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

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

Item 1. Financial Statements

~~ConnectOne Bancorp, inc. and Subsidiaries~~

CONNECTONEBANCORP, INC. ANDSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION

(in thousands, except for share data) September 30,
2015 December 31,
2014
(unaudited)
ASSETS
Cash and due from banks $ 30,100 $ 31,813
Interest-bearing deposits with banks 128,421 95,034
Cash and cash equivalents 158,521 126,847

Investment securities:
Available-for-sale 224,214 289,532
Held-to-maturity (fair value of $234,493 and $231,445) 227,221 224,682

Loans held for sale 990 —
Loans receivable 2,953,381 2,538,641
Less: Allowance for loan and lease losses 21,533 14,160
Net loans receivable 2,931,848 2,524,481

Investment in restricted stock, at cost 30,362 23,535
Bank premises and equipment, net 21,523 20,653
Accrued interest receivable 11,662 11,700
Bank-owned life insurance 53,681 52,518
Other real estate owned 3,244 1,108
Goodwill 145,909 145,909
Core deposit intangibles 4,125 4,825
Other assets 24,953 22,782
Total assets $ 3,838,253 $ 3,448,572
LIABILITIES
Deposits:
Noninterest-bearing $ 586,643 $ 492,515
Interest-bearing 2,079,981 1,983,092
Total deposits 2,666,624 2,475,607
Borrowings 621,674 495,553
Subordinated debentures 55,155 5,155
Other liabilities 23,654 26,038
Total liabilities 3,367,107 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 September 30, 2015 and December 31, 2014; total liquidation value of $11,250 at September 30, 2015 and December 31, 2014 11,250 11,250
Common stock, no par value, authorized 50,000,000 shares; issued 32,261,541 shares at September 30, 2015 and 31,758,558 at December 31, 2014; outstanding 30,197,619 shares at September 30, 2015 and 29,694,636 at December 31, 2014 374,287 374,287
Additional paid-in capital 8,315 6,015
Retained earnings 97,321 72,398
Treasury stock, at cost (2,063,922 common shares at September 30, 2015 and December 31, 2014) (16,717 ) (16,717 )
Accumulated other comprehensive loss (3,310 ) (1,014 )
Total stockholders’ equity 471,146 446,219
Total liabilities and stockholders’ equity $ 3,838,253 $ 3,448,572

	March 31,		December 31,
(in thousands, except for share data)	2016		2015
	(unaudited)
ASSETS
Cash and due from banks	$	34,603	$	31,291
Interest-bearing deposits with banks		83,656		169,604
Cash and cash equivalents		118,259		200,895

Investment securities:
Available-for-sale		191,331		195,770
Held-to-maturity (fair value of $229,470 and $230,558)		219,373		224,056

Loans receivable		3,263,813		3,099,007
Less: Allowance for loan and lease losses		29,074		26,572
Net loans receivable		3,234,739		3,072,435

Investment in restricted stock, at cost		31,487		32,612
Bank premises and equipment, net		22,652		22,333
Accrued interest receivable		12,604		12,545
Bank-owned life insurance		79,412		78,801
Other real estate owned		1,696		2,549
Goodwill		145,909		145,909
Core deposit intangibles		3,691		3,908
Other assets		29,847		24,096
Total assets	$	4,091,000	$	4,015,909
LIABILITIES
Deposits:
Noninterest-bearing	$	614,507	$	650,775
Interest-bearing		2,278,564		2,140,191
Total deposits		2,893,071		2,790,966
Borrowings		646,501		671,587
Subordinated debentures (net of $763 and $812 in debt issuance costs)		54,392		54,343
Other liabilities		22,309		21,669
Total liabilities		3,616,273		3,538,565

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 December 31, 2015; total liquidation value of $11,250 at
December 31, 2015		-		11,250

Common stock, no par value, authorized 50,000,000 shares; issued 32,227,000 shares at March 31, 2016
and 32,149,585 at December 31, 2015; outstanding 30,163,078 shares at March 31, 2016 and 30,085,663
at December 31, 2015		374,287		374,287
Additional paid-in capital		9,324		8,527
Retained earnings		112,663		104,606
Treasury stock, at cost (2,063,922 common shares at March 31, 2016 and December 31, 2015)		(16,717)		(16,717)
Accumulated other comprehensive loss		(4,830)		(4,609)
Total stockholders’ equity		474,727		477,344
Total liabilities and stockholders’ equity	$	4,091,000	$	4,015,909

See accompanying notes to unaudited consolidated financial statements.

~~ConnectOne Bancorp, inc. and Subsidiaries~~

CONNECTONEBANCORP, INC. ANDSUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands, except for share and per share data) 2015 2014 2015 2014

Interest income
Interest and fees on loans $ 32,276 $ 28,098 91,807 $ 48,670
Interest and dividends on investment securities:
Taxable 2,669 2,916 8,340 8,840
Tax-exempt 901 892 2,666 2,840
Dividends 297 349 797 639
Interest on federal funds sold and other short-term investments 43 88 127 88
Total interest income 36,186 32,343 103,737 61,077
Interest expense
Deposits 3,655 2,725 9,980 5,343
Borrowings 2,804 2,072 7,060 4,914
Total interest expense 6,459 4,797 17,040 10,257
Net interest income 29,727 27,546 86,697 50,820
Provision for loan and lease losses 4,175 1,300 7,550 2,209
Net interest income after provision for loan and lease losses 25,552 26,246 79,147 48,611
Noninterest income
Annuities and insurance commissions 77 94 210 299
Bank-owned life insurance 388 401 1,162 912
Net gains on sale of loans held for sale 63 65 276 144
Deposit, loan and other income 1,224 502 2,145 1,967
Insurance recovery — — 2,224 —
Net gains on sales of investment securities 2,067 111 2,793 2,100
Total noninterest income 3,819 1,173 8,810 5,422
Noninterest expenses
Salaries and employee benefits 6,905 6,243 20,480 13,153
Occupancy and equipment 1,916 1,781 5,785 3,658
FDIC insurance 535 504 1,535 1,092
Professional and consulting 836 530 2,045 1,289
Marketing and advertising 247 209 634 276
Data processing 957 902 2,686 1,761
Merger-related expenses — 8,784 — 10,573
Loss on extinguishment of debt — 4,550 2,397 4,550
Amortization of core deposit intangible 217 248 700 260
Other expenses 1,688 1,649 4,643 3,028
Total noninterest expenses 13,301 25,400 40,905 39,640
Income before income tax expense 16,070 2,019 47,052 14,393
Income tax expense 5,228 253 15,309 3,851
Net income 10,842 1,766 31,743 10,542
Less: Preferred stock dividends 28 28 84 84
Net income available to common stockholders $ 10,814 $ 1,738 31,659 $ 10,458

Earnings per common share:
Basic $ 0.36 $ 0.06 1.06 $ 0.50
Diluted $ 0.36 $ 0.06 1.04 $ 0.49
Weighted average common shares outstanding:
Basic 30,045,818 29,636,001 29,786,374 20,819,241
Diluted 30,335,571 30,108,103 30,323,376 21,285,452
Dividend per common share $ 0.075 $ 0.075 0.225 $ 0.225

	Three Months Ended
	March 31,
(dollars in thousands, except for per share data)	2016		2015
Interest income
Interest and fees on loans	$	35,017	$	29,314
Interest and dividends on investment securities:
Taxable		2,140		2,910
Tax-exempt		883		883
Dividends		352		220
Interest on federal funds sold and other short-term investments		134		43
Total interest income		38,526		33,370
Interest expense
Deposits		3,939		3,025
Borrowings		3,267		2,053
Total interest expense		7,206		5,078
Net interest income		31,320		28,292
Provision for loan and lease losses		3,000		1,825
Net interest income after provision for loan and lease losses		28,320		26,467
Noninterest income
Annuities and insurance commissions		40		86
Bank-owned life insurance		612		386
Net gains on sale of loans held for sale		35		114
Deposit, loan and other income		515		463
Net gains on sale of investment securities		-		506
Total other income		1,202		1,555
Noninterest expense
Salaries and employee benefits		7,599		6,628
Occupancy and equipment		2,247		2,082
FDIC insurance		595		560
Professional and consulting		711		494
Marketing and advertising		184		194
Data processing		1,024		900
Amortization of core deposit intangible		217		241
Other expenses		1,776		1,532
Total other expense		14,353		12,631
Income before income tax expense		15,169		15,391
Income tax expense		4,778		5,012
Net Income		10,391		10,379
Less: Preferred stock dividends		22		28
Net income available to common stockholders	$	10,369	$	10,351
Earnings per common share
Basic	$	0.35	$	0.35
Diluted	$	0.34	$	0.34
Weighted average common shares outstanding
Basic		29,995,870		29,757,316
Diluted		30,257,676		30,149,469
Dividends per common share	$	0.075	$	0.075

See accompanying notes to unaudited consolidated financial statements.

~~ConnectOne Bancorp, inc. and Subsidiaries~~

CONNECTONEBANCORP, INC. ANDSUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2015 2014 2015 2014
Net income $ 10,842 $ 1,766 $ 31,743 $ 10,542
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 108 (1,171 ) (1,196 ) 5,656
Tax effect (39 ) 584 485 (1,882 )
Net of tax amount 69 (587 ) (711 ) 3,774
Reclassification adjustment for realized gains arising during this period (2,067 ) (111 ) (2,793 ) (2,100 )
Tax effect 794 42 1,091 601
Net of tax amount (1,273 ) (69 ) (1,702 ) (1,499 )
Amortization of unrealized holding losses on securities transferred from available-for-sale to held-to-maturity 37 57 165 156
Tax effect (15 ) (24 ) (67 ) (67 )
Net of tax amount 22 33 98 89
Unrealized losses on cash flow hedges (855 ) — (1,153 ) —
Tax effect 349 — 471 —
Net of tax amount (506 ) — (682 ) —
Pension plan:
Actuarial gains 183 — 1,186 1,281
Tax effect (75 ) — (485 ) (523 )
Net of tax amount 108 — 701 758
Total other comprehensive (loss) income (1,580 ) (623 ) (2,296 ) 3,122
Total comprehensive income $ 9,262 $ 1,143 $ 29,447 $ 13,664

	Three Months Ended
	March 31,
(in thousands)	2016		2015
Net income	$	10,391	$	10,379
Other comprehensive income (loss):
Unrealized gains and losses on securities:
Unrealized holding gains on available-for-sale securities arising
during the period		895		1,509
Tax effect		(357)		(595)
Net of tax		538		914
Reclassification adjustment for realized gains included in net
income		-		(506)
Tax effect		-		207
Net of tax		-		(299)
Amortization of unrealized net losses on held-to-maturity
securities transferred from available-for-sale securities		51		65
Tax effect		(20)		(25)
Net of tax		31		40
Unrealized losses on cash flow hedge		(1,437)		(534)
Tax effect		587		218
Net of tax		(850)		(316)
Unrealized pension plan gains and losses:
Unrealized pension plan (losses) gains before reclassifications		(1)		634
Tax effect		-		(259)
Net of tax		(1)		375
Reclassification adjustment for realized losses included in net
income		102		108
Tax effect		(41)		(44)
Net of tax		61		64
Total other comprehensive (loss) income		(221)		778
Total comprehensive income	$	10,170	$	11,157

See accompanying notes to unaudited consolidated financial statements.

~~ConnectOne Bancorp, inc. and Subsidiaries~~

CONNECTONEBANCORP, INC. ANDSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

(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
Balanceas ofJanuary 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 — — 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 — — — 31,743 — — 31,743
Other comprehensive loss, net of tax — — — — — (2,296 ) (2,296 )
Dividend on series B preferred stock — — — (84 ) — — (84 )
Cash dividends declared on common stock ($0.225 per share) — — — (6,736 ) — — (6,736 )
Exercise of stock options (340,492 shares) — — 1,424 — — — 1,424
Restricted stock and performance units grants (162,491 shares) — — — — — — —
Stock-based compensation expense — — 876 — — — 876
Balance as of September 30, 2015 $ 11,250 $ 374,287 $ 8,315 $ 97,321 $ (16,717 ) $ (3,310 ) $ 471,146

											Accumulated
					Additional						Other		Total
	Preferred		Common		Paid In		Retained		Treasury		Comprehensive		Stockholders’
(dollars in thousands, except for per share data)	Stock		Stock		Capital		Earnings		Stock		Loss		Equity
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 stock options (110,500 shares)		-		-		590		-		-		-		590
Restricted stock grants (59,466 shares)		-		-		-		-		-		-		-
Stock-based compensation		-		-		479		-		-		-		479
Balance as of March 31, 2015	$	11,250	$	374,287	$	7,084	$	80,526	$	(16,717)	$	(236)	$	456,194
Balance as of December 31, 2015	$	11,250	$	374,287	$	8,527	$	104,606	$	(16,717)	$	(4,609)	$	477,344
Net income		-		-		-		10,391		-		-		10,391
Other comprehensive loss, net of tax		-		-		-		-		-		(221)		(221)
Dividend on series B preferred stock		-		-		-		(22)		-		-		(22)
Cash dividends declared on common stock
($0.075 per share)		-		-		-		(2,312)		-		-		(2,312)
Redemption of preferred stock		(11,250)		-		-		-		-		-		(11,250)
Exercise of stock options (5,495 shares)		-		-		42		-		-		-		42
Restricted stock grants (71,920 shares)		-		-		-		-		-		-		-
Stock-based compensation		-		-		755		-		-		-		755
Balance as of March 31, 2016	$	-	$	374,287	$	9,324	$	112,663	$	(16,717)	$	(4,830)	$	474,727

See accompanying notes to unaudited consolidated financial statements.

~~ConnectOne Bancorp, inc. and Subsidiaries~~

CONNECTONEBANCORP, INC. ANDSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands) Nine months Ended
September 30,
2015 2014
Cash flows from operating activities:
Net income $ 31,743 $ 10,542
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and accretion of discounts on investment securities, net 1,442 1,966
Depreciation and amortization 2,420 1,717
Provision for loan losses 7,550 2,209
Stock-based compensation 876 51
Gains on sales of investment securities, net (2,793 ) (2,100 )
Net loss on sale of other real estate owned 112 23
Loans originated for resale (18,004 ) (7,316 )
Proceeds from sale of loans held for sale 17,290 6,730
Gains on sale of loans held for sale (276 ) (144 )
Decrease in accrued interest receivable 38 296
Increase in cash surrender value of bank-owned life insurance (1,163 ) (912 )
(Increase) decrease in other assets (3,324 ) 1,128
Increase (decrease) in other liabilities 294 (3,791 )
Net cash provided by operating activities 36,205 10,399
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases (34,796 ) (31,550 )
Sales 44,397 66,738
Maturities, calls and principal repayments 53,542 20,951
Investment securities held-to-maturity:
Purchases (17,531 ) (8,310 )
Maturities and principal repayments 14,702 6,235
Net (purchases) redemptions of restricted investment in bank stocks (6,827 ) 4,710
Net increase in loans (417,291 ) (167,314 )
Purchases of premises and equipment (2,590 ) (2,199 )
Cash acquired in acquisition of Legacy ConnectOne — 70,318
Proceeds from sale of other real estate owned 126 1,562
Net cash (used in) provided by investing activities (366,268 ) (38,859 )
Cash flows from financing activities:
Net increase in deposits 191,017 75,821
Increase in subordinated debt 50,000 —
Advances of FHLB borrowings 625,000 11,590
Repayments of FHLB borrowings (482,879 ) —
Net decrease in repurchase agreements (16,000 ) —
Cash dividends on preferred stock (84 ) (84 )
Cash dividends paid on common stock (6,741 ) (4,681 )
Issuance cost of common stock — (7 )
Tax benefit of options exercised — 357
Proceeds from exercise of stock options 1,424 785
Net cash provided (used in) by financing activities 361,737 83,781
Net change in cash and cash equivalents 31,674 55,321
Cash and cash equivalents at beginning of period 126,847 82,692

Cash and cash equivalents at end of period $ 158,521 $ 138,013
Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowings $ 15,940 $ 10,222
Income taxes 17,045 4,653
Supplemental disclosures of non-cash investing activities:
Transfer of loans to other real estate owned 2,374 —
Dividends declared, not paid (5 ) 1,063

	Three Months Ended
	March 31,
(in thousands)	2016		2015
Cash flows from operating activities
Net income	$	10,391	$	10,379
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		653		799
Provision for loan and lease losses		3,000		1,825
Amortization of intangibles		217		241
Net accretion of loans		(1,174)		(1,442)
Accretion on bank premises		(31)		(26)
Accretion on deposits		(75)		(191)
Accretion on borrowings		(86)		(143)
Stock-based compensation		755		479
Gains on sales of investment securities, net		-		(506)
Gains on sale of loans held for sale, net		(35)		(114)
Loans originated for resale		(1,916)		(8,468)
Proceeds from sale of loans held for sale		1,951		7,190
Net loss on sale of other real estate owned		115		112
Increase in cash surrender value of bank-owned life insurance		(612)		(386)
Amortization of premiums and accretion of discounts on investments securities, net		417		518
(Increase) decrease in accrued interest receivable		(58)		187
Increase in other assets		(7,137)		(49)
Increase (decrease) in other liabilities		960		(2,388)
Net cash provided by operating activities		7,335		8,017

Cash flows from investing activities
Investment securities available-for-sale:
Purchases		(19,135)		(1,543)
Sales		-		9,537
Maturities, calls and principal repayments		24,295		6,673
Investment securities held-to-maturity:
Purchases		(1,000)		(9,986)
Maturities and principal repayments		5,439		2,749
Net redemptions (purchases) of restricted investment in bank stocks		1,125		(1,339)
Net increase in loans		(164,130)		(100,708)
Purchases of premises and equipment		(941)		(478)
Proceeds from sale of other real estate owned		738		126
Net cash used in investing activities		(153,609)		(94,969)

Cash flows from financing activities
Net increase in deposits		102,180		20,595
Advances of FHLB borrowings		50,000		90,101
Repayments of FHLB borrowings		(75,000)		(60,363)
Cash dividends paid on common stock		(2,312)		(2,247)
Cash dividends paid on preferred stock		(22)		(28)
Redemption of preferred stock		(11,250)		-
Proceeds from exercise of stock options		42		590
Net cash provided by financing activities		63,638		48,648
Net change in cash and cash equivalents		(82,636)		(38,304)
Cash and cash equivalents at beginning of period		200,895		126,847
Cash and cash equivalents at end of period	$	118,259	$	88,543

Supplemental disclosures of cash flow information
Cash payments for:
Interest paid on deposits and borrowings	$	6,492	$	4,724
Income taxes	$	10,235	$	5,500

See accompanying notes to unaudited consolidated financial statements.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
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 “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-one~~twenty 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 client. However, the clients’ ability to repay their loans is dependent on the cash flows, real estate and general economic conditions in the area.

The ~~following~~preceding 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 months ended ~~September 30, 2015~~March 31, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, ~~2015,~~2016, or for any other interim period. The Company’s ~~2014~~2015 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.

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 to current presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.

Note 2. New Authoritative Accounting Guidance

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 ("ASU 2014-12"). ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that 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(s) for which the requisite service has already been rendered.The Company adopted ASU 2014-12 effective on January 1, 2016and is not expected to have a significant impact on the Company's consolidated financial statements.

ASU No. 2015-03, ~~“Interest—Imputation~~"Interest-Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance ~~Costs”~~Costs" requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in the ASU No. 2015-03.The Company adopted ASU ~~No.~~ 2015-03 ~~will be~~ effective ~~for reporting periods (including interim periods) beginning after December 15, 2015. ASU No. 2015-03 became effective for the Company~~ on January 1, ~~2015~~ 2016and ~~did~~is not expected to have a significant impact on ~~its~~the Company's consolidated financial statements.

~~Note 3. Business Combinations~~

~~On January 20, 2014,~~ASU No. 2015-12, "Plan Accounting: Defined Benefit Pension Plans (Topic 960): Defined Contribution Pension Plans, (Topic 962): Health and Welfare Benefit Plans, (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient." ASU No. 2015-12 simplifies accounting for employee benefit plans as follows: (i) fully benefit-responsive investment contracts are now to be measured, presented and disclosed at contract value, (ii) the ~~Parent Corporation entered into~~requirement to disclose investments that represent 5 percent or more of net assets available for benefits has been eliminated, (iii) the net appreciation or depreciation in investments for the period should be presented in the aggregate, but is no longer required to be disaggregated and disclosed by general type, (iv) if an ~~Agreement and Plan of Merger (the “Merger Agreement”) with ConnectOne Bancorp, Inc., a New Jersey Company (“Legacy ConnectOne”). Effective July 1, 2014 (the “Effective Time”),~~investment is measured using 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 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~~net asset value per share ~~(the “Legacy ConnectOne Common Stock”), received 2.6 shares~~(or its equivalent) practical expedient in Topic 820, and that investment is in a fund that files a U.S. Department of ~~common stock~~Labor Form 5500, Annual Return/Report of Employee Benefit Plan, as a direct filing entity, disclosure of that investment’s strategy is no longer required, and (v) allows employers to measure (as a practical expedient) benefit plan assets on a month-end date nearest to the employer’s fiscal year end when the fiscal period does not coincide with a month end. ASU No. 2015-12 is effective for the Companyon January 1, 2016 and is not expected to have a significant impact on the Company’s consolidated financial statements.

ASU No. 2016-02, “Leases (Topic 842)” requires the recognition of a right of use asset and related lease liability by lessees for leases classified as operating leases under current GAAP. Topic 842, which replaces the current guidance under Topic 840, retains a distinction between finance leases and operating leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee also will not significantly change from current GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities. Topic 842 will be effective for the Company for reporting periods beginning January 1, 2019, with an early adoption permitted. The Company must apply a modified retrospective transition approach for the applicable leases existing at, or entered into after, the beginning of the ~~Parent Corporation, no par value per share (the “Company Common Stock”),~~earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for ~~each share~~leases that expired before the earliest comparative period presented. Management is currently evaluating the impact 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 StockTopic 842 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.Company’s consolidated financial statements.

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.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~(unaudited)~~

~~Note 3. 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 Company’s financial statements at fair value at the Merger date (in thousands):

~~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:~~

~~Represents the fair value adjustment on investment securities held to maturity.~~

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.

Represent an adjustment to reflect the fair value of above-market rent on leased premises. The above-market rent adjustment will be amortized on a straight-line basis over the remaining term of the respective leases.

Represents intangible assets recorded to reflect the fair value of core 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.

~~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.~~

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.

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, greater access to best-in-class banking technology, and related synergies that are expected to result from the acquisition.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 3. 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 loans were derived from the eventual sale of the collateral. These values were discounted using market derived 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 $12.4 million for the full year 2014. These items were recorded as merger-related expenses on the statement of operations.

Note 4.3. Earnings per Common Share

Basic earnings per common share 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 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,
(in thousands, except per share amounts) 2015 2014 2015 2014
Net income $ 10,842 $ 1,766 $ 31,743 $ 10,542
Less: preferred stock dividends (28 ) (28 ) (84 ) (84 )
Net income available to common stockholders $ 10,814 $ 1,738 31,659 10,458
Basic weighted average common shares outstanding 30,046 29,636 29,786 20,819
Plus: effect of dilutive options and awards 290 472 537 466
Diluted weighted average common shares outstanding 30,336 30,108 30,323 21,285
Earnings per common share:
Basic $ 0.36 $ 0.06 $ 1.06 $ 0.50
Diluted 0.36 0.06 1.04 0.49

	Three Months Ended
	March 31,
(in thousands, except for per share data)	2016		2015
Net income	$	10,391	$	10,379
Preferred stock dividends		(22)		(28)
Net income available to common stockholders	$	10,369	$	10,351
Basic weighted average common shares outstanding		29,996		29,757
Effect of dilutive options		262		392
Diluted weighted average common shares outstanding		30,258		30,149
Earnings per common share:
Basic	$	0.35	$	0.35
Diluted	$	0.34	$	0.34

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

Note 5.4. Investment Securities

The Company’s investment securities are classified as available-for-sale and held-to-maturity at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014.~~2015. 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 as of ~~September 30, 2015.~~March 31, 2016. 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 87 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.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 4. Investment Securities

The following tables present information related to the Company’s investment securities at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014.~~2015 (dollars in thousands):

Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
September 30, 2015
(in thousands)
Investment securities available-for-sale
Federal agency obligations $ 30,474 $ 438 $ (7 ) $ 30,905
Residential mortgage pass-through securities 46,943 1,162 (14 ) 48,091
Commercial mortgage pass-through securities 2,996 59 — 3,055
Obligations of U.S. states and political subdivisions 8,191 191 — 8,382
Trust preferred securities 16,087 385 (150 ) 16,322
Corporate bonds and notes 76,049 2,418 (81 ) 78,386
Asset-backed securities 21,403 2 (275 ) 21,130
Certificates of deposit 1,896 27 (3 ) 1,920
Equity securities 376 — (38 ) 338
Other securities 15,715 67 (97 ) 15,685
Total $ 220,130 $ 4,749 $ (665 ) $ 224,214
Investment securities held-to-maturity
U.S. Treasury and agency securities $ 28,419 $ 1,328 $ — $ 29,747
Federal agency obligations 35,519 642 (47 ) 36,114
Residential mortgage-backed securities 4,240 19 (1 ) 4,258
Commercial mortgage-backed securities 4,150 97 — 4,247
Obligations of U.S. states and political subdivisions 118,877 4,470 (46 ) 123,301
Corporate bonds and notes 36,016 888 (78 ) 36,826
Total $ 227,221 $ 7,444 $ (172 ) $ 234,493

Total investment securities $ 447,351 $ 12,193 $ (837 ) $ 458,707

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2016	Cost		Gains		Losses		Value
Investment securities available-for-sale
Federal agency obligations	$	31,370	$	486	$	(29)	$	31,827
Residential mortgage pass-through securities		47,404		1,162		(21)		48,545
Commercial mortgage pass-through securities		2,965		88		-		3,053
Obligations of U.S. states and political subdivisions		9,642		164		-		9,806
Trust preferred securities		16,089		440		(350)		16,179
Corporate bonds and notes		40,771		873		(256)		41,388
Asset-backed securities		18,682		-		(528)		18,154
Certificates of deposit		1,496		20		-		1,516
Equity securities		376		29		(28)		377
Other securities		20,490		84		(88)		20,486
Total securities available-for-sale	$	189,285	$	3,346	$	(1,300)	$	191,331

			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value
Investment securities held-to-maturity
U.S. Treasury and agency securities	$	28,523	$	1,890	$	-	$	30,413
Federal agency obligations		31,567		700		(8)		33,259
Residential mortgage-backed securities		3,489		28		(15)		3,502
Commercial mortgage-backed securities		1,317		30		-		1,347
Obligations of U.S. states and political divisions		117,416		6,208		-		123,624
Corporate bonds and notes		37,061		1,396		(132)		38,325
Total securities held-to-maturity	$	219,373	$	10,252	$	(155)	$	229,470

Total investment securities	$	408,658	$	13,598	$	(1,455)	$	420,801

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~(unaudited)~~

Note 5.4. 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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2015	Cost		Gains		Losses		Value
Investment securities available-for-sale
Federal agency obligations	$	29,062	$	142	$	(58)	$	29,146
Residential mortgage pass-through securities		44,155		803		(48)		44,910
Commercial mortgage pass-through securities		2,981		-		(9)		2,972
Obligations of U.S. states and political subdivisions		8,188		169		-		8,357
Trust preferred securities		16,088		398		(231)		16,255
Corporate bonds and notes		53,566		702		(292)		53,976
Asset-backed securities		20,005		18		(298)		19,725
Certificates of deposit		1,895		18		(8)		1,905
Equity securities		376		21		(23)		374
Other securities		18,303		-		(153)		18,150
Total securities available-for-sale	$	194,619	$	2,271	$	(1,120)	$	195,770

			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value
Investment securities held-to-maturity
U.S. Treasury and agency securities	$	28,471	$	755	$	-	$	29,226
Federal agency obligations		33,616		280		(119)		33,777
Residential mortgage-backed securities		3,805		11		(6)		3,810
Commercial mortgage-backed securities		4,110		27		(2)		4,135
Obligations of U.S. states and political divisions		118,015		5,001		(3)		123,013
Corporate bonds and notes		36,039		719		(161)		36,597
Total securities held-to-maturity	$	224,056	$	6,793	$	(291)	$	230,558

Total investment securities	$	418,675	$	9,064	$	(1,411)	$	426,328

The following table presents information for investment securities at ~~September 30, 2015,~~March 31, 2016, 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, 2015
Amortized
Cost Fair
Value
(in thousands)
Investment securities available-for-sale:
Due in one year or less $ 16,296 $ 16,443
Due after one year through five years 30,271 31,401
Due after five years through ten years 55,740 56,953
Due after ten years 51,793 52,248
Residential mortgage pass-through securities 46,943 48,091
Commercial mortgage pass-through securities 2,996 3,055
Equity securities 376 338
Other securities 15,715 15,685
Total $ 220,130 $ 224,214
Investment securities held-to-maturity:
Due in one year or less $ — $ —
Due after one year through five years 13,571 13,888
Due after five years through ten years 76,126 78,980
Due after ten years 129,134 133,120
Residential mortgage-backed securities 4,240 4,258
Commercial mortgage-backed securities 4,150 4,247
Total $ 227,221 $ 234,493
Total investment securities $ 447,351 $ 458,707

	March 31, 2016
	Amortized		Fair
	Cost		Value
	(in thousands)
Investment securities available-for-sale:
Due in one year or less	$	10,948	$	10,967
Due after one year through five years		15,800		16,287
Due after five years through ten years		37,582		37,795
Due after ten years		53,720		58,821
Residential mortgage pass-through securities		47,404		48,545
Commercial mortgage pass-through securities		2,965		3,053
Equity securities		376		377
Other securities		20,490		20,486
Total	$	189,285	$	191,331
Investment securities held-to-maturity:
Due in one year or less	$	1,000	$	1,000
Due after one year through five years		14,561		14,907
Due after five years through ten years		85,428		90,182
Due after ten years		113,578		118,532
Residential mortgage pass-through securities		3,489		3,502
Commercial mortgage pass-through securities		1,317		1,347
Total	$	219,373	$	229,470

Total investment securities	$	408,658	$	420,801

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~(unaudited)~~

Note 5.4. 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, 2016 and ~~nine-month periods ended September 30,~~ 2015 ~~and 2014~~ were as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2015 2014 2015 2014
Proceeds $ 32,125 $ 2,303 $ 44,397 $ 66,738
Gross gains on sales of investment securities 2,067 111 2,793 2,122
Gross losses on sales of investment securities — — — (22 )
Net gains on sales of investment securities $ 2,067 $ 111 $ 2,793 $ 2,100
Less: tax provision on net gains 794 42 1,091 601
Total $ 1,273 $ 69 $ 1,702 $ 1,499

	Three Months Ended
	March 31,
(in thousands)	2016		2015
Proceeds	$	-	$	9,537
Gross gains on sales of investment securities		-		506
Gross losses on sales of investment securities		-		-
Net gains on sales of investment securities		-		506
Less: tax provision on net gains		-		207
Total	$	-	$	299

The Company performs regular analysis on the 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 other-than-temporary impairment (“OTTI”) charges, through earnings, if they have the intent to sell, or more likely than not will be required to sell, an impaired debt security before recovery of its amortized cost basis. If the 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 Company does not intend to sell the security and it is more likely than not that the ~~entity~~Company will not be required to sell the security before recovery of its amortized cost basis less any current period loss, and ~~as such, it~~the Company 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 Company maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review. This could 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 September 30, 2015, of which all but one has at least one rating below investment grade (in thousands):

Lowest
Gross Credit
Amortized Fair Unrealized Rating
Issuer Cost Value Gain (Loss) Assigned

Countrywide Capital IV $ 1,771 $ 1,804 $ 33 BB+
Countrywide Capital V 2,747 2,829 82 BB+
Countrywide Capital V 250 257 7 BB+
Nationsbank Cap Trust III 1,576 1,426 (150 ) BB+
Morgan Stanley Cap Trust IV 2,500 2,537 37 BB
Morgan Stanley Cap Trust IV 1,743 1,775 32 BB
Goldman Sachs 1,000 1,149 149 BB
Stifel Financial 4,500 4,545 45 BBB-
Total $ 16,087 $ 16,322 $ 235

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 5. Investment Securities – (continued)~~

Temporarily Impaired Investments

The Company does not believe that the unrealized losses, for all securities, which were comprised of 5746 and 5474 investment securities as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, respectively, represent an other-than-temporary impairment. The gross unrealized losses associated withU.S. Treasury and agency securities, federal agency obligations, mortgage-backed securities, corporate bonds, ~~tax-exempt~~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 Company’s investment in any one issuer or industry. The Company has established policies to reduce exposure through diversification of concentration of the investment portfolio including limits on concentrations to any one issuer. The 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.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 4. Investment Securities – (continued)

The 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 consist primarily of senior unsecured corporate debt securities issued by large financial institutions, insurance companies and other corporate issuers. Single issuer corporate trust preferred 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, 2015.~~

March 31, 2016.

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 5. 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, 2015~~March 31, 2016 and December 31, ~~2014:~~2015:

September 30, 2015
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 $ 3,743 $ (7 ) $ 3,478 $ (5 ) $ 265 $ (2 )
Residential mortgage pass-through securities 2,283 (14 ) 2,162 (13 ) 121 (1 )
Trust preferred securities 1,426 (150 ) — — 1,426 (150 )
Corporate bonds and notes 8,389 (81 ) 6,437 (58 ) 1,952 (23 )
Asset-backed securities 19,628 (275 ) 18,359 (235 ) 1,269 (40 )
Certificates of deposit 220 (3 ) 220 (3 ) — —
Equity securities 338 (38 ) — — 338 (38 )
Other securities 5,597 (97 ) — — 5,597 (97 )
Total $ 41,624 $ (665 ) $ 30,656 $ (314 ) $ 10,968 $ (351 )

Investment securities held-to-maturity:
Federal agency obligation $ 5,443 $ (47 ) $ 4,614 $ (47 ) $ 829 $ —
Residential mortgage pass-through securities 438 (1 ) 391 (1 ) 47 —
Obligations of U.S. states and political subdivisions 7,313 (46 ) 7,313 (46 ) — —
Corporate bonds and notes 2,670 (78 ) 2,670 (78 ) — —
Total $ 15,864 $ (172 ) $ 14,988 $ (172 ) $ 876 $ —

Total temporarily impaired securities $ 57,488 $ (837 ) $ 45,644 $ (486 ) $ 11,844 $ (351 )

	March 31, 2016
	Total				Less than 12 Months				12 Months or Longer
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(in thousands)
Investment securities
available-for-sale:

Federal agency obligation	$	7,070	$	(29)	$	6,836	$	(28)	$	234	$	(1)
Residential mortgage
pass-through securities		7,173		(21)		6,679		(14)		494		(7)
Trust preferred securities		1,227		(350)		-		-		1,227		(350)
Corporate bonds and notes		15,553		(256)		11,727		(118)		3,826		(138)
Asset-backed securities		18,154		(528)		14,825		(417)		3,329		(111)
Equity securities		117		(28)		-		-		117		(28)
Other securities		5,412		(88)		-		-		5,412		(88)
Total	$	54,706	$	(1,300)	$	40,067	$	(577)	$	14,639	$	(723)

Investment securities
held-to-maturity:

Federal agency obligation	$	4,161	$	(8)	$	2,300	$	(6)	$	1,861	$	(2)
Residential mortgage
pass-through securities		1,920		(15)		1,920		(15)		-		-
Corporate bonds and notes		2,632		(131)		2,632		(131)		-		-
Total	$	8,713	$	(154)	$	6,852	$	(152)	$	1,861	$	(2)

Total temporarily impaired
securities	$	63,419	$	(1,454)	$	46,919	$	(729)	$	16,500	$	(725)

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~(unaudited)~~

Note 5.4. 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 )

	December 31, 2015
	Total				Less than 12 Months				12 Months or Longer
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(dollars in thousands)
Investment Securities
Available-for-Sale:
Federal agency obligation	$	12,260	$	(58)	$	12,013	$	(54)	$	247	$	(4)
Residential mortgage
pass-through securities		9,027		(48)		9,027		(48)		—		—
Commercial mortgage-backed
securities		2,971		(9)		2,971		(9)		—		—
Trust preferred securities		1,345		(231)		—		—		1,345		(231)
Corporate bonds and notes		16,533		(292)		12,702		(161)		3,831		(131)
Asset-backed securities		14,745		(298)		11,250		(188)		3,495		(110)
Certificates of deposit		215		(8)		215		(8)		—		—
Equity securities		123		(23)		—		—		123		(23)
Other securities		5,347		(153)		—		—		5,347		(153)
Total	$	62,566	$	(1,120)	$	48,178	$	(468)	$	14,388	$	(652)
Investment Securities
Held-to-Maturity:
Federal agency obligation		12,554		(119)		11,783		(109)		771		(10)
Residential mortgage
pass-through securities		2,480		(6)		2,480		(6)		—		—
Commercial mortgage-backed
securities		1,331		(2)		1,331		(2)		—		—
Obligations of U.S. states
and political subdivisions		981		(3)		981		(3)		—		—
Corporate bonds and notes		5,536		(161)		5,536		(161)		—		—
Total	$	22,882	$	(291)	$	22,111	$	(281)	$	771	$	(10)
Total Temporarily Impaired
Securities	$	85,448	$	(1,411)	$	70,289	$	(749)	$	15,159	$	(662)

Investment securities having a carrying value of approximately ~~$142.8~~$155.3 million and ~~$224.7~~$142.5 million at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, 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.

As of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

Note ~~6 -~~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 other terms of the individual interest rate swap agreements.

Interest rate swaps were entered into on August 24, 2015, October 15, 2014 and December 30, 2014, each with a respective notional amount of $25.0 million and were designated as a cash flow ~~hedge~~hedges of a Federal Home Loan Bank advance. The swaps were determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income while the aggregate fair value of the 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 hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~(unaudited)~~

Note 65 – Derivatives – (continued)

Summary information about the interest rate swaps designated as cash flow hedges as of ~~September 30,~~March 31, 2016, December 31, 2015 and ~~2014 and December~~March 31, ~~2014 is~~2015 are presented in the following table.

(dollars in thousands) September 30,
2015 December 31,
2014 September 30,
2014
Notional amount $ 75,000 $ 50,000 $ —
Weighted average pay rates 1.56 % 1.58 % — %
Weighted average receive rates 0.30 % 0.24 % — %
Weighted average maturity 4.1 years 4.4 years —
Fair value $ (1,105 ) $ 48 $ —

	March 31,		December 31,		March 31,
(dollars in thousands)	2016		2015		2015
Notional amount	$	75,000	$	75,000	$	50,000
Weighted average pay rates		1.57%		1.56%		1.58%
Weighted average receive rates		0.56%		0.44%		0.24%
Weighted average maturity	3.6 years			3.8 years		4.2 years
Fair value	$	(1,568)	$	(131)	$	(486)

Interest expense recorded on these swap transactions totaled approximately ~~$165 thousand and $528~~$191 thousand for the three ~~and nine~~ months ended ~~September 30, 2015, respectively. There were no related expenses during~~March 31, 2016 and $166 thousands for the ~~nine~~three months ended ~~September 30, 2014.~~March 31, 2015.

Cash Flow Hedge

The following table presents the net gains (losses), recorded in other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the ~~nine months ended September 30, 2015:~~following periods:

	Three Months Ended March 31, 2016
					Amount of
					loss
					recognized
					in other
	Amount of loss				Non-
	recognized		Amount of loss		interest
	in OCI		reclassified		income
	(Effective		from OCI to interest		(Ineffective
(in thousands)	Portion)		income		Portion)
Interest rate contracts	$	(1,437)	$	-	$	-

	Three Months Ended March 31, 2015
					Amount of
					loss
					recognized
					in other
	Amount of loss				non-
	recognized		Amount of loss		interest
	in OCI		reclassified		income
	(effective		from OCI to interest		(ineffective
(in thousands)	Portion)		income		portion)
Interest rate contracts	$	(534)	$	-	$	-

2015
(in thousands) Amount of loss
recognized
in OCI (Effective
Portion) Amount of loss
reclassified
from OCI to
interest income Amount of loss
recognized in other
Non-interest income
(Ineffective Portion)
Interest rate contracts $ (1,153 ) $ — $ —

~~There were no net gains (losses) recorded in accumulated other comprehensive income or~~The following table reflects the cash flow hedges included in the ~~Consolidated Statement~~consolidated statements of ~~Income relating to cash flow derivative instruments for the nine months ended September 30, 2014.~~condition as of March 31, 2016 and December 31, 2015:

	2016				2015
	Notional				Notional
(in thousands)	Amount		Fair Value		Amount		Fair Value
Included in other assets/(liabilities):
Interest rate swaps related to FHLB Advances	$	75,000	$	(1,568)	$	75,000	$	(131)

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~(unaudited)~~

Note 7.6. Loans and the Allowance for Loan and Lease Losses

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan and lease losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

Loan segments are defined as a group of loans and leases, which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Company has five segments of loans 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 is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The policy of the Company is to generally grant commercial, residential and consumer loans to residents and businesses within 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.

Allowance for Loan and Lease Losses

The allowance for 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 a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan and lease loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan 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 impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired. As part of the evaluation of impaired loans, the 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.

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 and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~(unaudited)~~

Note 7.6. 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 subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan and lease losses.

The 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 following: concentrations of credit; delinquency & nonaccrual trends; economic & business conditions including evaluation of the national and regional economies and industries with significant loan concentrations; external factors including legal, regulatory or competitive pressures that may impact the loan portfolio; changes in the experience, ability, or size of the 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.

Purchased Credit-Impaired Loans

The Company purchases 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~~credit-impaired loans (“PCI”) are accounted for individually. The Company estimates the amount and timing of expected cash flows for each loan 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~~A PCI loan may be resolved either through a sale of the loan, by working with the customer and obtaining partial or full repayment, by short sale of the collateral, or byforeclosure.A gain or loss on resolution would be recognized based on the difference between the proceeds received and the carrying amount of the loan.

Payments received earlier than expected ~~cash flows continue to be estimated. If the present value~~or in excess of expected cash flows ~~is less than~~from sales or other resolutions may result in the carrying ~~amount,~~value of a ~~loss is recorded. If the present value of~~pool being reduced to zero even though outstanding contractual balances and expected cash flows ~~is greater than~~remain related to loans in the pool. Once the carrying ~~amount, it~~value of a pool is reduced to zero, any future proceeds, which may include cash or real estate acquired in foreclosure, from the remaining loans, representing further realization of accretable yield, are recognized as ~~part~~interest income upon receipt.

PCI loans that met the criteria for nonaccrual may be considered performing, regardless of ~~future~~whether the customer is contractually delinquent, if management can reasonably estimate the timing and amount of the expected cash flows on such loans and if management expects to fully collect the new carrying value of the loans. As such, management may no longer consider the loans to be nonaccrual or nonperforming and may accrue interest ~~income.~~on these loans, including the impact of any accretable discount.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

Composition of Loan Portfolio

The following table sets forth the composition of the Company’s loan portfolio, including net deferred loan fees, at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014:~~2015:

September 30,
2015 December 31, 2014
(in thousands)
Commercial $ 569,605 $ 499,816
Commercial real estate 1,873,714 1,634,510
Commercial construction 283,623 167,359
Residential real estate 225,158 234,967
Consumer 3,569 2,879
Gross loans 2,955,669 2,539,531
Net deferred loan fees (2,288 ) (890 )
Total loans receivable $ 2,953,381 $ 2,538,641

	March 31,		December 31,
	2016		2015
	(in thousands)
Commercial	$	601,708	$	570,116
Commercial real estate		2,028,301		1,966,696
Commercial construction		402,594		328,838
Residential real estate		231,319		233,690
Consumer		1,851		2,454
Gross loans		3,265,773		3,101,794
Net deferred loan fees		(1,960)		(2,787)
Total loans receivable	$	3,263,813	$	3,099,007

At ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015 loan balances of approximately $1.6 billion ~~and $1.0 billion, respectively,~~ were pledged to secure borrowings from the Federal Home Loan Bank of New York.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 7. Loans and the Allowance for Loan and Lease Losses – (continued)~~

Purchased Credit-Impaired Loans

The 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, 2015~~March 31, 2016 and December 31, ~~2014.~~2015.

September 30,
2015 December 31, 2014
(in thousands)
Commercial $ 7,046 $ 7,199
Commercial real estate 1,799 1,816
Residential real estate 323 806
Total carrying amount $ 9,168 $ 9,821

	March 31,		December 31,
	2016		2015
	(in thousands)
Commercial	$	7,059	$	7,078
Commercial real estate		1,745		1,775
Residential real estate		334		328
Total carrying amount	$	9,138	$	9,181

For those purchased loans disclosed above, the Company did not increase the allowance for loan and lease losses for the ~~nine~~three months ended ~~September 30, 2015.~~

March 31, 2016.

The accretable yield, or income expected to be collected, on the purchased loans disclosed above for the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 is as follows (in thousands):

	Three Months		Three Months
	Ended March		Ended March
	31, 2016		31, 2015
Beginning balance	$	3,599	$	4,805
New loans purchased		-		-
Accretion of income		(183)		(54)
Reclassification from nonaccretable differences		-		-
Disposals		-		-
Ending balance	$	3,416	$	4,751

Three Months
Ended
September 30,
2014 Three Months
Ended
September 30,
2015 Nine Months
Ended
September 30,
2015
Beginning balance $ 5,013 $ 4,678 $ 4,805
New loans purchased — — —
Accretion of income (76 ) (53 ) (180 )
Reclassifications from nonaccretable difference — — —
Disposals — — —
Ending balance $ 4,937 $ 4,625 $ 4,625

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

The following table presents information about the recorded investment in loan receivables on nonaccrual status by segment at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014:~~2015:

Loans Receivable on Nonaccrual Status

September 30,
2015 December 31, 2014
(in thousands)
Commercial $ 5,051 $ 616
Commercial real estate 3,467 8,197
Commercial construction 1,479 —
Residential real estate 2,891 2,796
Total loans receivable on nonaccrual status $ 12,888 $ 11,609
~~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.~~

	March 31,		December 31,
	2016		2015
	(in thousands)
Commercial	$	7,239	$	6,586
Commercial real estate		8,841		9,112
Commercial construction		1,636		1,479
Residential real estate		3,734		3,559
Total loans receivable on nonaccrual status	$	21,450	$	20,736

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 7. Loans and the Allowance for Loan and Lease Losses – (continued)~~

The Company continuously monitors the credit quality of its loans receivable. In addition to its internal staff, the 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 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 loan fees, about the Company’s loan credit quality at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014:~~

September 30, 2015
Pass Special Mention Substandard Doubtful Total
(in thousands)
Commercial $ 476,142 $ 80,516 $ 12,696 $ 251 $ 569,605
Commercial real estate 1,827,412 25,189 21,113 — 1,873,714
Commercial construction 282,144 — 1,479 — 283,623
Residential real estate 222,370 — 2,788 — 225,158
Consumer 3,482 — 87 — 3,569

Total loans $ 2,811,550 $ 105,705 $ 38,163 $ 251 $ 2,955,669

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

212015:

	March 31, 2016
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(in thousands)
Commercial	$	494,413	$	6,976	$	100,319	$	-	$	601,708
Commercial real estate		1,979,211		17,820		31,270		-		2,028,301
Commercial construction		400,131		827		1,636		-		402,594
Residential real estate		226,879		-		4,440		-		231,319
Consumer		1,770		-		81		-		1,851

Total loans	$	3,102,404	$	25,623	$	137,746	$	-	$	3,265,773

	December 31, 2015
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(in thousands)
Commercial	$	462,358	$	11,760	$	95,998	$	-	$	570,116
Commercial real estate		1,919,041		18,990		28,426	239			1,966,696
Commercial construction		326,697		662		1,479		-		328,838
Residential real estate		229,426		-		4,264		-		233,690
Consumer		2,368		-		86		-		2,454

Total loans	$	2,939,890	$	31,412	$	130,253	$	239	$	3,101,794

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~(unaudited)~~

Note 7.6. Loans and the Allowance for Loan and Lease Losses – (continued)

The following table provides an analysis of the impaired loans, by loan segment, at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014:~~

September 30, 2015
Recorded
Investment Unpaid
Principal
Balance Related
Allowance
No related allowance recorded (in thousands)
Commercial $ 690 735
Commercial real estate 4,830 5,233
Commercial construction 1,479 1,479
Residential real estate 3,164 3,518
Consumer 95 87
Total $ 10,258 11,052

With an allowance recorded
Commercial $ 79,724 $ 79,494 $ 3,001

Total
Commercial $ 80,414 $ 80,229 $ 3,001
Commercial real estate 4,830 5,233 —
Commercial construction 1,479 1,479 —
Residential real estate 3,164 3,518 —
Consumer 95 87 —
Total $ 89,982 $ 90,546 $ 3,001

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

2015:

	March 31, 2016
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
No related allowance recorded	(in thousands)
Commercial	$	3,320	$	3,625
Commercial real estate		15,271		15,202
Commercial construction		2,466		2,538
Residential real estate		4,123		4,532
Consumer		81		81
Total	$	25,261	$	25,978

With an allowance recorded
Commercial	$	91,928	$	91,851	$	7,677

Total
Commercial	$	95,248	$	95,476	$	7,677
Commercial real estate		15,271		15,202		-
Commercial construction		2,466		2,538		-
Residential real estate		4,123		4,532		-
Consumer		81		81		-
Total	$	117,189	$	117,829	$	7,677

	December 31, 2015
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
No related allowance recorded	(in thousands)
Commercial	$	610	$	645
Commercial real estate		15,517		16,512
Commercial construction		2,149		2,141
Residential real estate		3,954		4,329
Consumer		87		86
Total	$	22,317	$	23,713

With an allowance recorded
Commercial	$	84,787	$	84,449	$	6,725

Total
Commercial	$	85,397	$	85,094	$	6,725
Commercial real estate		15,517		16,512		-
Commercial construction		2,149		2,141		-
Residential real estate		3,954		4,329		-
Consumer		87		86		-
Total	$	107,104	$	108,162	$	6,725

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~(unaudited)~~

Note 7.6. 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 segment as of and for the three and nine months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~ (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2015 2014 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

Impaired loans with no related allowance recorded:

Commercial $ 712 $ — $ 897 $ — $ 707 $ — $ 778 $ 30
Commercial real estate 4,869 15 5,046 31 4,905 46 5,313 74
Commercial construction 1,479 — — — 1,479 — — 31
Residential real estate 3,221 7 1,975 — �� 3,251 12 2,044 5
Consumer 100 1 106 2 102 4 106 —
Total $ 10,381 23 $ 8,024 33 $ 10,444 $ 62 $ 8,241 $ 140

Impaired loans with an allowance recorded:

Commercial $ 79,732 $ 722 $ — $ — $ 45,747 $ 1,206 $ — $ —
Commercial real estate — — 3,600 37 — — 3,600 122
Total $ 79,732 $ 722 $ 3,600 $ 37 $ 45,747 $ 1,206 $ 3,600 $ 122

Total impaired loans:

Commercial $ 80,444 $ 712 $ 897 $ — $ 46,454 $ 1,206 $ 778 $ 30
Commercial real estate 4,869 15 8,646 68 4,905 46 8,913 196
Commercial construction 1,479 — — — 1,479 — — —
Residential mortgage 3,221 7 1,975 — 3,251 12 2,044 31
Consumer 100 1 106 2 102 4 106 5
Total $ 90,113 $ 745 $ 11,624 $ 70 56,191 $ 1,268 $ 11,841 $ 262

	Three Months Ended March 31,
	2016				2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with
no related allowance
recorded

Commercial	$	2,591	$	24	$	290	$	-
Commercial real
estate		15,274		25		6,052		19
Commercial
construction		2,307		16		-		-
Residential real
estate		4,107		5		3,613		2
Consumer		84		1		106		1

Total	$	24,363	$	71	$	10,061	$	22

Impaired loans with
an allowance
recorded

Commercial	$	83,759	$	737	$	387	$	-
Commercial real
estate		-		-		6,335		-

Total	$	83,759	$	737	$	6,722	$	-

Total impaired loans

Commercial	$	86,350	$	761	$	677	$	-
Commercial real
estate		15,274		25		12,387		19
Commercial
construction		2,307		16
Residential real
estate		4,107		5		3,613		2
Consumer		84		1		106		1

Total	$	108,122	$	808	$	16,783	$	22

Included in impaired loans at ~~September 30, 2015,~~March 31, 2016 and December 31, ~~2014 and September 30, 2014~~2015 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.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 7.6. 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 loan fees that are past due at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015 by segment:

Aging Analysis

September 30, 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 $ — $ 9,726 $ 5,020 $ 14,746 $ 554,859 $ 569,605 $ —
Commercial real estate 782 1,365 3,232 5,379 1,868,335 1,873,714 —
Commercial construction — — 1,479 1,479 282,144 283,623 —
Residential real estate 922 1,308 3,244 5,474 219,684 225,158 268
Consumer — — — — 3,569 3,569
Total $ 1,704 $ 12,399 $ 12,975 $ 27,078 $ 2,928,591 $ 2,955,669 $ 268

~~Aging Analysis~~

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 or Greater
Past Due and
Accruing
(in thousands)
Commercial $ 6,060 $ — $ 662 $ 6,722 $ 493,094 $ 499,816 $ 45
Commercial real estate 4,937 638 5,961 11,535 1,622,975 1,634,510 609
Commercial construction — — — — 167,359 167,359 —
Residential real estate 1,821 210 3,200 5,231 229,736 234,967 557
Consumer 30 1 — 31 2,848 2,879 —
Total $ 12,848 $ 849 $ 9,823 $ 23,520 $ 2,516,011 $ 2,539,531 $ 1,211

	March 31, 2016
													Loans
													Receivable 90
					90 Days or								Days or Greater
	30-59 Days		60-89 Days		Greater Past		Total Past				Total Loans		Past Due and
	Past Due		Past Due		Due		Due		Current		Receivable		Accruing
	(in thousands)
Commercial	$	5,539	$	-	$	12,409	$	17,948	$	583,760	$	601,708	$	5,250
Commercial real
estate		5,408		-		10,027		15,435		2,012,866		2,028,301		1,382
Commercial
construction		1,750		-		-		1,750		400,844		402,594		-
Residential real
estate		1,741		380		2,746		4,867		226,452		231,319		-
Consumer		2		-		-		2		1,849		1,851
Total	$	14,440	$	380	$	25,181	$	40,002	$	3,225,771	$	3,265,773	$	6,632

	December 31, 2015
													Loans
													Receivable 90
					90 Days or								Days or Greater
	30-59 Days		60-89 Days		Greater Past		Total Past				Total Loans		Past Due and
	Past Due		Past Due		Due		Due		Current		Receivable		Accruing
	(in thousands)
Commercial	$	6,887	$	3,505	$	6,865	$	17,257	$	552,859	$	570,116	$	-
Commercial real
estate		1,998		988		9,561		12,547		1,954,149		1,966,696		-
Commercial
construction		-		-		1,479		1,479		327,359		328,838		-
Residential real
estate		-		-		2,122		2,122		231,568		233,690		-
Consumer		4		9		-		13		2,441		2,454		-
Total	$	8,889	$	4,502	$	20,027	$	33,418	$	3,068,376	$	3,101,794	$	-

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 7.6. Loans and the Allowance for Loan and Lease Losses – (continued)

The following table details, at the period presented, the amount of loans receivable that are evaluated individually, and collectively, for impairment (excluding net deferred loan fees), those acquired with deteriorated quality, and the related portion of the allowance for loan and lease losses that are allocated to each loan portfolio segment:

September 30, 2015
Commercial Commercial real estate Commercial construction Residential real estate Consumer Unallocated Total
(in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment $ 3,001 $ — $ — $ — $ — $ — $ 3,001
Collectively evaluated for impairment 4,122 10,274 2,646 1,012 4 474 18,532
Acquired with deteriorated credit quality — — — — — — —
Total $ 7,123 $ 10,274 $ 2,646 $ 1,012 $ 4 $ 474 $ 21,533

Loans receivable
Individually evaluated for impairment $ 80,414 $ 4,830 $ 1,479 $ 3,164 $ 95 $ — $ 89,982
Collectively evaluated for impairment 482,145 1,867,085 282,144 221,671 3,474 — 2,856,519
Acquired with deteriorated credit quality 7,046 1,799 — 323 — — 9,168
Total $ 569,605 $ 1,873,714 $ 283,623 $ 225,158 $ 3,569 $ — $ 2,955,669

	March 31, 2016
			Commercial		Commercial		Residential
	Commercial		real estate		construction		real estate		Consumer		Unallocated		Total
	(in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment	$	7,677	$	-	$	-	$	-	$	-	$	-	$	7.677
Collectively evaluated for impairment		5,420		10,941		3,617		1,074		4		341		21,397
Acquired with deteriorated credit quality		-		-		-		-		-		-		-
Total	$	13,097	$	10,941	$	3,617	$	1,074	$	4	$	341	$	29,074

Gross loans
Individually evaluated for impairment	$	95,248	$	15,271	$	2,466	$	4,123	$	81	$	-	$	117,189
Collectively evaluated for impairment		499,401		2,011,285		400,128		226,862		1,770		-		3,139,446
Acquired with deteriorated credit quality		7,059		1,745		-		334		-		-		9,138
Total	$	601,708	$	2,028,301	$	402,594	$	231,319	$	1,851	$	-	$	3,265,773

The table above includes approximately ~~$0.9 billion~~$824 million of acquired loans for the period ended ~~September 30, 2015~~March 31, 2016 reported as collectively evaluated for ~~impairment.~~

impairment, of which approximately $661 million were included in the commercial real estate loan segment.

The following table ~~at the period presented,~~ details the amount of gross loans that are evaluated individually, and collectively, for impairment (excluding net deferred ~~loan fees)~~costs), those acquired with deteriorated quality, and the related portion of the allowance for loan and lease ~~losses~~loss that ~~are~~is allocated to each loan portfolio ~~segment:~~class:

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 $ 868 $ 9,410 $ — $ 3,072 $ 109 $ — $ 13,459
Collectively evaluated for impairment 491,749 1,623,284 167,359 231,089 2,770 — 2,516,251
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

	December 31, 2015
			Commercial		Commercial		Residential
	Commercial		real estate		construction		real estate		Consumer		Unallocated		Total
	(in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment	$	6,725	$	-	$	-	$	-	$	-	$	-	$	6,725
Collectively evaluated for impairment		4,224		10,926		3,253		976		4		464		19,847
Acquired with deteriorated credit quality		-		-		-		-		-		-		-
Total	$	10,949	$	10,926	$	3,253	$	976	$	4	$	464	$	26,572

Gross loans
Individually evaluated for impairment	$	85,397	$	15,517	$	2,149	$	3,954	$	87	$	-	$	107,104
Collectively evaluated for impairment		477,641		1,949,404		326,689		229,408		2,367		-		2,985,509
Acquired with deteriorated credit quality		7,078		1,775		-		328		-		-		9,181
Total	$	570,116	$	1,966,696	$	328,838	$	233,690	$	2,454	$	-	$	3,101,794

The ~~table~~tables above ~~includes~~include approximately ~~$1.2 billion~~$867 million of acquired loans ~~for the period ended~~as of December 31, ~~2014~~2015 reported as collectively evaluated for ~~impairment.~~impairment, of which $672 million were included in the commercial real estate loan segment.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 7.6. Loans and the Allowance for Loan and Lease Losses – (continued)

The 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 and lease losses methodology as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2014.~~

2015.

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

Three Months Ended September 30, 2015
Commercial Commercial real estate Commercial construction Residential real estate Consumer Unallocated Total
(in thousands)
Balance at June 30, 2015 $ 4.633 $ 9,195 $ 1,945 $ 1,161 $ 7 $ 535 $ 17,480

Charge-offs — (124 ) — — — — (124 )

Recoveries 2 — — — — — 2

Provision 2,488 1,203 701 (149 ) (3 ) (61 ) 4,175

Balance at September 30, 2015 $ 7,123 $ 10,274 $ 2,646 $ 1,012 $ 4 $ 474 $ 21,533

Three Months Ended September 30, 2014
Commercial Commercial real estate Commercial construction Residential real estate Consumer Unallocated Total
(in thousands)
Balance at June 30, 2014 $ 2,412 $ 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, 2014 $ 2,478 $ 7,022 $ 524 $ 1,052 $ 5 $ 1,037 $ 12,118

	Three Months Ended March 31, 2016
			Commercial		Commercial		Residential
	Commercial		real estate		construction		real estate		Consumer		Unallocated		Total
	(in thousands)
Balance at December 31,
2015	$	10,949	$	10,926	$	3,253	$	976	$	4	$	464	$	26,572

Charge-offs		(445)		-		-		(67)		-		-		(512)

Recoveries		1		13		-		-		-		-		14

Provision		2,592		2		364		165		-		(123)		3,000

Balance at March 31, 2016	$	13,097	$	10,941	$	3,617	$	1,074	$	4	$	341	$	29,074

	Three Months Ended March 31, 2015
			Commercial		Commercial		Residential
	Commercial		real estate		construction		real estate		Consumer		Unallocated		Total
	(in thousands)
Balance at December 31,
2014	$	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

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~(unaudited)~~

Note 7.6. Loans and the Allowance for Loan and Lease Losses – (continued)

Nine Months Ended September 30, 2015
Commercial Commercial real estate Commercial construction Residential real estate Consumer Unallocated Total
(in thousands)
Balance at December 31, 2014 $ 3,083 $ 7,799 $ 1,239 $ 1,113 $ 7 $ 919 $ 14,160

Charge-offs (100 ) (406 ) — — (13 ) — (519 )

Recoveries 12 327 — 2 1 — 342

Provision 4,128 2,554 1,407 (103 ) 9 (445 ) 7,550

Balance at September 30, 2015 $ 7,123 $ 10,274 $ 2,646 $ 1,012 $ 4 $ 474 $ 21,533
Nine Months Ended September 30, 2014
Commercial Commercial real estate Commercial construction Residential real estate Consumer Unallocated Total
(in thousands)
Balance at December 31, 2013 $ 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, 2014 $ 2,478 $ 7,022 $ 524 $ 1,052 $ 5 $ 1,037 $ 12,118
27
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~Note 7. Loans and the Allowance for Loan and Lease Losses – (continued)~~

Trouble Debt Restructurings

At ~~September 30, 2015,~~March 31, 2016, there were no commitments to lend additional funds to borrowers whose loans were on 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 Company generally is to grant commercial, mortgage and consumer loans to residents and businesses within its market area. The ~~borrowers’~~ability of 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 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~~restructurings totaled ~~a recorded investment of $77.1~~$96.5 million at ~~September 30, 2015,~~March 31, 2016, of which ~~$1.1~~$1.4 million were on nonaccrual ~~status. The remaining loans modified~~status and $95.1 million were ~~current and have complied with the terms of their restructure agreement.~~performing troubled debt restructurings. At December 31, ~~2014,~~2015, loans modified in a troubled debt ~~restructuring~~restructurings totaled ~~$2.8~~$86.6 million, of which ~~$1.0~~$0.7 million were on nonaccrual ~~status. The remaining loans modified~~status and $85.9 million were ~~current at the time of the restructuring and have complied with the terms of their restructure agreement.~~performing troubled debt restructurings. The Company has allocated ~~$2.0~~$6.0 million in specific allocations with respect to loans whose loan terms had been modified in troubled debt restructurings as of ~~September 30, 2015. There~~March 31, 2016. At December 31, 2015, there were $4.5 million in specific allocations with respect to performing troubled debt restructurings, and there were no specific allocations with respect to troubled debt restructurings as of ~~September 30, 2014. The~~March 31, 2015.Performing TDRs ~~presented~~ as of ~~September 30, 2015~~March 31, 2016 increased the allowance for loan and lease losses by ~~$2.0~~$1.5 million for the three ~~and nine~~ months ended ~~September 30, 2015. The~~March 31, 2016. Performing TDRs ~~presented~~ as of ~~September 30, 2014~~March 31, 2015 did not increase the allowance for loan and lease losses for the three ~~and nine~~ months ended ~~September 30, 2014.~~

March 31, 2015.

The ~~$2.0~~$6.0 million in specific allocations referenced above were associated with taxi medallion lending ~~referred to above was~~and were calculated based on the present value of estimated cash flows, including contractual debt interest service through maturity, and principal repayments based on the fair value of the collateral ~~and excludes~~excluding any consideration for ~~the~~ personal guarantees of borrowers, which ~~provides~~provide an additional source of repayment but cannot be relied upon. The valuation per corporate medallion used for the calculation at ~~September 30, 2015~~March 31, 2016 was ~~$814,000. A~~approximately $775,000. An additional $1.5 million specific allocation was required at ~~September 30, 2015~~March 31, 2016 due to a decline in the Company’s estimated valuation of taxi medallions ~~from June 30,~~at December 31, 2015, when ~~there was no~~the specific allocation ~~required.~~was $4.5 million.

The following table presents loans by class modified as troubled debt restructurings that occurred during the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 (dollars in thousands):

Pre-Modification Post-Modification
Outstanding Outstanding
Number of Recorded Recorded
Loans Investment Investment
Troubled debt restructurings:
Commercial 47 $ 75,363 $ 75,363
Commercial real estate — — —
Commercial construction — — —
Residential real estate — — —
Consumer — — —

Total 47 $ 75,363 $ 75,363

		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Loans	Investment		Investment
Troubled debt restructurings:
Commercial	9	$	9,555	$	9,555
Commercial real estate	-		-		-
Commercial construction	-		-		-
Residential real estate	-		-		-
Consumer	-		-		-

Total	9	$	9,555	$	9,555

The increase in TDRs was primarily due to six loans secured by New York City taxi medallions totaling $8.0 million that were modified during the ~~second~~first quarter of ~~2015. The~~2016. Four of these modifications consisted of ~~a deferral of principal amortization from approximately 25-30 year amortization to interest-only. There was no extension~~short-term extensions of the loans’ contractual maturity dates ~~there was no forgiveness~~at the pre-existing contractual rate and two of ~~principle, and the~~these modifications interest rates ~~on these loans were increased~~decreased from approximately 3%~~-3.25%~~ to ~~3.75%~~1.3-1.6%. These six loans were accruing prior to modification, ~~and~~while five remained in accrual status post-modification.

The troubled debt restructurings described above increased the allowance for loan and lease losses by $45 thousand during the three months ended March 31, 2016.There were no charge-offs in connection with a loan modification at the time of modification during the ~~nine~~three months ended ~~September 30,~~March 31, 2016. 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, 2016.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

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 ~~nine~~three months ended ~~September 30,~~March 31, 2015.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 7. Loans and the Allowance for Loan and Lease Losses – (continued)~~

~~The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 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 — — —
Commercial construction — — —
Residential real estate 1 53 51
Consumer — — —

Total 2 $ 725 $ 366

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

Note 8.7 - Fair Value Measurements and Fair Value of Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

FASB ASC ~~Topic 820, “Fair Value Measurements~~820-10-05 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurements and ~~Disclosures,”~~enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly.

FASB ASC 820-10-05 establishes a fair value hierarchy that prioritizes the inputs to valuation ~~techniques~~methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820-10-05 are ~~described below:~~as follows:

Level 1:Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

		~~Level 1:~~ ~~Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.~~

		~~Level 2:~~ Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
		~~Level 3:~~ ~~Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).~~

Level 2:Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3:Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 8. Fair Value Measurements and Fair Value of Financial Instruments – (continued)~~

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 ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014:~~

2015:

Securities ~~available-for-sale~~Available-for-Sale -

Where quoted prices are available in an active market, securities are classified ~~with~~within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. ~~Level 1 securities held include: US Treasury securities, publicly traded equity securities, mutual funds and overnight money market funds.If~~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 ~~their~~the fair value of the instruments and these are classified as Level 3. Due to the inactive condition of the markets amidst the financial crisis, the Company treated certain securities as Level 3 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 Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~Derivatives~~Note 7 - Fair Value Measurements and Fair Value of Financial Instruments

Derivatives

The fair value of derivatives are based on valuation models using observable market data as of the measurement date (level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Loans ~~held~~Held for ~~sale~~Sale -

Loans held for sale are ~~carried~~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

~~Loans receivable~~ - The fair value 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 discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs.

~~Off-balance sheet 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 ~~market~~ 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.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~(unaudited)~~

Note 8.7 - Fair Value Measurements and Fair Value of Financial Instruments ~~– (continued)~~

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, 2015~~March 31, 2016 and December 31, ~~2014~~2015 are as follows:

			March 31, 2016
			Fair Value Measurements at Reporting Date Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
			(Level 1)		(Level 2)		(Level 3)
(in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available-for-sale:
Federal agency obligations	$	31,827	$	-	$	31,827	$	-
Residential mortgage pass-
through securities		48,545		-		48,545		-
Commercial mortgage pass-
through securities		3,053		-		3,053		-
Obligations of U.S. states and
political subdivision		9,806		-		9,806		-
Trust preferred securities		16,179		-		16,179		-
Corporate bonds and notes		41,388		-		41,388		-
Asset-backed securities		18,154		-		18,154		-
Certificates of deposit		1,516		-		1,516		-
Equity securities		377		377		-		-
Other securities		20,486		20,486		-		-
Total available-for-sale	$	191,331	$	20,863	$	170,468	$	-
Liabilities
Derivatives	$	1,568	$	-	$	1,568	$	-

Total liabilities	$	1,568	$	-	$	1,568	$	-

There were no transfers between Level 1, Level 2 and Level 3 during the three months ended March 31, 2016.

September 30, 2015
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 $ 30,905 $ — $ 30,905 $ —
Residential mortgage pass-through securities 48,091 — 48,091 —
Commercial mortgage pass-through securities 3,055 — 3,055 —
Obligations of U.S. states and political subdivision 8,382 — 8,382 —
Trust preferred securities 16,322 — 16,322 —
Corporate bonds and notes 78,386 — 78,386 —
Asset-backed securities 21,130 — 21,130 —
Certificates of deposit 1,920 — 1,920 —
Equity securities 338 338 — —
Other securities 15,685 15,685 — —
Total available-for-sale 224,214 16,023 208,191 —
Loans held for sale 990 — 990 —
Total assets $ 225,204 $ 16,023 $ 209,181 $ —
Liabilities
Derivatives $ 1,105 $ — $ 1,105 $ —

Total liabilities $ 1,105 $ — $ 1,105 $ —

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~(unaudited)~~

Note 8.7 - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

			December 31, 2015
			Fair Value Measurements at Reporting Date Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
			(Level 1)		(Level 2)		(Level 3)
(in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available-for-sale:
Federal agency obligations	$	29,146	$	-	$	29,146	$	-
Residential mortgage pass-
through securities		44,910		-		44,910		-
Commercial mortgage pass-
through securities		2,972		-		2,972		-
Obligations of U.S. states and
political subdivision		8,357		-		8,357		-
Trust preferred securities		16,255		-		16,255		-
Corporate bonds and notes		53,976		-		53,976		-
Asset-backed securities		19,725		-		19,725		-
Certificates of deposit		1,905		-		1,905		-
Equity securities		374		374		-		-
Other securities		18,150		18,150		-		-
Total available-for-sale	$	195,770	$	18,524	$	177,246	$	-
Liabilities
Derivatives	$	131	$	-	$	131	$	-
Total liabilities	$	131	$	-	$	131	$	-

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 $ —

~~For the nine months ended September 30, 2015, there~~There were no transfers ~~of investment securities available-for-sale into or out of~~between Level 1, Level 2 orand Level 3 ~~assets.~~during the year ended December 31, 2015.

Assets Measured at Fair Value on a Non-Recurring Basis

The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The Company primarily utilized appraisal value less cost to sell and other unobservable market inputs to determine fair value of assets, and therefore, these valuations are classified as a Level 3 measurement. For assets measured at fair value on a non-recurring basis, the ~~unobservable inputs used to derive~~ fair value measurements at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014 were~~2015 are as follows:

Impaired loans	Valuation Techniques	Range of Unobservable Inputs
Commercial	Appraisals of collateral value	Adjustment for age of comparable sales, generally a decline of 0% to 15%

~~Commercial real estate~~	~~Appraisals~~. Adjustment for age of ~~collateral value~~	lease payments. Market capitalization rates between 8%4% and ~~12%. Market rental rates for similar properties~~8%

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

~~(unaudited)~~

Note 8.7 - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Fair Value Measurements at Reporting Date Using

Quoted

Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

March 31,

Assets

Inputs

Assets measured at fair value on a nonrecurring basis:

2016

(Level 1)

(Level 2)

(Level 3)

Impaired loans

(in thousands)

Commercial

3,410

Fair Value Measurements at Reporting Date Using

Quoted

Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

December 31,

Assets

Inputs

Assets measured at fair value on a nonrecurring basis:

2015

(Level 1)

(Level 2)

(Level 3)

Impaired loans

(in thousands)

Commercial

3,751

Fair Value Measurements at Reporting Date Using
Assets measured at fair value on a nonrecurring basis: September 30, 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 $ 3,360 $ — $ — $ 3,360

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

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014.~~

2015.

Impaired loans -The value of the impaired loans above were measured based upon the fair value of the collateral of the loans. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and consumer loans, are specifically excluded from the impaired loan portfolio. The Company’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. Impaired loans at ~~September 30, 2015~~March 31, 2016 that required a valuation allowance ~~during 2015~~ were ~~$4.4~~$5.1 million with a related valuation allowance of ~~$1,001,000~~$1.7 million compared to ~~$3.9~~$6.0 million with a related valuation allowance of ~~$262,000~~$2.2 million at December 31, 2014. Additional provision for loan and lease losses of $211,000 and $840,000 for the three and nine months ending September 30, 2015, respectively, and $0 and $210,500 three and nine months ending September 30, 2014, respectively, were recorded.2015.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~Note 8. Fair Value Measurements and~~ Fair Value of Financial Instruments ~~– (continued)~~

~~Fair Value of Financial Instruments~~

FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-sale and investment securities available-for-sale. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Company for the purposes of this disclosure.

Cash and cash ~~equivalents~~ -equivalents.The carrying amounts of cash and short-term instruments approximate fair values.

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

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 7 - Fair Value Measurements and Fair Value of Financial Instruments – (continued)
Investment ~~securities held-to-maturity~~-Securities Held-to-Maturity.The fair value of the 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 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~~ -Loans.The fair value of the 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 non-interest-bearing deposits is equal to the amount payable on demand at the reporting date.~~
~~Interest-bearing deposits~~ -. The fair values of the Company’s interest-bearing deposits were estimated using discounted cash flow analyses. The ~~discount~~discounted rates used were based on rates currently offered for deposits with similar remaining maturities. The fair values of the Company’s interest-bearing deposits do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.
Term Borrowings and ~~subordinated debentures~~-Subordinated Debentures. The fair value of the Company’s long-term borrowings and subordinated debentures were calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities.
Accrued ~~interest receivable/payable~~-Interest Receivable/Payable.The carrying amounts of accrued interest approximate fair value resulting in a level 2 or level 3 classification based on the level of the asset or liability with which the accrual is associated.
34
31

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
~~(unaudited)~~
Note 8.7 - Fair Value Measurements and Fair Value of Financial Instruments – (continued)
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014.~~2015.
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)
September 30, 2015
Financial assets
Cash and cash equivalents $ 158,521 $ 158,521 $ 158,521 $ — $ —
Investment securities available-for-sale 224,214 224,214 16,023 208,191 —
Investment securities held-to-maturity 227,221 234,493 29,747 186,133 18,613
Investments in restricted stock, at cost 30,362 n/a n/a n/a n/a
Loans held for sale 990 990 — 990 —
Net loans receivable 2,931,848 2,929,939 — — 2,929,939
Accrued interest receivable 11,662 11,662 221 2,631 8,810

Financial liabilities
Noninterest-bearing deposits 586,643 586,643 586,643 — —
Interest-bearing deposits 2,079,981 2,084,440 — 2,084,440 —
Borrowings 621,674 627,399 — 627,399 —
Subordinated debentures 55,155 55,007 — 55,007 —
Derivatives 1,105 1,105 — 1,105 —
Accrued interest payable 5,198 5,198 — 5,198 —

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
Investments in restricted stock, at cost 23,535 n/a n/a n/a n/a
Net loans receivable 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 492,516 492,516 492,516 — —
Interest-bearing deposits 1,983,091 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 —
35
Fair Value Measurements
Quoted
Prices in
Active Significant
Markets for Other Significant
Identical Observable Unobservable
Carrying Fair Assets Inputs Inputs
      Amount       Value       (Level 1)       (Level 2)       (Level 3)
(in thousands)
March 31, 2016
Financial assets
       Cash and due from banks $      118,259 $      118,259 $      118,259 $      - $      -
       Investment securities available-for-sale 191,331 191,331 20,863 170,468 -
       Investment securities held-to-maturity 219,373 229,470 30,413 180,553 18,504
       Restricted investment in bank stocks 31,487 n/a n/a n/a n/a
       Net loans 3,234,739 3,242,398 - - 3,242,398
       Accrued interest receivable 12,604 12,604 199 2,486 9,919

Financial liabilities
       Noninterest-bearing deposits 614,507 614,507 614,507 - -
       Interest-bearing deposits 2,278,564 2,285,918 - 2,285,918 -
       Borrowings 646,501 651,739 - 651,739 -
       Subordinated debentures, net 54,392 57,879 - 57,879 -
       Derivatives 1,568 1,568 - 1,568 -
       Accrued interest payable $ 5,101 $ 5,101 $ - $ 5,101 $ -

December 31, 2015
Financial assets
       Cash and due from banks $ 200,895 $ 200,895 $ 200,895 $ - $ -
       Investment securities available-for-sale 195,770 195,770 18,524 177,246 -
       Investment securities held-to-maturity 224,056 230,558 29,226 182,774 18,558
       Restricted investment in bank stocks 32,612 n/a n/a n/a n/a
       Net loans 3,072,435 3,059,343 - - 3,059,343
       Accrued interest receivable 12,545 12,545 68 2,699 9,778

Financial liabilities
       Noninterest-bearing deposits 650,775 650,775 650,775 - -
       Interest-bearing deposits 2,140,191 2,137,149 - 2,137,149 -
       Borrowings 671,587 674,131 - 674,131 -
       Subordinated debentures, net 54,343 55,209 - 55,209 -
       Derivatives 131 131 - 131 -
       Accrued interest payable $ 4,387 $ 4,387 $ - $ 4,387 $ -

32

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
~~(unaudited)~~
Note 8.7 - Fair Value Measurements and Fair Value of Financial Instruments – (continued)
The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, 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 ~~market~~ 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~~ 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 9.8. Accumulated Other Comprehensive ~~Income~~
Loss
Accumulated other comprehensive loss (net of tax) at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015 consisted of the following:
March 31, December 31,
      2016       2015
(in thousands)
Net unrealized gain on investment securities available-for-sale $     1,251 $      713
Cash flow hedge (927) (77)
Unamortized component of securities transferred from available-for-sale to held-to-
       maturity (1,142) (1,173)
Defined benefit pension and post-retirement plans (4,012) (4,072)
       Total accumulated other comprehensive loss $ (4,830) $ (4,609)

33

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30,
2015 December 31,
2014
(in thousands)
Net unrealized gain on investment securities available-for-sale $ 2,461 $ 4,874
Cash flow hedge (654 ) 28
Unamortized component of securities transferred from available-for-sale to held-to-maturity (1,203 ) (1,301 )
Defined benefit pension and post-retirement plans (3,914 ) (4,615 )
Total accumulated other comprehensive loss $ (3,310 ) $ (1,014 )
Note ~~10.~~9. Stock-Based Compensation
The Company maintains three stock-based compensation plans from which new grants could be issued. The Company’s stock-based compensation plans permit Parent Corporation common stock to be issued to key employees and directors of the Company and its subsidiaries. ~~The options granted~~Grants under the existing plans ~~are intended to~~can be ~~either incentive~~in the form of stock options (qualified or ~~non-qualified options. Under the 2009 Equity Incentive Plan, a total of 303,615~~non-qualified), restricted shares, ~~are available for grant and issuance as of September 30, 2015. In addition, a total of 114,327 shares remain~~or performance units. Shares available for grant and issuance under ~~Legacy ConnectOne equity plans. Options may be exercised with~~the existing plans as of March 31, 2016 are as follows 68,516 under the 2009 Equity Incentive Plan and 235,090 shares ~~issued from Treasury~~under the North Jersey Community Bancorp 2009 Equity Compensation Plan. The Company intends to issue all shares under these plans in the form of newly issued ~~shares or~~shares.
Restricted stock and option awards typically have a ~~combination of both.~~
36
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~Note 10.  Stock-Based Compensation~~
~~Options have been granted to purchase common stock at the fair market value of the stock at the date of grant. Options granted to date are exercisable after a three to five-year~~three-year vesting period starting one year after the date of grant ~~and~~with one-third vesting each year. The options generally expire ten years from the date of grant. Restricted ~~shares~~stock awards granted to ~~date~~new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting ~~schedule ranging from one to three~~after 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 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 Company estimates the forfeiture rate based on its historical experience during the preceding seven fiscal years.
~~Under the principal stock-based compensation plans, the Company may also grant stock awards to certain employees. Stock awards~~ All issuances are ~~independent of option grants and are generally~~ subject to forfeiture if ~~employment terminates~~the recipient leaves or is terminated prior to the ~~release of any applicable restrictions. During that period, ownership of the~~awards vesting. Restricted 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 while options and performance units do not.
All awards are ~~considered to be currently~~ issued ~~and outstanding.~~at fair value of the underlying shares at the grant date. The Company expenses the cost of ~~stock~~the awards, which is determined to be the fair market value of the ~~shares~~awards at the date of grant, ratably over the ~~period during which any restrictions lapse.~~
There were 97,544 and 50,303 restricted stock awards outstanding at September 30, 2015 and December 31, 2014, respectively. These awards were issued with an award price equal to the market price of the 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.~~
~~There were no shares of common stock underlying~~No options ~~that~~ were granted during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 or 2015.
During the three months ended March 31, 2016 and 2015 a total of71,920and ~~2014,~~48,507 restricted shares were awarded, respectively.
~~Options activity under the stock-based~~ The compensation ~~plans as of September 30, 2015 and changes~~expense related to restricted stock awards during the ~~nine months~~quarter ended ~~September 30, 2015 were as follows:~~ March 31, 2016 was $182,000.
Shares Weighted-
Average
Exercise
Price Weighted-
Average
Remaining
Contractual
Term (Years) Aggregate
Intrinsic
Value
Outstanding at December 31, 2014 882,657 $ 5.65
Exercised (340,492 ) $ 4.19
Canceled/expired —
Forfeited (4,731 )
Outstanding at September 30, 2015 537,434 $ 6.50 3.43 $ 6,878,825
Exercisable at September 30, 2015 532,636 $ 6.44 3.38 $ 6,829,750
The aggregate intrinsic value of options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of 2015During 2016 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, 2015. This amount changes based on the fair value of the Company’s stock.
37
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~Note 10. 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 the Company’s common stock as of the grant date. Generally, grants of restricted shares to date 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 67,906 18.50
Vested (20,565 ) 10.76
Forfeited/cancelled/expired — —
Outstanding at September 30, 2015 97,544 $ 16.62
As of September 30, 2015, there was approximately $30,500 of total unrecognized compensation expense relating to unvested stock options. As of September 30, 2015, there was approximately $1,167,500 of total unrecognized compensation expense relating to unvested restricted stock awards. These costs are expected to be recognized over a weighted average period of 1.6 years.
~~On April 30,~~ 2015, the Company granted to various key employees performance unit awards, ~~(which are classified as equity awards),~~ with each unit entitling the holder to one share of the Company’s common stock contingent upon the Company meeting or exceeding certain return on asset targets over the course of a three-year period ~~ending April 30, 2018.~~commencing on the date of issuance. Under the agreement, and assuming the Company has met or exceeded the applicable targets, grants of performance unit awards will vest on the third anniversary of the grant date or on an earlier date in the event of a change in control, as defined in the ~~grant~~ agreement. At ~~September 30, 2015,~~March 31, 2016, the specific number of shares related to performance unit awards that were expected to vest was ~~94,585,~~151,577, determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed. The maximum amount of performance unit awards is ~~113,502.~~181,892 shares. The total amount of compensation cost related to performance unit awards included in salary expense during the quarter ended March 31, 2016 and 2015 was $193,000 and $0, respectively.
Option activity under the principal option plans as of March 31, 2016 and changes during the three months ended March 31, 2016 were as follows:
Weighted-
Average
Weighted- Remaining
Average Contractual
Exercise Term Aggregate
      Shares       Price       (In Years)       Intrinsic Value
Outstanding at December 31, 2015 535,906 $      6.48
Granted - -
Exercised (5,495) 7.67
Forfeited/cancelled/expired      (20,839) 9.77
Outstanding at March 31, 2016 509,572 $ 6.34 2.92 $      5,102,923
Exercisable at March 31, 2016 503,941 $ 6.22 2.90 $ 5,071,354

34

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 9. Stock-Based Compensation
Information related to stock option exercises during 2016:
2016
Intrinsic value of options exercised $       54,326
Cash received from options exercised 42,171
Tax benefit realized from options exercised 17,114
Weighted average fair value of options granted -

The aggregate intrinsic value of options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on March 31, 2016 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2016. This amount changes based on the fair market value of the Parent Corporation’s stock.
The below table represents information regarding restricted shares currently outstanding at March 31, 2016:
Weighted-
Average
Nonvested Grant Date
      Shares       Fair Value
Nonvested at December 31, 2015 96,902 $ 16.81
Granted 71,920 15.88
Vested (54,648) 16.01
Forfeited/cancelled/expired (1,000) 19.58
Nonvested at March 31, 2016 113,174 $      16.81

As of March 31, 2016, there was $1,806,000 of total unrecognized compensation cost related to nonvested restricted shares granted under the plans. The cost is expected to be recognized over a weighted average period of 24.0 months. The total fair value of shares vested during the quarter ended March 31, 2016, was $686,000.
35

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 9 - Stock Based Compensation – (continued)
A summary of the status of unearned performance unit awards and the change during the period is presented in the table below:
Weighted-
Average
Grant Date
Shares Fair Value
Unearned at December 31, 2015       94,485       $ 19.46
Awarded 64,540 17.15

Forfeited       (7,447) 19.46
Expired - -
Unearned at March 31, 2016 151,578 $      19.46

Shares Weighted-
Average
Grant Date
Fair Value
Unearned at June 30, 2015 94,585 $ 19.46
Awarded — —
Forfeited — —
Expired — —
Unearned at September 30, 2015 94,585 $ 19.46
~~The Company recognized $256,000 in~~At March 31, 2016, compensation ~~expense~~cost of $2,198,000 related to the performance units for the quarter ended September 30, 2015. As of September 30, 2015, there was approximately $1,584,985 of unrecognized compensation expense related to unearned performance units. These costs arenonvested awards not yet recognized is expected to be recognized over a weighted-average period of ~~2.5~~2.3 years.
38
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
Note ~~11.~~10. Components of Net Periodic Pension Cost
The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until March 31, 2007, at which time the Company froze the plan. The following table sets forth the net periodic pension cost of the Company’s pension plan for the periods indicated.
Three Months Ended
September 30, Nine months Ended
September 30,
2015 2014 2015 2014
(in thousands)
Interest cost $ 127 $ 143 $ 394 $ 429
Expected return on plan assets (123 ) (148 ) (387 ) (444 )
Net amortization 108 55 324 165
Recognized settlement loss 64 — 629 —
Net periodic pension cost $ 176 $ 50 $ 960 $ 150

Net actuarial gain $ (183 ) $ — $ (1,186 ) $ (1,281 )

Total recognized in other comprehensive income $ (183 ) $ — $ (1,186 ) $ (1,281 )

Total recognized in net expense and OCI (before tax) $ (7 ) $ 50 $ (226 ) $ (1,131 )
Three Months Ended
March 31,
2016 2015
Interest cost $      128 $      138
Expected return on plan assets       (136)       (137)
Net amortization 102 108
Recognized settlement loss - 450
       Total periodic pension expense $ 94 $ 559

Net actuarial gain $ (101) $ (742)

Total recognized in other comprehensive income $ (101) $ (742)

Total recognized in net periodic expense and other
comprehensive income (before tax) $ (7) $ (183)

Contributions
As of March 31, 2016, The Company ~~contributed~~intended to contribute $2.0 million to its Pension Trust during the second quarter of ~~2015. The Company does not plan on contributing additional amounts~~2016. (As intended, the company contributed $2.0 million to ~~the~~its Pension Trust ~~for the remainder of 2015.~~in April 2016). 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.
36

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note ~~12.~~11. FHLB and other borrowings
The Company’s FHLB and other borrowings and weighted average interest rates are summarized below:
September 30, 2015 December 31, 2014
Amount Rate Amount Rate
(in thousands)
By type of borrowing:
FHLB borrowings $ 606,674 1.16 % $ 464,553 1.18 %
Repurchase agreements 15,000 5.95 % 31,000 5.90 %
Total borrowings $ 621,674 1.28 % $ 495,553 1.48 %

By remaining period to maturity:
One year or less $ 290,674 0.53 % 258,553 0.50 %
One to two years 151,000 1.60 % 30,000 1.40 %
Two to three years 35,000 1.00 % 71,000 2.33 %
Three to four years 80,000 1.67 % 96,000 2.67 %
Four to five years 65,000 2.82 % — —
Greater than five years — 0.00 % 40,000 3.42 %
Total borrowings $ 621,674 1.28 % $ 495,553 1.48 %
March 31, 2016 December 31, 2015
Amount Rate Amount Rate
(in thousands)
By type of borrowing:
       FHLB borrowings $ 631,501 1.30 % $ 656,587 1.26 %
       Repurchase agreements("REPO") 15,000 5.95 15,000 5.95
Total borrowings $ 646,501 1.41 $ 671,587 1.37

By remaining period to maturity:
       One year or less $ 330,501 0.64 270,587 0.64
       One to two years 121,000 1.90 171,000 1.56
       Two to three years 105,000 1.96 130,000 1.84
       Three to four years 50,000 1.66 35,000 1.60
       Four to five years 40,000 3.42 65,000 2.82
Total borrowings $     646,501      1.41 % $     671,587      1.37 %

The FHLB borrowings are secured by pledges of certain collateral including, but not limited to, U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans.
39
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~Note 12. FHLB and other borrowings – (continued)~~
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.
Three of the 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 stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances are fixed rate while the REPOs are variable rate advances. The advances at ~~September 30, 2015~~March 31, 2016 were collateralized by approximately ~~$1.1~~$1.2 billion of commercial mortgage loans, net of required ~~over collateralization~~over-collateralization amounts, under a blanket lien arrangement. At ~~September 30, 2015~~March 31, 2016 the Company had remaining borrowing capacity of approximately ~~$550~~at FHLB of approximately $594 million.
37

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 12 – Securities Sold under Agreements to Repurchase
Repurchase agreements are secured borrowings. The Company pledges investment securities to secure those borrowings. Information concerning repurchase agreements is summarized as follows for the periods presented:
March 31, December 31, March 31,
(dollars in thousands) 2016 2015 2015
Average daily balance during the year-to-date $ 15,000 $ 22,890 $ 31,000
Average interest rate during the year-to-date 5.95% 5.92% 5.90%
Maximum month-end balance during the year-to-date $     15,000 $     31,000 $     31,000%
Weighted average interest rate during the year-to-date       5.95%       5.92%       5.90%

The table below shows the remaining contractual maturity of agreement by fair value of collateral pledged:
March 31, 2016
Remaining Contractual Maturity of the Agreements
Overnight and Up to 30 Greater Than
(dollars in thousands) Continuous Days 30-90 Days 90 Days Total
Repurchase agreements and
Repurchase-to-maturity transactions
       U.S. Treasury and agency securities       $ -       $ -       $ -       $ 5,069       $ 5,069
       Residential mortgage pass-through securities - - - 14,849 14,849
Total Borrowings $     - $     - $     - $     19,918 $     19,918

Amounts related to agreements not included in offsetting disclosure in Note 14 $ 4,918

December 31, 2015
Remaining Contractual Maturity of the Agreements
Overnight and Up to 30 Greater Than
(dollars in thousands) Continuous Days 30-90 Days 90 Days Total
Repurchase agreements and
Repurchase-to-maturity transactions
       U.S. Treasury and agency securities       $ -       $ -       $ -       $ 6,313       $ 6,313
       Residential mortgage pass-through securities - - - 12,589 12,589
Total Borrowings $     - $     - $     - $     18,902 $     18,902

Amounts related to agreements not included in offsetting disclosure in Note 14 $ 3,902

The fair value of securities pledged to secure repurchase agreement may decline. The Company manages this risk by having a policy to pledge securities valued at 8% above the gross outstanding balance of repurchase agreement. Securities sold under agreements to repurchase are secured by securities with a carrying amount of $19.1 million and $18.8 million at March 31, 2016 and December 31, 2015.
Note 13 - Subordinated Debentures
During 2003, the Company formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier I capital. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or in part prior to maturity. The floating interest rate on the subordinate debentures is three-month LIBOR plus 2.85% and reprices quarterly. The rate at ~~September 30, 2015~~March 31, 2016 was ~~3.15%~~3.47%. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with FASB ASC 810-10. Distributions on the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income.
38

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 13 - Subordinated Debentures – (continued)
The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014.~~2015.
Securities Redeemable by
Issuance Date Issued Liquidation Value Coupon Rate Maturity Issuer Beginning
12/19/2003 $      5,000,000 $1,000 per Capital Floating 3-month 01/23/2034 01/23/2009
Security LIBOR + 285 Basis
Points

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
During June 2015, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain institutional investors. The Notes are non-callable for five years, have a stated maturity of July 1, 2025, and bear interest at a fixed rate of 5.75% per year, from and including ~~September~~June 30, 2015 to, but excluding July 1, 2020. From and including July 1, 2020 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 393 basis points. As of ~~September 30, 2015, there were~~March 31, 2016,unamortized costs related to the debt issuance ~~of $828,000.~~
were $763,000.
The net proceeds from the sale of the Notes ~~will be~~were used to redeem, on or before January 1, 2016, $11.3 million of Senior Noncumulative Perpetual Preferred Stock issued in 2011 to the U.S. Treasury under the Small Business Lending Fund Program, and for general corporate purposes, which includedby the Parent Corporation ~~contributing~~to contribute $35.0 million of common equity to the Bank on ~~September~~June 30, ~~2015.~~
2015, and to repay, on March 11, 2016, $11.25 million of SBLF preferred issued to the U.S. Treasury. Remaining funds will be used for general corporate purposes.
In connection with the issuance of the Notes, the Parent Corporation obtained ratings from Kroll Bond Rating Agency (“KBRA”). KBRA assigned investment grade ratings of BBB- for the Company’s subordinated debt and a senior deposit rating of BBB+ for the Bank.
Note 14 – Offsetting Assets and Liabilities
40Certain financial instrument-related assets and liabilities may be eligible for offset on the consolidated statements of condition because they are subject to master netting agreements or similar agreements. However, the Company does not elect to offset such arrangements on the consolidated financial statements. The Company enters into interest rate swap agreements with financial institution counterparties. For additional detail regarding interest rate swap agreements refer to Footnote 5 within this section. In the event of default on, or termination of, any one contract, both parties have the right to net settle multiple contracts. Also, certain interest rate swap agreements may require the Company to receive or pledge cash or financial instrument collateral based on the contract provisions.
39

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 14 – Offsetting Assets and Liabilities – (continued)
The Company also entered into an agreement to sell securities subject to an obligation to repurchase the same or similar securities, referred to as a repurchase agreement. Under this agreement, 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 repurchase agreements remain in the respective investment securities account, therefore there is no offsetting or netting of the investment securities assets with the repurchase agreement liability. The following table presents information about financial instruments that are eligible for offset as of March 31, 2016 and December 31, 2015:
Gross Amounts Not Offset
Gross Amounts Net Amounts Cash or
Offset in the of Assets Presented in the Financial Financial
Gross Amounts Statement of Statement of Financial Instruments Instrument Net
Recognized Financial Position Position Recognized Collateral Amount
(in thousands)
March 31, 2016
Assets:
       Interest rate swaps     $ -     $ -     $ -     $ -     $ -     $ -
Liabilities:
       Interest rate swaps $ 1,568 $ - $ 1,568 $ - $ 1,568 $ -
       Repurchase
              agreements 15,000 - 15,000 - 15,000 -
                     Total $ 16,568 $ - $ 16,568 $ - $ 16,568 $ -
December 31, 2015
Assets:
       Interest rate swaps $ 48 $ - $ - $ - $ - $ -
Liabilities:
       Interest rate swaps $ 131 $ - $ 131 $ - $ 131 $ -
       Repurchase
              agreements 15,000 - 15,000 - 15,000 -
                     Total $     15,131 $     - $     15,131 $     - $     15,131 $     -

40

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 15 – Presentation of Debt Issuance Costs
As of January 1, 2016, the Company adopted Accounting Standards Update (“ASU”) No. 2015-03 “Simplifying the Presentation of Debt Issuance Costs,” which requires that debt issuance costs be presented in the consolidated statement of condition as a direct deduction from the carrying amount of debt liability. This ASU is required to be applied retrospectively to all periods presented. The following table summarizes the impact of retrospective application to the consolidated statement of condition for the year ended December 31, 2015:
December 31,
(dollars in thousands)       2015
Other assets
       As previously reported $ 24,908
       As reported under the new guidance 24,096

Total assets
       As previously reported $ 4,016,721
       As reported under the new guidance 4,015,909

Subordinated debentures
       As previously reported $ 55,155
       As reported under the new guidance 54,343

Total liabilities
       As previously reported $ 3,539,377
       As reported under the new guidance 3,538,565

41

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 Company’s results of operations for the periods presented herein and financial condition as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014.~~2015. 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 and regulations issued ~~thereafter;~~thereunder; (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.~~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 “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 Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. The Company has identified the determination of the allowance for 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 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 Company applies the guidance in FASB ASC 820-10-35 when determining fair value for the 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 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.
Income Taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns.
Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of operations. Note 12 of the Notes to Consolidated Financial Statements included in the Company’s ~~2014~~ Form 10-K for the year ended December 31, 2015 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 legacy ConnectOne was completed (the “Merger”). Accordingly, third quarter 2015 and 2014 results reflect the operations of the combined 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 both the three months ended ~~September 30,~~March 31, 2016 and March 31, 2015 amounted to ~~$10.8~~$10.4 million, ~~compared to $1.7 million for the comparable three-month period ended September 30, 2014. The Company’s~~or $0.34 per diluted earnings per share were $0.36 for the three months ended September 30, 2015 as compared with diluted earnings per share of $0.06 for the same three months of 2014. Two significant items negatively impacted 2014 pre-tax results: (i) $8.8 million in merger-related expenses and (ii) $4.6 million loss on extinguishment of debt.share.
Net income available to common stockholders for the nine months ended September 30, 2015 amounted to $31.7 million compared to $10.5 million for the comparable nine-month period ended September 30, 2014. The Company’s diluted earnings per share were $1.04 for the nine months ended September 30, 2015 as compared with diluted earnings per share of $0.49 for the first nine months of 2014. Two significant items negatively impacted 2014 pre-tax results: (i) $10.6 million in merger-related expenses and (ii) $4.6 million loss on extinguishment of debt.
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 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.
Fully taxable equivalent ~~(“FTE”)~~ net interest income for the ~~third~~first quarter of ~~2015~~2016 was ~~$30.4~~$32.0 million, an increase of ~~$2.2~~$3.1 million, or ~~7.9%~~10.7%, from the same quarter of ~~2014.~~2015. This was a result of a ~~12.8%~~17.2% increase in average interest-earning assets due to significant organic loan growth, partially offset by a 1623 basis-point contraction inof the net interest margin. Included in net interest income was accretion and amortization of purchase accounting adjustments of $1.3 million during the ~~third~~first quarter of ~~2015~~2016 and ~~$2.9~~$1.8 million in the ~~third~~same quarter of ~~2014.~~2015. Excluding these purchase accounting adjustments, the adjusted net interest margin was ~~3.35%~~3.31% in the ~~third~~first quarter of ~~2015, 6~~2016, 15 basis points ~~higher~~lower than the ~~2014 third~~2015 first quarter adjusted net interest margin of ~~3.29%~~3.46%. The ~~improvement~~reduction in the adjusted net interest margin in the ~~third~~first quarter of ~~2015~~2016 versus the same ~~2014~~2015 period was primarily attributable to an improved mix of interest earning assets arising from a greater proportion of average loans in third quarter of 2015 along with a reduction in the average rate paid on borrowings, which resulted from a $70 million debt extinguishment and subsequent refinancing accomplished at the end of the third quarter of 2014.
FTE net interest income for the first nine months of 2015 was $88.6 million, an increase of $36.0 million, from the same period of 2014. This was a result of a 63.3% increase in average interest-earning assets, due primarily to the Merger and, to a lesser extent, strong organic growth, coupled with a 10 basis-point widening in the net interest margin. Included in net interest income was accretion and amortization of purchase accounting adjustments of $4.7 million during the first nine months of 2015 and $2.9 million for the first nine months of 2014. Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.41% in the first nine months of 2015, 11 basis points higher than the same prior-year period. The improvement in the adjusted net interest margin in 2015 versus 2014 was attributable to a decline in yield on loans combined with an ~~improved mix~~increase in overall funding rates. The decline in loan yields largely reflects the impact of a protracted low interest ~~earning assets (specifically, a greater proportion~~rate environment, while the increase in the cost of ~~higher yielding loans~~funds was due to the June 30, 2015 issuance of approximately $50 million in subordinated debt, the extension of liability duration in connection with interest rate risk management, and ~~a lower proportion~~the impact of ~~lower-yielding securities) arising primarily from the Merger.~~an increasingly competitive environment for deposits.
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Average Statements of Condition with Interest and Average Rates
The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ the Company’s average assets, liabilities and stockholders’ equity. The Company’s net interest income, net interest spread and net interest margin are also reflected.
~~Average Statements of Condition with Interest and Average Rates~~
Three Months Ended March 31,
2016 2015
Three Months Ended September 30, Interest Interest
2015 2014 Average Income/ Average Average Income/ Average
Average
Balance Interest
Income/
Expense Average
Rate (7) Average
Balance Interest
Income/
Expense Average
Rate (7)      Balance      Expense      Rate (7)      Balance      Expense      Rate (7)
(dollars in thousands) (dollars in thousands)
Interest-earning assets:
Investment securities (1) (2) $ 483,677 $ 4,055 3.33 % $ 520,568 $ 4,372 3.33 % $ 415,481 $ 3,499      3.39 % $ 509,931 $ 4,268      3.39 %
Loans (2) (3) (4) 2,863,708 32,446 4.50 % 2,344,410 28,218 4.78 % 3,189,572 35,206 4.44 2,571,552 29,453 4.65
Federal funds sold and interest bearing with banks 90,712 134 0.59 76,138 43 0.23
Restricted investment in bank stocks 66,867 297 4.38 % 163,471 265 4.98 % 33,193 352 4.26 25,273 220 3.54
Federal funds sold and interest bearing with banks 26,899 43 0.26 % 21,107 88 0.21 %
Total interest-earning assets 3,441,151 36,841 4.25 % 3,049,556 32,943 4.29 % 3,728,958 39,191 4.23 3,182,894 33,984 4.33
Allowance for loan and lease losses (18,157 ) (11,250 ) (27,221) (14,749)
Noninterest earning assets 306,509 312,293 332,638 298,675
Total liabilities and stockholders’ equity $ 3,729,503 $ 3,350,599
Total assets $ 4,034,375 $ 3,466,820

Interest-bearing liabilities:
Money market deposits $ 710,767 $ 794 0.44 % $ 698,686 $ 677 0.38 % $ 782,757 $ 812 0.42 $ 707,474 $ 722 0.41
Savings deposits 220,481 146 0.26 % 233,041 144 0.25 % 215,491 157 0.29 222,613 162 0.29
Time deposits 787,262 2,391 1.20 % 676,291 1,474 0.86 % 807,801 2,535 1.26 688,989 1,818 1.07
Other interest-bearing deposits 352,156 324 0.37 % 375,041 429 0.45 % 377,696 435 0.46 349,628 323 0.37
Total interest-bearing deposits 2,070,666 3,655 0.70 % 1,983,059 2,724 0.54 % 2,183,745 3,939 0.73 1,968,704 3,025 0.62

Borrowings 544,774 1,944 1.42 % 430,238 1,988 1.83 % 684,469 2,413 1.42 534,052 1,968 1.49
Capital lease 2,933 44 5.95 % 3,044 45 5.87 % 2,874 43 6.02 2,989 45 6.10
Subordinated debentures 55,155 816 5.87 % 5,155 40 3.08 %
Subordinated debentures (8) 55,155 811 5.91 5,155 40 3.14
Total interest-bearing liabilities 2,673,528 6,459 0.96 % 2,421,496 4,797 0.79 % 2,926,243 7,206 0.99 2,510,900 5,078 0.82

Demand deposits 560,129 465,369 609,312 481,500
Other liabilities 24,164 17,349 16,317 20,200
Total noninterest-bearing liabilities 584,293 482,718 625,629 501,700
Stockholders’ equity 471,682 446,385 482,503 454,220
Total liabilities and stockholders’ equity $ 3,729,503 $ 3,350,599 $ 4,034,375 $ 3,466,820
Net interest income (tax equivalent basis) 30,382 28,146 31,985 28,906
Net interest spread (5) 3.29 % 3.50 % 3.24 % 3.51 %
Net interest margin (6) 3.50 % 3.66 % 3.45 % 3.68 %
Tax equivalent adjustment (655 ) (600 ) (665) (614)
Net interest income $ 29,727 $ 27,546 $ 31,320 $ 28,292

(1) Average balances are based on amortized cost.
(2) Interest income is presented on a tax equivalent basis using 35% federal tax rate.
(3) Includes loan fee income.
(4) Loans include 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~~assets.
(7) Rates are annualized.
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(8) Amount does not reflect netting of debt issuance costs of $763 for the three months ended March 31, 2016.

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~~Average Statements of Condition with Interest and Average Rates~~
Nine Months Ended September 30,
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) $ 496,375 $ 12,442 3.35 % $ 513,221 $ 13,441 3.50 %
Loans (2) (3) (4) 2,709,332 92,279 4.55 % 1,437,381 48,969 4.55 %
Federal funds sold and interest bearing with banks 65,663 127 0.26 % 13,146 408 4.15 %
Restricted investment in bank stock 26,385 797 4.04 % 55,089 88 0.21 %
Total interest-earning assets 3,297,755 105,645 4.28 % 2,018,837 62,906 4.17 %
Allowance for loan and lease losses (16,469 ) (10,791 )
Noninterest earning assets 302,316 226,410
Total liabilities and stockholders’ equity $ 3,583,602 $ 2,234,456

Interest-bearing liabilities:
Money market deposits $ 692,919 $ 2,204 0.43 % $ 509,212 $ 1,771 0.46 %
Savings deposits 220,639 465 0.28 % 185,986 394 0.28 %
Time deposits 742,037 6,339 1.14 % 342,177 2,205 0.86 %
Other interest-bearing deposits 349,626 972 0.37 % 358,482 973 0.36 %
Total interest-bearing deposits 2,005,221 9,980 0.67 % 1,395,857 5,343 0.51 %

Borrowings 548,013 6,022 1.47 % 243,597 4,752 2.61 %
Capital lease 2,961 134 6.05 % 1,026 45 5.87 %
Subordinated debentures 22,188 904 5.45 % 5,155 117 3.03 %
Total interest-bearing liabilities 2,578,383 17,040 0.88 % 1,645,635 10,257 0.83 %

Demand deposits 514,936 307,249
Other liabilities 26,917 15,018
Total noninterest-bearing liabilities 541,853 322,267
Stockholders’ equity 463,366 266,374
Total liabilities and stockholders’ equity $ 3,583,602 $ 2,234,276
Net interest income (tax equivalent basis) 88,605 52,649
Net interest spread (5) 3.40 % 3.34 %
Net interest margin (6) 3.59 % 3.49 %
Tax equivalent adjustment (1,908 ) (1,829 )
Net interest income $ 86,697 $ 50,820
~~(1)~~ ~~Average balances are based on amortized cost.~~
~~(2)~~ ~~Interest income is presented on a tax equivalent basis using 35% federal tax rate.~~
~~(3)~~ ~~Includes loan fee income.~~
~~(4)~~ ~~Loans include 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.~~
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Noninterest Income
Noninterest income totaled ~~$3.8~~$1.2 million in the ~~third~~first quarter of ~~2015, an increase~~2016, a decrease of ~~$2.6~~$0.4 million from ~~$1.2~~$1.6 million in the comparable prior-year quarter. ~~The increase was due to an increase in net gains on sale~~There were no securities sold during the first quarter of ~~investment securities of $1.9 million and a fee of approximately $0.7 million collected in satisfaction of an equity participation in a certain credit extension. Net securities~~2016. Securities gains were ~~$2.1 million and $0.1~~$0.5 million for the ~~third~~first quarter of ~~2015 and 2014, respectively.~~
2015.
Noninterest income includes bank-owned life insurance income, deposit and loan fees, annuities and life insurance commissions, and gains on sales of residential 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 in future periods.
Noninterest income totaled $8.8 million for the nine months ended September 30, 2015, an increase of $3.4 million from $5.4 million in the comparable prior-year period. The increase was primarily due to an insurance recovery of $2.2 million and an increase of $0.7 million in net securities gains.
Noninterest Expense
Noninterest expenses for the ~~third~~first quarter of ~~2015~~2016 were ~~$13.3~~$14.4 million, a ~~$12.1~~$1.7 million, or ~~47.6%, decrease from $25.4 million in the third quarter of 2014, and were $40.9 million for the first nine months of 2015, a $1.3 million, or 3.3%~~13.6%, increase from ~~$39.6~~$12.6 million in the first ~~nine months~~quarter of ~~2014.~~2015. The ~~factors contributing~~increase was largely attributable to ~~the decrease~~a $1.0 million increase in ~~the quarterly comparison were merger expenses of $8.8 million and debt extinguishment charges of $4.6 million incurred in 2014, offset by increases of $0.6 million in salaries~~salary and employee benefits, ~~expenses, $0.3~~$0.2 million in professional and consulting ~~expenses~~expense, $0.2 in occupancy and equipment expense, and $0.1 million in occupancy and equipment expenses. The factors contributing to the increase in the year-to-date comparison were increases, due to the merger and organic growth, in salary and employee benefits expenses of $7.3 million, occupancy charges of $2.1 million and all other expenses, including data processing, all resulting from increased levels of business and ~~consulting fees, of $4.7 million, partially offset by decreases in merger expenses of $10.6 million and debt extinguishment charges of $4.6 million.~~staff resulting from organic growth.
Income Taxes
Income tax expense was ~~$5.2 million and $15.3~~$4.8 million for the ~~three and nine months ended September 30, 2015, respectively,~~first quarter of 2016, compared ~~with $0.3 million and $3.9~~to $5.0 million for the ~~three~~first quarter of 2015, resulting in effective tax rates of 31.5% and ~~nine months ended September 30, 2014,~~32.6% for the first quarter of 2016 and first quarter of 2015, respectively.The effective tax ~~rates were 32.5% for both the third quarter and first nine months of 2015, compared with 12.5% and 26.8%,~~rate for the ~~third quarter and first nine months of 2014, respectively. The lower effective tax rates in 2014 were due~~full year 2016 is currently expected to ~~a relatively lower level of taxable income compared with 2015, primarily due to merger charges.~~
be approximately 31.5%.
Financial Condition
Loan Portfolio
Commercial lending is the Company’s primary business activity. The Company’s loan portfolio consists of commercial, residential and consumer loans, serving the diverse client base in its market area. The composition of the Company’s portfolio remains relatively constant but can change due to factors such as the economic climate, the level and fluctuations in interest rates, real estate values and employment metrics. Organic growth (i.e., growth other than through mergers and acquisitions) is generated through business development, repeat client requests for new financings, penetration into existing markets and entry into new markets.
The Company seeks to create growth in commercial lending by offering client-focused products, competitive pricing and by capitalizing on the positive trends in its market area. Products offered are designed to meet the financial requirements of the Company’s clients. It is the objective of the Company’s credit policies to diversify the commercial loan portfolio to limit concentrations in any single segment.
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The following table sets forth the composition of our loan portfolio, excluding loans held for sale and unearned net origination fees and costs, by type of loan at the ~~periodsindicated.~~periodsindicated.
Dollar
September 30, 2015 December 31, 2014 Dollar
Change March 31, 2016 December 31, 2015 Change
Amount % Amount % 2015 vs. 2014      Amount      %      Amount      %      2016 vs. 2015
(dollars in thousands) (dollars in thousands)
Commercial $ 569,605 19.3 % $ 499,816 19.7 % $ 69,789 $ 601,708 18.4% $ 570,116 18.4% $ 31,592

Commercial real estate 1,873,714 63.4 1,634,510 64.4 239,204 2,028,301 62.1 1,966,696 63.4 61,605

Commercial construction 283,623 9.6 167,359 6.6 116,264 402,594 12.3 328,838 10.6 73,756

Residential real estate 225,158 7.6 234,967 9.2 (9,809 ) 231,319 7.1 233,690 7.5 (2,371)

Consumer 3,569 0.1 2,879 0.1 690 1,851 0.1 2,454 0.1 (603)

Gross loans $ 2,955,669 100.0 % $ 2,539,531 100.0 % $ 416,138 $     3,265,773     100.0% $     3,101,794     100.0% $ 163,979

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At ~~September 30, 2015,~~March 31, 2016, total gross loans amounted to ~~$3.0~~$3.3 billion, an increase of ~~$0.4~~$0.2 billion, or ~~16.4%~~5.3%, as compared to December 31, ~~2014.~~2015. Net loan growth was primarily attributable to multi-family ($~~165 million),~~32 million, excluding a $28 million loan reclassified during the current quarter as multi-family from other commercial real ~~estate ($74 million)~~estate), commercial and industrial (“C&I”) ($7032 million), other commercial real estate ($29 million, excluding the aforementioned reclassification) and construction ($~~116~~74 million). Management’s current intent is to maintain a multi-family portfolio concentration in the range of 25-30% of total loans, while growing the C&I and construction segments. The growth in loans was funded with increases in deposits, borrowings and subordinated debt.
At ~~September 30, 2015,~~March 31, 2016, acquired loans remaining in the loan portfolio totaled ~~$0.9~~$0.8 billion, compared to ~~$1.2~~$0.9 billion as of December 31, ~~2014.~~2015.
Allowance for Loan and ~~lease~~Lease Losses and ~~related~~Related Provision
The purpose of the allowance for loan and lease losses (the “ALLL”) is to establish a valuation allowance for probable incurred losses in the loan portfolio. Additions to the ALLL are made through provisions charged against current operations and through recoveries made on loans previously charged off. The 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 external and portfolio risk factors. In establishing an appropriate 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. The Company’s analysis of its ALLL also takes into consideration the potential impact that current trends may have on the 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 Company’s allowance for loan and lease losses. Such agencies may require the Company to increase the ALLL based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in the State of New Jersey. Future adjustments to the 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 Company’s control.
At ~~September 30, 2015,~~March 31, 2016, the allowance was ~~$21.5~~$29.1 million as compared to ~~$14.2~~$26.6 million at December 31, ~~2014.~~2015. Provisions to the allowance for the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 totaled ~~$4.2~~$3.0 million, ~~and $7.6 million, respectively,~~ compared to ~~$1.3 and $2.2 million~~$1.8 for the same ~~periods~~period in ~~2014.~~2015. The increase to the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 primarily resulted from approximately ~~$2.0~~$1.5 million ~~in additional provisioning related~~of specific allocations to the Bank’s taxi ~~cab~~ medallion ~~loan~~ portfolio, ~~and the remainder~~partially offset by a reduced level of ~~the increase reflects higher organic loan growth.~~non-Taxi specific allocations. See “Asset Quality” for a discussion of the taxi cab medallion portfolio. There were ~~$122~~$498 thousand ~~and $177 thousand~~in net charge-offs during the three months ~~and nine months~~ ended ~~September 30, 2015, respectively,~~March 31, 2016, compared to ~~$7 thousand and $424~~$52 thousand in net charge-offs for the three ~~month and nine~~ months ended ~~September 30, 2014, respectively.~~March 31, 2015. The allowance for loan and lease losses as a percentage of total loans amounted to ~~0.73%~~0.89% at ~~September 30, 2015~~March 31, 2016 compared to ~~0.56%~~0.86% at December 31, ~~2014~~2015 and ~~0.50%~~0.60% at ~~September 30, 2014.~~
March 31, 2015.
The level of the allowance for the respective periods of ~~2015~~2016 and ~~2014~~2015 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 ALLL at ~~September 30, 2015~~March 31, 2016 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.
47
47

Changes in the allowance for loan and lease losses are presented in the following table for the periods indicated.
Three Months Ended
March 31,
      2016       2015
(dollars in thousands)
Average loans for the period $       3,189,572 $       2,571,552
Loans receivable at end of period $ 3,263,813 $ 2,640,739

Analysis of the Allowance for loan and lease losses:
Balance - beginning of year $ 26,572 $ 14,160
Charge-offs:
              Commercial (445) (45)
              Commercial real estate - (4)
              Residential real estate (67) -
              Consumer - (11)
       Total charge-offs (512) (60)
Recoveries:
              Commercial 1 6
              Commercial real estate 13 -
              Residential real estate - 1
              Consumer - 1
       Total recoveries 14 8
Net charge-offs (498) (52)
Provision for loan and lease losses 3,000 1,825
Balance - end of period $ 29,074 $ 15,933
Ratio of annualized net charge-offs during the period to average loans during the period 0.06% 0.01%
Allowance for loan and lease losses as a percent of total loans 0.89% 0.60%

Nine Months Ended
September 30,
2015 2014
(dollars in thousands)
Average loans for the period $ 2,709,332 $ 1,437,381
Loans receivable at end of period 2,953,381 2,426,765

Analysis of the Allowance for loan and lease losses:
Balance - beginning of year $ 14,160 $ 10,333
Charge-offs:
Commercial (100 ) (333 )
Commercial real estate (406 ) —
Residential real estate — (108 )
Consumer (13 ) (7 )
Total charge-offs (519 ) (448 )
Recoveries:
Commercial 12 —
Commercial real estate 327 11
Residential real estate 2 13
Consumer 1 —
Total recoveries 342 24
Net charge-offs (177 ) (424 )
Provision for loan and lease losses 7,550 2,209
Balance - end of period $ 21,533 $ 12,118
Ratio of annualized net charge-offs during the period to average loans during the period 0.01 % 0.04 %
Allowance for loan and lease losses as a percent of total loans 0.73 % 0.50 %
Asset Quality
The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix. The Company 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 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 nonaccrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on nonaccrual loans are generally applied against principal. A loan may be restored to an accruing basis when all past due amounts have been collected. Loans past due 90 days or more which are both well-secured and in the process of collection may remain on an accrual basis.
Nonperforming assets include nonaccrual loans and 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 90 days. Performing troubled debt restructured loans represent loans to borrowers experiencing financial difficulties on which a concession was granted, such as a reduction in interest rate below the current market rate for new debt with similar risks or modified repayment terms, and are performing under the restructured terms.
48

The following table sets forth, as of the dates indicated, the amount of the Company’s nonaccrual loans, other real estate owned ~~loans 90 days or more past due and still accruing,~~(“OREO”), performing troubled debt ~~restructured~~restructurings (“TDRs”) and loans past due 90 days and ~~the carrying amount of the purchased-credit impaired loans.~~ still accruing:
September 30,
2015 December 31,
2014
(in thousands)
Nonaccrual loans $ 12,888 $ 11,609
Other real estate owned 3,244 1,108
Total nonperforming assets $ 16,132 $ 12,717

Performing troubled debt restructured loans $ 77,090 $ 1,763
Loans 90 days or more past due and still accruing 268 1,211
Purchased-credit impaired loans (carrying amount) 9,168 9,821
March 31, December 31,
      2016       2015
Nonaccrual loans $ 21,450 $ 20,737
OREO 1,696 2,549
Total nonperforming assets $ 23,146 $ 23.286
Performing TDRs $      95,122 $      85,925
Loans past due 90 days and still
       accruing $ 6,631 $ -

Nonaccrual loans to total loans
       receivable 0.66% 0.67%
Nonperforming assets to total assets 0.57% 0.58%
Nonperforming assets, performing
       TDRs, and loans past due 90 days
       and still accruing to total loans
       receivable 3.83% 3.52%

The increase in TDRs was primarily due to 47six loans secured by ~~NYC~~New York City taxi medallions totaling ~~$75.4~~$8.0 million that were modified ~~in troubled debt restructurings~~ during the ~~second~~first quarter of ~~2015. The~~2016. Four of these modifications consisted of ~~a deferral of principal amortization from approximately 25-30 year amortization to interest-only. There was no extension~~short-term extensions of the loans’ contractual maturity dates at the pre-existing contractual rate and ~~the loans’~~in two of these modifications interest rates ~~were increased~~decreased from approximately 3%~~-3.25%~~ to ~~3.75%~~1.3%-1.6%. ~~There was no forgiveness of principal and the average remaining maturity of the loans was approximately 23 months at the time of modification.~~ These six loans were accruing prior to modification, ~~and~~while five remained in accrual status post-modification.
As of March 31, 2016, loans secured by New York City taxi medallions totaled $103.2 million, of which $99.9 million was current and $1.4 million was past due 30-59 days. Troubled debt restructurings associated with this portfolio totaled $86.4 million and total nonaccrual loans were $1.9 million. The ~~$2.0~~Company has allocated $6.0 million in specific allocations ~~associated~~ with ~~taxi~~respect to loans whose loan terms had been modified in troubled debt restructurings as of March 31, 2016. The average net loan-to-value ratio of the medallion ~~lending referred to~~portfolio was approximately 92%, based on the Company’s valuation of the medallions discussed below.
The $6.0 million in specific allocations referenced above ~~was~~were calculated based on the present value of estimated cash flows, including contractual debt interest service through maturity, and principal repayments based on the fair value of the collateral ~~and excludes~~excluding any consideration for ~~the~~ personal guarantees of borrowers, which ~~provides~~provide an additional source of repayment but cannot be relied upon. The valuation per corporate medallion used for the calculation at ~~September 30, 2015~~March 31, 2016 was ~~$814,000. A~~approximately $775,000. An additional $1.5 million specific allocation was required at ~~September 30, 2015~~March 31, 2016 due to a decline in the Company’s estimated valuation of taxi medallions from ~~June 30,~~December 31, 2015, when ~~there~~the specific allocation was ~~no specific reserve.~~$4.5 million.
As of September 30, 2015, taxi medallion loans, all of which are secured by New York City taxi medallions, totaled $103.3 million, and were 100% current as to principal and interest. The average loan-to-value ratio, assuming current estimated values was approximately 92.7%.
~~During the nine months ended September 30, 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, 2014 to $105.7 million, or 3.6% of total loans, at September 30, 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 $75.4 million of taxi medallion loans being classified as troubled debt restructurings during the second quarter of 2015.
Investment Portfolio
At ~~September 30, 2015,~~March 31, 2016, 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, 2015, approximately $44.4 million in~~March 31, 2016, no investment securities were sold from the available-for-sale portfolio. The cash flow from the ~~sale of~~ investment securities was primarily used to fund loan growth.
For the three months ended ~~September 30, 2015,~~March 31, 2016, average investment securities decreased ~~$36.9~~$94.5 million to approximately ~~$483.7~~$415.5 million, or ~~14.1%~~11.1% of average interest-earning assets, from ~~$520.6~~$509.9 million on average, or ~~17.1%~~16.0% of average interest-earning assets, for the comparable period in 2014. For the nine months ended September 30, 2015, average investment securities decreased $16.8 million to approximately $496.4 million, or 15.1% of average interest-earning assets, from $513.2 million on average, or 25.4% of average interest-earnings assets, for the comparable period in 2014.
2015.
At ~~September 30, 2015,~~March 31, 2016, 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 ~~$2.5~~$1.3 million as compared with net unrealized gains of ~~$4.9~~$0.7 million at December 31, ~~2014.~~2015. At ~~September 30, 2015,~~March 31, 2016, 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.
49

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, 2015~~March 31, 2016 and December 31, ~~2014~~2015 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.
49
The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates.
Based on our model, which was run as of ~~September 30,~~March 31, 2016, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 5.82%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 3.51%. As of December 31, 2015, we estimated that over the next one-year period, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 3.84%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 3.78%.   As of December 31, 2014, we estimated that over the next one-year period, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 0.29%5.65%, while a 100 basis-point instantaneous decrease in the general level of interest rates would decrease our net interest income by ~~3.41%~~3.62%.
Based on our model, which was run as of ~~September 30,~~March 31, 2016, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 6.91%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.29%. As of December 31, 2015, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by ~~5.36%~~6.66%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~6.41%~~5.59%.   As of December 31, 2014, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 2.76%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 6.54%.
An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of ~~September 30, 2015,~~March 31, 2016, would decline by ~~10.95%~~10.32% with an instantaneous rate shock of up 200 basis points, and increase by ~~10.62%~~5.3% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, ~~2014,~~2015, would decline by ~~15.02%~~9.65% with an instantaneous rate shock of up 200 basis points, and increase by ~~13.65%~~8.20% with an instantaneous rate shock of down 100 basis points.
Estimated Change in
Interest Rates Estimated EVE Interest Rates Estimated Estimated Change in NII
(basis points)       EVE       Amount       %       (basis points)       NII       Amount       %
+300 $ 368,986 $ (70,461) (16.0) % +300 $ 132,218 $ 10,503 8.6 %
+200 394,087 (45,360) (10.3) +200 128,794 7,079 5.8
+100 417,015 (22,432) (5.1) +100 125,082 3,367 2.8
0 439,447 - 0.0 0 121,715 - 0.0
-100 462,792 23,345 5.3 -100 117,437 (4,278) (3.5)

Interest Rates Estimated Estimated change in EVE Estimated Estimated change in NII
(basis points) EVE Amount % NII Amount %
+300 $ 357,062 $ (77,571 ) (17.8 )% $ 124,943 $ 7,230 6.1 %
+200 387,045 (47,588 ) (10.9 ) 122,227 4,514 3.8
+100 412,208 (22,425 ) (5.2 ) 119,609 1,896 1.6
0 434,633 — 0.0 117,713 — 0.0
-100 480,809 46,176 10.6 113,259 (4,454 ) (3.8 )
Estimates of Fair Value
The estimation of fair value is significant to a number of the 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.
50

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 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.
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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, 2015,~~March 31, 2016, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of ~~September 30, 2015,~~March 31, 2016, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were ~~$466.5~~$368.2 million, which represented ~~12.2%~~9.0% of total assets and ~~17.5%~~10.4% of total deposits and borrowings, compared to ~~$416.4~~$466.5 million at December 31, ~~2014,~~2015, which represented ~~12.1%~~11.6% of total assets and ~~14.0%~~13.5% of total deposits and borrowings on such date.
The decrease in the current period was mainly attributable to a reduction in cash balances of $82.6 million at March 31, 2016 from December 31, 2015.
The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of ~~September 30, 2015,~~March 31, 2016, had the ability to borrow $1.6 billion. In addition, at ~~September 30, 2015,~~March 31, 2016, the Bank had in place borrowing capacity of $37 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 capacity based on pledged collateral of ~~$94~~$67.3 million. At ~~September 30, 2015,~~March 31, 2016, the Bank had aggregate available and unused credit of ~~$686.3~~$696.4 million, which represents the aforementioned facilities totaling $1.3 billion net of ~~$606~~$631 million in outstanding borrowings. At ~~September 30, 2015,~~March 31, 2016, outstanding commitments for the Bank to extend credit were ~~$589~~$584 million.
Cash and cash equivalents totaled ~~$158.5~~$118.3 million on ~~September 30, 2015, increasing~~March 31, 2016, decreasing by ~~$31.7~~$82.6 million from ~~$126.8~~$200.9 million at December 31, ~~2014.~~2015. Operating activities provided ~~$36.2~~$7.3 million in net cash. Investing activities used ~~$366.3~~$153.6 million in net cash, primarily reflecting an increase in ~~loans, which was offset in part by cash flow from the securities portfolio.~~loans. Financing activities provided ~~$361.7~~$63.6 million in net cash, primarily reflecting a net increase of ~~$191.0~~$102.2 million in deposits, ~~$50.0~~aredemption of $11.3 million from the repayment of ~~new subordinated debt,~~preferred stock, and a net ~~increase~~decrease of ~~$142.1~~$25.0 million in borrowings (consisting of ~~$625.0~~$50.0 million in new borrowings offset by repayments of ~~$482.9~~$75.0 million). ~~Borrowing activity was significantly higher during the nine months ended September 30, 2015 when compared to the same period of 2014 due to the Merger and continued growth in our lending operations.~~
Deposits
~~Deposits~~
Total deposits increased by ~~$191.0~~$102.1 million, or ~~7.7%~~3.7% to ~~$2.6~~$2.9 billion at ~~September 30, 2015.~~March 31, 2016, which was primarily attributable to increases intime deposits, interest-bearing demand and money market, offset by a decrease in non-interest-bearing demand. The following table sets forth the composition of our deposit base by the periodsindicated.
Dollar
March 31, 2016 December 31, 2015 Change
      Amount       %       Amount       %       2016 vs. 2015
(dollars in thousands)
Demand, noninterest-bearing $ 614,508 21.2 % $ 650,775 23.3 % $ (36,267)
Demand, interest-bearing & NOW 517,809 17.9 490,380 17.6 27,429
Money market 678,222 23.5 658,695 23.6 19,527
Savings 219,865 7.6 216,399 7.8 3,466
Time 862,667 29.8 774,717 27.7 87,950
       Total deposits $      2,893,071      100.0 % $      2,790,966      100.0 % $      102,105

51

September 30, 2015 December 31, 2014 Dollar
Change
Amount % Amount % 2015 vs. 2014
(dollars in thousands)
Noninterest-bearing demand $ 586,643 22.0 % $ 492,515 19.9 % $ 94,129

Interest-bearing demand 334,018 12.5 365,550 14.8 (31,533 )

Savings Deposits 220,199 8.3 224,638 9.1 (4,439 )

Money market deposits 743,277 27.9 723,505 29.2 19,772

Time Deposits 782,487 29.3 669,399 27.0 113,088

Total deposits $ 2,666,624 100.0 % $ 2,475,607 100.0 % $ 191,017
Subordinated Debentures
During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85% and ~~re-prices~~reprices quarterly. The rate at ~~September 30, 2015~~March 31, 2016 was ~~3.13%~~3.47%.
51
During June 2015, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain institutional accredited investors. The net proceeds from the sale of the Notes ~~are expected~~were used by the Parent Corporation to ~~be used~~contribute $35.0 million of common equity to ~~redeem,~~the Bank on ~~January 1,~~June 30, 2015, and to repay, on March 11, 2016, ~~$11.3~~$11.25 million ~~outstanding~~ of ~~its Senior Noncumulative Perpetual Preferred Stock~~SBLF preferred issued ~~in 2011~~ to the U.S. ~~Treasury under the Small Business Lending Fund Program, and~~Treasury. Remaining funds will be used for general corporate ~~purposes, which included the Parent Corporation contributing $35 million of the net proceeds to the Bank in the form of common equity.~~purposes. The Notes are non-callable for five years, have a stated maturity of July 1, 2025, and bear interest at a fixed rate of 5.75% per year, from and including ~~September~~June 30, 2015 to, but excluding July 1, 2020. From and including July 1, 2020 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 393 basis points.
Stockholders’ Equity
Total stockholders’ equity ~~amounted to $471.1~~was $475 million at ~~September 30, 2015, compared to $446.2~~March 31, 2016, a decrease of $3 million atfrom December 31, ~~2014.~~2015. The ~~increase~~decrease in ~~total~~ stockholders’ equity was ~~primarily attributable~~due to the $11.25 million payoff of our SBLF preferred stock, offset by an increase of $8 million in retained earnings ~~of $24.9 million~~ and approximately ~~$2.3~~$1 million of equity issuance related to stock-based compensation, including the exercise of options, offset by a $2.3 million decrease in other comprehensive income (primarily $2.3 million in unrealized losses on available for sale securities and $0.7 million in unrealized losses on cash flow hedges, offset by $0.7 million in pension plan actuarial gains).options. Book value per common share was ~~$15.23~~$15.74 at ~~September 30, 2015,~~March 31, 2016, compared to ~~$14.65~~$15.49 at December 31, ~~2014.~~2015. Tangible book value (i.e., total stockholders’ equity less preferred stock, goodwill and other intangible assets) per common share was ~~$10.26~~$10.78 at ~~September 30, 2015,~~March 31, 2016, compared to ~~$9.57~~$10.51 at December 31, ~~2014.~~
2015.
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 Company believes that a disclosure of tangible book value per share may be helpful for those investors who seek to evaluate the 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, 2015~~March 31, 2016 and December 31, ~~2014.~~2015.
March 31, December 31,
      2016       2015
(in thousands, except for share data)
Stockholders’ equity $ 474,727 $ 477,344
Less: Preferred stock - 11,250
Less: Goodwill and other intangible assets 149,600 149,817
       Tangible common stockholders’ equity $ 325,127 $ 316,277

Common stock outstanding at period end 30,163,078 30,085,663

Book value per common share $ 15.74 $ 15.49
Less: Goodwill and other intangible assets 4.96 4.98
       Tangible book value per common share $ 10.78 $ 10.51

September 30,
2015 December 31,
2014
(in thousands, except for share data)
Stockholders’ equity $ 471,146 $ 446,219
Less: Preferred stock 11,250 11,250
Less: Goodwill and other intangible assets 150,034 150,734
Tangible common stockholders’ equity $ 309,862 $ 284,235

Common stock outstanding at period end 30,197,619 29,694,636

Book value per common share $ 15.23 $ 14.65
Less: Goodwill and other intangible assets 4.97 5.08
Tangible book value per common share $ 10.26 $ 9.57
During the nine months ended September 30, 2015, the Company had no purchases of common stock associated with its stock buyback programs. At September 30, 2015, there were 652,868 shares available for repurchase under the Company’s stock buyback programs.
Regulatory Capital and Capital Adequacy
The maintenance of a solid capital foundation is a primary goal for the Company. Accordingly, capital plans and dividend policies are monitored on an ongoing basis. The 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 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.
52

The following is a summary of regulatory capital amounts and ratios as of ~~September 30, 2015~~March 31, 2016 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository ~~institution.~~institution (dollars in thousands).
To Be Well-Capitalized Under
For Capital Adequacy Prompt Corrective Action
ConnectOne Bancorp, Inc. Purposes Provisions
At March 31, 2016      Amount      Ratio      Amount      Ratio      Amount      Ratio
(dollars in thousands)
Tier 1 leverage capital $ 336,588 8.66 % $ 155,450 4.00 % N/A N/A
CET I risk-based ratio 331,433 9.06 164,619 4.50 N/A N/A
Tier 1 risk-based capital 336,588 9.20 219,493 6.00 N/A N/A
Total risk-based capital       415,662 11.36       292,657       8.00 N/A N/A

To Be Well-Capitalized Under
For Capital Adequacy Prompt Corrective Action
ConnectOne Bank Purposes Provisions
At March 31, 2016 Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
Tier 1 leverage capital $ 382,063 9.83 % $ 155,398 4.00 % $ 194,247   5.00 %
CET I risk-based ratio 382,063 10.45 164,556 4.50 237,964 6.50
Tier 1 risk-based capital 382,063 10.45 219,408 6.00 292,879 8.00
Total risk-based capital 411,137 11.24 292,544 8.00 366,099                  10.00

ConnectOne Bancorp, Inc. For Capital Adequacy
Purposes To Be Well-Capitalized Under
Prompt Corrective Action
Provisions
At September 30, 2015 Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)

Tier 1 leverage capital $ 331,649 9.26 % $ 143,263 4.00 % N/A N/A
CET I risk-based ratio 315,244 9.33 151,990 4.50 N/A N/A
Tier 1 risk-based capital 331,649 9.82 202,653 6.00 N/A N/A
Total risk-based capital 403,182 11.94 270,204 8.00 N/A N/A

ConnectOne Bank For Capital Adequacy
Purposes To Be Well-Capitalized Under
Prompt Corrective Action
Provisions
At September 30, 2015 Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)

Tier 1 leverage capital $ 365,768 10.22 % $ 143,215 4.00 % $ 179,019 5.00 %
CET I risk-based ratio 365,768 10.83 151,945 4.50 219,476 6.50 %
Tier 1 risk-based capital 365,768 10.83 202,594 6.00 270,125 8.00 %
Total risk-based capital 387,301 11.47 270,125 8.00 337,656 10.00 %
N/A - not applicable
As of ~~September 30, 2015,~~March 31, 2016, management believes that each of the Bank and the Company meet all capital adequacy requirements to which they are subject.
The new Basel III
~~The Basel Committee on Banking Supervision (the “Basel Committee”) provides~~ rules require a ~~forum~~“capital conservation buffer,” for ~~regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve~~both 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;Company 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~~Bank. When fully phased 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 Federal Deposit Insurance Corporation, along with the other U.S. bank regulatory agencies, approved a final rule revising regulatory capital rules applicable to 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 were required to transition into the new rule beginning on January 1, ~~2015. The new rules also include a one-time opportunity to opt-out~~2019, each 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 September 30, 2015. As of that time, the Company and the Bank ~~elected~~will be required to ~~opt-out~~maintain a 2.5% capital conservation buffer, above and beyond the capital levels otherwise required under applicable regulation. The implementation of this capital conservation buffer began on January 1, 2016 at a level of 0.625%, and will increase by 0.625% on each subsequent January 1 until it reaches 2.5% on January 1, 2019. Under this guidance banking institutions with a CET1, Tier 1 Capital Ratio and Total Risk Based Capital Ratio above the minimum regulatory adequate capital ratios but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the ~~treatment~~shortfall.
As of ~~AOCI within Basel III.~~
March 31, 2016 both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the CET 1 Capital Ratio which was 2.565% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 2.605% above the minimum buffer ratio.
53

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.

54

Item 4. Controls and Procedures
a)Disclosure controls and procedures. As of the end of the Company’s most recently completed fiscal quarter covered by this report, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15.Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, the Company’s disclosure controls and procedures are not effective in ensuring that information required to be disclosed by the 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 Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
In the course of business, and from time to time, the Company modifies loans at the request of borrowers. Modifications that involve borrowers experiencing financial difficulties and that result in concessions regarding loan terms including reduced interest rates, deferral of principal and extension of maturities can be deemed troubled debt restructurings. We recently identified material weaknesses in our controls over the identification and measurement of troubled debt restructurings in our taxi medallion portfolio, which, due to loan size and structure, is underwritten using market and industry data, and did not contain individual loan information required to accurately assess whether or not a modification should be deemed a ~~TDR.~~TDR and the measurement of impairment for such TDRs. Upon completion of the review, it was determined that $75.4 million carrying value of taxi medallion loans, which were originally deemed to not be TDRs, should have been deemed TDRs when they were modified in April 2015. ~~None of the remaining $27.9 million taxi medallion loan portfolio have been modified.~~
b)Changes in internal controls over financial reporting. ~~There~~When the material weaknesses were identified, we enhanced our internal controls concerning identification of all TDRs by (i) strengthening our policies and procedures, including requirements that we obtain and analyze current information on each individual borrower and (ii) enhancing oversight, monitoring and approval authorities, before agreeing to any modification of a borrower’s loan. We also enhanced our internal controls concerning measurement of TDR impairment with regard to taxi medallion loans by employing the services of a third-party firm specializing in the industry and implementing a control to evaluate the results of the third party. Despite these control enhancements, we cannot assert as of March 31, 2016 that our material weaknesses have been fully remediated, due to insufficient time to fully test these controls.
Other than as discussed above, there have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s last fiscal quarter to which this report relates that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting. Management is currently in the process of improving its controls with respect to identifying and measuring impairment of TDRs when loans are modified by reviewing and enhancing the financial documentation on an individual loan basis, calculating impairment based on objectively verifiable evidence and by strengthening management oversight.

55

PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The 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~~There have been no changes to the risks inherent in our business from those described under Item 1A ~~–Risk~~– Risk Factors of our Annual Report on Form ~~10-K, investors in our securities should consider the following additional information:~~10-K.

~~Due to the restatement of our Quarterly Report for the quarter ended June 30, 2015, we have concluded that our disclosure controls and procedures may not be effective.~~

As disclosed elsewhere in this Quarterly Report, we recently identified material weaknesses in our controls over the identification and measurement of troubled debt restructurings in our taxi medallion portfolio, which, due to loan size and structure, is underwritten using market and industry data, and did not contain individual loan information required to accurately assess whether or not a modification should be deemed a troubled debt restructuring (“TDR”). Upon completion of the review, it was determined that $75.4 million in carrying value of taxi medallion loans, which were originally deemed to not be TDRs, should have been deemed TDRs when they were modified in April 2015. All of the modified loans are fully performing in accordance with their modified terms, and there have been no missed payments regarding any of the modified loans.
When such errors occur, we evaluate the impact on our disclosure controls and procedures, including our internal controls over financial reporting. Because our controls did not timely identify the modified loans as TDRs, we have concluded our disclosure controls and procedures, with regard to the identification of TDRs in our taxi medallion portfolio, are not effective in ensuring that information required to be disclosed by the 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. Management is currently in the process of improving its controls with respect to identifying and measuring impairment of TDRs when loans are modified by reviewing and enhancing the financial documentation on an individual loan basis, calculating impairment based on objectively verifiable evidence and by strengthening management oversight. However, we can give you no assurances that we may not discover additional issues which make us conclude that our disclosure controls and procedures are not effective in the future, or that the failure of our disclosure controls and procedures may not have a material adverse effect on our results of operations or financial condition.
Changes in the value of New York City taxi medallions could have a material impact on our future reported results of operations, and could cause significant volatility in our reported results of operations in future periods.
A significant portion ($75.4 million) of our portfolio of loans secured by New York City taxi medallions has been classified as troubled debt restructurings (“TDRs”) and the level of specific allocations we may need to recognize with regard to these loans in future periods will be largely dependent upon the valuation we assign to these medallions. Because reported sales prices of these medallions recently have been very volatile, as the industry is under competitive stress, and do not necessarily represent orderly sales, we may also need to take into consideration factors beyond the market price of the medallions in determining our valuation, such as cash flow and industry prospects. In any case, our valuation may be volatile from period to period, and could result in our recognizing significant additional provisions if our valuation declines, while an increase in our valuation could result in a recapture, or reversal, of any such additional provisions. As a result, our results of operations could be materially adversely affected by declines in our valuation of New York City taxi medallions, even if our loans continue to perform as agreed, and we could experience significant volatility in our reported earnings if the reported prices for these medallions continue to be unsettled.
56

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 55. Other Information
Not applicable

5657

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

5758

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.~~
CONNECTONEBANCORP,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 9, 2015~~May 6, 2016 Date: ~~November 9, 2015~~May 6, 2016

5859

		(Mark One)

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

		For the Quarterly Period Ended ~~September 30, 2015~~March 31, 2016 OR

☐
	OR

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

	~~For the transition period from~~ to

	~~Commission File Number: 000-11486~~

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

Large accelerated filer ☐o	Accelerated filer ☒x	Non-accelerated filer ☐		oSmaller reporting company ☐
		(Do not check if smaller
		reporting company)	~~Smaller reporting company~~ o

Common Stock, no par value:	~~30,084,744~~30,179,900 shares
(Title of Class)	(Outstanding as of ~~November 9, 2015)~~May 6, 2016)

				Page

PART I – FINANCIAL INFORMATION


Item 1.		Financial Statements
		Consolidated Statements of Condition at ~~September 30, 2015~~March 31, 2016 (unaudited) and December 31, ~~2014~~2015		3
		Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~ (unaudited)		4
		Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~
		(unaudited)		5
		Consolidated Statements of Changes in Stockholders’ Equity for the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 (unaudited)
		and for the year ended December 31, ~~2014~~2015		6
		Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~ (unaudited)		7
		Notes to Consolidated Financial Statements		8

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	41	42

Item 3.		Qualitative and Quantitative Disclosures about Market Risks		54

Item 4.		Controls and Procedures		55

PART II – OTHER INFORMATION


Item 1.		Legal Proceedings		56

Item 1a.		Risk Factors		56

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	56	57

Item 3.		Defaults Upon Senior Securities		57

Item 4.		Mine Safety Disclosures		57

Item 5.		Other Information		57

Item 6.		Exhibits		58

~~Item 3.~~			~~Defaults Upon Senior Securities~~	56

~~Item 4.~~	~~Mine Safety Disclosures~~	56

~~Item 5.~~	~~Other Information~~	56

~~Item 6.~~	~~Exhibits~~	57

SIGNATURES

(in thousands, except for share data)	September 30, 2015			December 31, 2014
	(unaudited)
ASSETS
Cash and due from banks	$	30,100		$	31,813
Interest-bearing deposits with banks		128,421			95,034
Cash and cash equivalents		158,521			126,847

Investment securities:
Available-for-sale		224,214			289,532
Held-to-maturity (fair value of $234,493 and $231,445)		227,221			224,682

Loans held for sale		990			—
Loans receivable		2,953,381			2,538,641
Less: Allowance for loan and lease losses		21,533			14,160
Net loans receivable		2,931,848			2,524,481

Investment in restricted stock, at cost		30,362			23,535
Bank premises and equipment, net		21,523			20,653
Accrued interest receivable		11,662			11,700
Bank-owned life insurance		53,681			52,518
Other real estate owned		3,244			1,108
Goodwill		145,909			145,909
Core deposit intangibles		4,125			4,825
Other assets		24,953			22,782
Total assets	$	3,838,253		$	3,448,572
LIABILITIES
Deposits:
Noninterest-bearing	$	586,643		$	492,515
Interest-bearing		2,079,981			1,983,092
Total deposits		2,666,624			2,475,607
Borrowings		621,674			495,553
Subordinated debentures		55,155			5,155
Other liabilities		23,654			26,038
Total liabilities		3,367,107			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 September 30, 2015 and December 31, 2014; total liquidation value of $11,250 at September 30, 2015 and December 31, 2014		11,250			11,250
Common stock, no par value, authorized 50,000,000 shares; issued 32,261,541 shares at September 30, 2015 and 31,758,558 at December 31, 2014; outstanding 30,197,619 shares at September 30, 2015 and 29,694,636 at December 31, 2014		374,287			374,287
Additional paid-in capital		8,315			6,015
Retained earnings		97,321			72,398
Treasury stock, at cost (2,063,922 common shares at September 30, 2015 and December 31, 2014)		(16,717	)		(16,717	)
Accumulated other comprehensive loss		(3,310	)		(1,014	)
Total stockholders’ equity		471,146			446,219
Total liabilities and stockholders’ equity	$	3,838,253		$	3,448,572

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except for share and per share data)	2015		2014		2015		2014

Interest income
Interest and fees on loans	$	32,276	$	28,098		91,807	$	48,670
Interest and dividends on investment securities:
Taxable		2,669		2,916		8,340		8,840
Tax-exempt		901		892		2,666		2,840
Dividends		297		349		797		639
Interest on federal funds sold and other short-term investments		43		88		127		88
Total interest income		36,186		32,343		103,737		61,077
Interest expense
Deposits		3,655		2,725		9,980		5,343
Borrowings		2,804		2,072		7,060		4,914
Total interest expense		6,459		4,797		17,040		10,257
Net interest income		29,727		27,546		86,697		50,820
Provision for loan and lease losses		4,175		1,300		7,550		2,209
Net interest income after provision for loan and lease losses		25,552		26,246		79,147		48,611
Noninterest income
Annuities and insurance commissions		77		94		210		299
Bank-owned life insurance		388		401		1,162		912
Net gains on sale of loans held for sale		63		65		276		144
Deposit, loan and other income		1,224		502		2,145		1,967
Insurance recovery		—		—		2,224		—
Net gains on sales of investment securities		2,067		111		2,793		2,100
Total noninterest income		3,819		1,173		8,810		5,422
Noninterest expenses
Salaries and employee benefits		6,905		6,243		20,480		13,153
Occupancy and equipment		1,916		1,781		5,785		3,658
FDIC insurance		535		504		1,535		1,092
Professional and consulting		836		530		2,045		1,289
Marketing and advertising		247		209		634		276
Data processing		957		902		2,686		1,761
Merger-related expenses		—		8,784		—		10,573
Loss on extinguishment of debt		—		4,550		2,397		4,550
Amortization of core deposit intangible		217		248		700		260
Other expenses		1,688		1,649		4,643		3,028
Total noninterest expenses		13,301		25,400		40,905		39,640
Income before income tax expense		16,070		2,019		47,052		14,393
Income tax expense		5,228		253		15,309		3,851
Net income		10,842		1,766		31,743		10,542
Less: Preferred stock dividends		28		28		84		84
Net income available to common stockholders	$	10,814	$	1,738		31,659	$	10,458

Earnings per common share:
Basic	$	0.36	$	0.06		1.06	$	0.50
Diluted	$	0.36	$	0.06		1.04	$	0.49
Weighted average common shares outstanding:
Basic		30,045,818		29,636,001		29,786,374		20,819,241
Diluted		30,335,571		30,108,103		30,323,376		21,285,452
Dividend per common share	$	0.075	$	0.075		0.225	$	0.225

(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
Balanceas ofJanuary 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		—		—		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		—		—		—		31,743			—			—			31,743
Other comprehensive loss, net of tax		—		—		—		—			—			(2,296	)		(2,296	)
Dividend on series B preferred stock		—		—		—		(84	)		—			—			(84	)
Cash dividends declared on common stock ($0.225 per share)		—		—		—		(6,736	)		—			—			(6,736	)
Exercise of stock options (340,492 shares)		—		—		1,424		—			—			—			1,424
Restricted stock and performance units grants (162,491 shares)		—		—		—		—			—			—			—
Stock-based compensation expense		—		—		876		—			—			—			876
Balance as of September 30, 2015	$	11,250	$	374,287	$	8,315	$	97,321		$	(16,717	)	$	(3,310	)	$	471,146

								$ 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

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2015			2014			2015			2014
Net income	$	10,842		$	1,766		$	31,743		$	10,542
Less: preferred stock dividends		(28	)		(28	)		(84	)		(84	)
Net income available to common stockholders	$	10,814		$	1,738			31,659			10,458
Basic weighted average common shares outstanding		30,046			29,636			29,786			20,819
Plus: effect of dilutive options and awards		290			472			537			466
Diluted weighted average common shares outstanding		30,336			30,108			30,323			21,285
Earnings per common share:
Basic	$	0.36		$	0.06		$	1.06		$	0.50
Diluted		0.36			0.06			1.04			0.49

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	September 30, 2015
	(in thousands)
Investment securities available-for-sale
Federal agency obligations	$	30,474	$	438	$	(7	)	$	30,905
Residential mortgage pass-through securities		46,943		1,162		(14	)		48,091
Commercial mortgage pass-through securities		2,996		59		—			3,055
Obligations of U.S. states and political subdivisions		8,191		191		—			8,382
Trust preferred securities		16,087		385		(150	)		16,322
Corporate bonds and notes		76,049		2,418		(81	)		78,386
Asset-backed securities		21,403		2		(275	)		21,130
Certificates of deposit		1,896		27		(3	)		1,920
Equity securities		376		—		(38	)		338
Other securities		15,715		67		(97	)		15,685
Total	$	220,130	$	4,749	$	(665	)	$	224,214
Investment securities held-to-maturity
U.S. Treasury and agency securities	$	28,419	$	1,328	$	—		$	29,747
Federal agency obligations		35,519		642		(47	)		36,114
Residential mortgage-backed securities		4,240		19		(1	)		4,258
Commercial mortgage-backed securities		4,150		97		—			4,247
Obligations of U.S. states and political subdivisions		118,877		4,470		(46	)		123,301
Corporate bonds and notes		36,016		888		(78	)		36,826
Total	$	227,221	$	7,444	$	(172	)	$	234,493

Total investment securities	$	447,351	$	12,193	$	(837	)	$	458,707

								Lowest
					Gross			Credit
	Amortized		Fair		Unrealized			Rating
Issuer	Cost		Value		Gain (Loss)			Assigned

Countrywide Capital IV	$	1,771	$	1,804	$	33		BB+
Countrywide Capital V		2,747		2,829		82		BB+
Countrywide Capital V		250		257		7		BB+
Nationsbank Cap Trust III		1,576		1,426		(150	)	BB+
Morgan Stanley Cap Trust IV		2,500		2,537		37		BB
Morgan Stanley Cap Trust IV		1,743		1,775		32		BB
Goldman Sachs		1,000		1,149		149		BB
Stifel Financial		4,500		4,545		45		BBB-
Total	$	16,087	$	16,322	$	235

	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	)

	2015
(in thousands)	Amount of loss recognized in OCI (Effective Portion)			Amount of loss reclassified from OCI to interest income		Amount of loss recognized in other Non-interest income (Ineffective Portion)
Interest rate contracts	$	(1,153	)	$	—	$	—

	Three Months Ended September 30, 2014			Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015
Beginning balance	$	5,013		$	4,678		$	4,805
New loans purchased		—			—			—
Accretion of income		(76	)		(53	)		(180	)
Reclassifications from nonaccretable difference		—			—			—
Disposals		—			—			—
Ending balance	$	4,937		$	4,625		$	4,625

	September 30, 2015
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Commercial	$	476,142	$	80,516	$	12,696	$	251	$	569,605
Commercial real estate		1,827,412		25,189		21,113		—		1,873,714
Commercial construction		282,144		—		1,479		—		283,623
Residential real estate		222,370		—		2,788		—		225,158
Consumer		3,482		—		87		—		3,569

Total loans	$	2,811,550	$	105,705	$	38,163	$	251	$	2,955,669

	September 30, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance
No related allowance recorded		(in thousands)
Commercial	$	690		735
Commercial real estate		4,830		5,233
Commercial construction		1,479		1,479
Residential real estate		3,164		3,518
Consumer		95		87
Total	$	10,258		11,052

With an allowance recorded
Commercial	$	79,724	$	79,494	$	3,001

Total
Commercial	$	80,414	$	80,229	$	3,001
Commercial real estate		4,830		5,233		—
Commercial construction		1,479		1,479		—
Residential real estate		3,164		3,518		—
Consumer		95		87		—
Total	$	89,982	$	90,546	$	3,001

	Three Months Ended September 30,									Nine Months Ended September 30,
	2015				2014					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

Impaired loans with no related allowance recorded:

Commercial	$	712	$	—	$	897	$	—		$	707	$	—	$	778	$	30
Commercial real estate		4,869		15		5,046		31			4,905		46		5,313		74
Commercial construction		1,479		—		—		—			1,479		—		—		31
Residential real estate		3,221		7		1,975		—	��		3,251		12		2,044		5
Consumer		100		1		106		2			102		4		106		—
Total	$	10,381		23	$	8,024		33		$	10,444	$	62	$	8,241	$	140

Impaired loans with an allowance recorded:

Commercial	$	79,732	$	722	$	—	$	—		$	45,747	$	1,206	$	—	$	—
Commercial real estate		—		—		3,600		37			—		—		3,600		122
Total	$	79,732	$	722	$	3,600	$	37		$	45,747	$	1,206	$	3,600	$	122

Total impaired loans:

Commercial	$	80,444	$	712	$	897	$	—		$	46,454	$	1,206	$	778	$	30
Commercial real estate		4,869		15		8,646		68			4,905		46		8,913		196
Commercial construction		1,479		—		—		—			1,479		—		—		—
Residential mortgage		3,221		7		1,975		—			3,251		12		2,044		31
Consumer		100		1		106		2			102		4		106		5
Total	$	90,113	$	745	$	11,624	$	70			56,191	$	1,268	$	11,841	$	262

	September 30, 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	$	—	$	9,726	$	5,020	$	14,746	$	554,859	$	569,605	$	—
Commercial real estate		782		1,365		3,232		5,379		1,868,335		1,873,714		—
Commercial construction		—		—		1,479		1,479		282,144		283,623		—
Residential real estate		922		1,308		3,244		5,474		219,684		225,158		268
Consumer		—		—		—		—		3,569		3,569
Total	$	1,704	$	12,399	$	12,975	$	27,078	$	2,928,591	$	2,955,669	$	268

	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 or Greater Past Due and Accruing
	(in thousands)
Commercial	$	6,060	$	—	$	662	$	6,722	$	493,094	$	499,816	$	45
Commercial real estate		4,937		638		5,961		11,535		1,622,975		1,634,510		609
Commercial construction		—		—		—		—		167,359		167,359		—
Residential real estate		1,821		210		3,200		5,231		229,736		234,967		557
Consumer		30		1		—		31		2,848		2,879		—
Total	$	12,848	$	849	$	9,823	$	23,520	$	2,516,011	$	2,539,531	$	1,211

	Three Months Ended September 30, 2015
	Commercial		Commercial real estate			Commercial construction		Residential real estate			Consumer			Unallocated			Total
	(in thousands)
Balance at June 30, 2015	$	4.633	$	9,195		$	1,945	$	1,161		$	7		$	535		$	17,480

Charge-offs		—		(124	)		—		—			—			—			(124	)

Recoveries		2		—			—		—			—			—			2

Provision		2,488		1,203			701		(149	)		(3	)		(61	)		4,175

Balance at September 30, 2015	$	7,123	$	10,274		$	2,646	$	1,012		$	4		$	474		$	21,533

	Three Months Ended September 30, 2014
	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer			Unallocated			Total
	(in thousands)
Balance at June 30, 2014	$	2,412	$	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, 2014	$	2,478	$	7,022	$	524	$	1,052	$	5		$	1,037		$	12,118

	Nine Months Ended September 30, 2015
	Commercial			Commercial real estate			Commercial construction		Residential real estate			Consumer			Unallocated			Total
	(in thousands)
Balance at December 31, 2014	$	3,083		$	7,799		$	1,239	$	1,113		$	7		$	919		$	14,160

Charge-offs		(100	)		(406	)		—		—			(13	)		—			(519	)

Recoveries		12			327			—		2			1			—			342

Provision		4,128			2,554			1,407		(103	)		9			(445	)		7,550

Balance at September 30, 2015	$	7,123		$	10,274		$	2,646	$	1,012		$	4		$	474		$	21,533

	Nine Months Ended September 30, 2014
	Commercial			Commercial real estate		Commercial construction		Residential real estate			Consumer			Unallocated			Total
	(in thousands)
Balance at December 31, 2013	$	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, 2014	$	2,478		$	7,022	$	524	$	1,052		$	5		$	1,037		$	12,118

			September 30, 2015
			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	$	30,905	$	—	$	30,905	$	—
Residential mortgage pass-through securities		48,091		—		48,091		—
Commercial mortgage pass-through securities		3,055		—		3,055		—
Obligations of U.S. states and political subdivision		8,382		—		8,382		—
Trust preferred securities		16,322		—		16,322		—
Corporate bonds and notes		78,386		—		78,386		—
Asset-backed securities		21,130		—		21,130		—
Certificates of deposit		1,920		—		1,920		—
Equity securities		338		338		—		—
Other securities		15,685		15,685		—		—
Total available-for-sale		224,214		16,023		208,191		—
Loans held for sale		990		—		990		—
Total assets	$	225,204	$	16,023	$	209,181	$	—
Liabilities
Derivatives	$	1,105	$	—	$	1,105	$	—

Total liabilities	$	1,105	$	—	$	1,105	$	—

			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

					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)
September 30, 2015
Financial assets
Cash and cash equivalents	$	158,521	$	158,521	$	158,521	$	—	$	—
Investment securities available-for-sale		224,214		224,214		16,023		208,191		—
Investment securities held-to-maturity		227,221		234,493		29,747		186,133		18,613
Investments in restricted stock, at cost		30,362		n/a		n/a		n/a		n/a
Loans held for sale		990		990		—		990		—
Net loans receivable		2,931,848		2,929,939		—		—		2,929,939
Accrued interest receivable		11,662		11,662		221		2,631		8,810

Financial liabilities
Noninterest-bearing deposits		586,643		586,643		586,643		—		—
Interest-bearing deposits		2,079,981		2,084,440		—		2,084,440		—
Borrowings		621,674		627,399		—		627,399		—
Subordinated debentures		55,155		55,007		—		55,007		—
Derivatives		1,105		1,105		—		1,105		—
Accrued interest payable		5,198		5,198		—		5,198		—

					Fair Value Measurements
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
	Amount		Value		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
March 31, 2016
Financial assets
Cash and due from banks	$	118,259	$	118,259	$	118,259	$	-	$	-
Investment securities available-for-sale		191,331		191,331		20,863		170,468		-
Investment securities held-to-maturity		219,373		229,470		30,413		180,553		18,504
Restricted investment in bank stocks		31,487		n/a		n/a		n/a		n/a
Net loans		3,234,739		3,242,398		-		-		3,242,398
Accrued interest receivable		12,604		12,604		199		2,486		9,919

Financial liabilities
Noninterest-bearing deposits		614,507		614,507		614,507		-		-
Interest-bearing deposits		2,278,564		2,285,918		-		2,285,918		-
Borrowings		646,501		651,739		-		651,739		-
Subordinated debentures, net		54,392		57,879		-		57,879		-
Derivatives		1,568		1,568		-		1,568		-
Accrued interest payable	$	5,101	$	5,101	$	-	$	5,101	$	-

December 31, 2015
Financial assets
Cash and due from banks	$	200,895	$	200,895	$	200,895	$	-	$	-
Investment securities available-for-sale		195,770		195,770		18,524		177,246		-
Investment securities held-to-maturity		224,056		230,558		29,226		182,774		18,558
Restricted investment in bank stocks		32,612		n/a		n/a		n/a		n/a
Net loans		3,072,435		3,059,343		-		-		3,059,343
Accrued interest receivable		12,545		12,545		68		2,699		9,778

Financial liabilities
Noninterest-bearing deposits		650,775		650,775		650,775		-		-
Interest-bearing deposits		2,140,191		2,137,149		-		2,137,149		-
Borrowings		671,587		674,131		-		674,131		-
Subordinated debentures, net		54,343		55,209		-		55,209		-
Derivatives		131		131		-		131		-
Accrued interest payable	$	4,387	$	4,387	$	-	$	4,387	$	-

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2014		882,657		$	5.65
Exercised		(340,492	)	$	4.19
Canceled/expired		—
Forfeited		(4,731	)
Outstanding at September 30, 2015		537,434		$	6.50		3.43	$	6,878,825
Exercisable at September 30, 2015		532,636		$	6.44		3.38	$	6,829,750

	Nonvested Shares			Weighted- Average Grant Date Fair Value
Nonvested at December 31, 2014		50,203		$	11.79

Granted		67,906			18.50
Vested		(20,565	)		10.76
Forfeited/cancelled/expired		—			—
Outstanding at September 30, 2015		97,544		$	16.62

				Weighted-
				Average
		Weighted-		Remaining
		Average		Contractual
		Exercise		Term		Aggregate
	Shares	Price		(In Years)		Intrinsic Value
Outstanding at December 31, 2015	535,906	$	6.48
Granted	-		-
Exercised	(5,495)		7.67
Forfeited/cancelled/expired	(20,839)		9.77
Outstanding at March 31, 2016	509,572	$	6.34		2.92	$	5,102,923
Exercisable at March 31, 2016	503,941	$	6.22		2.90	$	5,071,354

	2016
Intrinsic value of options exercised	$	54,326
Cash received from options exercised		42,171
Tax benefit realized from options exercised		17,114
Weighted average fair value of options granted		-

		Weighted-
		Average
	Nonvested	Grant Date
	Shares	Fair Value
Nonvested at December 31, 2015	96,902	$	16.81
Granted	71,920		15.88
Vested	(54,648)		16.01
Forfeited/cancelled/expired	(1,000)		19.58
Nonvested at March 31, 2016	113,174	$	16.81