ConnectOne Bancorp, Inc. 10-K

Item 8. Financial Statements and Supplementary Data   All Financial Statements:   The following financial statements are filed as part of this report under Item 8 - “Financial Statements and Supplementary Data.”       Page   Report of Independent Registered Public Accounting Firm   49   Consolidated Statements of Financial Condition   52   Consolidated Statements of Income   53   Consolidated Statements of Comprehensive Income   54   Consolidated Statements of Changes in Stockholders’ Equity   55   Consolidated Statements of Cash Flows   56   Notes to Consolidated Financial Statements   57     -53- Table of Contents     REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 173 )   Shareholders and the Board of Directors of ConnectOne Bancorp, Inc. and Subsidiaries Englewood Cliffs, New Jersey   Opinions on the Financial Statements and Internal Control over Financial Reporting   We have audited the accompanying consolidated statements of financial condition of ConnectOne Bancorp, Inc. and Subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).   In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.   Explanatory Paragraph – Change in Accounting Principle   As discussed in Note 1a to the consolidated financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of ASC 326, Financial Instruments – Credit Losses.   Basis for Opinions   The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.   Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.   -54- Table of Contents   Definition and Limitations of Internal Control Over Financial Reporting   A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.   Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.    Critical Audit Matter   The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.  The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.   Allowance for Credit Losses – Qualitative Loss Factors on Commercial and Commercial Real Estate Loans   As described in Note 1a to the consolidated financial statements, the Company accounts for credit losses under ASC 326, Financial Instruments – Credit Losses. ASC 326 requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost at the reporting date. As of December 31, 2022, the allowance for credit losses (“ACL”) on loans was $90,513,000.   Management employs a process and methodology to estimate the ACL on pooled loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors includes pooling loans into portfolio segments for loan that share similar characteristics. Pooled loan portfolio segments include commercial, commercial real estate, commercial construction, residential real estate, and consumer loans.   For pooled loans, the Company utilizes a discounted cash flow (”DCF”) methodology to estimate credit losses over the expected life of the loan. The DCF methodology combines probability of default, the loss given default, and prepayment speed assumptions to estimate a reserve for each loan. The quantitative loss rates are adjusted by macroeconomic scenarios and reverts, on a straight-line basis, to average historical losses after the forecasted periods. The sum of all the loan level reserves is aggregated for each portfolio segment and a quantitative loss factor is derived. The quantitative factors are also supplemented by certain qualitative loss factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. Qualitative loss factors, for each loan segment within the portfolio, incorporate consideration for a minimum to maximum range for qualitative loss factor derived from either the Company’s historical loss experience or peer group historical loss experience. Changes in these assumptions could have a material effect on the Company’s financial results.   We identified auditing the qualitative component of the ACL on pooled loans in the commercial and commercial real estate loan segments as a critical audit matter because the methodology to determine the estimate of credit losses uses subjective judgments by management and is subject to material variability.   Performing audit procedures to evaluate the qualitative loss factors on the commercial and commercial real estate loan segments involved a high degree of auditor judgment and required significant effort, including the need to involve more experienced audit personnel including the use of internal specialists.   -55- Table of Contents   The primary procedures we performed to address this critical audit matter included:     ● Testing the effectiveness of controls over the evaluation of the ACL on pooled loans, including controls addressing:   o Methodology and accounting policies.     o Data inputs, judgments and calculations used to determine the qualitative loss factors.     o Information technology general controls and application controls.     o Management’s evaluation of qualitative loss factors.     ● Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the ACL on pooled loans, which included:   o Evaluating the appropriateness of the Company’s accounting policies, judgments and elections.     o Testing the mathematical accuracy of the calculation.     o Testing the completeness and accuracy of data used in the calculation including utilizing internal specialists to assist in testing the mathematical accuracy of the underlying peer data used to develop the maximum loss factors.     o Evaluating the reasonableness of management’s judgments related to qualitative loss factors to determine if they are calculated to conform with management’s policies and were consistently applied period over period.                                                                                                                                                                                                                                                                                                         /s/  Crowe LLP   We have served as the Company's auditor since 2014.   Livingston, New Jersey February 24, 2023 -56- Table of Contents     CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION       December 31,       2022     2021   (in thousands, except share data)                 ASSETS                 Cash and due from banks   $ 61,629     $ 54,352   Interest-bearing deposits with banks     206,686       211,184   Cash and cash equivalents     268,315       265,536                     Investment securities     634,884       534,507   Equity securities     15,811       13,794                     Loans held-for-sale     13,772       250                     Loans receivable     8,099,689       6,828,622   Less: Allowance for credit losses - loans     90,513       78,773   Net loans receivable     8,009,176       6,749,849                     Investment in restricted stock, at cost     46,604       27,826   Bank premises and equipment, net     27,800       29,032   Accrued interest receivable     46,062       34,152   Bank owned life insurance     231,328       195,731   Right of use operating lease assets     10,179       11,017   Other real estate owned     264       -   Goodwill     208,372       208,372   Core deposit intangibles     7,312       8,997   Other assets     125,069       50,417   Total assets   $ 9,644,948     $ 8,129,480   LIABILITIES                 Deposits:                 Noninterest-bearing   $ 1,501,614     $ 1,617,049   Interest-bearing     5,855,008       4,715,904   Total deposits     7,356,622       6,332,953   Borrowings     857,622       468,193   Subordinated debentures, net of debt issuance costs     153,255       152,951   Operating lease liabilities     11,397       12,417   Other liabilities     87,301       38,754   Total liabilities     8,466,197       7,005,268                     COMMITMENTS AND CONTINGENCIES                                       STOCKHOLDERS’ EQUITY                 Preferred Stock, no par value;                 $ 1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of December 31, 2022 and as of December 31, 2021; outstanding 115,000 shares as of December 31, 2022 and as of December 31, 2021     110,927       110,927   Common stock, no par value:                 Authorized 100,000,000 shares; issued 41,942,149 shares as of December 31, 2022 and 41,820,008 shares as of December 31, 2021; outstanding 39,243,123 shares as of December 31, 2022 and 39,568,090 as of December 31, 2021     586,946       586,946   Additional paid-in capital     30,126       27,246   Retained earnings     535,915       440,169   Treasury stock, at cost 2,699,026 shares as of December 31, 2022 and 2,251,918 shares as of December 31, 2021     ( 52,799 )     ( 39,672 ) Accumulated other comprehensive loss     ( 32,364 )     ( 1,404 ) Total stockholders’ equity     1,178,751       1,124,212   Total liabilities and stockholders’ equity   $ 9,644,948     $ 8,129,480     See the accompanying notes to the consolidated financial statements.   -57- Table of Contents     CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME       Years Ended December 31,       2022     2021     2020   (dollars in thousands, except for per share data)                         Interest income:                         Interest and fees on loans   $ 352,993     $ 293,546     $ 296,611   Interest and dividends on investment securities:                         Taxable     12,712       4,413       6,456   Tax-exempt     3,893       2,403       2,797   Dividends     1,655       971       1,642   Interest on federal funds sold and other short-term investments     2,493       405       694   Total interest income     373,746       301,738       308,200   Interest expense:                         Deposits     50,561       24,768       52,386   Borrowings     21,066       14,092       17,823   Total interest expense     71,627       38,860       70,209   Net interest income     302,119       262,878       237,991   Provision for (reversal of) credit losses     17,750       ( 5,500 )     41,000   Net interest income after provision for credit losses     284,369       268,378       196,991   Noninterest income:                         Deposit, loan and other income     7,472       6,617       7,077   Income on bank owned life insurance     5,597       4,771       5,007   Net gains on sale of loans held-for-sale     1,695       3,807       2,085   Gain on sale of branches     -       674       -   Net (losses) gains on equity securities     ( 1,521 )     ( 373 )     202   Net gains on sale/redemption of investment securities     -       195       29   Total noninterest income     13,243       15,691       14,400   Noninterest expense:                         Salaries and employee benefits     81,289       64,341       58,877   Occupancy and equipment     9,865       11,638       13,882   FDIC insurance     2,881       2,665       4,002   Professional and consulting     8,053       8,286       7,383   Marketing and advertising     1,692       1,318       1,200   Information technology and communications     11,108       11,267       6,008   Merger expenses     -       -       14,640   Amortization of core deposit intangible     1,685       1,981       2,559   Net periodic pension income     ( 572 )     ( 269 )     ( 119 ) Increase in value of acquisition price     1,516       -       2,333   Other expenses     8,871       7,784       10,236   Total noninterest expenses     126,388       109,011       121,001   Income before income tax expense     171,224       175,058       90,390   Income tax expense     46,013       44,705       19,101   Net income     125,211       130,353       71,289   Preferred dividends     6,037       1,717       -   Net income available to common stockholders   $ 119,174     $ 128,636     $ 71,289   Earnings per common share:                         Basic   $ 3.03     $ 3.24     $ 1.80   Diluted     3.01       3.22       1.79     See the accompanying notes to the consolidated financial statements.   -58- Table of Contents     CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME       Years Ended December 31,       2022     2021     2020   (dollars in thousands)                                                   Net income   $ 125,211     $ 130,353     $ 71,289   Other comprehensive income:                         Unrealized gains and losses:                         Unrealized holding (losses) gains on available-for-sale securities arising during the period     ( 86,240 )     ( 11,109 )     7,005   Tax effect     24,949       2,914       ( 1,847 ) Net of tax     ( 61,291 )     ( 8,195 )     5,158   Reclassification adjustment for realized gains included in net income     -       ( 195 )     ( 29 ) Tax effect     -       48       6   Net of tax     -       ( 147 )     ( 23 ) Unrealized gains (losses) on cash flow hedges     46,181       3,593       ( 3,423 ) Tax effect     ( 13,960 )     ( 1,012 )     962   Net of tax     32,221       2,581       ( 2,461 ) Reclassification adjustment for (gains) losses arising during this period     ( 3,243 )     1,873       1,577   Tax effect     976       ( 528 )     ( 443 ) Net of tax     ( 2,267 )     1,345       1,134   Unrealized pension plan gains (losses):                         Unrealized pension plan gains (losses) before reclassifications     343       -       ( 112 ) Tax effect     ( 12 )     -       31   Net of tax     331       -       ( 81 ) Reclassification adjustment for realized losses included in net income     66       299       301   Tax effect     ( 20 )     ( 84 )     ( 84 ) Net of tax     46       215       217   Total other comprehensive (loss) income     ( 30,960 )     ( 4,201 )     3,944   Total comprehensive income   $ 94,251     $ 126,152     $ 75,233     See the accompanying notes to the consolidated financial statements.   -59- Table of Contents     CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY                                               Accumulated                                                       Other     Total                       Additional Paid     Retained             Comprehensive     Stockholders’       Preferred Stock     Common Stock     In Capital     Earnings     Treasury Stock     Income (Loss)     Equity   (in thousands, except share and per share data)                                                         Balance as of January 1, 2020   $ -     $ 468,571     $ 21,344     $ 271,782     $ ( 29,360 )   $ ( 1,147 )   $ 731,190   Net income     -       -       -       71,289       -       -       71,289   Other comprehensive income, net of tax     -       -       -       -       -       3,944       3,944   Cash dividends declared on common stock ($ 0.27 per share)     -       -       -       ( 11,120 )     -       -       ( 11,120 ) Repurchase of stock ( 54,693 shares)     -       -       -       -       ( 911 )     -       ( 911 ) Net shares issued in satisfaction of deferred stock units earned ( 16,541 shares)     -       -       -       -       -       -       -   Exercise of stock options ( 35,413 shares)     -       -       233       -       -       -       233   Restricted stock grants, net of forfeitures ( 89,879 shares)     -       -       -       -       -       -       -   Stock grants issued ( 1,340 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of performance units earned ( 22,402 shares)     -       -       -       -       -       -       -   Share redemption for tax withholdings on performance units and deferred stock units earned     -       -       ( 639 )     -       -       -       ( 639 ) Stock issued ( 4,602,450 shares) in acquisition of Bancorp of New Jersey​​     -       118,375       -       -       -       -       118,375   Stock-based compensation expense     -       -       2,949       -       -       -       2,949   Balance as of December 31, 2020   $ -     $ 586,946     $ 23,887     $ 331,951     $ ( 30,271 )   $ 2,797     $ 915,310   Cumulative effect of change in accounting principle (see note 1b. “Authoritative Accounting Guidance Presentation”), net of tax     -       -       -       ( 2,925 )     -       -       ( 2,925 ) Balance as of January 1, 2021, as adjusted for changes in accounting principle     -       586,946       23,887       329,026       ( 30,271 )     2,797       912,385   Net income     -       -       -       130,353       -       -       130,353   Other comprehensive loss, net of tax     -       -       -       -       -       ( 4,201 )     ( 4,201 ) Cash dividends declared on preferred stock ($ 0.371875 per share)     -       -       -       ( 1,717 )     -       -       ( 1,717 ) Cash dividends declared on common stock ($ 0.48 per share)     -       -       -       ( 17,493 )     -       -       ( 17,493 ) Exercise of stock options ( 14,247 shares)     -       -       106       -       -       -       106   Restricted stock grants, net of forfeitures ( 44,836 shares)     -       -       -       -       -       -       -   Stock grants ( 4,981 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of deferred stock units earned ( 14,711 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of performance units earned ( 34,458 shares     -       -       -       -       -       -       -   Share redemption for tax withholdings on performance units and deferred stock units earned     -       -       ( 1,283 )     -       -       -       ( 1,283 ) Repurchase of stock ( 330,541 shares)     -       -       -       -       ( 9,401 )     -       ( 9,401 ) Proceeds from preferred stock issuance, net of costs ( 115,000 shares)     110,927       -       -       -       -       -       110,927   Stock-based compensation expense     -       -       4,536       -       -       -       4,536   Balance as of December 31, 2021   $ 110,927     $ 586,946     $ 27,246     $ 440,169     $ ( 39,672 )   $ ( 1,404 )   $ 1,124,212   Net income     -       -       -       125,211       -       -       125,211   Other comprehensive loss, net of tax     -       -       -       -       -       ( 30,960 )     ( 30,960 ) Cash dividends declared on preferred stock ($ 1.3125 per share)     -       -       -       ( 6,037 )     -       -       ( 6,037 ) Cash dividends declared on common stock ($ 0.595 per share)     -       -       -       ( 23,428 )     -       -       ( 23,428 ) Exercise of stock options ( 15,086 shares)     -       -       124       -       -       -       124   Restricted stock grants, net of forfeitures ( 53,169 shares)     -       -       -       -       -       -       -   Stock grants ( 153 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of deferred stock units earned ( 31,383 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of performance units earned ( 22,350 ) shares     -       -       -       -       -       -       -   Share redemption for tax withholdings on performance units and deferred stock units earned     -       -       ( 2,133 )     -       -       -       ( 2,133 ) Repurchase of stock ( 447,108 shares)     -       -       -       -       ( 13,127 )     -       ( 13,127 ) Stock-based compensation expense     -       -       4,889       -       -       -       4,889   Balance as of December 31, 2022   $ 110,927     $ 586,946     $ 30,126     $ 535,915     $ ( 52,799 )   $ ( 32,364 )   $ 1,178,751     See the accompanying notes to the consolidated financial statements. -60- Table of Contents   CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS   .     Years Ended December 31,       2022     2021     2020   Cash flows from operating activities                         Net income   $ 125,211     $ 130,353     $ 71,289   Adjustments to reconcile net income to net cash provided by operating activities:                         Depreciation and amortization of premises and equipment     3,863       3,757       4,244   Provision for (reversal of) credit losses     17,750       ( 5,500 )     41,000   Amortization of intangibles     1,685       1,980       2,559   Net accretion of loans     ( 3,178 )     ( 5,350 )     ( 6,687 ) Accretion on bank premises     ( 49 )     ( 73 )     ( 90 ) Accretion on deposits     ( 777 )     ( 2,224 )     ( 4,301 ) Amortization (accretion) on borrowings     40       ( 36 )     ( 183 ) Net deferred income tax (benefit) expense     ( 403 )     16       ( 7,495 ) Stock-based compensation     4,889       4,536       2,949   Gains on sales/redemptions of investment securities, net     -       ( 195 )     ( 29 ) Change in fair value of equity securities, net     1,521       373       ( 202 ) Gain on sale of loans held-for-sale, net     ( 1,695 )     ( 3,807 )     ( 2,085 ) Gain on sale of branches     -       ( 674 )     -   Net losses on disposition of other fixed assets     22       65       -   Gain (loss) on sale of other real estate owned     6       ( 18 )     -   Loans originated for resale     ( 21,128 )     ( 51,669 )     ( 63,114 ) Proceeds from sale of loans held-for-sale     28,341       72,233       80,323   Increase in cash surrender value of bank owned life insurance     ( 5,597 )     ( 4,771 )     ( 4,793 ) Amortization of premiums and accretion of discounts on investments securities, net     2,155       5,966       5,506   Amortization of subordinated debt issuance costs     304       303       323   (Increase) decrease in accrued interest receivable     ( 11,910 )     1,165       ( 11,458 ) Net change in operating leases     ( 182 )     ( 769 )     41   (Increase) decrease in other assets     ( 12,413 )     46,086       ( 22,498 ) Increase (decrease) in other liabilities     48,322       10,526       ( 4,174 ) Net cash provided by operating activities     176,777       202,273       81,125   Cash flows from investing activities                         Investment securities available-for-sale:                         Purchases     ( 339,059 )     ( 349,500 )     ( 338,087 ) Sales     -       -       19,624   Maturities, calls and principal repayments     150,287       285,873       256,782   Net (purchases)/redemptions of restricted investment in bank stocks     ( 18,778 )     ( 2,727 )     5,362   Purchases of equity securities     ( 3,538 )     ( 780 )     ( 2,000 ) Loans held-for-sale payments     54       38       1,186   Net increase in loans     ( 1,292,938 )     ( 596,389 )     ( 329,210 ) Cash flow hedge premium payment     ( 6,965 )     -       -   Purchases of premises and equipment     ( 3,301 )     ( 2,783 )     ( 2,199 ) Purchases of bank owned life insurance     ( 30,000 )     ( 25,000 )     ( 25,000 ) Proceeds from life insurance death benefits     -       -       1,794   Proceeds from disposition of fixed assets     697       113       -   Proceeds from sale of branches     -       974       -   Cash and cash equivalents acquired in acquisitions, net     -       -       87,391   Proceeds from sale of other real estate owned     309       321       992   Net cash used in investing activities     ( 1,543,232 )     ( 689,860 )     ( 323,365 ) Cash flows from financing activities                         Net increase in deposits     1,024,446       375,953       410,605   (Repayment of) increase in subordinated debt     -       ( 50,000 )     73,440   Advances of FHLB borrowings     4,203,181       340,000       1,526,489   Repayments of FHLB borrowings     ( 3,813,792 )     ( 297,725 )     ( 1,650,387 ) Cash dividends paid on preferred stock     ( 6,037 )     ( 1,717 )     -   Cash dividends paid on common stock     ( 23,428 )     ( 17,493 )     ( 14,317 ) Proceeds from preferred stock offering     -       110,927       -   Purchase of treasury stock     ( 13,127 )     ( 9,401 )     ( 911 ) Proceeds from exercise of stock options     124       106       233   Share redemption for tax withholdings on performance units and deferred stock units earned     ( 2,133 )     ( 1,283 )     ( 639 ) Net cash provided by financing activities     1,369,234       449,367       344,513                             Net change in cash and cash equivalents     2,779       ( 38,220 )     102,273   Cash and cash equivalents at beginning of period     265,536       303,756       201,483   Cash and cash equivalents at end of period   $ 268,315     $ 265,536     $ 303,756   Supplemental disclosures of cash flow information:                         Cash payments for:                         Interest paid   $ 67,850     $ 41,787     $ 74,701   Income taxes paid     49,234       45,431       26,548   Supplemental disclosures of noncash investing activities:                         Transfer of loans to other real estate owned   $ 579     $ 304     $ -   Transfer of loans held-for-sale to loans held-for-investment     8,043       4,293       10,995   Transfer of loans held-for-investment to loans held-for-sale     27,137       16,628       26,548     See the accompanying notes to the consolidated financial statements.   -61- Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies   Nature of Operations   ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Parent Corporation’s business currently consists of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”). The Bank’s subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a 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. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), NJCB Spec- 1, LLC (a New Jersey limited liability company), Port Jervis Holdings, LLC (a New Jersey limited liability company), BONJ Special Properties, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey financial technology company).   The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its twenty-four other banking offices. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’ business, real estate rental and consumer wages.   Basis of Presentation and Principals of Consolidation   The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. The consolidated financial statements of the Parent Corporation are prepared on an accrual basis and include the accounts of the Parent Corporation and the Company. All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements.   Segments   FASB ASC 28, “Segment Reporting,” requires companies to report certain information about operating segments. The Company is managed as one segment: a community bank. All decisions including but not limited to loan growth, deposit funding, interest rate risk, credit risk and pricing are determined after assessing the effect on the totality of the organization. For example, loan growth is dependent on the ability of the organization to fund this growth through deposits or other borrowings. As a result, the Company is managed as one operating segment.   Use of Estimates   In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates.   Risks and Uncertainties   As previously disclosed, on March 11, 2020 the World Health Organization declared the outbreak of COVID- 19 as a global pandemic, which continues to impact the United States and the world. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID- 19 pandemic. The COVID- 19 pandemic has adversely affected, and continues to adversely affect economic activity globally, nationally and locally. Although economic activity  accelerated during 2022 the COVID pandemic and changes to peoples’ patterns of work and spending may   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. COVID- 19 could impact the Company’s operations in the future. Although state and local governments have lifted restrictions on conducting business, it is possible that restrictions could be reimposed.   - 62 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies (continued)   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 administrator after 2021. The announcement also indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, although banks have continued to submit certain rates for the calculation of LIBOR in 2022, at this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator . Similarly, banking regulators in the United States have required insured depository institutions in the United States to cease originating loans using LIBOR as a rate index as of December 31, 2021, and in March 2022 Congress adopted legislation providing for the replacement of LIBOR indexes in contracts without fall back language with the Secured Overnight Financing Rate ("SOFR"), and for the Federal Reserve to adopt regulation by September of 2022 implementing this change. Although the Bank ceased using LIBOR as an index for loans it originates, it is unclear at this time what effect these changes may have on the values of loans and liabilities held or owed by the Bank whose interest rates are or were tied to LIBOR. Uncertainty surrounding the phase out  of LIBOR may adversely affect the value of, and the return on our loans, and our investment securities.   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’ economy. 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.      Cash and Cash Equivalents   Cash and cash equivalents include cash, deposits with other financial institutions with maturities of less than 90 days, and federal funds sold. Net cash flows are reported for client loan and deposit transactions, interest-bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements.   Investment Securities   Effective January 1, 2021, the Company accounts for its investment securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320 - 10 - 05. Investments are classified into the following categories: ( 1 ) held-to-maturity securities, for which the Company has both the positive intent and ability to hold until maturity, which are reported at amortized cost; ( 2 ) trading securities, which are purchased and held principally for the purpose of selling in the near term and are reported at fair value with unrealized gains and losses included in earnings; and ( 3 ) available-for-sale securities, which do not meet the criteria of the other two categories and which management believes may be sold prior to maturity due to changes in interest rates, prepayment risk, liquidity or other factors, and are reported at fair value, with unrealized gains and losses, net of applicable income taxes, reported as a component of accumulated other comprehensive income, which is included in stockholders’ equity and excluded from earnings.   Investment securities are adjusted for amortization of premiums and accretion of discounts as adjustments to interest income, which are recognized on a level yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Investment securities gains or losses are determined using the specific identification method.   Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in comprehensive income, net of tax. Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are generally amortized using the level-yield method without estimating prepayments, except for mortgage-backed securities, where prepayment rates are estimated. Premiums on callable investment securities are amortized to their earliest call date. Gains and losses on sales of securities are recorded on the trade date and determined using the specific identification method.   - 63 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued)   For available-for-sale investment securities which are in an unrealized loss position, the Company will first assess whether we intend to sell, or it is more likely than not, that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria is met, the amortized cost basis of the security is written down to fair value through income. For available-for-sale investment securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from an actual or estimated credit loss event or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, changes to the rating of the security, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss is likely, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, an allowance for credit losses is recorded for the estimated credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit loss is recognized in other comprehensive income, net of tax. The Company elected the practical expedient of zero loss estimates for securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major agencies and have a long history of no credit losses.   Prior to January 1, 2021, securities were evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FASB ASC 320 - 10 - 65 clarifies the interaction of the factors that were considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management assessed whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps were done before assessing whether the entity will recover the cost basis of the investment. In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FASB ASC 320 - 10 - 65 changed the presentation and amount of the other-than-temporary impairment recognized in the Consolidated Statement of Income. The other-than-temporary impairment was separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss was recognized through earnings. The amount of the total other-than-temporary impairment related to all other factors was recognized through other comprehensive income.    Equity Securities   The Company’s investments in equity securities are recorded at fair value, with unrealized gains and losses included in earnings.   Loans Held-for-Sale   Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan.   Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. Fair value on these loans is determined based on the terms of the loan, such as interest rate, maturity date, and reset term, as well as sales of similar assets.   Loans   Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, purchase premium and discounts and an allowance for credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.   Loan segments are defined as a group of loans, which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Company has five segments of loans: commercial, commercial real estate, commercial construction, residential real estate (including home equity) and consumer.   - 64 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued)   Loans that are 90 days past due are placed on nonaccrual and previously accrued interest is reversed and charged against interest income unless the loans are both well-secured and in the process of collection. Past due status is based on the contractual terms of the loan. In certain cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for credit losses and loans individually evaluated for credit losses.   All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.   The policy of the Company is to generally grant commercial, residential and consumer loans to residents and businesses within the market-areas served by its offices in New Jersey, New York and Florida. The borrowers’ abilities to repay their obligations are dependent upon various factors including the borrowers’ income and net worth, cash flows generated by the borrowers’ underlying collateral, value of the underlying collateral, and priority of the lender’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the control of the Company. The Company is therefore subject to risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for credit losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for a large majority of the Company’s loans.   Allowance for Credit Losses   The allowance for credit losses is an estimate of current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial assets necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and investment securities measured at amortized cost. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. Loan losses are charged against the allowance for credit losses when the Company believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. The allowance is established through a provision for credit losses that is charged against income. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The expected credit loss for unfunded loan commitments is reported on the consolidated statement of financial condition in other liabilities.   For financial assets, the allowance for credit losses is a valuation account that is deducted from, or added to, the amortized cost basis of the financial assets to present the net amount expected to be collected on the financial assets. The Company 's methodology to estimate the allowance for credit losses has two components: (i) a collective reserve component for estimated lifetime expected credit losses for pools of loans that share common risk characteristics and (ii) an individual reserve component for loans that do not share common risk characteristics. The Company maintains an allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial letters of credit.   Information relevant to establishing an estimate of current expected credit losses includes historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. The Company reports in net income (as a credit loss expense) the amount necessary to adjust the allowance for credit losses and liabilities for credit losses on off-balance-sheet credit exposures for the current estimate of expected credit losses.   - 65 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued)   Expected credit losses of financial assets are measured on a collective (pool) basis when similar risk characteristic(s) exist. If the Company determines that a financial asset does not share risk characteristics with other financial assets, the Company will evaluate the financial asset for expected credit losses on an individual basis. Financial assets are assessed once, either through collective assessments or individual assessments. Standard expected losses are evaluated on a collective, or pool, basis when financial assets share similar risk characteristics. For pooled loan segments, utilizing a quantitative analysis, the Company calculates estimated credit losses using a probability of default and loss given default methodology, the results of which are applied to the aggregated discounted cash flow of each individual loan within the segment. In the absence of relevant and reliable internal data, probability of default and loss given default rates are determined using peer data. The point in time probability of default and loss given default are then conditioned by macroeconomic scenarios to incorporate reasonable and supportable forecasts that affect the collectability of the reported amount. Financial assets may be segmented based on one characteristic, or a combination of characteristics. Examples of risk characteristics relevant to the Company’s evaluation included, but were not limited to: ( 1 ) Internal or external credit scores or credit ratings, ( 2 ) Risk ratings or classifications, ( 3 ) Financial asset type, ( 4 ) Collateral type, ( 5 ) Size, ( 6 ) Effective interest rate, ( 7 ) Term, ( 8 ) Geographical location, ( 9 ) Industry of the borrower and ( 10 ) Vintage.   The Company’s quantitative analysis also considers relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts. The Company evaluates a variety of factors including third party economic forecasts, industry trends and other available published economic information in arriving at its forecasts. After the reasonable and supportable forecast period, the Company reverts, on a straight-line basis, to average historical losses. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate.   Included in the allowance for credit losses are qualitative reserves to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Each qualitative loss factor, for each loan segment within the portfolio, incorporates consideration for a minimum to maximum range for loss factors derived from either the Company’s historical loss experience, or peer group historical charge-off experience. These qualitative factor adjustments may increase or decrease the Company’s estimate of expected credit losses and are applied to each loan segment.   The Bank evaluates individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. The Company evaluates the pooling methodology at least annually. Loans transition from defined segments for individual analysis when credit characteristics, or risk traits, change in a material manner. A loan is considered for individual analysis when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by the Company in determining individual analysis include payment status and the probability of collecting scheduled principal and interest payments, when due.   Loans for which the terms have been modified as a concession to the borrower due to the borrower experiencing financial difficulties are troubled debt restructurings (“TDR”) and are individually analyzed if carrying value is $ 250,000 or higher. Additionally, nonaccrual loans that are $ 250,000 or higher are also individually analyzed. All PCD loans are individually analyzed. For loans designated as TDR or nonaccrual with balances less than $ 250,000 , these loans are collectively evaluated, and, accordingly, are not separately identified for analysis or disclosures. Instruments will not be included in both collective and individual analysis. Individual analysis will establish a specific reserve for instruments in scope.    For collateral dependent loans, when it is determined that a foreclosure is probable, the allowance for credit losses is determined on a loan level basis using the fair value of the collateral as of the reporting date, less estimated disposition costs (“net fair value”), which will ensure that the credit loss is not delayed until the time at which the actual foreclosure takes place. In the event that this fair value is less than then amortized cost basis of these specific loans, the Company will recognize the difference between the net fair value at the reporting date and the amortized cost basis in the allowance for credit losses. If the fair value of the collateral has increased as of the evaluation date, the increase in the fair value of the collateral is reflected through a reduction in the allowance for credit losses. Adjustments for estimated disposition costs are not appropriate when the repayment of a collateral-dependent loan is expected from the operation of the collateral. If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as the allowance for credit losses. The effective interest rate used to discount expected cash flows is adjusted to incorporate expected prepayments, if applicable.   - 66 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued)   Purchased Credit-Deteriorated Loans   Loans acquired in a business combination that have experienced a more-than-significant deterioration in credit quality since origination are considered PCD loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following: ( 1 ) non-accrual status; ( 2 ) troubled debt restructured designation; ( 3 ) risk ratings of special mention, substandard or doubtful; ( 4 ) watchlist credits; and ( 5 ) delinquency status, including loans that were current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium, which is recognized through interest income on a level-yield basis over the lives of the related loans. All loans considered to be purchased credit-impaired (PCI) prior to the adoption of ASU 2016 - 13 were converted to PCD upon adoption.   PCD loans that met the criteria for nonaccrual may be considered performing, regardless of whether the client is contractually delinquent, if management can reasonably estimate the timing and amount of the expected cash flows on such loans and if management expects to fully collect the new carrying value of the loans. As such, management may no longer consider the loans to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount.   Derivatives   The Company’s quantitative analysis also considers relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts. The Company evaluates a variety of factors including third party economic forecasts, industry trends and other available published economic information in arriving at its forecasts. After the reasonable and supportable forecast period, the Company reverts, on a straight-line basis, to average historical economic driver conditions. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate.   Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.   The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.   When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.   - 67 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued)   Restricted Stock   The Bank is a member of the Federal Home Loan Bank (“FHLB”) of New York. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends on the stock are reported as income.   Transfers of Financial Assets   Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.   Premises and Equipment   Land is carried at cost and premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 4 to 30 years. Leasehold improvements are depreciated using the straight-line method over the terms of the respective leases, or the estimated useful lives of the improvements, whichever is shorter. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years.   Leases   Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease team. The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option.   Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term. The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The Company has elected not to recognize leases with original terms of 12 months or less on the consolidated balance sheet.   Other Real Estate Owned   Other real estate owned (“OREO”), representing property acquired through foreclosure and held-for-sale, is initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequently, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs relating to holding the assets are charged to expenses.   Employee Benefit Plans   The Company has a noncontributory pension plan that covered all eligible employees up until September 30, 2007, at which time the Company froze its defined benefit pension plan. As such, all future benefit accruals in this pension plan were discontinued and all retirement benefits that employees would have earned as of September 30, 2007 were preserved. The Company’s policy is to fund at least the minimum contribution required by the Employee Retirement Income Security Act of 1974. The costs associated with the plan are accrued based on actuarial assumptions and included in salaries and employee benefits expense.   - 68 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued)   The Company accounts for its defined benefit pension plan in accordance with FASB ASC 715 - 30. FASB ASC 715 - 30 requires that the funded status of defined benefit postretirement plans be recognized on the Company’s statement of financial condition and changes in the funded status be reflected in other comprehensive income. FASB ASC 715 - 30 also requires companies to measure the funded status of the plan as of the date of its fiscal year-end.   The Company maintains a 401 (k)-employee savings plan to provide for defined contributions which covers substantially all employees of the Company. Employee 401 (k) and profit-sharing plan expense is the amount of matching contributions.   Stock-Based Compensation   Stock compensation accounting guidance (FASB ASC 718, “Compensation-Stock Compensation”) requires that the compensation cost related to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.   Stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. See Note 18 of the Notes to Consolidated Financial Statements for a further discussion.   Treasury Stock   Subject to certain regulatory limitations applicable to the Parent Corporation, treasury stock purchases may be made from time to time as, in the opinion of management, market conditions warrant, in the open market or in privately negotiated transactions. Shares repurchased are added to the corporate treasury and will be used for future stock dividends and other issuances. The repurchased shares are recorded as treasury stock, which results in a decrease in stockholders’ equity. Treasury stock is recorded using the cost method and accordingly is presented as a reduction of stockholders’ equity. During the year ended December 31, 2022 and December 31, 2021, the Parent Corporation repurchased 447,108  and 330,541  shares, respectively, under a board-approved share repurchase program.   Goodwill   Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized but tested for impairment annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected December 31 as the date to perform the annual impairment test. No impairment charge was deemed necessary as of the years ended December 31, 2022, 2021 and 2020 .   - 69 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued)   Other Intangible Assets   Other intangible assets consist of core deposit intangibles arising from business combinations that are amortized over their estimated useful lives to their estimated residual value.   Comprehensive Income   Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from nonowner sources. The Company’s other comprehensive income (loss) is comprised of unrealized holding gains and losses on securities available-for-sale, unrecognized actuarial gains and losses of the Company’s defined benefit pension plan and unrealized gains and losses on cash flow hedges, net of taxes.   Restrictions on Cash   Cash on hand or on deposit with the Federal Reserve Bank is required to meet regulatory reserve and clearing requirements.   Dividend Restriction   Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Parent Corporation or by the Parent Corporation to the stockholders.   Fair Value of Financial Instruments   Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.   Bank Owned Life Insurance   The Company invests in Bank Owned Life Insurance (“BOLI”) to help offset the cost of employee benefits. The change in the cash surrender value of the BOLI is recorded as a component of noninterest income.   Income Taxes   Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.   A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.   Advertising Costs   The Company recognizes its marketing and advertising cost as incurred.   Reclassifications   Certain reclassifications have been made in the consolidated financial statements and footnotes for  2021 and  2020 to conform to the classifications presented in 2022 . Such reclassifications had no impact on net income or stockholders’ equity.   - 70 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 1b – Authoritative Accounting Guidance   Adoption of New Accounting Standards in 2023   In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022 - 02, “Financial Instruments – Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022 - 02” ). ASU 2022 - 02 eliminates the accounting guidance for troubled debt restructurings (“TDRs”) in ASC 310 - 40, “Receivables - Troubled Debt Restructurings by Creditors” for entities that have adopted the current expected credit loss (“CECL”) model introduced by ASU 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments” (ASU 2016 - 13” ). ASU 2022 - 02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326 - 20, “Financial Instruments—Credit Losses—Measured at Amortized Cost”. ASU 2022 - 02 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The adoption of ASU 2022 - 02 did not have a material effect on the Company’s consolidated financial statements.   Newly Issued, But Not Yet Effective Accounting Standards   In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022 - 03, “Fair Value Measurement (Topic 820 ): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2022 - 03” ). ASU 2022 - 03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.  ASU 2022 - 03 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022 - 03 will have on its consolidated financial statements.   - 71 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 2 – Earnings per Common Share   Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 260 - 10 - 45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). The restricted stock awards granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities. The two -class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities. Earnings per common share have been computed based on the following:       Years Ended December 31,       2022     2021     2020       (in thousands, except per share amounts)   Net income available to common stockholders   $ 119,174     $ 128,636     $ 71,289   Earnings allocated to participating securities     ( 287 )     ( 313 )     ( 356 ) Income attributable to common stock   $ 118,887     $ 128,323     $ 70,933   Weighted average common shares outstanding, including participating securities     39,355       39,723       39,643   Weighted average participating securities     ( 95 )     ( 97 )     ( 131 ) Weighted average common shares outstanding     39,260       39,626       39,512   Incremental shares from assumed conversions of options, deferred stock units, performance units and restricted stock     216       260       132   Weighted average common and equivalent shares outstanding     39,476       39,886       39,644   Earnings per common share:                         Basic   $ 3.03     $ 3.24     $ 1.80   Diluted     3.01       3.22       1.79     There were no antidilutive common share equivalents as of December 31, 2022, 2021 and 2020 .   - 72 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 3 – Investment Securities   The Company’s investment securities are classified as available-for-sale as of December 31, 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 December 31, 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 20 of the Notes to Consolidated Financial Statements for a further discussion.   The following tables present information related to the Company’s portfolio of investment securities available-for-sale as of December 31, 2022 and 2021 .               Gross     Gross               Amortized     Unrealized     Unrealized     Fair       Cost     Gains     Losses     Value       (dollars in thousands)   December 31, 2022                                 Investment securities available-for-sale                                 Federal agency obligations   $ 54,889     $ -     $ ( 10,439 )   $ 44,450   Residential mortgage pass-through securities     475,263       178       ( 57,863 )     417,578   Commercial mortgage pass-through securities     25,485       -       ( 4,381 )     21,104   Obligations of U.S. states and political subdivisions​​     157,247       111       ( 14,462 )     142,896   Corporate bonds and notes     7,000       -       ( 26 )     6,974   Asset-backed securities     1,673       -       ( 33 )     1,640   Other securities     242       -       -       242   Total securities available-for-sale   $ 721,799     $ 289     $ ( 87,204 )   $ 634,884                   Gross     Gross               Amortized     Unrealized     Unrealized     Fair       Cost     Gains     Losses     Value       (dollars in thousands)   December 31, 2021                                 Investment securities available-for-sale                                 Federal agency obligations   $ 50,336     $ 649     $ ( 625 )   $ 50,360   Residential mortgage pass-through securities     317,111       1,868       ( 2,884 )     316,095   Commercial mortgage pass-through securities     10,814       118       ( 463 )     10,469   Obligations of U.S. states and political subdivisions​​     145,045       1,562       ( 982 )     145,625   Corporate bonds and notes     8,968       81       -       9,049   Asset-backed securities     2,563       3       ( 2 )     2,564   Certificates of deposit     150       -       -       150   Other securities     195       -       -       195   Total securities available-for-sale   $ 535,182     $ 4,281     $ ( 4,956 )   $ 534,507       - 73 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 3 – Investment Securities – (continued)   Investment securities having a carrying value of approximately $ 157 million and $ 71  million as of December 31, 2022 and December 31, 2021, respectively, were pledged to secure public deposits, borrowings, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law. As of December 31, 2022, and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.   The following table presents information for investment securities available-for-sale as of December 31, 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.       December 31, 2022       Amortized     Fair       Cost     Value       (dollars in thousands)   Investment securities available-for-sale:                 Due in one year or less   $ 5,453     $ 5,451   Due after one year through five years     4,106       4,082   Due after five years through ten years     2,247       2,244   Due after ten years     209,003       184,183   Residential mortgage pass-through securities     475,263       417,578   Commercial mortgage pass-through securities     25,485       21,104   Other securities     242       242   Total securities available-for-sale   $ 721,799     $ 634,884       Gross gains and losses from the sales and redemptions of investment securities for the years ended December 31, 2022, 2021 and 2020 were as follows:       Years Ended December 31,       2022     2021     2020       (dollars in thousands)   Proceeds   $ -     $ 5,185     $ 19,624   Gross gains on sale/redemption of investment securities   $ -     $ 195     $ 29   Gross losses on sale/redemption of investment securities     -       -       -   Net gains on sales/redemptions of investment securities​​     -       195       29   Tax provision on net gains     -       ( 48 )     ( 6 ) Net gains on sale/redemption of investment securities, after tax​​   $ -     $ 147     $ 23       - 74 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 3 – Investment Securities – (continued)   Impairment Analysis of Available-for-Sale Debt Securities   The following tables indicate gross unrealized losses for which an ACL has not been recorded, aggregated by investment category and by the length of continuous time individual securities have been in an unrealized loss position as of December 31, 2022 and December 31, 2021 .       December 31, 2022       Total     Less than 12 Months     12 Months or Longer       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized       Value     Losses     Value     Losses     Value     Losses       (dollars in thousands)   Investment securities available-for-sale:                                                 Federal agency obligation   $ 44,451     $ ( 10,439 )   $ 20,517     $ ( 1,831 )   $ 23,934     $ ( 8,608 ) Residential mortgage pass-through securities     403,039       ( 57,863 )     218,918       ( 13,869 )     184,121       ( 43,994 ) Commercial mortgage pass-through securities     21,105       ( 4,381 )     14,523       ( 2,304 )     6,582       ( 2,077 ) Obligations of U.S. states and political subdivisions     133,265       ( 14,462 )     47,446       ( 3,404 )     85,819       ( 11,058 ) Corporate bonds and notes     4,973       ( 26 )     4,973       ( 26 )     -       -   Asset-backed securities     1,640       ( 33 )     1,048       ( 16 )     592       ( 17 ) Total temporarily impaired securities   $ 608,473     $ ( 87,204 )   $ 307,425     $ ( 21,450 )   $ 301,048     $ ( 65,754 )       December 31, 2021       Total     Less than 12 Months     12 Months or Longer       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized       Value     Losses     Value     Losses     Value     Losses       (dollars in thousands)   Investment securities available-for-sale:                                                 Federal agency obligation   $ 28,974     $ ( 625 )   $ 28,974     $ ( 625 )   $ -     $ -   Residential mortgage pass-through securities     246,396       ( 2,884 )     214,701       ( 2,111 )     31,695       ( 773 ) Commercial mortgage pass-through securities     8,370       ( 463 )     4,682       ( 75 )     3,688       ( 388 ) Obligations of U.S. states and political subdivisions     89,473       ( 982 )     89,473       ( 982 )     -       -   Asset-backed securities     802       ( 2 )     802       ( 2 )     -       -   Total temporarily impaired securities   $ 374,015     $ ( 4,956 )   $ 338,632     $ ( 3,795 )   $ 35,383     $ ( 1,161 )   On January 1, 2021, the Company adopted ASU 2016 - 13 and implemented the CECL methodology for allowance for credit losses on its investment securities available-for-sale. The new CECL methodology replaces the other-than-temporary impairment model that previously existed. The Company did not have a CECL day 1 impact attributable to its investment securities portfolio and did not have an allowance for credit losses as of December 31, 2022 . The Company has elected to exclude accrued interest from the amortized cost of its investment securities available-for-sale. Accrued interest receivable for investment securities available for sale as of December 31, 2022 and December 31, 2021 , totaled $ 2.4  million and $ 1.6  million, respectively.   - 75 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 3 – Investment Securities – (continued)   The Company evaluates securities in an unrealized loss position for impairment related to credit losses on at least a quarterly basis. Securities in unrealized loss positions are first assessed as to whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If one of the criteria is met, the security’s amortized cost basis is written down to fair value through current earnings. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value resulted from credit losses or other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Unrealized losses on asset backed securities and state and municipal securities have not been recognized into income because the issuers are of high credit quality, we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale securities was recorded as of December 31, 2022 .   Federal agency obligations, residential mortgage-backed pass-through securities and commercial mortgage-backed pass-through securities are issued by U.S. Government agencies and U.S. Government sponsored enterprises. Although a government guarantee exists on these investments, these entities are not legally backed by the full faith and credit of the federal government, and the current support they receive is subject to a cap as part of the agreement entered into in 2008. Nonetheless, at this time we do not foresee any set of circumstances in which the government would not fund its commitments on these investments as the issuers are an integral part of the U.S. housing market in providing liquidity and stability. Therefore, we concluded that a zero -allowance approach for these investment securities is appropriate.   - 76 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 4 – Loans and the Allowance for Credit Losses   Loans Receivable: The following table sets forth the composition of the Company’s loan portfolio segments, net of deferred fees, as of December 31, 2022 and December 31, 2021 :       2022     2021       (dollars in thousands)   Commercial (1)   $ 1,472,734     $ 1,299,428   Commercial real estate     5,795,228       4,741,590   Commercial construction     574,139       540,178   Residential real estate     264,748       255,269   Consumer     2,312       1,886   Gross loans     8,109,161       6,838,351   Net deferred fees     ( 9,472 )     ( 9,729 ) Loans receivable   $ 8,099,689     $ 6,828,622         ( 1 ) Included in commercial loans as of December 31, 2022 and  December 31, 2021 were Paycheck Protection Program (“PPP”) loans of $ 11.4  million and $ 93.1  million, respectively. These loans are 100% federally guaranteed and currently not subject to any allocation of allowance for credit losses.   As of December 31, 2022 , and 2021 , loan balances of approximately $ 2.7  billion and $ 2.5  billion, respectively, were pledged to secure borrowings from the Federal Home Loan Bank.   The loan segments in the above table have unique risk characteristics with respect to credit quality:     • The repayment of commercial loans is generally dependent on the creditworthiness and cash flow of borrowers, and if applicable, guarantors, which may be negatively impacted by adverse economic conditions. While the majority of these loans are secured, collateral type, marketing, coverage, valuation and monitoring is not as uniform as in other portfolio classes and recovery from liquidation of such collateral may be subject to greater variability.         • Payment on commercial real estate is driven principally by operating results of the managed properties or underlying business and secondarily by the sale or refinance of such properties. Both primary and secondary sources of repayment, and value of the properties in liquidation, may be affected to a greater extent by adverse conditions in the real estate market or the economy in general.         • Properties underlying construction, land and land development loans often do not generate sufficient cash flows to service debt and thus repayment is subject to ability of the borrower and, if applicable, guarantors, to complete development or construction of the property and carry the project, often for extended periods of time. As a result, the performance of these loans is contingent upon future events whose probability at the time of origination is uncertain.         • The ability of borrowers to service debt in the residential and consumer loan portfolios is generally subject to personal income which may be impacted by general economic conditions, such as increased unemployment levels. These loans are predominately collateralized by first and/or second liens on single family properties. If a borrower cannot maintain the loan, the Company’s ability to recover against the collateral in sufficient amount and in a timely manner may be significantly influenced by market, legal and regulatory conditions.         • The Company considers loan classes and loan segments to be one and the same.   - 77 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 4 – Loans and the Allowance for Credit Losses – (continued)   Loans Held-For-Sale : The following table presents loans held-for-sale by loan segment as of December 31, 2022 and December 31, 2021 :       2022     2021       (dollars in thousands)   Commercial   $ 13,473     $ -   Residential real estate     299       250   Total carrying amount   $ 13,772     $ 250     Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an allowance for credit loss (“ACL”) as of December 31, 2022 and December 31, 2021 and nonaccrual loans without an ACL as of December 31, 2022 and December 31, 2021:       December 31, 2022       Nonaccrual loans with ACL     Nonaccrual loans without ACL     Total Nonaccrual loans       (dollars in thousands)   Commercial   $ 23,512     $ 1,745     $ 25,257   Commercial real estate     10,220       6,597       16,817   Residential real estate     604       1,776       2,380   Total   $ 34,336     $ 10,118     $ 44,454         December 31, 2021       Nonaccrual loans with ACL     Nonaccrual loans without ACL     Total Nonaccrual loans       (dollars in thousands)   Commercial   $ 28,746     $ 1,316     $ 30,062   Commercial real estate     15,362       10,031       25,393   Commercial construction     -       3,150       3,150   Residential real estate     1,239       1,856       3,095   Total   $ 45,347     $ 16,353     $ 61,700     Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.   - 78 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 4 – Loans and the Allowance for Credit Losses – (continued)   Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third -party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified as “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date. Assets are classified as “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified as special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected.   - 79 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 4 – Loans and the Allowance for Credit Losses – (continued)   We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP. Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below. As of December 31, 2022 , our loans based on year of origination and risk designation are as follows (dollars in thousands):       Term loans amortized cost basis by origination year                                                                       Revolving     Total       2022     2021     2020     2019     2018     Prior     Loans     Gross Loans   Commercial                                                                 Pass   $ 301,636     $ 305,721     $ 47,952     $ 28,177     $ 52,950     $ 127,739     $ 550,483     $ 1,414,658   Special mention     -       -       -       583       26       8,551       3,292       12,452   Substandard     7,615       146       15       1,769       11,214       22,596       2,269       45,624   Doubtful     -       -       -       -       -       -       -       -   Total Commercial   $ 309,251     $ 305,867     $ 47,967     $ 30,529     $ 64,190     $ 158,886     $ 556,044     $ 1,472,734                                                                     Commercial Real Estate                                                                 Pass   $ 1,571,751     $ 1,608,023     $ 382,987     $ 358,578     $ 375,886     $ 987,982     $ 401,365     $ 5,686,572   Special mention     3,040       -       -       -       -       37,774       8,839       49,653   Substandard     -       1,929       -       6,526       19,138       23,287       8,123       59,003   Doubtful     -       -       -       -       -       -       -       -   Total Commercial Real Estate   $ 1,574,791     $ 1,609,952     $ 382,987     $ 365,104     $ 395,024     $ 1,049,043     $ 418,327     $ 5,795,228                                                                     Commercial Construction                                                                 Pass   $ 8,615     $ 7,605     $ 6,720     $ 508     $ -     $ -     $ 542,460     $ 565,908   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       8,231       8,231   Doubtful     -       -       -       -       -       -       -       -   Total Commercial Construction   $ 8,615     $ 7,605     $ 6,720     $ 508     $ -     $ -     $ 550,691     $ 574,139                                                                     Residential Real Estate                                                                 Pass   $ 45,926     $ 25,318     $ 24,409     $ 21,557     $ 20,284     $ 78,314     $ 41,468     $ 257,276   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       3,379       4,093       7,472   Doubtful     -       -       -       -       -       -       -       -   Total Residential Real Estate   $ 45,926     $ 25,318     $ 24,409     $ 21,557     $ 20,284     $ 81,693     $ 45,561     $ 264,748                                                                     Consumer                                                                 Pass   $ 2,219     $ -     $ 9     $ -     $ -     $ 2     $ 82     $ 2,312   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 2,219     $ -     $ 9     $ -     $ -     $ 2     $ 82     $ 2,312                                                                     Total                                                                 Pass   $ 1,930,147     $ 1,946,667     $ 462,077     $ 408,820     $ 449,120     $ 1,194,037     $ 1,535,858     $ 7,926,726   Special mention     3,040       -       -       583       26       46,325       12,131       62,105   Substandard     7,615       2,075       15       8,295       30,352       49,262       22,716       120,330   Doubtful     -       -       -       -       -       -       -       -   Grand Total   $ 1,940,802     $ 1,948,742     $ 462,092     $ 417,698     $ 479,498     $ 1,289,624     $ 1,570,705     $ 8,109,161     - 80 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 4 – Loans and the Allowance for Credit Losses – (continued)   As of December 31, 2021, our loans based on year of origination and risk designation are as follows (dollars in thousands):                                                       Revolving     Total       2021     2020     2019     2018     2017     Prior     Loans     Gross Loans   Commercial                                                                 Pass   $ 403,203     $ 58,534     $ 54,485     $ 60,409     $ 95,727     $ 86,556     $ 471,588     $ 1,230,502   Special mention     -       -       -       -       1       4,045       4,266       8,312   Substandard     170       -       1,842       13,298       9,740       21,024       14,540       60,614   Doubtful     -       -       -       -       -       -       -       -   Total Commercial   $ 403,373     $ 58,534     $ 56,327     $ 73,707     $ 105,468     $ 111,625     $ 490,394     $ 1,299,428                                                                     Commercial Real Estate                                                                 Pass   $ 1,692,098     $ 533,315     $ 420,995     $ 452,262     $ 497,065     $ 842,244     $ 170,721     $ 4,608,700   Special mention     -       -       -       -       5,142       50,438       6,601       62,181   Substandard     1,968       9,039       4,006       20,624       -       26,108       8,964       70,709   Doubtful     -       -       -       -       -       -       -       -   Total Commercial Real Estate   $ 1,694,066     $ 542,354     $ 425,001     $ 472,886     $ 502,207     $ 918,790     $ 186,286     $ 4,741,590                                                                     Commercial Construction                                                                 Pass   $ 8,018     $ 7,370     $ 12,625     $ 2,600     $ 2,339     $ -     $ 490,119     $ 523,071   Special mention     -       -       -       -       350       -       1,443       1,793   Substandard     -       -       -       -       -       -       15,314       15,314   Doubtful     -       -       -       -       -       -       -       -   Total Commercial Construction   $ 8,018     $ 7,370     $ 12,625     $ 2,600     $ 2,689     $ -     $ 506,876     $ 540,178                                                                     Residential Real Estate                                                                 Pass   $ 27,081     $ 29,539     $ 23,611     $ 25,070     $ 28,701     $ 66,249     $ 44,221     $ 244,472   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       7,262       3,535       10,797   Doubtful     -       -       -       -       -       -       -       -   Total Residential Real Estate   $ 27,081     $ 29,539     $ 23,611     $ 25,070     $ 28,701     $ 73,511     $ 47,756     $ 255,269                                                                     Consumer                                                                 Pass   $ 1,590     $ 85     $ 39     $ 21     $ 28     $ -     $ 123     $ 1,886   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 1,590     $ 85     $ 39     $ 21     $ 28     $ -     $ 123     $ 1,886                                                                     Total                                                                 Pass   $ 2,131,990     $ 628,843     $ 511,755     $ 540,362     $ 623,860     $ 995,049     $ 1,176,772     $ 6,608,631   Special mention     -       -       -       -       5,493       54,483       12,310       72,286   Substandard     2,138       9,039       5,848       33,922       9,740       54,394       42,353       157,434   Doubtful     -       -       -       -       -       -       -       -   Grand Total   $ 2,134,128     $ 637,882     $ 517,603     $ 574,284     $ 639,093     $ 1,103,926     $ 1,231,435     $ 6,838,351     - 81 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 4 – Loans and the Allowance for Credit Losses – (continued)   Collateral Dependent Loans : Loans which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses. The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date. The following table presents collateral dependent loans that were individually evaluated for impairment as of December 31, 2022 and 2021:       December 31, 2022       Real Estate     Other     Total       (dollars in thousands)   Commercial   $ 5,352     $ 22,517     $ 27,869   Commercial real estate     52,477       -       52,477   Commercial construction     8,232       -       8,232   Residential real estate     5,864       -       5,864   Total   $ 71,925     $ 22,517     $ 94,442         December 31, 2021       Real Estate     Other     Total       (dollars in thousands)   Commercial   $ 6,385     $ 26,182     $ 32,567   Commercial real estate     55,244       -       55,244   Commercial construction     13,196       -       13,196   Residential real estate     8,856       -       8,856   Total   $ 83,681     $ 26,182     $ 109,863     - 82 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 4 – Loans and the Allowance for Credit Losses – (continued)   Aging Analysis - The following table provides an analysis of the aging of the loans by class, excluding the effect of net deferred fees, which are past due as of December 31, 2022 and  December 31, 2021 (dollars in thousands):       December 31, 2022       30-59 Days Past Due     60-89 Days Past Due     90 Days or Greater Past Due and Still Accruing     Nonaccrual     Total Past Due and Nonaccrual     Current     Gross Loans   Commercial   $ 306     $ -     $ -     $ 25,257     $ 25,563     $ 1,447,171     $ 1,472,734   Commercial real Estate     90       -       5,591       16,817       22,498       5,772,730       5,795,228   Commercial construction     -       -       -       -       -       574,139       574,139   Residential real Estate     1,569       -       -       2,380       3,949       260,799       264,748   Consumer     -       -       -       -       -       2,312       2,312   Total   $ 1,965     $ -     $ 5,591     $ 44,454     $ 52,010     $ 8,057,151     $ 8,109,161     The 90 days or greater past due and still accruing category reflects purchased credit-deteriorated loans, net of fair value marks, which accrete income per the valuation at date of acquisition.       December 31, 2021       30-59 Days Past Due     60-89 Days Past Due     90 Days or Greater Past Due and Still Accruing     Nonaccrual     Total Past Due and Nonaccrual     Current     Total Loans Receivable   Commercial   $ 4,305     $ 729     $ 4,457     $ 30,062     $ 39,553     $ 1,259,875     $ 1,299,428   Commercial real estate     1,622       1,009       5,935       25,393       33,959       4,707,631       4,741,590   Commercial construction     -       -       -       3,150       3,150       537,028       540,178   Residential real estate     1,437       292       3,139       3,095       7,963       247,306       255,269   Consumer     -       -       -       -       -       1,886       1,886   Total   $ 7,364     $ 2,030     $ 13,531     $ 61,700     $ 84,625     $ 6,753,726     $ 6,838,351     The 90 days or greater past due and still accruing category reflects purchased credit-deteriorated loans, net of fair value marks, which accrete income per the valuation at date of acquisition.   - 83 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 4 – Loans and the Allowance for Credit Losses – (continued)   The following tables detail the amount of gross loans that are individually evaluated for impairment, collectively evaluated for impairment, and loans acquired with deteriorated quality, and the related portion of the allowance for credit losses for loans that are allocated to each loan portfolio segment.       December 31, 2022       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Total       (dollars in thousands)   Allowance for credit losses - loans                                                 Individually evaluated   $ 7,426     $ 1,003     $ -     $ 50     $ -     $ 8,479   Collectively evaluated     19,319       50,818       3,718       4,093       7       77,955   Acquired with deteriorated credit quality individually analyzed​​     2,158       1,921       -       -       -       4,079   Total   $ 28,903     $ 53,742     $ 3,718     $ 4,143     $ 7     $ 90,513   Gross loans                                                 Individually evaluated   $ 30,994     $ 46,886     $ 8,232     $ 5,864     $ -     $ 91,976   Collectively evaluated     1,436,866       5,742,751       565,907       258,884       2,312       8,006,720   Acquired with deteriorated credit quality individually analyzed​​     4,874       5,591       -       -       -       10,465   Total   $ 1,472,734     $ 5,795,228     $ 574,139     $ 264,748     $ 2,312     $ 8,109,161            December 31, 2021       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Total       (dollars in thousands)   Allowance for credit losses - loans                                                 Individually evaluated   $ 15,131     $ 955     $ -     $ 131     $ -     $ 16,217   Collectively evaluated     8,561       42,713       3,580       3,497       7       58,358   Acquired with deteriorated credit quality individually analyzed​​     2,277       1,921       -       -       -       4,198   Total   $ 25,969     $ 45,589     $ 3,580     $ 3,628     $ 7     $ 78,773                                                     Gross loans                                                 Individually evaluated   $ 33,726     $ 49,310     $ 13,196     $ 5,717     $ -     $ 101,949   Collectively evaluated     1,260,537       4,686,346       526,982       246,413       1,886       6,722,164   Acquired with deteriorated credit quality individually analyzed​​     5,165       5,934       -       3,139       -       14,238   Total   $ 1,299,428     $ 4,741,590     $ 540,178     $ 255,269     $ 1,886     $ 6,838,351     - 84 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 4 – Loans and the Allowance for Credit Losses – (continued)   A summary of the activity in the allowance for credit losses for loans by loan segment is as follows:       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Unallocated     Total       (dollars in thousands)   Balance as of January 1, 2022   $ 25,969     $ 45,589     $ 3,580     $ 3,628     $ 7     $ -     $ 78,773   Charge-offs     ( 2,612 )     ( 2,819 )     -       ( 9 )     ( 3 )     -       ( 5,443 ) Recoveries     54       -       -       63       -       -       117   Provision for credit losses     5,492       10,972       138       461       3       -       17,066   Balance as of December 31, 2022   $ 28,903     $ 53,742     $ 3,718     $ 4,143     $ 7     $ -     $ 90,513     On January 1, 2021, the Company adopted CECL, which replaced the incurred loss method we used in prior periods for determining the provision for credit losses and the allowance for credit losses. Under CECL, we record an expected loss of all cash flows we do not expect to collect at the inception of the loan. The adoption of CECL resulted in an increase in our allowance for credit losses for loans of $ 6.6 million, which did not impact our consolidated income statement.       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Unallocated     Total       (dollars in thousands)   Balance as of January 1, 2021   $ 28,443     $ 39,330     $ 8,194     $ 2,687     $ 4     $ 568     $ 79,226   Day 1 Adjustment CECL     ( 4,225 )     9,605       ( 961 )     2,697       9       ( 568 )     6,557   Balance as of January 1, 2021     24,218       48,935       7,233       5,384       13       -       85,783   Charge-offs     ( 382 )     ( 1,780 )     -       ( 235 )     -       -       ( 2,397 ) Recoveries     289       85       -       20       11       -       405   Provision for (reversal of) credit losses     1,844       ( 1,651 )     ( 3,653 )     ( 1,541 )     ( 17 )     -       ( 5,018 ) Balance as of December 31, 2021   $ 25,969     $ 45,589     $ 3,580     $ 3,628     $ 7     $ -     $ 78,773           Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Unallocated     Total       (dollars in thousands)   Balance as of January 1, 2020   $ 8,349     $ 20,853     $ 7,304     $ 1,685     $ 3     $ 99     $ 38,293   Charge-offs     ( 552 )     -       -       ( 341 )     ( 7 )     -       ( 900 ) Recoveries     4       802       -       23       4       -       833   Provision for loan losses     20,642       17,675       890       1,320       4       469       41,000   Balance as of December 31, 2020   $ 28,443     $ 39,330     $ 8,194     $ 2,687     $ 4     $ 568     $ 79,226     - 85 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 4 – Loans and the Allowance for Credit Losses – (continued)   Troubled Debt Restructurings   Loans are considered to have been modified in a troubled debt restructuring (“TDR”) when, except as discussed below, due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, maturity extensions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a TDR remains on nonaccrual status for a period of nine months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status.   As of December 31, 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 a TDR.   As of December 31, 2022, TDRs totaled $ 75.1 million, of which $ 23.7 million were on nonaccrual status and $ 51.4 million were classified as accruing and 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 classified as accruing and were performing under their restructured terms. The Company has allocated $ 4.2  million and $ 10.4 million of specific allowance related to TDRs as of December 31, 2022 and December 31, 2021, respectively. There were no TDRs for which there was a payment default within twelve months following the modification during the year ended December 31, 2022, 2021 and 2020.   The following table presents loans by class modified as TDRs during the year ended December 31, 2022 :               Pre-Modification     Post-Modification               Outstanding     Outstanding       Number of     Recorded     Recorded       Loans     Investment     Investment       (dollars in thousands)   Troubled debt restructurings:                         Commercial     2     $ 633     $ 633   Commercial real estate     3       12,083       11,583   Residential real estate     3       949       949   Total     8     $ 13,665     $ 13,165                        The loans modified as TDRs during the year ended December 31, 2022 included maturity extensions and interest rate reductions.  One of the commercial real estate loans included a one -time principal paydown of $ 500,000 at the time of modification.  The eight loans modified during the year ended December 31, 2022 resulted in a $ 0.3 million increase to the allowance for credit losses at the time of their modification.       - 86 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 4 – Loans and the Allowance for Credit Losses – (continued)   The following table presents loans by class modified as TDRs during the year ended December 31, 2021               Pre-Modification     Post-Modification               Outstanding     Outstanding       Number of     Recorded     Recorded       Loans     Investment     Investment       (dollars in thousands)   Troubled debt restructurings:                         Commercial     4     $ 1,276     $ 1,276   Commercial real estate     11       35,635       35,635   Commercial construction     1       1,641       1,641   Residential real estate     3       1,758       1,758   Total     19     $ 40,310     $ 40,310                           The loans modified as TDRs during the year ended December 31, 2021  included maturity extensions and interest rate reductions.                      The following table presents loans by class modified as TDRs during the year ended December 31, 2020 :               Pre-Modification     Post-Modification               Outstanding     Outstanding       Number of     Recorded     Recorded       Loans     Investment     Investment       (dollars in thousands)   Troubled debt restructurings:                         Commercial     1     $ 188     $ 188   Commercial real estate     1       93       93   Commercial construction     1       4,021       4,021   Residential real estate     2       2,184       2,184   Total     5     $ 6,486     $ 6,486     The five loan modifications during the year ended December 31, 2020 were maturity extensions.    - 87 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 4 – Loans and the Allowance for Credit Losses – (continued)   Allowance for Credit Losses for Unfunded Commitments   The Company has recorded an ACL for unfunded credit commitments, which is recorded in other liabilities. The provision is recorded within the (reversal of) provision for credit losses on the Company’s income statement. The following table presents the allowance for credit losses for unfunded commitments for the year ended December 31, 2022  and 2021 (dollars in thousands):                         2022     2021   Balance as of beginning of period   $ 2,351     $ -   Day 1 Effect of CECL     -       2,833   Provision for (reversal of) credit losses - unfunded commitments     684       ( 482 ) Balance as of end of period   $ 3,035     $ 2,351                       Components of (Reversal of) Provision for Credit Losses   The following table summarizes the provision for (reversal of) provision for credit losses for the year ended December 31, 2022 and 2021 (dollars in thousands):                         2022     2021   Provision for (reversal of) credit losses - loans   $ 17,066     $ ( 5,018 ) Provision for (reversal of) credit losses - unfunded commitments     684       ( 482 ) Provision for (reversal of) credit losses   $ 17,750     $ ( 5,500 )   - 88 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 5 – Premises and Equipment   Premises and equipment are summarized as follows December 31, 2022 and 2021 :       Estimated                       Useful Life                       (Years)     2022     2021       (dollars in thousands)   Land     -     $ 6,732     $ 7,232   Buildings     10 - 25       9,797       10,509   Furniture, fixtures and equipment     3 - 7       24,830       24,137   Leasehold improvements     10 - 20       25,164       27,343   Subtotal             66,523       69,221   Less: accumulated depreciation, amortization and fair value adjustments             38,723       40,189   Total premises and equipment, net           $ 27,800     $ 29,032       Depreciation and amortization expense of premises and equipment was $ 3.9  million, $ 3.8  million and $ 4.2  million for 2022 ,  2021 and 2020 , respectively.   Finance Leases : The Company has a lease agreement for a building accounted for as a finance lease. The lease arrangement requires monthly payments through 2028.  As of December 31, 2022, the weighted average remaining term for the finance lease was 5.9 years and the weighted average discount rate used in the measurement of finance lease liabilities was 6.0 %. Total finance lease costs for the year ended December 31, 2022, was $ 280 thousand.   The Company has included this lease in premises and equipment as follows December 31, 2022 and 2021 :       2022     2021       (dollars in thousands)   Finance lease   $ 3,423     $ 3,423   Less: accumulated amortization     2,395       2,224       $ 1,028     $ 1,199       The following is a schedule by year of future minimum lease payments under the finance lease, together with the present value of net minimum lease payments as of December 31, 2022 (dollars in thousands):   2023   $ 323   2024     353   2025     353   2026     353   2027     353   Thereafter     323   Total minimum lease payments     2,058             Less amount representing interest     325   Present value of net minimum lease payments   $ 1,733       - 89 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 5 – Premises and Equipment – (continued)   The Company leases certain premises and equipment under operating leases. As of December 31, 2022 , the Company had lease liabilities totaling $ 11.4  million and right-of-use assets totaling $ 10.2  million. As of December 31, 2022 , the weighted average remaining lease term for operating leases was 5  years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.8 %. Total lease costs for the year ended December 31, 2022 was $ 3.2  million.   A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:       December 31,       2022       (dollars in thousands)   Lease payments due:         Less than 1 year   $ 2,958   1 year through less than 2 years     2,422   2 years through less than 3 years     2,139   3 years through less than 4 years     2,043   4 years through 5 years     1,391   After 5 years     1,360   Total undiscounted cash flows     12,313   Impact of discounting     ( 916 ) Total lease liability   $ 11,397         Note 6 – Goodwill and Other Intangible Assets   A goodwill impairment test is required under ASC 350, Intangibles – Goodwill and Other, and the FASB issued ASU No. 2011 - 08, “Testing Goodwill for Impairment,” allowing an initial qualitative assessment of goodwill commonly known as step zero impairment testing. In general, the step zero test allows an entity to first assess qualitative factors to determine whether it is more likely than not (i.e., more than 50% ) that the fair value of a reporting unit is less than its carrying value. If a step zero impairment test results in the conclusion that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, then no further testing is required.   Based upon management’s review through December 31, 2022 , the Company’s goodwill was not impaired. Management concludes that the ASC 350 goodwill step zero test has been passed, and no further testing is required.   Goodwill   The change in goodwill during the year is as follows:       2022     2021       (dollars in thousands)   Balance, January 1   $ 208,372     $ 208,372   Acquired goodwill     -       -   Impairment     -       -   Balance, December 31   $ 208,372     $ 208,372       - 90 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 6 – Goodwill and Other Intangible Assets – (continued)   Acquired Intangible Assets   The table below provides information regarding the carrying amounts and accumulated amortization of total amortized intangible assets as of the dates set forth below.       Gross             Net       Carrying     Accumulated     Carrying       Amount     Amortization     Amount       (dollars in thousands)   Core deposit intangibles                         December 31, 2022   $ 18,515     $ ( 11,203 )   $ 7,312   Core deposit intangibles                         December 31, 2021   $ 18,515     $ ( 9,518 )   $ 8,997     Aggregate amortization expense was approximately $ 1.7  million, $ 2.0  million and $ 2.6  million for 2022 ,  2021 and 2020 , respectively. Estimated amortization expense for each of the next five years (dollars in thousands):   2023   $ 1,438   2024     1,235   2025     1,116   2026     1,050   2027     989         Note 7 – Deposits   Time Deposits   As of December 31, 2022 , and 2021 , the Company's total time deposits were $ 2.4  billion and $ 1.2  billion, respectively. Included in time deposits were gross nonreciprocal brokered time deposits of $ 934.9  million and $ 215.2  million as of December 31, 2022 and 2021 , respectively. As of December 31, 2022 , the contractual maturities of these time deposits were as follows (dollars in thousands):   2023   $ 1,571,746   2024     502,172   2025     112,106   2026     169,440   2027     40,179   Time Deposits (before net discount)   $ 2,395,643   Fair value net discount     ( 1,453 ) Total Time Deposits (after net discount)   $ 2,394,190       The amount of time deposits with balances in excess of $250,000 were $ 591.8  million and $ 250.5  million as of December 31, 2022 and 2021 , respectively.   - 91 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 8 – FHLB Borrowings   The Company’s FHLB borrowings and weighted average interest rates are summarized below:       December 31, 2022     December 31, 2021       Amount     Rate     Amount     Rate       (dollars in thousands)   By remaining period to maturity:                                 Less than 1 year   $ 830,000       4.42 %   $ 390,549       0.56 % 1 year through less than 2 years     -       -       50,000       1.84   2 years through less than 3 years     25,000       1.00       -       n/a   3 years through less than 4 years     2,050       2.23       25,000       1.00   4 years through 5 years     326       2.85       2,050       2.23   After 5 Years     326       2.96       714       2.91   FHLB borrowings - (before discount)     857,702       4.32 %     468,313       0.73 % Fair value discount     ( 80 )             ( 120 )         FHLB borrowings (after discount)   $ 857,622             $ 468,193             The FHLB borrowings are secured by pledges of certain collateral including, but not limited to, U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans.   Advances are payable at stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances have fixed rates. The advances as of December 31, 2022 were primarily collateralized by approximately $ 2.7  billion of commercial mortgage and residential loans, net of required over collateralization amounts, under a blanket lien arrangement. As of December 31, 2022 , the Company had remaining borrowing capacity of approximately $ 498.9  million at the FHLB.   - 92 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 9 – Subordinated Debentures   During 2003, the Company formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $ 5.0 million of MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier I capital. The trust loaned the proceeds of this offering to the Company and received in exchange $ 5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or in part prior to maturity. The floating interest rate on the subordinate debentures is three -month LIBOR plus 2.85 % and reprices quarterly. The rate as of December 31, 2022 was 7.26 %. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with FASB ASC 810 - 10. Distributions on the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income.   The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of December 31, 2022 and December 31, 2021 .   Issuance Date   Securities Issued   Liquidation Value   Coupon Rate   Maturity   Redeemable by Issuer Beginning 12/19/2003   $ 5,000,000   $1,000 per Capital Security   Floating 3-month LIBOR + 285 Basis Points   1/23/2034   1/23/2009   On June 10, 2020, the Parent Corporation issued $ 75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes bear interest at 5.75 % annually from, and including, the date of initial issuance to, but excluding, June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2020. From and including June 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.   On January 11, 2018, the Parent Corporation issued $ 75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2018 Notes”). The 2018 Notes bore interest at  a rate that  resets quarterly to an interest rate per annum equal to the then current three -month LIBOR rate plus 284 basis points ( 2.84% ) payable quarterly in arrears. Interest on the 2018 Notes was to be  paid on  on February 1, May 1, August 1, and November 1, of each year to but excluding the stated maturity date, unless in any case previously redeemed. The 2018 Notes were redeemed in full on February 1, 2023.   During June 2015, the Parent Corporation issued $ 50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2015 Notes”).  As of December 31, 2020, the 2015 Notes had a stated maturity of July 1, 2025, and bore interest until the maturity date or early redemption date at a variable rate equal to the then current three -month LIBOR rate plus 393 basis points. As of December 31, 2020, the variable interest rate was 4.16 %, all costs related to 2015 issuance had been amortized and the 2015 Notes were redeemed in full on January 1, 2021.     - 93 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 10 – Income Taxes   The current and deferred amounts of income tax expense for December 2022 ,  2021 and  2020 are as follows (dollars in thousands):       2022     2021     2020   Current:                         Federal   $ 33,169     $ 32,364     $ 19,590   State     13,247       12,325       7,006   Subtotal     46,416       44,689       26,596   Deferred:                         Federal     ( 3,353 )     ( 110 )     ( 3,881 ) State     2,950       126       ( 3,614 ) Subtotal     ( 403 )     16       ( 7,495 ) Income tax expense   $ 46,013     $ 44,705     $ 19,101     On July 1, 2018 New Jersey Governor Phil Murphy signed Assembly Bill 4202 (“the Bill”) into law. The legislation imposes a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and of 1.5% for tax years beginning on or after January 1, 2020 through December 31, 2021. However, in 2020, this surtax was extended through December 31, 2023, at the 2.5% level. The legislation also requires combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019, changing New Jersey’s current status as a separate return state, and limits the deductibility of dividends received.   Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory federal tax rate for the following reasons (dollars in thousands) December 31,       2022     2021     2020   Income before income tax expense   $ 171,224     $ 175,058     $ 90,390   Federal statutory rate     21 %     21 %     21 % Computed “expected” Federal income tax expense     35,957       36,762       18,982   State tax, net of federal tax benefit     13,314       9,127       1,913   162M adjustment     777       -       -   Bank owned life insurance     ( 1,175 )     ( 1,001 )     ( 1,052 ) Tax-exempt interest and dividends     ( 1,969 )     ( 1,405 )     ( 1,491 ) Tax benefits from stock-based compensation     ( 417 )     ( 261 )     157   Other, net     ( 474 )     1,483       592   Income tax expense   $ 46,013     $ 44,705     $ 19,101       - 94 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 10 – Income Taxes – (continued)   The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability as of December 31, 2022 and 2021 are presented in the following table:       2022     2021       (dollars in thousands)   Deferred tax assets                 Allowance for credit losses   $ 26,901     $ 23,955   Depreciation     -       205   Pension actuarial losses     1,269       1,301   New Jersey net operating loss     156       3,609   Deferred compensation     3,784       2,786   Unrealized losses on available-for-sale securities     25,141       191   Deferred loan costs, net of fees     2,664       2,163   Finance lease     212       222   Nonaccrual interest     168       62   Operating lease liability     3,424       3,747   Other     4,172       3,703   Total deferred tax assets   $ 67,891     $ 41,944   Deferred tax liabilities                 Employee benefit plans   $ ( 2,452 )   $ ( 2,289 ) Purchase accounting     ( 1,458 )     ( 925 ) Depreciation     ( 381 )     -   Prepaid expenses     ( 1,011 )     ( 288 ) Market discount accretion     -       ( 437 ) Unrealized gains on swaps     ( 13,704 )     ( 941 ) Right of use asset     ( 3,059 )     ( 3,325 ) Other     ( 1,681 )     ( 1,984 ) Total deferred tax liabilities     ( 23,746 )     ( 10,189 ) Net deferred tax assets   $ 44,145     $ 31,755     In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income, and tax planning strategies in making this assessment. During 2022 and 2021, based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company believes the net deferred tax assets are more likely than not to be realized. There are no unrecorded tax benefits, and the Company does not expect the total amount of unrecognized income tax benefits to significantly increase in the next twelve months.   The Company’s federal income tax returns are open and subject to examination from the 2019 tax return year and forward. The Company’s state income tax returns are generally open from the 2018 and later tax return years based on individual state statutes of limitations.   As of December 31, 2022, the Company has $ 1.7 million in New Jersey net operating loss (NOL).  The NOL is set to expire on December 31, 2040.   - 95 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 11 – Preferred Stock   On August 19, 2021, the Company completed an underwritten public offering of 115,000 shares, or $ 115 million in aggregate liquidation preference, of its depositary shares, each representing a 1/40th interest in a share of the Company’s 5.25 % Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A, no par value, with a liquidation preference of $ 1,000 per share. The net proceeds received from the issuance of preferred stock at the time of closing were $ 110.9 million.     Note 12 – Commitments, Contingencies and Concentrations of Credit Risk   In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as standby and commercial letters of credit, unused portions of lines of credit and commitments to extend various types of credit. Commitments to extend credit and standby letters of credit generally do not exceed one year.   These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The commitment or contract amount of these financial instruments is an indicator of the Company’s level of involvement in each type of instrument as well as the exposure to credit loss in the event of nonperformance by the other party to the financial instrument.   The Company controls the credit risk of these financial instruments through credit approvals, limits and monitoring procedures. To minimize potential credit risk, the Company generally requires collateral and other credit-related terms and conditions from the client. In the opinion of management, the financial condition of the Company will not be materially affected by the final outcome of these commitments and contingent liabilities. A substantial portion of the Bank’s loans are secured by real estate located in New Jersey and New York. Accordingly, the collectability of a substantial portion of the loan portfolio of the Bank is susceptible to changes in the metropolitan New York real estate market.   The following table provides a summary of financial instruments with off-balance sheet risk as of December 31, 2022 and 2021 :       2022     2021       (dollars in thousands)   Commitments under commercial loans and lines of credit   $ 662,515     $ 647,971   Home equity and other revolving lines of credit     54,302       53,180   Outstanding commercial mortgage loan commitments     433,034       514,473   Standby letters of credit     20,770       25,271   Overdraft protection lines     905       973   Total   $ 1,171,526     $ 1,241,868       The Company is subject to claims and lawsuits that arise in the ordinary course of business. Based upon the information currently available in connection with such claims, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse impact on the consolidated financial position, results of operations, or liquidity of the Company.   - 96 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 13 – Transactions with Executive Officers, Directors and Principal Stockholders   Loans to principal officers, directors, and their affiliates during the years ended December 31, 2022 and 2021 were as follows:       2022     2021       (dollars in thousands)   Balance, January 1   $ 17,616     $ 21,534   New loans     1,200       5,250   Repayments     ( 2,550 )     ( 9,168 ) Balance, December 31   $ 16,266     $ 17,616       Deposits from principal officers, directors, and their affiliates as of December 31, 2022 and 2021 were $ 49.7  million and $ 59.5  million respectively.   The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal stockholders, their immediate families and affiliated companies (commonly referred to as related parties). The Company leases banking offices from related party entities. In addition, the Company also utilizes an advertising and public relations agency at which one of the Company’s directors is President and CEO and a principal owner. For these transactions, the expenses are not significant to the operations of the Company.     Note 14 – Stockholders ’ Equity and Regulatory Requirements   Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The accumulated other comprehensive gain or loss, on securities and derivatives is not included in computing regulatory capital. Management believes as of December 31, 2022 , the Bank and the Parent Corporation meet all capital adequacy requirements to which they are subject.   Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is classified as adequately capitalized or lower, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is growth and expansion, and capital restoration plans are required. As of December 31, 2022 , and 2021 , the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.   - 97 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 14 – Stockholders ’ Equity and Regulatory Requirements – (continued)   The following is a summary of the Bank’s and the Parent Corporation’s actual capital amounts and ratios as of December 31, 2022 and 2021 , compared to the FRB and FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a well-capitalized institution.                                       For Classification                                       Under Corrective                       Minimum     Action Plan                       Capital Adequacy     as Well Capitalized       Amount     Ratio     Amount     Ratio     Amount     Ratio   The Bank                   (dollars in thousands)                   December 31, 2022                                                 Leverage (Tier 1) capital   $ 996,013       10.64 %   $ 374,553       4.00 %   $ 468,191       5.00 % Risk-Based Capital:                                                 CET 1   $ 996,013       11.60     $ 386,289       4.50     $ 557,972       6.50   Tier 1     996,013       11.60       515,051       6.00       686,735       8.00   Total     1,117,733       13.02       686,735       8.00       858,419       10.00                                                     December 31, 2021                                                 Leverage (Tier 1) capital   $ 891,730       11.43 %   $ 312,166       4.00 %   $ 390,207       5.00 % Risk-Based Capital:                                                 CET 1   $ 891,730       11.96     $ 335,641       4.50     $ 484,815       6.50   Tier 1     891,730       11.96       447,522       6.00       596,696       8.00   Total     1,002,753       13.44       596,696       8.00       745,869       10.00                           Minimum Capital     For Classification                       Adequacy     as Well Capitalized       Amount     Ratio     Amount     Ratio     Amount     Ratio   The Company   (dollars in thousands)   December 31, 2022                                                 Leverage (Tier 1) capital   $ 1,000,577       10.68 %   $ 374,729       4.00 %     N/A       N/A   Risk-Based Capital:                                                 CET 1   $ 884,495       10.30     $ 386,295       4.50       N/A       N/A   Tier 1     1,000,577       11.66       515,061       6.00       N/A       N/A   Total     1,240,047       14.45       686,748       8.00       N/A       N/A                                                     December 31, 2021                                                 Leverage (Tier 1) capital   $ 909,577       11.65 %   $ 312,194       4.00 %     N/A       N/A   Risk-Based Capital:                                                 CET 1   $ 793,495       10.64     $ 335,648       4.50       N/A       N/A   Tier 1     909,577       12.19       447,531       6.00       N/A       N/A   Total     1,138,350       15.26       596,708       8.00       N/A       N/A     As of December 31, 2022 , both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the Tier 1 Risk Based Ratio which was 3.16 % above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 2.52 % above the minimum buffer ratio.    - 98 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 15 – Comprehensive Income   Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s other comprehensive income is comprised of unrealized holding gains and losses on securities available-for-sale, unrealized gains and losses on cash flow hedges, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, each net of taxes.   The following table represents the reclassification out of accumulated other comprehensive (loss) income for the periods presented:                             Affected Line Item in the Details about Accumulated Other   Amounts Reclassified from Accumulated   Consolidated Comprehensive Income (Loss) Components   Other Comprehensive Income (Loss)   Statements of Income     For the Year Ended         December 31,     (dollars in thousands)   2022     2021     2020     Sale of investment securities available-for-sale   $ -     $ 195     $ 29   Net gains on sale of investment securities       -       ( 48 )     ( 6 ) Income tax expense       -       147       23     Net interest income (expense) on swaps     3,243       ( 1,873 )     ( 1,577 ) Interest income (expense)       ( 976 )     528       443   Income tax (benefit) expense       2,267       ( 1,345 )     ( 1,134 )   Amortization of pension plan net actuarial losses     ( 66 )     ( 299 )     ( 301 ) Salaries and employee benefits       20       84       84   Income tax benefit       ( 46 )     ( 215 )     ( 217 )   Total reclassification   $ 2,221     $ ( 1,413 )   $ ( 1,328 )     Accumulated other comprehensive (loss) income as of December 31, 2022 and 2021 consisted of the following:       2022     2021       (dollars in thousands)   Investment securities available-for-sale, net of tax   $ ( 61,775 )   $ ( 484 ) Cash flow hedge, net of tax     32,360       2,406   Defined benefit pension, net of tax     ( 2,949 )     ( 3,326 ) Total   $ ( 32,364 )   $ ( 1,404 )     - 99 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 16 –  Pension and Other Benefits   Defined Benefit Plans   The Company maintains a frozen, noncontributory pension plan covering employees of the Company prior to the merger with Legacy ConnectOne. The benefits are based on years of service and the employee’s compensation over the prior five -year period. The plan’s benefits are payable in the form of a ten -year certain and life annuity. The plan is intended to be a tax-qualified defined benefit plan under Section 401 (a) of the Internal Revenue Code. Payments may be made under the Pension Plan once attaining the normal retirement age of 65 and are generally equal to 44% of a participant’s highest average compensation over a 5 -year period.   The following table sets forth changes in projected benefit obligation, changes in fair value of plan assets, funded status, and amounts recognized in the consolidated statements of condition for the Company’s pension plans as of December 31, 2022 and 2021 .       2022     2021       (dollars in thousands)   Change in Benefit Obligation:                 Projected benefit obligation as of January 1,   $ 14,644     $ 13,476   Interest cost     311       284   Actuarial (gain) loss     ( 4,657 )     1,584   Benefits paid     ( 981 )     ( 700 ) Projected benefit obligation as of December 31,   $ 9,317     $ 14,644   Change in Plan Assets:                 Fair value of plan assets as of January 1,   $ 17,604     $ 15,868   Actual return on plan assets     ( 3,366 )     2,436   Benefits paid     ( 981 )     ( 700 ) Fair value of plan assets as of December 31,   $ 13,257     $ 17,604   Funded status   $ 3,940     $ 2,960       The accumulated benefit obligation was $ 9.3  million and $ 14.6  million as of the year ended December 31, 2022 and 2021 , respectively.   - 100 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 16 – Pension and Other Benefits – (continued)   Amounts recognized as a component of accumulated other comprehensive loss as of the periods presented that have not been recognized as a component of the net periodic pension expense for the plan are presented in the following table. As of December 31, 2022, the Company expects to recognize approximately $ 0.3  million of the net actuarial loss as a component of net periodic pension expense during 2023.       As of December 31,       2022     2021       (dollars in thousands)   Net actuarial loss recognized in accumulated other comprehensive income (pre-tax)   $ 4,219     $ 4,627     The pre-tax, net periodic pension expense (income) and other comprehensive income for the years ended December 31,   2022 ,  2021 and  2020 includes the following:       2022     2021     2020       (dollars in thousands)   Interest cost   $ 311     $ 284     $ 364   Expected return on plan assets     ( 949 )     ( 852 )     ( 784 ) Net amortization     66       299       301   Total net periodic pension income   $ ( 572 )   $ ( 269 )   $ ( 119 )                           Total unrealized (gain) loss recognized in other comprehensive income     ( 343 )     -       112   Realized losses included in net income     ( 66 )     ( 299 )     ( 301 ) Total recognized in net periodic pension income and other comprehensive income   $ ( 981 )   $ ( 568 )   $ ( 308 )     - 101 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 16 – Pension and Other Benefits – (continued)   The following table presents the weighted average assumptions used to determine the pension benefit obligations as of December 31, for the following periods.       2022     2021   Discount rate     4.92 %     2.57 % Rate of compensation increase     N/A       N/A     The following table presents the weighted average assumptions used to determine net periodic pension cost for the following three years:       2023     2022     2021                             Discount rate     4.92 %     2.57 %     2.17 % Expected long-term return on plan assets     6.50 %     5.50 %     5.50 % Rate of compensation increase     N/A       N/A       N/A     The process of determining the overall expected long-term rate of return on plan assets begins with a review of appropriate investment data, including current yields on fixed income securities, historical investment data, historical plan performance and forecasts of inflation and future total returns for the various asset classes. This data forms the basis for the construction of a best-estimate range of real investment returns for each asset class. An average weighted real-return range is computed reflecting the plan’s expected asset mix, and that range, when combined with an expected inflation range, produces an overall best-estimate expected return range. Specific factors such as the plan’s investment policy, reinvestment risk and investment volatility are taken into consideration during the construction of the best estimate real return range, as well as in the selection of the final return assumption from within the range.   Plan Assets   The general investment policy of the Pension Trust is for the fund to experience growth in assets that will allow the market value to exceed the value of benefit obligations over time. The Company’s pension plan asset allocation as of December 31, 2022 and 2021 , target allocation, and expected long-term rate of return by asset are as follows:                               Weighted                               Average               % of Plan     % of Plan     Expected               Assets –     Assets –     Long-Term       Target     Year Ended     Year Ended     Rate of       Allocation     2022     2021     Return   Equity Securities                                 Domestic     45 %     58 %     59 %     4.5 % International     15       4       5       0.4   Debt and/or fixed income securities     38       35       34       1.5   Cash and other alternative investments, including real estate funds, commodity funds, hedge funds and equity structured notes     2       3       2       0.1   Total     100 %     100 %     100 %     6.5 %   - 102 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 16 – Pension and Other Benefits – (continued)   The fair values of the Company’s pension plan assets as of December 31, 2022 and 2021 , by asset class, are as follows:       December 31,                               2022     Fair Value Measurements at Reporting Date Using               Quoted Prices     Significant                       in Active     Other     Significant               Markets for     Observable     Unobservable               Identical Assets     Inputs     Inputs   Asset Class           (Level 1)     (Level 2)     (Level 3)       (dollars in thousands)   Cash   $ 262     $ 262     $ -     $ -   Equity securities:                                 U.S. companies     7,611       7,611       -       -   International companies     569       569       -       -   Debt and/or fixed income securities     4,684       4,684       -       -   Commodity funds     95       95       -       -   Real estate funds     36       36       -       -   Total   $ 13,257     $ 13,257     $ -     $ -         December 31,                               2021     Fair Value Measurements at Reporting Date Using               Quoted Prices     Significant                       in Active     Other     Significant               Markets for     Observable     Unobservable               Identical Assets     Inputs     Inputs   Asset Class           (Level 1)     (Level 2)     (Level 3)       (dollars in thousands)   Cash   $ 178     $ 178     $ -     $ -   Equity securities:                                 U.S. companies     10,551       10,551       -       -   International companies     897       897       -       -   Debt and/or fixed income securities     5,804       5,804       -       -   Commodity funds     111       111       -       -   Real estate funds     63       63       -       -   Total   $ 17,604     $ 17,604     $ -     $ -     Fair Value of Plan Assets   The Company used the following valuation methods and assumptions to estimate the fair value of assets held by the plan (for further information on fair value methods, see Note 20 ):   Equity securities and real estate funds : The fair values for equity securities and real estate funds are determined by quoted market prices, if available (Level 1 ). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2 ).   - 103 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 16 – Pension and Other Benefits – (continued)   Debt and fixed income securities : Certain debt securities are valued at the closing price reported in the active market in which the bond is traded (Level 1 inputs). Other debt securities are valued based upon recent bid prices or the average of recent bid and asked prices when available (Level 2 inputs) and, if not available, they are valued through matrix pricing models developed by sources considered by management to be reliable. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 ). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.   The investment manager is not authorized to purchase, acquire or otherwise hold certain types of market securities (subordinated bonds, real estate investment trusts, limited partnerships, naked puts, naked calls, stock index futures, oil, gas or mineral exploration ventures or unregistered securities) or to employ certain types of market techniques (margin purchases or short sales) or to mortgage, pledge, hypothecate, or in any manner transfer as security for indebtedness, any security owned or held by the Plan.   Cash Flows   Contributions   The Bank does not expect to make a contribution in 2023.   Estimated Future Benefit Payments   The following benefit payments, which reflect expected future service, as appropriate, for the following years are as follows (dollars in thousands):   2023   $ 738   2024     726   2025     724   2026     728   2027     770   2028 - 2032     3,744     401 (k) Plan   The Company maintains a 401 (k) plan to provide for defined contributions which covers substantially all employees of the Company. Beginning with the 2014 plan year, the 401 (k) plan was amended to provide for a match of 50 % of elective contributions, up to 6% of an employee’s contribution. In 2018, the 401 (k) plan was amended to provide for 100 % matching of employee contributions up to 5% of employee contributions. For 2022 ,  2021 and 2020 , employer contributions amounted to $ 2.2  million, $ 1.6 million and $ 1.6  million, respectively.   Supplemental Executive Retirement Plan ( “ SERP ” )   During 2019 and in 2021, the Company adopted supplemental executive retirement plans (“SERP’s”) for the benefit of several of its executive officers. Each SERP is a non-qualified plan which provides supplemental retirement benefits to the participating officers of the Company. SERP compensation expense was $ 1.4 million, $ 1.0  million and $ 0.4 million for the years ended December 31, 2022, December 31, 2021  and December 31, 2020, respectively.   - 104 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 17 – Stock Based Compensation   The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of December 31, 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 December 31, 2022 are approximately 201,715 . The Company intends to issue all shares under the Plan in the form of newly issued shares.   Restricted stock, options and deferred stock units typically have a three -year vesting period starting one year after the date of grant with one - third vesting each year. The options generally expire ten years from the date of grant. Restricted stock granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control. All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the awards vesting. Restricted shares have the same dividend and voting rights as common stock, while options, performance units and deferred stock units do not.   All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are recorded as incurred. Stock-based compensation expense was $ 4.9 million, $ 4.5  million and $ 2.9  million for the years ended December 31, 2022, 2021 and 2020 respectively.     Activity under the Company’s options for the year ended December 31, 2022 was as follows:                       Weighted-                               Average                       Weighted-     Remaining               Number of     Average     Contractual               Stock     Exercise     Term     Aggregate       Options     Price     (in years)     Intrinsic Value   Outstanding as of December 31, 2021     23,766     $ 9.94                   Granted     -       -                   Exercised     ( 15,086 )     8.21                   Forfeited/cancelled/expired     -       -                   Outstanding as of December 31, 2022     8,680       12.95       0.29     $ 97,673                                     Exercisable as of December 31, 2022     8,680     $ 12.95       -     $ -       - 105 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 17 – Stock Based Compensation - (continued)   The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on December 31, 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 December 31, 2022 . This amount changes based on the fair market value of the Company’s stock.   Activity under the Company’s restricted shares for year ended December 31, 2022 was as follows:               Weighted-               Average       Nonvested     Grant Date       Shares     Fair Value   Nonvested as of December 31, 2021     82,693     $ 21.78   Granted     53,543       30.76   Vested     ( 49,931 )     23.74   Forfeited/cancelled/expired     ( 374 )     30.99   Nonvested December 31, 2022     85,931     $ 26.20       - 106 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 17 – Stock Based Compensation – (continued)   As of December 31, 2022 , there was approximately $ 0.8  million of total unrecognized compensation cost related to nonvested restricted shares granted. The cost is expected to be recognized over a weighted average period of 1.1  years.   A summary of the status of unearned performance unit awards and the change during the period is presented in the table below:                       Weighted                       Average Grant       Units     Units     Date Fair       (expected)     (maximum)     Value   Unearned as of December 31, 2021     209,995             $ 16.18   Awarded     34,874               32.80   Vested shares     ( 49,604 )             20.79   Unearned as of December 31, 2022     195,265       221,541     $ 17.98     As of December 31, 2022, the specific number of shares related to performance units that were expected to vest was 195,265 , determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed. As of December 31, 2022, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 221,541 . During the year ended December 31, 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 year ended December 31, 2022 were 22,350 shares. As of December 31, 2022, compensation cost of approximately $ 1.2 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.7 years.   A summary of the status of unearned deferred stock units and the changes in deferred stock units during the period is presented in the table below:               Weighted               Average Grant       Units     Date Fair       (expected)     Value   Unearned as of December 31, 2021     136,948     $ 16.52   Awarded     52,312       32.80   Vested shares     ( 69,225 )     16.13   Unearned as of December 31, 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 year ended December 31, 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 deferred stock units during the year ended December 31, 2022 were 31,383 shares. As of December 31, 2022, compensation cost of approximately $ 1.5 million related to non-vested deferred stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.5 years.     Note 18 – Dividends and Other Restrictions   Certain restrictions, including capital requirements, exist on the availability of undistributed net profits of the Bank for the future payment of dividends to the Parent Corporation. A dividend may not be paid if it would impair the capital of the Bank. As of December 31, 2022 , approximately $ 259.3  million was available for payment of dividends based on regulatory guidelines.   - 107 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 19 – Derivatives   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.   The Company entered into eleven pay fixed-rate interest rate swaps, with a total notional amount of $ 500  million, all of which were entered into in 2021 and 2022.  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 0.63 % to 3.41 % and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”).  All swaps carry expiration dates on the eleven  positions ranging from December 2025   to March 2028 .  The swaps are determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.    The Company previously 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 and one additional interest rate cap spread transaction, with a total notional amount of $ 75 million, which became effective in November 2022 and matures in November of 2027 .   These are designated as cash flow hedges of brokered certificates of deposits, 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 total of  $225 million in notional amount of sold interest rate cap agreements, 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 a total of $225 million notional amount of interest rate cap agreements 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.    Interest expense recorded on these swap and cap transactions totaled approximately $( 3.3 ) million, $ 1.9 million, and $( 1.6 ) million during 2022, 2021, and  2020 is reported as a component of either interest expense on FHLB Advances and brokered certificates of deposits.   - 108 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 19 – Derivatives (continued)   The following table presents the net gains (losses), recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the years ended December 31, 2022 and 2021:       2022       Amount of gain     Amount of (gain)     Amount of gain (loss)       (loss) recognized     loss reclassified     recognized in other       in OCI (Effective     from OCI to     Noninterest income   (dollars in thousands)   Portion)     interest expense     (Ineffective Portion)   Interest rate contracts   $ 46,282     $ ( 3,343 )   $ -         2021       Amount of gain     Amount of (gain)     Amount of gain (loss)       (loss) recognized     loss reclassified     recognized in other       in OCI (Effective     from OCI to     Noninterest income   (dollars in thousands)   Portion)     interest expense     (Ineffective Portion)   Interest rate contracts   $ 3,593     $ 1,873     $ -     The following table reflects the cash flow hedges included in the Consolidated Statements of Condition as of December 31, 2022 and December 31, 2021 :       2022     2021       Notional             Notional           (dollars in thousands)   Amount     Fair Value     Amount     Fair Value   Included in other assets/(liabilities):                                 Interest rate contracts   $ 950,000     $ 56,797     $ 475,000     $ 3,347     There were no net gains (losses) recorded in accumulated other comprehensive income or in the Consolidated Statement of Income relating to cash flow derivative instruments for the years ended December 31, 2022 and December 31, 2021 .   - 109 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 20 – Fair Value Measurements and Fair Value of Financial Instruments   Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.   FASB ASC 820 - 10 - 05 defines fair value, establishes a framework for measuring fair value, establishes a three -level valuation hierarchy for disclosure of fair value measurements and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.   FASB ASC 820 - 10 - 65 provides additional guidance for estimating fair value in accordance with FASB ASC 820 - 10 - 05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly.   FASB ASC 820 - 10 - 05 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 - 10 - 05 are as follows:   Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.   Level 2: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.   Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).   An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.   Assets and Liabilities Measured at Fair Value on a Recurring Basis   The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of December 31, 2022 and December 31, 2021 :   Securities Available-for-Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.   Derivatives: The fair value of derivatives are based on valuation models using observable market data as of the measurement date (level 2 ). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third -party pricing services.   - 110 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of December 31, 2022 and  December 31, 2021 are as follows:               December 31, 2022               Fair Value Measurements at Reporting Date Using               Quoted Prices                               in Active     Significant                       Markets for     Other     Significant               Identical     Observable     Unobservable               Assets     Inputs     Inputs       Total Fair Value     (Level 1)     (Level 2)     (Level 3)   (dollars in thousands)                                 Recurring fair value measurements:                                 Assets                                 Investment securities:                                 Available-for-sale:                                 Federal agency obligations   $ 44,450     $ -     $ 44,450     $ -   Residential mortgage pass-through securities     417,578       -       417,578       -   Commercial mortgage pass-through securities     21,104       -       21,104       -   Obligations of U.S. states and political subdivision     142,896       -       135,547       7,349   Corporate bonds and notes     6,974       -       6,974       -   Asset-backed securities     1,640       -       1,640       -   Certificates of deposit     -       -       -       -   Other securities     242       242       -       -   Total available-for-sale   $ 634,884     $ 242     $ 627,293     $ 7,349                                     Equity securities     15,811       9,733       6,078       -   Derivatives - interest rate contracts     56,797       -       56,797       -   Total assets   $ 707,492     $ 9,975     $ 690,168     $ 7,349       There were no transfers between Level 1 and Level 2 during the years ended December 31, 2022 and 2021 .   - 111 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS               December 31, 2021               Fair Value Measurements at Reporting Date Using               Quoted Prices                               in Active     Significant                       Markets for     Other     Significant               Identical     Observable     Unobservable               Assets     Inputs     Inputs       Total Fair Value     (Level 1)     (Level 2)     (Level 3)   (dollars in thousands)                                 Recurring fair value measurements:                                 Assets                                 Investment securities:                                 Available-for-sale:                                 Federal agency obligations   $ 50,360     $ -     $ 50,360     $ -   Residential mortgage pass-through securities     316,095       -       316,095       -   Commercial mortgage pass-through securities     10,469       -       10,469       -   Obligations of U.S. states and political subdivision     145,625       -       137,060       8,565   Corporate bonds and notes     9,049       -       9,049       -   Asset-backed securities     2,564       -       2,564       -   Certificates of deposit     150       -       150       -   Other securities     195       195       -       -   Total available-for-sale   $ 534,507     $ 195     $ 525,747     $ 8,565                                     Equity securities     13,794       11,081       2,713       -   Derivatives - interest rate contracts     3,347       -       3,347       -   Total assets   $ 551,648     $ 11,276     $ 531,807     $ 8,565     Assets Measured at Fair Value on a Non-Recurring Basis   The Company may be required periodically to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis as of December 31, 2022 and December 31, 2021 :   - 112 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued)   Collateral Dependent Loans: The Company may record adjustments to the carrying value of loans based on fair value measurements, either as specific reserves or as partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with GAAP. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and are also based on Level 3 inputs.   For assets measured at fair value on a nonrecurring basis, the fair value measurements as of December 31, 2022 and  December 31, 2021 are as follows:                 Fair Value Measurements at Reporting Date Using               Quoted                               Prices                               in Active     Significant                       Markets for     Other     Significant               Identical     Observable     Unobservable       December 31,     Assets     Inputs     Inputs       2022     (Level 1)     (Level 2)     (Level 3)   Assets measured at fair value on a nonrecurring basis:   (dollars in thousands)   Collateral dependent loans:                                 Commercial   $ 14,550     $ -     $ -     $ 14,550   Commercial real estate     17,264       -       -       17,264   Residential real estate     1,392       -       -       1,392                 Fair Value Measurements at Reporting Date Using               Quoted                               Prices                               in Active     Significant                       Markets for     Other     Significant               Identical     Observable     Unobservable       December 31,     Assets     Inputs     Inputs       2021     (Level 1)     (Level 2)     (Level 3)   Assets measured at fair value on a nonrecurring basis:   (dollars in thousands)   Collateral dependent loans:                                 Commercial   $ 13,399     $ -     $ -     $ 13,399   Commercial real estate     20,185       -       -       20,185   Residential real estate     2,794       -       -       2,794     Collateral dependent loans - Collateral dependent loans as of December 31, 2022 that required a valuation allowance were $ 43.8 million with a related valuation allowance of $ 10.5 million.   Collateral dependent loans - Collateral dependent loans as of  December 31, 2021 that required a valuation allowance were $ 54.1  million with a valuation allowance of $ 17.8  million.   - 113 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued)   Assets Measured With Significant Unobservable Level 3 Inputs   Recurring basis   The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) for the years ended December 31, 2022 and year ended December 31, 2021 :       Municipal       Securities       (dollars in thousands)   Beginning balance, January 1, 2022   $ 8,565   Principal paydowns     ( 287 ) Changes in unrealized gain (loss)     ( 929 ) Ending balance, December 31, 2022   $ 7,349                   Municipal       Securities       (dollars in thousands)   Beginning balance, January 1, 2021   $ 8,844   Principal paydowns     ( 279 ) Ending balance, December 31, 2021   $ 8,565     The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of December 31, 2022 and December 31, 2021 . The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.   December 31, 2022         Valuation   Unobservable           Fair Value   Techniques   Input   Range   Securities available-for-sale:         (dollars in thousands)           Municipal securities   $ 7,349   Discounted cash flows   Discount rate   4.3 %   December 31, 2021         Valuation Unobservable             Fair Value   Techniques Input   Range   Securities available-for-sale:         (dollars in thousands)           Municipal securities   $ 8,565   Discounted cash flows Discount rate     2.9 %     - 114 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued)   Non-recurring basis   The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.   December 31, 2022                                 Valuation   Unobservable         (dollars in thousands)   Fair Value   Techniques   Input   Range (weighed average)   Commercial loans   $ 14,028   Market approach (100%)   Average transfer price as a price to unpaid principal balance     65% to 96% (67%)   Commercial loans     522   Appraisals of collateral   Adjustment for comparable sales   -10% to +13% (+3%)   Commercial real estate loans     17,264   Appraisals of collateral   Adjustment for comparable sales   -20% to +0% (-15%)   Residential real estate loans     1,392   Appraisals of collateral   Adjustment for comparable sales   +21% to +39% (22%)     December 31, 2021                               Valuation   Unobservable       (dollars in thousands)   Fair Value   Techniques   Input   Range (weighed average)   Commercial loans   $ 12,193   Market approach (100%)   Average transfer price as a price to unpaid principal balance   48% to 73% (49%)   Commercial loans     1,206   Appraisals of collateral   Adjustment for comparable sales   -10% to +35% (+6%)   Commercial real estate loans     20,185   Appraisals of collateral   Adjustment for comparable sales   -20% to +15% (-6%)   Residential real estate loans     2,794   Appraisals of collateral   Adjustment for comparable sales   -15% to +39% (5%)     - 115 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued)   Fair Value of Financial Instruments   FASB ASC 825 - 10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825 - 10. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-sale and investment securities available-for-sale. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Company for the purposes of this disclosure.   Fair values for financial instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These estimates are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with ASC Topic 825 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs.   Cash and cash equivalents. The carrying amounts of cash and short-term instruments approximate fair values.   FHLB stock. It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.   Loans. The fair value of portfolio loans, net is determined using an exit price methodology. The exit price methodology continues to be based on a discounted cash flow analysis, in which projected cash flows are based on contractual cash flows adjusted for prepayments for certain loan types ( e.g., residential mortgage loans and multi-family loans) and the use of a discount rate based on expected relative risk of the cash flows. The discount rate selected considers loan type, maturity date, a liquidity premium, cost to service, and cost of capital, which is a Level 3 fair value estimate.   Deposits. The carrying amounts of deposits with no stated maturities (i.e., non‐interest-bearing, savings, NOW, and money market deposits) are assigned fair values equal to the carrying amounts payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for alternative funding sources of similar remaining maturity.   Term Borrowings and Subordinated Debentures . The fair value of the Company’s long-term borrowings and subordinated debentures were calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities.   Accrued Interest Receivable/Payable. The carrying amounts of accrued interest approximate fair value resulting in a level 2 or level 3 classification based on the level of the asset or liability with which the accrual is associated.   - 116 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued)   The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2022 and December 31, 2021 :                       Fair Value Measurements                       Quoted                                       Prices in                                       Active     Significant                               Markets for     Other     Significant                       Identical     Observable     Unobservable       Carrying     Fair     Assets     Inputs     Inputs       Amount     Value     (Level 1)     (Level 2)     (Level 3)       (dollars in thousands)   December 31, 2022                                         Financial assets:                                         Cash and due from banks   $ 268,315     $ 268,315     $ 268,315     $ -     $ -   Investment securities available-for-sale     634,884       634,884       242       627,293       7,349   Restricted investment in bank stocks     46,604       n/a       n/a       n/a       n/a   Equity securities     15,811       15,811       9,733       6,078       -   Net loans     8,009,176       7,723,378       -       -       7,723,378   Derivatives - interest rate contracts     56,797       56,797       -       56,797       -   Accrued interest receivable     46,062       46,062       -       4,685       41,377                                             Financial liabilities:                                         Noninterest-bearing deposits     1,501,614       1,501,614       1,501,614       -       -   Interest-bearing deposits     5,855,008       5,811,291       3,460,818       2,350,473       -   Borrowings     857,622       854,698       -       854,698       -   Subordinated debentures     153,255       153,581       -       153,581       -   Accrued interest payable     6,925       6,925       -       6,925       -                                             December 31, 2021                                         Financial assets:                                         Cash and due from banks   $ 265,536     $ 265,536     $ 265,536     $ -     $ -   Investment securities available-for-sale     534,507       534,507       195       525,747       8,565   Restricted investment in bank stocks     27,826       n/a       n/a       n/a       n/a   Equity securities     13,794       13,794       11,081       2,713       -   Net loans     6,749,849       6,800,287       -       -       6,800,287   Derivatives - interest rate contracts     3,347       3,347       -       3,347       -   Accrued interest receivable     34,152       34,152       -       1,554       32,598                                             Financial liabilities:                                         Noninterest-bearing deposits     1,617,049       1,617,049       1,617,049       -       -   Interest-bearing deposits     4,715,904       4,716,358       3,565,795       1,150,563       -   Borrowings     468,193       469,671       -       469,671       -   Subordinated debentures     152,951       163,995       -       163,995       -   Accrued interest payable     2,716       2,716       -       2,716       -     - 117 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued)   The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, considering the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above.   Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.   The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company’s core deposit base is required by FASB ASC 825 - 10.   Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as the brokerage network, deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.   Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.   - 118 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 21 – Parent Corporation Only Financial Statements   The Parent Corporation operates its wholly-owned subsidiary, the Bank. The earnings of this subsidiary are recognized by the Parent Corporation using the equity method of accounting. Accordingly, earnings are recorded as increases in the Parent Corporation’s investment in the subsidiaries and dividends paid reduce the investment in the subsidiaries. The ability of the Parent Corporation to pay dividends will largely depend upon the dividends paid to it by the Bank. Dividends payable by the Bank to the Parent Corporation are restricted under supervisory regulations (see Note 18 of the Notes to Consolidated Financial Statements).   Condensed financial statements of the Parent Corporation only are as follows:   Condensed Statements of Condition       As of December 31,       2022     2021       (dollars in thousands)   ASSETS                 Cash and cash equivalents   $ 117,162     $ 133,648   Investment in subsidiaries     1,179,342       1,111,520   Investment securities     32,405       32,405   Equity securities     4,218       725   Other assets     699       699   Total assets   $ 1,333,826     $ 1,278,997   LIABILITIES AND STOCKHOLDERS’ EQUITY                 Other liabilities     1,820       1,834   Subordinated debentures, net     153,255       152,951   Stockholders’ equity     1,178,751       1,124,212   Total liabilities and stockholders’ equity   $ 1,333,826     $ 1,278,997                                                                                                                                                                                                                                                                                                                                         Condensed Statements of Income       For Years Ended December 31,       2022     2021     2020       (dollars in thousands)   Income:                         Dividend income from subsidiaries   $ 36,475     $ 24,071     $ 15,200   Other income     1,638       1,627       1,683   Total Income     38,113       25,698       16,883   Expenses     ( 8,928 )     ( 8,741 )     ( 9,263 ) Income before equity in undistributed earnings of subsidiaries     29,185       16,957       7,620   Equity in undistributed earnings of subsidiaries     96,026       113,396       63,669   Net Income     125,211       130,353       71,289   Preferred dividends     6,037       1,717       -   Net income available to common stockholders   $ 119,174     $ 128,636     $ 71,289     - 119 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 21 – Parent Corporation Only Financial Statements – (continued)   Condensed Statements of Cash Flows       For Years Ended December 31       2022     2021     2020       (dollars in thousands)                             Cash flows from operating activities:                         Net income   $ 125,211     $ 130,353     $ 71,289   Adjustments to reconcile net income to net cash provided by operating activities:                         Equity in undistributed earnings of subsidiary     ( 96,026 )     ( 113,396 )     ( 63,669 ) Loss on equity securities, net     45       55       -   Amortization of subordinated debt issuance costs     304       303       323   Decrease (increase) in other assets     -       50,590       ( 50,001 ) Decrease in other liabilities     ( 14 )     ( 287 )     ( 391 ) Net cash provided by (used in) operating activities     29,520       67,618       ( 42,449 )                           Cash flows from investing activities:                         Sale of equity securities     ( 3,538 )     ( 780 )     -   Repayment of short-term borrowing     -       -       ( 3,000 ) Net cash used in investing activities     ( 3,538 )     ( 780 )     ( 3,000 )                           Cash flows from financing activities:                         Proceeds from (repayment of) proceeds from subordinated debt     -       ( 50,000 )     73,440   Cash dividends paid on preferred stock     ( 6,037 )     ( 1,717 )     -   Cash dividends paid on common stock     ( 23,428 )     ( 17,493 )     ( 14,317 ) Purchase of treasury stock     ( 13,127 )     ( 9,401 )     ( 911 ) Proceeds from preferred stock offering     -       110,927       -   Proceeds from exercise of stock options     124       106       233   Net cash (used in) provided by financing activities     ( 42,468 )     32,422       58,445                             Decrease (increase) in cash and cash equivalents     ( 16,486 )     99,260       12,996   Cash and cash equivalents as of January 1,     133,648       34,388       21,392   Cash and cash equivalents as of December 31,   $ 117,162     $ 133,648     $ 34,388       - 120 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 22 – Quarterly Financial Information of ConnectOne Bancorp, Inc. (unaudited)       2022       4th Quarter     3rd Quarter     2nd Quarter     1st Quarter       (dollars in thousands, except per share data)   Total interest income   $ 112,469     $ 96,980     $ 85,356     $ 78,941   Total interest expense     34,460       18,819       9,765       8,583   Net interest income     78,009       78,161       75,591       70,358   Provision for credit losses     3,300       10,000       3,000       1,450   Total other income     3,508       3,322       3,359       3,054   Other expenses     33,312       32,143       31,703       29,230   Income before income taxes     44,905       39,340       44,247       42,732   Income tax expense     12,348       10,425       11,889       11,351   Net income     32,557       28,915       32,358       31,381   Preferred dividends     1,510       1,509       1,509       1,509   Net income available to common stockholders   $ 31,047     $ 27,406     $ 30,849     $ 29,872   Earnings per share:                                 Basic   $ 0.79     $ 0.70     $ 0.78     $ 0.76   Diluted     0.79       0.70       0.78       0.75                                       Note: Due to rounding, quarterly earnings per share for 2022 do not sum to reported annual earnings per share.       2021       4th Quarter     3rd Quarter     2nd Quarter     1st Quarter       (dollars in thousands, except per share data)   Total interest income   $ 79,040     $ 77,026     $ 73,051     $ 72,621   Total interest expense     8,579       8,781       10,042       11,458   Net interest income     70,461       68,245       63,009       61,163   Provision for (reversal of) credit losses     815       1,100       ( 1,649 )     ( 5,766 ) Total other income, net of securities gains     3,777       4,016       4,472       3,426   Other expenses     28,084       28,183       26,259       26,485   Income before income taxes     45,339       42,978       42,871       43,870   Income tax expense     12,301       10,881       10,652       10,871   Net income     33,038       32,097       32,219       32,999   Preferred dividends     1,717       -       -       -   Net income available to common stockholders   $ 31,321     $ 32,097     $ 32,219     $ 32,999   Earnings per share:                                 Basic   $ 0.79     $ 0.81     $ 0.81     $ 0.83   Diluted     0.79       0.80       0.81       0.82           - 121 - Table of Contents     Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures   None.