UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~September 30, 2014~~March 31, 2015

£o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ~~_______to _______~~to

Commission File Number: 000-11486

~~CONNECTONE BANCORP, INC.~~

CONNECTONEBANCORP,INC.

(Exact Name of Registrant as Specified in Its Charter)

New Jersey		52-1273725
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

301 Sylvan Avenue

Englewood Cliffs, New Jersey 07632

(Address of Principal Executive Offices) (Zip Code)

201-816-8900

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesSxNo£o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesSxNo£o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer £o

Accelerated filer Sx

Non-accelerated filer£o

(Do not check if smaller
reporting company)

Smaller reporting company £o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes£oNoSx

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, no par value:	~~29,665,075~~29,896,501 shares
(Title of Class)	(Outstanding as of ~~November 10, 2014)~~May 8, 2015)

Table of Contents

		Page

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Statements of Condition at ~~September 30, 2014~~March 31, 2015 (unaudited) and December 31, ~~2013~~2014	3
	Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~ (unaudited)	4
	Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~ (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015 (unaudited) and for the year ended December 31, ~~2013~~2014	6
	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~ (unaudited)	7
	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Qualitative and Quantitative Disclosures about Market Risks	5351

Item 4.	Controls and Procedures	5452

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	5453

Item 1a.	Risk Factors	5453

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 3.	Defaults Upon Senior Securities	53

Item 4.	Mine Safety Disclosures	53

Item 5.	Other Information	53

Item 6.	Exhibits	5554

SIGNATURES		56

Item 1. Financial Statements

~~CONNECTONE BANCORP,~~CONNECTONEBANCORP, INC. AND ~~SUBSIDIARIES~~SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

(in thousands, except for share data) September 30,
2014 December 31,
2013
(Unaudited)
ASSETS
Cash and due from banks $ 41,041 $ 82,692
Interest-bearing deposits with banks 96,972 —
Cash and cash equivalents 138,013 82,692

Investment securities:
Available-for-sale 307,502 323,070
Held-to-maturity (fair value of $222,393 and $210,958) 217,567 215,286
Loans held for sale 920 —

Loans receivable 2,426,765 960,943
Less: Allowance for loan losses 12,118 10,333
Net loans receivable 2,414,647 950,610

Investment in restricted stock, at cost 17,922 8,986
Bank premises and equipment, net 20,900 13,681
Accrued interest receivable 10,976 6,802
Bank-owned life insurance 51,999 35,734
Other real estate owned 1,442 220
Due from brokers for investment securities — 8,759
Goodwill 145,909 16,804
Core deposit intangibles 5,070 24
Other assets 23,390 10,414
Total assets $ 3,356,257 $ 1,673,082

LIABILITIES
Deposits:
Noninterest-bearing $ 471,151 $ 227,370
Interest-bearing 1,998,017 1,114,635
Total deposits 2,469,168 1,342,005
Borrowings 420,960 146,000
Subordinated debentures 5,155 5,155
Other liabilities 19,135 11,338
Total liabilities 2,914,418 1,504,498

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Preferred stock, $1,000 liquidation value per share, authorized 5,000,000 shares; issued and outstanding 11,250 shares of Series B preferred stock at September 30, 2014 and December 31, 2013; total liquidation value of $11,250,000 at September 30, 2014 and December 31, 2013 11,250 11,250
Common stock, no par value, authorized 50,000,000 shares; issued 31,728,997 shares at September 30, 2014 and 18,477,412 at December 31, 2013; outstanding 29,665,075 shares at September 30, 2014 and 16,369,012 at December 31, 2013 374,287 110,056
Additional paid-in capital 5,818 4,986
Retained earnings 66,623 61,914
Treasury stock, at cost (2,063,922 common shares at September 30, 2014 and 2,108,400 at December 31, 2013) (16,717 ) (17,078 )
Accumulated other comprehensive income (loss) 578 (2,544 )
Total stockholders’ equity 441,839 168,584
Total liabilities and stockholders’ equity $ 3,356,257 $ 1,673,082
~~See accompanying notes to unaudited consolidated financial statements.~~
(in thousands, except for share data) March 31,
2015 December 31,
2014
(unaudited)
ASSETS
Cash and due from banks $ 30,127 $ 31,813
Interest-bearing deposits with banks 58,416 95,034
Cash and cash equivalents 88,543 126,847

Investment securities:
Available-for-sale 276,121 289,532
Held-to-maturity (fair value of $240,263 and $231,445) 231,720 224,682
Loans held for sale 1,392 —

Loans receivable 2,640,739 2,538,641
Less: Allowance for loan and lease losses 15,933 14,160
Net loans receivable 2,624,806 2,524,481

Investment in restricted stock, at cost 24,874 23,535
Bank premises and equipment, net 20,358 20,653
Accrued interest receivable 11,513 11,700
Bank-owned life insurance 52,904 52,518
Other real estate owned 870 1,108
Goodwill 145,909 145,909
Core deposit intangibles 4,584 4,825
Other assets 22,297 22,782
Total assets $ 3,505,891 $ 3,448,572
LIABILITIES
Deposits:
Noninterest-bearing $ 479,652 $ 492,515
Interest-bearing 2,016,359 1,983,092
Total deposits 2,496,011 2,475,607
Borrowings 525,148 495,553
Subordinated debentures 5,155 5,155
Other liabilities 23,383 26,038
Total liabilities 3,049,697 3,002,353

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Preferred stock, $1,000 liquidation value per share, authorized 5,000,000 shares; issued and outstanding 11,250 shares of Series B preferred stock at March 31, 2015 and December 31, 2014; total liquidation value of $11,250 at March 31, 2015 and December 31, 2014 11,250 11,250
Common stock, no par value, authorized 50,000,000 shares; issued 31,928,524 shares at March 31, 2015 and 31,758,558 at December 31, 2014; outstanding 29,864,602 shares at March 31, 2015 and 29,694,636 at December 31, 2014 374,287 374,287
Additional paid-in capital 7,084 6,015
Retained earnings 80,526 72,398
Treasury stock, at cost (2,063,922 common shares at March 31, 2015 and December 31, 2014) (16,717 ) (16,717 )
Accumulated other comprehensive loss (236 ) (1,014 )
Total stockholders’ equity 456,194 446,219
Total liabilities and stockholders’ equity $ 3,505,891 $ 3,448,572

3
~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~
~~CONSOLIDATED STATEMENTS OF INCOME~~
~~(Unaudited)~~
Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands, except for share data) 2014 2013 2014 2013

Interest income
Interest and fees on loans $ 28,098 $ 10,148 $ 48,670 $ 29,963
Interest and dividends on investment securities:
Taxable 2,916 3,116 8,840 8,973
Tax-exempt 892 1,151 2,840 3,308
Dividends 349 126 639 378
Interest on federal funds sold and other short-term investments 88 — 88 2
Total interest income 32,343 14,541 61,077 42,624
Interest expense
Deposits 2,725 1,330 5,343 3,897
Borrowings 2,072 1,489 4,914 4,407
Total interest expense 4,797 2,819 10,257 8,304
Net interest income 27,546 11,722 50,820 34,320
Provision for loan losses 1,300 — 2,209 —
Net interest income after provision for loan losses 26,246 11,722 48,611 34,320
Noninterest income
Service charges, commissions and fees 315 780 1,645 1,890
Annuities and insurance commissions 94 92 299 338
Bank-owned life insurance 401 265 912 1,104
Net gains on sale of loans held for sale 65 26 144 255
Net gains on sales of investment securities 111 343 2,100 1,286
Other income 187 37 322 222
Total other income 1,173 1,543 5,422 5,095
Noninterest expense
Salaries and employee benefits 6,243 3,247 13,153 10,072
Occupancy and equipment 1,781 839 3,658 2,556
FDIC insurance 504 283 1,092 804
Professional and consulting 530 352 1,289 801
Marketing and advertising 209 94 276 257
Data processing 902 362 1,761 1,058
Merger expenses 8,784 — 10,573 —
Loss on extinguishment of debt 4,550 — 4,550 —
Amortization of core deposit intangible 248 6 260 19
Other expenses 1,649 1,022 3,028 3,252
Total other expense 25,400 6,205 39,640 18,819
Income before income tax expense 2,019 7,060 14,393 20,596
Income tax expense 253 1,966 3,851 5,655
Net Income 1,766 5,094 10,542 14,941
Less: Preferred stock dividends 28 28 84 112
Net income available to common stockholders $ 1,738 $ 5,066 $ 10,458 $ 14,829
Earnings per common share
Basic $ 0.06 $ 0.31 $ 0.50 $ 0.91
Diluted 0.06 0.31 0.49 0.91
Weighted average common shares outstanding
Basic 29,636,001 16,349,480 20,819,241 16,348,875
Diluted 30,108,103 16,385,155 21,285,452 16,380,970
Dividends per common share $ 0.075 $ 0.075 $ 0.225 $ 0.185
See accompanying notes to unaudited consolidated financial statements.

3
4
~~CONNECTONE BANCORP,~~CONNECTONEBANCORP, INC. AND ~~SUBSIDIARIES~~SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE~~ INCOME
~~(Unaudited)~~(unaudited)

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2014 2013 2014 2013
Net income $ 1,766 $ 5,094 $ 10,542 $ 14,941
Other comprehensive (loss) income, net of tax:
Unrealized gains and losses on securities available-for-sale:
Unrealized holding (losses) gains on available-for-sale securities (1,171 ) 383 5,656 (10,771 )
Tax effect 584 (118 ) (1,882 ) 4,371
Net of tax amount (587 ) 265 3,774 (6,400 )
Reclassification adjustment of OTTI losses included in income — — — 24
Tax effect — — — (6 )
Net of tax amount — — — 18
Reclassification adjustment for net gains arising during the period (111 ) (343 ) (2,100 ) (1,286 )
Tax effect 42 96 601 353
Net of tax amount (69 ) (247 ) (1,499 ) (933 )
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity 57 (42 ) 156 32
Tax effect (24 ) 15 (67 ) (13 )
Net of tax amount 33 (27 ) 89 19
Pension plan:
Actuarial gains — — 1,281 —
Tax effect — — (523 ) —
Net of tax amount — — 758 —
Total other comprehensive (loss) income (623 ) (9 ) 3,122 (7,296 )
Total comprehensive income $ 1,143 $ 5,085 $ 13,664 $ 7,645
Three Months Ended
March 31,
(dollars in thousands, except for per share data) 2015 2014

Interest income
Interest and fees on loans $ 29,314 $ 10,111
Interest and dividends on investment securities:
Taxable 2,910 3,057
Tax-exempt 883 1,056
Dividends 220 113
Interest on federal funds sold and other short-term investments 43 —
Total interest income 33,370 14,337
Interest expense
Deposits 3,025 1,316
Borrowings 2,053 1,411
Total interest expense 5,078 2,727
Net interest income 28,292 11,610
Provision for loan and lease losses 1,825 625
Net interest income after provision for loan and lease losses 26,467 10,985
Noninterest income
Annuities and insurance commissions 86 100
Bank-owned life insurance 386 255
Net gains on sale of loans held for sale 114 36
Deposit, loan and other income 463 715
Net gains on sale of investment securities 506 1,415
Total other income 1,555 2,521
Noninterest expense
Salaries and employee benefits 6,628 3,332
Occupancy and equipment 2,082 1,080
FDIC insurance 560 300
Professional and consulting 494 255
Marketing and advertising 194 40
Data processing 900 345
Merger expenses — 1,060
Amortization of core deposit intangible 241 6
Other expenses 1,532 1,078
Total other expense 12,631 7,496
Income before income tax expense 15,391 6,010
Income tax expense 5,012 1,612
Net Income 10,379 4,398
Less: Preferred stock dividends 28 28
Net income available to common stockholders $ 10,351 $ 4,370
Earnings per common share
Basic $ 0.35 $ 0.27
Diluted 0.34 0.27
Weighted average common shares outstanding
Basic 29,757,316 16,350,183
Diluted 30,149,469 16,405,540
Dividends per common share $ 0.075 $ 0.075
See accompanying notes to unaudited consolidated financial statements.

4
5
~~CONNECTONE BANCORP,~~CONNECTONEBANCORP, INC. AND ~~SUBSIDIARIES~~SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ~~CHANGES IN STOCKHOLDERS’ EQUITY~~COMPREHENSIVE INCOME
~~(Unaudited)~~(unaudited)

(in thousands, except for share and per
share data) Preferred
Stock Common
Stock Additional
Paid In
Capital Retained
Earnings Treasury
Stock Accumulated
Other
Comprehensive
Income (Loss) Total
Stockholders’
Equity
Balance as of January 1, 2013 $ 11,250 $ 110,056 $ 4,801 $ 46,753 $ (17,232 ) $ 5,063 $ 160,691
Net income — — — 19,925 — — 19,925
Other comprehensive loss, net of tax — — — — — (7,607 ) (7,607 )
Dividend on series B preferred stock — — — (169 ) — — (169 )
Issuance cost of common stock — — — (13 ) — — (13 )
Cash dividends declared on common stock ($0.260 per share) — — — (4,581 ) — — (4,581 )
Issuance of restricted stock awards (18,829 shares) — — 91 — 152 — 243
Dividend on restricted stock declared — — — (1 ) — — (1 )
Stock issued for options exercised (2,268 shares) — — 19 — 2 — 21
Stock-based compensation 75 75
Balance as of December 31, 2013 11,250 110,056 4,986 61,914 (17,078 ) (2,544 ) 168,584
Net income — — — 10,542 — 10,542
Other comprehensive income, net of tax — — — — — 3,122 3,122
Dividend on series B preferred stock — — — (84 ) — — (84 )
Issuance cost of common stock — — — (7 ) — — (7 )
Cash dividends declared on common stock ($0.225 per share) — — — (5,742 ) — — (5,742 )
Stock issued for options exercised (74,911 shares) — — 424 — 361 — 785
Stock issued (13,221,152 shares) and options acquired (783,732 shares) in acquisition of Legacy ConnectOne — 264,231 — — — — 264,231
Stock-based compensation — — 408 — — — 408
Balance as of September 30, 2014 $ 11,250 $ 374,287 $ 5,818 $ 66,623 $ (16,717 ) $ 578 $ 441,839
Three Months Ended
March 31,
(in thousands) 2015 2014
Net income $ 10,379 $ 4,398
Other comprehensive income (loss), net of tax:
Unrealized gains and losses on securities available-for-sale:
Unrealized holding gains on available-for-sale securities 1,509 3,516
Tax effect (595 ) (1,190 )
Net of tax amount 914 2,326
Reclassification adjustment for realized gains arising during period (506 ) (1,415 )
Tax effect 207 380
Net of tax amount (299 ) (1,035 )
Amortization of unrealized losses holding gains on held-to-maturity securities transferred from available-for-sale securities 65 45
Tax effect (25 ) (20 )
Net of tax amount 40 25
Unrealized losses on cash flow hedge (534 ) —
Tax effect 218 —
Net of tax amount (316 ) —
Unrealized pension plan gains 742 1,281
Tax effect (303 ) (523 )
Net of tax amount 439 758
Total other comprehensive income 778 2,074
Total comprehensive income $ 11,157 $ 6,472
See accompanying notes to unaudited consolidated financial statements.

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6
~~CONNECTONE BANCORP,~~CONNECTONEBANCORP, INC. AND ~~SUBSIDIARIES~~SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN STOCKHOLDERS’ EQUITY
~~(Unaudited)~~(unaudited)

(in thousands) Nine Months Ended
September 30,
2014 2013
Cash flows from operating activities:
Net income $ 10,542 $ 14,941
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and accretion of discounts on investment securities, net 1,966 2,665
Depreciation and amortization 1,717 650
Provision for loan losses 2,209 —
Stock-based compensation (excluding tax benefit) 51 41
Other-than-temporary impairment losses on investment securities — 24
Gains on sales of investment securities, net (2,100 ) (1,286 )
Net loss on sale of other real estate owned 23 75
Loans originated for resale (7,316 ) (14,045 )
Proceeds from sale of loans held for sale 6,730 15,690
Gains on sale of loans held for sale (144 ) (255 )
Decrease in accrued interest receivable 296 277
Increase in cash surrender value of bank-owned life insurance (912 ) (813 )
Life insurance death benefit — (291 )
Decrease (increase) in other assets 1,128 (2,351 )
(Decrease) increase in other liabilities (3,791 ) 2,446
Net cash provided by operating activities 10,399 17,768

Cash flows from investing activities:
Investment securities available-for-sale:
Purchases (31,550 ) (137,152 )
Sales 66,738 90,773
Maturities, calls and principal repayments 20,951 38,634
Investment securities held-to-maturity:
Purchases (8,310 ) (23,531 )
Maturities and principal repayments 6,235 3,248
Net (purchases) redemption of restricted investment in bank stocks 4,710 (22 )
Net increase in loans (167,314 ) (68,099 )
Purchases of premises and equipment (2,199 ) (535 )
Proceeds from bank-owned life insurance death benefits — 592
Proceeds from sale of other real estate owned 1,562 1,230
Cash acquired in acquisition of Legacy ConnectOne 70,318 —
Net cash used in investing activities (38,859 ) (94,862 )

Cash flows from financing activities:
Net increase in deposits 75,821 7,395
Net increase in borrowings 11,590 —
Cash dividends on preferred stock (84 ) (112 )
Cash dividends paid on common stock (4,681 ) (3,025 )
Issuance of restricted stock awards — 243
Issuance cost of common stock (7 ) (9 )
Tax benefit of options exercised 357 —
Proceeds from exercise of stock options 785 21
Net cash provided by financing activities 83,781 4,513
Net change in cash and cash equivalents 55,321 (72,581 )
Cash and cash equivalents at beginning of period 82,692 106,138

Cash and cash equivalents at end of period $ 138,013 $ 33,557

Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowings $ 10,222 $ 8,357
Income taxes $ 4,653 $ 2,195
(dollars in thousands, except for per share data) Preferred
Stock Common
Stock Additional
Paid In
Capital Retained
Earnings Treasury
Stock Accumulated
Other
Comprehensive
Income (Loss) Total
Stockholders’
Equity
Balance as of January 1, 2014 $ 11,250 $ 110,056 $ 4,986 $ 61,914 $ (17,078 ) $ (2,544 ) $ 168,584
Net income — — — 18,565 — — 18,565
Other comprehensive income, net of tax — — — — — 1,530 1,530
Dividend on series B preferred stock — — — (112 ) — — (112 )
Issuance cost of common stock — — — (7 ) — — (7 )
Cash dividends declared on common stock ($0.300 per share) — — — (7,962 ) — — (7,962 )
Exercise of 100,911 stock options (including tax benefits of $282) — — 806 — 361 — 1,167
Stock issued (13,221,152 shares) and options acquired (783,732 shares) in acquisition of Legacy ConnectOne — 264,231 — — — — 264,231
Stock-based compensation expense 223 223
Balance as of December 31, 2014 11,250 374,287 6,015 72,398 (16,717 ) (1,014 ) 446,219
Net income — — — 10,379 — — 10,379
Other comprehensive income, net of tax — — — — — 778 778
Dividend on series B preferred stock — — — (28 ) — — (28 )
Cash dividends declared on common stock ($0.075 per share) — — — (2,223 ) — — (2,223 )
Exercise of 110,500 stock options (including tax benefits of $165) — — 590 — — — 590
Granted 59,466 shares of restricted stock — — — — — — —
Stock-based compensation expense — — 479 — — — 479
Balance as of March 31, 2015 $ 11,250 $ 374,287 $ 7,084 $ 80,526 $ (16,717 ) $ (236 ) $ 456,194
See accompanying notes to unaudited consolidated financial statements.

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7
CONNECTONEBANCORP, INC. ANDSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
(in thousands) 2015 2014
Cash flows from operating activities
Net income $ 10,379 $ 4,398
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,040 204
Provision for loan and lease losses 1,825 625
Stock-based compensation (excluding tax benefit) 479 16
Gains on sales of investment securities, net (506 ) (1,415 )
Gains on sale of loans held for sale (114 ) (36 )
Loans originated for resale (8,468 ) (2,168 )
Proceeds from sale of loans held for sale 7,190 2,204
Net loss on sale of other real estate owned 112 —
Increase in cash surrender value of bank-owned life insurance (386 ) (255 )
Amortization of premiums and accretion of discounts on investments securities, net 518 536
Decrease in accrued interest receivable 187 461
(Increase) decrease in other assets (49 ) 1,588
Decrease in other liabilities (2,388 ) (31 )
Net cash provided by operating activities 9,819 6,127

Cash flows from investing activities
Investment securities available-for-sale:
Purchases (1,543 ) (10,397 )
Sales 9,537 50,611
Maturities, calls and principal repayments 6,673 6,999
Investment securities held-to-maturity:
Purchases (9,986 ) —
Maturities and principal repayments 2,749 890
Net purchases of restricted investment in bank stocks (1,339 ) —
Net increase in loans (102,150 ) (26,911 )
Purchases of premises and equipment (504 ) (350 )
Proceeds from sale of other real estate owned 126 —
Net cash (used in) provided by investing activities (96,437 ) 20,842

Cash flows from financing activities
Net increase (decrease) in deposits 20,404 (2,120 )
Net increase in borrowings 29,595 —
Cash dividends paid on preferred stock (28 ) (28 )
Cash dividends paid on common stock (2,247 ) (1,228 )
Issuance cost of common stock — (3 )
Proceeds from exercise of stock options 590 —
Net cash provided by (used in) financing activities 48,314 (3,379 )
Net change in cash and cash equivalents (38,304 ) 23,590
Cash and cash equivalents at beginning of period 126,847 82,692

Cash and cash equivalents at end of period $ 88,543 $ 106,282
Supplemental disclosures of cash flow information
Cash payments for:
Interest paid on deposits and borrowings $ 4,724 $ 2,723
    Income taxes 5,500 500
See accompanying notes to unaudited consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)

Note 1.Nature of Operations and Principles of Consolidation

The consolidated financial statements of ConnectOne Bancorp, Inc. (the “Parent Corporation”) are prepared on an accrual basis and include the accounts of the Parent Corporation and its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s other direct and indirect subsidiaries, the ~~“Corporation”~~“Company”). All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements.

The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its twenty-three other banking offices. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from business operations. There are no significant concentrations of loans to any one industry or ~~customer.~~client. However, the ~~customers’~~clients’ ability to repay their loans is dependent on the cash flows, real estate and general economic conditions in the area.

The following unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three ~~and nine~~ months ended ~~September 30, 2014~~March 31, 2015 are not necessarily indicative of the results that may be expected for the full year ending December 31, ~~2014,~~2015, or for any other interim period. The ~~Corporation’s 2013~~Company’s 2014 Annual Report on Form 10-K, should be read in conjunction with these financial statements.

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. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan and lease losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets.

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Some items in the prior year financial statements were reclassified to conform ~~with~~to current presentation. Reclassifications had ~~not~~no effect on prior year net income for stockholders’ equity.

Note 2. ~~Recent Accounting Pronouncements~~
~~FASB ASU 2014-04:~~~~Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure.~~ EITF Issue 13-E sought to define “in substance repossession or foreclosure” because of the diversity in practice regarding when entities were reclassifying loans receivable to other real estate owned instead of as a loan receivable. The timing of loan reclassifications to OREO may be qualitatively significant to regulators and other financial statement users. “In substance repossession or foreclosure” is clarified by the ASU. A creditor is considered to have received physical possession (resulting from an in substance repossession) of residential real estate property collateralizing a consumer mortgage loan only upon the occurrence of either of the following: a) The creditor obtains legal title to the residential real estate property upon completion of a foreclosure. A creditor may obtain legal title to the residential real estate property even if the borrower has redemption rights that provide the borrower with a legal right for a period of time after a foreclosure to reclaim the real estate property by paying certain amounts specified by law; or b) The borrower conveys all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The deed in lieu of foreclosure or similar legal agreement is completed when agreed-upon terms and conditions have been satisfied by both the borrower and the creditor. The ASU is effective for fiscal years beginning after December 15, 2014, and interim periods therein. Early adoption is permitted. The Corporation will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
~~FASB ASU No. 2014-09:~~~~Revenue from Contracts with Customers.~~ In May 2014, the FASB issued an update creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
8
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~
~~FASB ASC ASU No. 2014-11,~~~~Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures~~. In September 2014, the FASB issued an update impacting FASB ASC 860, Transfers and Servicing. The amendments in this update change the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require new disclosures. An entity is required to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. An entity must also provide additional information about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The amendments in this update become effective for the first interim or annual period beginning after December 15, 2014. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
~~FASB ASC ASU No. 2014-12,~~~~Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period~~. In September 2014, the FASB issued an update impacting FASB ASC 860, Transfers and Servicing. Generally, an award with a performance target also requires an employee to render service until the performance target is achieved. In some cases, however, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. The amendments in this update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. An entity should apply guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the service has already been rendered. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
~~FASB issued ASU 2014-14,~~~~Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure~~. This update requires the creditors to reclassify loans that are within the scope of the ASU to “other receivables” upon foreclosure, rather than reclassifying them to other real estate owned. The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor. The new guidance is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The impact of adoption of this ASU by the Corporation is not expected to be material.
~~Note 3. Acquisition~~Business Combinations

On January 20, 2014, the Parent Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ConnectOne Bancorp, Inc., a New Jersey ~~corporation~~Company (“Legacy ConnectOne”). Effective July 1, 2014 (the “Effective Time”), the Parent Corporation completed the merger contemplated by the Merger Agreement (the “Merger”) with Legacy ConnectOne. At closing, Legacy ConnectOne merged with and into the Parent Corporation, with the Parent Corporation as the surviving ~~corporation.~~Company. Also at closing, the Parent Corporation changed its name from “Center Bancorp, Inc.” to “ConnectOne Bancorp, Inc.” and changed its NASDAQ trading symbol to “CNOB” from “CNBC.”

Pursuant to the Merger Agreement, holders of Legacy ConnectOne common stock, no par value per share (the “Legacy ConnectOne Common Stock”), received 2.6 shares of common stock of the Parent Corporation, no par value per share (the “Company Common Stock”), for each share of Legacy ConnectOne Common Stock held immediately prior to the effective time of the Merger, with cash to be paid in lieu of fractional shares. Each outstanding share of Company Common Stock remained outstanding and was unaffected by the Merger. Each option granted by Legacy ConnectOne to purchase shares of Legacy ConnectOne Common Stock was converted into an option to purchase Company Common Stock on the same terms and conditions as were applicable prior to the Merger (taking into account any acceleration or vesting by reason of the consummation of the Merger and its related transactions), subject to adjustment of the exercise price and the number of shares of Company Common Stock issuable upon exercise of such option based on the 2.6 exchange ratio.

Immediately following the Merger, Union Center National Bank, a bank organized pursuant to the laws of the United States, and a wholly owned subsidiary of the Parent Corporation (“UNCB”), merged (the “Bank Merger”) with and into ConnectOne Bank, a New Jersey state-chartered commercial bank and a wholly owned subsidiary of Legacy ConnectOne, with ConnectOne Bank as the surviving entity (the “Bank”). The Bank now conducts business only in the name of and under the brand of ConnectOne.

8
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)
Note 2. Business Combinations – (continued)

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of July 1, 2014 based on management’s best estimate using the information available as of the Merger date. The application of the acquisition method of accounting resulted in the recognition of goodwill of $129,105,000 and a core deposit intangible of $5,308,000. As of July 1, 2014, Legacy ConnectOne had assets with a carrying value of approximately $1.5 billion, including loans with a carrying value of approximately $1.2 billion, and deposits with a carrying value of approximately $1.1 billion. The table below summarizes the amounts recognized as of the Merger date for each major class of assets acquired and liabilities assumed, the estimated fair value adjustments and the amounts recorded in the ~~Corporation’s~~Company’s financial statements at fair value at the Merger date (in thousands):

Consideration paid through Center Bancorp, Inc. common stock issued to Legacy ConnectOne shareholders and fair value of stock options acceleration was $ 264,231

Legacy
ConnectOne
carrying value Fair value
adjustments As recorded
at
acquisition

Cash and cash equivalents $ 70,318 $ — $ 70,318
Investment securities 28,436 16 (a) 28,452
Restricted stock 13,646 — 13,646
Loans held for sale 190 — 190
Loans 1,304,600 (5,316) (b) 1,299,284
Bank owned life insurance 15,481 — 15,481
Premises and equipment 7,380 (905) (c) 6,475
Accrued interest receivable 4,470 — 4,470
Core deposit and other intangibles — 5,308 (d) 5,308
Other real estate owned 2,455 — 2,455
Other assets 10,636 3,650 (e) 14,286
Deposits (1,049,666 ) (1,676) (f) (1,051,342 )
FHLB borrowings (262,046 ) (1,324) (g) (263,370 )
Other liabilities (10,527 ) — (10,527 )
Total identifiable net assets $ 135,373 $ (247 ) $ 135,126

Goodwill recorded in the Merger $ 129,105
Consideration paid through Parent Corporation common stock issued to Legacy ConnectOne shareholders and fair value of stock options acceleration was: $ 264,231
Legacy
ConnectOne
carrying value Fair value
adjustments As recorded
at
acquisition
Cash and cash equivalents $ 70,318 $ — $ 70,318
Investment securities 28,436 16 (a) 28,452
Restricted stock 13,646 — 13,646
Loans held for sale 190 — 190
Loans 1,304,600 (5,316 ) (b) 1,299,284
Bank owned life insurance 15,481 — 15,481
Premises and equipment 7,380 (905 ) (c) 6,475
Accrued interest receivable 4,470 — 4,470
Core deposit and other intangibles — 5,308 (d) 5,308
Other real estate owned 2,455 — 2,455
Other assets 10,636 3,650 (e) 14,286
Deposits (1,049,666 ) (1,676 ) (f) (1,051,342 )
FHLB borrowings (262,046 ) (1,324 ) (g) (263,370 )
Other liabilities (10,527 ) — (10,527 )
Total identifiable net assets $ 135,373 $ (247 ) $ 135,126

Goodwill recorded in the Merger $ 129,105

The following provides an explanation of certain fair value adjustments presented in the above table:

a) Represents the fair value adjustment on investment securities held to maturity.
b) Represents the elimination of Legacy ConnectOne’s allowance for loan and lease losses, deferred fees, deferred costs and an adjustment of the amortized cost of loans to estimated fair value, which includes an interest rate mark and credit mark.
c) Represent an adjustment to reflect the fair value of ~~below-market~~above-market rent on leased premises. The ~~below market~~above-market rent ~~intangible asset~~adjustment will be amortized on a straight-line basis over the remaining term of the respective leases.
d) Represents intangible assets recorded to reflect the fair value of core ~~deposits and below market rent leased premises.~~deposits. The core deposit asset was recorded as an identifiable intangible asset and will be amortized on an accelerated basis over the estimated average life of the deposit base.
e) Consist primarily of adjustments in net deferred tax assets resulting from the fair value adjustments related to acquired assets, liabilities assumed and identifiable intangibles recorded.
f) Represents fair value adjustment on time deposits as the weighted average interest rates of time deposits assumed exceeded the costs of similar funding available in the market at the time of the Merger, as well as the elimination of fees paid on brokered time deposits.
g) Represents the fair value adjustment on FHLB borrowings as the weighted average interest rate of FHLB borrowings assumed exceeded the cost of similar funding available in the market at the time of the Merger.

The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired by the Company and reflects the economies of scale, increased market share and lending ~~capabilities;~~capabilities, greater access to best-in-class banking technology, and related synergies that are expected to result from the ~~acquisition, and represents the excess purchase price over the estimated fair value of the net assets acquired by ConnectOne.~~acquisition.

9
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)
Note 2. Business Combinations – (continued)

Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired from Legacy ConnectOne were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimated future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. For collateral dependent loans with deteriorated credit quality, fair value was estimated by analyzing the value of the underlying collateral, assuming the fair values of the loan were derived from the eventual sale of the collateral. These values were discounted using marked derived ~~rate~~rates of returns, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of Legacy ConnectOne allowance for loan and lease losses associated with the loans that were acquired, as the loans were initially recorded at fair value on the date of the Merger.

The acquired loan portfolio subject to purchased credit impairment accounting guidance (ASC 310-30) as of July 1, 2014 was comprised of collateral dependent loans with deteriorated credit quality as follows (in thousands):

ASC 310-30
Loans
Contractual principal and accrued interest at acquisition $ 23,284
Principal not expected to be collected (non-accretable discount) (6,942 )
Expected cash flows at acquisition 16,342
Interest component of expected cash flows (accretable discount) (5,013 )
Fair value of acquired loans $ 11,329

The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years utilizing the accelerated method. Other intangibles consist of below market rents, which are amortized over the remaining life of each lease using the straight-line method.

Goodwill is not amortized for book purposes; however, it is reviewed at least annually for impairment and is not deductible for tax purposes.

The fair value of retail demand and interest bearing deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities. The fair value of borrowed funds was estimated by discounting the future cash flows using market rates for similar borrowings.

Direct acquisition and integration costs of the Merger were expensed as incurred and totaled $10.6 million. These items were recorded as merger-related expenses on the statement of operations.
The following table presents selected unaudited pro forma financial information reflecting the Merger assuming it was completed as of January 1, 2014 and January 1, 2013. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the Merger actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full fiscal year period. Pro forma basic and diluted earnings per common share were calculated using the Corporation’s actual weighted average shares outstanding for the periods presented, plus the incremental shares issued, assuming the Merger occurred at the beginning of the periods presented. The unaudited pro forma information is based on the actual financial statements of the Corporation for the periods presented, and on the actual financial statements of the Corporation for the 2013 period presented and in 2014 until the date of the Merger, at which time Legacy ConnectOne’s results of operations were included in the Corporation’s financial statements.
The unaudited pro forma information, for the nine months ended September 30, 2014 and 2013, set forth below reflects the adjustments related to (a) purchase accounting fair value adjustments; (b) amortization of core deposit and other intangibles; and (c) adjustments to interest income and expense due to amortization of premiums and accretion discounts. The unaudited pro forma information give effect to the Merger as if it occurred on January 1, 2014 with respect to the pro forma information for the nine months ended September 30, 2014 and on January 1, 2013 with respect to the pro forma information for the nine months ended September 30, 2013. In the table below, merger-related expenses of $13.5 million were excluded from pro forma non-interest expenses for the nine months ended September 30, 2014. Income taxes were also adjusted to exclude income tax benefits of $3.9 million related to the merger expenses for the nine months ended September 30, 2014. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue enhancement opportunities or anticipated cost savings.
11
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~
Pro Forma for the Nine
Months Ended September
30,
2014 2013
(in thousands, except per
share amounts)
Net interest income $ 78,872 $ 71,091
Noninterest income 6,168 5,948
Noninterest expense (41,073 ) (34,352 )
Net income 26,490 26,125

Pro forma earnings per share from continuing operations:
Basic $ 0.89 $ 0.91
Diluted 0.88 0.90
The Corporation has determined that it is impractical to report the amounts of revenue and earnings of legacy ConnectOne since the acquisition date, July 1, 2014. The back-office systems conversion of the combined entity took place on July 21, 2014. Accordingly, reliable and separate complete revenue and earnings information are no longer available. In addition, such amounts would require significant estimates related to the proper allocation of merger cost saves that cannot be objectively made.

Note 4.3. Earnings per Common Share

Basic earnings per common share (“EPS”) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g., stock options). The ~~Corporation’s~~Company’s weighted average common shares outstanding for diluted EPS include the effect of stock options and restricted stock awards outstanding using the Treasury Stock Method, which are not included in the calculation of basic EPS.

Earnings per common share have been computed as follows:

Three Months Ended
September 30, Nine Months Ended
September 30, Three Months Ended
March 31,
(in thousands, except share amounts) 2014 2013 2014 2013
(in thousands, except for per share data) 2015 2014
Net income $ 1,766 $ 5,094 $ 10,542 $ 14,941 $ 10,379 $ 4,398
Preferred stock dividends (28 ) (28 ) (84 ) (112 ) (28 ) (28 )
Net income available to common stockholders $ 1,738 $ 5,066 $ 10,458 $ 14,829 $ 10,351 $ 4,370
Basic weighted average common shares outstanding 29,636,001 16,349,480 20,819,241 16,348,875 29,757 16,350
Effect of dilutive options 472,102 35,675 466,211 32,095 392 56

Diluted weighted average common shares outstanding 30,108,103 16,385,155 21,285,452 16,380,970 30,149 16,406

Earnings per common share:
Basic $ 0.06 $ 0.31 $ 0.50 $ 0.91 $ 0.35 $ 0.27
Diluted 0.06 0.31 0.49 0.91 0.34 0.27
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 5.4. Investment Securities

The ~~Corporation’s~~Company’s investment securities are classified as available-for-sale and held-to-maturity at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013.~~2014. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value ~~at the balance sheet date.~~as of March 31, 2015. 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 78 of the Notes to Consolidated Financial Statements for a further discussion.

Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.

12
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~
The following tables present information related to the ~~Corporation’s~~Company’s investment securities at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013.~~2014.

September 30, 2014 March 31, 2015
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
(dollars in thousands) March 31, 2015
Investment Securities Available-for-Sale:
(in thousands)
U.S. Treasury and agency securities $ 11,517 $ — $ (132 ) $ 11,385
Investment securities available-for-sale:
Federal agency obligations 33,110 75 (193 ) 32,992 $ 30,774 $ 463 $ (4 ) $ 31,233
Residential mortgage pass-through securities 58,459 1,332 (100 ) 59,691 57,300 1,737 (9 ) 59,028
Commercial mortgage pass-through securities 3,057 — (41 ) 3,016 3,027 55 — 3,082
Obligations of U.S. states and political subdivisions 8,204 225 — 8,429 8,197 238 — 8,435
Trust preferred securities 16,085 465 (236 ) 16,314 16,086 648 (278 ) 16,456
Corporate bonds and notes 129,550 6,300 (10 ) 135,840 110,671 6,190 (22 ) 116,839
Asset-backed securities 21,603 151 (1 ) 21,753 26,045 127 (80 ) 26,092
Certificates of deposit 2,098 32 (6 ) 2,124 2,097 31 (5 ) 2,123
Equity securities 376 — (87 ) 289 376 — (56 ) 320
Mutual funds and money market funds 15,808 — (139 ) 15,669
Other securities 12,474 89 (50 ) 12,513
Total $ 299,867 $ 8,580 $ (945 ) $ 307,502 $ 267,047 $ 9,578 $ (504 ) $ 276,121

Investment Securities Held-to-Maturity:
Investment securities held-to-maturity:
U.S. Treasury and agency securities $ 28,212 $ 251 $ — $ 28,463 $ 28,315 $ 1,507 $ — $ 29,822
Federal agency obligations 21,119 112 (74 ) 21,157 35,393 586 (30 ) 35,949
Residential mortgage pass-through securities 2,616 7 — 2,623
Commercial mortgage pass-through securities 4,304 38 (19 ) 4,323
Residential mortgage-backed securities 5,542 26 (13 ) 5,555
Commercial mortgage-backed securities 4,124 86 — 4,210
Obligations of U.S. states and political subdivisions 123,379 3,914 (151 ) 127,142 119,384 4,966 (46 ) 124,304
Corporate bonds and notes 37,937 762 (14 ) 38,685 38,962 1,472 (11 ) 40,423
Total $ 217,567 $ 5,084 $ (258 ) $ 222,393 $ 231,720 $ 8,643 $ (100 ) $ 240,263

Total investment securities $ 517,434 $ 13,664 $ (1,203 ) $ 529,895 $ 498,767 $ 18,221 $ (604 ) $ 516,384

11
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)

December 31, 2013
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
(dollars in thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities $ 14,344 $ — $ (825 ) $ 13,519
Federal agency obligations 20,567 29 (655 ) 19,941
Residential mortgage pass-through securities 48,312 791 (229 ) 48,874
Commercial mortgage pass-through securities 7,145 3 (157 ) 6,991
Obligations of U.S. states and political subdivisions 30,804 711 (55 ) 31,460
Trust preferred securities 19,763 150 (510 ) 19,403
Corporate bonds and notes 154,182 4,930 (482 ) 158,630
Asset-backed securities 15,733 246 — 15,979
Certificates of deposit 2,250 32 (20 ) 2,262
Equity securities 376 — (89 ) 287
Mutual funds and money market funds 5,671 68 (15 ) 5,724
Total $ 319,147 $ 6,960 $ (3,037 ) $ 323,070
Investment Securities Held-to-Maturity:
U.S. Treasury and agency securities $ 28,056 $ — $ (1,019 ) $ 27,037
Federal agency obligations 15,249 23 (389 ) 14,883
Residential mortgage-backed securities 2,246 — (64 ) 2,182
Commercial mortgage-backed securities 4,417 41 (62 ) 4,396
Obligations of U.S. states and political subdivisions 127,418 1,303 (3,688 ) 125,033
Corporate bonds and notes 37,900 149 (622 ) 37,427
Total $ 215,286 $ 1,516 $ (5,844 ) $ 210,958
Total investment securities $ 534,433 $ 8,476 $ (8,881 ) $ 534,028
Note 4. Investment Securities – (continued)
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
December 31, 2014
(in thousands)
Investment securities available-for-sale:
Federal agency obligations $ 32,650 $ 217 $ (50 ) $ 32,817
Residential mortgage pass-through securities 58,836 1,531 (11 ) 60,356
Commercial mortgage pass-through securities 3,042 4 — 3,046
Obligations of U.S. states and political subdivisions 8,201 205 — 8,406
Trust preferred securities 16,086 489 (269 ) 16,306
Corporate bonds and notes 119,838 5,950 (11 ) 125,777
Asset-backed securities 27,393 140 (31 ) 27,502
Certificates of deposit 2,098 27 (2 ) 2,123
Equity securities 376 — (69 ) 307
Other securities 12,941 33 (82 ) 12,892
Total $ 281,461 $ 8,596 $ (525 ) $ 289,532
Investment securities held-to-maturity:
U.S. Treasury and agency securities $ 28,264 $ 920 $ — $ 29,184
Federal agency obligations 27,103 322 (28 ) 27,397
Residential mortgage-backed securities 5,955 28 — 5,983
Commercial mortgage-backed securities 4,266 50 — 4,316
Obligations of U.S. states and political subdivisions 120,144 4,512 (60 ) 124,596
Corporate bonds and notes 38,950 1,026 (7 ) 39,969
Total $ 224,682 $ 6,858 $ (95 ) $ 231,445

Total investment securities $ 506,143 $ 15,454 $ (620 ) $ 520,977

The following table presents information for investment securities available-for-sale at ~~September 30, 2014,~~March 31, 2015, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

September 30, 2014 March 31, 2015
Amortized
Cost Fair Value Amortized
Cost Fair
Value
(in thousands) (in thousands)
Investment Securities Available-for-Sale:
Investment securities available-for-sale:
Due in one year or less $ 14,395 $ 14,543 $ 23,891 $ 24,248
Due after one year through five years 43,153 44,425 32,274 33,611
Due after five years through ten years 110,494 115,594 83,910 88,819
Due after ten years 54,125 54,275 53,795 54,500
Residential mortgage pass-through securities 58,459 59,691 57,300 59,028
Commercial mortgage pass-through securities 3,057 3,016 3,027 3,082
Equity securities 376 289 376 320
Mutual funds and money market funds 15,808 15,669
Other securities 12,474 12,513
Total $ 299,867 $ 307,502 $ 267,047 $ 276,121
Investment Securities Held-to-Maturity:
Investment securities held-to-maturity:
Due in one year or less $ 7,059 $ 7,140 $ 4,991 $ 5,020
Due after one year through five years 7,907 8,056 9,207 9,401
Due after five years through ten years 69,114 70,359 71,916 75,354
Due after ten years 126,567 129,892 135,940 140,723
Residential mortgage-backed securities 2,616 2,623 5,542 5,555
Commercial mortgage pass-through securities 4,304 4,323
Commercial mortgage-backed securities 4,124 4,210
Total $ 217,567 $ 222,393 $ 231,720 $ 240,263

Total investment securities $ 517,434 $ 529,895 $ 498,767 $ 516,384

12
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)

~~For the nine months ended September 30, 2014, proceeds of available-for-sale investment securities sold amounted to approximately $67.0 million.~~Note 4. Investment Securities – (continued)

Gross gains and losses from the sales, calls, and maturities of investment securities for the ~~three-month~~three months ended March 31, 2015 and ~~nine-month periods ended September 30,~~ 2014 ~~and 2013~~ were as follows:

Three Months Ended
September 30, Nine Months Ended
September 30, Three Months Ended
March 31,
(in thousands) 2014 2013 2014 2013 2015 2014
Proceeds $ 9,537 $ 50,611
Gross gains on sales of investment securities $ 111 $ 343 $ 2,122 $ 1,375 506 1,432
Gross losses on sales of investment securities — — 22 89 — (17 )
Net gains on sales of investment securities 111 343 2,100 1,286 506 1,415
Less: tax provision on gross gains 42 96 601 353
Gross gains on sales of investments, net of tax $ 69 $ 247 $ 1,499 $ 933
Less: tax provision on net gains 207 380
Total $ 299 $ 1,035

The ~~following summarizes OTTI charges for the periods indicated.~~
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2014 2013 2014 2013
Other than temporary impairment charges $ — $ — $ — $ —
Principal losses on a variable rate CMO — — — 24
Total other-than-temporary impairment charges $ — $ — $ — $ 24
~~The Corporation~~Company performs regular analysis on ~~all its investment~~the available-for-sale securities portfolio to determine whether a decline in fair value indicates that an investment is other-than-temporarily impaired in accordance with FASB ASC 320-10. FASB ASC 320-10 requires companies to record ~~OTTI~~other-than-temporary impairment (“OTTI”) charges, through earnings, if they have the intent to sell, or ~~if it is~~ more likely than not ~~that they will~~ be required to sell, an impaired debt security before recovery of its amortized cost basis. If the ~~Corporation~~Company intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its estimated fair value at the balance sheet date. If the ~~Corporation~~Company does not intend to sell the security and it is ~~not~~ more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, and as such, it determines that a decline in fair value is other than temporary, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The ~~Corporation’s assessment~~Company reviews all securities for potential recognition of whether an impairment is other than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced a restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed a deteriorating financial condition or sustained significant losses.other-than-temporary impairment. The ~~Corporation~~Company maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review. This could ~~result from~~include credit rating downgrades.

The Company’s assessment of whether an impairment in the portfolio is other than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed deteriorating financial condition or sustained significant losses.
The following table presents detailed information for each single issuer trust preferred security held by the Company at March 31, 2015, of which all but one has at least one rating below investment grade (in thousands):
Issuer Amortized
Cost Fair
Value Gross
Unrealized
Gain (Loss) Lowest
Credit
Rating
Assigned
Countrywide Capital IV $ 1,771 $ 1,819 $ 48 BB
Countrywide Capital V 2,747 2,848 101 BB
Countrywide Capital V 250 259 9 BB
Nationsbank Cap Trust III 1,575 1,297 (278 ) BB
Morgan Stanley Cap Trust IV 2,500 2,567 67 BB
Morgan Stanley Cap Trust IV 1,743 1,795 52 BB
Goldman Sachs 1,000 1,252 252 BB
Stifel Financial 4,500 4,619 119 BBB-
Total $ 16,086 $ 16,456 $ 370
13
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)

~~The following table presents detailed information for each trust preferred security held by the Corporation at September 30, 2014 which has at least one rating below investment grade.~~
Issuer Single
Issuer or
Pooled Class/
Tranche Amortized
Cost Fair
Value Gross
Unrealized
Gain (Loss) Lowest
Credit
Rating
Assigned Number of
Banks
Currently
Performing Deferrals
and
Defaults
as % of
Original
Collateral Expected
Deferral/Defaults
as % of
Remaining
Performing
Collateral
(dollars in thousands)
Countrywide Capital IV Single n/a $ 1,771 $ 1,813 42 BB 1 None None
Countrywide Capital V Single n/a 2,747 2,827 80 BB 1 None None
Countrywide Capital V Single n/a 250 257 7 BB 1 None None
Nationsbank Cap Trust III Single n/a 1,575 1,339 (236 ) BB 1 None None
Morgan Stanley Cap Trust IV Single n/a 2,500 2,517 17 BB 1 None None
Morgan Stanley Cap Trust IV Single n/a 1,742 1,760 18 BB 1 None None
Goldman Sachs Single n/a 1,000 1,137 137 BB 1 None None
Stifel Financial Single n/a 4,500 4,664 164 BBB- 1 None None
Total $ 16,085 $ 16,314 229
~~Credit Loss Portion of OTTI Recognized in Earnings on Debt~~Note 4. Investment Securities
Nine Months
Ended
September 30,
2014 Year
Ended
December
31, 2013
(in thousands)
Balance of credit-related OTTI at January 1, $ — $ 4,450
Addition:
Credit losses on investment securities for which other-than-temporary impairment was not previously recognized — 652
Reduction:
Credit losses on investment securities sold during the period — (5,102 )
Balance of credit-related OTTI at period end $ — $ —
16
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~ – (continued)

Temporarily Impaired Investments

For all other securities, the ~~Corporation~~Company does not believe that the unrealized losses, which were comprised of 8439 and 54 investment securities as of ~~September 30,~~March 31, 2015 and December 31, 2014, respectively, represent an other-than-temporary impairment. The gross unrealized losses ~~of $1.2 million~~ associated with U.S. Treasury and agency securities, federal agency obligations, mortgage-backed securities, corporate bonds, tax-exempt securities, asset-backed securities, trust preferred securities, mutual funds and equity securities are not considered to be other than temporary because these unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.

Factors affecting the market price include credit risk, market risk, interest rates, economic cycles, and liquidity risk. The magnitude of any unrealized loss may be affected by the relative concentration of the ~~Corporation’s~~Company’s investment in any one issuer or industry. The ~~Corporation~~Company has established policies to reduce exposure through diversification of concentration of the investment portfolio including limits on concentrations to any one issuer. The ~~Corporation~~Company believes the investment portfolio is prudently diversified.

The decline in value is related to a change in interest rates and subsequent change in credit spreads required for these issues affecting market price. All issues are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. Short to intermediate average durations and in certain cases monthly principal payments should reduce further market value exposure to increases in rates.

The ~~Corporation~~Company evaluates all securities with unrealized losses quarterly to determine whether the loss is other than temporary. Unrealized losses in the corporate debt securities category ~~consists~~consist primarily of senior unsecured corporate debt securities issued by large financial institutions, insurance companies and other corporate ~~issuers and single~~issuers. Single issuer corporate trust preferred ~~securities. None~~securities are also included, and in the case of one holding the market valuation loss is largely based upon the floating rate coupon and corresponding market valuation. Neither that trust preferred issuer, nor any other corporate issuers, have defaulted on interest payments. The unrealized loss in equity securities consists of losses on other bank equities. The decline in fair value is due in large part to the lack of an active trading market for these securities, changes in market credit spreads and rating agency downgrades. Management concluded that these securities were not other-than-temporarily impaired at ~~September 30, 2014. Future deterioration in the credit quality of these large financial institution issuers of TRUP debt securities could result in impairment charges in the future.~~March 31, 2015.

In determining that the securities giving rise to the previously mentioned unrealized losses were not ~~other-than-temporarily impaired,~~other than temporary, the ~~Corporation~~Company evaluated the factors cited above, which the ~~Corporation~~Company considers when assessing whether a security is other-than-temporarily impaired. In making these evaluations the ~~Corporation~~Company must exercise considerable judgment. Accordingly, there can be no assurance that the actual results will not differ from the ~~Corporation’s~~Company’s judgments and that such differences may not require the future recognition of other-than-temporary impairment charges that could have a material effect on the ~~Corporation’s~~Company’s financial position and results of operations. In addition, the value of, and the realization of any loss on, an investment security ~~are~~is subject to numerous risks as cited above.

14
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)
Note 4. Investment Securities – (continued)

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013:~~2014:

September 30, 2014 March 31, 2015
Total Less than 12 Months 12 Months or Longer Total Less than 12 Months 12 Months or Longer
Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
(in thousands) (in thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities $ 9,488 $ (132 ) $ 4,744 $ (57 ) $ 4,744 $ (75 )
Federal agency obligations 22,682 (193 ) 18,601 (113 ) 4,081 (80 )
Investment securities available-for-sale:

Federal agency obligation $ 1,656 $ (4 ) $ 1,357 $ (1 ) $ 299 $ (3 )
Residential mortgage pass-through securities 16,327 (100 ) 16,327 (100 ) — — 1,026 (9 ) 1,026 (9 ) — —
Commercial mortgage pass-through securities 3,016 (41 ) — — 3,016 (41 )
Trust preferred securities 1,338 (236 ) — — 1,338 (236 ) 1,297 (278 ) — — 1,297 (278 )
Corporate bonds and notes 3,002 (10 ) 3,002 (10 ) — — 3,935 (22 ) 3,935 (22 ) — —
Asset-backed securities 1,952 (1 ) 1,952 (1 ) — — 9,698 (80 ) 9,698 (80 ) — —
Certificates of deposit 216 (6 ) 216 (6 ) — — 217 (5 ) 217 (5 ) — —
Equity securities 289 (87 ) — — 289 (87 ) 320 (56 ) — — 320 (56 )
Mutual funds and money market funds 11,361 (139 ) 10,379 (122 ) 982 (17 )
Other securities 5,477 (50 ) — — 5,477 (50 )
Total 69,671 $ (945 ) $ 55,221 $ (409 ) $ 14,450 $ (536 ) $ 23,626 $ (504 ) $ 16,233 $ (117 ) $ 7,393 $ (387 )
Investment Securities Held-to-Maturity:
Federal agency obligations $ 8,325 $ (74 ) $ 8,325 $ (74 ) $ — $ —
Commercial mortgage pass-through securities 1,392 (19 ) — — 1,392 (19 )

Investment securities held-to-maturity:

Federal agency obligation $ 6,422 $ (30 ) $ 6,422 $ (30 ) $ — $ —
Residential mortgage pass-through securities 3,660 (13 ) 3,660 (13 ) — —
Obligations of U.S. states and political subdivisions 14,789 (151 ) 3,336 (4 ) 11,453 (147 ) 7,336 (46 ) 7,336 (46 ) — —
Corporate bonds and notes 2,700 (14 ) 2,700 (14 ) — — 3,720 (11 ) 3,720 (11 ) — —
Total 27,206 (258 ) 14,361 (92 ) 12,845 (166 ) $ 21,138 $ (100 ) $ 21,138 $ (100 ) $ — $ —
Total Temporarily Impaired Securities $ 96,877 $ (1,203 ) $ 69,582 $ (501 ) $ 27,295 $ (702 )

Total temporarily impaired securities $ 44,764 $ (604 ) $ 37,371 $ (217 ) $ 7,393 $ (387 )

15
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)

December 31, 2013
Total Less than 12 Months 12 Months or Longer
Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
(in thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities $ 13,519 $ (825 ) $ 13,519 $ (825 ) $ — $ —
Federal agency obligation 17,200 (655 ) 17,200 (655 ) — —
Residential mortgage pass-through securities 18,293 (229 ) 18,293 (229 ) — —
Commercial mortgage pass-through securities 2,924 (157 ) 2,924 (157 ) — —
Obligations of U.S. states and political subdivisions 4,199 (55 ) 4,199 (55 ) — —
Trust preferred securities 5,306 (510 ) 4,031 (211 ) 1,275 (299 )
Corporate bonds and notes 32,498 (482 ) 30,533 (448 ) 1,965 (34 )
Certificates of deposit 552 (20 ) 552 (20 ) — —
Equity securities 287 (89 ) — — 287 (89 )
Mutual funds and money market funds 985 (15 ) — — 985 (15 )
Total 95,763 (3,037 ) 91,251 (2,600 ) 4,512 (437 )
Investment Securities Held-to-Maturity:
U.S. Treasury and agency securities $ 27,037 $ (1,019 ) $ 27,037 $ (1,019 ) $ — $ —
Federal agency obligation 13,492 (389 ) 13,197 (388 ) 295 (1 )
Residential mortgage pass-through securities 2,182 (64 ) 2,182 (64 ) — —
Commercial mortgage pass-through securities 1,395 (62 ) 1,395 (62 ) — —
Obligations of U.S. states and political subdivisions 66,034 (3,688 ) 57,072 (2,957 ) 8,962 (731 )
Corporate bonds and notes 27,210 (622 ) 27,210 (622 ) — —
Total 137,350 (5,844 ) 128,093 (5,112 ) 9,257 (732 )
Total Temporarily Impaired Securities $ 233,113 $ (8,881 ) $ 219,344 $ (7,712 ) $ 13,769 $ (1,169 )
Note 4. Investment Securities – (continued)
December 31, 2014
Total Less than 12 Months 12 Months or Longer
Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
(in thousands)
Investment securities available-for-sale:
Federal agency obligation $ 6,755 $ (50 ) $ 2,770 $ (9 ) $ 3,985 $ (41 )
Residential mortgage pass-through securities 5,694 (11 ) 5,694 (11 ) — —
Trust preferred securities 1,307 (269 ) — — 1,307 (269 )
Corporate bonds and notes 1,961 (11 ) 1,961 (11 ) — —
Asset-backed securities 9,773 (31 ) 9,773 (31 ) — —
Certificates of deposit 369 (2 ) 369 (2 ) — —
Equity securities 307 (69 ) — — 307 (69 )
Other securities 5,417 (82 ) 1,978 (21 ) 3,439 (61 )
Total $ 31,583 $ (525 ) $ 22,545 $ (85 ) $ 9,038 $ (440 )

Investment securities held-to-maturity:
Federal agency obligation $ 3,228 $ (28 ) $ 3,228 $ (28 ) $ — $ —
Obligations of U.S. states and political subdivisions 8,341 (60 ) 1,401 (3 ) 6,940 (57 )
Corporate bonds and notes 993 (7 ) 993 (7 ) — —
Total $ 12,562 $ (95 ) $ 5,622 $ (38 ) $ 6,940 $ (57 )
Total temporarily impaired securities $ 44,145 $ (620 ) $ 28,167 $ (123 ) $ 15,978 $ (497 )

Investment securities having a carrying value of approximately ~~$232.9~~$215.9 million and ~~$109.3~~$224.7 million at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013,~~2014, respectively, were pledged to secure public deposits, borrowings, Federal Reserve Discount Window, and Federal Home Loan Bank advances and for other purposes required or permitted by law.

~~At September 30, 2014~~As of March 31, 2015 and December 31, ~~2013,~~2014, there were no holdings of securities of any one issuer, other than the ~~U.S.~~U.S Government and its agencies, in an amount greater than 10% of stockholders’ equity.

Note ~~6. Loans~~5 - Derivatives
The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the ~~Allowance for Loan Losses~~
Loans are stated at their principal amounts inclusive of net deferred loan origination fees. Interest income is credited as earned except when a loan becomes past due 90 days or more and doubt exists as to the ultimate collection of interest or principal. In those cases the recognition of income is discontinued. Past due status is based on the contractualother terms of the ~~loan. Loans that are past due 90 days or more that are both well secured and in the process of collection will remain on an accruing basis. When a loan is placed on non-accrual status,~~individual interest ~~accruals cease and uncollected accrued interest is reversed and charged against current income.~~rate swap agreements.

~~Payments received~~Interest Rate Swaps Designated as Cash Flow Hedges: Interest rate swaps with a notional amount totaling $25.0 million and $25.0 million were entered into on ~~non-accrual loans are generally applied against principal. A loan may only~~October 15, 2014 and December 30, 2014, respectively, and were designated as cash flow hedges of certain Federal Home Loan Bank advances. The swaps were determined to be ~~restored to an accruing basis when it again becomes well secured~~fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. Therefore, the ~~process of collection or all past due amounts have been collected. Loan origination fees and certain direct loan origination costs are deferred and recognized over the life~~aggregate fair value of the ~~loan as an adjustment~~swaps 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 ~~loan’s yield using~~hedges no longer be considered effective. The Company expects the ~~level yield method.~~hedges to remain fully effective during the remaining term of the swaps.

16
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)

~~Portfolio segments~~Note 5 – Derivatives – (continued)
Summary information about the interest rate swaps designated as cash flow hedges as of period-end is as follows:
(dollars in thousands) March 31,
2015 March 31,
2014 December 31,
2014
Notional amount $ 50,000 $ — $ 50,000
Weighted average pay rates 1.58 % — % 1.58 %
Weighted average receive rates 0.25 % — % 0.24 %
Weighted average maturity 4.2 years — 4.4 years
Fair value $ (486 ) $ — $ 48
Interest expense recorded on these swap transactions totaled approximately $166,000 for the three months ended March 31, 2015 and there are ~~defined as~~no related expenses for the ~~level at which an entity develops~~three months ended March 31, 2014.
Cash Flow Hedge
The following table presents the net gains (losses), recorded in other comprehensive income and ~~documents a systematic methodology~~the Consolidated Statements of Income relating to ~~determine its allowance. Management~~the cash flow derivative instruments for the three months ended March 31, 2015:
(in thousands) Amount of gain
(loss) recognized
in OCI (Effective
Portion) Amount of gain
(loss) reclassified
from OCI to
interest income Amount of gain
(loss)
recognized in other
Non-interest income (Ineffective Portion)
Interest rate contracts $ (534 ) $ — $ —
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 three months ended March 31, 2014.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Loans and the Allowance for Loan and Lease Losses
Loans that management has ~~determined that~~ the ~~Corporation has two portfolio segments of loans~~intent and ~~leases (commercial and consumer) in determining~~ability to hold for the ~~allowance. Both quantitative and qualitative factors~~foreseeable future or until maturity or payoff are ~~used by management~~reported at the ~~portfolio segment level in determining the adequacy~~principal balance outstanding, net of ~~the~~deferred loan fees and costs, and an allowance for loan and lease losses. Interest income is accrued on the ~~Corporation. Classes~~unpaid principal balance. Loan origination fees, net of ~~loans~~certain direct origination costs, are deferred and ~~leases are a disaggregation of~~recognized in interest income using the ~~Corporation’s portfolio segments. Classes~~level-yield method without anticipating prepayments.
Loan segments are defined as a group of loans and leases, which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the ~~Corporation~~Company has five ~~classes~~segments of loans and leases: commercial (including lease financing), commercial real estate, commercial construction, residential real estate (including home equity) and consumer.
Interest income on commercial, commercial real estate, commercial construction and residential loans are discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to nonaccrual status in accordance with the Company’s policy, typically after 90 days of non-payment.
All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The policy of the Company is to generally grant commercial, residential and consumer loans to New Jersey residents and businesses within its market area. 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 loan and lease 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.

~~Impaired Loans~~Allowance for Loan and Lease Losses

The ~~Corporation accounts~~allowance for ~~impaired loans in accordance with FASB ASC 310-10-35. The value~~loan and lease losses is a valuation allowance for probable incurred credit losses. Losses are charged against the allowance when management believes the uncollectibility of ~~impaired loans~~a loan balance is ~~based on~~confirmed. Subsequent recoveries, if any, are credited to the ~~present value of expected future cash flows discounted at~~allowance. Management estimates the ~~loan’s effective interest rate or, as a practical expedient, at~~allowance balance required using past loan and lease loss experience, the ~~loan’s observable market price or at the fair value~~nature and volume of the portfolio, information about specific borrower situations and estimated collateral ifvalues, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan ~~is collateral dependent.~~that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is ~~considered~~ impaired when, based on current information and events, it is probable that the ~~Corporation~~Company will ~~not~~ be ~~able~~unable to collect all amounts due ~~from the borrower in accordance with~~according to the contractual terms of the loan ~~including scheduled interest payments. The Corporation has defined its population of impaired loans to include all classes of non-accrual,~~agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt ~~restructuring~~restructurings (“~~TDR”~~TDRs”) ~~loans~~ and ~~loans with a specific reserve.~~classified as impaired. As part of the evaluation of impaired loans, the ~~Corporation~~Company individually reviews for impairment all non-homogeneous loans internally classified as substandard or below. Generally, smaller impaired non-homogeneous loans and impaired homogeneous loans are collectively evaluated for impairment.

~~When~~The Bank has defined its population of impaired loans to include all loans on nonaccrual status; all troubled debt restructuring loans; and all loans (above an established dollar threshold of $250,000) internally classified as “Special Mention” or below that require a specific reserve.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan ~~has been identified as being impaired,~~and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of ~~impairment is measured based on~~ the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral-dependent. If the measurement of the impaired loan is less than the recorded investmentshortfall in the loan (including accrued interest, net of deferred loan fees or costs and unamortized premiums or discounts), impairment is recognized by creating or adjusting an existing allocation of the allowance, or by recording a partial charge-off of the loanrelation to ~~its fair value. Interest payments made on impaired loans are typically applied to principal unless collectability of~~ the principal ~~amount is reasonably assured, in which case~~and interest ~~income may be accrued or recognized on a cash basis.~~owed.

~~Loans Modified in a Troubled Debt Restructuring~~
Loans are considered to have been modified in a TDR when due to a borrower’s financial difficulties; the Corporation makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for a period of nine months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.
~~Reserve for Credit Losses~~
~~The Corporation’s reserve for credit losses is comprised of two components, the allowance for loan losses and the reserve for unfunded commitments (the “Unfunded Commitments”).~~
~~Allowance for Loan Losses~~
The allowance reflects management’s best estimate of probable losses within the existing loan portfolio. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risk inherent in the loan portfolio. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.
The Corporation’s allowance for loan losses includes (1) specific valuation allowances for impaired loans evaluated in accordance with FASB Codification Topic 310: Receivables; (2) formulaic allowances based on historical loss experience by loan category, adjusted, as necessary, to reflect the impact of current conditions; and (3) unallocated general valuation allowances determined in accordance with FASB Codification Topic 450: Contingencies based on general economic conditions and other qualitative risk factors both internal and external to the Corporation.
18
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)

~~Material estimates~~Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that ~~are particularly susceptible to significant change~~subsequently default, the Company determines the amount of reserve in accordance with the ~~near-term relate to the determination of~~accounting policy for the allowance for loan and lease losses. ~~In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.~~

The ~~ultimate collectability of a substantial portion~~general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience, the primary factor, is determined by loan class and is based on the actual loss history experienced by the Bank over an actual three year rolling calculation. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. This actual loss experience is supplemented with the exogenous factor adjustments based on the risks present for each loan category. These exogenous factors (nine total) include consideration of the ~~Corporation’s~~following: concentrations of credit; delinquency & nonaccrual trends; economic & business conditions including evaluation of the national and regional economies and industries with significant loan ~~portfolio is susceptible to~~concentrations; external factors including legal, regulatory or competitive pressures that may impact the loan portfolio; changes in the ~~real estate market and economic conditions in the State of New Jersey and the impact of such conditions on the creditworthiness~~experience, ability, or size of the ~~borrowers.~~lending staff, management, or board of directors that may impact the loan portfolio; changes in underwriting standards, collection procedures, charge-off practices, or other changes in lending policies and procedures that may impact the loan portfolio; loss and recovery trends; changes in portfolio size and mix; and trends in problem loans.

~~Purchase Credit Impaired~~Purchased Credit-Impaired Loans

The ~~Corporation~~Company purchases ~~individual loans and~~ groups of loans in conjunction with mergers, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan and lease losses. After acquisition, losses are recognized by an increase in the allowance for loan and lease losses.

Such purchased credit impaired loans are accounted for individually. The ~~Corporation~~Company estimates the amount and timing of expected cash flows for each loan ~~or pool,~~ and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan, , expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

~~Reserve for Unfunded Commitments~~
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other liabilities in the consolidated statements of condition. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, and credit risk. Net adjustments to the reserve for unfunded commitments are included in other expense.
Composition of Loan Portfolio

The following table sets forth the composition of the ~~Corporation’s~~Company’s loan portfolio, including net deferred loan fees, ~~and costs,~~ at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013:~~2014:

September 30, December 31,
2014 2013 March 31,
2015 December 31,
2014
(in thousands) (in thousands)
Commercial $ 470,510 $ 229,688 $ 562,931 $ 499,816
Commercial real estate 1,570,854 536,539 1,668,310 1,634,510
Construction 141,844 42,722
Commercial construction 181,056 167,359
Residential real estate 241,387 150,571 226,645 234,967
Consumer 2,640 1,084 3,581 2,879
Subtotal 2,427,235 960,604
Net deferred loan (fees) costs (470 ) 339
Loans receivable $ 2,426,765 $ 960,943
Gross loans 2,642,523 2,539,531
Net deferred loan fees (1,784 ) (890 )
Total loans receivable $ 2,640,739 $ 2,538,641

At ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013,~~2014, loan balances of approximately ~~$987.5 million~~$1.1 billion and ~~$564.7 million,~~$1.0 billion, respectively, were pledged to secure borrowings from the Federal Home Loan Bank of New York.

19
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)

~~Purchase Credit Impaired~~Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)
Purchased Credit-Impaired Loans

The ~~Corporation~~Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013.~~2014.

September 30, December 31,
2014 2013 March 31,
2015 December 31,
2014
(in thousands) (in thousands)
Commercial $ 7,255 $ — $ 7,146 $ 7,199
Commercial real estate 1,835 — 1,807 1,816
Construction — —
Residential real estate 2,262 — 819 806
Consumer — —
Total carrying amount $ 11,352 $ — $ 9,772 $ 9,821

For those purchased loans disclosed above, the ~~Corporation~~Company did not increase the allowance for loan and lease losses for the ~~nine~~three months ended ~~September 30, 2014,~~March 31, 2015, nor did it increase the allowance for loan and lease losses for purchased impaired loans during the ~~nine~~three months ended ~~September 30, 2013.~~March 31, 2015.

The accretable yield, or income expected to be collected, on the purchased loans ~~above~~for the three months ended March 31, 2015 is as follows ~~at September 30, 2014 and December 31, 2013.~~(in thousands):

September 30,
2014
Balance at July 1 $ 5,013
New loans purchased —
Accretion of income (76 )
Reclassifications from non-accretable difference —
Disposals —
Balance at September 30 $ 4,937
22
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~
March 31,
2015
Balance at January 1, 2015 $ 4,805
New loans purchased —
Accretion of income (54 )
Reclassifications from non-accretable difference —
Disposals —
Balance at March 31, 2015 $ 4,751

The following table presents information about the recorded investment in loan receivables on ~~non-accrual~~nonaccrual status by class at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013:~~2014:

Loans Receivable on Non-Accrual Status

September 30, 2014 December 31, 2013
(in thousands)
Commercial $ 634 $ 753
Commercial real estate 3,765 744
Residential real estate 1,684 1,640
Total loans receivable on non-accrual status $ 6,083 $ 3,137
Loans Receivable on Nonaccrual Status
March 31,
2015 December 31,
2014
(in thousands)
Commercial $ 3,347 $ 616
Commercial real estate 8,009 8,197
Residential real estate 3,229 2,796
Total loans receivable on nonaccrual status $ 14,585 $ 11,609

~~Non-accrual~~Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans.

20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)
The ~~Corporation~~Company continuously monitors the credit quality of its loans receivable. In addition to its internal staff, the ~~Corporation~~Company utilizes the services of a third party loan review firm to rate the credit quality of its loans receivable. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “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 ~~Corporation’s~~Company’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified 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. The following table presents information, excluding net deferred ~~costs,~~loan fees, about the ~~Corporation’s~~Company’s loan credit quality at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013:~~2014:

~~Credit Quality Indicators~~
March 31, 2015
Pass Special
Mention Substandard Doubtful Total
(in thousands)
Commercial $ 528,431 $ 23,975 $ 10,249 $ 276 $ 562,931
Commercial real estate 1,621,181 24,509 22,620 — 1,668,310
Commercial construction 179,577 1,479 — — 181,056
Residential real estate 223,148 — 3,497 — 226,645
Consumer 3,484 — 97 — 3,581

Total loans $ 2,555,821 $ 49,963 $ 36,463 $ 276 $ 2,642,523

September 30, 2014
Pass Special Mention Substandard Doubtful Total
(in thousands)
Commercial $ 449,688 $ 15,447 $ 5,073 $ 302 $ 470,510
Commercial real estate 1,533,499 17,521 19,834 — 1,570,854
Construction 140,365 — 1,479 — 141,844
Residential real estate 238,516 — 2,871 — 241,387
Consumer 2,534 — 106 — 2,640

Total loans $ 2,364,602 $ 32,968 $ 29,363 $ 302 $ 2,427,235

December 31, 2013
Pass Special Mention Substandard Doubtful Total
(in thousands)
Commercial $ 226,013 $ 1,719 $ 1,284 $ 672 $ 229,688
Commercial real estate 509,679 14,544 12,316 — 536,539
Construction 41,492 — 1,230 — 42,722
Residential real estate 147,379 978 2,214 — 150,571
Consumer 964 — 120 — 1,084
Total loans $ 925,527 $ 17,241 $ 17,164 $ 672 $ 960,604
December 31, 2014
Pass Special
Mention Substandard Doubtful Total
(in thousands)
Commercial $ 481,638 $ 3,686 $ 14,203 $ 289 $ 499,816
Commercial real estate 1,596,606 14,140 23,764 — 1,634,510
Commercial construction 165,880 1,479 — — 167,359
Residential real estate 230,772 — 4,195 — 234,967
Consumer 2,778 — 101 — 2,879

Total loans $ 2,477,674 $ 19,305 $ 42,263 $ 289 $ 2,539,531

21
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)
Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

The following table provides an analysis of the impaired loans, by ~~class,~~loan segment, at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013:~~2014:
September 30, 2014
Recorded
Investment Unpaid
Principal
Balance Related
Allowance
(in thousands)
No Related Allowance Recorded
Commercial $ 890 $ 663 $ —
Commercial real estate 5,005 5,654 —
Residential real estate 1,957 2,288 —
Consumer 106 106 —
Total $ 7,958 $ 8,711 —

With An Allowance Recorded
Commercial real estate $ 3,600 $ 3,600 $ 323
Total $ 3,600 $ 3,600 $ 323
Total
Commercial $ 890 $ 663 $ —
Commercial real estate 8,605 9,254 —
Residential real estate 1,957 2,288 —
Consumer 106 106 —
Total $ 11,558 $ 12,311 $ 323
December 31, 2013
Recorded
Investment Unpaid
Principal
Balance Related
Allowance
(in thousands)
No Related Allowance Recorded
Commercial $ 449 $ 449 $ —
Commercial real estate 10,482 10,783 —
Residential real estate 1,858 2,000 —
Consumer 120 120 —
Total $ 12,909 $ 13,352 $ —
With An Allowance Recorded
Commercial $ 672 $ 672 $ 300
Commercial real estate 4,344 4,344 115
Total $ 5,016 $ 5,016 $ 415
Total
Commercial $ 1,121 $ 1,121 $ 300
Commercial real estate 14,826 15,127 115
Residential real estate 1,858 2,000 —
Consumer 120 120 —
Total $ 17,925 $ 18,368 $ 415

March 31, 2015
Recorded
Investment Unpaid
Principal
Balance Related
Allowance
No related allowance recorded (in thousands)
Commercial $ 314 $ 334 $ —
Commercial real estate 5,774 6,468 —
Residential real estate 3,505 3,869 —
Consumer 105 97 —
Total $ 9,698 $ 10,768 $ —

With an allowance recorded
Commercial $ 382 $ 390 $ 188
Commercial real estate 6,341 6,341 518
Total $ 6,723 $ 6,731 $ 706

Total
Commercial $ 696 $ 724 $ 188
Commercial real estate 12,115 12,809 518
Residential real estate 3,505 3,869 —
Consumer 105 97 —
Total $ 16,421 $ 17,499 $ 706
December 31, 2014
Recorded
Investment Unpaid
Principal
Balance Related
Allowance
No related allowance recorded (in thousands)
Commercial $ 481 $ 527 $ —
Commercial real estate 5,890 6,587 —
Residential real estate 3,072 3,407 —
Consumer 109 101 —
Total $ 9,552 $ 10,622 $ —

With an allowance recorded
Commercial $ 387 $ 390 $ 111
Commercial real estate 3,520 3,520 151
Total $ 3,907 $ 3,910 $ 262

Total
Commercial $ 868 $ 917 $ 111
Commercial real estate 9,410 10,107 151
Residential real estate 3,072 3,407 —
Consumer 109 101 —
Total $ 13,459 $ 14,532 $ 262
22
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)
Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by ~~class~~segment as of and for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013.~~(in thousands):

Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
2014 2013 2014 2013 2015 2014
Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized
Impaired loans with no related allowance recorded:
Impaired loans with no related allowance recorded

Commercial $ 897 $ — $ — $ — $ 778 $ 30 $ — $ — $ 290 $ — $ — $ —
Commercial real estate 5,046 31 1,275 19 5,313 74 1,275 57 6,052 19 1,275 57
Residential real estate 1,975 0 — — 2,044 31 — — 3,613 2 — —
Consumer 106 2 — — 106 5 — — 106 1 — —

Total $ 8,024 32 $ 1,275 $ 19 $ 8,241 $ 140 $ 1,275 $ 57 $ 10,061 $ 22 $ 1,275 $ 57

Impaired loans with an allowance recorded:
Impaired loans with an allowance recorded

Commercial $ 387 $ — $ — $ —
Commercial real estate 6,335 — 2,302 68
Residential real estate — — 1,226 31

Total $ 6,722 $ $ 3,528 $ 99

Total impaired loans

Commercial $ — $ — $ — $ — $ — $ — $ — $ — $ 677 $ — $ — $ —
Commercial real estate 3,600 37 175 — 3,600 122 2,302 68 12,387 19 3,477 125
Residential real estate — — 1,226 10 — — 1,226 31 3,613 2 1,226 31
Consumer — — — — — — — 106 1 — —

Total $ 3,600 $ 37 $ 1,401 $ 10 $ 3,600 $ 122 $ 3,428 $ 99 $ 16,783 $ 22 $ 4,703 $ 156

Total impaired loans:

Commercial $ 897 $ — $ — $ — $ 778 $ 30 $ — $ —
Commercial real estate 8,646 68 1,450 19 8,913 196 3,477 125
Residential real estate 1,975 0 1,226 10 2,044 31 1,226 31
Consumer 106 2 — — 106 5 — —

Total $ 11,624 $ 69 $ 2,676 $ 29 11,841 $ 262 $ 4,703 $ 156

Included in impaired loans at ~~September 30,~~March 31, 2015, December 31, 2014 and March 31, 2014 are loans that are deemed troubled debt restructurings. The recorded investment in loans include accrued interest receivable and other capitalized costs such as real estate taxes paid on behalf of the borrower and loan origination fees, net, when applicable. Cash basis interest and interest income recognized on accrual basis approximate each other.

23
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)
Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

The following table provides an analysis of the aging of the recorded investment of loans, excluding net deferred ~~costs~~loan fees that are past due at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013~~2014 by ~~class:~~segment:
Aging Analysis
March 31, 2015
30-59 Days
Past Due 60-89 Days
Past Due 90 Days or
Greater Past
Due Total Past
Due Current Total Loans
Receivable Loans
Receivable 90
Days or Greater
Past Due and
Accruing
(in thousands)
Commercial $ 5,562 $ 554 $ 3,899 $ 10,015 $ 552,916 $ 562,931 $ 638
Commercial real estate 2,567 5,092 4,180 11,839 1,656,471 1,668,310 —
Commercial construction 375 — — 375 180,681 181,056 —
Residential real estate 1,925 — 2,937 4,862 221,783 226,645 —
Consumer 2 1 — 3 3,578 3,581
Total $ 10,431 $ 5,647 $ 11,016 $ 27,094 $ 2,615,429 $ 2,642,523 $ 638

Aging Analysis

September 30, 2014 December 31, 2014
30-59 Days
Past Due 60-89 Days
Past Due 90 Days or
Greater Past
Due Total Past
Due Current Total Loans
Receivable Loans
Receivable > 90
Days Past Due
and
Accruing 30-59 Days
Past Due 60-89 Days
Past Due 90 Days or
Greater Past
Due Total Past
Due Current Total Loans
Receivable Loans
Receivable 90
Days or Greater
Past Due and
Accruing
(in thousands) (in thousands)
Commercial $ 405 $ — $ 752 $ 1,157 $ 469,353 $ 470,510 $ — $ 6,060 $ — $ 662 $ 6,722 $ 493,094 $ 499,816 $ 45
Commercial real estate 951 2,044 4,020 7,015 1,563,839 1,570,854 — 4,937 638 5,961 11,535 1,622,975 1,634,510 609
Construction — — — — 141,844 141,844 —
Commercial construction — — — — 167,359 167,359 —
Residential real estate 347 1,763 3,403 5,513 235,874 241,387 — 1,821 210 3,200 5,231 229,736 234,967 557
Consumer 17 — — 17 2,623 2,640 30 1 — 31 2,848 2,879 —
Total $ 1,720 $ 3,807 $ 8,175 $ 13,702 $ 2,413,533 $ 2,427,235 $ — $ 12,848 $ 849 $ 9,823 $ 23,519 $ 2,516,012 $ 2,539,531 $ 1,211

December 31, 2013
30-59 Days
Past Due 60-89 Days
Past Due 90 Days or
Greater Past
Due Total Past
Due Current Total Loans
Receivable Loans
Receivable > 90
Days Past Due
and
Accruing
(in thousands)
Commercial $ 18 $ — $ 753 $ 771 $ 228,917 $ 229,688 $ —
Commercial Real Estate 221 — 744 965 535,574 536,539 —
Construction — — — — 42,722 42,722 —
Residential real estate 990 258 1,640 2,888 147,683 150,571 —
Consumer 5 — — 5 1,079 1,084
Total $ 1,234 $ 258 $ 3,137 $ 4,629 $ 955,975 $ 960,604 $ —
24
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)
Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

The following table details the amount of loans receivable that are evaluated individually, and collectively, for impairment (excluding net deferred ~~costs)~~loan fees), acquired, and the related portion of the allowance for loan ~~loss~~and lease losses that isare allocated to each loan portfolio ~~class:~~segment:

September 30, 2014 March 31, 2015
Commercial Commercial
real estate Construction Residential
real estate Consumer Unallocated Total Commercial Commercial
real estate Commercial
construction Residential
real estate Consumer Unallocated Total
(in thousands) (in thousands)
Allowance for loan and lease losses:
Allowance for loan and lease losses
Individually evaluated for impairment $ — $ 323 $ — $ — $ — $ — $ 323 $ 188 $ 518 $ — $ — $ — $ — $ 706
Collectively evaluated for impairment 2,478 6,699 524 1,052 5 1,037 11,795 3,739 8,328 1,518 981 4 657 15,227
Acquired with deteriorated credit quality — — — — — — — — — — — — — —
Total $ 2,478 $ 7,022 $ 524 $ 1,052 $ 5 $ 1,037 $ 12,118 $ 3,927 $ 8,846 $ 1,518 $ 981 $ 4 $ 657 $ 15,933

Loans Receivable
Loans receivable
Individually evaluated for impairment $ 68 $ 5,983 $ — $ 1,733 $ 106 $ — $ 7,890 $ 696 $ 12,115 $ — $ 3,905 $ 105 $ — $ 16,421
Collectively evaluated for impairment 463,187 1,563,036 141,844 237,391 2,534 — 2,407,992 555,089 1,654,388 181,056 222,321 3,476 — 2,616,330
Acquired with deteriorated credit quality 7,255 1,835 — 2,263 — — 11,353 7,146 1,807 — 819 — — 9,772
Total $ 470,510 $ 1,570,854 $ 141,844 $ 241,387 $ 2,640 $ — $ 2,427,235 $ 562,931 $ 1,668,310 $ 181,056 $ 226,645 $ 3,581 $ — $ 2,642,523

The tables above include approximately ~~$1,275,000,000~~$1.1 billion of acquired loans for the period ended ~~September 30,~~March 31, 2015 reported as collectively evaluated for impairment.
The following table details the amount of loans that are evaluated individually, and collectively, for impairment (excluding net deferred loan fees), acquired, and the related portion of the allowance for loan and lease losses that are allocated to each loan portfolio segment:
December 31, 2014
Commercial Commercial
real estate Commercial
construction Residential
real estate Consumer Unallocated Total
(in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment $ 111 $ 151 $ — $ — $ — $ — $ 262
Collectively evaluated for impairment 2,972 7,648 1,239 1,113 7 919 13,898
Acquired with deteriorated credit quality — — — — — — —
Total $ 3,083 $ 7,799 $ 1,239 $ 1,113 $ 7 $ 919 $ 14,160

Loans receivable
Individually evaluated for impairment $ 452 $ 6,284 $ — $ 2,180 $ 101 $ — $ 9,017
Collectively evaluated for impairment 492,165 1,626,410 167,359 231,981 2,778 — 2,520,693
Acquired with deteriorated credit quality 7,199 1,816 — 806 — — 9,821
Total $ 499,816 $ 1,634,510 $ 167,359 $ 234,967 $ 2,879 $ — $ 2,539,531
The tables above include approximately $1.2 billion of acquired loans for the period ended December 31, 2014 reported as collectively evaluated for impairment.

25
December 31, 2013
Commercial Commercial
real estate Construction Residential
real estate Consumer Unallocated Total
(in thousands)
Allowance for loan and lease losses:
Individually evaluated for impairment $ 300 $ 115 $ — $ — $ — $ — $ 415
Collectively evaluated for impairment 1,398 5,631 362 990 146 1,391 9,918
Total $ 1,698 $ 5,746 $ 362 $ 990 $ 146 $ 1,391 $ 10,333

Loans Receivable
Individually evaluated for impairment $ 1,121 $ 14,826 $ — $ 1,858 $ 120 $ — $ 17,925
Collectively evaluated for impairment 228,567 521,713 42,722 148,713 964 — 942,679
Total $ 229,688 $ 536,539 $ 42,722 $ 150,571 $ 1,084 $ — $ 960,604
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~The tables above include approximately $34,000,000 of acquired loans~~Note 6. Loans and the Allowance for ~~the period ended December 31, 2013 reported as collectively evaluated for impairment.~~Loan and Lease Losses – (continued)

The ~~Corporation’s~~Company’s allowance for loan and lease losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit. There have been no material changes to the allowance for loan ~~loss~~and lease losses methodology as disclosed in the ~~Corporation’s~~Company’s Annual Report on Form 10-K for the year ended December 31, ~~2013.~~2014.

A summary of the activity in the allowance for loan and lease losses is as follows:

Three Months Ended September 30, 2014
Commercial Commercial
real estate Construction Residential
real estate Consumer Unallocated Total
(in thousands)
Balance at July 1, $ 2,142 $ 5,741 $ 504 $ 1,011 $ 63 $ 1,364 $ 10,825

Charge offs — — — — (18 ) — (18 )

Recoveries — — — — 11 — 11

Provision 336 1,281 20 41 (51 ) (327 ) 1,300

Balance at September 30, $ 2,478 $ 7,022 $ 524 $ 1,052 $ 5 $ 1,037 $ 12,118
Three Months Ended March 31, 2015
Commercial Commercial
real estate Commercial
construction Residential
real estate Consumer Unallocated Total
(in thousands)
Balance at January 1, 2015 $ 3,083 $ 7,799 $ 1,239 $ 1,113 $ 7 $ 919 $ 14,160

Charge-offs (45 ) (4 ) — — (11 ) — (60 )

Recoveries 6 — — 1 1 — 8

Provision 883 1,051 279 (133 ) 7 (262 ) 1,825

Balance at March 31, 2015 $ 3,927 $ 8,846 $ 1,518 $ 981 $ 4 $ 657 $ 15,933

Three Months Ended March 31, 2014
Commercial Commercial
real estate Commercial
construction Residential
real estate Consumer Unallocated Total
(in thousands)
Balance at January 1, 2014 $ 1,698 $ 5,746 $ 362 $ 990 $ 146 $ 1,391 $ 10,333

Charge-offs (333 ) — — — (3 ) — (336 )

Recoveries — — — 10 1 — 11

Provision 860 (362 ) 72 4 (65 ) 116 625

Balance at March 31, 2014 $ 2,225 $ 5,384 $ 434 $ 1,004 $ 79 $ 1,507 $ 10,663
26
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)

Nine Months Ended September 30, 2014
Commercial Commercial real estate Construction Residential real estate Consumer Unallocated Total
(in thousands)
Balance at January 1, $ 1,698 $ 5,746 $ 362 $ 990 $ 146 $ 1,391 $ 10,333

Charge offs (333 ) — — (108 ) (7 ) — (448 )

Recoveries — — — 11 13 — 24

Provision 1,113 1,276 162 159 (147 ) (354 ) 2,209

Balance at September 30, $ 2,478 $ 7,022 $ 524 $ 1,052 $ 5 $ 1,037 $ 12,118

Three Months Ended September 30, 2013
Commercial Commercial
real estate Construction Residential
real estate Consumer Unallocated Total
(in thousands)
Balance at July 1, $ 2,422 $ 5,333 $ 318 $ 1,341 $ 29 $ 759 $ 10,202

Charge offs (6 ) — — — (4 ) — (10 )

Recoveries — — — — 2 — 2

Provision (702 ) 455 51 (37 ) 67 166 —

Balance at September 30, $ 1,714 $ 5,788 $ 369 $ 1,304 $ 94 $ 925 $ 10,194

Nine Months Ended September 30, 2013
Commercial Commercial real estate Construction Residential real estate Consumer Unallocated Total
(in thousands)
Balance at January 1, $ 2,424 $ 5,323 $ 313 $ 1,532 $ 113 $ 532 $ 10,237

Charge offs (6 ) (50 ) — — (20 ) — (76 )

Recoveries 21 8 — — 4 — 33

Provision (725 ) 507 56 (228 ) (3 ) 393 —

Balance at September 30, $ 1,714 $ 5,788 $ 369 $ 1,304 $ 94 $ 925 $ 10,194
28
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

~~Troubled~~Trouble Debt Restructurings

At ~~September 30, 2014,~~March 31, 2015, there were no commitments to lend additional funds to borrowers whose loans were on ~~non-accrual~~nonaccrual status or were contractually past due in excess of 90 days and still accruing interest, or whose terms have been modified in troubled debt restructurings.

The policy of the ~~Corporation~~Company generally is to grant commercial, mortgage and consumer loans to residents and businesses within its market area. 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 ~~Corporation.~~Company. The ~~Corporation~~Company is therefore subject to risk of loss. The ~~Corporation~~Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan and lease losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for virtually all loans. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

Loans modified in a troubled debt restructuring totaled a recorded investment of $2.8 million at ~~September 30, 2014,~~March 31, 2015, of which ~~$1.0~~$1.1 million were on ~~non-accrual~~nonaccrual status. The remaining loans modified were current and have complied with the terms of their restructure agreement. At December 31, ~~2013,~~2014, loans modified in a troubled debt restructuring totaled ~~$6.6~~$2.8 million, of which ~~$826,000 was~~$1.0 million were on ~~non-accrual~~nonaccrual status. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreement. The ~~Corporation~~Company has allocated no specific allocations with respect to loans whose loan terms had been modified in troubled debt restructurings as of ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013.~~2014. The TDRs presented as of March 31, 2015 and December 31, 2014 did not increase the allowance for loan and lease losses.
There were no troubled debt restructurings occurring during the three months ended March 31, 2015.
There were no charge-offs in connection with a loan modification at the time of modification during the three months ended March 31, 2015. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, 2015.

The following table presents loans by ~~class~~segment modified as troubled debt restructurings that occurred during the ~~nine months~~year ended ~~September 30,~~March 31, 2014 (dollars in thousands):

Pre-Modification Post-Modification
Outstanding Outstanding
Number of Recorded Recorded
Loans Investment Investment
Troubled debt restructurings:
Commercial 1 $ 672 $ 315
Commercial real estate 1 136 93
Construction — — —
Residential real estate 2 275 273

Total 4 $ 1,083 $ 681
Pre-Modification Post-Modification
Outstanding Outstanding
Number of Recorded Recorded
Loans Investment Investment
Troubled debt restructurings:
Commercial 1 $ 672 $ 337

The ~~Corporation~~Company had a $333,000 charge-off in connection with a loan modification at the time of modification during the ~~nine~~three months ended ~~September 30,~~March 31, 2014. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the ~~nine~~three months ended ~~September 30,~~March 31, 2014.

There were no troubled debt restructurings that occurred during the year ended December 31, 2013. The Corporation had no loans charged-off in connection with a loan modification at the time of the modification during the year ended December 31, 2013. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the year ended December 31, 2013.
In an effort to proactively manage delinquent loans, the Corporation has selectively extended to certain borrowers concessions such as rate reductions, extension of maturity dates, principal or interest forgiveness, adjusted repayment terms, forbearance agreements, or combinations of two or more of these concessions. As of September 30, 2014, loans on which concessions were made with respect to adjusted repayment terms amounted to $2.0 million, and deemed troubled debt restructurings. Loans on which combinations of two or more concessions were made amounted to $1.3 million. The concessions granted included principal concessions, rate reduction, adjusted repayment, extended maturity and payment deferral.
27
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)

Note 7. Fair Value Measurements and Fair Value of Financial Instruments

~~Fair~~ASC Topic 820, “Fair Value Measurements
~~Management uses its best judgment in estimating the~~ and Disclosures,” establishes a fair value ofhierarchy that prioritizes the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. The estimated fair value amounts have been measured as of September 30, 2014 and December 31, 2013, and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequentinputs to ~~those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.~~
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. There are three levels of inputs that may bevaluation techniques used to measure fair ~~values:~~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 are described below:

· 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 ~~(unadjusted)~~ for ~~identical~~similar assets orand liabilities in active markets, ~~that the entity has the ability to access as of the measurement date.~~
· ~~Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other~~and inputs that are observable for the asset or ~~can be corroborated by observable market data.~~liability, either directly or indirectly, for substantially the full term of the financial instrument.
·
Level 3: ~~Significant unobservable~~   Prices or valuation techniques that require inputs that ~~reflect a reporting entity’s own assumptions about~~are both significant to the ~~assumptions that~~fair value measurement and unobservable (for example, supported with little or no market ~~participants would use in pricing an asset or liability.~~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.

~~Investment Securities Available-for-Sale~~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 a 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. 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 at March 31, 2015 and December 31, 2014:

Securities available-for-sale - Where quoted prices are available in an active market, ~~investment~~ securities are classified inwith Level 1 of the valuation hierarchy. Level 1 inputs include ~~investment~~ 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 ~~its~~their fair value and ~~it is~~are classified as Level 3. Due to the inactive condition of the markets amidst the financial crisis, the ~~Corporation~~Company treated certain ~~investment~~ securities as Level 3 ~~assets~~securities in order to provide more appropriate valuations. For assets in an inactive market, the infrequent trades that do occur are not a true indication of fair value. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The ~~Corporation’s valuations~~Company’s evaluations are based on market data and the ~~Corporation~~Company employs combinations of these approaches for its valuation methods depending on the asset class. ~~In certain cases~~
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 ~~there were limited~~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 ~~less transparent information provided by~~pricing curves, prepayment rate, and volatility factors to value the ~~Corporation’s~~position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing ~~service,~~services.
Loans held for sale - Loans held for sale are required to be measured at the lower of cost or fair value. Under FASB ASC 820-10-05, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions.
Loans receivable - The fair value ~~was~~of performing loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risks inherent in the loan. The estimate of maturity is based on the historical experience of the Bank with prepayments for each loan classification, modified as required by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by ~~the use of~~discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary ~~pricing services or through the use of non-binding third-party broker quotes.~~market sources adjusted to reflect differences in servicing and credit costs.

On a quarterly basis, management reviews the pricing information received from the Corporation’s third-party pricing service. This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the Corporation’s third-party pricing service.
Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the securities being valued. As of September 30, 2014 and December 31, 2013, management made no adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.
The Corporation determined that an income approach valuation technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at the prior measurement dates. As a result, the Corporation used the discount rate adjustment technique to determine fair value.
28
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)
Note 7. Fair Value Measurements and Fair Value of Financial Instruments
Off-balance sheet financial instruments- The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account 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 rate and the committed rates.
The fair value of financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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 at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013~~2014 are as follows:

Fair Value Measurements at
Reporting Date Using March 31, 2015
Assets Measured at Fair Value on a Recurring Basis September 30,
2014 Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(in thousands) Fair Value Measurements at Reporting Date Using
U.S. Treasury & agency securities $ 11,385 $ 11,385 $ — $ —
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available-for-sale:
Federal agency obligations 32,992 — 32,992 — $ 31,233 $ — $ 31,233 $ —
Residential mortgage pass-through securities 59,691 — 59,691 — 59,028 — 59,028 —
Commercial mortgage pass-through securities 3,016 — 3,016 — 3,082 — 3,082 —
Obligations of U.S. states and political subdivisions 8,429 — 8,429 —
Obligations of U.S. states and political subdivision 8,435 — 8,435 —
Trust preferred securities 16,314 — 16,314 — 16,456 — 16,456 —
Corporate bonds and notes 135,840 — 135,840 — 116,839 — 116,839 —
Asset-backed securities 21,753 — 21,753 — 26,092 — 26,092 —
Certificates of deposit 2,124 — 2,124 — 2,123 — 2,123 —
Equity securities 289 289 — — 320 320 — —
Mutual funds and money market funds 15,669 15,669 — —

Investment securities available-for-sale $ 307,502 $ 27,343 $ 280,159 $ —
Other securities 12,513 12,513 — —
Total available-for-sale 276,121 12,833 263,288 —
Loans held for sale 1,392 — 1,392 —
Total assets $ 277,513 $ 12,833 $ 264,680 $ —
Liabilities
Derivatives $ 486 $ — $ 486 $ —
Total liabilities $ 486 $ — $ 486 $ —

Fair Value Measurements at
Reporting Date Using
Assets Measured at Fair Value on a Recurring Basis December 31,
2013 Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(in thousands)
U.S. Treasury and agency securities $ 13,519 $ 13,519 $ — $ —
Federal agency obligations 19,941 — 19,941 —
Residential mortgage pass-through securities 48,874 — 48,874 —
Commercial mortgage pass-through securities 6,991 — 6,991 —
Obligations of U.S. states and political subdivisions 31,460 — 31,460 —
Trust preferred securities 19,403 — 19,403 —
Corporate bonds and notes 158,630 — 158,630 —
Asset-backed securities 15,979 — 15,979 —
Certificates of deposit 2,262 — 2,262 —
Equity securities 287 287 — —
Mutual funds and money market funds 5,724 5,724 — —

Investment securities available-for-sale $ 323,070 $ 19,530 $ 303,540 $ —
29
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

~~The fair values used by the Corporation are obtained from an independent pricing service~~Note 7. Fair Value Measurements and represent either quoted market prices for the identical securities (Level 1 inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2).Fair Value of Financial Instruments

December 31, 2014
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available-for-sale:
Federal agency obligations $ 32,817 $ — $ 32,817 $ —
Residential mortgage pass-through securities 60,356 — 60,356 —
Commercial mortgage pass-through securities 3,046 — 3,046 —
Obligations of U.S. states and political subdivision 8,406 — 8,406 —
Trust preferred securities 16,306 — 16,306 —
Corporate bonds and notes 125,777 — 125,777 —
Asset-backed securities 27,502 — 27,502 —
Certificates of deposit 2,123 — 2,123 —
Equity securities 307 307 — —
Other securities 12,892 12,892 — —
Total available-for-sale 289,532 13,199 276,333 —
Derivatives 48 — 48 —
Total assets $ 289,580 $ 13,199 $ 276,381 $ —
~~The following tables present the changes in investment securities available-for-sale with significant unobservable inputs (Level 3) for~~
For the three months ended ~~September 30, 2014 and 2013.~~
Three Months Ended Nine Months Ended
September 30, September 30,
2014 2013 2014 2013
(in thousands)
Balance, beginning of the period $ — $ 72 $ — $ 36
Interest payment deferrals — 14 — 43
Principal repayments — — — —
Total net losses included in net income — — — —
Total net unrealized (losses) gains — 8 — 15
Balance, end of the period — $ 94 — $ 94
~~For the nine months ended September 30, 2014,~~March 31, 2015, there were no transfers of investment securities available-for-sale into or out of Level 1, Level 2, or Level 3 assets.

Assets Measured at Fair Value on a Non-Recurring Basis

For assets measured at fair value on a non-recurring basis, the unobservable inputs used to derive fair value measurements at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013~~2014 were as follows:

Impaired ~~Loans~~loans Valuation Techniques Range of Unobservable Inputs

~~Residential~~ ~~Appraisals of collateral value~~ ~~Adjustment for age of comparable sales, generally a decline of 0% to 25%~~
~~Commercial~~ ~~Discounted cash flow model~~ ~~Discount rate from 0% to 6%~~
Commercial real estate Appraisals of collateral value Market capitalization rates between 8% toand 12%. Market rental rates for similar properties
Other real estate owned

~~Other Real Estate Owned~~
~~Residential~~Commercial real estate Appraisals of collateral value Adjustment for age of comparable sales, generally a decline of 0% to 25%

Fair Value Measurements at Reporting Date Using
Assets Measured at Fair Value on a Non-Recurring Basis September 30,
2014 Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(in thousands)
Impaired Loans
Commercial real estate $ 3,277 $ — $ — $ 3,277

Other Real Estate Owned
Residential 1,442 — — 1,442
30
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~(unaudited)

Note 7. Fair Value Measurements and Fair Value of Financial Instruments
Fair Value Measurements at Reporting Date Using
Assets Measured at Fair Value on a Non-Recurring Basis December 31,
2013 Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(in thousands)
Impaired Loans
Commercial $ 372 $ — $ — $ 372
Commercial real estate 4,229 — — 4,229

Other Real Estate Owned
Residential 220 — — 220
Fair Value Measurements at Reporting Date Using
Assets measured at fair value on a nonrecurring basis: March 31,
2015 Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)

Impaired loans (in thousands)
Commercial $ 194 $ — $ — $ 194
Commercial real estate 5,823 — — 5,823

Other real estate owned
Commercial real estate 870 — — 870
Fair Value Measurements at Reporting Date Using
Assets Measured at Fair Value on a Non-Recurring Basis December 31,
2014 Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)

Impaired loans (in thousands)
Commercial $ 276 $ — $ — $ 276
Commercial real estate 3,369 — — 3,369

Other real estate owned
Commercial real estate 1,108 — — 1,108

The following methods and assumptions were used to estimate the fair values of the ~~Corporation’s~~Company’s assets measured at fair value on a non-recurring basis at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013.~~2014.

~~Impaired Loans.~~ The value of an impaired loan is measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans are specifically excluded from the impaired loan portfolio. The Corporation’s impaired loans are primarily collateral dependent. Impaired loans ~~are individually assessed to determine that each loan’s carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows.~~ -Impaired loans at ~~September 30, 2014~~March 31, 2015 that required a valuation allowance during ~~2014~~2015 were ~~$3.6~~$6.7 million with a related valuation allowance of ~~$323,000~~$706,000 compared to ~~$5.0~~$3.9 million with a related valuation allowance of ~~$415,000~~$262,000 at December 31, ~~2013.~~2014. Additional provision for loan and lease losses of ~~$0 and $210,500~~$444,000 for the ~~third~~first quarter ~~and first nine months~~ of ~~2014, respectively, were~~2015 was recorded. ~~Additional~~An additional provision for loan and lease losses of ~~$415,000~~$262,000 for the year ended December 31, ~~2013 were~~2014 was recorded.

Other ~~Real Estate Owned.~~real estate owned -Other real estate owned (“OREO”) is measured at fair value less costs to ~~sell, generally a decline of 0% to 25% for residential OREO and a decline of 0% to 15% for commercial OREO.~~sell. The ~~Corporation~~Company believes that the fair value component in its valuation follows the provisions of FASB ASC 820-10-05. The fair value of OREO is determined by sales agreements or appraisals by qualified licensed appraisers approved and hired by the ~~Corporation.~~Company. Costs to sell associated with OREO are based on estimation per the terms and conditions of the sales agreements or appraisals. For the three months ended March 31, 2015, no provision recorded.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. Fair Value Measurements and Fair Value of Financial Instruments

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 ~~Corporation,~~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 ~~Corporation’s~~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 ~~Corporation’s~~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 ~~Corporation~~Company for the purposes of this disclosure.

Cash and ~~due from banks and interest bearing deposits:~~cash equivalents -The carrying amounts of cash and short-term instruments approximate fair ~~values and care classified as Level 1.~~values.

~~Investment in Restricted Stock:~~FHLB stock -It is not practical to determine the fair value of FHLB ~~Stock~~stock due to restrictions placed on its transferability.

Investment ~~Securities Held-to-Maturity~~securities held-to-maturity -. The fair value of the ~~Corporation’s~~Company’s investment securities held-to-maturity was primarily measured using information from a third-party pricing service. If quoted prices were not available, fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. In cases where there may be limited or less transparent information provided by the ~~Corporation’s~~Company’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.

Loans ~~Held-for-Sale~~ -~~. Fair value is estimated using the prices of the Corporation’s existing commitments to sell such loans and/or the quoted market price for commitments to sell similar loans.~~
33
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~
~~Loans.~~The fair value of the ~~Corporation’s~~Company’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans were segregated by types such as commercial, residential and consumer loans. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

~~Noninterest-Bearing Deposits~~Interest-bearing deposits~~. The fair value for noninterest-bearing deposits is equal to the amount payable on demand at the reporting date.~~
~~Interest-Bearing Deposits~~-. The fair values of the ~~Corporation’s~~Company’s interest-bearing deposits were estimated using discounted cash flow analyses. The ~~discounted~~discount rates used were based on rates currently offered for deposits with similar remaining maturities. The fair values of the ~~Corporation’s~~Company’s interest-bearing deposits do not take into consideration the value of the ~~Corporation’s~~Company’s long-term relationships with depositors, which may have significant value.

~~Term~~ Borrowings and ~~Subordinated Debentures~~subordinated debentures -. The fair value of the ~~Corporation’s long-term~~Company’s 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~~interest receivable/payable -. The carrying amounts of accrued interest approximate fair value resulting in a ~~Level~~level 2 or ~~Level~~level 3 classification based on the level of the asset or liability with which the accrual is associated.

32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7. Fair Value Measurements and Fair Value of Financial Instruments
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the ~~Corporation’s~~Company’s financial instruments as of ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013.~~2014.

Fair Value Measurements Fair Value Measurements
Carrying
Amount Fair Value Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Carrying
Amount Fair
Value Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(in thousands) (in thousands)
September 30, 2014
Financial assets:
March 31, 2015
Financial assets
Cash and cash equivalents $ 138,013 $ 138,013 $ 138,013 $ — $ — $ 88,543 $ 88,543 $ 88,543 $ — $ —
Investment securities available-for-sale 307,502 307,502 27,343 280,159 — 276,121 276,121 12,833 263,288 —
Investment securities held-to-maturity 217,567 222,393 28,463 175,105 18,825 231,720 240,263 29,822 191,722 18,719
Investment in restricted stock, at cost 17,922 n/a n/a n/a n/a
Restricted investment in bank stocks 24,874 n/a n/a n/a n/a
Loans held for sale 1,392 1,392 1,392
Net loans 2,414,647 2,427,263 — — 2,427,263 2,624,806 2,628,873 — — 2,628,873
Accrued interest receivable 10,976 10,976 278 3,176 7,522 11,513 11,513 199 2,943 8,371

Financial liabilities:
Financial liabilities
Noninterest-bearing deposits $ 471,151 $ 471,151 $ 471,151 $ — $ — 479,652 479,652 479,652 — —
Interest-bearing deposits 1,998,017 2,004,084 — 2,004,084 — 2,016,359 2,021,144 — 2,021,144 —
Borrowings 420,960 436,366 — 436,366 — 525,148 532,335 — 532,335 —
Subordinated debentures 5,155 4,786 — 4,786 — 5,155 4,852 — 4,852 —
Derivatives 486 486 — 486 —
Accrued interest payable 3,811 3,811 — 3,811 — 4,316 4,316 — 4,316 —

Fair Value Measurements
Carrying
Amount Fair
Value Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(in thousands)
December 31, 2014
Financial assets
Cash and cash equivalents $ 126,847 $ 126,847 $ 126,847 $ — $ —
Investment securities available-for-sale 289,532 289,532 13,199 276,333 —
Investment securities held-to-maturity 224,682 231,445 29,184 183,489 18,772
Restricted investment in bank stocks 23,535 n/a n/a n/a n/a
Net loans 2,524,481 2,538,415 — — 2,538,415
Derivatives 48 48 — 48 —
Accrued interest receivable 11,700 11,700 68 3,674 7,958

Financial liabilities
Noninterest-bearing deposits 492,515 492,515 492,515 — —
Interest-bearing deposits 1,983,092 1,990,484 — 1,990,484 —
Borrowings 495,553 505,641 — 505,641 —
Subordinated debentures 5,155 4,768 — 4,768 —
Accrued interest payable 3,930 3,930 — 3,930 —
33
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 7. Fair Value Measurements and Fair Value of Financial Instruments
Fair Value Measurements
Carrying
Amount Fair Value Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(in thousands)
December 31, 2013
Financial assets:
Cash and due from banks $ 82,692 $ 82,692 $ 82,692 $ — $ —
Investment securities available-for-sale 323,070 323,070 19,530 303,540 —
Investment securities held-to-maturity 215,286 210,958 27,037 164,940 18,981
Investment in restricted stock, at cost 8,986 n/a n/a n/a n/a
Net loans 950,610 948,606 — — 948,606
Accrued interest receivable 6,802 6,802 102 4,034 2,666

Financial liabilities:
Noninterest-bearing deposits 227,370 227,370 227,370 — —
Interest-bearing deposits 1,114,635 1,115,781 — 1,115,781 —
Borrowings 146,000 157,440 — 157,440 —
Subordinated debentures 5,155 5,143 — 5,143 —
Accrued interest payable 963 963 — 963 —
The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account 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.
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.

Note 8. Accumulated Other Comprehensive Income

Accumulated other comprehensive ~~income (loss)~~loss (net of tax) at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013~~2014 consisted of the following:

September 30,
2014 December 31,
2013
(in thousands)
Net unrealized gain on investment securities available-for-sale, net of tax $ 4,650 $ 2,374
Unamortized component of securities transferred from available-for-sale to held-to-maturity, net of tax (1,336 ) (1,425 )
Defined benefit pension and post-retirement plans, net of tax (2,736 ) (3,493 )
Total accumulated other comprehensive income (loss) $ 578 $ (2,544 )
March 31,
2015 December 31,
2014
(in thousands)
Net unrealized gain on investment securities available-for-sale $ 5,491 $ 4,874
Cash flow hedge (288 ) 28
Unamortized component of securities transferred from available-for-sale to held-to-maturity (1,263 ) (1,301 )
Defined benefit pension and post-retirement plans (4,176 ) (4,615 )
Total accumulated other comprehensive loss $ (236 ) $ (1,014 )

Note 9. Stock-Based Compensation

The ~~Corporation maintains two stock-based compensation plans from which new grants could be issued. The Corporation’s~~Company’s stock-based compensation plans permit Parent Corporation common stock to be issued to key employees and directors of the ~~Corporation~~Company and its subsidiaries. The options granted under the plans are intended to be either incentive stock options or non-qualified options. Under the 2009 Equity Incentive Plan, a total of ~~363,081~~303,615 shares are available for grant and issuance as of ~~September 30, 2014. Under the 2003 Non-Employee Director Stock Option Plan, a total of 380,644 shares remain available for grant and issuance under the plan as of September 30, 2014.~~March 31, 2015. In addition, a total of 237,621 shares remain available for grant and issuance under Legacy ConnectOne equity plans. Options may be exercised with shares issued from Treasury shares, newly issued shares or a combination of both.

34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9. Stock-Based Compensation
Options have been granted to purchase common stock ~~principally~~ at the fair market value of the stock at the date of grant. Options are exercisable ~~over~~after a ~~three-year~~three to five-year vesting period starting one year after the date of grant and generally expire ten years from the date of grant.
35
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~ Restricted shares have a vesting schedule ranging from 1-3 years.

Stock-based compensation expense for share-based payment awards is based on the grant date fair value estimated on the date of grant. The ~~Corporation~~Company recognizes compensation costs for those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of three years. The ~~Corporation~~Company estimates the forfeiture rate based on its historical experience during the preceding seven fiscal years.

~~For the nine months ended September 30, 2014 and September 30, 2013, total stock compensation (excluding tax benefit) was $51,000 and $60,000, respectively.~~
Under the principal stock-based compensation plans, the ~~Corporation~~Company may also grant stock awards to certain employees. Stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of any applicable restrictions. ~~Unless fully vested at the time of grant, such awards generally vest within 30 days to five years from the date of grant.~~ During that period, ownership of the shares cannot be transferred. Restricted stock and stock awards that are fully vested at the time of grant have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding. The ~~Corporation~~Company expenses the cost of stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which any restrictions lapse.

There were ~~52,467~~89,104 and 18,829 restricted stock awards outstanding at ~~September 30,~~March 31, 2015 and March 31, 2014, ~~and September 30, 2013,~~ respectively. These awards were issued with an award price equal to the market price of the ~~Corporation’s~~Company’s common stock on the award date and with a three year vesting period. Forfeiture provisions exist for personnel that separate employment before the vesting period expires. A total of 37,110 shares of restricted stock became fully vested on July 1, 2014.

There were ~~0 and 31,257~~no shares of common stock underlying options that were granted during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2015 and 2014, ~~and 2013,~~ respectively. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values at the time the grants were awarded:

Nine Months Ended
September 30,
2014 2013
Weighted average fair value of grants n/a $ 3.34
Risk-free interest rate n/a 1.97 %
Dividend yield n/a 1.32 %
Expected volatility n/a 25.84 %
Expected life in months n/a 74
~~Activity~~Options activity under the stock-based compensation plans as of ~~September 30, 2014~~March 31, 2015 and changes during the ~~ninth~~three months ended ~~September 30, 2014~~March 31, 2015 were as follows:

Shares Weighted-
Average
Exercise
Price Weighted-
Average
Remaining
Contractual
Term (Years) Aggregate
Intrinsic
Value
Outstanding at December 31, 2013 214,263 $ 10.59
Options assumed in merger 783,732 4.73
Exercised (74,911 ) $ 10.48
Canceled/expired —
Forfeited —
Outstanding at September 30, 2014
923,084 $ 5.58 3.12 $ 12,522,584
Exercisable at September 30, 2014 923,084 $ 5.58 3.12 $ 12,522,584
Shares Weighted-
Average
Exercise
Price Weighted-
Average
Remaining
Contractual
Term (Years) Aggregate
Intrinsic
Value
Outstanding at December 31, 2014 882,657 $ 5.65
Exercised (110,500 ) $ 3.85
Canceled/expired —
Forfeited (3,362 )
Outstanding at March 31, 2015 768,795 $ 5.87 2.67 $ 10,273,607
Exercisable at March 31, 2015 763,028 $ 5.80 2.62 $ 10,244,830

The aggregate intrinsic value of options above represents the total pre-tax intrinsic value (the difference between the ~~Corporation’s~~Company’s closing stock price on the last trading day of the ~~second~~first quarter of ~~2014~~2015 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on ~~September 30, 2014.~~March 31, 2015. This amount changes based on the fair value of the ~~Corporation’s~~Company’s stock.

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36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 9. Stock-Based Compensation – (continued)
In conjunction with the plans above, the Company granted restricted shares to certain executive officers. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date. The fair value of the stock granted was based on the closing market price of its common stock as of the grant date. Generally, grants of restricted shares vest one-third, each, on the first, second and third anniversaries of the grant date.
Nonvested Shares Weighted-
Average
Grant Date
Fair Value
Nonvested at December 31, 2014 50,203 $ 11.79

Granted 59,466 18.47
Vested (20,565 ) 10.76
Forfeited/cancelled/expired — —
Outstanding at March 31, 2015 89,104 $ 16.43
As of ~~September 30, 2014,~~March 31, 2015, there was approximately $0$35,500 of total unrecognized compensation expense relating to unvested stock options. As of ~~September 30, 2014,~~March 31, 2015, there was approximately ~~$425,329~~$1,358,000 of total unrecognized compensation expense relating to unvested restricted stock awards. These costs are expected to be recognized over a weighted average period of ~~1.8~~2.1 years.

Note 10. Components of Net Periodic Pension Cost

The ~~Corporation~~Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until ~~September 30,~~March 31, 2007, at which time the ~~Corporation~~Company froze the plan. The following table sets forth the net periodic pension cost of the ~~Corporation’s~~Company’s pension plan for the periods indicated.

Three Months Ended
September 30, Nine Months Ended
September 30,
2014 2013 2014 2013 Three Months Ended
March 31,
(in thousands) 2015 2014
Interest cost $ 143 $ 133 $ 429 $ 397 $ 138 $ 144
Expected return on plan assets (148 ) (122 ) (444 ) (366 ) (137 ) (149 )
Net amortization and deferral 55 93 165 281
Net periodic pension cost $ 50 $ 104 $ 150 $ 312
Net amortization 108 56
Recognized settlement loss 450 —
Total periodic pension expense $ 559 $ 51

Net actuarial gain $ (742 ) $ (1,281 )

Total recognized in other comprehensive income $ (742 ) $ (1,281 )

Total recognized in net periodic expense and other comprehensive income (before tax) $ (183 ) $ (1,230 )

Contributions

The ~~Corporation~~Company presently estimates that it will ~~not~~ contribute $2.0 million to its Pension Trust ~~for 2014.~~in 2015. The trust is established to provide retirement and other benefits for eligible employees and their beneficiaries. No part of the trust assets may be applied to any purpose other than providing benefits under the plan and for defraying expenses of administering the plan and the trust.

~~Note 11. Supplemental disclosure of non-cash activities~~
Nine Months Ended
September 30,
2014 2013
(in thousands)
Investing:
Due to broker, net $ — $ 2,983
Transfer of loans to other real estate owned 352 236
Transfer of investment securities available-for-sale to investment securities held-to-maturity — 75,694
Financing:
Dividends declared, not paid $ 1,061 $ 327
Acquisition of legacy ConnectOne:
Non-cash assets acquired:
Securities available-for-sale $ 28,452 $ —
Restricted investments 13,646 —
Loans held for sale 190 —
Loans 1,299,284 —
Accrued interest receivable 4,470 —
Premise and equipment, net 6,475 —
Goodwill 129,105 —
Core deposit intangible 5,308 —
Bank-owned life insurance 15,481 —
Other real estate owned 2,455 —
Other assets 14,286 —
Total non-cash assets acquired $ 1,519,152 $ —
Non-cash liabilities assumed:
Deposits $ 1,051,342 $ —
Borrowings 263,370 —
Other liabilities 10,527 —
Total non-cash liabilities assumed $ 1,325,239 $ —

Net non-cash assets acquired $ 193,913 $ —
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37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note ~~12. Borrowings~~11. FHLB and other borrowings

The ~~components of~~Company’s FHLB and other borrowings and weighted average interest rates are summarized below:
March 31, 2015 December 31, 2014
Amount Rate Amount Rate
(in thousands)
By type of borrowing:
FHLB borrowings $ 494,148 1.23% $ 464,553 1.18%
Repurchase agreements 31,000 5.90% 31,000 5.90%
Total borrowings $ 525,148 1.51% $ 495,553 1.48%

By remaining period to maturity:
One year or less $ 238,148 0.50% 258,553 0.50%
One to two years 55,000 1.20% 30,000 1.40%
Two to three years 71,000 2.33% 71,000 2.33%
Three to four years 96,000 2.67% 96,000 2.67%
Four to five years 25,000 1.85% — —
Greater than five years 40,000 3.43% 40,000 3.42%
Total borrowings $ 525,148 1.51% $ 495,553 1.48%
The FHLB borrowings are ~~as follows (dollars in thousands):~~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.

September 30, 2014 December 31, 2013
Type Maturity
Date InterestRate Oustanding Type Maturity
Date InterestRate Oustanding
FRB Discount Window 10/01/14 0.07 % $ 50,000 Citi REPO 06/15/17 5.95 % $ 15,000
FHLB 10/28/14 0.38 25,000 FHLB 11/16/17 3.18 5,000
FHLB 10/29/14 0.30 50,000 FHLB 11/16/17 3.29 5,000
FHLB 02/23/15 0.88 10,000 FHLB 11/16/17 3.10 5,000
FHLB 05/07/15 0.81 15,000 FHLB 11/16/17 3.49 10,000
FHLB 05/11/15 2.17 785 FHLB 11/27/17 3.16 5,000
FHLB 05/11/15 2.91 5,000 FHLB 11/27/17 3.40 5,000
FHLB 06/09/15 0.44 25,000 FHLB 01/03/18 3.25 4,000
FHLB 06/26/15 0.48 25,000 FHLB 01/03/18 2.99 3,000
FHLB 08/05/15 1.49 2,000 FHLB 01/03/18 2.74 3,000
FHLB 08/03/16 1.93 10,000 FHLB 01/31/18 3.34 10,000
FHLB 08/26/16 1.04 5,000 FHLB 01/31/18 2.44 10,000
FHLB 10/11/16 1.15 5,000 FHLB 01/31/18 2.78 5,000
FHLB 01/23/17 1.16 10,000 Citi REPO 08/08/18 5.85 16,000
FHLB 04/28/17 1.26 5,000 FHLB 09/12/18 4.16 5,000
Citi REPO 06/15/17 5.95 15,000 FHLB 11/02/20 3.62 20,000
FHLB 06/26/17 1.30 25,000 FHLB 11/30/20 3.24 20,000
FHLB 07/08/17 1.29 5,000
FHLB 09/25/17 1.41 11,000 $ 146,000
FHLB 02/12/18 1.56 10,000
FHLB 04/02/18 2.50 2,500
FHLB 04/02/18 1.98 7,500
FHLB 04/30/18 1.75 5,000
FHLB 07/16/18 2.99 5,000
Citi REPO 08/08/18 5.85 16,000
FHLB 09/11/18 4.15 5,000
FHLB 10/23/18 1.68 10,000
FHLB 11/19/18 1.68 10,000
FHLB 01/30/19 1.79 4,000
FHLB 02/11/19 1.99 6,000
FHLB 10/30/20 3.23 20,000
FHLB 11/02/20 3.61 20,000

$ 419,785
Fair value mark: 1,175
$ 420,960
The Company has entered into agreements under which it has sold securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. The obligation to repurchase the securities is reflected as a liability in the Company’s consolidated statement of condition, while the securities underlying the securities sold under agreements to repurchase remain in the respective asset accounts and are delivered to and held as collateral by third party trustees.

~~On September 30, 2014,~~Three of the ~~Corporation extinguished $70,000,000 of FHLBNY~~FHLB notes ($2,500,000 and $7,500,000 each due April 2, 2018, and $5,000,000 due July 16, 2018) contain a convertible option which allows the FHLB, at quarterly intervals, to convert the fixed convertible advance into replacement funding for the same or lesser principal based on any advance then offered by the FHLB at its current market rate. The Company has the option to repay these advances, if converted, without penalty. The remaining advances are payable at its stated maturity, with a ~~weighted average~~prepayment penalty for fixed rate ~~of 3.10 percent and a weighted average maturity of 3.2 years.~~advances. All FHLB advances are fixed rate while the REPOs are variable rate advances. The advances at March 31, 2015 were ~~putable at~~collateralized by approximately $809 million of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement. At March 31, 2015 the ~~option~~Company had remaining borrowing capacity of approximately $315 million.
Note 12 - 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 ~~FHLBNY. A pre-tax prepayment penalty~~Trust; (ii) investing the gross proceeds of ~~$4.6~~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 ~~associated~~of, MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier I capital. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or in part prior to maturity. The floating interest rate on the subordinate debentures is three-month LIBOR plus 2.85% and reprices quarterly. The rate at March 31, 2015 was 3.10%. 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 ~~extinguishment was recorded to noninterest expense.~~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 at March 31, 2015 and December 31, 2014.
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 01/23/2034 01/23/2009
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note ~~13.~~13 – Subsequent Event

On ~~November 5, 2014,~~April 27, 2015, the Corporation ~~discovered that during the fourth quarter the account~~received a pretax recovery amounting to $2.2 million from one of ~~one~~ its ~~business customers had been the target~~insurance carriers with regard to a wire fraud pretax loss of a fraud involving hacking of the customer’s e-mail account and subsequent unauthorized funds transfers. The fraud did not involve an intrusion of the Corporation’s computer systems. The Corporation is still investigating the matter and the after-tax charge, to be$2.4 million recorded ~~during~~in the fourth quarter of ~~2014, is expected to~~2014. This recovery will be ~~no higher than $1.5 million. The~~recognized in the second quarter of 2015. At this time, the Corporation ~~is reviewing all available avenues of recovery, including the return of funds from recipient financial institutions and potential insurance claims.~~
does not expect any further recoveries on this matter.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the ~~Corporation’s~~Company’s results of operations for the periods presented herein and financial condition as of ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013.~~2014. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Cautionary Statement Concerning Forward-Looking Statements

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan and lease loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp is engaged, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; (7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; and (10)the outcome of regulatory and legal investigations and proceedings may not be anticipated. Further information on other factors that could affect the financial results of ConnectOne Bancorp is included in Item 1A. of ConnectOne Bancorp’s Annual Report on Form 10-K and in ConnectOne Bancorp’s other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission’s website at http://www.sec.gov and/or from ConnectOne Bancorp, Inc.

Critical Accounting Policies and Estimates

The accounting and reporting policies followed by ConnectOne Bancorp, Inc. and its subsidiaries (collectively, the ~~“Corporation”~~“Company”) conform, in all material respects, to U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the consolidated statements of operations. Actual results could differ significantly from those estimates.

The ~~Corporation’s~~Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. The ~~Corporation~~Company has identified the determination of the allowance for loan and lease losses, the other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies is provided below.

Allowance for ~~Loan Losses~~loan and lease losses and Related Provision

The allowance for loan and lease losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, individual credit situation and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated statements of condition.

The evaluation of the adequacy of the allowance for loan and lease losses includes, among other factors, an analysis of historical loss rates by loan category applied to current loan totals. However, actual loan and lease losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.

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The allowance for loan and lease losses is established through a provision for loan and lease losses charged to expense. Management believes that the current allowance for loan and lease losses will be adequate to absorb loan and lease losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers’ ability to pay. The evaluation also details historical losses by loan category and the resulting loan and lease loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the allowance for loan and lease losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan and lease losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 1 of the Notes to Consolidated Financial Statements.

Other-Than-Temporary Impairment of Investment Securities

Investment securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FASB ASC 320-10-65 clarifies the interaction of the factors that should be considered when determining whether a debt security is other–than-temporarily impaired. For debt securities, management assesses whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery.

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Fair Value of Investment Securities

FASB ASC 820-10-35 clarifies the application of the provisions of FASB ASC 820-10-05 in an inactive market and how an entity would determine fair value in an inactive market. The ~~Corporation~~Company applies the guidance in FASB ASC 820-10-35 when determining fair value for the ~~Corporation’s~~Company’s private label collateralized mortgage obligations, pooled trust preferred securities and single name corporate trust preferred securities. See Note 8 of the Notes to Consolidated Financial Statements for further discussion.

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.

Goodwill

The ~~Corporation~~Company adopted the provisions of FASB ASC 350-10, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but rather tested for impairment annually or more frequently if impairment indicators arise. No impairment charge was deemed necessary for the three ~~and nine~~ months ended ~~September 30, 2014~~March 31, 2015 and ~~2013.~~2014.

Income Taxes

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

Fluctuations in the actual outcome of these future tax consequences could impact the ~~Corporation’s~~Company’s consolidated financial condition or results of operations.  Note 12 of the ~~2013 Form 10-K of the~~ Notes to Consolidated Financial Statements included in the Company’s 2014 Form 10-K includes additional discussion on the accounting for income taxes.

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Operating Results Overview

On July 1, 2014, the merger of equals with Center Bancorp, Inc. and ~~the~~ legacy ConnectOne was completed (the “Merger”)~~; therefore third~~. Accordingly, first quarter ~~2014~~2015 results reflect the operations of the combined ~~entity. Historical~~entity, whereas, historical financial information prior to July 1, 2014 includes only the operations of Center Bancorp, Inc., the legal and accounting acquirer in the transaction. On July 1, 2014, the combined company changed its name to ConnectOne.

Net income available to common stockholders for the three months ended ~~September 30, 2014~~March 31, 2015 amounted to ~~$1.7~~$10.4 million compared to ~~$5.1~~$4.4 million for the comparable three-month period ended ~~September 30, 2013.~~March 31, 2014. The ~~Corporation’s~~Company’s diluted earnings per share ~~was $0.06~~were $0.34 for the three months ended ~~September 30, 2014~~March 31, 2015 as compared with diluted earnings per share of ~~$0.31~~$0.27 for the same three months of 2013. The annualized return on average assets was 0.21% for the three months ended September 30, 2014, compared to 1.23% for the three months ended September 30, 2013. The annualized return on average stockholders’ equity was 1.59% for the three-month period ended September 30, 2014, compared to 12.53% for the three months ended September 30, 2013.
Net income available to common stockholders for the nine months ended September 30, 2014 amounted to $10.5 million compared to $14.8 million for the comparable nine-month period ended September 30, 2013. The Corporation recorded earnings per diluted common share of $0.49 for the nine months ended September 30, 2014 as compared with earnings of $0.91 per diluted common share for the same nine months of 2013. The annualized return on average assets was 0.63% for the nine months ended September 30, 2014, compared to 1.23% for nine months ended September 30, 2013. The annualized return on average stockholders’ equity was 5.25% for the nine-month period ended September 30, 2013, compared to 12.15% for the nine months ended September 30, 2013.2014.

Net Interest Income and Margin

Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets. Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (primarily interest earned on obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues. Net interest margin is defined as net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.

~~Net~~Fully taxable equivalent (“FTE”) net interest income ~~on a tax-equivalent basis increased to $28.1 million and $52.6 million~~ for the ~~three- and nine-month periods ended September 30, 2014, respectively, from $12.4~~first quarter of 2015 was $28.9 million, ~~and $36.2 million for the three- and nine-month periods ended September 30, 2013, respectively. The increases were primarily due~~ an increase of $16.6 million, or 135.4%, from the same quarter of 2014. This was a result of a 112.4% increase in average interest-earning assets and a 40 basis-point widening of the net interest rate margin, ~~resulting from~~both due to the Merger. Average interest earning assets increased to $3.1 billion and $2.0 billion for the three- and nine-month periods ended September 30, 2014, respectively, from $1.5 billion for both the three- and nine-month periods ended September 30, 2014, respectively. Net interest margin widened to 3.66% and 3.49% for the three- and nine-month periods ended September 30, 2014, respectively, from 3.31% and 3.30% for the three- and nine-month periods ended September 30, 2014, respectively. Net interest income during the ~~third~~first quarter ~~and first nine months~~ of ~~2014~~2015 was positively impacted by ~~$2.9~~$1.8 million of accretion and amortization of purchase accounting adjustments.

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The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2015 and 2014, ~~and 2013,~~ the ~~Corporation’s~~Company’s average assets, liabilities and stockholders’ equity. The ~~Corporation’s~~Company’s net interest income, net interest spread and net interest margin are also reflected.

Average Statements of Condition with Interest and Average Rates

Three Months Ended September 30,
2014 2013
(tax-equivalent basis) Average
Balance Interest
Income/
Expense Average
Rate (7) Average
Balance Interest
Income/
Expense Average
Rate (7)
(dollars in thousands)
Assets
Interest-earning assets:
Investment securities (1) (2) $ 520,568 $ 4,372 3.33 % $ 567,971 $ 4,914 3.46 %
Loans (2) (3) (4) 2,344,410 28,218 4.78 921,523 10,202 4.43
Restricted investment in bank stocks 21,107 265 4.98 8,986 99 4.41
Other interest-bearing deposits 163,471 88 0.21 — — —
Total interest-earning assets 3,049,556 32,943 4.29 1,498,480 15,215 4.06
Non interest-earning assets:
Noninterest earning assets 312,293 163,732
Allowance for loan losses (11,250 ) (10,200 )
Total assets $ 3,350,599 $ 1,652,012
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Money market deposits $ 698,686 $ 677 0.38 % $ 427,387 $ 485 0.45 %
Savings deposits 233,041 144 0.25 182,382 151 0.33
Time deposits 676,291 1,474 0.86 170,996 381 0.89
Other interest-bearing deposits 375,041 429 0.45 305,992 313 0.41
Total interest-bearing deposits 1,983,059 2,724 0.54 1,086,757 1,330 0.49
Borrowings and FHLB advances 430,238 1,988 1.83 146,598 1,449 3.95
Capital lease 3,044 45 5.87 — — —
Subordinated debentures 5,155 40 3.08 5,155 40 3.10
Total interest-bearing liabilities 2,421,496 4,797 0.79 1,238,510 2,819 0.91
Noninterest-bearing liabilities:
Demand deposits 465,369 238,194
Other liabilities 17,349 12,751
Total noninterest-bearing liabilities 482,718 250,945
Stockholders’ equity 446,385 162,557
Total liabilities and stockholders’ equity $ 3,350,599 $ 1,652,012
Net interest income (tax-equivalent basis) 12,396
Net interest spread (5) 28,146 3.50 % 3.15 %
Net interest margin (6) 3.66 % 3.31 %
Tax-equivalent adjustment (600 ) (674 )
Net interest income $ 27,546 $ 11,722
Three Months Ended March 31,
2015 2014
Average
Balance Interest
Income/
Expense Average
Rate (7) Average
Balance Interest
Income/
Expense Average
Rate (7)
(dollars in thousands)
Interest-earning assets:
Investment securities (1) (2) $ 509,931 $ 4,268 3.39 % $ 526,526 $ 4,682 3.56 %
Loans (2) (3) (4) 2,571,552 29,453 4.65 % 963,098 10,214 4.24 %
Restricted investment in bank stocks 25,273 220 3.54 % 8,986 113 5.03 %
Federal funds sold and interest bearing with banks 76,138 43 0.23 % — — — %
Total interest-earning assets 3,182,894 33,984 4.33 % 1,498,610 15,009 4.01 %
Allowance for loan and lease losses (14,749 ) (10,358 )
Noninterest earning assets 298,675 188,684
Total liabilities and stockholders’ equity $ 3,466,820 $ 1,676,936

Interest-bearing liabilities:
Money market deposits $ 707,474 $ 722 0.41 % $ 430,086 $ 519 0.48 %
Savings deposits 222,613 162 0.29 % 162,621 127 0.31 %
Time deposits 688,989 1,818 1.07 % 171,145 368 0.86 %
Other interest-bearing deposits 349,628 323 0.37 % 349,361 302 0.35 %
Total interest-bearing deposits 1,968,704 3,025 0.62 % 1,113,213 1,316 0.47 %

Borrowings 534,052 1,968 1.49 % 146,500 1,372 3.75 %
Capital lease 2,989 45 6.10 % — — — %
Subordinated debentures 5,155 40 3.14 % 5,155 39 3.03 %
Total interest-bearing liabilities 2,510,900 5,078 0.82 % 1,264,868 2,727 0.86 %

Demand deposits 481,500 225,407
Other liabilities 20,200 13,477
Total noninterest-bearing liabilities 501,700 238,884
Stockholders’ equity 454,220 173,184
Total liabilities and stockholders’ equity $ 3,466,820 $ 1,676,936
Net interest income (tax equivalent basis) 28,906 12,282
Net interest spread (5) 3.51 % 3.15 %
Net interest margin (6) 3.68 % 3.28 %
Tax equivalent adjustment (614 ) (672 )
Net interest income $ 28,292 $ 11,610
(1) Average balances are based on amortized cost.
(2) Interest income is presented on a tax equivalent basis using ~~35 percent~~35% federal tax rate.
(3) Includes loan fee income.
(4) Loans include ~~non-accrual~~nonaccrual loans.
(5) Represents difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a tax equivalent basis.
(6) Represents net interest income on a tax equivalent basis divided by average total interest-earning assets
(7) Rates are annualized.

42
~~Average Statements of Condition with Interest and Average Rates~~
Nine Months Ended September 30,
2014 2013
(tax-equivalent basis) Average
Balance Interest
Income/
Expense Average
Rate (7) Average
Balance Interest
Income/
Expense Average
Rate (7)
(dollars in thousands)
Assets
Interest-earning assets:
Investment securities (1) (2) $ 513,221 $ 13,441 3.50 % $ 557,117 $ 14,134 3.38 %
Loans (2) (3) (4) 1,437,381 48,969 4.55 894,712 30,017 4.47
Restricted investment in bank stocks 13,146 408 4.15 8,982 306 4.54
Other interest-bearing deposits 55,089 88 0.21 470 2 0.57
Total interest-earning assets 2,018,837 62,906 4.17 1,461,281 44,459 4.06
Non interest-earning assets:
Noninterest earning assets 226,410 172,611
Allowance for loan losses (10,791 ) (10,214 )
Total assets $ 2,234,456 $ 1,623,678
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Money market deposits $ 509,212 $ 1,771 0.46 % $ 402,656 $ 1,303 0.43 %
Savings deposits 185,986 394 0.28 193,153 481 0.33
Time deposits 342,177 2,205 0.86 174,142 1,213 0.93
Other interest-bearing deposits 358,482 973 0.36 299,332 900 0.40
Total interest-bearing deposits 1,395,857 5,343 0.51 1,069,283 3,897 0.49
Borrowings and FHLB advances 243,597 4,752 2.61 146,568 4,288 3.90
Capital lease 1,026 45 5.87 — — —
Subordinated debentures 5,155 117 3.03 5,155 119 3.08
Total interest-bearing liabilities 1,645,635 10,257 0.83 1,221,006 8,304 0.91
Noninterest-bearing liabilities:
Demand deposits 307,429 223,766
Other liabilities 15,018 14,975
Total noninterest-bearing liabilities 322,447 238,741
Stockholders’ equity 266,374 163,931
Total liabilities and stockholders’ equity $ 2,234,456 $ 1,623,678
Net interest income (tax-equivalent basis) 52,649 36,155
Net interest spread (5) 3.34 % 3.15 %
Net interest margin (6) 3.49 % 3.30 %
Tax-equivalent adjustment (1,829 ) (1,835 )
Net interest income $ 50,820 $ 34,320
~~(1)~~ ~~Average balances are based on amortized cost.~~
~~(2)~~ ~~Interest income is presented on a tax equivalent basis using 35 percent federal tax rate.~~
~~(3)~~ ~~Includes loan fee income.~~
~~(4)~~ ~~Loans include non-accrual loans.~~
~~(5)~~ ~~Represents difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a tax equivalent basis.~~
~~(6)~~ ~~Represents net interest income on a tax equivalent basis divided by average total interest-earning assets~~
~~(7)~~ ~~Rates are annualized.~~
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Noninterest Income

Noninterest income totaled ~~$1.2~~$1.6 million in the ~~third~~first quarter of ~~2014,~~2015, a decline of ~~$0.3~~$1.0 million from ~~$1.5~~$2.5 million in the comparable prior-year quarter. ~~The decline was primarily a result of a decline of~~Net securities gains were $0.5 million ~~in service charges, commissions~~ and ~~fees as~~$1.4 million for the Company has de-emphasized service charges, focusing instead on customer growth and retention. This strategy was particularly important during the merger conversion process as the implementation of certain fees and other charges were intentionally delayed or waived. Also contributing to the decline in noninterest income were net securities gains, which declined by $0.2 million in the thirdfirst quarter of 2015 and 2014, ~~from the third quarter of 2013. Offsetting these declines were increases in~~respectively. Noninterest income includes bank-owned life insurance income, ~~net gains on the sale of residential mortgage loans,~~deposit and ~~other miscellaneous income, including card-related fees.~~
Noninterest income totaled $5.4 million for the nine months ended September 30, 2014, an increase of $0.3 million from $5.1 million in the comparable prior-year period. The increase was primarily due to higher net securities gains, increasing by $0.8 million to $2.1 million for the first nine months of 2014 from $1.3 million in the prior-year period. Offsetting the increase in net securities gains were lower service chargesloan fees, annuities and ~~commissions, bank-owned~~ life insurance ~~income~~commissions, and gains on sales of residential ~~mortgages.~~mortgages in the secondary market and represents a relatively small portion of the Bank’s total revenue. Although management intends to continue its strategy of de-emphasizing service charges in order to attract new and retain existing clients, it expects fee income to increase modestly over the course of 2015.

Noninterest Expense

Noninterest expenses totaled ~~$25.4~~$12.6 million for the ~~third~~first quarter of ~~2014,~~2015, an increase of ~~$19.2~~$5.1 million from ~~$6.2~~$7.5 million for the prior year quarter. The significant increase in noninterest expense levels for the first quarter 2015 from the first quarter of 2014 was primarily due to the Merger ~~including merger-related charges~~with Legacy ConnectOne on July 1, 2014, which approximately doubled the size of ~~$8.8 million.~~the Company. At that date, Legacy ConnectOne had approximately $1.5 billion in total assets, $1.3 billion in total loans, $1.0 billion in total deposits, 8 branches, and 100 employees. In addition, at the ~~end~~Company experienced an increased level of business and staff resulting from organic growth. Partially offsetting the increased size of the ~~third quarter of 2014, the Company repurchased $70.0~~institution was merger cost saves, estimated to be approximately $7.0 million of putable Federal Home Loan Bank advances which resulted in a loss on debt extinguishment of $4.6 million. The repurchase is expected to reduce interest expense and improve the Bank’s interest rate risk profile in future periods.annually, or approximately $1.8 million per quarter.

Income Taxes

Income tax expense was ~~$0.3~~$5.0 million and ~~$3.9~~$1.6 million for the ~~third~~first quarter of 2015 and ~~first nine months of~~ 2014, respectively, ~~compared with $2.0 million and $5.7 million, for the third quarter and first nine months of 2013, respectively. The~~resulting in an effective tax ~~rates were 12.5%~~rate of 32.6% and 26.8% for the ~~third~~first quarter of 2015 and ~~first nine months of~~ 2014, ~~respectively, compared with 27.8% and 27.5%, for the third quarter and first nine months of 2013,~~ respectively. The ~~decrease~~increase in the effective tax rate for ~~2014~~2015 reflects a ~~lower level~~decline in the percentage of ~~taxable~~tax-exempt income to total pretax income. The effective tax rate for the remainder of 2015 is expected to remain fairly constant.
Financial Condition

Investment Portfolio

At ~~September 30, 2014,~~March 31, 2015, the principal components of the investment securities portfolio were U.S. Treasury and agency obligations, federal agency obligations, mortgage-backed securities, obligations of U.S. states and political subdivisions, corporate bonds and notes, trust preferred securities, asset backed securities and equity securities.

During the ~~nine~~three months ended ~~September 30, 2014,~~March 31, 2015, approximately ~~$67.0~~$9.6 million in investment securities were sold from the available-for-sale portfolio. The cash flow from the sale of investment securities was primarily used to ~~either~~ fund loan growth orand purchase new securities.

For the three months ended ~~September 30, 2014,~~March 31, 2015, average investment securities decreased ~~$47.4~~$16.6 million to approximately ~~$520.6~~$509.9 million, or ~~17.1%~~16.0% of average interest-earning assets, from ~~$568.0~~$526.5 million on average, or ~~37.9%~~35.1% of average interest-earning assets, for the comparable period in ~~2013. For~~2014. The decrease in the ~~nine months ended September 30, 2014, average~~ investment securities ~~decreased $43.9 million to approximately $513.2 million, or 25.42% of average interest-earning assets, from $557.1 million~~portfolio, vis-à-vis an increase in loans receivable, reflects the Company’s strategic focus on ~~average, or 38.1% of average interest-earning assets, for the comparable period in 2013.~~relationship-based clients.

At ~~September 30, 2014,~~March 31, 2015, net unrealized gains on investment securities available-for-sale, which are carried as a component of accumulated other comprehensive income and included in stockholders’ equity, net of tax, amounted to ~~$4.7~~$5.5 million as compared with net unrealized gains of ~~$2.4~~$4.9 million at December 31, ~~2013.~~2014. At ~~September 30, 2014,~~March 31, 2015, the net unrealized gains and losses on investment securities held-to-maturity that were transferred from securities available-for-sale, are carried, net of tax, as a component of accumulated other comprehensive income and included in stockholders’ equity. The gross unrealized losses associated with agency securities and federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other-than-temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.

44
Loan Portfolio

~~Lending~~Commercial lending is ~~one of~~ the ~~Corporation’s~~Company’s primary business ~~activities.~~activity. The ~~Corporation’s~~Company’s loan portfolio consists of commercial, residential and ~~retail~~consumer loans, serving the diverse ~~customer~~client base in its market area. The composition of the ~~Corporation’s~~Company’s portfolio ~~continues to~~remains relatively constant but can change due to ~~the local economy. Factors~~factors such as the economic climate, the level and fluctuations in interest rates, real estate values and employment ~~all contribute to these changes. Growth~~metrics. Organic growth (i.e., growth other than through mergers and acquisitions) is generated through business development, ~~efforts,~~ repeat ~~customer~~client requests for new financings, penetration into existing markets and entry into new markets.

The ~~Corporation~~Company seeks to create growth in commercial lending by offering ~~customer-focused~~client-focused products, ~~and~~ competitive pricing and by capitalizing on the positive trends in its market area. Products offered are designed to meet the financial requirements of the ~~Corporation’s customers.~~Company’s clients. It is the objective of the ~~Corporation’s~~Company’s credit policies to diversify the commercial loan portfolio to limit concentrations in any single ~~industry.~~segment.

43
At ~~September 30, 2014,~~March 31, 2015, total loans amounted to ~~$2.4~~$2.6 billion, an increase of ~~$1.5~~$0.1 billion, or ~~152.5%~~4.0%, as compared to December 31, ~~2013. For the period ended September 30, 2014,~~2014. The increase in loans was attributable to organic growth generated through our relationship banking teams. As of ~~$240.8 million~~March 31, 2015, our loan composition was approximately 21.3% in ~~the~~ commercial, ~~portfolio, $1.0 billion~~63.1% in ~~the~~ commercial real estate, ~~portfolio, $99.1 million~~6.9% in ~~the~~commercial construction, ~~portfolio and $92.4 million~~8.6% in ~~the~~ residential real estate ~~portfolio were primarily attributed to the merger. Total gross~~and 0.1% in consumer loans. At March 31, 2015, acquired loans ~~recorded~~remaining in the ~~quarter included $200.0 million~~loan portfolio totaled $1.1 billion, compared to $1.2 billion as of ~~new loans and advances, offset by payoffs and principal payments of $80.0 million.~~December 31, 2014.

Allowance for Loan and lease Losses and ~~Related~~related Provision

The purpose of the allowance for loan and lease losses (the ~~“allowance”~~“ALLL”) is to establish a valuation allowance for probable incurred losses in the loan portfolio. Additions to the ~~allowance~~ALLL are made through provisions charged against current operations and through recoveries made on loans previously ~~charged-off.~~charged off. The ~~allowance for loan losses~~ALLL is maintained at an amount considered adequate by management to provide for probable credit losses inherent in the loan portfolio based upon historical losses and a periodic evaluation of ~~the portfolio’s~~external and portfolio risk ~~characteristics.~~factors. In establishing an appropriate ~~allowance,~~ALLL, an assessment of the individual borrowers, a determination of the value of the underlying collateral, a review of historical loss experience and an analysis of the levels and trends of loan categories, delinquencies and problem loans are considered. Such factors as the level and trend of interest rates and current economic conditions and peer group statistics are also reviewed. ~~Given the extraordinary economic volatility impacting national, regional and local markets, the Corporation’s~~The Company’s analysis of its ~~allowance for loan losses~~ALLL also takes into consideration the potential impact that current trends may have on the ~~Corporation’s~~Company’s borrower base.

Although management uses the best information available, the level of the allowance for loan and lease losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the ~~Corporation’s~~Company’s allowance for loan and lease losses. Such agencies may require the ~~Corporation~~Company to increase the ~~allowance~~ALLL based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the ~~Corporation’s~~Company’s loans are secured by real estate in the State of New Jersey. Future adjustments to the ~~allowance~~ALLL may be necessary due to economic factors impacting New Jersey real estate and the economy in general, as well as operating, regulatory and other conditions beyond the ~~Corporation’s~~Company’s control.

At ~~September 30, 2014,~~March 31, 2015, the level of the allowance was ~~$12.1~~$15.9 million as compared to ~~$10.3~~$14.2 million at December 31, ~~2013.~~2014. Provisions to the allowance for the ~~nine-month~~three-month period ended ~~September 30, 2014~~March 31, 2015 totaled ~~$2.2~~$1.8 million compared to $0$0.6 for the same period in ~~2013.~~2014. The net charge-offs were ~~$448,000~~$52 thousand for the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015 compared to ~~$43,000~~$325 thousand in net charge-offs for the ~~nine~~three months ended ~~September 30, 2013.~~March 31, 2014. The allowance for loan and lease losses as a percentage of total loans amounted to ~~0.50%~~0.60% at ~~September 30, 2014~~March 31, 2015 compared to ~~1.08%~~0.56% at December 31, ~~2013~~2014 and ~~1.06%~~1.08% at ~~September 30, 2013.~~March 31, 2014.

The level of the allowance for the respective periods of ~~2014~~2015 and ~~2013~~2014 reflects the credit quality within the loan portfolio, the loan volume recorded during the periods, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the ~~allowance~~ALLL at ~~September 30, 2014~~March 31, 2015 is adequate to cover losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.

44
45
Changes in the allowance for loan and lease losses are presented in the following table for the periods indicated.

Nine Months Ended
September 30,
2014 2013
(dollars in thousands)
Average loans for the period $ 1,437,381 $ 894,712
Total loans at end of period 2,426,765 957,492

Analysis of the Allowance for Loan Losses:
Balance - beginning of year $ 10,333 $ 10,237
Charge-offs:
Commercial (333 ) (6 )
Commercial real estate (50 )
Residential mortgage loans (108 ) —
Consumer (7 ) (20 )
Total charge-offs (448 ) (76 )
Recoveries:
Commercial and industrial — 21
Commercial real estate — 8
Residential mortgage loans 24 4
Total recoveries 24 33
Net charge-offs (424 ) (43 )
Provision for loan losses 2,209 —
Balance - end of period $ 12,118 $ 10,194
Ratio of net charge-offs during the period to average loans during the period⁽¹⁾ 0.04 % 0.00 %
Allowance for loan losses as a percent of total loans 0.50 % 1.06 %
~~(1)~~ ~~Annualized.~~
Three Months Ended
March 31,
2015 2014
(dollars in thousands)
Average loans for the period $ 2,571,552 $ 963,098
Loans receivable at end of period 2,640,739 987,529

Analysis of the Allowance for loan and lease losses:
Balance - beginning of year $ 14,160 $ 10,237
Charge-offs:
Commercial (45 ) (6 )
Commercial real estate (4 ) (126 )
Residential real estate — (175 )
Consumer (11 ) (22 )
Total charge-offs (60 ) (329 )
Recoveries:
Commercial 6 41
Commercial real estate — 28
Residential real estate 1 —
Consumer 1 6
Total recoveries 8 75
Net charge-offs (52 ) (254 )
Provision for loan and lease losses 1,825 350
Balance - end of period $ 15,933 $ 10,333
Ratio of annualized net charge-offs during the period to average loans during the period 0.01 % 0.13 %
Allowance for loan and lease losses as a percent of total loans 0.60 % 1.12 %

Asset Quality

The ~~Corporation~~Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix. The ~~Corporation~~Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for loan and lease losses at all times.

It is generally the ~~Corporation’s~~Company’s policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of ninety days. When a loan is placed on ~~non-accrual~~nonaccrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on ~~non-accrual~~nonaccrual loans are generally applied against principal. A loan may be restored to an accruing basis when ~~it again becomes well-secured,~~ all past due amounts have been ~~collected and the borrower continues to make payments for the next nine months on a timely basis. Accruing loans~~collected. Loans past due 90 days or more which are ~~generally~~both well-secured and in the process of ~~collection.~~collection may remain on an accrual basis.

~~Non-Performing Assets and Troubled Debt Restructured Loans~~
~~Non-performing loans~~Nonperforming assets include ~~non-accrual~~nonaccrual loans and ~~accruing loans past due 90 days or more. Non-accrual~~other real estate owned. Nonaccrual loans represent loans on which interest accruals have been suspended. In general, it is the policy of management to consider the charge-off of uncollectible amounts of loans at the point they become past due ~~in excess of~~ 90 ~~days, with the exception of loans that are both well-secured and in the process of collection. Non-performing assets include non-performing loans and other real estate owned.~~days. Performing troubled debt restructured loans represent loans to borrowers experiencing financial difficulties on which a concession was granted, such as a reduction in interest rate below the current market rate for new debt with similar risks or modified repayment terms, and are performing under the restructured terms. ~~Such loans, as restructured, are not included within the Corporation’s non-performing loans.~~

45
46
The following table sets forth, as of the dates indicated, the amount of the ~~Corporation’s non-accrual~~Company’s nonaccrual loans, ~~accruing~~other real estate owned, loans ~~past due~~ 90 days or more ~~other real estate owned~~past due and ~~troubled debt restructured loans.~~
September 30,
2014 December 31,
2013
(in thousands)
Non-accrual loans $ 6,083 $ 3,137
Accruing loans past due 90 days or more — —
Total non-performing loans 6,083 3,137
Other real estate owned 1,442 220
Total non-performing assets $ 7,525 $ 3,357
Troubled debt restructured loans - performing $ 1,782 $ 5,746
At September 30, 2014, non-performing assets totaled $7.5 million, or 0.22% of total assets, as compared with $1.7 million, or 0.14% of total assets, at September 30, 2013 and $3.4 million, or 0.20%, at December 31, 2013.
~~The Corporation held $1.4 million and $0.2 million in other real estate owned at September 30, 2014 and December 31, 2013, respectively.~~
~~Troubled debt restructured loans totaled $2.9 million at September 30, 2014 and $6.6 million at December 31, 2013. A total of $1.9 million and $5.7 million of~~still accruing, performing troubled debt restructured loans ~~were performing pursuant to~~and the ~~terms~~carrying amount of ~~their respective modifications at September 30, 2014 and~~the purchased-credit impaired loans.
March 31,
2015 December 31,
2014
(in thousands)
Nonaccrual loans $ 14,585 $ 11,610
Other real estate owned 870 1,108
Total nonperforming assets $ 15,455 $ 12,718

Performing troubled debt restructured loans $ 1,731 $ 1,763
Loans 90 days or more past due and still accruing 638 1,211
Purchased-credit impaired loans (carrying amount) 9,772 9,821
During the first quarter of 2015, “special mention” loans, which include acceptable credit quality loans which possess higher risk characteristics than satisfactory assets, increased from $19.3 million, or 0.8% of total loans, at December 31, ~~2013, respectively.~~2014 to $50.0 million, or 1.9% of total loans, at March 31, 2015. The increase in “special mention” loans was due to downgrades of specific credits in both the commercial and commercial real estate segments of the loan portfolio. The commercial loans were downgraded due to a weakening financial condition of one guarantor of certain taxi medallion loans, while the commercial real estate loans were downgraded due to borrowers’ declining operating cash flows. The aforementioned loans are accruing and current as of March 31, 2015.

At ~~September 30, 2014,~~March 31, 2015, other than the loans set forth above, the ~~Corporation~~Company is not aware of any loans which present serious doubts as to the ability of its borrowers to comply with present loan repayment terms and which are expected to fall into one of the categories set forth in the tables or descriptions above.

~~Recent Accounting Pronouncements~~
~~Note 2 of the Notes to Consolidated Financial Statements discusses the expected impact of accounting pronouncements recently issued or proposed and adopted or not yet required to be adopted.~~
47
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.

We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013~~2014 the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and Bank’s management.

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

In our model, which was run as of ~~September 30,~~March 31, 2015, we estimated that, over the next one-year period, a 200 basis-point increase in the general level of interest rates will increase our net interest income by 0.23%, while a 100 basis-point decrease in interest rates would decrease net interest income by 3.06%.   As of December 31, 2014, we estimated that, over the next one-year period, a 200 basis-point increase in the general level of interest rates ~~will decrease~~would increase our net interest income by 1.47%, while a 100 basis-point decrease in interest rates will also decrease net interest income by 2.73%.   As of December 31, 2013, we estimated that, over the next one-year period, a 200 basis-point increase in the general level of interest rates will decrease our net interest income by 1.44%0.29%, while a 100 basis-point decrease in the general level of interest rates ~~will~~would decrease our net interest income by ~~0.89%~~3.41%.

In our model, which was run as of ~~September 30,~~March 31, 2015, we estimated that, over the next three years on a cumulative basis, a 200 basis-point increase in the general level of interest rates will increase our net interest income by 2.40%, while a 100 basis-point decrease in interest rates will decrease net interest income by 5.79%.   As of December 31, 2014, we estimated that, over the next three years on a cumulative basis, a 200 basis-point increase in the general level of interest rates will increase our net interest income by ~~0.72%~~2.76%, while a 100 basis-point decrease in interest rates will decrease net interest income by 5.38%.   As of December 31, 2013, we estimated that, over the next three years on a cumulative basis, a 200 basis-point increase in the general level of interest rates will increase our net interest income by 0.81%, while a 100 basis-point decrease in interest rates will decrease net interest income by 4.93%6.54%.

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An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of ~~September 30, 2014,~~March 31, 2015, would decline by ~~16.58%~~14.54% with a rate shock of up 200 basis points, and increase by ~~13.67%~~13.18% with a rate shock of down 100 basis points.  Our EVE as of December 31, ~~2013,~~2014, would decline by ~~16.65%~~15.02% with a rate shock of up 200 basis points, and increase by ~~14.04%~~13.65% with a rate shock of down 100 basis points.

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The following table reflects the Company’s net interest income sensitivity over a one-year period and economic value of equity sensitivity as of March 31, 2015:
Interest Rates Estimated Estimated change in EVE Estimated Estimated change in NII
(basis points) EVE Amount % NII Amount %
+300 $ 316,960 $ (95,354 ) (23.1 )% $ 114,601 $ 1,002 0.9 %
+200 352,365 (59,949 ) (14.5 ) 113,858 259 0.2
+100 384,231 (28,082 ) (6.8 ) 113,413 (186 ) (0.1 )
0 412,313 — — 113,599 — —
-100 466,655 54,341 13.1 110,128 (3,472 ) (3.1 )
Estimates of Fair Value

The estimation of fair value is significant to a number of the ~~Corporation’s~~Company’s assets, including loans held for sale and investment securities available-for-sale. 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, 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. 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.

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 operations; unlike most industrial companies, nearly all of the ~~Corporation’s~~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.

At ~~September 30, 2014,~~March 31, 2015, 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 ~~customer~~client credit needs could be satisfied. As of ~~September 30, 2014,~~March 31, 2015, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were ~~$417.8~~$380.5 million, which represented ~~12.4%~~10.9% of total assets and ~~14.4%~~12.6% of total deposits and borrowings, compared to ~~$515.8~~$416.4 million at December 31, ~~2013,~~2014, which represented ~~30.8%~~12.1% of total assets ~~34.5%~~and 14.0% of total deposits and borrowings on such date.

The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of ~~September 30, 2014,~~March 31, 2015, had the ability to borrow ~~$745.1million.~~$808.7 million. In addition, at ~~September 30, 2014,~~March 31, 2015, the Bank had in place borrowing capacity of ~~$43.0~~$62.0 million through correspondent banks. The Bank also has a credit facility established with the Federal Reserve Bank of New York for direct discount window borrowings with approximate capacity based on pledged collateral of ~~$116~~$107.0 million. At ~~September 30, 2014,~~March 31, 2015, the Bank had aggregate available and unused credit of ~~$515.3~~$484.4 million, which represents the aforementioned facilities totaling ~~$909.1~~$977.7 million net of ~~the $388.6~~$493.3 million in outstanding borrowings. At ~~September 30, 2014,~~March 31, 2015, outstanding commitments for the Bank to extend credit were ~~$497.5~~$558.1 million.

Cash and cash equivalents totaled ~~$138.0~~$88.5 million on ~~September 30, 2014, increasing~~March 31, 2015, decreasing by ~~$55.3~~$38.3 million or ~~66.9%~~30.2%, from ~~$82.7~~$126.8 million at December 31, ~~2013.~~2014.  Operating activities provided ~~$10.4~~$9.8 million in net cash.  Investing activities used ~~$38.9~~$96.4 million in net cash, primarily
47
reflecting an increase in loans, which was ~~partially~~ offset in part by cash flow of from the securities portfolio.  Financing activities provided ~~$83.8~~$48.3 million in net cash, primarily reflecting a net increase of ~~$75.8~~$30.0 million in borrowings and $20.4 million in deposits.

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Deposits

Total deposits increased by ~~$1.2 billion~~$20.4 million, or 0.8% to $2.5 billion at ~~September 30, 2014~~March 31, 2015. Total noninterest-bearing deposits decreased $12.9 million or 2.6% from ~~$1.3 billion at December 31, 2013. Total non interest-bearing deposits increased from $227.4~~$492.5 million at December 31, ~~2013~~2014 to ~~$471.2~~$480.0 million at ~~September 30, 2014, an increase of $243.8 million or 107.2%.~~March 31, 2015. Money market deposits ~~increased~~decreased by ~~$258.1~~$11.1 million from ~~$470.7~~$723.5 at December 31, ~~2013~~2014 to ~~$728.8~~$712.4 million at ~~June 30, 2014.~~March 31, 2015. Time deposits increased by ~~$508.7~~$71.5 million to ~~$673.0~~$740.9 million at ~~September 30, 2014,~~March 31, 2015, up from ~~$164.2~~$669.4 million at December 31, ~~2013.~~2014. The ~~increases during the quarter are mostly due~~increase in deposits was mainly attributable to ~~the merger. Strong organic deposit growth as well as the use of the brokered~~originations in listing services and ~~listing service markets also contributed to the increase.~~other time deposits, offset by seasonal decreases in noninterest-bearing and interest-bearing demand deposits.

September 30, 2014 December 31, 2013 Dollar
Change March 31, 2015 December 31, 2014 Dollar
Change
Amount percent Amount percent 2014 vs. 2013 Amount % Amount % 2015 vs. 2014
(dollars in thousands) (dollars in thousands)
Non interest-bearing demand $ 471,151 19.0 % $ 227,370 16.9 % $ 243,781
Noninterest-bearing demand $ 479,652 19.2 % $ 492,515 19.9 % $ (12,863 )

Interest-bearing demand 364,607 14.8 318,475 23.8 46,132 342,261 13.7 365,550 14.8 (23,289 )

Savings Deposits 231,648 9.4 161,232 12.0 70,416 220,764 8.8 224,638 9.1 (3,874 )

Money market deposits 728,803 29.5 470,714 35.2 258,089 712,427 28.6 723,505 29.2 (11,078 )

Time Deposits 672,959 27.3 164,214 12.1 508,745 740,907 29.7 669,399 27.0 71,508

Total deposits $ 2,469,168 100.0 % $ 1,342,005 100.0 % $ 1,127,163 $ 2,496,011 100.0 % $ 2,475,607 100.0 % $ 20,404

Subordinated Debentures

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 trust loaned the proceeds of this offering to the ~~Corporation~~Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85% and ~~reprices~~re-prices quarterly. The rate at ~~September 30, 2014~~March 31, 2015 was ~~3.09%~~3.10%.

Stockholders’ Equity

Total stockholders’ equity amounted to ~~$441.8~~$456.2 million ~~or 13.2% of total assets,~~ at ~~September 30, 2014,~~March 31, 2015, compared to ~~$168.6~~$446.2 million ~~or 10.1% of total assets~~ at December 31, ~~2013.~~2014. The increase in total stockholders’ equity was primarily attributable to an increase in retained earnings of $8.1 million, a $0.8 million increase in other comprehensive income (primarily $0.7 million in unrealized gains on available for sale securities and $0.4 million in pension plan actuarial gains, offset by a $0.3 million in unrealized losses on cash flow hedges), and approximately $1.1 million of equity issuance related to stock-based compensation, including the exercise of options. Book value per common share was ~~$14.52~~$14.90 at ~~September 30, 2014,~~March 31, 2015, compared to ~~$9.61~~$14.65 at December 31, ~~2013.~~2014. Tangible book value (i.e., total stockholders’ equity less preferred stock, goodwill and other intangible assets) per common share was ~~$9.43~~$9.86 at ~~September 30, 2014,~~March 31, 2015, compared to ~~$8.58~~$9.57 at December 31, ~~2013.~~2014.

Tangible book value per share is a non-GAAP financial measure and represents tangible stockholders’ equity (or tangible book value) calculated on a per common share basis. The ~~Corporation~~Company believes that a disclosure of tangible book value per share may be helpful for those investors who seek to evaluate the ~~Corporation’s~~Company’s book value per share without giving effect to goodwill and other intangible assets. The following table presents a reconciliation of total book value per share to tangible book value per share as of ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013.~~2014.

September 30, December 31, March 31, December 31,
2014 2013 2015 2014
(in thousands, except for share data) (in thousands, except for share data)
Stockholders’ equity $ 441,839 $ 168,584 $ 456,194 $ 446,219
Less: Preferred stock 11,250 11,250 11,250 11,250
Less: Goodwill and other intangible assets 150,978 16,828 150,493 150,734
Tangible common stockholders’ equity $ 279,611 $ 140,506 $ 294,451 $ 284,235

Book value per common share $ 14.52 $ 9.61 $ 14.90 $ 14.65
Less: Goodwill and other intangible assets 5.09 1.03 5.04 5.08
Tangible book value per common share $ 9.43 $ 8.58 $ 9.86 $ 9.57

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On September 15, 2011, the ~~Corporation~~Company issued $11.25 million in nonvoting senior preferred stock to the Treasury under the SBLF Program. Under the Securities Purchase Agreement, the ~~Corporation~~Company issued to the Treasury a total of 11,250 shares of the ~~Corporation’s~~Company’s Senior non-cumulative perpetual preferred stock, Series B, having a liquidation value of $1,000 per share. Simultaneously, using the proceeds from the issuance of the SBLF Preferred Stock, the ~~Corporation~~Company redeemed from the Treasury, all 10,000 outstanding shares of its fixed rate cumulative perpetual preferred stock, Series A, liquidation amount $1,000 per share, for a redemption price of $10,041,667, including accrued but unpaid dividends up to the date of redemption. The investment in the SBLF program provided the ~~Corporation~~Company with approximately $1.25 million in additional Tier 1 capital. The capital that the ~~Corporation~~Company received under the program enabled it to continue to serve small business clients through the commercial lending program. On December 7, 2011, the ~~Corporation~~Company repurchased the warrants issued on January 12, 2009 to the Treasury as part of its participation in the Treasury’s TARP Capital Purchase Program. In the repurchase, the ~~Corporation~~Company paid the Treasury $245,000 for the warrants.

During the three ~~and nine~~ months ended ~~September 30, 2014,~~March 31, 2015, the ~~Corporation~~Company had no purchases of common stock associated with its stock buyback programs. At ~~September 30, 2014,~~March 31, 2015, there were 652,868 shares available for repurchase under the ~~Corporation’s~~Company’s stock buyback programs.

Regulatory Capital and Capital Adequacy

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

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

The following is a summary of regulatory capital amounts and ratios as of ~~September 30, 2014~~March 31, 2015 for the Parent Corporation and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution.

ConnectOne Bancorp, Inc. For Capital Adequacy
Purposes To Be Well-Capitalized Under
Prompt Corrective Action
Provisions
At September 30, 2014 Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)

Tier 1 leverage capital $ 295,345 9.23 % $ 127,985 4.00 % N/A N/A
Tier 1 risk-based capital 295,345 10.63 % 111,182 4.00 % N/A N/A
Total risk-based capital 307,673 11.07 % 222,364 8.00 % N/A N/A
ConnectOne Bank For Capital Adequacy
Purposes To Be Well-Capitalized Under
Prompt Corrective Action
Provisions
At September 30, 2014 Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)

Tier 1 leverage capital $ 293,194 9.16 % $ 127,985 4.00 % $ 159,981 5.00 %
Tier 1 risk-based capital 293,194 10.59 % 110,709 4.00 % 166,063 6.00 %
Total risk-based capital 305,522 11.04 % 221,418 8.00 % 276,772 10.00 %
ConnectOne Bancorp,
Inc. For Capital Adequacy
Purposes To Be Well-Capitalized Under
Prompt Corrective Action
Provisions
At March 31, 2015 Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)

Tier 1 leverage capital $ 313,471 9.45 % $ 132,749 4.00 % N/A N/A
CET I risk-based ratio 297,066 9.75 132,127 4.50 N/A N/A
Tier 1 risk-based capital 313,471 10.29 182,836 6.00 N/A N/A
Total risk-based capital 329,614 10.82 243,782 8.00 N/A N/A

ConnectOne Bank For Capital Adequacy
Purposes To Be Well-Capitalized Under
Prompt Corrective Action
Provisions
At March 31, 2015 Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)

Tier 1 leverage capital $ 312,112 9.41 % $ 132,730 4.00 % $ 165,913 5.00 %
CET I risk-based ratio 312,112 10.24 137,116 4.50 198,056 6.50 %
Tier 1 risk-based capital 312,112 10.24 182,821 6.00 243,761 8.00 %
Total risk-based capital 328,255 10.77 243,761 8.00 304,702 10.00 %

N/A - not applicable

As of ~~September 30, 2014,~~March 31, 2015, management believes that each of the Bank and the ~~Corporation~~Company meet all capital adequacy requirements to which they are subject.

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Basel III

The Basel Committee on Banking Supervision (the “Basel Committee”) provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. At times, the Basel Committee uses this common understanding to develop guidelines and supervisory standards in areas where they are considered desirable. In this regard, the Basel Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision.

The Basel Committee released a comprehensive list of proposals for changes to capital, leverage, and liquidity requirements for banks in December 2009 (commonly referred to as “Basel III”). In July 2010, the Basel Committee announced the design for its capital and liquidity reform proposals and in September 2010, the oversight body of the Basel Committee announced minimum capital ratios and transition periods.

In December 2010 and January 2011, the Basel Committee published the final texts of reforms on capital and liquidity generally referred to as “Basel III.” Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions have also been considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including the Bank.

On July 9, 2013, the Office of the Comptroller of the Currency approved a final rule revising regulatory capital rules applicable to national banks, implementing Basel III. This rule redefines Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity Tier 1 Risk-based Capital Ratio) and implements a capital conservation buffer. It also revises the prompt corrective action thresholds and makes changes to risk weighs for certain assets and off-balance-sheet exposures. Banks ~~are~~were required to transition into the new rule beginning on January 1, 2015, although, based on the ~~Corporation’s~~Company’s capital levels and balance sheet composition at ~~September 30, 2014,~~March 31, 2015, the ~~Corporation~~Company does not believe implementation of the new rule will have a material impact on the ~~Corporation’s~~Company’s capital needs; however, due to the complexity of the rules, the ~~Corporation~~Company will continue to evaluate the impact of these changes to our regulatory capital. The new rules also include a one-time opportunity to opt-out of the changes to the treatment of accumulated other comprehensive income (“AOCI”) components. By making the election to opt-out, an institution may continue to treat AOCI items in a manner consistent with risk-based capital rules in effect prior to January 1, 2015. The election, which cannot be reversed, must be made in the institution’s regulatory financial report for the period ending March 31, 2015. As of March 31, 2015, the company elected to opt-out of the treatment of AOCI within Basel III. This statement regarding the impact of the new regulations constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from this statement as a result of various factors, including modifications to the new regulations that may be adopted prior to the effective dates of the new regulations.

~~Looking Forward~~
One of the Corporation’s primary objectives is to achieve balanced asset and revenue growth, and at the same time expand market presence and diversify its financial products. However, it is recognized that objectives, no matter how focused, are subject to factors beyond the control of the Corporation, which can impede its ability to achieve these goals. The following factors should be considered when evaluating the Corporation’s ability to achieve its objectives:
The financial marketplace is rapidly changing and currently is in flux. The United States Treasury and banking regulators have implemented, and may continue to implement, a number of programs under new legislation to address capital and liquidity issues in the banking system. In addition, new financial system reform legislation may affect banks’ abilities to compete in the marketplace. It is difficult to assess whether these programs and actions will have short-term and/or long-term positive effects.
Banks are not the only place to obtain loans, nor the only place to keep financial assets. The banking industry has lost market share to other financial service providers. The future is predicated on the Corporation’s ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace.
Net interest income, the primary source of earnings, is impacted favorably or unfavorably by changes in interest rates. Although the impact of interest rate fluctuations can be mitigated by appropriate asset/liability management strategies, significant changes in interest rates can have a material adverse impact on profitability.
The ability of customers to repay their obligations is often impacted by changes in the regional and local economy. Although the Corporation sets aside loan loss provisions toward the allowance for loan losses when the Board determines such action to be appropriate, significant unfavorable changes in the economy could impact the assumptions used in the determination of the adequacy of the allowance.
Technological changes will have a material impact on how financial service companies compete for and deliver services. It is recognized that these changes will have a direct impact on how the marketplace is approached and ultimately on profitability. The Corporation has taken steps to improve its traditional delivery channels. However, continued success will likely be measured by the ability to anticipate and react to future technological changes.
This “Looking Forward” description constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the Corporation’s forward-looking statements due to numerous known and unknown risks and uncertainties, including the factors referred to in this quarterly report and in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.
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Item 3. Qualitative and Quantitative Disclosures about Market Risks

Market Risk

Interest rate risk management is our primary market risk. See ~~"Item~~“Item 2- ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operation- Interest Rate Sensitivity ~~Analysis"~~Analysis” herein for a discussion of our management of our interest rate risk.

~~Equity Price Risk~~
The Corporation is exposed to equity price risk inherent in its portfolio of publicly traded equity securities, which had an estimated fair value of approximately $289,000 and $287,000 at September 30, 2014 and December 31, 2013, respectively. We monitor equity investment holdings for impairment on a quarterly basis. In the event that the carrying value of the equity investment exceeds its fair value, and the decline in value is determined to be to be other than temporary, the carrying value is reduced to its current fair value by recording a charge to current operations. For the three months ended September 30, 2014 and 2013, the Corporation recorded no other-than-temporary impairment charges on its equity security holdings.
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Item 4. Controls and Procedures

a)Disclosure controls and procedures. As of the end of the ~~Corporation’s~~Company’s most recently completed fiscal quarter covered by this report, the ~~Corporation~~Company carried out an evaluation, with the participation of the ~~Corporation’s~~Company’s management, including the ~~Corporation’s~~Company’s chief executive officer and chief financial officer, of the effectiveness of the ~~Corporation’s~~Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the ~~Corporation’s~~Company’s chief executive officer and chief financial officer concluded that ~~due exclusively to~~ the ~~event described in Note 13. Subsequent Events, and as further described below, the Corporation’s~~Company’s disclosure controls and procedures are ~~not~~ effective in ensuring that information required to be disclosed by the ~~Corporation~~Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and are operating in an effective manner and that such information is accumulated and communicated to management, including the ~~Corporation’s~~Company’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Due to the fraud, in conjunction with our normal evaluation, we commenced a review of our internal control over funds transfer to determine how the fraud occurred and determined that the internal control we have identified as critical to the process were present, but not functioning with sufficient precision that are required as part of the Corporation’s policies and procedures over the safeguarding of assets, which resulted in a loss to the Corporation. As a result of this determination of a material weakness, we will be undertaking an evaluation of internal controls to ensure that the controls function as management has designed them to function, or whether enhancements to current controls are necessary to be able to conclude that internal controls over financial reporting are effective going forward. In addition, we have performed procedures to determine that there was no impact on financial results previously presented.
b)Changes in internal controls over financial ~~reporting.~~reporting : There have been no changes in the ~~Corporation’s~~Company’s internal controls over financial reporting that occurred during the ~~Corporation’s~~Company’s last fiscal quarter to which this report relates that have materially affected, or are reasonable likely to materially affect, the ~~Corporation’s~~Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The ~~Corporation~~Company is not subject to any legal proceedings, which could have a materially adverse impact on its results of operations and financial condition.

Item 1a. Risk Factors

In addition to the risks described under Item 1A –Risk Factors of our Annual Report on Form 10-K, investors in our securities should consider the following additional information:

~~Our internal control systems could fail~~Risk Related to ~~detect certain events.~~our Mortgage Banking Operations

WeThe Bank sells residential mortgage loans in the secondary market, primarily to Fannie Mae but also to other investors. The agreements governing these loan sales include various representations and warranties regarding the origination and characteristics of the residential mortgage loans sold as well as its servicing by the Bank. In addition, the agreements require the Bank to deliver various documents to the purchaser or its agent. Although the Bank sells residential mortgage loans on a non-recourse basis, the Bank may be obligated to repurchase sold loans where required documents are ~~subject~~not delivered or are defective or there is a breach of a representation or warranty made by the Bank. . Investors may require the immediate repurchase of a mortgage loan when an early payment default occurs, even if the mortgage loan has subsequently been brought current. As of March 31, 2015, there were no pending repurchase requests related to ~~certain operational risks, including but~~representation and warranty provisions. However, we can give you no assurance that we will not ~~limited~~be required to ~~data processing system failures and errors and third-party, customer~~repurchase sold loans in the future, or ~~employee fraud. We maintain a system of internal controls~~that our mortgage banking operations will not expose us to mitigate such occurrences and maintain insurance coverage for such risks. However, should such an event occur that is not prevented or detected by our internal controls, or is uninsured or in excess of applicable insurance limits, it could have a significant adverse effect on our business, results of operations, financial condition or prospects.potential future losses.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5 Other Information
Not applicable
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Item 6. Exhibits

Exhibit No. Description

31.1 Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Definition Taxonomy Extension Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

*Furnished and not filed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.

~~CONNECTONE BANCORP, INC.~~ConnectOne Bancorp, Inc.
(Registrant)

By: /s/ Frank Sorrentino III By: /s/ William S. Burns
Frank Sorrentino III William S. Burns
Chairman and Chief Executive Officer Executive Vice President, and Chief Financial Officer

Date: ~~November 10, 2014~~May 8, 2015 Date: ~~November 10, 2014~~May 8, 2015

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(in thousands, except for share data)	September 30, 2014			December 31, 2013
	(Unaudited)
ASSETS
Cash and due from banks	$	41,041		$	82,692
Interest-bearing deposits with banks		96,972			—
Cash and cash equivalents		138,013			82,692

Investment securities:
Available-for-sale		307,502			323,070
Held-to-maturity (fair value of $222,393 and $210,958)		217,567			215,286
Loans held for sale		920			—

Loans receivable		2,426,765			960,943
Less: Allowance for loan losses		12,118			10,333
Net loans receivable		2,414,647			950,610

Investment in restricted stock, at cost		17,922			8,986
Bank premises and equipment, net		20,900			13,681
Accrued interest receivable		10,976			6,802
Bank-owned life insurance		51,999			35,734
Other real estate owned		1,442			220
Due from brokers for investment securities		—			8,759
Goodwill		145,909			16,804
Core deposit intangibles		5,070			24
Other assets		23,390			10,414
Total assets	$	3,356,257		$	1,673,082

LIABILITIES
Deposits:
Noninterest-bearing	$	471,151		$	227,370
Interest-bearing		1,998,017			1,114,635
Total deposits		2,469,168			1,342,005
Borrowings		420,960			146,000
Subordinated debentures		5,155			5,155
Other liabilities		19,135			11,338
Total liabilities		2,914,418			1,504,498

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Preferred stock, $1,000 liquidation value per share, authorized 5,000,000 shares; issued and outstanding 11,250 shares of Series B preferred stock at September 30, 2014 and December 31, 2013; total liquidation value of $11,250,000 at September 30, 2014 and December 31, 2013		11,250			11,250
Common stock, no par value, authorized 50,000,000 shares; issued 31,728,997 shares at September 30, 2014 and 18,477,412 at December 31, 2013; outstanding 29,665,075 shares at September 30, 2014 and 16,369,012 at December 31, 2013		374,287			110,056
Additional paid-in capital		5,818			4,986
Retained earnings		66,623			61,914
Treasury stock, at cost (2,063,922 common shares at September 30, 2014 and 2,108,400 at December 31, 2013)		(16,717	)		(17,078	)
Accumulated other comprehensive income (loss)		578			(2,544	)
Total stockholders’ equity		441,839			168,584
Total liabilities and stockholders’ equity	$	3,356,257		$	1,673,082

(in thousands, except for share data)	March 31, 2015			December 31, 2014
		(unaudited)
ASSETS
Cash and due from banks	$	30,127		$	31,813
Interest-bearing deposits with banks		58,416			95,034
Cash and cash equivalents		88,543			126,847

Investment securities:
Available-for-sale		276,121			289,532
Held-to-maturity (fair value of $240,263 and $231,445)		231,720			224,682
Loans held for sale		1,392			—

Loans receivable		2,640,739			2,538,641
Less: Allowance for loan and lease losses		15,933			14,160
Net loans receivable		2,624,806			2,524,481

Investment in restricted stock, at cost		24,874			23,535
Bank premises and equipment, net		20,358			20,653
Accrued interest receivable		11,513			11,700
Bank-owned life insurance		52,904			52,518
Other real estate owned		870			1,108
Goodwill		145,909			145,909
Core deposit intangibles		4,584			4,825
Other assets		22,297			22,782
Total assets	$	3,505,891		$	3,448,572
LIABILITIES
Deposits:
Noninterest-bearing	$	479,652		$	492,515
Interest-bearing		2,016,359			1,983,092
Total deposits		2,496,011			2,475,607
Borrowings		525,148			495,553
Subordinated debentures		5,155			5,155
Other liabilities		23,383			26,038
Total liabilities		3,049,697			3,002,353

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Preferred stock, $1,000 liquidation value per share, authorized 5,000,000 shares; issued and outstanding 11,250 shares of Series B preferred stock at March 31, 2015 and December 31, 2014; total liquidation value of $11,250 at March 31, 2015 and December 31, 2014		11,250			11,250
Common stock, no par value, authorized 50,000,000 shares; issued 31,928,524 shares at March 31, 2015 and 31,758,558 at December 31, 2014; outstanding 29,864,602 shares at March 31, 2015 and 29,694,636 at December 31, 2014		374,287			374,287
Additional paid-in capital		7,084			6,015
Retained earnings		80,526			72,398
Treasury stock, at cost (2,063,922 common shares at March 31, 2015 and December 31, 2014)		(16,717	)		(16,717	)
Accumulated other comprehensive loss		(236	)		(1,014	)
Total stockholders’ equity		456,194			446,219
Total liabilities and stockholders’ equity	$	3,505,891		$	3,448,572

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except for share data)	2014		2013		2014		2013

Interest income
Interest and fees on loans	$	28,098	$	10,148	$	48,670	$	29,963
Interest and dividends on investment securities:
Taxable		2,916		3,116		8,840		8,973
Tax-exempt		892		1,151		2,840		3,308
Dividends		349		126		639		378
Interest on federal funds sold and other short-term investments		88		—		88		2
Total interest income		32,343		14,541		61,077		42,624
Interest expense
Deposits		2,725		1,330		5,343		3,897
Borrowings		2,072		1,489		4,914		4,407
Total interest expense		4,797		2,819		10,257		8,304
Net interest income		27,546		11,722		50,820		34,320
Provision for loan losses		1,300		—		2,209		—
Net interest income after provision for loan losses		26,246		11,722		48,611		34,320
Noninterest income
Service charges, commissions and fees		315		780		1,645		1,890
Annuities and insurance commissions		94		92		299		338
Bank-owned life insurance		401		265		912		1,104
Net gains on sale of loans held for sale		65		26		144		255
Net gains on sales of investment securities		111		343		2,100		1,286
Other income		187		37		322		222
Total other income		1,173		1,543		5,422		5,095
Noninterest expense
Salaries and employee benefits		6,243		3,247		13,153		10,072
Occupancy and equipment		1,781		839		3,658		2,556
FDIC insurance		504		283		1,092		804
Professional and consulting		530		352		1,289		801
Marketing and advertising		209		94		276		257
Data processing		902		362		1,761		1,058
Merger expenses		8,784		—		10,573		—
Loss on extinguishment of debt		4,550		—		4,550		—
Amortization of core deposit intangible		248		6		260		19
Other expenses		1,649		1,022		3,028		3,252
Total other expense		25,400		6,205		39,640		18,819
Income before income tax expense		2,019		7,060		14,393		20,596
Income tax expense		253		1,966		3,851		5,655
Net Income		1,766		5,094		10,542		14,941
Less: Preferred stock dividends		28		28		84		112
Net income available to common stockholders	$	1,738	$	5,066	$	10,458	$	14,829
Earnings per common share
Basic	$	0.06	$	0.31	$	0.50	$	0.91
Diluted		0.06		0.31		0.49		0.91
Weighted average common shares outstanding
Basic		29,636,001		16,349,480		20,819,241		16,348,875
Diluted		30,108,103		16,385,155		21,285,452		16,380,970
Dividends per common share	$	0.075	$	0.075	$	0.225	$	0.185

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2014			2013			2014			2013
Net income	$	1,766		$	5,094		$	10,542		$	14,941
Other comprehensive (loss) income, net of tax:
Unrealized gains and losses on securities available-for-sale:
Unrealized holding (losses) gains on available-for-sale securities		(1,171	)		383			5,656			(10,771	)
Tax effect		584			(118	)		(1,882	)		4,371
Net of tax amount		(587	)		265			3,774			(6,400	)
Reclassification adjustment of OTTI losses included in income		—			—			—			24
Tax effect		—			—			—			(6	)
Net of tax amount		—			—			—			18
Reclassification adjustment for net gains arising during the period		(111	)		(343	)		(2,100	)		(1,286	)
Tax effect		42			96			601			353
Net of tax amount		(69	)		(247	)		(1,499	)		(933	)
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity		57			(42	)		156			32
Tax effect		(24	)		15			(67	)		(13	)
Net of tax amount		33			(27	)		89			19
Pension plan:
Actuarial gains		—			—			1,281			—
Tax effect		—			—			(523	)		—
Net of tax amount		—			—			758			—
Total other comprehensive (loss) income		(623	)		(9	)		3,122			(7,296	)
Total comprehensive income	$	1,143		$	5,085		$	13,664		$	7,645

	Three Months Ended March 31,
(dollars in thousands, except for per share data)	2015		2014

Interest income
Interest and fees on loans	$	29,314	$	10,111
Interest and dividends on investment securities:
Taxable		2,910		3,057
Tax-exempt		883		1,056
Dividends		220		113
Interest on federal funds sold and other short-term investments		43		—
Total interest income		33,370		14,337
Interest expense
Deposits		3,025		1,316
Borrowings		2,053		1,411
Total interest expense		5,078		2,727
Net interest income		28,292		11,610
Provision for loan and lease losses		1,825		625
Net interest income after provision for loan and lease losses		26,467		10,985
Noninterest income
Annuities and insurance commissions		86		100
Bank-owned life insurance		386		255
Net gains on sale of loans held for sale		114		36
Deposit, loan and other income		463		715
Net gains on sale of investment securities		506		1,415
Total other income		1,555		2,521
Noninterest expense
Salaries and employee benefits		6,628		3,332
Occupancy and equipment		2,082		1,080
FDIC insurance		560		300
Professional and consulting		494		255
Marketing and advertising		194		40
Data processing		900		345
Merger expenses		—		1,060
Amortization of core deposit intangible		241		6
Other expenses		1,532		1,078
Total other expense		12,631		7,496
Income before income tax expense		15,391		6,010
Income tax expense		5,012		1,612
Net Income		10,379		4,398
Less: Preferred stock dividends		28		28
Net income available to common stockholders	$	10,351	$	4,370
Earnings per common share
Basic	$	0.35	$	0.27
Diluted		0.34		0.27
Weighted average common shares outstanding
Basic		29,757,316		16,350,183
Diluted		30,149,469		16,405,540
Dividends per common share	$	0.075	$	0.075

(in thousands, except for share and per share data)	Preferred Stock		Common Stock		Additional Paid In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance as of January 1, 2013	$	11,250	$	110,056	$	4,801	$	46,753		$	(17,232	)	$	5,063		$	160,691
Net income		—		—		—		19,925			—			—			19,925
Other comprehensive loss, net of tax		—		—		—		—			—			(7,607	)		(7,607	)
Dividend on series B preferred stock		—		—		—		(169	)		—			—			(169	)
Issuance cost of common stock		—		—		—		(13	)		—			—			(13	)
Cash dividends declared on common stock ($0.260 per share)		—		—		—		(4,581	)		—			—			(4,581	)
Issuance of restricted stock awards (18,829 shares)		—		—		91		—			152			—			243
Dividend on restricted stock declared		—		—		—		(1	)		—			—			(1	)
Stock issued for options exercised (2,268 shares)		—		—		19		—			2			—			21
Stock-based compensation						75											75
Balance as of December 31, 2013		11,250		110,056		4,986		61,914			(17,078	)		(2,544	)		168,584
Net income		—		—		—		10,542			—						10,542
Other comprehensive income, net of tax		—		—		—		—			—			3,122			3,122
Dividend on series B preferred stock		—		—		—		(84	)		—			—			(84	)
Issuance cost of common stock		—		—		—		(7	)		—			—			(7	)
Cash dividends declared on common stock ($0.225 per share)		—		—		—		(5,742	)		—			—			(5,742	)
Stock issued for options exercised (74,911 shares)		—		—		424		—			361			—			785
Stock issued (13,221,152 shares) and options acquired (783,732 shares) in acquisition of Legacy ConnectOne		—		264,231		—		—			—			—			264,231
Stock-based compensation		—		—		408		—			—			—			408
Balance as of September 30, 2014	$	11,250	$	374,287	$	5,818	$	66,623		$	(16,717	)	$	578		$	441,839

Consideration paid through Center Bancorp, Inc. common stock issued to Legacy ConnectOne shareholders and fair value of stock options acceleration was							$	264,231

	Legacy ConnectOne carrying value			Fair value adjustments			As recorded at acquisition

Cash and cash equivalents	$	70,318		$	—		$	70,318
Investment securities		28,436			16	(a)		28,452
Restricted stock		13,646			—			13,646
Loans held for sale		190			—			190
Loans		1,304,600			(5,316)	(b)		1,299,284
Bank owned life insurance		15,481			—			15,481
Premises and equipment		7,380			(905)	(c)		6,475
Accrued interest receivable		4,470			—			4,470
Core deposit and other intangibles		—			5,308	(d)		5,308
Other real estate owned		2,455			—			2,455
Other assets		10,636			3,650	(e)		14,286
Deposits		(1,049,666	)		(1,676)	(f)		(1,051,342	)
FHLB borrowings		(262,046	)		(1,324)	(g)		(263,370	)
Other liabilities		(10,527	)		—			(10,527	)
Total identifiable net assets	$	135,373		$	(247	)	$	135,126

Goodwill recorded in the Merger							$	129,105

	ASC 310-30 Loans
Contractual principal and accrued interest at acquisition	$	23,284
Principal not expected to be collected (non-accretable discount)		(6,942	)
Expected cash flows at acquisition		16,342
Interest component of expected cash flows (accretable discount)		(5,013	)
Fair value of acquired loans	$	11,329

	Pro Forma for the Nine Months Ended September 30,
	2014			2013
	(in thousands, except per share amounts)
Net interest income	$	78,872		$	71,091
Noninterest income		6,168			5,948
Noninterest expense		(41,073	)		(34,352	)
Net income		26,490			26,125

Pro forma earnings per share from continuing operations:
Basic	$	0.89		$	0.91
Diluted		0.88			0.90

	September 30, 2014									March 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)									March 31, 2015
Investment Securities Available-for-Sale:
										(in thousands)
U.S. Treasury and agency securities	$	11,517	$	—	$	(132	)	$	11,385
Investment securities available-for-sale:
Federal agency obligations		33,110		75		(193	)		32,992	$	30,774	$	463	$	(4	)	$	31,233
Residential mortgage pass-through securities		58,459		1,332		(100	)		59,691		57,300		1,737		(9	)		59,028
Commercial mortgage pass-through securities		3,057		—		(41	)		3,016		3,027		55		—			3,082
Obligations of U.S. states and political subdivisions		8,204		225		—			8,429		8,197		238		—			8,435
Trust preferred securities		16,085		465		(236	)		16,314		16,086		648		(278	)		16,456
Corporate bonds and notes		129,550		6,300		(10	)		135,840		110,671		6,190		(22	)		116,839
Asset-backed securities		21,603		151		(1	)		21,753		26,045		127		(80	)		26,092
Certificates of deposit		2,098		32		(6	)		2,124		2,097		31		(5	)		2,123
Equity securities		376		—		(87	)		289		376		—		(56	)		320
Mutual funds and money market funds		15,808		—		(139	)		15,669
Other securities											12,474		89		(50	)		12,513
Total	$	299,867	$	8,580	$	(945	)	$	307,502	$	267,047	$	9,578	$	(504	)	$	276,121

Investment Securities Held-to-Maturity:
Investment securities held-to-maturity:
U.S. Treasury and agency securities	$	28,212	$	251	$	—		$	28,463	$	28,315	$	1,507	$	—		$	29,822
Federal agency obligations		21,119		112		(74	)		21,157		35,393		586		(30	)		35,949
Residential mortgage pass-through securities		2,616		7		—			2,623
Commercial mortgage pass-through securities		4,304		38		(19	)		4,323
Residential mortgage-backed securities											5,542		26		(13	)		5,555
Commercial mortgage-backed securities											4,124		86		—			4,210
Obligations of U.S. states and political subdivisions		123,379		3,914		(151	)		127,142		119,384		4,966		(46	)		124,304
Corporate bonds and notes		37,937		762		(14	)		38,685		38,962		1,472		(11	)		40,423
Total	$	217,567	$	5,084	$	(258	)	$	222,393	$	231,720	$	8,643	$	(100	)	$	240,263

Total investment securities	$	517,434	$	13,664	$	(1,203	)	$	529,895	$	498,767	$	18,221	$	(604	)	$	516,384

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities	$	14,344	$	—	$	(825	)	$	13,519
Federal agency obligations		20,567		29		(655	)		19,941
Residential mortgage pass-through securities		48,312		791		(229	)		48,874
Commercial mortgage pass-through securities		7,145		3		(157	)		6,991
Obligations of U.S. states and political subdivisions		30,804		711		(55	)		31,460
Trust preferred securities		19,763		150		(510	)		19,403
Corporate bonds and notes		154,182		4,930		(482	)		158,630
Asset-backed securities		15,733		246		—			15,979
Certificates of deposit		2,250		32		(20	)		2,262
Equity securities		376		—		(89	)		287
Mutual funds and money market funds		5,671		68		(15	)		5,724
Total	$	319,147	$	6,960	$	(3,037	)	$	323,070
Investment Securities Held-to-Maturity:
U.S. Treasury and agency securities	$	28,056	$	—	$	(1,019	)	$	27,037
Federal agency obligations		15,249		23		(389	)		14,883
Residential mortgage-backed securities		2,246		—		(64	)		2,182
Commercial mortgage-backed securities		4,417		41		(62	)		4,396
Obligations of U.S. states and political subdivisions		127,418		1,303		(3,688	)		125,033
Corporate bonds and notes		37,900		149		(622	)		37,427
Total	$	215,286	$	1,516	$	(5,844	)	$	210,958
Total investment securities	$	534,433	$	8,476	$	(8,881	)	$	534,028

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2014		2013		2014		2013
Other than temporary impairment charges	$	—	$	—	$	—	$	—
Principal losses on a variable rate CMO		—		—		—		24
Total other-than-temporary impairment charges	$	—	$	—	$	—	$	24

Issuer	Amortized Cost		Fair Value		Gross Unrealized Gain (Loss)			Lowest Credit Rating Assigned
Countrywide Capital IV	$	1,771	$	1,819	$	48		BB
Countrywide Capital V		2,747		2,848		101		BB
Countrywide Capital V		250		259		9		BB
Nationsbank Cap Trust III		1,575		1,297		(278	)	BB
Morgan Stanley Cap Trust IV		2,500		2,567		67		BB
Morgan Stanley Cap Trust IV		1,743		1,795		52		BB
Goldman Sachs		1,000		1,252		252		BB
Stifel Financial		4,500		4,619		119		BBB-
Total	$	16,086	$	16,456	$	370

Issuer	Single Issuer or Pooled	Class/ Tranche	Amortized Cost		Fair Value		Gross Unrealized Gain (Loss)			Lowest Credit Rating Assigned	Number of Banks Currently Performing		Deferrals and Defaults as % of Original Collateral	Expected Deferral/Defaults as % of Remaining Performing Collateral
	(dollars in thousands)
Countrywide Capital IV	Single	n/a	$	1,771	$	1,813		42		BB		1	None	None
Countrywide Capital V	Single	n/a		2,747		2,827		80		BB		1	None	None
Countrywide Capital V	Single	n/a		250		257		7		BB		1	None	None
Nationsbank Cap Trust III	Single	n/a		1,575		1,339		(236	)	BB		1	None	None
Morgan Stanley Cap Trust IV	Single	n/a		2,500		2,517		17		BB		1	None	None
Morgan Stanley Cap Trust IV	Single	n/a		1,742		1,760		18		BB		1	None	None
Goldman Sachs	Single	n/a		1,000		1,137		137		BB		1	None	None
Stifel Financial	Single	n/a		4,500		4,664		164		BBB-		1	None	None
Total			$	16,085	$	16,314		229

	Nine Months Ended September 30, 2014		Year Ended December 31, 2013
	(in thousands)
Balance of credit-related OTTI at January 1,	$	—	$	4,450
Addition:
Credit losses on investment securities for which other-than-temporary impairment was not previously recognized		—		652
Reduction:
Credit losses on investment securities sold during the period		—		(5,102	)
Balance of credit-related OTTI at period end	$	—	$	—

	December 31, 2013
	Total					Less than 12 Months					12 Months or Longer
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities	$	13,519	$	(825	)	$	13,519	$	(825	)	$	—	$	—
Federal agency obligation		17,200		(655	)		17,200		(655	)		—		—
Residential mortgage pass-through securities		18,293		(229	)		18,293		(229	)		—		—
Commercial mortgage pass-through securities		2,924		(157	)		2,924		(157	)		—		—
Obligations of U.S. states and political subdivisions		4,199		(55	)		4,199		(55	)		—		—
Trust preferred securities		5,306		(510	)		4,031		(211	)		1,275		(299	)
Corporate bonds and notes		32,498		(482	)		30,533		(448	)		1,965		(34	)
Certificates of deposit		552		(20	)		552		(20	)		—		—
Equity securities		287		(89	)		—		—			287		(89	)
Mutual funds and money market funds		985		(15	)		—		—			985		(15	)
Total		95,763		(3,037	)		91,251		(2,600	)		4,512		(437	)
Investment Securities Held-to-Maturity:
U.S. Treasury and agency securities	$	27,037	$	(1,019	)	$	27,037	$	(1,019	)	$	—	$	—
Federal agency obligation		13,492		(389	)		13,197		(388	)		295		(1	)
Residential mortgage pass-through securities		2,182		(64	)		2,182		(64	)		—		—
Commercial mortgage pass-through securities		1,395		(62	)		1,395		(62	)		—		—
Obligations of U.S. states and political subdivisions		66,034		(3,688	)		57,072		(2,957	)		8,962		(731	)
Corporate bonds and notes		27,210		(622	)		27,210		(622	)		—		—
Total		137,350		(5,844	)		128,093		(5,112	)		9,257		(732	)
Total Temporarily Impaired Securities	$	233,113	$	(8,881	)	$	219,344	$	(7,712	)	$	13,769	$	(1,169	)

	December 31, 2014
	Total					Less than 12 Months					12 Months or Longer
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
Investment securities available-for-sale:
Federal agency obligation	$	6,755	$	(50	)	$	2,770	$	(9	)	$	3,985	$	(41	)
Residential mortgage pass-through securities		5,694		(11	)		5,694		(11	)		—		—
Trust preferred securities		1,307		(269	)		—		—			1,307		(269	)
Corporate bonds and notes		1,961		(11	)		1,961		(11	)		—		—
Asset-backed securities		9,773		(31	)		9,773		(31	)		—		—
Certificates of deposit		369		(2	)		369		(2	)		—		—
Equity securities		307		(69	)		—		—			307		(69	)
Other securities		5,417		(82	)		1,978		(21	)		3,439		(61	)
Total	$	31,583	$	(525	)	$	22,545	$	(85	)	$	9,038	$	(440	)

Investment securities held-to-maturity:
Federal agency obligation	$	3,228	$	(28	)	$	3,228	$	(28	)	$	—	$	—
Obligations of U.S. states and political subdivisions		8,341		(60	)		1,401		(3	)		6,940		(57	)
Corporate bonds and notes		993		(7	)		993		(7	)		—		—
Total	$	12,562	$	(95	)	$	5,622	$	(38	)	$	6,940	$	(57	)
Total temporarily impaired securities	$	44,145	$	(620	)	$	28,167	$	(123	)	$	15,978	$	(497	)

(dollars in thousands)	March 31, 2015			March 31, 2014			December 31, 2014
Notional amount	$	50,000		$	—		$	50,000
Weighted average pay rates		1.58	%		—	%		1.58	%
Weighted average receive rates		0.25	%		—	%		0.24	%
Weighted average maturity		4.2 years			—			4.4 years
Fair value	$	(486	)	$	—		$	48

(in thousands)		Amount of gain (loss) recognized in OCI (Effective Portion)				Amount of gain (loss) reclassified from OCI to interest income				Amount of gain (loss) recognized in other Non-interest income (Ineffective Portion)
Interest rate contracts		$	(534	)		$	—			$	—

	September 30,			December 31,
	2014			2013		March 31, 2015			December 31, 2014
	(in thousands)					(in thousands)
Commercial	$	470,510		$	229,688	$	562,931		$	499,816
Commercial real estate		1,570,854			536,539		1,668,310			1,634,510
Construction		141,844			42,722
Commercial construction							181,056			167,359
Residential real estate		241,387			150,571		226,645			234,967
Consumer		2,640			1,084		3,581			2,879
Subtotal		2,427,235			960,604
Net deferred loan (fees) costs		(470	)		339
Loans receivable	$	2,426,765		$	960,943
Gross loans							2,642,523			2,539,531
Net deferred loan fees							(1,784	)		(890	)
Total loans receivable						$	2,640,739		$	2,538,641

	September 30,
	2014
Balance at July 1	$	5,013
New loans purchased		—
Accretion of income		(76	)
Reclassifications from non-accretable difference		—
Disposals		—
Balance at September 30	$	4,937

	March 31,
	2015
Balance at January 1, 2015	$	4,805
New loans purchased		—
Accretion of income		(54	)
Reclassifications from non-accretable difference		—
Disposals		—
Balance at March 31, 2015	$	4,751

Loans Receivable on Non-Accrual Status

	September 30, 2014		December 31, 2013
	(in thousands)
Commercial	$	634	$	753
Commercial real estate		3,765		744
Residential real estate		1,684		1,640
Total loans receivable on non-accrual status	$	6,083	$	3,137

	March 31, 2015
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Commercial	$	528,431	$	23,975	$	10,249	$	276	$	562,931
Commercial real estate		1,621,181		24,509		22,620		—		1,668,310
Commercial construction		179,577		1,479		—		—		181,056
Residential real estate		223,148		—		3,497		—		226,645
Consumer		3,484		—		97		—		3,581

Total loans	$	2,555,821	$	49,963	$	36,463	$	276	$	2,642,523

	September 30, 2014
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Commercial	$	449,688	$	15,447	$	5,073	$	302	$	470,510
Commercial real estate		1,533,499		17,521		19,834		—		1,570,854
Construction		140,365		—		1,479		—		141,844
Residential real estate		238,516		—		2,871		—		241,387
Consumer		2,534		—		106		—		2,640

Total loans	$	2,364,602	$	32,968	$	29,363	$	302	$	2,427,235

	September 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(in thousands)
No Related Allowance Recorded
Commercial	$	890	$	663	$	—
Commercial real estate		5,005		5,654		—
Residential real estate		1,957		2,288		—
Consumer		106		106		—
Total	$	7,958	$	8,711		—

With An Allowance Recorded
Commercial real estate	$	3,600	$	3,600	$	323
Total	$	3,600	$	3,600	$	323
Total
Commercial	$	890	$	663	$	—
Commercial real estate		8,605		9,254		—
Residential real estate		1,957		2,288		—
Consumer		106		106		—
Total	$	11,558	$	12,311	$	323

	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended March 31,
	2014				2013				2014				2013				2015				2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with no related allowance recorded:
Impaired loans with no related allowance recorded

Commercial	$	897	$	—	$	—	$	—	$	778	$	30	$	—	$	—	$	290	$	—	$	—	$	—
Commercial real estate		5,046		31		1,275		19		5,313		74		1,275		57		6,052		19		1,275		57
Residential real estate		1,975		0		—		—		2,044		31		—		—		3,613		2		—		—
Consumer		106		2		—		—		106		5		—		—		106		1		—		—

Total	$	8,024		32	$	1,275	$	19	$	8,241	$	140	$	1,275	$	57	$	10,061	$	22	$	1,275	$	57

Impaired loans with an allowance recorded:
Impaired loans with an allowance recorded

Commercial																	$	387	$	—	$	—	$	—
Commercial real estate																		6,335		—		2,302		68
Residential real estate																		—		—		1,226		31

Total																	$	6,722	$		$	3,528	$	99

Total impaired loans

Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	677	$	—	$	—	$	—
Commercial real estate		3,600		37		175		—		3,600		122		2,302		68		12,387		19		3,477		125
Residential real estate		—		—		1,226		10		—		—		1,226		31		3,613		2		1,226		31
Consumer		—		—		—				—		—		—		—		106		1		—		—

Total	$	3,600	$	37	$	1,401	$	10	$	3,600	$	122	$	3,428	$	99	$	16,783	$	22	$	4,703	$	156

Total impaired loans:

Commercial	$	897	$	—	$	—	$	—	$	778	$	30	$	—	$	—
Commercial real estate		8,646		68		1,450		19		8,913		196		3,477		125
Residential real estate		1,975		0		1,226		10		2,044		31		1,226		31
Consumer		106		2		—		—		106		5		—		—

Total	$	11,624	$	69	$	2,676	$	29		11,841	$	262	$	4,703	$	156

	March 31, 2015
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loans Receivable		Loans Receivable 90 Days or Greater Past Due and Accruing
	(in thousands)
Commercial	$	5,562	$	554	$	3,899	$	10,015	$	552,916	$	562,931	$	638
Commercial real estate		2,567		5,092		4,180		11,839		1,656,471		1,668,310		—
Commercial construction		375		—		—		375		180,681		181,056		—
Residential real estate		1,925		—		2,937		4,862		221,783		226,645		—
Consumer		2		1		—		3		3,578		3,581
Total	$	10,431	$	5,647	$	11,016	$	27,094	$	2,615,429	$	2,642,523	$	638

	December 31, 2014
	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Unallocated		Total
	(in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment	$	111	$	151	$	—	$	—	$	—	$	—	$	262
Collectively evaluated for impairment		2,972		7,648		1,239		1,113		7		919		13,898
Acquired with deteriorated credit quality		—		—		—		—		—		—		—
Total	$	3,083	$	7,799	$	1,239	$	1,113	$	7	$	919	$	14,160

Loans receivable
Individually evaluated for impairment	$	452	$	6,284	$	—	$	2,180	$	101	$	—	$	9,017
Collectively evaluated for impairment		492,165		1,626,410		167,359		231,981		2,778		—		2,520,693
Acquired with deteriorated credit quality		7,199		1,816		—		806		—		—		9,821
Total	$	499,816	$	1,634,510	$	167,359	$	234,967	$	2,879	$	—	$	2,539,531

	Three Months Ended September 30, 2014
	Commercial		Commercial real estate		Construction		Residential real estate		Consumer			Unallocated			Total
	(in thousands)
Balance at July 1,	$	2,142	$	5,741	$	504	$	1,011	$	63		$	1,364		$	10,825

Charge offs		—		—		—		—		(18	)		—			(18	)

Recoveries		—		—		—		—		11			—			11

Provision		336		1,281		20		41		(51	)		(327	)		1,300

Balance at September 30,	$	2,478	$	7,022	$	524	$	1,052	$	5		$	1,037		$	12,118