ConnectOne Bancorp, Inc. 10-K

Item 8. Financial Statements and Supplementary Data All Financial Statements: The following financial statements are filed as part of this report under Item 8 - “Financial Statements and Supplementary Data.” Page Report of Independent Registered Public Accounting Firm 68 Consolidated Statements of Financial Condition 71 Consolidated Statements of Income 72 Consolidated Statements of Comprehensive Income 73 Consolidated Statements of Changes in Stockholders’ Equity 74 Consolidated Statements of Cash Flows 75 Notes to Consolidated Financial Statements 76 -67- Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 173 ) Shareholders and the Board of Directors of ConnectOne Bancorp, Inc. and Subsidiaries Englewood Cliffs, New Jersey Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statements of financial condition of ConnectOne Bancorp, Inc. and Subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. -68- Table of Contents Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses – Qualitative Loss Factors on Commercial and Commercial Real Estate Loans As described in Note 1a to the consolidated financial statements, the Company accounts for credit losses under ASC 326, Financial Instruments – Credit Losses. ASC 326 requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost at the reporting date. As of December 31, 2023, the allowance for credit losses (“ACL”) on loans was $81,974,000. Management employs a process and methodology to estimate the ACL on pooled loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors includes pooling loans into portfolio segments for loans that share similar characteristics. Pooled loan portfolio segments include commercial, commercial real estate, commercial construction, residential real estate, and consumer loans. For pooled loans, the Company utilizes a discounted cash flow (“DCF”) methodology to estimate credit losses over the expected life of the loan. The DCF methodology combines probability of default, the loss given default, and prepayment speed assumptions to estimate a reserve for each loan. The quantitative loss rates are adjusted by macroeconomic scenarios and reverts, on a straight-line basis, to average historical losses after the forecasted periods. The sum of all the loan level reserves is aggregated for each portfolio segment and a quantitative loss factor is derived. The quantitative factors are also supplemented by certain qualitative loss factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. Qualitative loss factors, for each loan segment within the portfolio, incorporate consideration for a minimum to maximum range for qualitative loss factor derived from either the Company’s historical loss experience of peer group historical loss experience. Changes in these assumptions could have a material effect on the Company’s financial results. We identified auditing the qualitative component of the ACL on pooled loans in the commercial and commercial real estate loan segments as a critical audit matter because the methodology to determine the estimate of credit losses uses subjective judgments by management and is subject to material variability. -69- Table of Contents Performing audit procedures to evaluate the qualitative loss factors on the commercial and commercial real estate loan segments involved a high degree of auditor judgment and required significant effort, including the need to involve more experienced audit personnel including the use of internal specialists. The primary procedures we performed to address this critical audit matter included: ● Testing the effective of controls over the evaluation of the ACL on pooled loans, including controls addressing: o Methodology and accounting policies. o Data inputs, judgments and calculations used to determine the qualitative loss factors. o Information technology general controls and application controls. o Management’s evaluation of qualitative loss factors. ● Substantively, testing management’s process, including evaluating their judgments and assumptions, for developing the ACL on pooled loans, which included: o Evaluating the appropriateness of the Company’s accounting policies, judgments and elections. o Testing the mathematical accuracy of the calculation. o Testing the completeness and accuracy of data used in the calculation including utilizing internal specialists to assist in testing the mathematical accuracy of the underlying peer data used to develop the maximum loss factors. o Evaluating the reasonableness of management’s judgments related to qualitative loss factors to determine if they are calculated to conform with management’s policies and were consistently applied period over period. /s/ Crowe LLP We have served as the Company's auditor since 2014. Livingston, New Jersey February 23, 2024 -70- Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2023 2022 (in thousands, except share data) ASSETS Cash and due from banks $ 61,421 $ 61,629 Interest-bearing deposits with banks 181,293 206,686 Cash and cash equivalents 242,714 268,315 Investment securities 617,162 634,884 Equity securities 18,564 15,811 Loans held-for-sale - 13,772 Loans receivable 8,345,145 8,099,689 Less: Allowance for credit losses - loans 81,974 90,513 Net loans receivable 8,263,171 8,009,176 Investment in restricted stock, at cost 51,457 46,604 Bank premises and equipment, net 30,779 27,800 Accrued interest receivable 49,108 46,062 Bank owned life insurance 237,644 231,328 Right of use operating lease assets 12,007 10,179 Other real estate owned - 264 Goodwill 208,372 208,372 Core deposit intangibles 5,874 7,312 Other assets 118,751 125,069 Total assets $ 9,855,603 $ 9,644,948 LIABILITIES Deposits: Noninterest-bearing $ 1,259,364 $ 1,501,614 Interest-bearing 6,276,838 5,855,008 Total deposits 7,536,202 7,356,622 Borrowings 933,579 857,622 Subordinated debentures, net of debt issuance costs 79,439 153,255 Operating lease liabilities 13,171 11,397 Other liabilities 76,592 87,301 Total liabilities 8,638,983 8,466,197 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY Preferred Stock, no par value; $ 1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of December 31, 2023 and as of December 31, 2022; outstanding 115,000 shares as of December 31, 2023 and as of December 31, 2022 110,927 110,927 Common stock, no par value: Authorized 100,000,000 shares; issued 42,122,948 shares as of December 31, 2023 and 41,942,149 shares as of December 31, 2022; outstanding 38,519,770 shares as of December 31, 2023 and 39,243,123 as of December 31, 2022 586,946 586,946 Additional paid-in capital 33,182 30,126 Retained earnings 590,970 535,915 Treasury stock, at cost 3,603,178 shares as of December 31, 2023 and 2,699,026 shares as of December 31, 2022 ( 70,296 ) ( 52,799 ) Accumulated other comprehensive loss ( 35,109 ) ( 32,364 ) Total stockholders’ equity 1,216,620 1,178,751 Total liabilities and stockholders’ equity $ 9,855,603 $ 9,644,948 See the accompanying notes to the consolidated financial statements. -71- Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2023 2022 2021 (dollars in thousands, except for per share data) Interest income: Interest and fees on loans $ 453,992 $ 352,993 $ 293,546 Interest and dividends on investment securities: Taxable 16,666 12,712 4,413 Tax-exempt 4,641 3,893 2,403 Dividends 3,662 1,655 971 Interest on federal funds sold and other short-term investments 11,104 2,493 405 Total interest income 490,065 373,746 301,738 Interest expense: Deposits 206,176 50,561 24,768 Borrowings 28,783 21,066 14,092 Total interest expense 234,959 71,627 38,860 Net interest income 255,106 302,119 262,878 Provision for (reversal of) credit losses 8,200 17,750 ( 5,500 ) Net interest income after provision for credit losses 246,906 284,369 268,378 Noninterest income: Deposit, loan and other income 6,098 7,472 6,617 Income on bank owned life insurance 6,316 5,597 4,771 Net gains on sale of loans held-for-sale 1,704 1,695 3,807 Gain on sale of branches - - 674 Net losses on equity securities ( 117 ) ( 1,521 ) ( 373 ) Net gains on sale/redemption of investment securities - - 195 Total noninterest income 14,001 13,243 15,691 Noninterest expense: Salaries and employee benefits 88,325 81,289 64,341 Occupancy and equipment 10,884 9,865 11,638 FDIC insurance 8,365 2,881 2,665 Professional and consulting 7,547 8,053 8,286 Marketing and advertising 1,965 1,692 1,318 Information technology and communications 14,340 11,108 11,267 Amortization of core deposit intangible 1,438 1,685 1,981 Net periodic pension income ( 102 ) ( 572 ) ( 269 ) Increase in value of acquisition price - 1,516 - Other expenses 11,187 8,871 7,784 Total noninterest expenses 143,949 126,388 109,011 Income before income tax expense 116,958 171,224 175,058 Income tax expense 29,955 46,013 44,705 Net income 87,003 125,211 130,353 Preferred dividends 6,036 6,037 1,717 Net income available to common stockholders $ 80,967 $ 119,174 $ 128,636 Earnings per common share: Basic $ 2.08 $ 3.03 $ 3.24 Diluted 2.07 3.01 3.22 See the accompanying notes to the consolidated financial statements. -72- Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2023 2022 2021 (dollars in thousands) Net income $ 87,003 $ 125,211 $ 130,353 Other comprehensive income: Unrealized gains and losses: Unrealized holding gains (losses) on available-for-sale securities arising during the period 5,715 ( 86,240 ) ( 11,109 ) Tax effect ( 1,775 ) 24,949 2,914 Net of tax 3,940 ( 61,291 ) ( 8,195 ) Reclassification adjustment for realized gains included in net income - - ( 195 ) Tax effect - - 48 Net of tax - - ( 147 ) Unrealized gains on cash flow hedges 9,431 46,181 3,593 Tax effect ( 2,837 ) ( 13,960 ) ( 1,012 ) Net of tax 6,594 32,221 2,581 Reclassification adjustment for (gains) losses arising during this period ( 20,230 ) ( 3,243 ) 1,873 Tax effect 6,086 976 ( 528 ) Net of tax ( 14,144 ) ( 2,267 ) 1,345 Unrealized pension plan gains: Unrealized pension plan gains before reclassifications 941 343 - Tax effect ( 283 ) ( 12 ) - Net of tax 658 331 - Reclassification adjustment for realized losses included in net income 296 66 299 Tax effect ( 89 ) ( 20 ) ( 84 ) Net of tax 207 46 215 Total other comprehensive loss ( 2,745 ) ( 30,960 ) ( 4,201 ) Total comprehensive income $ 84,258 $ 94,251 $ 126,152 See the accompanying notes to the consolidated financial statements. -73- Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY Accumulated Other Total Additional Paid Retained Comprehensive Stockholders’ Preferred Stock Common Stock In Capital Earnings Treasury Stock Income (Loss) Equity (in thousands, except share and per share data) Balance as of December 31, 2020 $ - $ 586,946 $ 23,887 $ 331,951 $ ( 30,271 ) $ 2,797 $ 915,310 Cumulative effect of change in accounting principle (see note 1b. “Authoritative Accounting Guidance Presentation”), net of tax - - - ( 2,925 ) - - ( 2,925 ) Balance as of January 1, 2021, as adjusted for changes in accounting principle - 586,946 23,887 329,026 ( 30,271 ) 2,797 912,385 Net income - - - 130,353 - - 130,353 Other comprehensive loss, net of tax - - - - - ( 4,201 ) ( 4,201 ) Cash dividends declared on preferred stock ($ 0.371875 per share) - - - ( 1,717 ) - - ( 1,717 ) Cash dividends declared on common stock ($ 0.48 per share) - - - ( 17,493 ) - - ( 17,493 ) Exercise of stock options ( 14,247 shares) - - 106 - - - 106 Restricted stock grants, net of forfeitures ( 44,836 shares) - - - - - - - Stock grants ( 4,981 shares) - - - - - - - Net shares issued in satisfaction of deferred stock units earned ( 14,711 shares) - - - - - - - Net shares issued in satisfaction of performance units earned ( 34,458 shares) - - - - - - - Share redemption for tax withholdings on performance units and deferred stock units earned - - ( 1,283 ) - - - ( 1,283 ) Repurchase of stock ( 330,541 shares) - - - - ( 9,401 ) - ( 9,401 ) Proceeds from preferred stock issuance, net of costs ( 115,000 shares) 110,927 - - - - - 110,927 Stock-based compensation expense - - 4,536 - - - 4,536 Balance as of December 31, 2021 $ 110,927 $ 586,946 $ 27,246 $ 440,169 $ ( 39,672 ) $ ( 1,404 ) $ 1,124,212 Net income - - - 125,211 - - 125,211 Other comprehensive loss, net of tax - - - - - ( 30,960 ) ( 30,960 ) Cash dividends declared on preferred stock ($ 1.3125 per share) - - - ( 6,037 ) - - ( 6,037 ) Cash dividends declared on common stock ($ 0.595 per share) - - - ( 23,428 ) - - ( 23,428 ) Exercise of stock options ( 15,086 shares) - - 124 - - - 124 Restricted stock grants, net of forfeitures ( 53,169 shares) - - - - - - - Stock grants ( 153 shares) - - - - - - - Net shares issued in satisfaction of deferred stock units earned ( 31,383 shares) - - - - - - - Net shares issued in satisfaction of performance units earned ( 22,350 shares) - - - - - - - Share redemption for tax withholdings on performance units and deferred stock units earned - - ( 2,133 ) - - - ( 2,133 ) Repurchase of stock ( 447,108 shares) - - - - ( 13,127 ) - ( 13,127 ) Stock-based compensation expense - - 4,889 - - - 4,889 Balance as of December 31, 2022 $ 110,927 $ 586,946 $ 30,126 $ 535,915 $ ( 52,799 ) $ ( 32,364 ) $ 1,178,751 Net income - - - 87,003 - - 87,003 Other comprehensive loss, net of tax - - - - - ( 2,745 ) ( 2,745 ) Cash dividends declared on preferred stock ($ 1.3125 per share) - - - ( 6,036 ) - - ( 6,036 ) Cash dividends declared on common stock ($ 0.665 per share) - - - ( 25,912 ) - - ( 25,912 ) Exercise of stock options ( 7,388 shares) - - 96 - - - 96 Restricted stock grants, net of forfeitures ( 84,057 shares) - - - - - - - Stock grants ( 995 shares) - - - - - - - Net shares issued in satisfaction of deferred stock units earned ( 36,006 shares) - - - - - - - Net shares issued in satisfaction of performance units earned ( 52,353 shares) - - - - - - - Share redemption for tax withholdings on performance units and deferred stock units earned - - ( 1,900 ) - - - ( 1,900 ) Repurchase of stock ( 904,152 shares, including 1% excise tax) - - - - ( 17,497 ) - ( 17,497 ) Stock-based compensation expense - - 4,860 - - - 4,860 Balance as of December 31, 2023 $ 110,927 $ 586,946 $ 33,182 $ 590,970 $ ( 70,296 ) $ ( 35,109 ) $ 1,216,620 See the accompanying notes to the consolidated financial statements. -74- Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS . Years Ended December 31, 2023 2022 2021 Cash flows from operating activities Net income $ 87,003 $ 125,211 $ 130,353 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 4,503 3,863 3,757 Provision for (reversal of) credit losses 8,200 17,750 ( 5,500 ) Amortization of intangibles 1,438 1,685 1,980 Net accretion of loans ( 1,904 ) ( 3,178 ) ( 5,350 ) Accretion on bank premises ( 49 ) ( 49 ) ( 73 ) Accretion on deposits ( 279 ) ( 777 ) ( 2,224 ) Amortization (accretion) on borrowings 21 40 ( 36 ) Net deferred income tax expense (benefit) 4,135 ( 403 ) 16 Stock-based compensation 4,860 4,889 4,536 Gains on sales/redemptions of investment securities, net - - ( 195 ) Change in fair value of equity securities, net 117 1,521 373 Gain on sale of loans held-for-sale, net ( 1,704 ) ( 1,695 ) ( 3,807 ) Gain on sale of branches - - ( 674 ) Net losses on disposition of other fixed assets - 22 65 Gain (loss) on sale of other real estate owned 22 6 ( 18 ) Loans originated for resale ( 26,153 ) ( 21,128 ) ( 51,669 ) Proceeds from sale of loans held-for-sale 36,645 28,341 72,233 Increase in cash surrender value of bank owned life insurance ( 6,316 ) ( 5,597 ) ( 4,771 ) Amortization of premiums and accretion of discounts on investments securities, net 1,030 2,155 5,966 Amortization of subordinated debt issuance costs 1,184 304 303 (Increase) decrease in accrued interest receivable ( 3,046 ) ( 11,910 ) 1,165 Net change in operating leases ( 54 ) ( 182 ) ( 769 ) (Increase) decrease in other assets ( 7,514 ) ( 12,413 ) 46,086 Increase (decrease) in other liabilities ( 9,248 ) 48,322 10,526 Net cash provided by operating activities 92,891 176,777 202,273 Cash flows from investing activities Investment securities available-for-sale: Purchases ( 42,143 ) ( 339,059 ) ( 349,500 ) Maturities, calls and principal repayments 64,550 150,287 285,873 Net (purchases)/redemptions of restricted investment in bank stocks ( 4,853 ) ( 18,778 ) ( 2,727 ) Purchases of equity securities ( 2,870 ) ( 3,538 ) ( 780 ) Loans held-for-sale payments 25 54 38 Net increase in loans ( 255,556 ) ( 1,292,938 ) ( 596,389 ) Cash flow hedge premium payment - ( 6,965 ) - Purchases of premises and equipment ( 7,433 ) ( 3,301 ) ( 2,783 ) Purchases of bank owned life insurance - ( 30,000 ) ( 25,000 ) Proceeds from disposition of fixed assets - 697 113 Proceeds from sale of branches - - 974 Proceeds from sale of other real estate owned 242 309 321 Net cash used in investing activities ( 248,038 ) ( 1,543,232 ) ( 689,860 ) Cash flows from financing activities Net increase in deposits 179,859 1,024,446 375,953 Repayment of subordinated debt ( 75,000 ) - ( 50,000 ) Advances of Federal Holme Loan Bank ("FHLB") borrowings 2,946,500 4,203,181 340,000 Repayments of FHLB borrowings ( 2,870,564 ) ( 3,813,792 ) ( 297,725 ) Cash dividends paid on preferred stock ( 6,036 ) ( 6,037 ) ( 1,717 ) Cash dividends paid on common stock ( 25,912 ) ( 23,428 ) ( 17,493 ) Proceeds from preferred stock offering - - 110,927 Purchase of treasury stock ( 17,497 ) ( 13,127 ) ( 9,401 ) Proceeds from exercise of stock options 96 124 106 Share redemption for tax withholdings on performance units and deferred stock units earned ( 1,900 ) ( 2,133 ) ( 1,283 ) Net cash provided by financing activities 129,546 1,369,234 449,367 Net change in cash and cash equivalents ( 25,601 ) 2,779 ( 38,220 ) Cash and cash equivalents at beginning of period 268,315 265,536 303,756 Cash and cash equivalents at end of period $ 242,714 $ 268,315 $ 265,536 Supplemental disclosures of cash flow information: Cash payments for: Interest paid $ 230,806 $ 67,850 $ 41,787 Income taxes paid 31,647 49,234 45,431 Supplemental disclosures of noncash investing activities: Transfer of loans to other real estate owned $ - $ 579 $ 304 Transfer of loans held-for-sale to loans held-for-investment 16,156 8,043 4,293 Transfer of loans held-for-investment to loans held-for-sale 11,197 27,137 16,628 See the accompanying notes to the consolidated financial statements. -75- Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies Nature of Operations ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Parent Corporation’s business currently consists of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”) and making certain limited investments. The Bank’s direct and indirect subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a Delaware investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), NJCB Spec- 1, LLC (a New Jersey limited liability company), Port Jervis Holdings, LLC (a New Jersey limited liability company), BONJ Special Properties, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey financial technology company). The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its 24 other banking offices. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’ business, real estate rental and consumer wages. Basis of Presentation and Principals of Consolidation The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. The consolidated financial statements of the Parent Corporation are prepared on an accrual basis and include the accounts of the Parent Corporation and the Company. All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements. Segments FASB ASC 28, “Segment Reporting,” requires companies to report certain information about operating segments. The Company is managed as one segment: a community bank. All decisions including but not limited to loan growth, deposit funding, interest rate risk, credit risk and pricing are determined after assessing the effect on the totality of the organization. For example, loan growth is dependent on the ability of the organization to fund this growth through deposits or other borrowings. As a result, the Company is managed as one operating segment. Use of Estimates In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates. - 76 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies (continued) Risks and Uncertainties Recent events impacting the financial services industry, including the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, have resulted in increased volatility and reduced valuations of equity and other securities of banks in the capital markets. In addition, the Federal Reserve, in order to combat inflation, has employed quantitative tightening in order to reduce the size of its balance sheet, resulting in increased competition and costs for bank deposits and an increased risk of an economic recession. These recent events have, and could continue to, increase competition for deposits and adversely impact the market price and volatility of the Company’s common stock. The United States economy is currently experiencing a level of price inflation not experienced since the late 1970’s and early 1980’s. It is therefore difficult to predict the response of consumers and businesses to this level of inflation, and its impact on the economy. In addition, in order to attempt to control and reduce the level of inflation, the Federal Reserve has embarked on a series of interest rate increases along with quantitative tightening to further constrict economic conditions. It is unclear whether the Federal Reserve’s efforts will be successful, and what impact they may have on the United States’ economy. It is possible that the combined effects of inflation and increases in market interest rates could cause the economy of the United States to enter a recession, which could negatively affect the businesses of our borrowers and their ability to repay their loans or need credit, which could negatively affect our results of operations. Cash and Cash Equivalents Cash and cash equivalents include cash, deposits with other financial institutions with maturities of less than 90 days, and federal funds sold. Net cash flows are reported for client loan and deposit transactions, interest-bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements. Investment Securities Effective January 1, 2021, the Company accounts for its investment securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320 - 10 - 05. Investments are classified into the following categories: ( 1 ) held-to-maturity securities, for which the Company has both the positive intent and ability to hold until maturity, which are reported at amortized cost; ( 2 ) trading securities, which are purchased and held principally for the purpose of selling in the near term and are reported at fair value with unrealized gains and losses included in earnings; and ( 3 ) available-for-sale securities, which do not meet the criteria of the other two categories and which management believes may be sold prior to maturity due to changes in interest rates, prepayment risk, liquidity or other factors, and are reported at fair value, with unrealized gains and losses, net of applicable income taxes, reported as a component of accumulated other comprehensive income, which is included in stockholders’ equity and excluded from earnings. Investment securities are adjusted for amortization of premiums and accretion of discounts as adjustments to interest income, which are recognized on a level yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Investment securities gains or losses are determined using the specific identification method. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in comprehensive income, net of tax. Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are generally amortized using the level-yield method without estimating prepayments, except for mortgage-backed securities, where prepayment rates are estimated. Premiums on callable investment securities are amortized to their earliest call date. Gains and losses on sales of securities are recorded on the trade date and determined using the specific identification method. - 77 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) For available-for-sale investment securities which are in an unrealized loss position, the Company will first assess whether we intend to sell, or it is more likely than not, that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria is met, the amortized cost basis of the security is written down to fair value through income. For available-for-sale investment securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from an actual or estimated credit loss event or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, changes to the rating of the security, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss is likely, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, an allowance for credit losses is recorded for the estimated credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit loss is recognized in other comprehensive income, net of tax. The Company elected the practical expedient of zero loss estimates for securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major agencies and have a long history of no credit losses. Equity Securities The Company’s investments in equity securities are recorded at fair value, with unrealized gains and losses included in earnings. Loans Held-for-Sale Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. Fair value on these loans is determined based on the terms of the loan, such as interest rate, maturity date, and reset term, as well as sales of similar assets. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, purchase premium and discounts and an allowance for credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Loan segments are defined as a group of loans, which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Company has five segments of loans: commercial, commercial real estate, commercial construction, residential real estate (including home equity) and consumer. - 78 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Loans that are 90 days past due are placed on nonaccrual and previously accrued interest is reversed and charged against interest income unless the loans are both well-secured and in the process of collection. Past due status is based on the contractual terms of the loan. In certain cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for credit losses and loans individually analyzed for credit losses. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The policy of the Company is to grant commercial, residential and consumer loans to residents and businesses within the market-areas served by its offices in New Jersey, New York and Florida. The borrowers’ abilities to repay their obligations are dependent upon various factors including the borrowers’ income and net worth, cash flows generated by the borrowers’ underlying collateral, value of the underlying collateral, and priority of the lender’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the control of the Company. The Company is therefore subject to risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for credit losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for a large majority of the Company’s loans. Allowance for Credit Losses The allowance for credit losses is an estimate of current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial assets necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and investment securities measured at amortized cost. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. Loan losses are charged against the allowance for credit losses when the Company believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. The allowance is established through a provision for credit losses that is charged against income. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The expected credit loss for unfunded loan commitments is reported on the consolidated statement of financial condition in other liabilities. For financial assets, the allowance for credit losses is a valuation account that is deducted from, or added to, the amortized cost basis of the financial assets to present the net amount expected to be collected on the financial assets. The Company's methodology to estimate the allowance for credit losses has two components: (i) a collective reserve component for estimated lifetime expected credit losses for pools of loans that share common risk characteristics and (ii) an individual reserve component for loans that do not share common risk characteristics. The Company maintains an allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial letters of credit. Information relevant to establishing an estimate of current expected credit losses includes historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. The Company reports in net income (as a credit loss expense) the amount necessary to adjust the allowance for credit losses and liabilities for credit losses on off-balance-sheet credit exposures for the current estimate of expected credit losses. - 79 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Expected credit losses of financial assets are measured on a collective (pool) basis when similar risk characteristic(s) exist. If the Company determines that a financial asset does not share risk characteristics with other financial assets, the Company will evaluate the financial asset for expected credit losses on an individual basis. Financial assets are assessed once, either through collective assessments or individual assessments. Standard expected losses are evaluated on a collective, or pool, basis when financial assets share similar risk characteristics. For pooled loan segments, utilizing a quantitative analysis, the Company calculates estimated credit losses using a probability of default and loss given default methodology, the results of which are applied to the aggregated discounted cash flow of each individual loan within the segment. In the absence of relevant and reliable internal data, probability of default and loss given default rates are determined using peer data. The point in time probability of default and loss given default are then conditioned by macroeconomic scenarios to incorporate reasonable and supportable forecasts that affect the collectability of the reported amount. Financial assets may be segmented based on one characteristic, or a combination of characteristics. Examples of risk characteristics relevant to the Company’s evaluation include, but were not limited to: ( 1 ) Internal or external credit scores or credit ratings, ( 2 ) Risk ratings or classifications, ( 3 ) Financial asset type, ( 4 ) Collateral type, ( 5 ) Size, ( 6 ) Effective interest rate, ( 7 ) Term, ( 8 ) Geographical location, ( 9 ) Industry of the borrower and ( 10 ) Vintage. The Company’s quantitative analysis also considers relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts. The Company evaluates a variety of factors including third party economic forecasts, industry trends and other available published economic information in arriving at its forecasts. After the reasonable and supportable forecast period, the Company reverts, on a straight-line basis, to average historical losses. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Included in the allowance for credit losses are qualitative reserves to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Each qualitative loss factor, for each loan segment within the portfolio, incorporates consideration for a minimum to maximum range for loss factors derived from either the Company’s historical loss experience, or peer group historical charge-off experience. These qualitative factor adjustments may increase or decrease the Company’s estimate of expected credit losses and are applied to each loan segment. The Bank evaluates individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. The Company evaluates the pooling methodology at least annually. Loans transition from defined segments for individual analysis when credit characteristics, or risk traits, change in a material manner. A loan is considered for individual analysis when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by the Company in determining individual analysis include payment status and the probability of collecting scheduled principal and interest payments, when due. Nonaccrual loans that are $ 250,000 or higher and all purchased credit-deteriorated ("PCD") loans are individually analyzed. For loans designated as nonaccrual with balances of less than $ 250,000 , these loans are collectively evaluated, and, accordingly, are not separately identified for analysis or disclosures. Instruments will not be included in either collective and individual analysis. Individual analysis will establish a specific reserve for instruments in scope. For collateral dependent loans, when it is determined that a foreclosure is probable, the allowance for credit losses is determined on a loan level basis using the fair value of the collateral as of the reporting date, less estimated disposition costs (“net fair value”), which will ensure that the credit loss is not delayed until the time at which the actual foreclosure takes place. In the event that this fair value is less than then amortized cost basis of these specific loans, the Company will recognize the difference between the net fair value at the reporting date and the amortized cost basis in the allowance for credit losses. If the fair value of the collateral has increased as of the evaluation date, the increase in the fair value of the collateral is reflected through a reduction in the allowance for credit losses. Adjustments for estimated disposition costs are not appropriate when the repayment of a collateral-dependent loan is expected from the operation of the collateral. If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as the allowance for credit losses. The effective interest rate used to discount expected cash flows is adjusted to incorporate expected prepayments, if applicable. - 80 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Purchased Credit-Deteriorated Loans Loans acquired in a business combination that have experienced a more-than-significant deterioration in credit quality since origination are considered PCD loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following: ( 1 ) non-accrual status; ( 2 ) troubled debt restructured designation; ( 3 ) risk ratings of special mention, substandard or doubtful; ( 4 ) watchlist credits; and ( 5 ) delinquency status, including loans that were current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium, which is recognized through interest income on a level-yield basis over the lives of the related loans. All loans considered to be purchased credit-impaired ("PCI") prior to the adoption of ASU 2016 - 13 were converted to PCD upon adoption. PCD loans that met the criteria for nonaccrual may be considered performing, regardless of whether the client is contractually delinquent, if management can reasonably estimate the timing and amount of the expected cash flows on such loans and if management expects to fully collect the new carrying value of the loans. As such, management may no longer consider the loans to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. Derivatives Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged. The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings. - 81 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Restricted Stock The Bank is a member of the Federal Home Loan Bank (“FHLB”) of New York. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends on the stock are reported as income. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Premises and Equipment Land is carried at cost and premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 4 to 30 years. Leasehold improvements are depreciated using the straight-line method over the terms of the respective leases, or the estimated useful lives of the improvements, whichever is shorter. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years. Leases Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease team. The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term. The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The Company has elected not to recognize leases with original terms of 12 months or less on the consolidated balance sheet. Other Real Estate Owned Other real estate owned (“OREO”), representing property acquired through foreclosure and held-for-sale, is initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequently, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs relating to holding the assets are charged to expenses. Employee Benefit Plans The Company has a noncontributory pension plan that covered all eligible employees up until September 30, 2007, at which time the Company froze its defined benefit pension plan. As such, all future benefit accruals in this pension plan were discontinued and all retirement benefits that employees would have earned as of September 30, 2007 were preserved. The Company’s policy is to fund at least the minimum contribution required by the Employee Retirement Income Security Act of 1974. The costs associated with the plan are accrued based on actuarial assumptions and included in salaries and employee benefits expense. - 82 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) The Company accounts for its defined benefit pension plan in accordance with FASB ASC 715 - 30. FASB ASC 715 - 30 requires that the funded status of defined benefit postretirement plans be recognized on the Company’s statement of financial condition and changes in the funded status be reflected in other comprehensive income. FASB ASC 715 - 30 also requires companies to measure the funded status of the plan as of the date of its fiscal year-end. The Company maintains a 401 (k)-employee savings plan to provide for defined contributions which covers substantially all employees of the Company. Employee 401 (k) and profit-sharing plan expense is the amount of matching contributions. Stock-Based Compensation Stock compensation accounting guidance (FASB ASC 718, “Compensation-Stock Compensation”) requires that the compensation cost related to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. Stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. See Note 18 of the Notes to Consolidated Financial Statements for further discussion. Treasury Stock Subject to certain regulatory limitations applicable to the Parent Corporation, treasury stock purchases may be made from time to time as, in the opinion of management, market conditions warrant, in the open market or in privately negotiated transactions. Shares repurchased are added to the corporate treasury and will be used for future stock dividends and other issuances. The repurchased shares are recorded as treasury stock, which results in a decrease in stockholders’ equity. Treasury stock is recorded using the cost method and accordingly is presented as a reduction of stockholders’ equity. During the years ended December 31, 2023 and December 31, 2022, the Parent Corporation repurchased 904,152 and 447,108 shares, respectively, under board-approved share repurchase programs. On August 16, 2022, The Inflation Reduction Act, P.L. 117 - 169, was signed into law. The act included a new Sec. 4501 that imposes an excise tax on certain repurchases of stock by publicly traded corporations. In general, and before considering exceptions, the amount of the excise tax is equal to 1% of ( 1 ) the aggregate fair market value (FMV) of stock repurchased by a corporation, over ( 2 ) the aggregate FMV of stock issued by the corporation, in each case, during the tax year. The excise tax applies to repurchases of stock by corporations beginning after December 31, 2022. The excise tax is not deductible for purposes of computing U.S. federal income tax (Sec. 275 (a)( 6 )). On December 27, 2022, Treasury and the IRS released Notice 2023 - 2, which announced that they intend to issue proposed regulations with respect to the excise tax. The notice provides interim guidance that Treasury and the Service generally intend to include in the proposed regulations, including several examples that illustrate the application of the rules set forth in the notice. Treasury and the IRS anticipate that the proposed regulations will be consistent with the guidance provided in the notice. In addition, until the issuance of the proposed regulations, taxpayers are permitted to rely on the operating rules set forth in Section 3 of the notice. The proposed regulations are anticipated to apply to repurchases of stock made after December 31, 2022, and to issuances of stock made during a tax year ending after December 31, 2022. As of December 31, 2023, the Company accrued $ 0.2 million related to the excise tax through equity. - 83 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Goodwill Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized but tested for impairment annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected December 31 as the date to perform the annual impairment test. No impairment charge was deemed necessary as of the years ended December 31, 2023, 2022 and 2021 . Other Intangible Assets Other intangible assets consist of core deposit intangibles arising from business combinations that are amortized over their estimated useful lives to their estimated residual value. Comprehensive Income Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from nonowner sources. The Company’s other comprehensive income (loss) is comprised of unrealized holding gains and losses on securities available-for-sale, unrecognized actuarial gains and losses of the Company’s defined benefit pension plan and unrealized gains and losses on cash flow hedges, net of taxes. Restrictions on Cash Cash on hand or on deposit with the Federal Reserve Bank is required to meet regulatory reserve and clearing requirements. Dividend Restriction Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Parent Corporation or by the Parent Corporation to the stockholders. - 84 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1a – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies – (continued) Fair Value of Financial Instruments The fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Bank Owned Life Insurance The Company invests in Bank Owned Life Insurance (“BOLI”) to help offset the cost of employee benefits. The change in the cash surrender value of the BOLI is recorded as a component of noninterest income. Income Taxes Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Advertising Costs The Company recognizes its marketing and advertising costs as incurred. Reclassifications Certain reclassifications have been made in the consolidated financial statements and footnotes for 2022 and 2021 to conform to the classifications presented in 2023 . Such reclassifications had no impact on net income or stockholders’ equity. - 85 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1b – Authoritative Accounting Guidance Adoption of New 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. We adopted ASU 2022 - 03 on January 1, 2024 and it did not have a material effect on the Company’s financial statements. In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022 - 02, “Financial Instruments – Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022 - 02” ). ASU 2022 - 02 eliminates the accounting guidance for troubled debt restructurings (“TDRs”) in ASC 310 - 40, “Receivables - Troubled Debt Restructurings by Creditors” for entities that have adopted the current expected credit loss (“CECL”) model introduced by ASU 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments” (ASU 2016 - 13” ). ASU 2022 - 02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326 - 20, “Financial Instruments—Credit Losses—Measured at Amortized Cost”. 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 December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023 - 09, Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures. These amendments require that public business entities on an annual basis ( 1 ) disclose specific categories in the rate reconciliation and ( 2 ) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5% of the amount computed by multiplying pretax income (or loss) by the applicable statutory income tax rate). The amendments require that all entities disclose on an annual basis the following information about income taxes paid: 1 ) The amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes. 2 ) The amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5% of total income taxes paid (net of refunds received). The amendments also require that all entities disclose the following information: 1 ) Income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and 2 ) Income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign. ASU 2023 - 09 is effective for the Company beginning January 1, 2025. The Company is evaluating the effect that ASU 2023 - 09 will have on its consolidated financial statements. - 86 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 – Earnings per Common Share Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 260 - 10 - 45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). The restricted stock awards granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities. The two -class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities. Earnings per common share have been computed based on the following: Years Ended December 31, 2023 2022 2021 (in thousands, except per share amounts) Net income available to common stockholders $ 80,967 $ 119,174 $ 128,636 Earnings allocated to participating securities ( 216 ) ( 287 ) ( 313 ) Income attributable to common stock $ 80,751 $ 118,887 $ 128,323 Weighted average common shares outstanding, including participating securities 38,913 39,355 39,723 Weighted average participating securities ( 104 ) ( 95 ) ( 97 ) Weighted average common shares outstanding 38,809 39,260 39,626 Incremental shares from assumed conversions of options, deferred stock units, performance units and restricted stock 153 216 260 Weighted average common and equivalent shares outstanding 38,962 39,476 39,886 Earnings per common share: Basic $ 2.08 $ 3.03 $ 3.24 Diluted 2.07 3.01 3.22 There were no antidilutive common share equivalents as of December 31, 2023, 2022 and 2021 . - 87 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities The Company’s investment securities are classified as available-for-sale as of December 31, 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 December 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 20 of the Notes to Consolidated Financial Statements for a further discussion. The following tables present information related to the Company’s portfolio of investment securities available-for-sale as of December 31, 2023 and 2022 . Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (dollars in thousands) December 31, 2023 Investment securities available-for-sale Federal agency obligations $ 55,898 $ 189 $ ( 10,761 ) $ 45,326 Residential mortgage pass-through securities 462,004 620 ( 51,433 ) 411,191 Commercial mortgage pass-through securities 25,240 - ( 3,676 ) 21,564 Obligations of U.S. states and political subdivisions​​ 148,795 415 ( 16,505 ) 132,705 Corporate bonds and notes 5,000 - ( 27 ) 4,973 Asset-backed securities 1,260 - ( 22 ) 1,238 Other securities 165 - - 165 Total investment securities available-for-sale $ 698,362 $ 1,224 $ ( 82,424 ) $ 617,162 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (dollars in thousands) December 31, 2022 Investment securities available-for-sale Federal agency obligations $ 54,889 $ - $ ( 10,439 ) $ 44,450 Residential mortgage pass-through securities 475,263 178 ( 57,863 ) 417,578 Commercial mortgage pass-through securities 25,485 - ( 4,381 ) 21,104 Obligations of U.S. states and political subdivisions​​ 157,247 111 ( 14,462 ) 142,896 Corporate bonds and notes 7,000 - ( 26 ) 6,974 Asset-backed securities 1,673 - ( 33 ) 1,640 Other securities 242 - - 242 Total investment securities available-for-sale $ 721,799 $ 289 $ ( 87,204 ) $ 634,884 - 88 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities – (continued) Investment securities having a carrying value of approximately $ 358 million and $ 157 million as of December 31, 2023 and December 31, 2022, respectively, were pledged to secure public deposits, borrowings, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law. As of December 31, 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’ equity. The following table presents information for investment securities available-for-sale as of December 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. December 31, 2023 Amortized Fair Cost Value (dollars in thousands) Investment securities available-for-sale: Due in one year or less $ 2,000 $ 1,980 Due after one year through five years 6,389 6,379 Due after five years through ten years 1,851 1,857 Due after ten years 200,713 174,026 Residential mortgage pass-through securities 462,004 411,191 Commercial mortgage pass-through securities 25,240 21,564 Other securities 165 165 Total investment securities available-for-sale $ 698,362 $ 617,162 Gross gains and losses from the sales and redemptions of investment securities for the years ended December 31, 2023, 2022 and 2021 were as follows: Years Ended December 31, 2023 2022 2021 (dollars in thousands) Proceeds $ - $ - $ 5,185 Gross gains on sale/redemption of investment securities $ - $ - $ 195 Gross losses on sale/redemption of investment securities - - - Net gains on sales/redemptions of investment securities​​ - - 195 Tax provision on net gains - - ( 48 ) Net gains on sale/redemption of investment securities, after tax​​ $ - $ - $ 147 - 89 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities – (continued) Impairment Analysis of Available-for-Sale Debt Securities The following tables indicate gross unrealized losses for which an ACL has not been recorded, aggregated by investment category and by the length of continuous time individual securities have been in an unrealized loss position as of December 31, 2023 and December 31, 2022 . December 31, 2023 Total Less than 12 Months 12 Months or Longer Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses (dollars in thousands) Investment securities available-for-sale: Federal agency obligation $ 40,779 $ ( 10,761 ) $ 1,689 $ ( 65 ) $ 39,090 $ ( 10,696 ) Residential mortgage pass-through securities 382,042 ( 51,433 ) 4,138 ( 51 ) 377,904 ( 51,382 ) Commercial mortgage pass-through securities 21,565 ( 3,676 ) - - 21,565 ( 3,676 ) Obligations of U.S. states and political subdivisions 101,189 ( 16,505 ) 1,340 ( 7 ) 99,849 ( 16,498 ) Corporate bonds and notes 4,973 ( 27 ) 2,993 ( 7 ) 1,980 ( 20 ) Asset-backed securities 1,238 ( 22 ) - - 1,238 ( 22 ) Total temporarily impaired securities $ 551,786 $ ( 82,424 ) $ 10,160 $ ( 130 ) $ 541,626 $ ( 82,294 ) December 31, 2022 Total Less than 12 Months 12 Months or Longer Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses (dollars in thousands) Investment securities available-for-sale: Federal agency obligation $ 44,451 $ ( 10,439 ) $ 20,517 $ ( 1,831 ) $ 23,934 $ ( 8,608 ) Residential mortgage pass-through securities 403,039 ( 57,863 ) 218,918 ( 13,869 ) 184,121 ( 43,994 ) Commercial mortgage pass-through securities 21,105 ( 4,381 ) 14,523 ( 2,304 ) 6,582 ( 2,077 ) Obligations of U.S. states and political subdivisions 133,265 ( 14,462 ) 47,446 ( 3,404 ) 85,819 ( 11,058 ) Corporate bonds and notes 4,973 ( 26 ) 4,973 ( 26 ) - - Asset-backed securities 1,640 ( 33 ) 1,048 ( 16 ) 592 ( 17 ) Total temporarily impaired securities $ 608,473 $ ( 87,204 ) $ 307,425 $ ( 21,450 ) $ 301,048 $ ( 65,754 ) On January 1, 2021, the Company adopted ASU 2016 - 13 and implemented the CECL methodology for allowance for credit losses on its investment securities available-for-sale. The new CECL methodology replaces the other-than-temporary impairment model that previously existed. The Company did not have a CECL day 1 impact attributable to its investment securities portfolio and did not have an allowance for credit losses as of December 31, 2023 . The Company has elected to exclude accrued interest from the amortized cost of its investment securities available-for-sale. Accrued interest receivable for investment securities available for sale as of December 31, 2023 and December 31, 2022 , totaled $ 2.3 million and $ 2.4 million, respectively. - 90 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities – (continued) The Company evaluates securities in an unrealized loss position for impairment related to credit losses on at least a quarterly basis. Securities in unrealized loss positions are first assessed as to whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If one of the criteria is met, the security’s amortized cost basis is written down to fair value through current earnings. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value resulted from credit losses or other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Unrealized losses on asset backed securities and state and municipal securities have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale securities was recorded as of December 31, 2023. Federal agency obligations, residential mortgage-backed pass-through securities and commercial mortgage-backed pass-through securities are issued by U.S. Government agencies and U.S. Government sponsored enterprises. Although a government guarantee exists on these investments, these entities are not legally backed by the full faith and credit of the federal government, and the current support they receive is subject to a cap as part of the agreement entered into in 2008. Nonetheless, at this time we do not foresee any set of circumstances in which the government would not fund its commitments on these investments as the issuers are an integral part of the U.S. housing market in providing liquidity and stability. Therefore, we concluded that a zero -allowance approach for these investment securities is appropriate. - 91 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses Loans Receivable: The following table sets forth the composition of the Company’s loan portfolio segments, net of deferred fees, as of December 31, 2023 and December 31, 2022 : 2023 2022 (dollars in thousands) Commercial (1) $ 1,578,730 $ 1,472,734 Commercial real estate 5,895,545 5,795,228 Commercial construction 620,496 574,139 Residential real estate 256,041 264,748 Consumer 1,029 2,312 Gross loans 8,351,841 8,109,161 Net deferred fees ( 6,696 ) ( 9,472 ) Loans receivable $ 8,345,145 $ 8,099,689 ( 1 ) Includes PPP loans of $ 9 million and $ 11 million as of December 31, 2023 and December 31, 2022, respectively. As of December 31, 2023 , and 2022 , loan balances of approximately $ 5.8 billion and $ 2.7 billion, respectively, were pledged to secure borrowings from the FHLB of New York and the Federal Reserve Bank of New York. During 2023, the Company took actions to increase its secured borrowing access and increase levels of off-balance sheet liquidity and as such increased the amount of loans pledged to each of these borrowing facilities. • The repayment of commercial loans is generally dependent on the creditworthiness and cash flow of borrowers, and if applicable, guarantors, which may be negatively impacted by adverse economic conditions. While the majority of these loans are secured, collateral type, marketing, coverage, valuation and monitoring is not as uniform as in other portfolio classes and recovery from liquidation of such collateral may be subject to greater variability. • Payment on commercial real estate is driven principally by operating results of the managed properties or underlying business and secondarily by the sale or refinance of such properties. Both primary and secondary sources of repayment, and value of the properties in liquidation, may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. • Properties underlying construction, land and land development loans often do not generate sufficient cash flows to service debt and thus repayment is subject to the ability of the borrower and, if applicable, guarantors, to complete development or construction of the property and carry the project, often for extended periods of time. As a result, the performance of these loans is contingent upon future events whose probability at the time of origination is uncertain. • The ability of borrowers to service debt in the residential and consumer loan portfolios is generally subject to personal income which may be impacted by general economic conditions, such as increased unemployment levels. These loans are predominately collateralized by first and/or second liens on single family properties. If a borrower cannot maintain the loan, the Company’s ability to recover against the collateral in sufficient amount and in a timely manner may be significantly influenced by market, legal and regulatory conditions. • The Company considers loan classes and loan segments to be one and the same. - 92 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) Loans Held-For-Sale : The following table presents loans held-for-sale by loan segment as of December 31, 2023 and December 31, 2022 : 2023 2022 (dollars in thousands) Commercial $ - $ 13,473 Residential real estate - 299 Total carrying amount $ - $ 13,772 Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an allowance for credit loss (“ACL”) as of December 31, 2023 and December 31, 2022 and nonaccrual loans without an ACL as of December 31, 2023 and December 31, 2022: December 31, 2023 Nonaccrual loans with ACL Nonaccrual loans without ACL Total Nonaccrual loans (dollars in thousands) Commercial $ 1,763 $ 11,064 $ 12,827 Commercial real estate 8,013 28,179 36,192 Residential real estate 1,033 2,472 3,505 Total $ 10,809 $ 41,715 $ 52,524 December 31, 2022 Nonaccrual loans with ACL Nonaccrual loans without ACL Total Nonaccrual loans (dollars in thousands) Commercial $ 23,512 $ 1,745 $ 25,257 Commercial real estate 10,220 6,597 16,817 Residential real estate 604 1,776 2,380 Total $ 34,336 $ 10,118 $ 44,454 Nonaccrual loans include loans that are collectively evaluated and individually analyzed. - 93 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) Credit Quality Indicators – The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third -party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified as “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date. Assets are classified as “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified as special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. - 94 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP. Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below. As of December 31, 2023 , our loans based on year of origination and risk designation are as follows (dollars in thousands): Term loans amortized cost basis by origination year Revolving Total 2023 2022 2021 2020 2019 Prior Loans Gross Loans Commercial Pass $ 178,582 $ 252,151 $ 265,705 $ 38,909 $ 13,726 $ 112,145 $ 684,779 $ 1,545,997 Special mention - 10,620 - - 562 3,417 3,199 17,798 Substandard 250 439 241 1 612 11,695 1,697 14,935 Doubtful - - - - - - - - Total Commercial $ 178,832 $ 263,210 $ 265,946 $ 38,910 $ 14,900 $ 127,257 $ 689,675 $ 1,578,730 Commercial real estate Pass $ 248,660 $ 1,561,841 $ 1,585,109 $ 352,445 $ 353,391 $ 1,232,240 $ 497,588 $ 5,831,274 Special mention - - - - - 24,202 - 24,202 Substandard - - 1,888 - 1,255 20,141 16,785 40,069 Doubtful - - - - - - - - Total Commercial real estate $ 248,660 $ 1,561,841 $ 1,586,997 $ 352,445 $ 354,646 $ 1,276,583 $ 514,373 $ 5,895,545 Commercial construction Pass $ 582 $ 5,463 $ 15,645 $ 6,236 $ - $ - $ 583,870 $ 611,796 Special mention - - - - - - 8,700 8,700 Substandard - - - - - - - - Doubtful - - - - - - - - Total Commercial construction $ 582 $ 5,463 $ 15,645 $ 6,236 $ - $ - $ 592,570 $ 620,496 Residential real estate Pass $ 15,455 $ 42,830 $ 21,987 $ 21,704 $ 19,896 $ 91,114 $ 36,082 $ 249,068 Special mention - - - - - 651 2,817 3,468 Substandard - - 555 - - 2,144 806 3,505 Doubtful - - - - - - - - Total Residential real estate $ 15,455 $ 42,830 $ 22,542 $ 21,704 $ 19,896 $ 93,909 $ 39,705 $ 256,041 Consumer Pass $ 849 $ 83 $ - $ 5 $ - $ - $ 92 $ 1,029 Special mention - - - - - - - - Substandard - - - - - - - - Doubtful - - - - - - - - Total Consumer $ 849 $ 83 $ - $ 5 $ - $ - $ 92 $ 1,029 Total Pass $ 444,128 $ 1,862,368 $ 1,888,446 $ 419,299 $ 387,013 $ 1,435,499 $ 1,802,411 $ 8,239,164 Special mention - 10,620 - - 562 28,270 14,716 54,168 Substandard 250 439 2,684 1 1,867 33,980 19,288 58,509 Doubtful - - - - - - - - Grand Total $ 444,378 $ 1,873,427 $ 1,891,130 $ 419,300 $ 389,442 $ 1,497,749 $ 1,836,415 $ 8,351,841 - 95 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) As of December 31, 2022, our loans based on year of origination and risk designation are as follows (dollars in thousands): Term loans amortized cost basis by origination year Revolving Total 2022 2021 2020 2019 2018 Prior Loans Gross Loans Commercial Pass $ 301,636 $ 305,721 $ 47,952 $ 28,177 $ 52,950 $ 127,739 $ 550,483 $ 1,414,658 Special mention - - - 583 26 8,551 3,292 12,452 Substandard 7,615 146 15 1,769 11,214 22,596 2,269 45,624 Doubtful - - - - - - - - Total Commercial $ 309,251 $ 305,867 $ 47,967 $ 30,529 $ 64,190 $ 158,886 $ 556,044 $ 1,472,734 Commercial real estate Pass $ 1,571,751 $ 1,608,023 $ 382,987 $ 358,578 $ 375,886 $ 987,982 $ 401,365 $ 5,686,572 Special mention 3,040 - - - - 37,774 8,839 49,653 Substandard - 1,929 - 6,526 19,138 23,287 8,123 59,003 Doubtful - - - - - - - - Total Commercial real estate $ 1,574,791 $ 1,609,952 $ 382,987 $ 365,104 $ 395,024 $ 1,049,043 $ 418,327 $ 5,795,228 Commercial construction Pass $ 8,615 $ 7,605 $ 6,720 $ 508 $ - $ - $ 542,460 $ 565,908 Special mention - - - - - - - - Substandard - - - - - - 8,231 8,231 Doubtful - - - - - - - - Total Commercial construction $ 8,615 $ 7,605 $ 6,720 $ 508 $ - $ - $ 550,691 $ 574,139 Residential real estate Pass $ 45,926 $ 25,318 $ 24,409 $ 21,557 $ 20,284 $ 78,314 $ 41,468 $ 257,276 Special mention - - - - - - - - Substandard - - - - - 3,379 4,093 7,472 Doubtful - - - - - - - - Total Residential real estate $ 45,926 $ 25,318 $ 24,409 $ 21,557 $ 20,284 $ 81,693 $ 45,561 $ 264,748 Consumer Pass $ 2,219 $ - $ 9 $ - $ - $ 2 $ 82 $ 2,312 Special mention - - - - - - - - Substandard - - - - - - - - Doubtful - - - - - - - - Total Consumer $ 2,219 $ - $ 9 $ - $ - $ 2 $ 82 $ 2,312 Total Pass $ 1,930,147 $ 1,946,667 $ 462,077 $ 408,820 $ 449,120 $ 1,194,037 $ 1,535,858 $ 7,926,726 Special mention 3,040 - - 583 26 46,325 12,131 62,105 Substandard 7,615 2,075 15 8,295 30,352 49,262 22,716 120,330 Doubtful - - - - - - - - Grand Total $ 1,940,802 $ 1,948,742 $ 462,092 $ 417,698 $ 479,498 $ 1,289,624 $ 1,570,705 $ 8,109,161 - 96 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) As of December 31, 2023, our gross write-offs based on year of origination are as follows (dollars in thousands). Term Loans 2023 2022 2021 2020 2019 Prior Revolving Loans Total Commercial Current period gross write-off $ 54 $ 3,397 $ - $ - $ 280 $ 11,094 $ 63 $ 14,888 Commercial real estate Current period gross write-off $ - $ - $ - $ - $ - $ 2,142 $ - $ 2,142 Commercial construction Current period gross write-off $ - $ - $ - $ - $ - $ - $ - $ - Residential real estate Current period gross write-off $ - $ - $ - $ - $ - $ - $ 18 $ 18 Consumer Current period gross write-off $ - $ - $ - $ - $ - $ - $ 1 $ 1 Total Current period gross write-off $ 54 $ 3,397 $ - $ - $ 280 $ 13,236 $ 82 $ 17,049 - 97 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) Collateral Dependent Loans : Loans which meet certain criteria are individually analyzed as part of the process of calculating the allowance for credit losses. The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date. The following table presents collateral dependent loans that were individually analyzed as of December 31, 2023 and 2022: December 31, 2023 Real Estate Other Total (dollars in thousands) Commercial $ 4,949 $ 10,387 $ 15,336 Commercial real estate 39,986 - 39,986 Commercial construction 8,700 - 8,700 Residential real estate 5,941 - 5,941 Total $ 59,576 $ 10,387 $ 69,963 December 31, 2022 Real Estate Other Total (dollars in thousands) Commercial $ 5,352 $ 22,517 $ 27,869 Commercial real estate 52,477 - 52,477 Commercial construction 8,232 - 8,232 Residential real estate 5,864 - 5,864 Total $ 71,925 $ 22,517 $ 94,442 - 98 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) Aging Analysis - The following table provides an analysis of the aging of the loans by class, excluding the effect of net deferred fees, which are past due as of December 31, 2023 and December 31, 2022 (dollars in thousands): December 31, 2023 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due and Still Accruing Nonaccrual Total Past Due and Nonaccrual Current Gross Loans Commercial $ 555 $ - $ - $ 12,827 $ 13,382 $ 1,565,348 $ 1,578,730 Commercial real estate 527 - - 36,192 36,719 5,858,826 5,895,545 Commercial construction - 23,600 - - 23,600 596,896 620,496 Residential real estate 275 226 - 3,505 4,006 252,035 256,041 Consumer - - - - - 1,029 1,029 Total $ 1,357 $ 23,826 $ - $ 52,524 $ 77,707 $ 8,274,134 $ 8,351,841 December 31, 2022 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due and Still Accruing Nonaccrual Total Past Due and Nonaccrual Current Total Loans Receivable Commercial $ 306 $ - $ - $ 25,257 $ 25,563 $ 1,447,171 $ 1,472,734 Commercial real estate 90 - 5,591 16,817 22,498 5,772,730 5,795,228 Commercial construction - - - - - 574,139 574,139 Residential real estate 1,569 - - 2,380 3,949 260,799 264,748 Consumer - - - - - 2,312 2,312 Total $ 1,965 $ - $ 5,591 $ 44,454 $ 52,010 $ 8,057,151 $ 8,109,161 The 90 days or greater past due and still accruing category reflects purchased credit-deteriorated loans, net of fair value marks, which accrete income per the valuation at date of acquisition. - 99 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) The following tables detail the amount of gross loans that are individually analyzed, collectively evaluated, and loans acquired with deteriorated quality, and the related portion of the allowance for credit losses for loans that are allocated to each loan portfolio segment. December 31, 2023 Commercial Commercial real estate Commercial construction Residential real estate Consumer Total (dollars in thousands) Allowance for credit losses - loans Individually analyzed $ - $ 941 $ - $ - $ - $ 941 Collectively evaluated 20,215 51,337 4,739 4,320 5 80,616 Acquired with deteriorated credit quality 417 - - - - 417 Total $ 20,632 $ 52,278 $ 4,739 $ 4,320 $ 5 $ 81,974 Gross loans Individually analyzed $ 15,336 $ 39,986 $ 8,700 $ 5,941 $ - $ 69,963 Collectively evaluated 1,562,910 5,855,559 611,796 250,100 1,029 8,281,394 Acquired with deteriorated credit quality 484 - - - - 484 Total $ 1,578,730 $ 5,895,545 $ 620,496 $ 256,041 $ 1,029 $ 8,351,841 December 31, 2022 Commercial Commercial real estate Commercial construction Residential real estate Consumer Total (dollars in thousands) Allowance for credit losses - loans Individually analyzed $ 7,426 $ 1,003 $ - $ 50 $ - $ 8,479 Collectively evaluated 19,319 50,818 3,718 4,093 7 77,955 Acquired with deteriorated credit quality 2,158 1,921 - - - 4,079 Total $ 28,903 $ 53,742 $ 3,718 $ 4,143 $ 7 $ 90,513 Gross loans Individually analyzed $ 30,994 $ 46,886 $ 8,232 $ 5,864 $ - $ 91,976 Collectively evaluated 1,436,866 5,742,751 565,907 258,884 2,312 8,006,720 Acquired with deteriorated credit quality 4,874 5,591 - - - 10,465 Total $ 1,472,734 $ 5,795,228 $ 574,139 $ 264,748 $ 2,312 $ 8,109,161 - 100 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) A summary of the activity in the allowance for credit losses for loans by loan segment is as follows: Commercial Commercial real estate Commercial construction Residential real estate Consumer Total (dollars in thousands) Balance as of January 1, 2023 $ 28,903 $ 53,742 $ 3,718 $ 4,143 $ 7 $ 90,513 Charge-offs ( 14,888 ) ( 2,142 ) - ( 18 ) ( 1 ) ( 17,049 ) Recoveries 10 - - 68 8 86 Provision for (reversal) of credit losses 6,607 678 1,021 127 ( 9 ) 8,424 Balance as of December 31, 2023 $ 20,632 $ 52,278 $ 4,739 $ 4,320 $ 5 $ 81,974 Commercial Commercial real estate Commercial construction Residential real estate Consumer Total (dollars in thousands) Balance as of January 1, 2022 $ 25,969 $ 45,589 $ 3,580 $ 3,628 $ 7 $ 78,773 Charge-offs ( 2,612 ) ( 2,819 ) - ( 9 ) ( 3 ) ( 5,443 ) Recoveries 54 - - 63 - 117 Provision for credit losses 5,492 10,972 138 461 3 17,066 Balance as of December 31, 2022 $ 28,903 $ 53,742 $ 3,718 $ 4,143 $ 7 $ 90,513 On January 1, 2021, the Company adopted CECL, which replaced the incurred loss method we used in prior periods for determining the provision for credit losses and the allowance for credit losses. Under CECL, we record an expected loss of all cash flows we do not expect to collect at the inception of the loan. The adoption of CECL resulted in an increase in our allowance for credit losses for loans of $ 6.6 million, which did not impact our consolidated income statement. Commercial Commercial real estate Commercial construction Residential real estate Consumer Unallocated Total (dollars in thousands) Balance as of January 1, 2021 $ 28,443 $ 39,330 $ 8,194 $ 2,687 $ 4 $ 568 $ 79,226 Day 1 Adjustment CECL ( 4,225 ) 9,605 ( 961 ) 2,697 9 ( 568 ) 6,557 Balance as of January 1, 2021 24,218 48,935 7,233 5,384 13 - 85,783 Charge-offs ( 382 ) ( 1,780 ) - ( 235 ) - - ( 2,397 ) Recoveries 289 85 - 20 11 - 405 Provision for (reversal of) credit losses 1,844 ( 1,651 ) ( 3,653 ) ( 1,541 ) ( 17 ) - ( 5,018 ) Balance as of December 31, 2021 $ 25,969 $ 45,589 $ 3,580 $ 3,628 $ 7 $ - $ 78,773 - 101 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) 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 and the percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the gross loans of the relevant loan segment. The total percentage represents the total modified loans as compared to the total gross loans balance as of December 31, 2023. Twelve Months Ended December 31, 2023 Term Extension Payment Deferral Interest Rate Reduction Total % of Portfolio Loan Segment (dollars in thousands) Commercial $ 34 $ 10,283 $ - $ 10,317 0.65 % Commercial real estate 209 - 7,272 7,481 0.13 Total $ 243 $ 10,283 $ 7,272 $ 17,798 0.21 % The above table consists of loans that added a weighted average of 13 years to the maturity of the modified loans with term extensions, which did not have a material effect on the cash flows. For loans that had payment deferrals, the weighted average deferral period was six months. For loans that had interest rate reduction modifications, the weighted average interest rate reduction was 1.9 %. The following table presents the performance of loans that have been modified in the last twelve months: December 31, 2023 Current Past Due 30-89 Days Past Due 90 Days or More (dollars in thousands) Commercial $ 10,317 $ - $ - Commercial real estate 7,481 - - There were no loans to borrowers experiencing financial difficulty that had a payment default during the twelve months ended December 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 analyzed 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. - 102 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans and the Allowance for Credit Losses – (continued) Allowance for Credit Losses for Unfunded Commitments The Company has recorded an ACL for unfunded credit commitments, which is recorded in other liabilities. The provision is recorded within the (reversal of) provision for credit losses on the Company’s income statement. The following table presents the allowance for credit losses for unfunded commitments for the year ended December 31, 2023 and 2022 (dollars in thousands): 2023 2022 Balance as of beginning of period $ 3,035 $ 2,351 (Reversal of) provision for credit losses - unfunded commitments ( 224 ) 684 Balance as of end of period $ 2,811 $ 3,035 Components of (Reversal of) Provision for Credit Losses The following table summarizes the provision for (reversal of) provision for credit losses for the year ended December 31, 2023 and 2022 (dollars in thousands): 2023 2022 Provision for credit losses – loans $ 8,424 $ 17,066 (Reversal of) provision for credit losses - unfunded commitments ( 224 ) 684 Provision for credit losses $ 8,200 $ 17,750 - 103 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 – Premises and Equipment Premises and equipment are summarized as of December 31, 2023 and 2022 : Estimated Useful Life (Years) 2023 2022 (dollars in thousands) Land - $ 6,732 $ 6,732 Buildings 10 - 25 11,043 9,797 Furniture, fixtures and equipment 3 - 7 28,548 24,830 Leasehold improvements 10 - 20 27,633 25,164 Subtotal 73,956 66,523 Less: accumulated depreciation, amortization and fair value adjustments 43,177 38,723 Total premises and equipment, net $ 30,779 $ 27,800 Depreciation and amortization expense of premises and equipment was $ 4.5 million, $ 3.9 million and $ 3.8 million for 2023 , 2022 and 2021 , respectively. Finance Leases : The Company has a lease agreement for a building accounted for as a finance lease. The lease arrangement requires monthly payments through 2028. As of December 31, 2023, the weighted average remaining term for the finance lease was 4.9 years and the weighted average discount rate used in the measurement of finance lease liabilities was 6.0 %. Total finance lease costs for the year ended December 31, 2023, was $ 0.3 million. The Company has included this lease in premises and equipment as follows December 31, 2023 and 2022: 2023 2022 (dollars in thousands) Finance lease $ 3,423 $ 3,423 Less: accumulated amortization 2,567 2,395 $ 856 $ 1,028 The following is a schedule by year of future minimum lease payments under the finance lease, together with the present value of net minimum lease payments as of December 31, 2023 (dollars in thousands): 2024 $ 353 2025 353 2026 353 2027 353 2028 322 Total minimum lease payments 1,734 Less amount representing interest 228 Present value of net minimum lease payments $ 1,506 - 104 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 – Premises and Equipment – (continued) The Company leases certain premises and equipment under operating leases. As of December 31, 2023 , the Company had lease liabilities totaling $ 13.2 million and right-of-use assets totaling $ 12.0 million. As of December 31, 2023 , the weighted average remaining lease term for operating leases was 6.3 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.5 %. Total lease costs for the year ended December 31, 2023 were $ 4.0 million. A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows: December 31, 2023 (dollars in thousands) Lease payments due: Less than 1 year $ 3,046 1 year through less than 2 years 2,683 2 years through less than 3 years 2,591 3 years through less than 4 years 1,924 4 years through 5 years 1,421 After 5 years 3,243 Total undiscounted cash flows 14,908 Impact of discounting ( 1,737 ) Total lease liability $ 13,171 - 105 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 – Goodwill and Other Intangible Assets A goodwill impairment test is required under ASC 350, Intangibles – Goodwill and Other, and the FASB issued ASU No. 2011 - 08, “Testing Goodwill for Impairment,” allowing an initial qualitative assessment of goodwill commonly known as step zero impairment testing. In general, the step zero test allows an entity to first assess qualitative factors to determine whether it is more likely than not (i.e., more than 50% ) that the fair value of a reporting unit is less than its carrying value. If a step zero impairment test results in the conclusion that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, then no further testing is required. Due to recent declines in bank stock prices and events impacting the banking industry, the Company performed a quantitative impairment analysis as of December 31, 2023. The annual quantitative assessment of goodwill for the reporting unit was performed utilizing a discounted cash flow analysis ("income approach") and estimates of selected market information ("market approaches"). The income approach measures the fair value of an interest in a business by discounting expected future cash flows to present value. The market approaches take into consideration fair values of comparable companies operating in similar lines of business that are potentially subject to similar economic and environmental factors and could be considered reasonable investment alternatives. The result of the income approach was weighted 50% and the results of the market approaches comprised the remaining 50% in determining the fair value of the reporting unit. The results of the annual quantitative impairment analysis indicated that the fair value exceeded the carrying value of the reporting unit. Based upon management’s review through December 31, 2023 , the Company’s goodwill was not impaired. Management concludes that the ASC 350 goodwill step zero test has been passed, and no further testing is required. Goodwill The change in goodwill during the year is as follows: 2023 2022 (dollars in thousands) Balance, January 1 $ 208,372 $ 208,372 Acquired goodwill - - Impairment - - Balance, December 31 $ 208,372 $ 208,372 - 106 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 – Goodwill and Other Intangible Assets – (continued) Acquired Intangible Assets The table below provides information regarding the carrying amounts and accumulated amortization of total amortized intangible assets as of the dates set forth below. Gross Net Carrying Accumulated Carrying Amount Amortization Amount (dollars in thousands) Core deposit intangibles December 31, 2023 $ 18,515 $ ( 12,641 ) $ 5,874 Core deposit intangibles December 31, 2022 $ 18,515 $ ( 11,203 ) $ 7,312 Aggregate amortization expense was approximately $ 1.4 million, $ 1.7 million and $ 2.0 million for 2023 , 2022 and 2021 , respectively. Estimated amortization expense for each of the next five years (dollars in thousands): 2024 $ 1,235 2025 1,116 2026 1,050 2027 989 2028 930 Note 7 – Deposits Time Deposits As of December 31, 2023 , and 2022 , the Company's total time deposits were $ 2.5 billion and $ 2.4 billion, respectively. Included in time deposits were gross nonreciprocal brokered time deposits of $ 916.8 million and $ 934.9 million as of December 31, 2023 and 2022 , respectively. As of December 31, 2023 , the contractual maturities of these time deposits were as follows (dollars in thousands): 2024 $ 2,131,378 2025 181,578 2026 179,678 2027 36,034 2028 3,879 Time deposits (before net discount) $ 2,532,547 Fair value net discount ( 1,175 ) Total time deposits (after net discount) $ 2,531,372 The amount of time deposits with balances in excess of $250,000 were $ 643.4 million and $ 591.8 million as of December 31, 2023 and 2022 , respectively. - 107 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 – FHLB Borrowings The Company’s FHLB borrowings and weighted average interest rates are summarized below: December 31, 2023 December 31, 2022 Amount Rate Amount Rate (dollars in thousands) By remaining period to maturity: Less than 1 year $ 881,000 5.57 % $ 830,000 4.42 % 1 year through less than 2 years 25,000 1.00 - - 2 years through less than 3 years 2,050 2.23 25,000 1.00 3 years through less than 4 years 293 2.85 2,050 2.23 4 years through 5 years 25,000 4.18 326 2.85 After 5 Years 294 2.96 326 2.96 FHLB borrowings (before discount) 933,637 5.41 % 857,702 4.32 % Fair value discount ( 58 ) ( 80 ) FHLB borrowings (after discount) $ 933,579 $ 857,622 The FHLB borrowings are secured by pledges of certain collateral including, but not limited to, U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans. Advances are payable at stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances have fixed rates. The advances as of December 31, 2023 were primarily collateralized by approximately $ 4.1 billion of commercial mortgage and residential loans, or $ 2.7 billion net of required over collateralization amounts, under a blanket lien arrangement. As of December 31, 2023 , the Company had remaining borrowing capacity of billion approximately $ 1.3 billion at the FHLB. - 108 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 – Subordinated Debentures During 2003, the Company formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $ 5.0 million of MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier I capital. The trust loaned the proceeds of this offering to the Company and received in exchange $ 5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or in part prior to maturity. The floating interest rate on the subordinate debentures was previously three -month LIBOR plus 2.85 % and reprices quarterly. Upon the cessation of publication of LIBOR rates and pursuant to the Federal LIBOR Act and Federal Reserve regulations implementing the Act, applicable US Dollar LIBOR indexed instruments like the Company’s outstanding $ 5.0 million of MMCapS capital securities converted effective June 30, 2023 to a new index based on CME Term SOFR, as defined in the LIBOR Act, plus a tenor spread adjustment, which is referred to as the Benchmark Replacement. Therefore, effective for quarterly interest rate resets after July 3, 2023 the subordinated debentures’ floating rate will be three -month CME Term SOFR plus 2.85 % plus a tenor spread adjust of 0.26161 %. The rate as of December 31, 2023 was 8.50 %. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements, as the statutory business trust is not consolidated in accordance with FASB ASC 810 - 10. Distributions on the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income. The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of December 31, 2023 and December 31, 2022 . As of December 31, 2023 Issuance Date Securities Issued Liquidation Value Coupon Rate Maturity Redeemable by Issuer Beginning 12/19/2003 $ 5,000,000 $1,000 per Capital Security Floating 3-month CME Term SOFR + 285 Basis Points + 26.161 Basis Points 1/23/2034 1/23/2009 As of December 31, 2022 Issuance Date Securities Issued Liquidation Value Coupon Rate Maturity Redeemable by Issuer Beginning 12/19/2003 $ 5,000,000 $1,000 per Capital Security Floating 3-month LIBOR + 285 Basis Points 1/23/2034 1/23/2009 - 109 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 – Subordinated Debentures - (continued) On June 10, 2020, the Parent Corporation issued $ 75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes bear interest at 5.75 % annually from, and including, the date of initial issuance to, but excluding, June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2020. From and including June 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero. On January 11, 2018, the Parent Corporation issued $ 75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2018 Notes”). The 2018 Notes bore interest at a rate that resets quarterly to an interest rate per annum equal to the then current three -month LIBOR rate plus 284 basis points ( 2.84 %) payable quarterly in arrears. Interest on the 2018 Notes was to be paid on February 1, May 1, August 1, and November 1, of each year to but excluding the stated maturity date, unless in any case previously redeemed. The 2018 Notes were redeemed in full on February 1, 2023. During June 2015, the Parent Corporation issued $ 50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2015 Notes”). As of December 31, 2020, the 2015 Notes had a stated maturity of July 1, 2025, and bore interest until the maturity date or early redemption date at a variable rate equal to the then current three -month LIBOR rate plus 393 basis points. As of December 31, 2020, the variable interest rate was 4.16 %, all costs related to 2015 issuance had been amortized and the 2015 Notes were redeemed in full on January 1, 2021. - 110 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 – Income Taxes The current and deferred amounts of income tax expense for 2023 , 2022 and 2021 are as follows (dollars in thousands): 2023 2022 2021 Current: Federal $ 16,185 $ 33,169 $ 32,364 State 9,635 13,247 12,325 Subtotal 25,820 46,416 44,689 Deferred: Federal 2,903 ( 3,353 ) ( 110 ) State 1,232 2,950 126 Subtotal 4,135 ( 403 ) 16 Income tax expense $ 29,955 $ 46,013 $ 44,705 Actual income tax expense differs from the tax computed based on pre-tax income and the applicable statutory federal tax rate for the following reasons (dollars in thousands) December 31, 2023 2022 2021 Income before income tax expense $ 116,958 $ 171,224 $ 175,058 Federal statutory rate 21 % 21 % 21 % Computed “expected” Federal income tax expense 24,561 35,957 36,762 State tax, net of federal tax benefit 9,404 13,314 9,127 162M adjustment 779 777 - Bank owned life insurance ( 1,326 ) ( 1,175 ) ( 1,001 ) Tax-exempt interest and dividends ( 2,514 ) ( 1,969 ) ( 1,405 ) Tax benefits from stock-based compensation ( 66 ) ( 417 ) ( 261 ) Other, net ( 883 ) ( 474 ) 1,483 Income tax expense $ 29,955 $ 46,013 $ 44,705 - 111 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 – Income Taxes – (continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability as of December 31, 2023 and 2022 are presented in the following table: 2023 2022 (dollars in thousands) Deferred tax assets Allowance for credit losses $ 23,973 $ 26,901 Depreciation 65 - Pension actuarial losses 897 1,269 New Jersey net operating loss 1,187 156 Deferred compensation 5,240 3,784 Unrealized losses on available-for-sale securities 23,365 25,141 Deferred loan costs, net of fees 1,628 2,664 Finance lease 192 212 Nonaccrual interest 111 168 Operating lease liability 3,897 3,424 Other 1,887 4,172 Total deferred tax assets $ 62,442 $ 67,891 Deferred tax liabilities Employee benefit plans $ ( 2,439 ) $ ( 2,452 ) Purchase accounting ( 1,660 ) ( 1,458 ) Depreciation - ( 381 ) Prepaid expenses ( 1,386 ) ( 1,011 ) Unrealized gains on derivatives ( 10,676 ) ( 13,704 ) Right of use asset ( 3,545 ) ( 3,059 ) Other ( 1,664 ) ( 1,681 ) Total deferred tax liabilities ( 21,370 ) ( 23,746 ) Net deferred tax assets $ 41,072 $ 44,145 In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income, and tax planning strategies in making this assessment. During 2023 and 2022, based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company believes the net deferred tax assets are more likely than not to be realized. There are no unrecorded tax benefits, and the Company does not expect the total amount of unrecognized income tax benefits to significantly increase in the next twelve months. The Company’s federal income tax returns are open and subject to examination from the 2020 tax return year and forward. The Company’s state income tax returns are generally open from the 2019 and later tax return years based on individual state statutes of limitations. As of December 31, 2023, the Company has $ 13.1 million in New Jersey net operating loss (NOL). The NOL is set to expire on December 31, 2040. - 112 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11 – Preferred Stock On August 19, 2021, the Company completed an underwritten public offering of 115,000 shares, or $ 115 million in aggregate liquidation preference, of its depositary shares, each representing a 1/40th interest in a share of the Company’s 5.25 % Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A, no par value, with a liquidation preference of $ 1,000 per share. The net proceeds received from the issuance of preferred stock at the time of closing were $ 110.9 million. Note 12 – Commitments, Contingencies and Concentrations of Credit Risk In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as standby and commercial letters of credit, unused portions of lines of credit and commitments to extend various types of credit. Commitments to extend credit and standby letters of credit generally do not exceed one year. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The commitment or contract amount of these financial instruments is an indicator of the Company’s level of involvement in each type of instrument as well as the exposure to credit loss in the event of nonperformance by the other party to the financial instrument. The Company controls the credit risk of these financial instruments through credit approvals, limits and monitoring procedures. To minimize potential credit risk, the Company generally requires collateral and other credit-related terms and conditions from the client. In the opinion of management, the financial condition of the Company will not be materially affected by the final outcome of these commitments and contingent liabilities. A substantial portion of the Bank’s loans are secured by real estate located in New Jersey and New York. Accordingly, the collectability of a substantial portion of the loan portfolio of the Bank is susceptible to changes in the metropolitan New York real estate market. The following table provides a summary of financial instruments with off-balance sheet risk as of December 31, 2023 and 2022 : 2023 2022 (dollars in thousands) Commitments under commercial loans and lines of credit $ 723,228 $ 662,515 Home equity and other revolving lines of credit 48,786 54,302 Outstanding commercial mortgage loan commitments 370,574 433,034 Standby letters of credit 23,562 20,770 Overdraft protection lines 829 905 Total $ 1,166,979 $ 1,171,526 The Company is subject to claims and lawsuits that arise in the ordinary course of business. Based upon the information currently available in connection with such claims, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse impact on the consolidated financial position, results of operations, or liquidity of the Company. - 113 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13 – Transactions with Executive Officers, Directors and Principal Stockholders Loans to principal officers, directors, and their affiliates during the years ended December 31, 2023 and 2022 were as follows: 2023 2022 (dollars in thousands) Balance, January 1 $ 16,266 $ 17,616 Originations and drawdowns 9,801 1,200 Repayments ( 5,744 ) ( 2,550 ) Balance, December 31 $ 20,323 $ 16,266 Deposits from principal officers, directors, and their affiliates as of December 31, 2023 and 2022 were $ 32.3 million and $ 49.7 million respectively. The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal stockholders, their immediate families and affiliated companies (commonly referred to as related parties). The Company leases banking offices from related party entities. In addition, the Company also utilizes an advertising and public relations agency at which one of the Company’s directors is President and CEO and a principal owner. For these transactions, the expenses are not significant to the operations of the Company. Note 14 – Stockholders ’ Equity and Regulatory Requirements Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The accumulated other comprehensive gain or loss on securities and derivatives is not included in computing regulatory capital. Management believes as of December 31, 2023 , the Bank and the Parent Corporation meet all capital adequacy requirements to which they are subject. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is classified as adequately capitalized or lower, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is growth and expansion, and capital restoration plans are required. As of December 31, 2023 , and 2022 , the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. - 114 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14 – Stockholders ’ Equity and Regulatory Requirements – (continued) The following is a summary of the Bank’s and the Parent Corporation’s actual capital amounts and ratios as of December 31, 2023 and 2022 , compared to the FRB and FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a well-capitalized institution. For Classification Under Corrective Minimum Action Plan Capital Adequacy as Well Capitalized Amount Ratio Amount Ratio Amount Ratio The Bank (dollars in thousands) December 31, 2023 Leverage (Tier 1) capital $ 1,074,204 11.20 % $ 383,619 4.00 % $ 479,524 5.00 % Risk-Based Capital: CET 1 $ 1,074,204 12.31 $ 392,643 4.50 $ 567,151 6.50 Tier 1 1,074,204 12.31 523,524 6.00 698,032 8.00 Total 1,158,572 13.28 698,032 8.00 872,540 10.00 December 31, 2022 Leverage (Tier 1) capital $ 996,013 10.64 % $ 374,553 4.00 % $ 468,191 5.00 % Risk-Based Capital: CET 1 $ 996,013 11.60 $ 386,289 4.50 $ 557,972 6.50 Tier 1 996,013 11.60 515,051 6.00 686,735 8.00 Total 1,117,733 13.02 686,735 8.00 858,419 10.00 Minimum Capital For Classification Adequacy as Well Capitalized Amount Ratio Amount Ratio Amount Ratio The Company (dollars in thousands) December 31, 2023 Leverage (Tier 1) capital $ 1,042,481 10.86 % $ 383,900 4.00 % N/A N/A Risk-Based Capital: CET 1 $ 926,399 10.62 $ 392,650 4.50 N/A N/A Tier 1 1,042,481 11.95 523,533 6.00 N/A N/A Total 1,201,849 13.77 698,044 8.00 N/A N/A December 31, 2022 Leverage (Tier 1) capital $ 1,000,577 10.68 % $ 374,729 4.00 % N/A N/A Risk-Based Capital: CET 1 $ 884,495 10.30 $ 386,295 4.50 N/A N/A Tier 1 1,000,577 11.66 515,061 6.00 N/A N/A Total 1,240,047 14.45 686,748 8.00 N/A N/A As of December 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 Capital Ratio which was 3.27 % above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 2.78 % above the minimum buffer ratio. - 115 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15 – Comprehensive Income Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s other comprehensive income is comprised of unrealized holding gains and losses on securities available-for-sale, unrealized gains and losses on cash flow hedges, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, each net of taxes. The following table represents the reclassification out of accumulated other comprehensive (loss) income for the periods presented: Affected Line Item in the Details about Accumulated Other Amounts Reclassified from Accumulated Consolidated Comprehensive Income (Loss) Components Other Comprehensive Income (Loss) Statements of Income For the Year Ended December 31, (dollars in thousands) 2023 2022 2021 Sale of investment securities available-for-sale $ - $ - $ 195 Net gains on sale of investment securities - - ( 48 ) Income tax expense - - 147 Net interest income (expense) on derivatives 20,230 3,243 ( 1,873 ) Interest income (expense) ( 6,086 ) ( 976 ) 528 Income tax (benefit) expense 14,144 2,267 ( 1,345 ) Amortization of pension plan net actuarial losses ( 296 ) ( 66 ) ( 299 ) Salaries and employee benefits 89 20 84 Income tax benefit ( 207 ) ( 46 ) ( 215 ) Total reclassification $ 13,937 $ 2,221 $ ( 1,413 ) Accumulated other comprehensive loss as of December 31, 2023 and 2022 consisted of the following: 2023 2022 (dollars in thousands) Investment securities available-for-sale, net of tax $ ( 57,835 ) $ ( 61,775 ) Derivatives, net of tax 24,810 32,360 Defined benefit pension, net of tax ( 2,084 ) ( 2,949 ) Total $ ( 35,109 ) $ ( 32,364 ) - 116 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 – Pension and Other Benefits Defined Benefit Plans The Company maintains a frozen, noncontributory pension plan covering employees of the Company prior to the merger with Legacy ConnectOne. The benefits are based on years of service and the employee’s compensation over the prior five -year period. The plan’s benefits are payable in the form of a ten -year certain and life annuity. The plan is intended to be a tax-qualified defined benefit plan under Section 401 (a) of the Internal Revenue Code. Payments may be made under the Pension Plan once attaining the normal retirement age of 65 and are generally equal to 44% of a participant’s highest average compensation over a 5 -year period. The following table sets forth changes in projected benefit obligation, changes in fair value of plan assets, funded status, and amounts recognized in the consolidated statements of condition for the Company’s pension plans as of December 31, 2023 and 2022 . 2023 2022 (dollars in thousands) Change in Benefit Obligation: Projected benefit obligation as of January 1, $ 9,317 $ 14,644 Interest cost 441 311 Actuarial (gain) loss 251 ( 4,657 ) Benefits paid ( 674 ) ( 981 ) Projected benefit obligation as of December 31, $ 9,335 $ 9,317 Change in Plan Assets: Fair value of plan assets as of January 1, $ 13,257 $ 17,604 Actual return on plan assets 2,031 ( 3,366 ) Benefits paid ( 674 ) ( 981 ) Fair value of plan assets as of December 31, $ 14,614 $ 13,257 Funded status $ 5,279 $ 3,940 The accumulated benefit obligation was $ 9.3 million for both years ended December 31, 2023 and 2022 . - 117 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 – Pension and Other Benefits – (continued) Amounts recognized as a component of accumulated other comprehensive loss as of the periods presented that have not been recognized as a component of the net periodic pension expense for the plan are presented in the following table. As of December 31, 2023, the Company expects to recognize approximately $ 0.2 million of the net actuarial loss as a component of net periodic pension expense during 2024. As of December 31, 2023 2022 (dollars in thousands) Net actuarial loss recognized in accumulated other comprehensive income (pre-tax) $ 2,981 $ 4,219 The pre-tax, net periodic pension expense (income) and other comprehensive income for the years ended December 31, 2023 , 2022 and 2021 includes the following: 2023 2022 2021 (dollars in thousands) Interest cost $ 440 $ 311 $ 284 Expected return on plan assets ( 838 ) ( 949 ) ( 852 ) Net amortization 296 66 299 Total net periodic pension income $ ( 102 ) $ ( 572 ) $ ( 269 ) Total unrealized gain recognized in other comprehensive income ( 941 ) ( 343 ) - Realized losses included in net income ( 296 ) ( 66 ) ( 299 ) Total recognized in net periodic pension income and other comprehensive income $ ( 1,339 ) $ ( 981 ) $ ( 568 ) - 118 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 – Pension and Other Benefits – (continued) The following table presents the weighted average assumptions used to determine the pension benefit obligations as of December 31, for the following periods. 2023 2022 Discount rate 4.72 % 4.92 % Rate of compensation increase N/A N/A The following table presents the weighted average assumptions used to determine net periodic pension cost for the following three years: 2024 2023 2022 Discount rate 4.72 % 4.92 % 2.57 % Expected long-term return on plan assets 6.00 % 6.50 % 5.50 % Rate of compensation increase N/A N/A N/A The process of determining the overall expected long-term rate of return on plan assets begins with a review of appropriate investment data, including current yields on fixed income securities, historical investment data, historical plan performance and forecasts of inflation and future total returns for the various asset classes. This data forms the basis for the construction of a best-estimate range of real investment returns for each asset class. A weighted average real-return range is computed reflecting the plan’s expected asset mix, and that range, when combined with an expected inflation range, produces an overall best-estimate expected return range. Specific factors such as the plan’s investment policy, reinvestment risk and investment volatility are taken into consideration during the construction of the best estimate real return range, as well as in the selection of the final return assumption from within the range. Plan Assets The general investment policy of the Pension Trust is for the fund to experience growth in assets that will allow the market value to exceed the value of benefit obligations over time. The Company’s pension plan asset allocation as of December 31, 2023 and 2022 , target allocation, and expected long-term rate of return by asset are as follows: Weighted Average % of Plan % of Plan Expected Assets – Assets – Long-Term Target Year Ended Year Ended Rate of Allocation 2023 2022 Return Equity Securities Domestic 56 % 66 % 58 % 3.4 % International 9 4 4 0.8 Debt and/or fixed income securities 33 28 35 1.7 Cash and other alternative investments, including real estate funds, commodity funds, hedge funds and equity structured notes 2 2 3 0.1 Total 100 % 100 % 100 % 6.0 % - 119 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 – Pension and Other Benefits – (continued) The fair values of the Company’s pension plan assets as of December 31, 2023 and 2022 , by asset class, are as follows: December 31, 2023 Fair Value Measurements at Reporting Date Using Quoted Prices Significant in Active Other Significant Markets for Observable Unobservable Identical Assets Inputs Inputs Asset Class (Level 1) (Level 2) (Level 3) (dollars in thousands) Cash $ 201 $ 201 $ - $ - Equity securities: U.S. companies 9,647 9,647 - - International companies 654 654 - - Debt and/or fixed income securities 4,012 4,012 - - Commodity funds 62 62 - - Real estate funds 38 38 - - Total $ 14,614 $ 14,614 $ - $ - December 31, 2022 Fair Value Measurements at Reporting Date Using Quoted Prices Significant in Active Other Significant Markets for Observable Unobservable Identical Assets Inputs Inputs Asset Class (Level 1) (Level 2) (Level 3) (dollars in thousands) Cash $ 262 $ 262 $ - $ - Equity securities: U.S. companies 7,611 7,611 - - International companies 569 569 - - Debt and/or fixed income securities 4,684 4,684 - - Commodity funds 95 95 - - Real estate funds 36 36 - - Total $ 13,257 $ 13,257 $ - $ - Fair Value of Plan Assets The Company used the following valuation methods and assumptions to estimate the fair value of assets held by the plan (for further information on fair value methods, see Note 20 ): Equity securities and real estate funds : The fair values for equity securities and real estate funds are determined by quoted market prices, if available (Level 1 ). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2 ). - 120 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 – Pension and Other Benefits – (continued) Debt and fixed income securities : Certain debt securities are valued at the closing price reported in the active market in which the bond is traded (Level 1 inputs). Other debt securities are valued based upon recent bid prices or the average of recent bid and asked prices when available (Level 2 inputs) and, if not available, they are valued through matrix pricing models developed by sources considered by management to be reliable. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 ). Discounted cash flows are calculated using spread to continuous yield or quoted market pricing curves. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations. The investment manager is not authorized to purchase, acquire or otherwise hold certain types of market securities (subordinated bonds, real estate investment trusts, limited partnerships, naked puts, naked calls, stock index futures, oil, gas or mineral exploration ventures or unregistered securities) or to employ certain types of market techniques (margin purchases or short sales) or to mortgage, pledge, hypothecate, or in any manner transfer as security for indebtedness, any security owned or held by the Plan. Cash Flows Contributions The Bank does not expect to make a contribution in 2024. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, for the following years are as follows (dollars in thousands): 2024 $ 709 2025 707 2026 710 2027 752 2028 752 2029 - 2033 3,598 401 (k) Plan The Company maintains a 401 (k) plan to provide for defined contributions which covers substantially all employees of the Company. Beginning with the 2014 plan year, the 401 (k) plan was amended to provide for a match of 50 % of elective contributions, up to 6% of an employee’s contribution. In 2018, the 401 (k) plan was amended to provide for 100 % matching of employee contributions up to 5% of employee contributions. For 2023 , 2022 and 2021 , employer contributions amounted to $ 2.6 million, $ 2.2 million and $ 1.6 million, respectively. Supplemental Executive Retirement Plan ( “ SERP ” ) During 2019 and in 2022, the Company adopted supplemental executive retirement plans (“SERP’s”) for the benefit of several of its executive officers. Each SERP is a non-qualified plan which provides supplemental retirement benefits to the participating officers of the Company. SERP compensation expense was $ 0.4 million, $ 1.4 million and $ 1.0 million for the years ended December 31, 2023, December 31, 2022 and December 31, 2021, respectively. - 121 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Stock Based Compensation The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of December 31, 2023. The Plan was amended in 2023 so that the maximum number of shares of common stock or equivalents which may be issued under the Plan, is 750,000 . Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, restricted share units or performance units. Shares available for grant and issuance under the Plan as of December 31, 2023 are approximately 469,501 . The Company intends to issue all shares under the Plan in the form of newly issued shares. Restricted stock, options and deferred stock units typically have a three -year vesting period starting one year after the date of grant with one - third vesting each year. The options generally expire ten years from the date of the grant. Restricted stock granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control. All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the awards vesting. Restricted shares have the same dividend and voting rights as common stock, while options, performance units and deferred stock units do not. All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are recorded as incurred. Stock-based compensation expense was $ 4.9 million, $ 4.9 million and $ 4.5 million for the years ended December 31, 2023, 2022 and 2021 respectively. Activity under the Company’s options for the year ended December 31, 2023 was as follows: Weighted- Average Weighted- Remaining Number of Average Contractual Stock Exercise Term Aggregate Options Price (in years) Intrinsic Value Outstanding as of December 31, 2022 8,680 $ 12.95 $ - Granted - - - Exercised ( 7,388 ) 12.73 - Forfeited/cancelled/expired ( 1,292 ) 14 - Outstanding as of December 31, 2023 - - - $ - Exercisable as of December 31, 2023 - $ - - $ - - 122 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Stock Based Compensation - (continued) The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on December 31, 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 December 31, 2023 . This amount changes based on the fair market value of the Company’s stock. Activity under the Company’s restricted shares for year ended December 31, 2023 was as follows: Weighted- Average Nonvested Grant Date Shares Fair Value Nonvested as of December 31, 2022 85,931 $ 26.20 Granted 93,147 16.19 Vested ( 54,183 ) 27.59 Cancelled/netted ( 9,090 ) 21.76 Nonvested December 31, 2023 115,805 $ 17.85 - 123 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Stock Based Compensation – (continued) As of December 31, 2023 , there was approximately $ 0.7 million of total unrecognized compensation cost related to nonvested restricted shares granted. The cost is expected to be recognized over a weighted average period of 1.1 years. A summary of the status of unearned performance unit awards and the change during the period is presented in the table below: Weighted Average Grant Units Units Date Fair (expected) (maximum) Value Unearned as of December 31, 2022 195,265 $ 17.98 Awarded 85,158 17.93 Vested shares ( 116,192 ) 10.77 Unearned as of December 31, 2023 164,231 233,087 $ 23.06 As of December 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 December 31, 2023, the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 233,087 . During the year ended December 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 year ended December 31, 2023 were 52,353 shares. As of December 31, 2023, compensation cost of approximately $ 1.4 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.7 years. A summary of the status of unearned deferred stock units and the changes in deferred stock units during the period is presented in the table below: Weighted Average Grant Units Date Fair (expected) Value Unearned as of December 31, 2022 120,035 $ 23.84 Awarded 146,857 18.98 Vested shares ( 78,544 ) 18.91 Unearned as of December 31, 2023 188,348 $ 22.11 Any forfeitures would result in previously recognized expense being reversed. A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient. During the year ended December 31, 2023, 78,544 shares vested. A total of 42,538 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of deferred stock units during the year ended December 31, 2023 were 36,006 shares. As of December 31, 2023, compensation cost of approximately $ 1.5 million related to non-vested deferred stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.4 years. Note 18 – Dividends and Other Restrictions Certain restrictions, including capital requirements, exist on the availability of undistributed net profits of the Bank for the future payment of dividends to the Parent Corporation. A dividend may not be paid if it would impair the capital of the Bank. As of December 31, 2023 , approximately $ 286.0 million was available for payment of dividends based on regulatory guidelines. - 124 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 19 – Derivatives As part of our overall asset liability management and strategy the Company uses derivative instruments, which can include interest rate swaps, collars, caps, and floors. The notional amount does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis. Derivatives Designated as Hedges Subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship are accounted for in the following manner: 1 ) Cash flow hedges: changes in fair value are recognized as a component in other comprehensive income 2 ) Fair value hedges: changes in fair value are recognized concurrently in earnings As long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100% of the periodic changes in fair value of the hedging instrument are accounted for as outlined above. This is the case whether or not economic mismatches exist in the hedging relationship. As a result, there is no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses is recognized in the period in which the hedged transactions impact earnings. The change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness is presented in the same income statement line item that is used to present the earnings effect of the hedged item. Cash Flow Hedges The Company entered into eleven pay fixed-rate interest rate swaps, with a total notional amount of $ 500 million, all of which were entered into in 2021 and 2022. These are designated as cash flow hedges of current, Federal Home Loan Bank advances. We are required to pay fixed rates of interest ranging from 0.63 % to 3.41 % and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”). All swaps carry expiration dates on the eleven positions ranging from December 2025 to March 2028. The swaps are determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps. The Company previously entered into one forward starting interest rate cap spread transaction, with a total notional amount of $ 150 million, which became effective on October 1, 2022 and matures in October of 2027 and one additional interest rate cap spread transaction, with a total notional amount of $ 75 million, which became effective in November 2022 and matures in November of 2027. These are designated as cash flow hedges of brokered certificates of deposits, and the interest rate cap spread is indexed to a benchmark of fed funds with payment required on a monthly basis. The structure of these instruments is such that the Company entered into a total of $225 million in notional amount of sold interest rate cap agreements, in which we are required to pay the counterparty an incremental amount if the index rate exceeds a set cap rate. Simultaneously, the Company purchased a total of $ 225 million notional amount of interest rate cap agreements in which we receive an incremental amount if the index rate is above a set cap rate. No payments are required if the index rate is at, or below, the cap rate on the sold or purchased interest rate cap agreements. Interest (income) expense recorded on these swap and cap transactions totaled approximately $( 20.2 ) million, $( 3.3 ) million, and $ 1.9 million during 2023, 2022, and 2021 is reported as a component of either interest expense on FHLB Advances or brokered certificates of deposits. - 125 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 19 – Derivatives (continued) The following table presents the net gains (losses), recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the years ended December 31, 2023 and 2022: 2023 Amount of gain Amount of (gain) Amount of gain (loss) (loss) recognized loss reclassified recognized in other in OCI (Effective from OCI to Noninterest income (dollars in thousands) Portion) interest expense (Ineffective Portion) Interest rate contracts $ 9,431 $ ( 20,230 ) $ - 2022 Amount of gain Amount of (gain) Amount of gain (loss) (loss) recognized loss reclassified recognized in other in OCI (Effective from OCI to Noninterest income (dollars in thousands) Portion) interest expense (Ineffective Portion) Interest rate contracts $ 46,282 $ ( 3,343 ) $ - The following table reflects the cash flow hedges included in the Consolidated Statements of Condition as of December 31, 2023 and December 31, 2022 : 2023 2022 Notional Notional (dollars in thousands) Amount Fair Value Amount Fair Value Included in other assets/(liabilities): Interest rate contracts $ 950,000 $ 43,805 $ 950,000 $ 56,797 There were no net gains (losses) recorded in accumulated other comprehensive income or in the Consolidated Statement of Income relating to cash flow derivative instruments for the years ended December 31, 2023 and December 31, 2022 . - 126 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 - 10 - 05 defines fair value, establishes a framework for measuring fair value, establishes a three -level valuation hierarchy for disclosure of fair value measurements and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. FASB ASC 820 - 10 - 65 provides additional guidance for estimating fair value in accordance with FASB ASC 820 - 10 - 05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly. FASB ASC 820 - 10 - 05 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 - 10 - 05 are as follows: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity). An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of December 31, 2023 and December 31, 2022 : Securities Available-for-Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class. Derivatives: The fair value of derivatives are based on valuation models using observable market data as of the measurement date (level 2 ). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third -party pricing services. - 127 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of December 31, 2023 and December 31, 2022 are as follows: December 31, 2023 Fair Value Measurements at Reporting Date Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs Total Fair Value (Level 1) (Level 2) (Level 3) (dollars in thousands) Recurring fair value measurements: Assets Investment securities: Available-for-sale: Federal agency obligations $ 45,326 $ - $ 45,326 $ - Residential mortgage pass-through securities 411,191 - 411,191 - Commercial mortgage pass-through securities 21,564 - 21,564 - Obligations of U.S. states and political subdivision 132,705 - 125,583 7,122 Corporate bonds and notes 4,973 - 4,973 - Asset-backed securities 1,238 - 1,238 - Certificates of deposit - - - - Other securities 165 165 - - Total available-for-sale $ 617,162 $ 165 $ 609,875 $ 7,122 Equity securities 18,564 9,867 8,697 - Derivatives - interest rate contracts 43,805 - 43,805 - Total assets $ 679,531 $ 10,032 $ 662,377 $ 7,122 There were no transfers between Level 1 and Level 2 during the years ended December 31, 2023 and 2022 . - 128 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 Fair Value Measurements at Reporting Date Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs Total Fair Value (Level 1) (Level 2) (Level 3) (dollars in thousands) Recurring fair value measurements: Assets Investment securities: Available-for-sale: Federal agency obligations $ 44,450 $ - $ 44,450 $ - Residential mortgage pass-through securities 417,578 - 417,578 - Commercial mortgage pass-through securities 21,104 - 21,104 - Obligations of U.S. states and political subdivision 142,896 - 135,547 7,349 Corporate bonds and notes 6,974 - 6,974 - Asset-backed securities 1,640 - 1,640 - Certificates of deposit - - - - Other securities 242 242 - - Total available-for-sale $ 634,884 $ 242 $ 627,293 $ 7,349 Equity securities 15,811 9,733 6,078 - Derivatives - interest rate contracts 56,797 - 56,797 - Total assets $ 707,492 $ 9,975 $ 690,168 $ 7,349 Assets Measured at Fair Value on a Non-Recurring Basis The Company may be required periodically to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis as of December 31, 2023 and December 31, 2022 : - 129 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) Collateral Dependent Loans: The Company may record adjustments to the carrying value of loans based on fair value measurements, either as specific reserves or as partial charge-offs of the uncollectible portions of these loans. Specific reserves are calculated in accordance with GAAP. Specific reserves are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the specific reserve amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and are also based on Level 3 inputs. For assets measured at fair value on a nonrecurring basis, the fair value measurements as of December 31, 2023 and December 31, 2022 are as follows: Fair Value Measurements at Reporting Date Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable December 31, Assets Inputs Inputs 2023 (Level 1) (Level 2) (Level 3) Assets measured at fair value on a nonrecurring basis: (dollars in thousands) Collateral dependent loans: Commercial $ 657 $ - $ - $ 657 Commercial real estate 7,005 - - 7,005 Fair Value Measurements at Reporting Date Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable December 31, Assets Inputs Inputs 2022 (Level 1) (Level 2) (Level 3) Assets measured at fair value on a nonrecurring basis: (dollars in thousands) Collateral dependent loans: Commercial $ 14,550 $ - $ - $ 14,550 Commercial real estate 17,264 - - 17,264 Residential real estate 1,392 - - 1,392 Collateral dependent loans - Collateral dependent loans as of December 31, 2023 that required a valuation allowance were $ 7.7 million with a related valuation allowance of $ 1.4 million. Collateral dependent loans - Collateral dependent loans as of December 31, 2022 that required a valuation allowance were $ 43.8 million with a valuation allowance of $ 10.5 million. - 130 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) Assets Measured With Significant Unobservable Level 3 Inputs Recurring basis The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) for the years ended December 31, 2023 and year ended December 31, 2022 : Municipal Securities (dollars in thousands) Beginning balance, January 1, 2023 $ 7,349 Principal paydowns ( 272 ) Changes in unrealized gain (loss) 45 Ending balance, December 31, 2023 $ 7,122 Municipal Securities (dollars in thousands) Beginning balance, January 1, 2022 $ 8,565 Principal paydowns ( 287 ) Changes in unrealized gain (loss) ( 929 ) Ending balance, December 31, 2022 $ 7,349 The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of December 31, 2023 and December 31, 2022 . The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy. December 31, 2023 Valuation Unobservable Fair Value Techniques Input Range Securities available-for-sale: (dollars in thousands) Municipal securities $ 7,122 Discounted cash flows Discount rate 4.3 % December 31, 2022 Valuation Unobservable Fair Value Techniques Input Range Securities available-for-sale: (dollars in thousands) Municipal securities $ 7,349 Discounted cash flows Discount rate 4.3 % - 131 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) Non-recurring basis The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy. December 31, 2023 Valuation Unobservable (dollars in thousands) Fair Value Techniques Input Range (weighed average) Commercial loans $ 657 Appraisals of collateral Adjustment for comparable sales -7.5% to +25% (+.1%) Commercial real estate loans 7,005 Appraisals of collateral Adjustment for comparable sales -15% to +0% (-10.3%) December 31, 2022 Valuation Unobservable (dollars in thousands) Fair Value Techniques Input Range (weighed average) Commercial loans $ 14,028 Market approach (100%) Average transfer price as a price to unpaid principal balance 65% to 96% (67%) Commercial loans 522 Appraisals of collateral Adjustment for comparable sales -10% to +13% (+3%) Commercial real estate loans 17,264 Appraisals of collateral Adjustment for comparable sales -20% to +0% (-15%) Residential real estate loans 1,392 Appraisals of collateral Adjustment for comparable sales +21% to +39% (22%) - 132 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) Fair Value of Financial Instruments FASB ASC 825 - 10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825 - 10. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-sale and investment securities available-for-sale. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Company for the purposes of this disclosure. Fair values for financial instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These estimates are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with ASC Topic 825 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs. Cash and cash equivalents. The carrying amounts of cash and short-term instruments approximate fair values. FHLB stock. It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability. Loans. The fair value of portfolio loans, net is determined using an exit price methodology. The exit price methodology continues to be based on a discounted cash flow analysis, in which projected cash flows are based on contractual cash flows adjusted for prepayments for certain loan types ( e.g., residential mortgage loans and multi-family loans) and the use of a discount rate based on expected relative risk of the cash flows. The discount rate selected considers loan type, maturity date, a liquidity premium, cost to service, and cost of capital, which is a Level 3 fair value estimate. Deposits. The carrying amounts of deposits with no stated maturities (i.e., non‐interest-bearing, savings, NOW, and money market deposits) are assigned fair values equal to the carrying amounts payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for alternative funding sources of similar remaining maturity. Term Borrowings and Subordinated Debentures . The fair value of the Company’s long-term borrowings and subordinated debentures were calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities. Accrued Interest Receivable/Payable. The carrying amounts of accrued interest approximate fair value resulting in a level 2 or level 3 classification based on the level of the asset or liability with which the accrual is associated. - 133 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2023 and December 31, 2022 : Fair Value Measurements Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Carrying Fair Assets Inputs Inputs Amount Value (Level 1) (Level 2) (Level 3) (dollars in thousands) December 31, 2023 Financial assets: Cash and due from banks $ 242,714 $ 242,714 $ 242,714 $ - $ - Investment securities available-for-sale 617,162 617,162 165 609,875 7,122 Restricted investment in bank stocks 51,457 n/a n/a n/a n/a Equity securities 18,564 18,564 9,867 8,697 - Net loans 8,263,171 8,001,504 - - 8,001,504 Derivatives - interest rate contracts 43,805 43,805 - 43,805 - Accrued interest receivable 49,108 49,108 - 5,387 43,721 Financial liabilities: Noninterest-bearing deposits 1,259,364 1,259,364 1,259,364 - - Interest-bearing deposits 6,276,838 6,256,444 3,745,467 2,510,977 - Borrowings 933,579 932,081 - 932,081 - Subordinated debentures 79,439 77,952 - 77,952 - Accrued interest payable 10,152 10,152 - 10,152 - December 31, 2022 Financial assets: Cash and due from banks $ 268,315 $ 268,315 $ 268,315 $ - $ - Investment securities available-for-sale 634,884 634,884 242 627,293 7,349 Restricted investment in bank stocks 46,604 n/a n/a n/a n/a Equity securities 15,811 15,811 9,733 6,078 - Net loans 8,009,176 7,723,378 - - 7,723,378 Derivatives - interest rate contracts 56,797 56,797 - 56,797 - Accrued interest receivable 46,062 46,062 - 4,685 41,377 Financial liabilities: Noninterest-bearing deposits 1,501,614 1,501,614 1,501,614 - - Interest-bearing deposits 5,855,008 5,811,291 3,460,818 2,350,473 - Borrowings 857,622 854,698 - 854,698 - Subordinated debentures 153,255 153,581 - 153,581 - Accrued interest payable 6,925 6,925 - 6,925 - - 134 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20 – Fair Value Measurements and Fair Value of Financial Instruments – (continued) The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, considering the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above. Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company’s core deposit base is required by FASB ASC 825 - 10. Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as the brokerage network, deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. - 135 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 21 – Parent Corporation Only Financial Statements The Parent Corporation operates its wholly-owned subsidiary, the Bank. The earnings of this subsidiary are recognized by the Parent Corporation using the equity method of accounting. Accordingly, earnings are recorded as increases in the Parent Corporation’s investment in the subsidiaries and dividends paid reduce the investment in the subsidiaries. The ability of the Parent Corporation to pay dividends will largely depend upon the dividends paid to it by the Bank. Dividends payable by the Bank to the Parent Corporation are restricted under supervisory regulations (see Note 18 of the Notes to Consolidated Financial Statements). Condensed financial statements of the Parent Corporation only are as follows: Condensed Statements of Condition As of December 31, 2023 2022 (dollars in thousands) ASSETS Cash and cash equivalents $ 35,885 $ 117,162 Investment in subsidiaries 1,253,497 1,179,342 Investment securities 156 32,405 Equity securities 6,957 4,218 Other assets - 699 Total assets $ 1,296,495 $ 1,333,826 LIABILITIES AND STOCKHOLDERS’ EQUITY Other liabilities 436 1,820 Subordinated debentures, net 79,439 153,255 Stockholders’ equity 1,216,620 1,178,751 Total liabilities and stockholders’ equity $ 1,296,495 $ 1,333,826 Condensed Statements of Income For Years Ended December 31, 2023 2022 2021 (dollars in thousands) Income: Dividend income from subsidiaries $ 50,725 $ 36,475 $ 24,071 Other income 946 1,638 1,627 Total Income 51,671 38,113 25,698 Expenses ( 6,359 ) ( 8,928 ) ( 8,741 ) Income before equity in undistributed earnings of subsidiaries 45,312 29,185 16,957 Equity in undistributed earnings of subsidiaries 41,691 96,026 113,396 Net Income 87,003 125,211 130,353 Preferred dividends 6,036 6,037 1,717 Net income available to common stockholders $ 80,967 $ 119,174 $ 128,636 - 136 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 21 – Parent Corporation Only Financial Statements – (continued) Condensed Statements of Cash Flows For Years Ended December 31 2023 2022 2021 (dollars in thousands) Cash flows from operating activities: Net income $ 87,003 $ 125,211 $ 130,353 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary ( 41,691 ) ( 96,026 ) ( 113,396 ) Loss on equity securities, net 131 45 55 Amortization of subordinated debt issuance costs 1,184 304 303 Decrease in other assets 699 - 50,590 Decrease in other liabilities ( 1,384 ) ( 14 ) ( 287 ) Net cash provided by operating activities 45,942 29,520 67,618 Cash flows from investing activities: Payments for investments and advances in subsidiaries ( 32,250 ) - - Repayment of investments and advances in subsidiaries 32,250 - - Purchases of equity securities ( 2,870 ) ( 3,538 ) ( 780 ) Net cash used in investing activities ( 2,870 ) ( 3,538 ) ( 780 ) Cash flows from financing activities: Repayment of subordinated debt ( 75,000 ) - ( 50,000 ) Cash dividends paid on preferred stock ( 6,036 ) ( 6,037 ) ( 1,717 ) Cash dividends paid on common stock ( 25,912 ) ( 23,428 ) ( 17,493 ) Purchase of treasury stock ( 17,497 ) ( 13,127 ) ( 9,401 ) Proceeds from preferred stock offering - - 110,927 Proceeds from exercise of stock options 96 124 106 Net cash (used in) provided by financing activities ( 124,349 ) ( 42,468 ) 32,422 (Increase) decrease in cash and cash equivalents ( 81,277 ) ( 16,486 ) 99,260 Cash and cash equivalents as of January 1, 117,162 133,648 34,388 Cash and cash equivalents as of December 31, $ 35,885 $ 117,162 $ 133,648 - 137 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 22 – Quarterly Financial Information of ConnectOne Bancorp, Inc. (unaudited) 2023 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter (dollars in thousands, except per share data) Total interest income $ 128,957 $ 123,686 $ 121,325 $ 116,097 Total interest expense 67,135 61,329 57,482 49,013 Net interest income 61,822 62,357 63,843 67,084 Provision for credit losses 2,700 1,500 3,000 1,000 Total other income 4,209 3,562 3,438 2,792 Other expenses 37,845 35,784 35,450 34,870 Income before income taxes 25,486 28,635 28,831 34,006 Income tax expense 6,213 7,228 7,437 9,077 Net income 19,273 21,407 21,394 24,929 Preferred dividends 1,509 1,509 1,509 1,509 Net income available to common stockholders $ 17,764 $ 19,898 $ 19,885 $ 23,420 Earnings per share: Basic $ 0.46 $ 0.51 $ 0.51 $ 0.60 Diluted 0.46 0.51 0.51 0.59 2022 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter (dollars in thousands, except per share data) Total interest income $ 112,469 $ 96,980 $ 85,356 $ 78,941 Total interest expense 34,460 18,819 9,765 8,583 Net interest income 78,009 78,161 75,591 70,358 Provision for credit losses 3,300 10,000 3,000 1,450 Total other income, net of securities gains 3,508 3,322 3,359 3,054 Other expenses 33,312 32,143 31,703 29,230 Income before income taxes 44,905 39,340 44,247 42,732 Income tax expense 12,348 10,425 11,889 11,351 Net income 32,557 28,915 32,358 31,381 Preferred dividends 1,510 1,509 1,509 1,509 Net income available to common stockholders $ 31,047 $ 27,406 $ 30,849 $ 29,872 Earnings per share: Basic $ 0.79 $ 0.70 $ 0.78 $ 0.76 Diluted 0.79 0.70 0.78 0.75 Note: Due to rounding, quarterly earnings per share for 2022 do not sum to reported annual earnings per share. - 138 - Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.