What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-05-05 compared with 2022-11-04 · 361 added, 869 removed, 1835 unchanged (40% of the section changed)

4 unchanged sentences

(in thousands, except for share data)

September 30,

Cash and due from banks

14 unchanged sentences

Loans held-for-sale

11,197  

13,772  

Loans receivable

21 unchanged sentences

10,179  

11,017  

Other real estate owned

34 unchanged sentences

Authorized 5,000,000 shares;

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

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

issued 115,000 shares as of March 31, 2023 and as of December 31, 2022;

outstanding 115,000 shares as of March 31, 2023 and as of December 31, 2022

110,927  

2 unchanged sentences

Authorized 100,000,000 shares;

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

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

issued 42,083,240 shares as of March 31, 2023 and 41,942,149 shares as of December 31, 2022;

outstanding 39,179,051 shares as of March 31, 2023 and 39,243,123 as of December 31, 2022

586,946  

6 unchanged sentences

535,915  

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

Treasury stock, at cost 2,904,189 common shares as of March 31, 2023 and 2,699,026 as of December 31, 2022

( 57,652 )  

12 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(dollars in thousands, except for per share data)

1 unchanged sentence

Interest and fees on loans

$ 90,731  

$ 75,092  

$ 248,041  

$ 216,655  

Interest and dividends on investment securities:

1 unchanged sentence

Total interest income

96,980  

77,026  

261,277  

222,698  

Interest expense

13,299  

24,018  

19,487  

13,149  

10,794  

Total interest expense

18,819  

37,167  

30,281  

Net interest income

78,161  

68,245  

224,110  

192,417  

Provision for (reversal of) credit losses

10,000  

14,450  

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

68,161  

67,145  

209,660  

198,732  

Provision for credit losses

Net interest income after provision for credit losses

Noninterest income

2 unchanged sentences

Net gains on sale of loans held-for-sale

Gain on sale of branches

Net losses on equity securities

( 430 )  

( 78 )  

( 1,431 )  

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

Total noninterest income

11,914  

Noninterest expenses

Salaries and employee benefits

21,025  

16,807  

59,470  

47,790  

Occupancy and equipment

5 unchanged sentences

Other components of net periodic pension expense

( 143 )  

( 67 )  

( 429 )  

Increase in value of acquisition price

1 unchanged sentence

Total noninterest expenses

32,143  

28,183  

93,076  

80,927  

Income before income tax expense

39,340  

42,978  

126,319  

129,719  

Income tax expense

10,425  

10,881  

33,665  

32,404  

28,915  

32,097  

92,654  

97,315  

Preferred dividends

Net income available to common stockholders

$ 27,406  

$ 32,097  

$ 88,127  

$ 97,315  

Earnings per common share

$ 0.70  

$ 0.81  

$ 2.24  

$ 2.45  

See accompanying notes to unaudited consolidated financial statements.

3 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

$ 28,915  

$ 32,097  

$ 92,654  

$ 97,315  

Other comprehensive income (loss):

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

( 39,912 )  

( 3,228 )  

( 94,428 )  

11,471  

27,178  

( 28,441 )  

( 2,432 )  

( 67,250 )  

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

Reclassification adjustment for realized gains included in net income

Unrealized gains on cash flow hedges

16,969  

44,253  

( 5,094 )  

( 533 )  

( 13,381 )  

11,875  

30,872  

Unrealized (losses) gains on cash flow hedges

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

( 1,178 )  

( 524 )  

( 90 )  

( 835 )  

( 365 )  

Unrealized gains on pension plan

( 567 )  

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

( 21 )  

( 14 )  

Total other comprehensive loss

( 17,389 )  

( 783 )  

( 35,088 )  

Total comprehensive income

$ 11,526  

$ 31,314  

$ 57,566  

$ 93,545  

See accompanying notes to unaudited consolidated financial statements.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’

Nine Months Ended September 30, 2022

Three Months Ended March 31, 2023

Comprehensive

14 unchanged sentences

( 1,498 )  

Cash dividend declared on preferred stock ($ 0.984375 per depositary share)

Cash dividends declared on preferred stock ($ 0.328125 per depositary share)

( 1,509 )  

4 unchanged sentences

Stock grants ( 995 shares)

Net shares issued in satisfaction of restricted stock units earned ( 31,383 shares)

Net shares issued in satisfaction of performance units earned ( 22,350 shares)

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

( 2,133 )  

Repurchase of treasury stock ( 447,108 shares)

( 13,127 )  

Net shares issued in satisfaction of deferred stock units earned ( 32,068 shares)

Net shares issued in satisfaction performance units earned ( 52,353 shares)

Stock-based compensation expense

Balance as of September 30, 2022

$ 110,927  

$ 586,946  

$ 28,756  

$ 510,957  

$ ( 52,799 )  

$ ( 36,492 )  

$ 1,148,295  

Three Months Ended September 30, 2022

Comprehensive

Stockholders’

(in thousands, except share data)

(Loss) Income

Balance as of June 30, 2022

$ 110,927  

$ 586,946  

$ 27,536  

$ 489,640  

$ ( 52,799 )  

$ ( 19,103 )  

$ 1,143,147  

28,915  

Other comprehensive loss, net of tax

( 17,389 )  

Cash dividends declared on preferred stock ($ 0.328125 per depositary share)

( 1,509 )  

Cash dividends declared on common stock ($ 0.155 per share)

Repurchase of treasury stock ( 205,163 shares)

( 4,853 )  

Stock-based compensation expense

Balance as of September 30, 2022

Balance as of March 31, 2023

$ 110,927  

5 unchanged sentences

$ 1,190,970  

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

Comprehensive

9 unchanged sentences

$ ( 1,404 )  

Cumulative effect of change in accounting principle (see note 1b.

“Authoritative Accounting Guidance Presentation”), net of tax

$ 1,124,212  

Balance as of January 1, 2021 as adjusted for changes in accounting principle

31,381  

329,026  

( 30,271 )  

912,385  

97,315  

Other comprehensive loss, net of tax

2 unchanged sentences

( 5,152 )  

Cash dividends declared on preferred stock ($ 0.328125 per depositary share)

( 1,509 )  

Exercise of stock options ( 8,774 shares)

1 unchanged sentence

Stock grants ( 153 shares)

Net shares issued in satisfaction of restricted stock units earned ( 14,711 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 restricted stock units earned

( 1,283 )  

Repurchase of treasury stock ( 144,793 shares)

( 4,786 )  

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

110,927  

Stock-based compensation expense

Balance as of September 30, 2021

$ 110,927  

$ 586,946  

$ 25,851  

$ 413,996  

$ ( 38,314 )  

$ ( 973 )  

$ 1,098,433  

Three Months Ended September 30, 2021

Comprehensive

Stockholders’

(in thousands, except share data)

(Loss) Income

Balance as of June 30, 2021

$ 586,946  

$ 24,606  

$ 386,280  

$ ( 32,682 )  

$ 964,960  

32,097  

Other comprehensive loss, net of tax

( 783 )  

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

( 4,381 )  

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

Stock grants ( 4,535 shares)

Repurchase of treasury stock ( 196,069 shares)

( 5,632 )  

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

110,927  

Stock-based compensation expense

Balance as of September 30, 2021

Balance as of March 31, 2022

$ 110,927  

9 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended

September 30,

Three Months Ended

(dollars in thousands)

Cash flows from operating activities

$ 92,654  

$ 97,315  

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

Depreciation and amortization of premises and equipment

Provision for (reversal of) credit losses

14,450  

Provision for credit losses

Amortization of intangibles

Net accretion of loans

( 2,448 )  

Accretion on bank premises

( 37 )  

Accretion on deposits

( 657 )  

Amortization (accretion) on borrowings, net

Amortization on borrowings, net

Stock-based compensation

Gains on sales/redemptions of securities available-for-sale, net

Losses on equity securities, net

Gain on sale of branches

Net losses on disposition of other premises and equipment

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

( 1,519 )  

Loans originated for resale

( 18,619 )  

Proceeds from sale of loans held-for-sale

25,955  

57,674  

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

Loss on sale of other real estate owned

Increase in cash surrender value of bank owned life insurance

( 4,069 )  

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

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

Amortization of subordinated debentures issuance costs

(Increase) decrease in accrued interest receivable

( 4,788 )  

Net change in operating leases

( 142 )  

(Increase) decrease in other assets

( 4,781 )  

43,319  

(Decrease) increase in other liabilities

( 12,291 )  

Increase in other assets

Increase in other liabilities

Net cash provided by operating activities

94,946  

154,644  

Cash flows from investing activities

Investment securities available-for-sale:

( 320,946 )  

Maturities, calls and principal repayments

135,548  

215,531  

Purchases of equity securities

( 3,200 )  

Net (purchases) redemptions of restricted investment in bank stocks

( 17,498 )  

Cash flow hedge premium payment

( 6,965 )  

Purchase of equity securities

Net redemptions of restricted investment in bank stocks

Payments on loans held-for-sale

Net increase in loans

( 1,084,483 )  

Purchases of bank owned life insurance

( 30,000 )  

Purchases of premises and equipment

( 2,353 )  

Proceeds from sale of branches

Proceeds from sale of other real estate owned

Proceeds from sale of OREO

Net cash used in investing activities

( 1,329,583 )  

Cash flows from financing activities

Net increase in deposits

978,214  

440,876  

Repayment of subordinated debentures

Advances of borrowings

2,305,181  

100,000  

Repayments of borrowings

( 1,943,448 )  

Advances of Federal Home Loan Bank (“FHLB”) borrowings

Repayments of FHLB borrowings

Repayment of subordinated debt

Cash dividends on preferred stock

( 4,528 )  

Repurchase of treasury stock

( 13,127 )  

Cash dividends paid on common stock

( 17,338 )  

Repurchase of treasury stock

Proceeds from exercise of stock options

Net proceeds from the issuance of preferred stock

110,927  

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

( 2,133 )  

Net cash provided by financing activities

1,302,945  

307,491  

Net change in cash and cash equivalents

68,308  

109,439  

Cash and cash equivalents at beginning of period

265,536  

303,756  

Cash and cash equivalents at end of period

$ 333,844  

$ 413,195  

Supplemental disclosures of cash flow information

1 unchanged sentence

Interest paid on deposits and borrowings

$ 34,552  

$ 32,664  

31,426  

35,809  

Supplemental disclosures of noncash activities

Transfer of loans from held-for-investment to other real estate owned

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

Transfer of loans to other real estate owned

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

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

See accompanying notes to unaudited consolidated financial statements.

6 unchanged sentences

(the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”).

The Parent Corporation’s business currently consists primarily of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank”

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”).

6 unchanged sentences

The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005.

The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its twenty-four  other banking offices and two loan production/business development offices throughout New Jersey, New York and South Florida.

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 rentals and consumer wages.

The preceding unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10 -Q and Rule 10 - 01 of Regulation S- X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements.

However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022, or for any other interim period.

The Company’s 2021 Annual Report on Form 10 -K should be read in conjunction with these consolidated financial statements.

Basis of Presentation

The consolidated financial statements have been prepared in conformity with GAAP.

Some items in the prior year consolidated financial statements were reclassified to conform to current presentation.

Reclassifications had no effect on prior year net income or stockholders’

equity. 

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.

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

5 unchanged sentences

Risks and Uncertainties

As previously disclosed, on March 11, 2020 the World Health Organization declared the outbreak of COVID- 19 as a global pandemic, which continues to impact the United States and the world.

On March 27, 2020, the 

Coronavirus Aid, Relief, and  

Economic Security Act  (CARES Act) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID- 19 pandemic.

The COVID- 19 pandemic has adversely affected, and continues to adversely affect economic activity globally, nationally and locally.

Although economic activity began to accelerate in 2021, and the United States continues to implement a COVID- 19 vaccination program, COVID- 19, its variants and actions taken to mitigate the spread of it have had and may in the future have an adverse impact on the economies and financial markets of many countries and parts of the United States, including the New Jersey/New York metropolitan area in which the Company primarily operates.

Although the Company has been able to mitigate the impact of the pandemic on its operations, COVID- 19 could impact the Company’s operations in the future.

The effects of the COVID- 19 pandemic may adversely affect the Company’s financial condition and results of operations in future periods.

Although state and local governments have lifted most restrictions on conducting business, it is possible that restrictions could be reimposed.

On July 27, 2017, the U.K.

Financial Conduct Authority, which regulates London Interbank Offered Rate ("LIBOR"), announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the LIBOR 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 rates for the calculation of LIBOR in 2022, at this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere.

Similarly, banking regulators in the United States have required insured depository institutions in the United States to cease originating loans using LIBOR as a rate index as of December 31, 2021, and in March 2022 Congress adopted legislation providing for the replacement of LIBOR indexes in contracts without fall back language with the Secured Overnight Financing Rate ("SOFR"), and for the Federal Reserve to adopt regulation by September of 2022 implementing this change.

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

Although the Bank ceased using LIBOR as an index for loans it originates, it is unclear at this time what effect these changes may have on the values of loans and liabilities held or owed by the Bank whose interest rates are tied to LIBOR.

Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our loans, and our investment securities.

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

3 unchanged sentences

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.

CONNECTONE BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Authoritative Accounting Guidance

Newly Issued, But Not Yet Effective Accounting Standards

In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022 - 03, “Fair Value Measurement (Topic 820 ):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”

(“ASU 2022 - 03”

ASU 2022 - 03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. 

ASU 2022 - 03 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted.

The Company is evaluating the effect that ASU 2022 - 03 will have on its consolidated financial statements.

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 –

8 unchanged sentences

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.

We adopted ASU 2022 - 02 on January 1, 2023 and it 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 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.

8 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(dollars in thousands, except for per share data)

2 unchanged sentences

$ 29,872  

$ 88,127  

$ 97,315  

Earnings allocated to participating securities

( 44 )  

( 76 )  

( 217 )  

Income attributable to common stock

1 unchanged sentence

$ 29,792  

$ 87,910  

$ 97,065  

Weighted average common shares outstanding, including participating securities

1 unchanged sentence

39,560  

39,393  

39,770  

Weighted average participating securities

( 74 )  

( 95 )  

( 97 )  

Weighted average common shares outstanding

1 unchanged sentence

39,453  

39,296  

39,668  

Incremental shares from assumed conversions of options, performance units and restricted shares

2 unchanged sentences

39,727  

39,510  

39,888  

Earnings per common share:

1 unchanged sentence

$ 0.76  

$ 2.24  

$ 2.45  

There were no antidilutive share equivalents as of  

September 30, 2022  or 

September 30, 2021 .

There were no antidilutive share equivalents for the quarters ended March 31, 2023  and 

March 31, 2022 .

CONNECTONE BANCORP, INC.

2 unchanged sentences

Investment Securities

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

The Company’s investment securities are classified as available-for-sale as of March 31, 2023 and December 31, 2022 .

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 September 30, 2022 and December 31, 2021 .

Accordingly, the carrying value of such securities reflects their fair value as of March 31, 2023 and December 31, 2022 .

Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value.

See Note 6 of the Notes to Consolidated Financial Statements for a further discussion.

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

See Note 6 of the Notes to Consolidated Financial Statements for further discussion.

The following tables present information related to the Company’s portfolio of securities available-for-sale as of March 31, 2023 and December 31, 2022 .

(dollars in thousands)

September 30, 2022

Securities available-for-sale

March 31, 2023

Investment securities available-for-sale:

Federal agency obligations

16 unchanged sentences

Corporate bonds and notes

( 23 )  

Asset-backed securities

6 unchanged sentences

December 31, 2022

Securities available-for-sale

Investment securities available-for-sale:

Federal agency obligations

16 unchanged sentences

Corporate bonds and notes

( 26 )  

Asset-backed securities

Certificates of deposit

( 33 )  

Other securities

3 unchanged sentences

$ 634,884  

$ 534,507  

CONNECTONE BANCORP, INC.

2 unchanged sentences

Investment Securities –

Investment securities having a carrying value of approximately $ 174.8  million and $ 71.2  million as of September 30, 2022 and December 31, 2021 , respectively, were pledged to secure public deposits, borrowings, repurchase agreements, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law.

As of September 30, 2022 and December 31, 2021 , there were no holdings of securities of any one issuer, other than the U.S.

Investment securities having a carrying value of approximately $ 377.5  million and $ 157.0 million as of March 31, 2023 and December 31, 2022 , respectively, were pledged to secure public deposits, borrowings, repurchase agreements, access to unutilized Federal Reserve Discount Window, Bank Term Funding ("BTF") program borrowings, and access to unutilized Federal Home Loan Bank advances and for other purposes required or permitted by law.

As of March 31, 2023 and December 31, 2022 , there were no holdings of securities of any one issuer, other than the U.S.

Government and its agencies, in an amount greater than 10% of stockholders’

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

The following table presents information for investments in securities available-for-sale as of March 31, 2023 , 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.

September 30, 2022

Securities not due at a single maturity date are shown separately.

March 31, 2023

(dollars in thousands)

Securities available-for-sale:

Investment securities available-for-sale:

Due in one year or less

16 unchanged sentences

$ 629,001  

Gross gains and losses from the sales and redemptions of securities for periods presented were as follows:

Three Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

$ 5,185  

Gross gains on sales/redemptions of securities

Gross losses on sales/redemptions of securities

Net gain on sales/redemptions of securities

tax provision on net gain

Net gain on sales/redemptions of securities, after taxes

There were 

no  realized gains or losses on securities for the three months ended March 31, 2023 and December 

CONNECTONE BANCORP, INC.

3 unchanged sentences

Impairment Analysis of Available--for-sale Debt Securities

The following tables indicate securities in an unrealized loss position for which an allowance for credit losses (“ACL”) has not been recorded, aggregated by investment category and by the length of continuous time individual securities have been in an unrealized loss position as of September 30, 2022 and December 31, 2021 .

September 30, 2022

March 31, 2023

Less than 12 Months

1 unchanged sentence

(dollars in thousands)

Securities available-for-sale:

Investment securities available-for-sale:

Federal agency obligations

23 unchanged sentences

Corporate bonds and notes

( 23 )  

Asset-backed securities

11 unchanged sentences

(dollars in thousands)

Securities available-for-sale:

Investment securities available-for-sale:

Federal agency obligations

3 unchanged sentences

$ ( 1,831 )  

$ 23,934  

Residential mortgage pass-through securities

7 unchanged sentences

( 4,381 )  

14,523  

( 2,304 )  

Obligations of U.S.

4 unchanged sentences

( 3,404 )  

85,819  

Corporate bonds and notes

( 26 )  

Asset-backed securities

( 33 )  

( 16 )  

Total temporarily impaired securities

8 unchanged sentences

Investment Securities –

The Company has elected to exclude accrued interest from the amortized cost of its investment securities available-for-sale. Accrued interest receivable for investment securities available for sale as of September 30, 2022 and December 31, 2021 , totaled $ 2.6  million and $ 1.6  million, respectively.

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 March 31, 2023 and December 31, 2022 , totaled $ 2.2  million and $ 2.4  million, respectively.

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

4 unchanged sentences

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.

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

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

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

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

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 March 

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

23 unchanged sentences

Cash Flow Hedges

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

We are required to pay fixed rates of interest ranging from 0.631 % to 1.23 % and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”).

All swaps are currently on the books with expiration dates on the nine  positions ranging from December 2025  

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”). 

The eleven  swaps carry expiration dates ranging from December 2025  

to March 2028 . 

3 unchanged sentences

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

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

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

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

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

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

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

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

Three Months Ended September 30, 2022

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

Amount of (gain) loss reclassified from OCI to interest income

Amount of gain recognized in other Noninterest income (Ineffective Portion)

(dollars in thousands)

Interest rate contracts

$ 16,969  

$ ( 1,178 )  

Three Months Ended September 30, 2021

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

Amount of gain (loss) reclassified from OCI to interest income

Amount of gain recognized in other Noninterest income (Ineffective Portion)

(dollars in thousands)

Interest rate contracts

$ 1,890  

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.

Net interest (income) expense recorded on these swap and interest rate cap transactions totaled approximately ($ 4.3 ) million and $ 0.5  million during the three months ended March 31, 2023  and March 31, 2022, respectively, and is recorded as a component of either interest expense on FHLB Advances or brokered certificates of deposits.

CONNECTONE BANCORP, INC.

2 unchanged sentences

Derivatives –

Nine Months Ended September 30, 2022

Three Months Ended March 31, 2023

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

Amount of (gain) loss reclassified from OCI to interest income

Amount of (gain) loss reclassified from OCI to interest expense

Amount of gain recognized in other Noninterest income (Ineffective Portion)

3 unchanged sentences

$ ( 4,267 )  

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

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

Amount of gain (loss) reclassified from OCI to interest income

Amount of (gain) loss reclassified from OCI to interest expense

Amount of gain recognized in other Noninterest income (Ineffective Portion)

2 unchanged sentences

$ 19,000  

$ 1,543  

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

September 30, 2022

The following table reflects the cash flow hedges included in the consolidated statements of condition as of March 31, 2023 and December 31, 2022 :

March 31, 2023

December 31, 2022

12 unchanged sentences

Loans Receivable –

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

September 30, 2022  

The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred loan fees, as of March 31, 2023 and December 31, 2022 :

March 31, 2023  

December 31, 2022  

(dollars in thousands)

Commercial (1)

$ 1,414,226  

16 unchanged sentences

$ 8,099,689  

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

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

As of September 30, 2022  and December 31, 2021 , loans totaling approximately $ 2.6  billion and $ 2.5  billion respectively, were pledged to secure borrowings from the FHLB of New York.

Loans held-for-sale - The following table sets forth the composition of the Company’s loans held-for-sale as of September 30, 2022 and December 31, 2021 :

September 30, 2022  

As of both  

March 31, 2023  and December 31, 2022 , loans totaling approximately $ 2.7  billion were pledged to secure borrowings from the FHLB of New York.

During April 2023 the Bank increased its unpaid principal balances of loans pledged to $ 5.4 billion, as a result of increasing unutilized borrowing capacity at both the Federal Reserve Bank of New York and the FHLB of New York.

Loans held-for-sale - The following table sets forth the composition of the Company’s loans held-for-sale as of March 31, 2023 and December 31, 2022 :

March 31, 2023  

December 31, 2022  

2 unchanged sentences

$ 11,197  

$ 13,473  

Residential real estate

1 unchanged sentence

$ 11,197  

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

September 30, 2022

$ 13,772  

Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL and nonaccrual loans without an ACL as of March 31, 2023 and December 31, 2022 :

March 31, 2023

Nonaccrual loans with ACL

4 unchanged sentences

$ 19,321  

$ 26,858  

Commercial real estate

20 unchanged sentences

16,817  

25,393  

Commercial construction

Residential real estate

2 unchanged sentences

$ 44,454  

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated and individually evaluated.

Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable.

19 unchanged sentences

We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP.

Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below. The following table presents loans by origination and risk designation as of September 30, 2022 (dollars in thousands):

Term loans amortized cost basis by origination year

37 unchanged sentences

50,114  

70,421  

Total Commercial Real Estate

39 unchanged sentences

$ 1,182  

$ 1,435  

Special mention

9 unchanged sentences

$ 1,601,535  

Special mention

$ 7,999,437  

12,184  

59,486  

Special mention

46,137  

71 unchanged sentences

$ 565,908  

$ 490,119  

$ 523,071  

Special mention

15,314  

Total Commercial Construction

4 unchanged sentences

$ 574,139  

$ 506,876  

$ 540,178  

Residential Real Estate

8 unchanged sentences

Special mention

10,797  

Total Residential Real Estate

45 unchanged sentences

The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date.

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

September 30, 2022

The following table presents collateral dependent loans that were individually evaluated for impairment as of March 31, 2023 and December 31, 2022 :

March 31, 2023

Real Estate  

21 unchanged sentences

Commercial construction

13,196  

Residential real estate

2 unchanged sentences

$ 94,442  

Analysis - The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due as of September 30, 2022 and December 31, 2021 :

September 30, 2022

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 March 31, 2023 and December 31, 2022:

March 31, 2023

30-59 Days Past Due

34 unchanged sentences

$ 1,472,734  

$ 1,259,875  

$ 1,299,428  

Commercial real estate

15 unchanged sentences

$ 8,109,161  

$ 6,838,351  

CONNECTONE BANCORP, INC.

3 unchanged sentences

The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for credit losses that are allocated to each loan portfolio segment:

September 30, 2022

March 31, 2023

Commercial real estate  

6 unchanged sentences

$ 6,857  

$ 13,911  

Collectively evaluated impairment

27 unchanged sentences

$ 8,141,176  

$ 7,910,013  

December 31, 2022

7 unchanged sentences

$ 1,003  

$ 8,479  

Collectively evaluated impairment

1 unchanged sentence

50,818  

77,955  

Acquired with deteriorated credit quality individually analyzed

28 unchanged sentences

Loans and the Allowance for Credit Losses –

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

Three Months Ended September 30, 2022

Commercial real estate

Commercial construction

Residential real estate

(dollars in thousands)

Balance as of June 30, 2022

$ 28,135  

$ 47,562  

$ 3,413  

$ 3,625  

$ 82,739  

( 410 )  

Provision for credit losses - loans

Balance as of September 30, 2022

$ 29,689  

$ 54,526  

$ 3,444  

$ 4,053  

$ 91,717  

Nine Months Ended September 30, 2022

Activity in the Company’s ACL for loans for the three months ended March 31, 2023 is summarized in the tables below.

Three Months Ended March 31, 2023

Commercial real estate

10 unchanged sentences

( 1,717 )  

Provision for credit losses - loans

( 136 )  

Provision for (reversal of) credit losses - loans

( 276 )  

Balance as of September 30, 2022

Balance as of March 31, 2023

$ 26,162  

3 unchanged sentences

$ 87,002  

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

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

The CECL Day 1 row in the table for the nine months ended September 30, 2021 presents adjustments recorded through retained earnings to adopt the CECL standard and the increase to the ACL for loans associated with nonaccretable purchase accounting marks on loans that were classified as purchased credit-impaired as of December 31, 2020 .

Three Months Ended September 30, 2021

Activity in the Company’s ACL for loans for the three months ended March 

31, 2022 is summarized in the table below.

Three Months Ended March 31, 2022

Commercial real estate

2 unchanged sentences

(dollars in thousands)

Balance as of June 30, 2021

Balance as of December 31, 2021

$ 25,969  

8 unchanged sentences

( 299 )  

Balance as of September 30, 2021

( 204 )  

Balance as of March 31, 2022

$ 25,459  

2 unchanged sentences

$ 3,455  

$ 80,070  

CONNECTONE BANCORP, INC.

2 unchanged sentences

Loans and the Allowance for Credit Losses –

Nine Months Ended September 30, 2021

Commercial real estate

Commercial construction

Residential real estate

Loan Modifications to Borrowers Experiencing Financial Difficulty:

The Company adopted Accounting Standards Update (“ASU”) 2022 - 02, Financial Instruments - Credit Losses (Topic 326 ) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022 - 02”

) effective January 1, 2023.

The amendments in ASU 2022 - 02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

The following table presents the amortized cost basis at the end of the reporting period of the loan modifications to borrowers experiencing financial difficulty:

Three Months Ended

March 31, 2023

Term Extension

% of Portfolio

(dollars in thousands)

Balance as of December 31, 2020

$ 28,443  

$ 39,330  

$ 8,194  

$ 2,687  

$ 79,226  

Day 1 effect of CECL

( 4,225 )  

( 961 )  

( 568 )  

Balance as of January 1, 2021 as adjusted for changes in accounting principle

24,218  

48,935  

85,783  

( 304 )  

( 1,628 )  

(Reversal of) provision for credit losses - loans

( 4,050 )  

( 3,531 )  

( 1,799 )  

( 14 )  

Balance as of September 30, 2021

$ 27,336  

$ 43,342  

$ 3,702  

$ 3,598  

$ 77,986  

Troubled Debt Restructurings

Loans are considered to have been modified in a troubled debt restructuring (“TDRs”) when, except as discussed below, due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider.

Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.

Generally, a nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan.

However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period.

If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status.

As of September 30, 2022 , there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in troubled debt restructurings.

As of September 30, 2022 , TDRs totaled $ 74.5  million, of which $ 27.5  million were on nonaccrual status and $ 47.0  million were performing under their restructured terms.

As of December 31, 2021 , TDRs totaled $ 79.5  million, of which $ 35.9  million were on nonaccrual status and $ 43.6  million were performing under their restructured terms.

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

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

Pre-Modification

Post-Modification

The above table consists of one commercial loan on which 3.0 years was added to the life of the modified loan, which did not have a material effect on the cash flows. 

The following table presents the performance of loans that have been modified in the last twelve months:

March 31, 2023

Past Due 30-89 Days

Past Due 90 Days or More

(dollars in thousands)

There were no loans to borrowers experiencing financial difficulty that had a payment default during the three months ended March 31, 2023 and which were modified in the twelve months prior to that default.

Default is determined at 90 or more days past due, upon charge-off, or upon foreclosure.

Modified loans in default are individually evaluated for the allowance for credit losses or if the modified loan is deemed uncollectible, the loan, or a portion of the loan, is written off and the allowance for credit losses is adjusted accordingly.

Troubled debt restructurings:

Commercial real estate

Residential real estate

$ 10,075  

$ 9,575  

Information on loan modifications prior to the adoption of ASU 2022 - 02 on January 1, 2023 is presented in accordance with the applicable accounting standards in effect at that time.

During the three months ended March 31, 2022, the Company modified two loans that were determined to be troubled debt restructuring, a commercial loan and a commercial real estate loan, with outstanding balances of $ 98 thousand and $ 8.3 million, respectively.

The commercial loan modified as a TDR during the three months ended March 31, 2022 was a maturity extension, while the commercial real estate loan modified as a TDR during the three months ended March 31, 2022 was an interest rate reduction, that was commensurate with a one -time, $ 500,000 , principal paydown.

CONNECTONE BANCORP, INC.

2 unchanged sentences

Loans and the Allowance for Credit Losses –

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

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

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

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

Pre-Modification

Post-Modification

(dollars in thousands)

Troubled debt restructurings:

$ 1,276  

Commercial real estate

35,595  

Commercial construction

Residential real estate

$ 40,270  

The loans modified as TDRs during the nine  months ended September 

30, 2021 included maturity extensions and interest rate reductions. 

Allowance for Credit Losses for Unfunded Commitments

1 unchanged sentence

The provision is recorded within the provision for (reversal of) credit losses on the Company’s income statement.

The following table presents a rollforward of the allowance for credit losses for unfunded commitments for the 

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

The following table presents a roll forward of the allowance for credit losses for unfunded commitments for the 

three months ended March 31, 2023 and 2022 :

Three Months Ended

September 30,

(dollars in thousands)

2 unchanged sentences

$ 2,351  

Provision for credit losses - unfunded commitments

Balance at end of period

$ 2,986  

$ 2,564  

Nine Months Ended

September 30,

(dollars in thousands)

Balance at beginning of period

$ 2,352  

Day 1 Effect of CECL

Provision for (reversal of) credit losses - unfunded commitments

8 unchanged sentences

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

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

three months ended March 31, 2023 and 2022  :

Three Months Ended

September 30,

(dollars in thousands)

1 unchanged sentence

$ 1,539  

Provision for credit losses - unfunded commitments

Provision for (reversal of) credit losses - unfunded commitments

Provision for credit losses

1 unchanged sentence

$ 1,450  

Nine Months Ended

September 30,

(dollars in thousands)

Provision for (reversal of) credit losses - loans

$ 13,816  

Provision for (reversal of) credit losses - unfunded commitments

Provision for (reversal of) credit losses

$ 14,450  

Fair Value Measurements and Fair Value of Financial Instruments

11 unchanged sentences

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 :

Securities Available-for-Sale and Equity Securities :

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 March 31, 2023 and December 31, 2022 :

Investment Securities Available-for-Sale and Equity Securities :

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.

11 unchanged sentences

The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third -party pricing services.

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of September 30, 2022 and December 31, 2021 are as follows:

September 30, 2022

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of March 31, 2023 and December 31, 2022 are as follows:

March 31, 2023

Fair Value Measurements at Reporting Date Using

41 unchanged sentences

Total Fair Value

Quoted Prices

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

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

(dollars in thousands)

17 unchanged sentences

Asset-backed securities

Certificates of deposit

Other securities

10 unchanged sentences

$ 690,168  

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

$ 7,349  

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2023 and during the year ended December 31, 2022 .

Assets Measured at Fair Value on a Nonrecurring Basis

1 unchanged sentence

These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets.

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis as of September 30, 2022 and December 31, 2021 .

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis as of March 31, 2023 and December 31, 2022 .

Loans Held-for-Sale :

14 unchanged sentences

Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and are also based on Level 3 inputs.

For assets measured at fair value on a nonrecurring basis, the fair value measurements as of September 30, 2022 and December 31, 2021 are as follows:

For assets measured at fair value on a nonrecurring basis, the fair value measurements as of March 31, 2023 and December 31, 2022 are as follows:

Fair Value Measurements at Reporting Date Using

Assets measured at fair value on a nonrecurring basis:

Carrying Value as of September 30, 2022  

March 31, 2023  

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

24 unchanged sentences

Collateral dependent loans –

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

Collateral dependent loans as of March 31, 2023 that required a valuation allowance were $ 30.6  million with a related valuation allowance of $ 7.2  million compared to $ 43.8  million with a related valuation allowance of $ 10.5  million as of December 31, 2022 .

CONNECTONE BANCORP, INC.

4 unchanged sentences

Recurring basis

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

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) for the three months ended March 31, 2023 and for the year ended December 

Municipal Securities  

4 unchanged sentences

Change in unrealized gain (loss)

Ending balance, September 30, 2022

Ending balance, March 31, 2023

$ 7,488  

4 unchanged sentences

Principal paydowns

Changes in unrealized gain (loss)

Ending balance, December 31, 2022

$ 7,349  

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 .

The 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 March 31, 2023 and December 31, 2022 .

The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.

September 30, 2022

March 31, 2023

Valuation Techniques

22 unchanged sentences

The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy of collateral dependent loans.

September 30, 2022

March 31, 2023

(dollars in thousands)

23 unchanged sentences

Range (weighted average)

Commercial loans

$ 14,028  

2 unchanged sentences

65% to 96% (67%)  

Commercial loans

Appraisals of collateral value

1 unchanged sentence

-10% to +13% (+3%)

Commercial real estate

Commercial real estate loans

17,264  

2 unchanged sentences

-20% to +0% (-15%)

Residential real estate

Residential real estate loans

Appraisals of collateral value

5 unchanged sentences

Fair Value Measurements and Fair Value of Financial Instruments – 

As of September 30, 2022 the fair value measurements presented are consistent with Topic 820, Fair Value Measurement , in which fair value represents exit price.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2022 and December 31, 2021 : 

As of March 31, 2023 the fair value measurements presented are consistent with Topic 820, Fair Value Measurement , in which fair value represents exit price.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2023 and December 31, 2022 : 

Fair Value Measurements

4 unchanged sentences

(dollars in thousands)

September 30, 2022

March 31, 2023

Financial assets:

15 unchanged sentences

7,749,886  

Derivatives - interest rate contracts

47,620  

41 unchanged sentences

7,723,378  

Derivatives - interest rate contracts

56,797  

Accrued interest receivable

29 unchanged sentences

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.

8 unchanged sentences

Details about Accumulated Other Comprehensive Income Components

Amounts Reclassified from Accumulated Other Comprehensive Income  

Affected Line item in the Consolidated Statements of Income

Three Months Ended September 30,

Nine Months Ended September 30,

Sale of investment securities available-for-sale

Net gains on sale of securities available-for-sale

( 48 ) Income tax expense

Net interest expense on swaps

$ 1,178  

$ ( 328 )  

$ ( 1,543 ) Borrowings

Three Months Ended March 31,

Interest income (expense) on cash flow hedges

$ 4,267  

$ ( 525 ) Borrowings and brokered certificate of deposits expense

( 1,284 )  

4 unchanged sentences

$ ( 74 )  

$ ( 75 )  

$ ( 49 )  

$ ( 16 ) Other components of net periodic pension expense

2 unchanged sentences

$ ( 12 )  

$ ( 35 )  

$ ( 162 )  

Total reclassification

5 unchanged sentences

Comprehensive (Loss) Income –

(continued)  

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

September 30, 2022

Accumulated other comprehensive loss as of March 31, 2023 and December 31, 2022 consisted of the following:

March 31, 2023

December 31, 2022

4 unchanged sentences

26,328  

32,360  

Defined benefit pension and post-retirement plans, net of tax

3 unchanged sentences

The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017 .

The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of September 30, 2022 .

The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of March 31, 2023 .

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 September 30, 2022  were approximately 

Shares available for grant and issuance under the Plan as of March 31, 2023  were approximately 

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

Restricted stock, options and restricted stock units typically have a three -year vesting period starting one year after the date of grant with one - third vesting each year.

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 and restricted stock units granted to new employees and board members may be granted with shorter vesting periods.

Restricted stock and deferred stock units granted to new employees and board members may be granted with shorter vesting periods.

Grants of performance units typically have a cliff vesting after three years or upon a change of control.

1 unchanged sentence

Any forfeitures would result in previously recognized expense being reversed.

Restricted stock grants have the same dividend and voting rights as common stock, while options, performance units and restricted stock units do not.

Restricted stock grants 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.

1 unchanged sentence

Forfeiture rates are not estimated but are recorded as incurred.

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

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

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

Stock-based compensation expense was $ 1.1  million for both the three months ended March 31, 2023 and March 31, 2022.

 Activity under the Company’s options for the three months ended March 31, 2023 was as follows:

Number of Stock Options  

5 unchanged sentences

( 6,473 )  

( 15,086 )  

Forfeited/cancelled/expired

Outstanding as of September 30, 2022

Outstanding as of March 31, 2023

$ 7,592  

Exercisable as of September 30, 2022

Exercisable as of March 31, 2023

$ 14.24  

The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on September 30, 2022 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2022 .

$ 7,592  

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 March 31, 2023 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 March 31, 2023 .

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

4 unchanged sentences

(continued)  

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

Activity under the Company’s restricted stock for the three months ended March 31, 2023 was as follows:

Nonvested Shares  

7 unchanged sentences

( 1,415 )  

Nonvested as of September 30, 2022

Nonvested as of March 31, 2023

110,688  

$ 22.09  

As of September 30, 2022 , there was approximately $ 1.3  million of total unrecognized compensation cost related to nonvested restricted stock granted.

As of March 31, 2023 , there was approximately $ 1.4  million of total unrecognized compensation cost related to nonvested restricted stock granted.

The cost is expected to be recognized over a weighted average period of 1.6  years.

9 unchanged sentences

( 116,192 )  

Unearned as of September 30, 2022

Unearned as of March 31, 2023

164,231  

1 unchanged sentence

$ 23.06  

As of September 30, 2022 , the specific number of shares related to performance units that were expected to vest was 195,264 , determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period.

As of March 31, 2023 , the specific number of shares related to performance units that were expected to vest was 164,231 , 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 September 30, 2022 , the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 221,541 .

During the nine months ended September 30, 2022 , 49,604  shares vested.

As of March 31, 2023 , the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 233,087 .

During the three months ended March 31, 2023 , 116,192  shares vested.

A total of 63,839  shares were netted from the vested shares to satisfy employee tax obligations.

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

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

A summary of the status of unearned restricted stock units and the changes in restricted stock units during the period is presented in the table below:

The net shares issued from vesting of performance units during the three months ended March 31, 2023 

52,353  shares.

As of March 31, 2023 , compensation cost of approximately $ 2.4  million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 2.3  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:

Units (expected)  

6 unchanged sentences

( 70,669 )  

Unearned as of September 30, 2022

Unearned as of March 31, 2023

196,223  

$ 21.88  

A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient.

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

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 three months ended March 31, 2023 , 70,669  shares vested.

A total of 38,601  shares were netted from the vested shares to satisfy employee tax obligations.

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

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

The net shares issued from vesting of deferred stock units during the three months ended March 31, 2023 were 32,068  shares.

As of March 31, 2023 , compensation cost of approximately $ 3.1  million related to non-vested deferred stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.8  years.

CONNECTONE BANCORP, INC.

6 unchanged sentences

Affected Line Item in the Consolidated

September 30,

Statements of Income

10 unchanged sentences

$ ( 143 )  

Nine Months Ended

Affected Line Item in the Consolidated

September 30,

Statements of Income

(dollars in thousands)

Interest cost

Other components of net periodic pension expense

Expected return on plan assets

( 711 )  

( 639 ) Other components of net periodic pension expense

Net amortization

Other components of net periodic pension expense

Total periodic pension income

$ ( 429 )  

$ ( 201 )  

Contributions

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

The Company did not contribute to the Pension Trust during the three months ended March 31, 2023 .

The Company does not plan on contributing amounts to the Pension Trust for the remainder of 2023.

3 unchanged sentences

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

September 30, 2022

March 31, 2023

December 31, 2022

6 unchanged sentences

1 year through less than 2 years

50,000  

2 years through less than 3 years

2 unchanged sentences

3 years through less than 4 years

2.23 %  

25,000  

4 years through 5 years

After 5 years

2.91 %  

FHLB borrowings - gross

17 unchanged sentences

All FHLB advances bear fixed rates.

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

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

The advances as of March 31, 2023 were primarily collateralized by approximately $ 2.1  billion of commercial mortgage loans and securities, net of required over collateralization amounts, under a blanket lien arrangement.

As of March 31, 2023 the Company had remaining borrowing capacity of approximately $ 0.7  billion at FHLB. As of April 2023, the Company increased its collateral for advances to $ 2.9 billion, net of required over collateralization amounts, and increased its remaining borrowing capacity of $ 1.5 billion at FHLB.

Subordinated Debentures

During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly owned subsidiary of the Parent Corporation issued $ 5.0  million of MMCapS capital securities to investors due on January 23, 2034 .

The trust loaned the proceeds of this offering to the Company and received in exchange $ 5.2  million of the Parent Corporation’s subordinated debentures.

The subordinated debentures are redeemable in whole or part.

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

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

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

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 March 

31, 2023  was 7.65 %.

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 March 31, 2023 and December 31, 2022 .

Issuance Date

5 unchanged sentences

Floating 3-month LIBOR + 285 Basis Points

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

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.

1 unchanged sentence

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

During January 2018, the Parent Corporation issued $ 75  million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain accredited investors.

The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included the Parent Corporation contributing $ 65  million of the net proceeds to the Bank in the form of debt and common equity.

The Notes are non-callable for five years, have a stated maturity of February 1, 2028  and bear interest at a fixed rate of 5.20 % per year, from and including January 17, 2018  to, but excluding February 1, 2023 .

From and including February 1, 2023  to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three -month LIBOR rate plus 284  basis points.

Preferred Stock

On August 19, 2021 , the Company completed an underwritten public offering of 115,000  shares, or $ 115.0  million in aggregate liquidation preference, of its depositary shares, each representing a 1/40th  interest in a share of the Company’s 5.25 % Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A, no par value, with a liquidation preference of $ 1,000  per share.

The net proceeds received from the issuance of preferred stock at the time of closing were $ 110.9  million.

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 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.

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of September 30, 2022 and December 31, 2021.

In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

35 unchanged sentences

Critical Accounting Policies and Estimates

The accounting and reporting policies followed by ConnectOne Bancorp, Inc.

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

In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the consolidated statements of income.

Actual results could differ significantly from those estimates.

The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations.

The Company has identified the determination of the allowance for credit losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available.

Additional information on these policies is provided below.

Allowance for Credit Losses and Related Provision :

The allowance for credit losses (“ACL”) represents management’s estimate of current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial asset(s).

Determining the amount of the ACL is considered a critical accounting estimate because it requires significant judgment and the use of estimates including reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

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

Management believes that the current ACL will be adequate to absorb credit losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio.

The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers’

ability to pay.

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

Loss estimates for specified problem loans are also detailed.

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

To the extent actual outcomes differ from management estimates, additional provisions for credit losses may be required that could materially adversely impact earnings in future periods.

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

Income Taxes :

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.

Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns.

Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of operations.  Note 10 of the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2021 includes additional discussion on the accounting for income taxes.

Impact of COVID-19

COVID-19 continues to impact the Company’s operations and financial results, as well as those of our customers.

In response to the COVID-19 pandemic, the Company continued to offer temporary relief to effected customers, deferring either their full loan payment, the principal component or the interest component of their loan payment for an initial period of time ranging from 30 to 120 days.

As provided for under the CARES act, these short-term deferrals are not considered troubled debt restructurings, provided that the modification is related to COVID-19, executed on a loan that was not more than 30 days past due as of December 31, 2019 or the date of the deferral, and executed between March 1, 2020 and January 1, 2022, or the date that is 60 days after the termination date of the national emergency declared by the president on March 13, 2020, under the National Emergencies Act related to the outbreak of COVID-19.

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company was an active participant in assisting its customers with applications for resources through the program.

PPP loans originated prior to June 5, 2020 have a two-year term, which may be extended to five years with the consent of the Company, and those originated on or after June 5, 2020 have a five-year term, and the loans bear interest at 1%, along with an origination fee payable from the SBA to the Company.

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

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

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

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

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

Our accounting policies are integral to understanding the results reported.

We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies.

As of March 31, 2023, there have been no material changes to our critical accounting policies as compared to the critical accounting policies disclosed in our most recent Annual Report on Form 10-K.

Reference is made to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Operating Results Overview

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

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

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

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

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

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

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

Net income available to common stockholders for the three months ended March 31, 2023 was $23.4 million compared to $29.9 million for the comparable three-month period ended March 31, 2022.

The Company’s diluted earnings per share were $0.59 for the three months ended March 31, 2023 as compared with diluted earnings per share of $0.75 for the comparable three-month period ended March 31, 2022. The $6.5 million decrease in net income available to common stockholders and $0.16 decrease in diluted earnings per share versus the three months ended March 31, 2022 were primarily due to a $3.3 million decrease in net interest income, a $0.3 million decrease in noninterest income and a $5.6 million increase in noninterest expenses, partially offset by a decrease in provision for credit losses of $0.5 million and a $2.3 million decrease in income tax expenses.

Net Interest Income and Margin

Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets.

Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid on deposits and borrowings, which support these assets.

Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (including interest earned on tax-free loans and on obligations of state and local political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable assets.

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

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

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

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

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

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

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

Fully taxable equivalent net interest income for the three months ended March 31, 2023 decreased by $3.0 million, or 4.3%, from the comparable three-month period ended March 31, 2022.

The decrease from the three months ended March 31, 2022 resulted primarily from a 71 basis-point decrease of the net interest margin from 3.71% to 3.00%, partially offset by an increase in interest-earning assets of $1.4 billion.

The contraction of the net interest margin for the three months ended March 31, 2023 when compared to the three months ended March 31, 2022 was primarily attributable to a 222 basis-point increase in the cost of interest-bearing liabilities, partially offset by 102 basis-point increase in the yield on average interest-earning assets.

The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three months ended March 31, 2023 and 2022, the Company’s average assets, liabilities and stockholders’

The Company’s net interest income, net interest spread and net interest margin are also reflected.

Average Statements of Condition with Interest and Average Rates

Three Months Ended September 30,

(dollars in thousands)

Interest-earning assets:

Securities (1) (2)

Total loans (2) (3) (4)

Federal funds sold and interest-bearing with banks

Restricted investment in bank stocks

Total interest-earning assets

Noninterest-earning assets:

Allowance for credit losses

Other noninterest-earning assets

Interest-bearing liabilities:

Interest-bearing deposits:

Time deposits

Other interest-bearing deposits

Total interest-bearing deposits

Subordinated debentures

Finance lease

Total interest-bearing liabilities

Demand deposits

Other liabilities

Total noninterest-bearing liabilities

Stockholders’

Total liabilities and stockholders’

Net interest income (tax-equivalent basis)

Net interest spread (5)

Net interest margin (6)

Tax-equivalent adjustment

Net interest income

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

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

Includes loan fee income and accretion of purchase accounting adjustments.

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

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

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

Rates are annualized.

Nine Months Ended September 30,

Three Months Ended March 31,

(dollars in thousands)

27 unchanged sentences

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

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

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

Includes loan fee income and accretion of purchase accounting adjustments.

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

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

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

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

1 unchanged sentence

Noninterest Income

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

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

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

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

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

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

Noninterest income totaled $2.8 million for the three months ended March 31, 2023, compared with $3.1 million for the comparable three-month period ended March 31, 2022. Included in noninterest income for the three months ended March 31, 2023 and March 31, 2022 were net losses on equity securities of $0.2 million and $0.6 million, respectively. Excluding net losses on equity securities, adjusted noninterest income was $3.0 million and $3.7 million for the three months ended March 31, 2023 and March 31, 2022, respectively. The $0.7 million decrease in adjusted noninterest income for the three months ended March 31, 2023 versus the three months ended March 31, 2022 was primarily due to decreases in net gains on sale of loans held-for-sale of $0.7 million and deposit, loan and other income of $0.3 million, partially offset by an increase in bank owned life insurance ("BOLI") income of $0.3 million.

Noninterest Expenses

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

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

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

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

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

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

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

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

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

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

Noninterest expenses totaled $34.9 million for the three months ended March 31, 2023, compared with $29.2 million for the three months ended March 31, 2022.The increase in noninterest expenses of $5.6 million from the three months ended March 31, 2022 was primarily attributable to increases in salaries and employee benefits of $3.5 million, other expenses of $0.8 million, occupancy and equipment of $0.8 million, professional and consulting of $0.4 million, FDIC insurance of $0.3 million, information technology and communications of $0.2 million, marketing and advertising of $0.2 million and amortizations of core deposit intangible of $0.1 million partially offset by a decrease in acquisition expenses related to BoeFly of $0.7 million. The increase in salaries and employee benefits was attributable to increased staff in both the revenue and back-office of the Bank and seasonal increases in payroll taxes.

Income tax expense was $9.1 million for the three months ended March 31, 2023, compared to $11.4 million for the three months ended March 31, 2022. The decrease in income tax expense was the result of lower income before taxes.

The effective tax rate for the three months ended March 31, 2023 and March 31, 2022 was 26.7% and 26.6%, respectively.  

Financial Condition

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

September 30, 2022

March 31, 2023

December 31, 2022

1 unchanged sentence

(dollars in thousands)

Commercial (1)

Commercial real estate

1 unchanged sentence

Residential real estate

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

As of March 31, 2023, gross loans totaled $8.1 billion, an increase of $32.0  million or 0.4%, as compared to December 31, 2022.

Net loan growth was attributable to organic loan originations.

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

Allowance for Credit Losses and Related Provision

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

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

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

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

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

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

There were $0.4 million 

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

The ACL as a percentage of loans receivable amounted to 1.16% as of September 30, 2022 compared to 1.15% as of December 31, 2021.

Excluding the impact of PPP loans in the calculation of the ACL as a percentage of loans receivable, the September 30, 2022 ratio was at 1.16%, compared to 1.17% as of December 31, 2021.

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

The level of the allowance for the respective periods of 2022 and 2021 reflects the credit quality within the loan portfolio, loan growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors.

In management’s view, the level of the ACL as of September 30, 2022 is adequate to cover credit losses inherent in the loan portfolio.

As of March 31, 2023, the Company’s allowance for credit losses for loans was $87.0 million, a decrease of $3.5 million from $90.5 million as of December 31, 2022.

The decrease was primarily attributable to $4.5 million in net charge-offs, offset by a $1.0 million provision for credit losses.

The provision for credit losses was $1.0 million for the three months ended March 31, 2023 and $1.5 million for the three months ended March 31, 2022. 

The provision for credit losses during the three months ended March 31, 2023 reflects modest loan growth and an increase in qualitative factors.

There were $4.5 million net charge-offs for the three months ended March 31, 2023, compared with $0.2 million in net charge-offs for the three months ended March 31, 2022. 

The net charge-offs for the three months ended March 31, 2023 reflect the resolution of certain nonaccrual taxi loans and one owner-occupied commercial real estate loan that were previously reserved for and, therefore, required no additional loan loss provisioning.

The ACL as a percentage of loans receivable amounted to 1.07% as of March 31, 2023 and 1.12% as of 

December 31, 2022. 

The level of the allowance for the respective periods of 2023 and 2022 reflects the credit quality within the loan portfolio, loan growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors.

In management’s view, the level of the ACL as of March 31, 2023 is adequate to cover credit losses inherent in the loan portfolio.

Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement”

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

Changes in the ACL are presented in the following table for the periods indicated.

Changes in the ACL on loans are presented in the following table for the periods indicated.

Three Months Ended

September 30,

(dollars in thousands)

4 unchanged sentences

Total charge-offs

Commercial real estate

Residential real estate

Total recoveries

5 unchanged sentences

ACL as a percentage of loans receivable

Nine Months Ended

September 30,

(dollars in thousands)

Average loans receivable

Analysis of the ACL:

Balance - beginning of quarter

CECL Day 1 Adjustment

Balance –

beginning of quarter (as adjusted)

Commercial real estate

Residential real estate

Total charge-offs

Commercial real estate

Residential real estate

Total recoveries

Net charge-offs

Provision for (reversal of) credit losses - loans

Balance - end of period

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

Loans receivable

ACL as a percentage of loans receivable

Asset Quality

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix.

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through a review processes that includes analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix.

The Company strives to identify loans experiencing difficulty early on, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for credit losses at all times.

5 unchanged sentences

Nonperforming assets include nonaccrual loans and other real estate owned.

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

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

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

Performing troubled debt restructured loans represent loans to borrowers experiencing financial difficulties on which a concession was granted, such as a reduction in interest rate below the current market rate for new debt with similar risks or modified repayment terms, and are performing under the restructured terms.

The following table sets forth, as of the dates indicated, the amount of the Company’s nonaccrual loans, other real estate owned (“OREO”), performing troubled debt restructurings (“TDRs”) and loans past due 90 days or greater and still accruing:

September 30, 2022

The following table sets forth, as of the dates indicated, the amount of the Company’s nonperforming assets:

March 31, 2023

December 31, 2022

2 unchanged sentences

Total nonperforming assets (1)

Performing TDRs

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

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

Nonperforming assets are defined as nonaccrual loans and OREO.

1 unchanged sentence

Nonperforming assets to total assets

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

Investment Securities

As of September 30, 2022, the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations of U.S.

As of March 31, 2023, the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations of U.S.

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

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

As of September 30, 2022, net unrealized losses on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included in stockholders’

equity, net of tax, amounted to $67.7 million as compared with net unrealized losses of $0.5 million as of December 31, 2021.

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

For the three-months ended March 31, 2023, average securities decreased $11.0 million to approximately $732.9 million, or 8.0% of average total interest-earning assets, from approximately $743.9 million, or 8.3% of average interest-earning assets, at December 31, 2022.

As of March 31, 2023, net unrealized losses on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included in stockholders’

equity, net of tax, amounted to $57.3 million as compared with net unrealized losses of $61.8 million as of December 31, 2022.

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

Unrealized losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely that we will not be required to sell the securities prior to their anticipated recovery.  The decline in fair value is largely due to changes in interest rates and other market conditions.

This also resulted in a $27.2 million increase in deferred tax assets, attributable to the decline in fair value on securities available-for-sale since December 31, 2021. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. The Company did not record an allowance for credit losses for available-for-sale as of September 30, 2022.

The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. The Company did not record an allowance for credit losses for available-for-sale as of March 31, 2023.

Interest Rate Sensitivity Analysis

5 unchanged sentences

The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.

The Company utilizes a number of strategies to manage interest rate risk including, but not limited to:

(i) balancing the types and structures of interest-earning assets and interest-bearing liabilities by diversifying mix, coupons, maturities and/or repricing characteristics (ii) reducing the overall interest rate sensitivity of liabilities by emphasizing core and/or longer-term deposits;

utilizing FHLB advances and wholesale deposits for our interest rate risk profile, (iii) managing the investment portfolio for liquidity and interest rate risk profile, and (iv) entering into interest rate swap and cap agreements.

We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates.

As of September 30, 2022 and December 31, 2021, the results of the models were within guidelines prescribed by our Board of Directors.

As of March 31, 2023 and December 31, 2022, the results of the models were within guidelines prescribed by our Board of Directors.

If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and the Bank’s management.

The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates.

Based on our model, which was run as of September 30, 2022, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 0.28%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 1.51%. As of December 31, 2021, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.35%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.64%.

Based on our model, which was run as of September 30, 2022, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 1.87%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 3.27%.

As of December 31, 2021, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 9.77%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 10.41%.

Based on our model, which was run as of March 31, 2023, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 0.63%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.79%.

As of December 31, 2022, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 2.22%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.01%.

Based on our model, which was run as of March 31, 2023, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 3.11%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 3.01%.

As of December 31, 2022, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 2.66%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 3.99%.

An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points.

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

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

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

Our EVE as of March 31, 2023, would decrease by 12.16% with an instantaneous rate shock of up 200 basis points, and decline by 0.49% with an instantaneous rate shock of down 100 basis points. 

Our EVE as of December 31, 2022, would decrease by 10.51% with an instantaneous rate shock of up 200 basis points, and decrease by 1.13% with an instantaneous rate shock of down 100 basis points.

The change in interest rate sensitivity was impacted by an increases in our cash on hand position and in short and intermediate-term fixed rate funding, partially offset by the deposit mix shift into certificates of deposit, from both noninterest-bearing and interest-bearing nonmaturity deposits.

The following table illustrates the most recent results for EVE and one-year NII sensitivity as of March 31, 2023.

Interest Rates

4 unchanged sentences

(basis points)

Certain model limitations are inherent in the methodology used in the EVE and net interest income measurements.

The models require the making of certain assumptions which may tend to oversimplify the way actual yields and costs respond to changes in market interest rates.

The models assume that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured, thus they do not consider the Company’s strategic plans, or any other steps it may take to respond to changes in rates over the forecasted period of time.

Additionally, the models assume immediate changes in interest rates, based on yield curves as of a point-in-time, which are reflected in a parallel, instantaneous and uniform manner across all yield curves, when in reality changes may rarely be of this nature.

The models also utilize data derived from historical performance and as interest rates change the actual performance of loan prepayments, rate sensitivities, and average life assumptions may deviate from assumptions utilized in the models and can impact the results.

Accordingly, although the above measurements provide an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates.

Given the unique nature of the post-pandemic interest rate environment and the speed with which interest rates have been changing, the projections noted above on the Company’s EVE and net interest income and can be expected to differ from actual results.

Estimates of Fair Value

16 unchanged sentences

While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

As of September 30, 2022, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’

As of March 31, 2023, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’

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

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

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

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

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

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

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

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

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

The increase was primarily due to increases in noninterest bearing demand deposits, interest-bearing and NOW and time deposits, partially offset by a decrease in savings deposits.

The following table sets forth the composition of our deposit base by the periods indicated.

September 30, 2022

As of March 31, 2023, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $827.7 million, which represented 8.1% of total assets and 9.6% of total deposits and borrowings, compared to $760.0 million as of December 31, 2022, which represented 7.9% of total assets and 9.3% of total deposits and borrowings.

The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of March 31, 2023, had the ability to borrow $2.1 billion. The Bank also has a credit facility established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral of $73.7 million.

In addition, as of March 31, 2023, the Bank had in place borrowing capacity of $410 million through correspondent banks and other unsecured borrowing lines.

As of March 31, 2023, the Bank had aggregate available and unused credit of approximately $1.2 billion, which represents the aforementioned facilities totaling $2.6 billion net of $1.4 billion in outstanding borrowings and letters of credit.

As of March 31, 2023, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.

During April 2023 the Bank increased its availability at both the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York, by a total of approximately $2.0 billion, primarily through the additional pledging of previously unencumbered and unpledged loans.

The Bank’s access to the Federal Reserve Bank of New York, for both discount window and BTF access, was increased to $1.2 billion, from $0.1 billion as of March 31, 2023, primarily reflecting loans now pledged with unpaid principal balances of approximately $1.4 billion.

The Bank’s access to the Federal Home Loan Bank was increased to $2.9 billion, from $2.1 billion as of March 31, 2023, primarily reflecting increased loans pledged with unpaid principal balances of approximately $1.2 billion.

Cash and cash equivalents totaled $562.4 million as of March 31, 2023, increasing by $294.1 million from $268.3 million as of December 31, 2022.  Operating activities provided $16.4 million in net cash.  Investing activities used $26.6 million in net cash, primarily reflecting an increase in loans and investment securities.

 Financing activities provided $304.3 million in net cash, primarily reflecting an increase in deposits of $396.7 million and partially offset by repayment of subordinated debt of $75.0 million.

Total deposits increased by $396.6 million, or 5.4%, to $7.8 billion as of March 31, 2023 from December 31, 2022.

The increase was primarily due to increases in time deposits and interest-bearing and NOW deposits partially offset by a decrease in demand, noninterest-bearing deposits and savings deposits. The following table sets forth the composition of our deposit base by the periods indicated.

March 31, 2023

December 31, 2022

4 unchanged sentences

Subordinated Debentures

During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034.

During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034.

The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures.

The subordinated debentures are redeemable in whole or part prior to maturity.

The subordinated debentures are redeemable in whole or part.

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

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

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

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.

The rate as of March 31, 2023 was 7.65%.

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

The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding, September 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on September 15 and December 15 of each year, commencing December 15, 2020.

From and including September 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025.

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

During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain accredited investors.

The net proceeds from the sale of the 2018 Notes were used for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity in the first quarter of 2018.

The 2018 Notes are non-callable for five years, have a stated maturity of February 1, 2028 and bear interest at a fixed rate of 5.20% per year, from and including January 17, 2018 to, but excluding February 1, 2023.

From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points.

The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity.

The Notes were non-callable for five years, had a stated maturity of February 1, 2028 and bore interest at a rate that reset quarterly to then current three-month LIBOR rate plus 284 basis points. 

The 2018 Notes were redeemed in full on February 1, 2023.

Stockholders ’

The Company’s stockholders’

equity was $1.1 billion as of September 30, 2022, an increase of $24.1 million from December 31, 2021.

equity was $1.2 billion as of March 31, 2023, an increase of $12.2 million from December 31, 2022.

The increase in stockholders’

equity was primarily attributable to retained earnings, in addition to an increase in additional paid-in capital, partially offset by a decrease in accumulated other comprehensive income, reflecting the after-tax decline in the fair value of investment securities net of unrealized hedge gains recorded in other assets, and an increase in treasury stock.

As of September 30, 2022, the Company’s tangible common equity ratio and tangible book value per share were 8.87% and $20.93, respectively.

As of March 31, 2023, the Company’s tangible common equity ratio and tangible book value per share were 8.87% and $22.07, respectively.

As of December 31, 2022, the tangible common equity ratio and tangible book value per share were 9.04% and $21.71, respectively.

Total goodwill and other intangible assets were approximately $216.1 million and $217.4 million, as of September 30, 2022 and December 31, 2021, respectively.

Total goodwill and other intangible assets were approximately $215.3 million and $215.7 million, as of March 31, 2023 and December 31, 2022, respectively.

The following table shows the reconciliation of common equity to tangible common equity and the tangible common equity ratio.

September 30, 2022

March 31, 2023

December 31, 2022

16 unchanged sentences

The Company and the Bank are subject to regulatory guidelines establishing minimum capital standards that involve quantitative measures of assets, and certain off-balance sheet items, as risk-adjusted assets under regulatory accounting practices.

The following is a summary of regulatory capital amounts and ratios as of September 30, 2022 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution (for the Bank).

The following is a summary of regulatory capital amounts and ratios as of March 31, 2023 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution (for the Bank).

ConnectOne Bancorp, Inc.

1 unchanged sentence

To Be Well-Capitalized Under Prompt Corrective Action Provisions

As of September 30, 2022

As of March 31, 2023

(dollars in thousands)

7 unchanged sentences

To Be Well-Capitalized Under Prompt Corrective Action Provisions

As of September 30, 2022

As of March 31, 2023

(dollars in thousands)

3 unchanged sentences

Total risk-based capital

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

The lowest ratio at the Company is the Tier I Risk Based Ratio which was 3.08% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 2.50% above the minimum buffer ratio.

As of March 31, 2023, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them.

The lowest ratio at the Company is the Total Risk Based Capital Ratio which was 3.34% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 2.77% above the minimum buffer ratio.

Qualitative and Quantitative Disclosures about Market Risks

3 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements