What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-11-04 compared with 2022-08-05 · 489 added, 317 removed, 2215 unchanged (27% of the section changed)

4 unchanged sentences

(in thousands, except for share data)

September 30,

Cash and due from banks

74 unchanged sentences

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

issued 115,000 shares as of September 30, 2022 and as of December 31, 2021;

outstanding 115,000 shares as of September 30, 2022 and as of December 31, 2021

110,927  

2 unchanged sentences

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

issued 42,679,405 shares as of September 30, 2022 and 42,557,264 shares as of December 31, 2021;

outstanding 39,243,123 shares as of September 30, 2022 and 39,568,090 as of December 31, 2021

586,946  

6 unchanged sentences

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

Treasury stock, at cost 3,436,282 common shares as of September 30, 2022 and 2,989,174 as of December 31, 2021

( 52,799 )  

12 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands, except for per share data)

1 unchanged sentence

Interest and fees on loans

$ 90,731  

$ 75,092  

$ 248,041  

$ 216,655  

Interest and dividends on investment securities:

1 unchanged sentence

Total interest income

96,980  

77,026  

261,277  

222,698  

Interest expense

13,299  

24,018  

19,487  

13,149  

10,794  

Total interest expense

18,819  

37,167  

30,281  

Net interest income

78,161  

68,245  

224,110  

192,417  

Provision for (reversal of) credit losses

10,000  

14,450  

Net interest income after provision for (reversal of) credit losses

68,161  

67,145  

209,660  

198,732  

Noninterest income

3 unchanged sentences

Gain on sale of branches

Net (losses) gains on equity securities

Net losses on equity securities

( 430 )  

( 78 )  

( 1,431 )  

Net gain on sales/redemptions of securities available-for-sale

Total noninterest income

11,914  

Noninterest expenses

Salaries and employee benefits

21,025  

16,807  

59,470  

47,790  

Occupancy and equipment

5 unchanged sentences

Other components of net periodic pension expense

( 143 )  

( 67 )  

( 429 )  

Increase in value of acquisition price

1 unchanged sentence

Total noninterest expenses

32,143  

28,183  

93,076  

80,927  

Income before income tax expense

39,340  

42,978  

126,319  

129,719  

Income tax expense

10,425  

10,881  

33,665  

32,404  

28,915  

32,097  

92,654  

97,315  

Preferred dividends

Net income available to common stockholders

$ 27,406  

$ 32,097  

$ 88,127  

$ 97,315  

Earnings per common share

$ 0.70  

$ 0.81  

$ 2.24  

$ 2.45  

See accompanying notes to unaudited consolidated financial statements.

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

$ 28,915  

$ 32,097  

$ 92,654  

$ 97,315  

Other comprehensive income (loss):

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

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

( 39,912 )  

( 3,228 )  

( 94,428 )  

11,471  

27,178  

( 28,441 )  

( 2,432 )  

( 67,250 )  

Reclassification adjustment for realized gains included in net income

Unrealized gains (losses) on cash flow hedges

Reclassification adjustment for realized losses on cash flow hedges included in net income

Unrealized gains on cash flow hedges

16,969  

44,253  

( 5,094 )  

( 533 )  

( 13,381 )  

11,875  

30,872  

Reclassification adjustment for realized (gains) losses on cash flow hedges

( 1,178 )  

( 524 )  

( 90 )  

( 835 )  

( 365 )  

Unrealized gains on pension plan

( 567 )  

Reclassification adjustment for realized losses on pension plan included in net income

Total other comprehensive (loss) income

( 21 )  

( 14 )  

Total other comprehensive loss

( 17,389 )  

( 783 )  

( 35,088 )  

Total comprehensive income

$ 11,526  

$ 31,314  

$ 57,566  

$ 93,545  

See accompanying notes to unaudited consolidated financial statements.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Comprehensive

28 unchanged sentences

Stock-based compensation expense

Balance as of June 30, 2022

Balance as of September 30, 2022

$ 110,927  

5 unchanged sentences

$ 1,148,295  

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Comprehensive

2 unchanged sentences

(Loss) Income

Balance as of March 31, 2022

Balance as of June 30, 2022

$ 110,927  

13 unchanged sentences

( 6,089 )  

Exercise of stock options ( 6,312 shares)

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

( 2,133 )  

Restricted stock grants, net of forfeitures ( 20,715 shares)

Repurchase of treasury stock ( 302,315 shares)

( 8,341 )  

Stock-based compensation expense

Balance as of June 30, 2022

Balance as of September 30, 2022

$ 110,927  

5 unchanged sentences

$ 1,148,295  

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Comprehensive

33 unchanged sentences

( 8,043 )  

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

110,927  

Stock-based compensation expense

Balance as of June 30, 2021

Balance as of September 30, 2021

$ 110,927  

4 unchanged sentences

$ ( 973 )  

Three Months Ended June 30, 2021

$ 1,098,433  

Three Months Ended September 30, 2021

Comprehensive

2 unchanged sentences

(Loss) Income

Balance as of March 31, 2021

Balance as of June 30, 2021

$ 586,946  

5 unchanged sentences

32,097  

Other comprehensive loss, net of tax

( 783 )  

Other comprehensive income, net of tax

Cash dividends declared on common stock ($ 0.11 per share)

1 unchanged sentence

Restricted stock grants, net of forfeitures ( 1,082 shares)

Stock grants ( 4,535 shares)

Repurchase of treasury stock ( 196,069 shares)

( 5,632 )  

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

110,927  

Stock-based compensation expense

Balance as of June 30, 2021

Balance as of September 30, 2021

$ 110,927  

4 unchanged sentences

$ ( 973 )  

$ 1,098,433  

See accompanying notes to unaudited consolidated financial statements.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

Cash flows from operating activities

$ 92,654  

$ 97,315  

Adjustments to reconcile net income to net cash provided by operating activities:

1 unchanged sentence

Provision for (reversal of) credit losses

14,450  

Amortization of intangibles

Net accretion of loans

( 2,448 )  

Accretion on bank premises

( 37 )  

Accretion on deposits

( 657 )  

Amortization (accretion) on borrowings, net

5 unchanged sentences

Gains on sale of loans held-for-sale, net

( 1,519 )  

Loans originated for resale

( 18,619 )  

Proceeds from sale of loans held-for-sale

Gain on sale of other real estate owned

25,955  

57,674  

Loss/(gain) on sale of other real estate owned

Increase in cash surrender value of bank owned life insurance

( 4,069 )  

Amortization of premiums and accretion of discounts on securities available-for-sale

1 unchanged sentence

(Increase) decrease in accrued interest receivable

( 4,788 )  

Net change in operating leases

( 142 )  

(Increase) decrease in other assets

Increase in other liabilities

( 4,781 )  

43,319  

(Decrease) increase in other liabilities

( 12,291 )  

Net cash provided by operating activities

94,946  

154,644  

Cash flows from investing activities

Investment securities available-for-sale:

( 320,946 )  

Maturities, calls and principal repayments

135,548  

215,531  

Purchases of equity securities

( 3,200 )  

Net (purchases) redemptions of restricted investment in bank stocks

( 17,498 )  

Cash flow hedge premium payment

( 6,965 )  

Payments on loans held-for-sale

Net increase in loans

( 1,084,483 )  

Purchases of bank owned life insurance

( 30,000 )  

Purchases of premises and equipment

( 2,353 )  

Proceeds from sale of branches

1 unchanged sentence

Net cash used in investing activities

( 1,329,583 )  

Cash flows from financing activities

Net increase in deposits

Increase in (repayment of) subordinated debentures

978,214  

440,876  

Repayment of subordinated debentures

Advances of borrowings

2,305,181  

100,000  

Repayments of borrowings

( 1,943,448 )  

Cash dividends on preferred stock

( 4,528 )  

Repurchase of treasury stock

( 13,127 )  

Cash dividends paid on common stock

( 17,338 )  

Proceeds from exercise of stock options

Net proceeds from the issuance of preferred stock

110,927  

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

( 2,133 )  

Net cash provided by financing activities

1,302,945  

307,491  

Net change in cash and cash equivalents

68,308  

109,439  

Cash and cash equivalents at beginning of period

265,536  

303,756  

Cash and cash equivalents at end of period

$ 333,844  

$ 413,195  

Supplemental disclosures of cash flow information

1 unchanged sentence

Interest paid on deposits and borrowings

$ 34,552  

$ 32,664  

31,426  

35,809  

Supplemental disclosures of noncash activities

1 unchanged sentence

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

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

See accompanying notes to unaudited consolidated financial statements.

10 unchanged sentences

(a New Jersey investment company), Twin Bridge Investment Co.

(a New Jersey investment company), ConnectOne Preferred Funding Corp.

(a Delaware 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.

2 unchanged sentences

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.

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 and two loan production/business development offices throughout New Jersey, New York and South Florida.

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.

business, real estate rentals 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.

Operating results for the three and nine months ended September 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.

16 unchanged sentences

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.

Although economic activity began to accelerate in 2021, and the United States continues to implement a COVID- 19 vaccination program, COVID- 19, its 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 mitigate the impact of the pandemic on its operations, 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. 

Although state and local governments have lifted most 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.

1 unchanged sentence

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 

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.

Although the Federal Reserve has proposed regulations implementing this legislation, the regulations have not yet been finalized.

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.

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The United States economy is currently experiencing a level of price inflation not experienced since the late 1970’s and early 1980’s.

It is therefore difficult to predict the response of consumers and businesses to this level of inflation, and its impact on the economy.

In addition, in order to attempt to control and reduce the level of inflation, the Federal Reserve has embarked on a series of interest rate increases along with quantitative tightening to further constrict economic conditions.

It is unclear whether the Federal Reserve’s efforts will be successful, and what impact they may have on the United States’

It is possible that the combined effects of inflation and increases in market interest rates could cause the economy of the United States to enter a recession, which could negatively affect the businesses of our borrowers and their ability to repay their loans or need credit, which could negatively affect our results of operations.

Authoritative Accounting Guidance

17 unchanged sentences

The Company is evaluating the effect that ASU 2022 - 02 will have on its consolidated financial statements.

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Earnings per Common Share

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands, except for per share data)

39 unchanged sentences

There were no antidilutive share equivalents as of  

June 30, 2022 and June 30, 2021 .

September 30, 2022  or 

September 30, 2021 .

CONNECTONE BANCORP, INC.

2 unchanged sentences

Investment Securities

The Company’s investment securities are classified as available-for-sale as of June 30, 2022 and December 31, 2021 .

The Company’s investment securities are classified as available-for-sale as of September 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 .

Accordingly, the carrying value of such securities reflects their fair value as of September 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 .

The following tables present information related to the Company’s portfolio of securities available-for-sale as of September 30, 2022 and December 31, 2021 .

(dollars in thousands)

June 30, 2022

September 30, 2022

Securities available-for-sale

56 unchanged sentences

Investment Securities –

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.

Investment securities having a carrying value of approximately $ 174.8  million and $ 71.2  million as of September 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 September 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’

The following table presents information for investments in securities available-for-sale as of June 30, 2022 , based on scheduled maturities.

The following table presents information for investments in securities available-for-sale as of September 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

September 30, 2022

(dollars in thousands)

20 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

$ 5,185  

Gross gains on sales/redemptions of securities

2 unchanged sentences

tax provision on net gain

( 48 )  

Net gain on sales/redemptions of securities, after taxes

4 unchanged sentences

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

The following tables indicate securities 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 September 30, 2022 and December 31, 2021 .

September 30, 2022

Less than 12 Months

7 unchanged sentences

$ ( 4,261 )  

$ 15,085  

Residential mortgage pass-through securities

15 unchanged sentences

( 11,098 )  

54,017  

Corporate bonds and notes

44 unchanged sentences

Investment Securities –

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.

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 September 30, 2022 and December 31, 2021 , totaled $ 2.6  million and $ 1.6  million, respectively.

The Company evaluates securities in an unrealized loss position for impairment related to credit losses on at least a quarterly basis.

Securities in unrealized loss positions are first assessed as to whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis.

2 unchanged sentences

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.

As of September 30, 2022, the issuers of these securities continue to make timely principal and interest payments.

The decline in fair value is primarily due to changes in interest rates and market conditions, not changes in credit quality.

No allowance for credit losses was recorded as of September 30, 2022.

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. 

Federal agency obligations, residential mortgage backed pass-through securities and commercial mortgage backed pass-through securities are issued by U.S.

5 unchanged sentences

Therefore, we concluded that a zero -allowance approach for these investment securities is appropriate.

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.

As part of our overall asset liability management and strategy the Company uses derivative instruments, which can include interest rate swaps, collars, caps, and floors.  The notional amount 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 agreements.

Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.

Derivatives Designated as Hedges

Subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship are accounted for in the following manner:

1 ) Cash flow hedges:

changes in fair value are recognized as a component in other comprehensive income

2 ) Fair value hedges:

changes in fair value are recognized concurrently in earnings

As long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100% of the periodic changes in fair value of the hedging instrument are accounted for as outlined above.

This is the case whether or not economic mismatches exist in the hedging relationship.

As a result, there is no periodic measurement or recognition of ineffectiveness.

Rather, the full impact of hedge gains and losses is recognized in the period in which the hedged transactions impact earnings.

The change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness is presented in the same income statement line item that is used to present the earnings effect of the hedged item.

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Derivatives –

Cash Flow Hedges

 The Company entered into nine  forward starting pay fixed-rate interest rate swaps, with a total notional amount of $ 400  million, all of which have since commenced. These are designated as cash flow hedges of current, 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 .

All swaps are currently on the books 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.

2 unchanged sentences

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

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Derivatives –

  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

Interest (income) expense recorded on these swap transactions totaled approximately ($ 1.2 ) million and ($ 0.5 ) million during the three and nine months ended September 30, 2022 , respectively, compared to $ 0.3  million and $ 1.5  million during the three and nine months ended September 30, 2021 , respectively, and is reported as a component of interest expense on FHLB Advances.

 The Company entered into one  forward starting interest rate cap spread transaction, with a total notional amount of $ 150  million, which became effective on October 1, 2022 and matures in October of 2027.

 This is designated as a cash flow hedge of brokered certificates of deposit, and the interest rate cap spread is indexed to a benchmark of fed funds with payment required on a monthly basis.

The structure of these instruments is such that the Company entered into a $ 150 million notional amount of a sold interest rate cap agreement, in which we are required to pay the counterparty an incremental amount if the index rate exceeds a set cap rate.

Simultaneously, the Company purchased $ 150 million notional amount of an interest rate cap agreement in which we receive an incremental amount if the index rate is above a set cap rate.  

No payments are required if the index rate is at, or below, the cap rate on the sold or purchased interest rate cap agreements. 

The following table presents the net gains (losses) recorded in other comprehensive income and the Consolidated Statements of Income relating to the cash flow hedge derivative instruments for the periods indicated:

Three Months Ended September 30, 2022

Amount of gain (loss) recognized in OCI (Effective Portion)

4 unchanged sentences

$ 16,969  

Three Months Ended June 30, 2021

$ ( 1,178 )  

Three Months Ended September 30, 2021

Amount of gain (loss) recognized in OCI (Effective Portion)

8 unchanged sentences

Derivatives –

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Amount of gain (loss) recognized in OCI (Effective Portion)

4 unchanged sentences

$ 44,253  

Six Months Ended June 30, 2021

$ ( 524 )  

Nine Months Ended September 30, 2021

Amount of gain (loss) recognized in OCI (Effective Portion)

5 unchanged sentences

$ 1,543  

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

The following table reflects the cash flow hedges included in the consolidated statements of condition as of September 30, 2022 and December 31, 2021 :

September 30, 2022

December 31, 2021

2 unchanged sentences

(dollars in thousands)

Interest rate swaps related to FHLB advances included in assets

Interest rate contracts

$ 700,000  

7 unchanged sentences

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  

The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred loan fees, as of September 30, 2022 and December 31, 2021 :

September 30, 2022  

December 31, 2021  

19 unchanged sentences

$ 6,828,622  

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  

Includes PPP loans of $ 11.5  million and $ 93.1  million as of  

September 30, 2022 and December 31, 2021  , respectively.

As of September 30, 2022  and December 31, 2021 , loans totaling approximately $ 2.6  billion and $ 2.5  billion respectively, 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 as of September 30, 2022 and December 31, 2021 :

September 30, 2022  

December 31, 2021  

5 unchanged sentences

$ 8,080  

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

Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL and nonaccrual loans without an ACL as of September 30, 2022 and December 31, 2021 :

September 30, 2022

Nonaccrual loans with ACL

8 unchanged sentences

28,138  

29,183  

Commercial construction

Residential real estate

23 unchanged sentences

$ 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.

Nonaccrual loans 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.

19 unchanged sentences

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 Loans

Total Gross Loans

$ 248,673  

10 unchanged sentences

47,347  

13,984  

53,689  

Total Commercial

23 unchanged sentences

70,421  

63,863  

Total Commercial Real Estate

13 unchanged sentences

$ 529,596  

$ 537,890  

$ 562,612  

Special mention

7 unchanged sentences

$ 25,487  

Residential Real Estate

$ 25,292  

4 unchanged sentences

$ 249,002  

$ 42,760  

$ 242,454  

Special mention

9 unchanged sentences

$ 1,030  

$ 1,248  

Special mention

9 unchanged sentences

$ 7,717,949  

$ 7,068,659  

Special mention

21 unchanged sentences

Term loans amortized cost basis by origination year

Revolving Loans

Total Gross Loans

$ 403,203  

121 unchanged sentences

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

The following table presents collateral dependent loans that were individually evaluated for impairment as of September 30, 2022 and December 31, 2021 :

September 30, 2022

Real Estate  

27 unchanged sentences

$ 109,863  

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

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 September 30, 2022 and December 31, 2021 :

September 30, 2022

30-59 Days Past Due

24 unchanged sentences

$ 7,910,013  

$ 7,282,423  

December 31, 2021

33 unchanged sentences

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

September 30, 2022

Commercial real estate  

79 unchanged sentences

Loans and the Allowance for Credit Losses –

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

Activity in the Company’s ACL for loans for the three and nine months ended September 30, 2022 is summarized in the tables below.

Three Months Ended September 30, 2022

Commercial real estate

2 unchanged sentences

(dollars in thousands)

Balance as of March 31, 2022

$ 25,459  

Balance as of June 30, 2022

$ 28,135  

3 unchanged sentences

$ 82,739  

(Reversal of) provision for credit losses (loans)

( 410 )  

Balance as of June 30, 2022

Provision for credit losses - loans

Balance as of September 30, 2022

$ 29,689  

3 unchanged sentences

$ 91,717  

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Commercial real estate

10 unchanged sentences

( 226 )  

(Reversal of) provision for credit losses (loans)

Provision for credit losses - loans

( 136 )  

13,816  

Balance as of June 30, 2022

Balance as of September 30, 2022

$ 29,689  

3 unchanged sentences

$ 91,717  

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

Activity in the Company’s ACL for loans for the three and 

nine months ended September 30, 2021 is summarized in the table below.

The CECL Day 1 row in the table for the nine months ended September 30, 2021 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 purchased credit-impaired as of December 31, 2020 .

Three Months Ended September 30, 2021

Commercial real estate

2 unchanged sentences

(dollars in thousands)

Balance as of March 31, 2021

Balance as of June 30, 2021

$ 25,567  

8 unchanged sentences

( 788 )  

( 331 )  

Balance as of June 30, 2021

Balance as of September 30, 2021

$ 27,336  

7 unchanged sentences

Loans and the Allowance for Credit Losses –

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Commercial real estate

22 unchanged sentences

( 1,799 )  

Balance as of June 30, 2021

( 14 )  

Balance as of September 30, 2021

$ 27,336  

2 unchanged sentences

$ 3,598  

$ 77,986  

Troubled Debt Restructurings

4 unchanged sentences

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 September 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 September 30, 2022 , TDRs totaled $ 74.5  million, of which $ 27.5  million were on nonaccrual status and $ 47.0  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 :

The Company has allocated $ 7.5  million and $ 10.4  million of specific allowance related to TDRs as of September 30, 2022 and December 31, 2021 , respectively.

The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2022 :

Pre-Modification

3 unchanged sentences

Commercial real estate

Residential real estate

$ 10,075  

$ 9,575  

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.

CONNECTONE BANCORP, INC.

2 unchanged sentences

Loans and the Allowance for Credit Losses –

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:

The loans modified as a TDR during the nine months ended September 30, 2022 included five maturity extensions and one interest rate reduction. 

The one loan that was an interest rate reduction was a commercial real estate loan that included a one -time $ 500,000  principal paydown. 

There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2022 and September 30, 2021 .

The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2021 :

Pre-Modification

2 unchanged sentences

Troubled debt restructurings:

$ 1,276  

Commercial real estate

35,595  

Commercial construction

2 unchanged sentences

$ 40,270  

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. 

The loans modified as TDRs during the nine  months ended September 

30, 2021 included maturity extensions and interest rate reductions. 

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 provision is recorded within the provision for (reversal of) 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 and nine months ended September 30, 2022 and 2021 :

Three Months Ended

September 30,

(dollars in thousands)

6 unchanged sentences

$ 2,564  

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

2 unchanged sentences

Day 1 Effect of CECL

Reversal of credit losses - unfunded commitments

( 28 )  

Provision for (reversal of) credit losses - unfunded commitments

Balance at end of period

6 unchanged sentences

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  :

The following table summarizes the provision for (reversal of) credit losses for the 

three and nine months ended September 30, 2022 and 2021  :

Three Months Ended

September 30,

(dollars in thousands)

Provision for (reversal of) credit losses (loans)

Provision for credit losses - loans

$ 9,338  

(Reversal of) provision for credit losses - unfunded commitments

Provision for (Reversal of) credit losses

Provision for credit losses - unfunded commitments

Provision for credit losses

$ 10,000  

Six Months Ended

$ 1,100  

Nine Months Ended

September 30,

(dollars in thousands)

1 unchanged sentence

$ 13,816  

Reversal of credit losses - unfunded commitments

( 28 )  

Provision for (reversal of) credit losses - unfunded commitments

Provision for (reversal of) credit losses

13 unchanged sentences

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 :

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 September 30, 2022 and December 31, 2021 :

Securities Available-for-Sale and Equity Securities :

12 unchanged sentences

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

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 September 30, 2022 and December 31, 2021 are as follows:

September 30, 2022

Fair Value Measurements at Reporting Date Using

34 unchanged sentences

$ 7,377  

$ 8,422  

CONNECTONE BANCORP, INC.

38 unchanged sentences

$ 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 .

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2022 and during the year ended December 31, 2021 .

Assets Measured at Fair Value on a Nonrecurring Basis

1 unchanged sentence

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 .

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 September 30, 2022 and December 31, 2021 .

Loans Held-for-Sale :

14 unchanged sentences

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:

For assets measured at fair value on a nonrecurring basis, the fair value measurements as of September 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  

Carrying Value as of September 30, 2022  

Quoted Prices in Active Markets for Identical Assets (Level 1)  

24 unchanged sentences

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 .

Collateral dependent loans as of September 30, 2022 that required a valuation allowance were $ 42.0  million with a related valuation allowance of $ 15.9  million compared to $ 54.1  million with a related valuation allowance of $ 17.8  million as of December 31, 2021 .

CONNECTONE BANCORP, INC.

4 unchanged sentences

Recurring basis

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) for the six months ended June 30, 2022 and for the year ended December 31, 2021 :

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 nine months ended September 30, 2022 and for the year ended December 31, 2021 :

Municipal Securities  

3 unchanged sentences

Principal paydowns

Ending balance, June 30, 2022

Change in unrealized gain (loss)

Ending balance, September 30, 2022

$ 7,377  

Municipal Securities  

(dollars in thousands)

4 unchanged sentences

$ 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 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 September 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

September 30, 2022

Valuation Techniques

22 unchanged sentences

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

September 30, 2022

(dollars in thousands)

15 unchanged sentences

Residential real estate

$ 1,365  

Appraisals of collateral value

10 unchanged sentences

48% to 73% (49%)  

$ 1,206  

Appraisals of collateral value

7 unchanged sentences

Residential real estate

$ 2,794  

Appraisals of collateral value

5 unchanged sentences

Fair Value Measurements and Fair Value of Financial Instruments – 

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 : 

As of September 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 September 30, 2022 and December 31, 2021 : 

Fair Value Measurements

4 unchanged sentences

(dollars in thousands)

June 30, 2022

September 30, 2022

Financial assets:

18 unchanged sentences

54,041  

31,285  

Accrued interest receivable

83 unchanged sentences

Affected Line item in the Consolidated Statements of Income

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Sale of investment securities available-for-sale

Net gains on sale of securities available-for-sale

( 48 )  

( 48 ) Income tax expense

2 unchanged sentences

$ ( 328 )  

$ ( 654 )  

$ ( 1,543 ) Borrowings

Income tax benefit

( 343 )  

( 159 )  

Income tax (expense) benefit

$ ( 238 )  

13 unchanged sentences

$ ( 1,124 )  

$ ( 493 )  

$ ( 832 )  

CONNECTONE BANCORP, INC.

3 unchanged sentences

(continued)  

Accumulated other comprehensive (loss) as of June 30, 2022 and December 31, 2021 consisted of the following:

June 30, 2022

Accumulated other comprehensive loss as of September 30, 2022 and December 31, 2021 consisted of the following:

September 30, 2022

December 31, 2021

9 unchanged sentences

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 Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of September 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 

Shares available for grant and issuance under the Plan as of September 30, 2022  were approximately 

The Company intends to issue all shares under the Plan in the form of newly issued shares.

4 unchanged sentences

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.

Any forfeitures would result in previously recognized expense being reversed.

Restricted stock grants 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.

1 unchanged sentence

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:

Stock-based compensation expense for the three and nine months ended September 30, 2022  was $ 1.2  million and $ 3.5  million, respectively. 

Stock-based compensation expense for the three and nine months ended September 30, 2021  was $ 1.2  million and $ 3.2  million, respectively.

Activity under the Company’s options for the nine months ended September 30, 2022 was as follows:

Number of Stock Options  

7 unchanged sentences

Forfeited/cancelled/expired

Outstanding as of June 30, 2022

Outstanding as of September 30, 2022

$ 87,691  

Exercisable as of June 30, 2022

Exercisable as of September 30, 2022

$ 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 .

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 September 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 September 30, 2022 .

This amount changes based on the fair market value of the Company’s stock.

4 unchanged sentences

(continued)  

Activity under the Company’s restricted stock for the six months ended June 30, 2022 was as follows:

Activity under the Company’s restricted stock for the nine months ended September 30, 2022 was as follows:

Nonvested Shares  

7 unchanged sentences

( 374 )  

Nonvested as of June 30, 2022

Nonvested as of September 30, 2022

93,047  

$ 25.43  

As of June 30, 2022 , there was approximately $ 1.8  million of total unrecognized compensation cost related to nonvested restricted stock granted.

As of September 30, 2022 , there was approximately $ 1.3  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 1.1  years.

9 unchanged sentences

( 49,604 )  

Unearned as of June 30, 2022

Unearned as of September 30, 2022

195,265  

1 unchanged sentence

$ 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.

As of September 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.

As of September 30, 2022 , the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 221,541 .

During the nine months ended September 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.

The net shares issued from vesting of performance units during the nine months ended September 30, 2022 were 22,350  shares.

As of September 30, 2022 , compensation cost of approximately $ 1.5  million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.8  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:

7 unchanged sentences

( 69,225 )  

Unearned as of June 30, 2022

Unearned as of September 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.

During the nine months ended September 30, 2022 , 69,225  shares vested.

A total of 37,842  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.

The net shares issued from vesting of restricted stock units during the nine months ended September 30, 2022 were 31,383  shares.

As of September 30, 2022 , compensation cost of approximately $ 1.5  million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.5  years.

CONNECTONE BANCORP, INC.

6 unchanged sentences

Affected Line Item in the Consolidated

September 30,

Statements of Income

10 unchanged sentences

$ ( 67 )  

Six Months Ended

Nine Months Ended

Affected Line Item in the Consolidated

September 30,

Statements of Income

11 unchanged sentences

Contributions

The Company did not contribute to the Pension Trust during the six months ended June 30, 2022 .

The Company did not contribute to the Pension Trust during the nine months ended September 30, 2022 .

The Company does not plan on contributing amounts to the Pension Trust for the remainder of 2022 .

3 unchanged sentences

The Company’s FHLB borrowings and weighted average interest rates are summarized below:

June 30, 2022

September 30, 2022

December 31, 2021

35 unchanged sentences

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.

The advances as of September 30, 2022 were primarily collateralized by approximately $ 1.9  billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement.

As of September 30, 2022 the Company had remaining borrowing capacity of approximately $ 0.6  billion at FHLB.

Subordinated Debentures

3 unchanged sentences

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 .

The rate as of September 30, 2022 was 5.63 %.

The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of September 30, 2022 and December 31, 2021 .

Issuance Date

1 unchanged sentence

Liquidation Value

Redeemable by

Issuer Beginning

Redeemable by Issuer Beginning

$ 5,000,000  

14 unchanged sentences

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.

45 unchanged sentences

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.

The ACL is established through a provision for credit losses charged to expense.

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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.

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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.

As of September 30, 2022, PPP loans were $11.5 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.

government and, as such, the Company has not included the PPP loans in calculation of the ACL as of September 30, 2022.

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

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 income available to common stockholders for the three months ended September 30, 2022 was $27.4 million compared to $32.1 million for the comparable three-month period ended September 30, 2021.

The Company’s diluted earnings per share were $0.70 for the three months ended September 30, 2022 as compared with diluted earnings per share of $0.80 for the comparable three-month period ended September 30, 2021.

The $4.7 million decrease in net income available to common stockholders and $0.10 decrease in diluted earnings per share versus the three months ended September 30  2021 were primarily due to an $8.9 million increase in the provision for credit losses, a $4.0 million increase in noninterest expenses, $1.5 million in preferred dividends, which were not paid in the 2021 period, and a $0.7 million decrease in noninterest income, partially offset by a $9.9 million increase in net interest income and a $0.5 million decrease in income tax expense.

Net income available to common stockholders for the nine months ended September 30, 2022 was $88.1 million compared to $97.3 million for the comparable nine-month period ended September 30, 2021.

The Company’s diluted earnings per share were $2.23 for the nine months ended September 30, 2022 as compared with diluted earnings per share of $2.43 for the comparable nine-month period ended September 30, 2021.

The $9.2 million decrease in net income available to common stockholders and $0.20 decrease in diluted earnings per share versus the nine months ended 

September 30, 2021 were due to a $20.8 million increase to provision for credit losses, a $12.1 million increase in noninterest expenses, $4.5 million in preferred dividends which were not paid in the 2021 period, a $2.2 million decrease in noninterest income, and a $1.3 million increase in income tax expense, partially offset by a $31.7 million increase in net interest income.

Net Interest Income and Margin

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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.

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’

Fully taxable equivalent net interest income for the three months ended September 30, 2022 increased by $10.1 million, or 14.7%, from the comparable three-month period ended September 30, 2021.

The increase from the three months ended September 30, 2021 resulted primarily from a 16.1% increase in average interest earning assets, primarily loans, and was partially offset by a 5 basis-point contraction of the net interest margin to 3.68% from 3.73%.

The contraction in the net interest margin resulted from a 56 basis-point increase in the cost of average interest-bearing liabilities, partially offset by a 36 basis-point increase in the yield on average interest-earning assets and a 12.5% increase in average noninterest-bearing demand deposits.

Fully taxable equivalent net interest income for the nine months ended September 30, 2022 increased by $32.1 million, or 16.6%, from the comparable nine-month period ended September 30, 2021.

The increase from the nine months ended September 30, 2021 resulted primarily from a 12.5% increase in average interest earning assets, primarily loans, and a 13 basis-point widening of the net interest margin to 3.76% from 3.63%. The widening of the net interest margin resulted from an 18 basis-point increase in the yield on interest-earning assets and a 13.1% increase in average noninterest-bearing demand deposits partially offset by a 9 basis-point increase in the cost of interest-bearing liabilities.

The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three months ended September 30, 2022 and 2021, the Company’s average assets, liabilities and stockholders’

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,

Three Months Ended September 30,

(dollars in thousands)

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Rates are annualized.

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands)

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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 income totaled $3.3 million for the three months ended September 30, 2022, compared with $4.0 million for the comparable three month period ended September 30, 2021. Included in noninterest income for the three months ended September 30, 2022 and September 30, 2021 were net losses on equity securities of $0.4 million and $0.1 million, respectively. Excluding net losses on equity securities, adjusted noninterest income was $3.8 million and $4.1 million for the three months ended September 30, 2022 and September 30, 2021, respectively. The $0.3 million decrease in adjusted noninterest income for the three months ended September 30, 2022 versus the three months ended September 30, 2021 was primarily due to a decrease in net gains on loans held-for-sale of $0.8 million, partially offset by increases in deposit, loan and other income of $0.3 million and bank owned life insurance ("BOLI") income of $0.2 million.

Noninterest income totaled $9.7 million for the nine months ended September 30, 2022, compared with $11.9 million for the nine months ended September 30, 2021.

Included in noninterest income were net losses on equity securities of $1.4 million and $0.2 million for the nine months ended September 30, 2022 and 2021, respectively.

Additionally, there was a $0.7 million gain on the sale of branches and $0.2 million gain on sale/redemption of investment securities during the nine months ended September 30, 2021.

Excluding the aforementioned items, noninterest income was $11.2 million and $11.3 million for the nine months ended September 30, 2022 and 2021, respectively.

The $0.1 million decrease in noninterest income excluding the items discussed above for the nine months ended September 30, 2022 versus the nine months ended September 30, 2021 was primarily due to decreases of $1.1 million in gains on sale of loans held-for-sale, partially offset by increases in deposit, loan and other income of $0.5 million, and BOLI income of $0.5 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 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.

Noninterest expenses totaled $32.1 million for the three months ended September 30, 2022, compared with $28.2 million for the three months ended September 30, 2021.The increase in noninterest expenses of $4.0 million from the three months ended September 30, 2021 was primarily attributable to increases in salaries and employee benefits of $4.2 million. The increase in salaries and employee benefits was attributable to increased staff in both the revenue and back-office of the Bank, base salary increases, and incentive compensation accruals.

Noninterest expenses totaled $93.1 million for the nine months ended September 30, 2022, compared to $80.9 million for the nine months ended September 30, 2021.

Included in noninterest expenses for the nine months ended September 30, 2022 was an increase in acquisition price related to the BoeFly acquisition of $1.5 million.

Excluding this item, noninterest expenses increased $10.6 million when compared to the nine months ended September 30, 2021. The increase was primarily attributable to increases in salaries and employee benefits of $11.7 million attributable to new hires in both the revenue and back-office areas, base-salary increases, and bonus accruals.

Also, contributing to the increase were increases in other expenses of $0.8 million, information technology and communications of $0.2 million and marketing and advertising of $0.4 million, partially offset by decreases in occupancy of $1.6 million, professional and consulting of $0.4 million and amortization of core deposit intangibles of $0.2 million.

Income tax expense was $10.4 million for the three months ended September 30, 2022, compared to $10.9 million for the three months ended September 30, 2021. The decrease in income tax expense was the result of lower income before taxes.

The effective tax rate for the three months ended September 30, 2022 and September 30, 2021 was 26.5% and 25.3%, respectively. The higher effective tax rate during the three months ended September 30, 2022 when compared to the three months ended September 30, 2021 resulted from a lower proportion of income from non-taxable sources. 

Income tax expense was $33.7 million for the nine months ended September 30, 2022, compared to $32.4 million for the nine months ended September 30, 2021.

The effective tax rate for the nine months ended September 30, 2022 and September 30, 2021 was 26.7% and 25.0%, respectively.

The effective tax rate for the nine months ended of September 30, 2022 was higher compared to the nine months ended September 30, 2021 due to a lower proportion of income from non-taxable sources.

Financial Condition

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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

September 30, 2022

December 31, 2021

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Residential real estate

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.

As of September 30, 2022, gross loans totaled $7.9 billion, an increase of $1.1 billion or 15.7%, as compared to December 31, 2021.

Net loan growth was attributable to organic loan originations.

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.

Includes PPP loans of $11.5 million and $93.1 million as of September 30, 2022 and December 31, 2021 , 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.

As of September 30, 2022, the Company’s allowance for credit losses for loans was $91.7 million, an increase of $12.9 million from $78.8 million at December 31, 2021.

The increase was primarily attributable to provision for credit losses for loans of $13.8 million partially related to organic loan originations, partially offset by $0.9 million in net charge-offs.

The provision for (reversal of) credit losses, which includes provision for unfunded commitments, for the three and nine months ended September 30, 2022 was $10.0 million and  $14.5 million, respectively, compared to $1.1 million and $(6.3) million, for the three and nine months ended September 30, 2021, respectively.

The increase in provision for credit losses when compared to the comparable prior-year periods, reflected strong organic loan growth and changes in forecasted macroeconomic conditions.

The prior year provision in the three and nine months ended September 30, 2021, was primarily the result of 

an improved macro-economic forecast as of September 30, 2021 when compared to January 1, 2021, the day the Company adopted CECL.

There were $0.4 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.

and $0.9 million in net charge-offs for the three and nine months ended September 30, 2022, respectively, compared with $1.6 million and $1.8 million in net charge-offs for the three and nine months ended September 30, 2021, respectively.

The ACL as a percentage of loans receivable amounted to 1.16% as of September 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 September 30, 2022 ratio was at 1.16%, 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.

In management’s view, the level of the ACL as of September 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”

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Three Months Ended

September 30,

(dollars in thousands)

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Commercial real estate

Residential real estate

Total charge-offs

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Total recoveries

Net (charge-offs) recoveries

Provision for (reversal of) loan losses (loans)

Net charge-offs

Provision for credit losses - loans

Balance - end of period

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ACL as a percentage of loans receivable

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

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Total recoveries

Net (charge-offs) recoveries

Net charge-offs

Provision for (reversal of) credit losses - loans

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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

September 30, 2022

December 31, 2021

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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.

As of September 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’

For the three-months ended September 30, 2022, average securities increased $280.8 million to approximately $740.4 million, or 8.7% of average total interest-earning assets, from approximately $459.6 million, or 6.3% of average interest-earning assets, compared to September 30, 2021.

As of September 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 $67.7 million as compared with net unrealized losses of $0.5 million as of December 31, 2021.

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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.

This also resulted in a $27.2 million increase in deferred tax assets, attributable to the decline in fair value on securities available-for-sale since December 31, 2021. 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 September 30, 2022.

Interest Rate Sensitivity Analysis

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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.

As of September 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%.

Based on our model, which was run as of September 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 0.28%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 1.51%. As of December 31, 2021, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.35%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.64%.

Based on our model, which was run as of September 30, 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 1.87%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 3.27%.

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%.

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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. 

The following table illustrates the most recent results for EVE and one-year NII sensitivity as of June 30, 2022.

Our EVE as of September 30, 2022, would decrease by 5.54% with an instantaneous rate shock of up 200 basis points, and decline by 0.95% with an instantaneous rate shock of down 100 basis points.  Our EVE as of December 31, 2021, would increase by 0.24% with an instantaneous rate shock of up 200 basis points, and decline by 5.20% with an instantaneous rate shock of down 100 basis points.

The following table illustrates the most recent results for EVE and one-year NII sensitivity as of September 30, 2022.

Interest Rates

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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’

As of September 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.

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.

As of September 30, 2022, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $796.9 million, which represented 8.4% of total assets and 9.8% of total deposits and borrowings, compared to $742.1 million as of December 31, 2021, which represented 9.1% of total assets and 10.9% of total deposits and borrowings.

The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of September 30, 2022, had the ability to borrow $2.0 billion.

In addition, as of September 30, 2022, the Bank had in place borrowing capacity of $325 million through correspondent banks and other unsecured borrowing lines.

As of September 30, 2022, the Bank had aggregate available and unused credit of approximately $0.9 billion, which represents the aforementioned facilities totaling $2.3 billion net of $1.4 billion in outstanding borrowings and letters of credit.

As of September 30, 2022, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.

Cash and cash equivalents totaled $333.8 million as of September 30, 2022, increasing by $68.3 million from $265.5 million as of December 31, 2021.  Operating activities provided $94.9 million in net cash.  Investing activities used $1.3 billion in net cash, primarily reflecting an increase in loans and investment securities.

 Financing activities provided $1.3 billion in net cash, primarily reflecting an increase in deposits of $978.2 million and an increase in net borrowings of $361.7 million.

Total deposits increased by $977.6 million, or 15.4%, to $7.3 billion as of September 30, 2022 from December 31, 2021.

The increase was primarily due to increases in noninterest bearing demand 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

September 30, 2022

December 31, 2021

8 unchanged sentences

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 rate as of September 30, 2022 was 5.63%.

During June 2020, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”).

8 unchanged sentences

The Company’s stockholders’

equity was $1.1 billion as of June 30, 2022, an increase of $18.9 million from December 31, 2021.

equity was $1.1 billion as of September 30, 2022, an increase of $24.1 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 September 30, 2022, the Company’s tangible common equity ratio and tangible book value per share were 8.87% and $20.93, 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.

Total goodwill and other intangible assets were approximately $216.1 million and $217.4 million, as of September 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

September 30, 2022

December 31, 2021

16 unchanged sentences

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).

The following is a summary of regulatory capital amounts and ratios as of September 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.

1 unchanged sentence

To Be Well-Capitalized Under Prompt Corrective Action Provisions

As of June 30, 2022

As of September 30, 2022

(dollars in thousands)

7 unchanged sentences

To Be Well-Capitalized Under Prompt Corrective Action Provisions

As of June 30, 2022

As of September 30, 2022

(dollars in thousands)

3 unchanged sentences

Total risk-based capital

As of June 30, 2022, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them.

As of September 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 3.08% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 2.50% above the minimum buffer ratio.

4 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements