interest-earning assets, compared to June 30, 2021.   As of June 30, 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 $39.3 million as compared with net unrealized losses of $0.5 million as of December 31, 2021. The increase in unrealized losses 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. This also resulted in a $15.7 million increase in deferred tax assets, attributable to the decline in fair value on securities available-for-sale. 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 allowance for credit losses for available-for-sale as of June 30, 2022.   Interest Rate Sensitivity Analysis   The principal objective of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”). The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.   We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of June 30, 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.   Based on our model, which was run as of June 30, 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 2.30%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.65%. 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 June 30, 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 5.76%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 8.65%. 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. The economic value of equity is likely to be different as interest rates change. Our EVE as of June 30, 2022, would decrease by 1.41% with an instantaneous rate shock of up 200 basis points, and decline by 6.86% 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.    49 Table of Contents   The following table illustrates the most recent results for EVE and one-year NII sensitivity as of June 30, 2022.   Interest Rates     Estimated     Estimated Change in EVE     Interest Rates     Estimated     Estimated Change in NII   (basis points)     EVE     Amount       %   (basis points)     NII     Amount       % 300     $ 1,357,671       (56,033 )     (3.96 )     300     $ 315,272     $ 8,942       2.92   200       1,393,815       (19,889 )     (1.41 )     200       313,381       7,051       2.30   100       1,419,841       6,137       0.43       100       311,264       4,934       1.61   0       1,413,704       -       -       0       306,330       -       -   -100       1,316,776       (96,928 )     (6.86 )     -100       289,023       (17,307 )     (5.65 )   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. 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. 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 of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.   Impact of Inflation and Changing Prices   The 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.   Liquidity   Liquidity is a measure of a bank’s ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.   As of June 30, 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 June 30, 2022, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $796.9 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 June 30, 2022, had the ability to borrow $2.3 billion. In addition, as of June 30, 2022, the Bank had in place borrowing capacity of $325 million through correspondent banks and other unsecured borrowing lines. 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 June 30, 2022, the Bank had aggregate available and unused credit of approximately $880 million, which represents the aforementioned facilities totaling $2.3 billion net of $1.4 billion in outstanding borrowings and letters of credit. As of June 30, 2022, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.   Cash and cash equivalents totaled $299.3 million as of June 30, 2022, increasing by $33.8 million from $265.5 million as of December 31, 2021.  Operating activities provided $71.0 million in net cash.  Investing activities used $699.7 million in net cash, primarily reflecting an increase in loans and investment securities.  Financing activities provided $662.5 million in net cash, primarily reflecting an increase in deposits of $285.2 million and an increase in net borrowings of $406.8 million.   50 Table of Contents   Deposits   Total deposits increased by $284.6 million, or 4.5%, to $6.6 billion as of June 30, 2022 from December 31, 2021. The increase was primarily due to increases in demand, noninterest bearing deposits, interest-bearing and NOW and time deposits, partially offset by a decrease in savings deposits. The following table sets forth the composition of our deposit base by the periods indicated.       June 30, 2022     December 31, 2021                                               Amount                                       Increase/       Amount     %     Amount     %     (Decrease)       (dollars in thousands)   Demand, noninterest-bearing   $ 1,712,875       25.9 %   $ 1,617,049       25.5 %   $ 95,826   Demand, interest-bearing and NOW     3,200,709       48.4 %     3,127,350       49.4 %     73,359   Savings     418,606       6.3 %     438,445       6.9 %     (19,839 ) Time     1,285,409       19.4 %     1,150,109       18.2 %     135,300   Total deposits   $ 6,617,599       100.0 %   $ 6,332,953       100.0 %   $ 284,646     Subordinated Debentures   During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part prior to maturity. The floating interest rate on the subordinated debentures is three month LIBOR plus 2.85% and re-prices quarterly. The rate as of June 30, 2022 was 4.14%.   During June 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.   During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2018 Notes”) to certain accredited investors. The net proceeds from the sale of the 2018 Notes were used for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity in the first quarter of 2018. The 2018 Notes are non-callable for five years, have a stated maturity of February 1, 2028 and bear interest at a fixed rate of 5.20% per year, from and including January 17, 2018 to, but excluding February 1, 2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points.   51 Table of Contents   Stockholders ’ Equity   The Company’s stockholders’ equity was $1.1 billion as of June 30, 2022, an increase of $18.9 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 June 30, 2022, the Company’s tangible common equity ratio and tangible book value per share were 9.46% and $20.79, respectively. As of December 31, 2021, the tangible common equity ratio and tangible book value per share were 10.06% and $20.12, respectively. Total goodwill and other intangible assets were approximately $216.5 million and $217.4 million, as of June 30, 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.       June 30, 2022     December 31, 2021       (dollars in thousands, except for share and per share data)   Common equity   $ 1,032,220     $ 1,013,285   Less: intangible assets     (216,502 )     (217,369 ) Tangible common stockholders’ equity   $ 815,718     $ 795,916                     Total assets   $ 8,841,506     $ 8,129,480   Less: intangible assets     (216,502 )     (217,369 ) Tangible assets   $ 8,625,004     $ 7,912,111                     Common stock outstanding at period end     39,243,123       39,568,090                     Tangible common equity ratio (1)     9.46 %     10.06 %                   Book value per common share   $ 26.30     $ 25.61   Less: intangible assets     5.51       5.49   Tangible book value per common share   $ 20.79     $ 20.12     (1) Tangible common equity ratio is a non-GAAP measure.   52 Table of Contents   Regulatory Capital and Capital Adequacy   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 June 30, 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   The Company   Amount     Ratio     Amount     Ratio     Amount     Ratio   As of June 30, 2022   (dollars in thousands)   Tier 1 leverage capital   $ 947,294       11.63 %   $ 325,841       4.00 %     $ N/A       N/A   CET I risk-based ratio     831,212       10.63       351,981       4.50       N/A       N/A   Tier 1 risk-based capital     947,294       12.11       469,308       6.00       N/A       N/A   Total risk-based capital     1,180,033       15.09       625,744       8.00       N/A       N/A     N/A - not applicable       ConnectOne Bank     For Capital Adequacy Purposes     To Be Well-Capitalized Under Prompt Corrective Action Provisions   The Bank   Amount     Ratio     Amount     Ratio     Amount     Ratio   As of June 30, 2022                   (dollars in thousands)                   Tier 1 leverage capital   $ 944,700       11.60 %   $ 325,674       4.00 %     407,092       5.00 % CET I risk-based ratio     944,700       12.08       351,973       4.50       508,405       6.50   Tier 1 risk-based capital     944,700       12.08       469,297       6.00       625,730       8.00   Total risk-based capital     1,059,689       13.55       625,730       8.00       782,162       10.00     As of June 30, 2022, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the Tier I Risk Based Ratio which was 3.61% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 3.05% above the minimum buffer ratio.   53 Table of Contents   Item 3. Qualitative and Quantitative Disclosures about Market Risks   Market Risk   Interest rate risk management is our primary market risk.  See “Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity Analysis” herein for a discussion of our management of our interest rate risk.   54 Table of Contents