ConnectOne Bancorp, Inc. (CNOB) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document.

Cautionary Statement Concerning Forward-Looking Statements

See Item 1 of this Annual Report on Form 10-K for information regarding forward-looking statements.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company considers the allowance for credit losses and related provision to be critical to our financial results. For information on our significant accounting policies, see Note 1a in the Notes to Consolidated Financial Statements.

Allowance for Credit Losses and Related Provision

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 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 loan portfolio also represents the largest asset type on the Company’s Consolidated Statements of Condition.

Management believes the following information may enable investors to better understand the changes in our allowance for credit losses for loans. The Company’s allowance for credit losses ("ACL") for loans totaled $82.0 million and $90.5 million as of December 31, 2023 and 2022, respectively. The $8.5 million decrease in the allowance for credit losses for loans was primarily driven by net charge-offs of $17.0 million, partially offset by $8.4 million in provision for credit losses.

The quantitative component of our ACL for loans on collectively evaluated loans, which is largely based on a selection of various economic forecasts, increased by $3.4 million as of December 31, 2023 when compared to December 31, 2022. This increase was primarily attributable to organic growth of $0.3 billion in collectively evaluated loans. The qualitative component of our ACL for loans, which is largely based on management’s judgment of qualitative loss factors, was relatively unchanged, on an absolute basis, over the same period-of-time, as qualitative factor trends slightly improved over 2023, or largely remained unchanged.

The Company’s allowance for credit losses for collectively evaluated loans totaled $80.6 million as of December 31, 2023, which included $71.6 million of allowance related to commercial and commercial real estate loans. Of the $71.6 million allowance related to commercial and commercial real estate loans, $24.1 million was attributable to qualitative loss factors. Changes in managements’ judgement of qualitative loss factors could result in a significant change to the allowance for credit losses for loans. As described in Note 1a to our financial statements filed as part of this Annual Report on Form 10-K, qualitative loss factors are applied to each portfolio segment with the amounts judgmentally determined by the relative risk to the most severe loss periods identified in the historical loan charge-offs of a peer group of similar-sized regional banks. As of December 31, 2023, on a weighted average basis the most severe historical loss rate for our commercial and commercial real estate loans were 2.33% and 1.88%, respectively.

-37-

Table of Contents

The Company’s quantitative component of allowance for credit losses for collectively evaluated loans is calculated with an economic forecast sourced from Moody’s. Management performed a hypothetical sensitivity analysis to understand the impact of changes in the economic forecast as a key input on our allowance for credit losses for collectively evaluated loans. Within the various economic scenarios considered for this hypothetical sensitivity analysis, as of December 31, 2023, the quantitative estimate of the allowance for credit loss for collectively evaluated loans would increase by approximately $39.4 million under sole consideration of an adverse Moody’s economic forecast. The hypothetical sensitivity calculation reflects the sensitivity of the modeled allowance estimate to macroeconomic forecast data but lacks other qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process. As such, this does not necessarily reflect the nature and extent of future changes in the allowance for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.

Our allowance for credit losses for individually analyzed loans is determined on an individual basis using the present value of expected cash flows discounted using the loan’s effective interest rate or, for collateral-dependent loans, the fair value of the collateral, less estimated selling costs, as applicable. As of December 31, 2023, the Company’s allowance for credit losses on individually analyzed loans decreased $9.4 million from December 31, 2022. This decrease was primarily due to reductions in individually analyzed loans, increases in charge-offs, and increases in the fair value of collateral for collateral-dependent loans, partially offset by increases to the allowance on existing individually analyzed loans.

Overview and Strategy

We serve as a holding company for the Bank, which is our primary asset and only operating subsidiary. We follow a business plan that emphasizes the delivery of customized banking services in our market area to clients who desire a high level of personalized service and responsiveness. The Bank conducts a traditional banking business, making commercial loans, consumer loans and residential and commercial real estate loans. In addition, the Bank offers various non-deposit products through non-proprietary relationships with third party vendors. The Bank relies upon deposits as the primary funding source for its assets. The Bank offers traditional deposit products.

Many of our clients relationships start with referrals from existing clients. We then seek to cross sell our products to clients to grow the client relationship. For example, we will frequently offer an interest rate concession on credit products for clients that maintain a noninterest-bearing deposit account at the Bank. This strategy has helped maintain our funding costs and the growth of our interest expense even as we have substantially increased our total deposits. It has also helped fuel our significant loan growth. We believe that the Bank’s continued growth and profitability demonstrate the need for and success of our brand of banking.

Our results of operations depend primarily on our net interest income, which is the difference between the interest earned on our interest-earning assets and the interest paid on funds borrowed to support those assets, primarily deposits. Net interest margin is the difference between the weighted average rate received on interest-earning assets and the weighted average rate paid to fund those interest-earning assets, which is also affected by the average level of interest-earning assets as compared with that of interest-bearing liabilities. Net income is also affected by the amount of noninterest income and noninterest expenses.

General

The following discussion and analysis present the more significant factors affecting the Company’s financial condition as of December 31, 2023 and 2022 and results of operations for each of the years in the three-year period ended December 31, 2023. The MD&A should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and other information contained in this report.

-38-

Table of Contents

Operating Results Overview

Net income available to common stockholders for the year ended December 31, 2023 was $81.0 million, a decrease of $38.2 million, or 32.1%, compared to net income of $119.2 million for 2022. Diluted earnings per share were $2.07 for 2023, a 31.2% decrease from $3.01 for 2022.

The change in net income from 2022 to 2023 was attributable to the following:

Net income available to common stockholders for the year ended December 31, 2022 was $119.2 million, a decrease of $9.5 million, or 7.4%, compared to net income of $128.6 million for 2021. Diluted earnings per share were $3.01 for 2022, a 6.5% decrease from $3.22 for 2021.

The change in net income from 2021 to 2022 was primarily attributable to the following:

-39-

Table of Contents

Net Interest Income

Fully taxable equivalent net interest income for 2023 totaled $258.3 million, a decrease of $46.3 million, or 15.2%, from 2022. The decrease in net interest income was due to an 87 basis-point contraction in the net interest margin to 2.82% from 3.69%, partially offset by a $0.9 billion, or 11.0%, increase in average interest-earning assets.  The net interest margin contraction was due to a 199-basis point increase in the average cost of deposits, including noninterest-bearing demand, to 2.74%, and was partially offset by a 77 basis-point increase in the loan portfolio yield to 5.57%.  Average total loans, which includes loans held-for-sale, increased by 10.8% to $8.2 billion in 2023 from $7.4 billion in 2022. The increase in average total loans is attributable to higher loan originations.

Fully taxable equivalent net interest income for 2022 totaled $304.6 million, an increase of $39.9 million, or 15.1%, from 2022. The increase in net interest income was due to an increase in average interest-earning assets, which grew by 14.3% to $8.3 billion and a widening of 3 basis-points in the net interest margin. The widening of the net interest margin was mainly attributable to higher yields on loans and securities and lower average cash balances, offset by a higher cost of funds. Average total loans, which includes loans held-for-sale, increased by 15.0% to $7.4 billion in 2022 from $6.4 billion in 2021. The increase in average total loans is primarily attributable to higher loan originations.

-40-

Table of Contents

Average Balance Sheets

The following table sets forth certain information relating to our average assets and liabilities for the years ended December 31, 2023, 2022 and 2021 and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.

-41-

Table of Contents

Rate/Volume Analysis

The following table presents, by category, the major factors that contributed to the changes in net interest income. Changes due to both volume and rate have been allocated in proportion to the relationship of the dollar amount change in each.

Provision for (Reversal of) Credit Losses

In determining the provision for credit losses, management considers national and local economic trends and conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; effects of changes in lending policies, trends in volume and terms of loans; levels and trends in delinquencies, individually analyzed loans and net charge-offs and the results of independent third party loan reviews.

The Bank adopted CECL beginning on January 1, 2021. Provision expense may therefore become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

For the year ended December 31, 2023, the provision for credit losses was $8.2 million, a decrease of $9.6 million, compared to the provision for credit losses of $17.8 million for the year ended December 31, 2022. The decrease in provision for credit losses for the year ended December 31, 2023 reflected changes in forecasted macroeconomic conditions, partially offset by organic loan growth.

For the year ended December 31, 2022, the provision for (reversal of) credit losses were $17.8 million, an increase of $23.3 million, compared to the provision for (reversal of) credit losses of ($5.5) million for the year ended December 31, 2021. The increase in provision for credit losses for the year ended December 31, 2022 reflected strong organic loan growth and changes in forecasted macroeconomic conditions.

-42-

Table of Contents

Noninterest Income

Noninterest income for the full-year 2023 increased by $0.7 million, or 5.7%, to $14.0 million from $13.2 million in 2022. The increase was primarily due to decreases in net losses on equity securities of $1.4 million and increases in income on bank owned life insurance of $0.7 million, partially offset by decreases in deposit, loan and other income of $1.4 million.

Noninterest income for the full-year 2022 decreased by $2.4 million, or 15.6%, to $13.2 million from $15.7 million in 2021. The decrease was primarily due to decreases in net gains on loans held for sale of $2.1 million, gains on sale of branches of $0.7 million, net gains on sale/redemption of investment securities of $0.2 million and an increase in net losses on equity securities of $1.1 million, partially offset by increases in deposit, loan and other income of $0.9 million and income on bank owned life insurance of $0.8 million.

Noninterest Expense

Noninterest expenses for the full-year 2023 increased by $17.6 million, primarily due to increases in salaries and employee benefits of $7.0 million attributable to increased staff in both the revenue and back-office areas of the Bank, base salary increases and incentive compensation accruals.  Additionally, there were increases in FDIC insurance of $5.5 million, which included a $2.1 million FDIC special assessment recognized in 2023.  Excluding the $2.1 million special assessment, the increase in FDIC insurance from the prior year of $3.4 million was attributable to balance sheet growth and a two-basis point increase in the Bank’s initial base rate.  Finally, there were increases in information technology and communications of $3.2 million, other expenses of $2.3 million, occupancy and equipment of $1.0 million and marketing and advertising of $0.3 million, partially offset by decreases in professional and consulting of $0.5 million, BoeFly acquisition of $0.5 million and amortization of core deposit intangibles of $0.2 million.  The increase in information technology and communications was primarily attributable to additional investments in technology, equipment and software.

Noninterest expenses for the full-year 2022 increased by $17.4 million, or 15.9%, to $126.4 million from $109.0 million in 2021. The increase was primarily due to increases in salaries and employee benefits of $16.9 million, change in value of acquisition price of $1.5 million , other expenses of $1.1 million, marketing and advertising of $0.4 million and FDIC insurance of $0.2 million, partially offset by decreases in occupancy and equipment of $1.8 million, amortization of core deposit intangible of $0.3 million, information technology and communication of $0.2 million, professional and consulting of $0.2 million and other components of net periodic pension income of $0.3 million. The increase in salaries and employee benefits was attributable to increased staff in both revenue and back-office areas of the Bank, base salary increases, and incentive compensation accruals.

-43-

Table of Contents

Income Taxes

Income tax expense was $30.0 million for 2023 compared to $46.0 million for 2022 and $44.7 million for 2021. The decrease in income tax expense in 2023 when compared to 2022 was primarily the result of lower taxable income. The increase in income tax expense in 2022 when compared to 2021 was also primarily the result of higher taxable income. The effective tax rates were 25.6% in 2023, 26.9% in 2022 and 25.5% for 2021. The lower effective tax rate during 2023 when compared to 2022, was the result of a lower percentage of income being derived from taxable sources. The higher effective tax rate during 2022 when compared to 2021 was the result of a higher percentage of income being derived from taxable sources.

For a more detailed description of income taxes see Note 10 of the Notes to Consolidated Financial Statements.

Financial Condition Overview

As of December 31, 2023, the Company’s total assets were $9.856 billion, an increase of $0.2 billion from December 31, 2022. Total loans (including loans held-for-sale) were $8.3 billion, an increase of $0.2 billion from December 31, 2022. Deposits were $7.5 billion, an increase of $0.2 billion from December 31, 2022.

As of December 31, 2022, the Company’s total assets were $9.645 billion, an increase of $1.5 billion from December 31, 2021. Total loans (including loans held-for-sale) were $8.1 billion, an increase of $1.3 billion from December 31, 2021. Deposits were $7.4 billion, an increase of $1.0 billion from December 31, 2021.

Loan Portfolio

The Bank’s lending activities are generally oriented to small-to-medium sized businesses, high net worth individuals, professional practices and consumer and retail clients living and working in the Bank’s metropolitan, New York market area, consisting of Bergen, Union, Morris, Essex, Hudson, Mercer and Monmouth counties, New Jersey, as well as NYC’s five boroughs, Nassau, Rockland, Orange and Westchester counties, in New York and businesses and individuals living and working in the communities served by the Bank's West Palm Beach, Florida office. The Bank has not made loans to borrowers outside of the United States. The Bank believes that its strategy of high-quality client service, competitive rate structures and selective marketing have enabled it to gain market share.

-44-

Table of Contents

Commercial loans are loans made for business purposes and are primarily secured by collateral such as business assets including accounts receivable, inventory and equipment. These facilities can also be secured by cash balances with the Bank, marketable securities held by or under the control of the Bank, and commercial and residential real estate.  Commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include loans secured by first liens on completed commercial properties, including multifamily properties, to purchase or refinance such properties, as well as land loans. Residential mortgages include loans secured by first liens on residential real estate and are generally made to existing clients of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences. Consumer loans are made to individuals who qualify for auto loans, cash reserve, credit cards and installment loans.

Gross loans as of December 31, 2023 totaled $8.3 billion, an increase of $0.2 billion, or 3.0%, over gross loans as of December 31, 2022 of $8.1 billion.

The largest component of the gross loan portfolio as of December 31, 2023 and December 31, 2022 was commercial real estate loans. Commercial real estate loans as of December 31, 2023 totaled $5.9 billion, an increase of $100 million, or 1.7%, compared to commercial real estate loans as of December 31, 2022 of $5.8 billion. The main component contributing to the increase in commercial real estate loans is an increase in multifamily loans. See the tables below for more detailed information on our commercial real estate portfolio. Commercial loans totaled $1.6 billion as of December 31, 2023, a decrease of $106 million, or 7.2%, compared to commercial loans as of December 31, 2022 of $1.5 billion. Included in commercial loans were PPP loans of $9 million as of December 31, 2023 and $11 million as of December 31, 2022. Commercial construction loans as of December 31, 2023 totaled $620 million, an increase of $46 million, or 8.1%, compared to commercial construction loans as of December 31, 2022 of $574 million.

Residential real estate loans totaled $256 million as of December 31, 2023, a decrease of $9 million, or 3.3%, compared to residential real estate loans as of December 31, 2022 of $265 million. Consumer loans as of December 31, 2023 totaled $1 million compared to $2 million as of December 31, 2022.

The following table sets forth the classification of our loans by loan portfolio segment for the periods presented.

(1) Includes PPP loans of $9 million, $11 million and $93 million as of December 31, 2023, December 31, 2022 and December 31, 2021, respectively.

-45-

Table of Contents

While the previous table reflects the classification of our loans by loan portfolio segment, the following tables present further disaggregation of our commercial real estate portfolio along with loan-to-value ("LTV") percentages.

The table above is further broken down in the following table by geography:

-46-

Table of Contents

In addition, the following tables presents further detail with respect to our owner-occupied and nonowner-occupied borrower concentrations included in the commercial real estate segment.

-47-

Table of Contents

The following table sets forth the classification of our gross loans by loan portfolio segment and by fixed and adjustable-rate loans as of December 31, 2023 by remaining contractual maturity.

For additional information regarding loans, see Note 4 of the Notes to the Consolidated Financial Statements.

-48-

Table of Contents

Asset Quality

General. One of our key objectives is to maintain a high level of asset quality. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by sending late notices, as well as making personal contact with the borrower. Typically, late notices are sent approximately 10 days after the date the payment is due, followed up by direct contact with the borrower approximately 15 days after payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed, and additional efforts are made to collect the deficiency. Total loans delinquent 30 days or more are reported to the board of directors of the Bank on a monthly basis.

On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases (“nonaccrual” loans). Except for loans that are well-secured and in the process of collection, it is our policy to discontinue accruing additional interest and reverse any interest accrued on any loan that is 90 days or greater past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to the borrower’s ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt. Typically, a nonaccrual loan may return to accrual status if the borrower makes the loan current, and then makes six consecutive payments as scheduled.

Real estate acquired as a result of foreclosure is classified as other real estate owned (“OREO”) until sold. OREO is recorded at the lower of cost or fair value less estimated selling costs. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of OREO are charged to operations, as incurred.

The Company 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 or individual analysis. Individual analysis will establish a specific reserve for instruments in scope.

-49-

Table of Contents

Asset Classification. Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special mention.”

When an insured institution classifies one or more assets, or portions thereof, as “substandard” or “doubtful,” it is required that a general valuation allowance for credit losses must be established in an amount deemed prudent by management. General valuation allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as “loss,” it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.

A bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for credit losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Our management believes that, based on information currently available, our allowance for credit losses is maintained at a level which covers all known and probable incurred losses in the portfolio at each reporting date. However, actual losses are dependent upon future events and, as such, further additions to the level of allowances for credit losses may become necessary.

The table below sets forth information on our classified loans and loans designated as special mention (excluding loans held-for-sale) as of the dates presented:

During the year ended December 31, 2023, “substandard” loans and “doubtful” loans, which include lower credit quality loans which possess higher risk characteristics than “special mention” loans, decreased to $58.5 million, or 0.7% of loans receivable, as of December 31, 2023 from $120.3 million, or 1.5% of loans receivable, as of December 31, 2022. The decrease in substandard loans from the prior year was primarily attributable to loan payoffs resulting from successful loan workouts.

During the year ended December 31, 2023, “special mention” loans were $54.2 million, or 0.6% of loans receivable, while “special mention” loans as of December 31, 2022 were $62.1 million, or 0.8% of loans receivable.

-50-

Table of Contents

Nonaccrual Loans, OREO and Loans 90 Days or Greater Past Due and Still Accruing

Nonperforming assets include nonaccrual loans and OREO. Nonaccrual loans represent loans on which interest accruals have been suspended. OREO represents property acquired through foreclosure in partial or full satisfaction of loans. Loans 90 days or greater past due and still accruing represent loans that are both well-secured and in the process of collection, as well as any purchased credit-deteriorated loans, net of fair value marks, which accrete income per the valuation at date of acquisition.  The Company considers charging off loans, or a portion thereof, at the time the Company deems it has exhausted all means of collection. For additional information regarding loans, see Note 4 of the Notes to the Consolidated Financial Statements.

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

Allowance for Credit Losses and Related Provision

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 Bank 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”.

As of December 31, 2023, the allowance for credit losses for loans was $82.0 million, a decrease of $8.5 million, or 9.4%, from $90.5 million as of December 31, 2022. The decrease in the allowance for credit losses was primarily driven by net charge-offs of $17.0 million, partially offset by $8.4 million in provision for credit losses.

-51-

Table of Contents

The allowance for credit losses for loans as a percentage of loans receivable was 0.98% as of December 31, 2023 and 1.12% as of December 31, 2022.

Three-Year Statistical Allowance for Credit Losses for Loans

The following table reflects the relationship of loan volume, the provision and allowance for credit losses for loans and net charge-offs for the periods presented.

For additional information regarding loans, see Note 4 of the Notes to the Consolidated Financial Statements.

Implicit in the lending function is the fact that credit losses will be experienced and that the risk of loss will vary with the type of loan being made, the creditworthiness of the borrower and prevailing economic conditions. The allowance for credit losses has been allocated in the table below according to the estimated amount deemed to be reasonably and supportably necessary to provide for the possibility of either lifetime expected losses or losses being incurred within the following categories of loans as of December 31, for each of the past three years.

The following table shows the amounts of the allowance allocable to such loans and the percentage of such loans to gross loans, along with the amount of the unallocated allowance. “Total Commercial”, as shown below, includes commercial, commercial real estate and commercial construction loans.

-52-

Table of Contents

Investments

For the year ended December 31, 2023, the amortized cost of investment securities, including equity securities, increased by $65.7 million to approximately $726.5 million or 7.9% of average earning assets, from $660.8 million, or 8.0% of average earning assets, for the year ended December 31, 2022. As of December 31, 2023, the principal components of the investment portfolio are U.S. Treasury and Government Agency Obligations, Federal Agency Obligations including mortgage-backed securities, Obligations of U.S. States and Political Subdivisions, Corporate Bonds and other debt and equity securities.

During the year ended December 31, 2023, rate related factors increased investment revenue by $2.9 million and volume related factors increased investment revenue by $2.0 million. The tax-equivalent yield on investments increased by 43 basis points to 3.10% from a yield of 2.67% during the year ended December 31, 2022.

Securities available-for-sale are a part of the Company’s interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. The Company continues to reposition the investment portfolio as part of an overall corporate-wide strategy to produce reasonable and consistent margins where feasible, while attempting to limit risks inherent in the Company’s Consolidated Statement of Condition.

As of December 31, 2023, net unrealized losses on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included in stockholders’ equity, net of tax, amounted to $57.8 million as compared with net unrealized losses of $61.8 million as of December 31, 2022. The decrease in unrealized losses is predominately attributable to changes in market conditions and interest rates. Unrealized losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely that we will not be required to sell the securities prior to their anticipated recovery.  The 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. For additional information regarding the Company’s investment portfolio, see Note 3, Note 15 and Note 20 of the Notes to the Consolidated Financial Statements.

During 2023, 2022 and 2021, there were no sales from the Company’s available-for-sale portfolio. The Company had a $195 thousand gain on the redemption of available-for-sale securities during 2021. The Company had no impairment charges in 2023, 2022 and 2021. The table below illustrates the maturity distribution and weighted average yield on a tax-equivalent basis for amortized cost of our investment securities, excluding equity securities, as of December 31, 2023, on a contractual maturity basis.

-53-

Table of Contents

For information regarding the carrying value of the investment portfolio, see Note 3, Note 15 and Note 20 of the Notes to the Consolidated Financial Statements.

The securities listed in the table above are either rated investment grade by Moody’s and/or Standard and Poor’s or have shadow credit ratings from a credit agency supporting an investment grade and conform to the Company’s investment policy guidelines. There were no municipal securities, or corporate securities, of any single issuer exceeding 10% of stockholders’ equity as of December 31, 2023. Other securities do not have a contractual maturity and are included in the “Due in 1 year or less” maturity in the table above.

-54-

Table of Contents

The following table sets forth the carrying value of the Company’s investment securities, as of December 31 for each of the last three years.

For other information regarding the Company’s investment securities portfolio, see Note 3, Note 15 and Note 20 of the Notes to the Consolidated Financial Statements.

Interest Rate Sensitivity Analysis

The principal objective of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”). The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.

The Company utilizes a number of strategies to manage interest rate risk including, but not limited to: (i) balancing the types and structures of interest-earning assets and interest-bearing liabilities by diversifying mix, coupons, maturities and/or repricing characteristics, (ii) reducing the overall interest rate sensitivity of liabilities by emphasizing core and/or longer-term deposits; utilizing FHLB advances and wholesale deposits for our interest rate risk profile, (iii) managing the investment portfolio for liquidity and interest rate risk profile, and (iv) entering into interest rate swap and cap agreements.

We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of December 31, 2023, and December 31, 2022, the results of the models are monitored by guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and Bank’s management.

-55-

Table of Contents

The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates.  The year over year change in the interest rate risk profile primarily reflects updated model assumptions in response to dynamically changing market conditions, including higher beta assumptions, as well as a positioning of the balance sheet to be more liability sensitive.

Based on our model, which was run as of December 31, 2023, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 9.25%, while a 100 basis-point instantaneous decrease in interest rates would increase net interest income by 5.34%. As of December 31, 2022, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 2.22%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.01%.

Based on our model, which was run as of December 31, 2023, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 5.68%, while a 100 basis-point instantaneous decrease in interest rates would increase net interest income by 4.29%. As of December 31, 2022, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 2.66%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 3.99%.

An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of December 31, 2023, would decrease by 15.09% with an instantaneous rate shock of up 200 basis points, and increase by 5.75% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2022, would decrease by 10.51% with an instantaneous rate shock of up 200 basis points, and decrease by 1.13% with an instantaneous rate shock of down 100 basis points.

The change in interest rate sensitivity was impacted by changes in overall market interest rates, updates to certain model assumptions, changes in short and intermediate-term fixed rate funding and by the deposit mix shift into certificates of deposit, from both noninterest-bearing and interest-bearing non-maturity deposits.

-56-

Table of Contents

The following table illustrates the most recent results for EVE and NII as of December 31, 2023.

Certain model limitations are inherent in the methodology used in the EVE and net interest income measurements. The models require the making of certain assumptions which may tend to oversimplify the way actual yields and costs respond to changes in market interest rates. The models assume that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured, thus they do not consider the Company’s strategic plans, or any other steps it may take to respond to changes in rates over the forecasted period of time. Additionally, the models assume immediate changes in interest rates, based on yield curves as of a point-in-time, which are reflected in a parallel, instantaneous and uniform manner across all yield curves, when in reality changes may rarely be of this nature. The models also utilize data derived from historical performance and as interest rates change the actual performance of loan prepayments, rate sensitivities, and average life assumptions may deviate from assumptions utilized in the models and can impact the results. Accordingly, although the above measurements provide an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates. Given the unique nature of the post-pandemic interest rate environment, and the speed with which interest rates have been changing, the projections noted above on the Company’s EVE and net interest income and can be expected to differ from actual results.

Estimates of Fair Value

The estimation of fair value is significant to certain assets of the Company, including available-for-sale investment securities. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, expected cash flows, credit quality, discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. See Note 20 of the Notes to Consolidated Financial Statements for additional discussion.

These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

-57-

Table of Contents

Impact of Inflation and Changing Prices

The financial statements and notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the operations; unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Liquidity

Liquidity is a measure of a bank’s ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

As of December 31, 2023, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of December 31, 2023, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $516.3 million, which represented 5.2% of total assets and 6.1% of total deposits and borrowings, compared to $760.0 million as of December 31, 2022, which represented 7.9% of total assets and 9.3% of total deposits and borrowings on such date. As of December 31, 2023, not included in the above liquid assets were securities with a market value of $276.0 million which were pledged to either the Federal Reserve Bank’s Bank Term Funding Program (“BTFP”), or the Federal Home Loan Bank, which support aggregate unutilized borrowing capacity of $300.5 million as of December 31, 2023.

-58-

Table of Contents

The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of December 31, 2023, had the ability to borrow $2.8 billion. The Bank also has two credit facilities established with the Federal Reserve Bank of New York for direct discount window borrowings and BTFP capacity based on pledged collateral and had the ability to borrow $1.6 billion as of December 31, 2023. The BTFP is scheduled to cease making new loans on March 11, 2024. At such time the unencumbered securities pledged to the BTFP can be released as unpledged collateral or pledged to other borrowing facilities for unutilized borrowing capacity.  Currently the Bank has no outstanding BTFP borrowings. In addition, as of December 31, 2023, the Bank had in place borrowing capacity of $335 million through correspondent banks and other unsecured borrowing lines. As of December 31, 2023, the Bank had aggregate available and unused credit of approximately $3.3 billion, which represents the aforementioned facilities totaling $4.8 billion net of $1.5 billion in outstanding borrowings and letters of credit. As of December 31, 2023, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.

Cash and cash equivalents totaled $242.7 million as of December 31, 2023, decreasing by $25.6 million from $268.3 million as of December 31, 2022. Operating activities provided $92.9 million in net cash. Investing activities used $248.0 million in net cash, primarily reflecting an increase in loans. Financing activities provided $129.6 million in net cash, primarily reflecting a net increase in deposits of $179.9 million and an increase in net borrowings of $75.9 million, partially offset by a repayment of subordinated debt of $75.0 million.

-59-

Table of Contents

Deposits

Deposits are our primary source of funds. Average total deposits increased by $765 million, or 11.3%, to $7.5 billion in 2023 from $6.8 billion in 2022 and increased $558 million, or 9.0%, to $6.8 billion in 2022 from $6.2 billion in 2021. The increase in total average deposits in 2023 was primarily attributed to average time deposits of $1.1 billion, partially offset by decreases in average noninterest-bearing demand deposits of $279 million and savings deposits of $44 million.

The increase in average time deposits of $1.1 billion during 2023 was primarily attributed to increases of $570 million in nonreciprocal brokered time deposits, $406 million in retail time deposits and $96 million in CDARs. The Bank has increased its utilization of nonreciprocal brokered time deposits during 2023 primarily to enhance balance sheet liquidity and because it served as a favorable alternative to other borrowings.

The decrease in average noninterest-bearing demand deposits was consistent with industry trends reflecting higher levels of interest rates which resulted in migration of noninterest-bearing deposits to interest-bearing demand deposits.

ICS reciprocal deposits are offered through the Bank’s participation in the IntraFi Network LLC network, formerly known as Promontory Interfinancial Network. Clients, who are Federal Deposit Insurance Corporation (“FDIC”) insurance sensitive, are able to place large dollar deposits with the Company and the Company utilizes ICS and CDARS, under which the Bank receives a reciprocal deposit back in return to place those funds into non-maturity accounts, or certificates of deposit, issued by other banks in the IntraFi Network. This occurs in increments of less than the Federal Deposit Insurance Corporation (“FDIC”) insurance limits so that both the principal and interest are eligible for FDIC insurance coverage in amounts larger than the insured dollar amount.

Total year-to-date average demand deposits as of December 31, 2023 included $943 million in ICS reciprocal deposits, compared to $301 million as of December 31, 2022.  Total year-to-date average time deposits as of December 31, 2023 included $111 million in CDARS, compared to $15 million as of December 31, 2022.  The increases in ICS reciprocal deposits and CDARS resulted primarily from changes in customer and market sentiment related to the failure of three regional banks in March 2023 and the resulting  migration of client deposits to the IntraFi Network in an effort to increase the level  of FDIC deposit insurance for clients.

The beta, which is the measurement of deposit rate sensitivity in response to market rate changes, on nonreciprocal brokered deposits tends to be higher than that of  ICS and CDARS reciprocal deposits, as nonreciprocal brokered time deposits are more directly correlated to prevailing market rates of interest, while ICS and CDARs reciprocal deposits reflect the Bank’s relationship with reciprocal deposit clients and are more driven by a desire for FDIC insurance coverage than market leading rates.

-60-

Table of Contents

The following table sets forth the year-to-date average balances and weighted average rates of our deposits for the periods indicated.

The following table sets forth information related to the uninsured deposit balances of the Bank.

-61-

Table of Contents

The following table sets forth the distribution of total actual deposit accounts, by account types for the periods indicated.

Total deposits increased by $180 million, or 2.4%, to $7.5 billion in 2023 from $7.4 billion in 2022. The increase in total deposits in 2023 was primarily attributed to an increase in demand, interest-bearing & NOW of $241 million, an increase in time deposits of $137 million and an increase in savings of $43 million, partially offset by decreases in noninterest-bearing deposits of $242 million.

Total demand deposits as of December 31, 2023 include $1.1 billion in ICS reciprocal deposits, compared to $272 million as of December 31, 2022.  Total time deposits as of December 31, 2023 include $96 million in CDARS, compared to $3 million as of December 31, 2022. As discussed above, these increases were primarily related to market and customer sentiment related to FDIC deposit insurance coverage stemming from bank failures earlier in 2023.

Included in time deposits were nonreciprocal brokered deposits of $915 million as of December 31, 2023, which were relatively flat when compared to $933 million as of December 31, 2022.

As of December 31, 2023, we held $643 million of time deposits that exceed the FDIC insurance limit, which was an increase of $52 million from $592 million as of December 31, 2022. The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit as of December 31, 2023 and 2022:

-62-

Table of Contents

Federal Home Loan Bank Advances

Federal Home Loan Bank advances are secured, under the terms of a blanket collateral agreement, primarily by commercial mortgage loans. As of December 31, 2023, the Company had a gross carrying value of $933.6 million, excluding a net fair value discount of $58 thousand, in notes outstanding at a weighted average interest rate of 5.41%. As of December 31, 2022, the Company had a gross carrying value of $857.6 million, excluding a net fair value discount of $80 thousand, in notes outstanding at a weighted average interest rate of 4.32%.

Contractual Obligations and Other Commitments

The following table summarizes contractual obligations as of December 31, 2023 and the effect such obligations are expected to have on liquidity and cash flows in future periods.

-63-

Table of Contents

Capital

The maintenance of a solid capital foundation continues to be a primary goal for the Company. Accordingly, capital plans, stock repurchases, and dividend policies are monitored on an ongoing basis. The most important objective of the capital planning process is to balance effectively the retention of capital to support future growth and the goal of providing stockholders with an attractive long-term return on their investment.

The Company’s Tier 1 leverage capital (defined as tangible stockholders’ equity for common stock and Trust Preferred Capital Securities) as of December 31, 2023 amounted to $1.0 billion or 10.8% of average total assets. As of December 31, 2022, the Company’s Tier 1 leverage capital amounted to $1.0 billion or 10.7% of average total assets. The increase in Tier 1 capital reflects the Company’s retained earnings during 2023.

United States bank regulators have issued guidelines establishing minimum capital standards related to the level of assets and off balance-sheet exposures adjusted for credit risk. Specifically, these guidelines categorize assets and off balance-sheet items into risk-weightings and require banking institutions to maintain a minimum ratio of capital to risk-weighted assets. As of December 31, 2023, the Company’s CET 1, Tier 1 and total risk-based capital ratios were 10.62%, 11.95% and 13.77%, respectively. For information on risk-based capital and regulatory guidelines for the Parent Corporation and its bank subsidiary, see Note 15 to the Consolidated Financial Statements.

The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the bank regulators regarding capital components, risk weightings, and other factors.

-64-

Table of Contents

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.

During June 2020, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance to, but excluding, September 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on September 15 and December 15 of each year, commencing December 15, 2020. From and including September 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.

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

-65-

Table of Contents

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.