UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2019 OR For the transition period from Commission File Number: 000-11486 CONNECTONE BANCORP, INC. 301 Sylvan Avenue 201-816-8900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No☐ Indicate by check mark whether the registrant has submitted electronically Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No☒ Securities registered pursuant to Section 12(b) of the Act: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Table of Contents Item 1. Financial Statements See accompanying notes to unaudited consolidated financial statements. See accompanying notes to unaudited consolidated financial statements. CONNECTONE BANCORP, INC. AND SUBSIDIARIES (continued) See accompanying notes to unaudited consolidated financial statements. CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 1. Nature of Operations and Principles of Consolidation ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company. The Parent Corporation’s business currently consists of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”). The Bank’s subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a Delaware investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), Port Jervis Holdings LLC (a New York limited liability company) and NJCB Spec-1, LLC (a New Jersey limited liability company). The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its The preceding unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments 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 GAAP. Some items in the prior year consolidated financial statements were reclassified to conform to current presentation. Reclassifications had no effect on prior year net income or stockholders’ equity. Note Adoption of New Accounting Standards Effective January 1, 2019, the Company implemented ASU No. CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 1a. Authoritative Accounting Guidance Newly Issued, But Not Yet Effective Accounting Standards SU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” ASU No. 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 will be effective for ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018-15 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements. ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements. ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update modify disclosure requirements on fair value measurements by removing, modifying and adding certain disclosure requirements. The amendments primarily pertain to Level 3 fair value measurements and depending on the amendment are applied either prospectively or retrospectively. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements. ASU No. 2017-04,“Intangibles – Goodwill and Other (Topic 350).”ASU 2017-04 aims to simplify the subsequent measurement of goodwill. Under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets and still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019. Although management continues to evaluate the potential impact of ASU 2017-04 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 2. The acquisition of GHB was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the In connection with the The amount of goodwill recorded represents the excess purchase price over the estimated fair value of Loans acquired in the CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 2. The Note 3. Earnings per Common Share Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). The restricted stock awards previously granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities. The two-class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities. Earnings per common share have been computed based on the following: There were no antidilutive share equivalents as of CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 4. Securities (4,602 Investment securities having a carrying value of CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 4. Securities The following table presents information for investments in securities available-for-sale at Gross gains and losses from the sales The Company reviews all securities for potential recognition of other-than-temporary impairment. 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. CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 4. Securities Available-For-Sale – (continued) Temporarily Impaired Securities The Company does not believe that any of the unrealized losses, which were comprised of Factors which may contribute to unrealized losses include credit risk, market risk, changes in 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 the securities portfolio including limits on concentrations to any one issuer. The Company believes the securities portfolio is prudently diversified. The unrealized losses included in the tables below are primarily related to changes in interest rates and credit spreads. All of the Company’s securities are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. These are largely intermediate duration holdings and, in certain cases, monthly principal payments can further reduce loss exposure resulting from an increase in rates. 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 OTTI at In determining whether or not securities are OTTI, 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 OTTI 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, a security is subject to numerous risks as cited above. CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 4. Securities Available-For-Sale – (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 Note 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. CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 5. Derivatives – (continued) Interest rate swaps were entered into on April 13, 2017, August 24, 2015, and December 30, Summary information about the interest rate swaps designated as cash flow hedges as of Cash Flow Hedge The following table presents the net losses recorded in other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the following periods: CONNECTONE BANCORP, INC. AND SUBSIDIARIES The following table reflects the cash flow hedges included in the consolidated statements of condition as of March 31, 2019 and December 31, 2018: CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 6. Loans and the Allowance for Loan Losses Loans At Purchased Credit-Impaired For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during The following CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 6. Loans and the Allowance for Loan Losses – (continued) Loans Receivable on Nonaccrual Nonaccrual loans and loans 90 days or greater past due and still accruing include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment. Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “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. All loans past due 90 days or greater and all impaired loans are included in the appropriate category below. CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 6. Loans and the Allowance for Loan Losses – (continued) The following table provides an analysis of the impaired loans by CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 6. Loans and the Allowance for Loan Losses – (continued) The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by Included in impaired loans at CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 6. Loans and the Allowance for Loan Losses – (continued) Aging Analysis -The following table provides an analysis of the aging of Included in the 90 days or greater past due and still The amount reported 90 days or greater past due and still accruing as of December 31, CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 6. Loans and the Allowance for Loan Losses – (continued) The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 6. Loans and the Allowance for Loan Losses – (continued) The Company’s allowance for loan 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. A summary of the activity in the CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 6. Loans and the Allowance for Loan Losses – (continued) Troubled Debt Restructurings Loans are considered to have been modified in a troubled debt restructuring (“TDRs”) when due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of At March 31, 2019, TDRs totaled There were no loans modified as The following table presents loans by class modified as Note 7. 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. 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). CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 7. Fair Value Measurements and Fair Value of Financial Instruments – (continued) An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to 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. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at Securities Available-for-Sale and Equity Securities :Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class. Derivatives : The fair value of derivatives is 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. CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 7. Fair Value Measurements and Fair Value of Financial Instruments – (continued) 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 CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 7. There were no transfers between Level 1 and Level 2 during the quarter ended Assets Measured at Fair Value on a The Company may be required periodically to measure certain assets at fair value on a Loans Held-for-Sale :Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. Management obtains quotes or bids on all or CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 7. Impaired Loans :The Company may record adjustments to the carrying value of loans based on fair value measurements, generally as partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with GAAP. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the market place and are also based on Level 3 inputs. For assets measured at fair value on a Impaired loans–Collateral dependent impaired loans at CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 7. Assets Measured With Significant Unobservable Level 3 Inputs Recurring basis The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the 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 CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 7. Nonrecurring basis The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 7. price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 7. The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above. Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. 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 8. Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from nonowner sources. The Company’s other comprehensive income (loss) is comprised of unrealized holding gains and losses on securities available-for-sale, obligations for defined benefit pension plan, changes in fair value of derivatives and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, net of taxes. The following table represents the CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 8. Accumulated other comprehensive Note 9. Premises and Equipment The Company leases certain premises and equipment under operating leases. At March 31, 2019, the Company had lease liabilities totaling $16.7 million and right-of-use assets totaling $15.3 million. For the three months ended March 31, 2019, the weighted average remaining lease term for operating leases was 7.3 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.0%. Total lease costs for the three months ended March 31, 2019 was $0.8 million. Rent expense for the three months ended March 31, 2018, prior to adoption of ASU 2016-02, was $0.5 million. There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the three months ended March 31, 2019. At maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows: CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of Restricted stock, options and All awards are issued at fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are handled on a case-by-case basis. Activity under the Company’s The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on As of CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 10. Stock Based Compensation A summary of the status of unearned performance unit awards and the change during the period is presented in the table below: At At March 31, 2019, compensation cost of approximately $1.4 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.8 years. A total of 35,636 performance units were awarded during the three months ended March 31, 2019. A summary of the status of unearned At At March 31, 2019, compensation cost of approximately CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until Contributions The Company did not make CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note The Company’s FHLB borrowings and weighted average interest rates are summarized below: 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. Note The Company, CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 13. Revenue Recognition – (continued) All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the three months ended March 31, 2019 and 2018. Items outside of ASC 606 are noted as such. Not within scope of ASC 606 A description of the Company’s revenue streams accounted for under ASC 606 is as follows: Service Charges on Deposit Accounts: The Company earns fees from deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in the time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance. Interchange Income: The Company earns interchange fees from debit and credit card holder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided by the cardholder. Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether the collectability of the transaction prices is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note 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 The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II at During June 2015, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”). 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 On January 11, 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”). The Notes bear interest at 5.20% annually from, and including, the date of initial issuance to, but excluding, February 1, 2023, payable semi-annually in arrears. From and including February 1, 2023 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 284 basis points (2.84%) payable quarterly in arrears. If three-month LIBOR is not available for any reason, then the rate for that interest period will be determined by such alternate method as provided in the Supplemental Indenture. Interest on the Notes will be paid on February 1, and August 1, commencing August 1, 2018 to but not including February 1, 2023, and from and including February 1, 2023, on February 1, May 1, August 1, and November 1, of each year to but excluding the stated maturity date, unless in any case previously redeemed. As of March 31, 2019, unamortized costs related to this debt issuance were approximately $1,291,000. CONNECTONE BANCORP, INC. AND SUBSIDIARIES Note Certain 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 Note 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 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 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 Critical Accounting Policies and Estimates The accounting and reporting policies followed by ConnectOne Bancorp, Inc. and its subsidiaries (collectively, the “Company”) conform, in all material respects, to GAAP. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the consolidated statements of 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 losses, the other-than-temporary impairment evaluation of securities, business combinations, the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies is provided below. Allowance for Loan Losses and Related Provision : The allowance for loan losses (“ALLL”) represents management’s estimate of probable incurred credit losses inherent in the loan portfolio. Determining the amount of the ALLL 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 ALLL includes, among other factors, an analysis of historical loss rates by loan The ALLL is established through a provision for loan losses charged to expense. Management believes that the current ALLL will be adequate to absorb loan 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 Other-Than-Temporary Impairment of Securities Available-for-Sale : Securities available-for-sale 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 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 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. Business Combinations: We account for business combinations under the acquisition method of accounting. Using this method, assets acquired, liabilities assumed and consideration paid are recorded at their estimated fair values as of the acquisition date. The application of this method of accounting requires the use of significant estimates and assumptions The application of the acquisition method of accounting usually results in the recognition of goodwill and a core deposit intangible (if the acquiree has deposits). The amount of goodwill recorded represents the excess purchase price over the estimated fair value of the net assets acquired, including any identifiable intangibles, if applicable. Goodwill is not amortized for book purposes; however, it is reviewed at least annually for impairment and is usually not deductible for tax purposes. The assets acquired and liabilities assumed and consideration paid in the acquisition are recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. Our estimates are based upon assumptions that we believe to be reasonable and the Company may use an outside servicer provider to assist with the valuations. 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. 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 Form 10-K for the year ended December 31, Operating Results Overview On January 2, 2019, the acquisition of Greater Hudson Bank was completed and first quarter 2019 results reflect the operations of the combined entity. Historical financial information includes only the operations of ConnectOne Bank. Net income 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. Fully taxable equivalent net interest income for the The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three Average Statements of Condition with Interest and Average Rates Average balances are based on amortized Interest income is presented on a tax-equivalent basis using Includes loan fee income. Total loans include loans held-for-sale and nonaccrual loans. Average balances are net of debt issuance costs of Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets. Rates are annualized. Noninterest Income Noninterest income totaled Noninterest Expenses Noninterest expenses totaled Income Taxes Income tax expense was 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 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. The following table sets forth the composition of our loan portfolio, excluding loans held-for-sale and unearned net origination fees and costs, by loan segment at the periods indicated. At At Allowance for Loan Losses and Related Provision The purpose of the allowance for loan losses (“ALLL”) is to establish a valuation allowance for probable incurred credit 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 incurred 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 Although management uses the best information available, the level of the ALLL 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 ALLL. 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 There were The level of the allowance for the respective periods of Changes in the ALLL are presented in the following table for the periods indicated. 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 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. The following table sets forth, as of the dates indicated, the amount of the Company’s nonaccrual loans, other real estate owned (“OREO”), performing troubled debt restructurings (“TDRs”) and loans past due 90 days or greater and still Securities At 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 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 Based on our model, which was run as of 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 The following table illustrates the most recent results for EVE and one year NII sensitivity as of March 31, 2019. 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 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 securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Impact of Inflation and Changing Prices The consolidated financial statements and notes thereto presented elsewhere herein have been prepared in accordance with GAAP, which 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 The Bank is a member of the Cash and cash equivalents totaled Deposits Total deposits increased by 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 prior to maturity. The floating interest rate on the subordinated debentures is three month LIBOR plus 2.85% and 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 were used by the Parent Corporation to contribute $35.0 million of common equity to the Bank During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2018 Notes”) to certain accredited investors. The net proceeds from the sale of the 2018 Notes were used for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity in the first quarter of 2018. The 2018 Notes are non-callable for five years, have a stated maturity of February 1, 2028 and bear interest at a fixed rate of 5.20% per year, from and including January 17, 2018 to, but excluding February 1, 2023. From and including February 1, 2023 to, but excluding the maturity date, or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 284 basis points. Stockholders’ Equity The Company’s stockholders’ equity was In March 2019, the Board of Directors of the Company approved a stock repurchase program for up to 1,200,000 shares. The Company may repurchase shares from time to time in the open market, in privately negotiated stock purchases or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission and applicable federal securities laws. The share repurchase plan does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company's discretion. Pursuant to this plan, in March 2019 the Company repurchased 13,000 shares at an average price of $19.13 per share. As of March 31, 2019, the Company had authorization to repurchase an additional 1,187,000 shares under the plan. The following table details stock repurchases during the three months ended March 31, 2019: Regulatory Capital and Capital Adequacy The maintenance of a solid capital foundation is a primary goal for the Company. Accordingly, capital plans, stock repurchases 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. The following is a summary of regulatory capital amounts and ratios as of N/A - not applicable As of Basel III rules require a “capital conservation buffer” for both the Company and the Bank. As of Item 3. Qualitative and Quantitative Disclosures about Market Risks Market Risk Interest rate risk management is our primary market risk. See "Item 2- Management's Discussion and Analysis of Financial Condition and Results of 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 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. b)Changes in internal controls over financial reporting. 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 reasonably likely to materially affect, the Company’s internal control over financial reporting. 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 There have been no changes to the risks inherent in our business from those described under Item 1A – Risk Factors of our Annual Report on Form 10-K. 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 Not applicable Item 6. Exhibits * Incorporated by reference to exhibits 10.1, 10.2 and 10.3 to the Registrant’s Current Report on Form 8-k filed on July 12, 2018. 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.For the Quarterly Period Ended September 30, 2017☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934_________________ to _________________
(Exact Name of Registrant as Specified in Its Charter)New Jersey 52-1273725 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.)
Englewood Cliffs, New Jersey 07632
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s Telephone Number, Including Area Code)and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒No☐ora smaller reporting company or emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):Large accelerated filer ☐ ☒Accelerated filer ☒ ☐Non-accelerated filer☐ Smaller reporting company☐ (Do not check if smaller Emerging growth company ☐ reporting company) Emerging growth company☐Title of each class Trading symbol Name of each exchange on which registered Common stock CNOB NASDAQ Common Stock, no par value: 32,015,317 shares
(Title of Class)35,455,756 shares
(Outstanding as of November 3, 2017)May 7, 2019)Page PART I – FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Condition at September 30, 2017March 31, 2019 (unaudited) and December 31, 201620183 Consolidated Statements of Income for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 (unaudited)4 Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 (unaudited)5 Consolidated Statements of Changes in Stockholders’ Equity for the ninethree months ended September 30, 2017March 31, 2019 and 20162018 (unaudited)6 Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2019 and 20162018 (unaudited)7 Notes to Consolidated Financial Statements
(unaudited)89Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 4443Item 3. Qualitative and Quantitative Disclosures about Market Risks 5854Item 4. Controls and Procedures 5955PART II – OTHER INFORMATION Item 1. Legal Proceedings 6056Item 1a. Risk Factors 6056Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 6157Item 3. Defaults Upon Senior Securities 6157Item 4. Mine Safety Disclosures 6157Item 5. Other Information 6157Item 6. Exhibits 6258SIGNATURES 59 2 CONNECTONE BANCORP, INC. AND SUBSIDIARIESConnectOne Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION September 30, December 31, (in thousands, except for share data) 2017 2016 (unaudited) ASSETS Cash and due from banks $ 41,114 $ 37,150 Interest-bearing deposits with banks 100,148 163,249 Cash and cash equivalents 141,262 200,399 Securities available-for-sale 400,516 353,290 Loans held-for-sale (net of valuation allowance of $15,287 and $-0-, respectively) 89,386 78,005 Loans receivable 3,889,289 3,475,832 Less: Allowance for loan losses 29,870 25,744 Net loans receivable 3,859,419 3,450,088 Investment in restricted stock, at cost 29,672 24,310 Bank premises and equipment, net 21,917 22,075 Accrued interest receivable 14,841 12,965 Bank owned life insurance 110,762 98,359 Other real estate owned - 626 Goodwill 145,909 145,909 Core deposit intangibles 2,533 3,088 Other assets 28,538 37,234 Total assets $ 4,844,755 $ 4,426,348 LIABILITIES Deposits: Noninterest-bearing $ 719,582 $ 694,977 Interest-bearing 2,904,187 2,649,294 Total deposits 3,623,769 3,344,271 Borrowings 585,124 476,280 Subordinated debentures (net of debt issuance costs of $498 and $621, respectively) 54,657 54,534 Other liabilities 23,514 20,231 Total liabilities 4,287,064 3,895,316 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY Common stock, no par value, authorized 50,000,000 shares; issued 34,079,239 shares at September 30, 2017 and 34,018,731 at December 31, 2016; outstanding 32,015,317 shares at September 30, 2017 and 31,948,307 at December 31, 2016 412,546 412,726 Additional paid-in capital 12,840 11,407 Retained earnings 151,851 126,462 Treasury stock, at cost (2,063,922 common shares at September 30, 2017 and December 31, 2016) (16,717 ) (16,717 ) Accumulated other comprehensive loss (2,829 ) (2,846 ) Total stockholders’ equity 557,691 531,032 Total liabilities and stockholders’ equity $ 4,844,755 $ 4,426,348 See accompanying notes to unaudited consolidated financial statements.March 31, December 31, (in thousands, except for share data) 2019 2018 (unaudited) ASSETS Cash and due from banks $ 54,520 $ 39,161 Interest-bearing deposits with banks 118,028 133,205 Cash and cash equivalents 172,548 172,366 Securities available-for-sale 516,539 412,034 Equity securities 11,564 11,460 Loans held-for-sale 368 - Loans receivable 4,972,651 4,541,092 Less: Allowance for loan losses 36,858 34,954 Net loans receivable 4,935,793 4,506,138 Investment in restricted stock, at cost 31,727 31,136 Bank premises and equipment, net 20,150 19,062 Accrued interest receivable 21,198 18,214 Bank owned life insurance 125,300 113,820 Right of use operating lease assets 15,311 - Goodwill 156,243 145,909 Core deposit intangibles 6,504 1,737 Other assets 35,731 30,216 Total assets $ 6,048,976 $ 5,462,092 LIABILITIES Deposits: Noninterest-bearing $ 833,090 $ 768,584 Interest-bearing 3,760,908 3,323,508 Total deposits 4,593,998 4,092,092 Borrowings 603,412 600,001 Operating lease liabilities 16,719 - Subordinated debentures (net of debt issuance costs of $1,517 and $1,599, respectively) 128,638 128,556 Other liabilities 23,814 27,516 Total liabilities 5,366,581 4,848,165 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY Preferred Stock: Authorized 5,000,000 shares - - Common stock, no par value: Authorized 50,000,000 shares; issued 37,520,855 shares at March 31, 2019 and 34,392,464 shares at December 31, 2018; outstanding 35,443,933 shares at March 31, 2019 and 32,328,542 at December 31, 2018 468,571 412,546 Additional paid-in capital 16,513 15,542 Retained earnings 219,558 211,345 Treasury stock, at cost (2,076,922 common shares at March 31, 2019 and 2,063,922 at December 31, 2018) (16,967 ) (16,717 ) Accumulated other comprehensive loss (5,280 ) (8,789 ) Total stockholders’ equity 682,395 613,927 Total liabilities and stockholders’ equity $ 6,048,976 $ 5,462,092 See accompanying notes to unaudited consolidated financial statements. 3 CONNECTONE BANCORP, INC. AND SUBSIDIARIESConnectOne Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited) Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except for per share data) 2017 2016 2017 2016 Interest income Interest and fees on loans $ 43,241 $ 37,803 $ 121,879 $ 109,381 Interest and dividends on securities: Taxable 1,695 1,774 5,042 5,879 Tax-exempt 870 988 2,655 2,867 Dividends 362 352 982 1,074 Interest on federal funds sold and other short-term investments 170 261 555 541 Total interest income 46,338 41,178 131,113 119,742 Interest expense Deposits 6,113 5,159 16,717 13,532 Borrowings 3,206 2,995 9,135 9,472 Total interest expense 9,319 8,154 25,852 23,004 Net interest income 37,019 33,024 105,261 96,738 Provision for loan losses 1,450 6,750 4,000 13,500 Net interest income after provision for loan losses 35,569 26,274 101,261 83,238 Noninterest income Annuities and insurance commissions - 68 39 140 Income on bank owned life insurance 985 615 2,402 1,843 Net gains on sale of loans held-for-sale 50 56 120 147 Deposit, loan and other income 721 706 2,023 1,984 Net gains on sales of securities available-for-sale - 4,131 1,596 4,234 Total noninterest income 1,756 5,576 6,180 8,348 Noninterest expenses Salaries and employee benefits 8,872 7,791 25,710 23,143 Occupancy and equipment 1,969 2,049 6,215 6,450 FDIC insurance 840 745 2,550 1,955 Professional and consulting 740 667 2,192 2,078 Marketing and advertising 225 293 770 817 Data processing 1,176 1,002 3,474 3,036 Amortization of core deposit intangible 169 193 555 627 Increase in valuation allowance, loans held-for-sale 3,000 - 15,325 - Other expenses 1,650 1,811 5,402 5,150 Total noninterest expenses 18,641 14,551 62,193 43,256 Income before income tax expense 18,684 17,299 45,248 48,330 Income tax expense 5,607 5,443 12,608 15,224 Net income 13,077 11,856 32,640 33,106 Less: Preferred stock dividends - - - 22 Net income available to common stockholders $ 13,077 $ 11,856 $ 32,640 $ 33,084 Earnings per common share: Basic $ 0.41 $ 0.39 $ 1.02 $ 1.10 Diluted 0.41 0.39 1.01 1.09 Dividends per common share $ 0.075 $ 0.075 $ 0.225 $ 0.225 See accompanying notes to unaudited consolidated financial statements. Three Months Ended March 31, (dollars in thousands, except for per share data) 2019 2018 Interest income Interest and fees on loans $ 60,326 $ 47,025 Interest and dividends on investment securities: Taxable 2,942 1,887 Tax-exempt 1,127 814 Dividends 457 485 Interest on federal funds sold and other short-term investments 357 264 Total interest income 65,209 50,475 Interest expense Deposits 15,351 7,688 Borrowings 4,906 4,640 Total interest expense 20,257 12,328 Net interest income 44,952 38,147 Provision for loan losses 4,500 17,800 Net interest income after provision for loan losses 40,452 20,347 Noninterest income Income on bank owned life insurance 822 774 Net gains on sale of loans held-for-sale 19 17 Deposit, loan and other income 786 616 Net gains (losses) on equity securities 103 (120 ) Net gains on sales of securities available-for-sale 8 - Total noninterest income 1,738 1,287 Noninterest expenses Salaries and employee benefits 11,954 9,672 Occupancy and equipment 2,495 2,143 FDIC insurance 755 850 Professional and consulting 1,209 723 Marketing and advertising 210 207 Data processing 1,155 1,148 Merger expenses 7,562 - Amortization of core deposit intangibles 364 169 Other components of net periodic pension expense 29 7 Other expenses 2,329 2,020 Total noninterest expenses 28,062 16,939 Income before income tax expense 14,128 4,695 Income tax expense 2,493 444 Net income $ 11,635 $ 4,251 Earnings per common share Basic $ 0.33 $ 0.13 Diluted 0.33 0.13 Dividends per common share $ 0.090 $ 0.075 See accompanying notes to unaudited consolidated financial statements. 4 CONNECTONE BANCORP, INC. AND SUBSIDIARIESConnectOne Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited) Three Months Ended Nine Months Ended Three Months Ended September 30, September 30, March 31, (in thousands) 2017 2016 2017 2016 2019 2018 Net income $ 13,077 $ 11,856 $ 32,640 $ 33,106 $ 11,635 $ 4,251 Other comprehensive income: Unrealized gains and losses: Other comprehensive income (loss): Unrealized gains and losses on securities: Unrealized holding gains (losses) on available-for-sale securities arising during the period 415 (523 ) 1,332 1,551 5,558 (5,019 ) Tax effect (165 ) 187 (525 ) (634 ) (1,422 ) 1,292 Net of tax 250 (336 ) 807 917 4,136 (3,727 ) Unrealized gains on securities transferred from held-to-maturity to available-for-sale the period - 10,069 - 10,069 Tax effect - (3,815 ) - (3,815 ) Net of tax - 6,254 6,254 Reclassification adjustment for realized gains included in net income - (4,131 ) (1,596 ) (4,234 ) (8 ) - Tax effect - 1,640 579 1,682 2 - Net of tax - (2,491 ) (1,017 ) (2,552 ) (6 ) - Amortization of unrealized net losses on held-to-maturity securities transferred from available-for-sale securities - 1,890 - 1,986 Unrealized (losses) gains on cash flow hedge (391 ) 916 Tax effect 110 (258 ) Net of tax (281 ) 658 Unrealized pension plan (losses) gains: Unrealized pension plan (losses) gains before reclassifications (562 ) 236 Tax effect - (774 ) - (813 ) 158 (67 ) Net of tax 1,116 - 1,173 (404 ) 169 Unrealized gains (losses) on cash flow hedges 119 644 76 (1,081 ) Reclassification adjustment for realized losses included in net income 89 91 Tax effect (48 ) (263 ) (31 ) 441 (25 ) (25 ) Net of tax 71 381 45 (640 ) 64 66 Unrealized pension plan gains and losses: Unrealized pension plan losses before reclassifications - - (2 ) (1 ) Tax effect - - 1 - Net of tax - - (1 ) (1 ) Reclassification adjustment for amortization included in net income 103 204 309 306 Tax effect (42 ) (83 ) (126 ) (124 ) Net of tax 61 121 183 182 Total other comprehensive income 382 5,045 17 5,333 Total other comprehensive income (loss) 3,509 (2,834 ) Total comprehensive income $ 13,459 $ 16,901 $ 32,657 $ 38,439 $ 15,144 $ 1,417 5 CONNECTONE BANCORP, INC. AND SUBSIDIARIESConnectOne Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited) Accumulated Additional Other Total (dollars in thousands, except for per Preferred Common Paid-In Retained Treasury Comprehensive Stockholders’ share data) Stock Stock Capital Earnings Stock (Loss) Income Equity Balance as of December 31, 2015 $ 11,250 $ 374,287 $ 8,527 $ 104,606 $ (16,717 ) $ (4,609 ) $ 477,344 Net income - - - 33,106 - - 33,106 Other comprehensive income, net of tax - - - - - 5,333 5,333 Dividend on series B preferred stock - - - (22 ) - - (22 ) Cash dividends declared on common stock ($0.225 per share) - - - (6,805 ) - - (6,805 ) Redemption of preferred stock (11,250 ) - - - - - (11,250 ) Exercise of stock options (36,135 shares) - - 232 - - - 232 Restricted stock and performance units grants (75,520 shares) - - - - - - - Stock-based compensation expense - - 1,650 - - - 1,650 Balance as of September 30, 2016 $ - $ 374,287 $ 10,409 $ 130,885 $ (16,717 ) $ 724 $ 499,588 Balance as of December 31, 2016 $ - $ 412,726 $ 11,407 $ 126,462 $ (16,717 ) $ (2,846 ) $ 531,032 Net income - - - 32,640 - - 32,640 Other comprehensive income, net of tax - - - - - 17 17 Cash dividends declared on common stock ($0.225 per share) - - - (7,251 ) - - (7,251 ) Stock issuance costs - (180 ) - - - - (180 ) Exercise of stock options (10,846 shares) - - 118 - - - 118 Restricted stock grants (57,164 shares) - - - - - - - Stock-based compensation expense - - 1,315 - - - 1,315 Balance as of September 30, 2017 $ - $ 412,546 $ 12,840 $ 151,851 $ (16,717 ) $ (2,829 ) $ 557,691 Accumulated Additional Other Total (dollars in thousands, except for per Preferred Common Paid-In Retained Treasury Comprehensive Stockholders’ share data) Stock Stock Capital Earnings Stock (Loss) Income Equity Balance as of December 31, 2017 $ - $ 412,546 $ 13,602 $ 160,025 $ (16,717 ) $ (4,019 ) $ 565,437 Reclassification of stranded tax effects (ASU 2018-02) - - - 709 - (709 ) - Cumulative effect of adopting ASU 2016-01 - - - (55 ) - 55 - Net income - - - 4,251 - - 4,251 Other comprehensive loss, net of tax - - - - - (2,834 ) (2,834 ) Cash dividends declared on common stock ($0.075 per share) - - - (2,420 ) - - (2,420 ) Exercise of stock options (38,697) shares) - - 202 - - - 202 Restricted stock grants (22,004 shares) - - - - - - - Net performance units issued (42,672 shares) - - (819 ) - - - (819 ) Stock-based compensation - - 449 - - - 449 Balance as of March 31, 2018 $ - $ 412,546 $ 13,434 $ 162,510 $ (16,717 ) $ (7,507 ) $ 564,266 Balance as of December 31, 2018 $ - $ 412,546 $ 15,542 $ 211,345 $ (16,717 ) $ (8,789 ) $ 613,927 Net income - - - 11,635 - - 11,635 Other comprehensive income, net of tax - - - - - 3,509 3,509 Cash dividends declared on common stock ($0.090 per share) - - - (3,422 ) - - (3,422 ) Exercise of stock options (21,991 shares) - - 143 - - - 143 Restricted stock grants (43,483 shares) - - - - - - - Restricted stock units (4,904 shares) - - - - - - - Net performance units issued (26,517 shares) - - 196 - - - 196 Repurchase of treasury stock (13,000 shares) - - - - (250 ) - (250 ) Stock issued (3,032,496 shares) in acquisition of Greater Hudson Bank - 56,025 - - - - 56,025 Stock-based compensation - - 632 - - - 632 Balance as of March 31, 2019 $ - $ 468,571 $ 16,513 $ 219,558 $ (16,967 ) $ (5,280 ) $ 682,395 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Nine Months Ended Three Months Ended September 30, March 31, (dollars in thousands) 2017 2016 (in thousands) 2019 2018 Cash flows from operating activities Net income $ 32,640 $ 33,106 $ 11,635 $ 4,251 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 2,364 2,084 814 775 Provision for loan losses 4,000 13,500 4,500 17,800 Increase in valuation allowance 15,325 - Amortization of intangibles 555 627 364 169 Net accretion of loans (1,106 ) (3,381 ) (963 ) (179 ) Accretion on bank premises (58 ) (94 ) (21 ) (16 ) Accretion on deposits (19 ) (167 ) (328 ) (15 ) Accretion on borrowings (156 ) (250 ) Amortization (accretion) on borrowings, net 58 (45 ) Stock-based compensation 1,315 1,650 828 (370 ) Gains on sales of investment securities, net (1,596 ) (4,234 ) Gains on sales of loans held-for-sale, net (120 ) (147 ) Gains on sales of fixed assets, net (8 ) - Gains on sales of securities available-for-sale, net (8 ) - (Gains) losses on equity securities, net (103 ) 121 Gains on sale of loans held-for-sale, net (19 ) (17 ) Loans originated for resale (6,790 ) (6,399 ) (1,497 ) (1,045 ) Proceeds from sale of loans held-for sale 12,015 4,948 Net loss (gain) on sale of other real estate owned 82 (182 ) Proceeds from sale of loans held-for-sale 1,148 1,145 Increase in cash surrender value of bank owned life insurance (2,402 ) (1,843 ) (822 ) (189 ) Amortization of premiums and accretion of discounts on investments securities, net 1,808 1,148 (Increase) decrease in accrued interest receivable (1,876 ) 48 Amortization of premiums and accretion of discounts on securities available-for-sale 683 1,045 Amortization of subordinated debt issuance costs 82 86 Increase in accrued interest receivable (550 ) (550 ) Net change in operating leases 1,408 - Decrease (increase) in other assets 8,894 (2,813 ) 3,723 (2,269 ) Increase (decrease) in other liabilities 3,444 (981 ) Decrease in other liabilities (7,933 ) (464 ) Net cash provided by operating activities 68,311 36,620 12,999 20,233 Cash flows from investing activities Investment securities available-for-sale: Securities available-for-sale: Purchases (138,945 ) (114,844 ) (107,405 ) (46,333 ) Sales 29,543 85,253 94,075 - Maturities, calls and principal repayments 61,700 109,452 35,371 39,503 Investment securities held-to-maturity: Purchases - (1,000 ) Maturities and principal repayments - 14,758 Net (purchases) redemptions of restricted investment in bank stocks (5,362 ) 8,077 Net purchases of restricted investment in bank stocks (591 ) (1,125 ) Payments on loans held-for-sale 2,841 - - 112 Net increase in loans (447,457 ) (359,945 ) (70,278 ) (69,837 ) Proceeds from sales of fixed assets 8 - Purchases of premises and equipment (2,148 ) (1,769 ) (257 ) (139 ) Purchases of bank owned life insurance (10,000 ) (17,000 ) Proceeds from sale of other real estate owned 1,124 2,992 Cash and cash equivalents acquired in acquisition 13,741 - Net cash used in investing activities (508,696 ) (274,026 ) (35,344 ) (77,819 ) Cash flows from financing activities Net increase in deposits 279,517 478,150 Net increase (decrease) in deposits 86,124 (45,526 ) Increase in subordinated debentures - 73,525 Advances of Federal Home Loan Bank (“FHLB”) borrowings 780,000 375,000 420,000 435,000 Repayments of FHLB borrowings (656,000 ) (565,000 ) (480,833 ) (410,000 ) Repayment of repurchase agreement (15,000 ) - Cash dividends paid on common stock (7,207 ) (6,805 ) (2,657 ) (2,410 ) Cash dividends paid on preferred stock - (22 ) Common stock issuance costs (180 ) - Redemption of preferred stock - (11,250 ) Repurchase of treasury stock (250 ) - Proceeds from exercise of stock options 118 232 143 202 Net cash provided by financing activities 381,248 270,305 22,527 50,791 Net change in cash and cash equivalents (59,137 ) 32,899 182 (6,795 ) Cash and cash equivalents at beginning of period 200,399 200,895 172,366 149,582 Cash and cash equivalents at end of period $ 141,262 $ 233,794 $ 172,548 $ 142,787 Supplemental disclosures of cash flow information Cash payments for: Interest paid on deposits and borrowings $ 25,807 $ 22,791 Income taxes 4,670 18,195 Supplemental disclosures of noncash investing activities Transfer of loans to other real estate owned $ 580 $ 887 Transfer of loans from held-for-investment to held-for-sale 34,652 13,514 Transfer of investment securities from held-to-maturity to available-for-sale - 209,855 7 Supplemental disclosures of cash flow information Cash payments for: Interest paid on deposits and borrowings $ 22,340 $ 10,927 Income taxes - 1,223 Supplemental disclosures of noncash activities: Investing: Transfer of loans to other real estate owned $ - $ 538 Transfer of loans from held-for-investment to held-for-sale - 24,236 Business combination: Fair value of assets acquired, net of cash and cash equivalents $ 534,166 $ - Fair value of liabilities assumed 488,475 - 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)twentytwenty-eight other banking offices. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’borrower’s business, real estate rental and consumer wages.(consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 2017March 31, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017,2019, or for any other interim period. The Company’s 20162018 Annual Report on Form 10-K should be read in conjunction with these consolidated financial statements.2. New1a. Authoritative Accounting Guidance2017-12 “Derivatives2016-02, “Leases (Topic 842)” (modified by ASU 2018-01 – Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842) and HedgingASU 2018-20 – Leases (Topic 815)842) Narrow – Scope Improvements for Lessors). ASU 2016-02 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. Effective with the adoption, the Company recognized a “right-of-use-asset” and a “lease liability” for its operating leases and has elected to apply practical expedients pertaining to the ASU. The Company applied a modified retrospective transition approach for the applicable leases. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption. The Company elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and non-lease components as a single component and account for it as a lease. The adoption of ASU 2016-02 resulted in the recognition of $15.3 million of “right-of-use assets” and $16.7 million of lease liabilities as of the date of the adoption. This adoption did not materially impact the Company’s Consolidated Statement of Income for the first quarter ended March 31, 2019 and it is not expected to have a material impact on the Consolidated Statement of Income in future periods. See Note 9 – Premises and Equipment for additional disclosures related to leases.9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)TargetedAssets Measured at Amortized Cost.” (modifiedby ASU 2018-19 – Codification Improvements to Accounting for Hedging Activities.”Topic 326, Financial Instruments –Credit Losses). ASU No. 2017-12 refines2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and expands hedge accounting for bothrequires consideration of a broader range of reasonable and supportable information to inform credit loss estimates and affects loans, debt securities, trade receivables, off-balance-sheet credit exposures, reinsurance receivables, and any other financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both onassets not excluded from the face ofscope that have the financial statements and in the footnotes. It also makes certain targeted improvementscontractual right to simplify the application of hedge accounting guidance. ASU 2017-12 will be effective forreceive cash. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, and2019, including interim periods within those fiscal years. Although management continuesThe Company has formed a CECL committee which has assessed our data and system needs. The Company has engaged third-party vendors to evaluateassist in analyzing our data and developing a CECL model. The Company, in conjunction with these vendors, has researched and analyzed modeling standards, loan segmentation, as well as potential external inputs to supplement our historical loss history. We expect to recognize a one-time cumulative effect adjustment to the potentialallowance for loan losses as of the beginning of the first reporting period in which the ASU is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the ASU 2017-12 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact to our consolidated financial statements.us on January 1,public business entities for fiscal years beginning after December 15, 2019, and weinterim periods within fiscal years beginning after December 15, 2020. We are currently evaluating this ASU to determine the impact on our consolidated financial statements.toon our consolidated financial statements.810
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)New Authoritative Accounting Guidance – (continued)Business CombinationASU No. 2016-15, “StatementOn July 11, 2018, the Company entered into an Agreement and Plan of Cash Flows (Topic 230):ClassificationMerger with Greater Hudson Bank (“GHB”), under which GHB would merge with and into ConnectOne Bank, with ConnectOne Bank as the surviving bank. This transaction was completed effective January 2, 2019 (“Merger date”). As part of Certain Cash Receiptsthis merger, the Company acquired seven branch offices located in Rockland, Orange and Cash Payments” provides guidance on the following eight specific cash flow issues: (1) Debt prepayment or debt extinguishment costs; (2) Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relationWestchester Counties, New York. Pursuant to the effective interest ratemerger agreement, holders of GHB common stock received 0.245 shares of common stock of ConnectOne with cash paid in lieu of fractional shares.borrowing; (3) Contingent consideration payments made after a business combination; (4) Proceeds from the settlement of insurance claims; (5) Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) Distributions received from equity method investees; (7) Beneficial interests in securitization transactions; and (8) Separately identifiable cash flows andacquisition date. The application of the predominance principle.acquisition method of accounting resulted in the recognition of goodwill of $10.3 million and a core deposit intangible of $5.1 million. The amendmentsassets acquired and liabilities assumed and consideration paid in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected asacquisition of GHB were recorded at their estimated fair values based on management’s best estimates using information available at the date of the beginningacquisition and are subject to adjustment for up to one year after the closing date of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all ofacquisition. While the amendments in the same period. The amendments in this update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. Although management continues to evaluate the potential impact of ASU 2016-05 on our consolidated financial statements, at this time, we believe the adoption of this standard willfair values are not have a significant impact to our consolidated financial statements.ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Assets Measured at Amortized Cost.” ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates and affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excludedmaterially different from the scopeestimates, accounting guidance provides that havean acquirer must recognize adjustments to provisional amounts that are identified during the contractual right to receive cash. For public business entities,measurement period, which runs through January 2, 2020, in the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has formed a CECL committee that will be assessing our data and system needs. The Company has also met with multiple third-party vendors who may provide assistance in implementation and model creation. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reportingmeasurement period in which the ASU is effective, but cannot yet determineadjustment amounts are determined. The acquirer must record in the magnitudefinancial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, such one-time adjustment or the overall impactas a result of the ASU on our 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 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 earliest comparative period presented in the consolidated financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The Company is currently leasing seventeen properties as branch locations and is leasing certain office equipment. The adoption of ASU 2016-02 will result in increaseschanges to the Company'sprovisional amounts, calculated as if the accounting had been completed at the acquisition date. The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets and liabilities. We are currently inresulting from the process of evaluating all of our leases for complianceacquisition.new ASU.ASU No. 2016-01,Financial Instruments – Overall (Subtopic 825-10): Recognitionacquisition, the consideration paid and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01, among other things; (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requires an entity to present separately in other comprehensive income the portionidentifiable assets acquired and liabilities assumed as of the total changedate of acquisition are summarized in the following table:Estimated Fair Value at January 2, 2019 (in thousands) Consideration paid: Common stock issued in acquisition $ 56,025 Assets acquired: Cash and cash equivalents 13,741 Securities available-for-sale 121,672 Loans, net 362,914 Premises and equipment, net 1,624 Accrued interest receivable 2,434 Core deposit intangibles 5,131 Other assets 26,650 Total assets acquired 534,166 Liabilities assumed: Deposits 416,110 Borrowings 64,186 Other liabilities 8,179 Total liabilities assumed 488,475 Net assets acquired 45,691 Goodwill recorded in acquisition $ 10,334 a liability resultingthe net assets acquired by ConnectOne 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 a changethe acquisition.instrument-specific credit risk when the entity has elected to measure the liabilityGHB acquisition were recorded at fair value, in accordance with theand there was no carryover related allowance for loan losses. The fair value option for financial instruments; (vi) requires separate presentationvalues of financial assets and financial liabilities by measurement category and form of financial assetloans acquired from GHB were estimated based on the balance sheet orvalue of the accompanying notesexpected cash flows, which were projected based on the contractual terms of the loans, including both maturity and contractual amortization. The monthly principal and interest cash flows were adjusted for expected losses and prepayments, where appropriate. Projected cash flows were then discounted to present value using a discount rate developed based on the financial statements;relative risk of the cash flows, considering the loan type, liquidity risk, the maturity of the loans, servicing costs and (vii) clarifies that an entity should evaluate the need for a valuation allowancerequired return on a deferred tax asset related to available-for-sale. ASU 2016-01 will be effective for us on January 1, 2018 and we are currently evaluating the potential impact of ASU No. 2016-01 on our consolidated financial statements.capital.911
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)New Authoritative Accounting GuidanceBusiness Combination – (continued)ASU No. 2014-09,“Revenue from ContractsThe following is a summary of the loans accounted for in accordance with Customers (Topic 606).”ASU 2014-09 implements a common revenue standardASC 310-30 that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligationswere acquired in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective for us on January 1, 2017; however, the FASB recently issued ASU 2015-14,“Revenue from Contracts with Customers (Topic 606) - DeferralGHB acquisition as of the Effective Date” which deferred the effective date of ASU 2014-09 by one year to January 1, 2018. Although management continues to evaluate the potential impact of ASU 2014-09 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact to our consolidated financial statements.Merger date:Estimated Fair Value at January 2, 2019 (in thousands) Contractually required principal and interest acquisition $ 19,874 Contractual cash flows not expected to be collected (non-accretable discount) (12,167 ) Expected cash flows at acquisition 7,707 Interest component of expected cash flows (accretable discount) (1,286 ) Fair value of acquired loans $ 6,421 In March 2016, the FASB issued ASU No. 2016-08,Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments relate to when another party, along with the entity, is involved in providing a good or service to a customer. The amendments in this update affect the guidance in ASU No. 2014-09 above, whichGoodwill is not yet effective. amortized for book purposes; however, it is reviewed at least annually for impairment and is not deductible for tax purposes.effective date will befair value of retail demand and interest bearing deposit accounts was assumed to approximate the samecarrying value as those accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the effective datecontractual future cash flows using market rates offered for time deposits of ASU No. 2014-09.similar remaining maturities. The fair value of borrowed funds was estimated by discounting the future cash flows using market rates for similar borrowings.In April 2016, the FASB issued ASU No. 2016-10,Revenue from Contracts with Customers (Topic 606): Identifying Performance ObligationsDirect acquisition and Licensing. The amendments clarify the following two aspects of Topic 606: identifying performance obligations, and the licensing implementation guidance. The amendments in this update are intended to improve the operability and understandabilityintegration costs of the licensing implementation guidance. The amendments in this update affectMerger were expensed as incurred. These items were recorded as merger-related expenses on the guidance in ASU No. 2014-09 above, which is not yet effective. The effective date will bestatement of operations. During the same as the effective date of ASU No. 2014-09.three months ended March 31, 2019, merger expenses were $7.6 million.In May 2016, the FASB issued ASU No. 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients.In December 2016, the FASB issued ASU No. 2016-20,Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements. The FASB board decided to issue a separate update for technical corrections and improvements to Topic 606 and other Topics amended by ASU No. 2014-09 to increase awareness of the proposals and to expedite improvements to ASU No. 2014-09. The amendment affects narrow aspects of the guidance issued in ASU No. 2014-09.10CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)Three Months Ended Nine Months Ended Three Months Ended September 30, September 30, March 31, (dollars in thousands, except for per share data) 2019 2018 Net income $ 11,635 $ 4,251 Earnings allocated to participating securities (26 ) (12 ) Income attributable to common stock $ 11,609 $ 4,239 (in thousands, except for per share data) 2017 2016 2017 2016 Net income available to common stockholders $ 13,035 $ 11,812 $ 32,534 $ 33,084 Earnings allocated to participating securities 42 44 106 22 Net income $ 13,077 $ 11,856 $ 32,640 $ 33,106 Weighted average common shares outstanding, including participating securities 32,015 30,143 31,999 30,094 35,283 32,116 Weighted average participating securities (103 ) (113 ) (104 ) (98 ) (25 ) (94 ) Weighted average common shares outstanding 31,912 30,030 31,895 29,996 35,258 32,022 Incremental shares from assumed conversions of options, performance units and restricted shares 270 329 272 351 61 274 Weighted average common and equivalent shares outstanding 32,182 30,359 32,167 30,347 35,319 32,296 Earnings per common share: Basic $ 0.41 $ 0.39 $ 1.02 $ 1.10 $ 0.33 $ 0.13 Diluted 0.41 0.39 1.01 1.09 0.33 0.13 September 30, 2017March 31, 2019 and September 30, 2016.March 31, 2018.12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)Available-For-SaleAvailable-for-SaleThe Company’s securities are all classified as available-for-sale at September 30, 2017 and December 31, 2016. Securities available-for-sale are reported at fair value with unrealized gains or losses included in stockholders’ equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value as of September 30, 2017March 31, 2019 and December 31, 2016.2018. 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 7 of the Notes to Consolidated Financial Statements for a further discussion.DuringThe following table summarizes the quarter ended September 30, 2016, the Company transferred all securities previously categorized as held-to-maturity to available-for-sale classification. The transfer resulted in an increase of approximately $210 million in amortized cost basis of available-for-sale securities and resulted in a net increase to accumulated other comprehensive income of $7.4 million, net of tax. The transfer enhanced liquidity and increased flexibility with regard to asset-liability management and balance sheet composition. As a result of the transfer, the Company believes it has tainted its held-to-maturity classification and judgment will be required in the future in determining when circumstances have changed such that management can assert that it has the intent and ability to hold debt securities to maturity. Based on this guidance, the Company does not expect to classify any securities as held-to-maturity within the near future.Transfers of debt securities from the held-to-maturity category to the available-for-sale category are made at fair value of securities available-for-sale at March 31, 2019 and December 31, 2018 and the datecorresponding amounts of transfer. For transfers from the available-for-sale category to the held-to maturity category thegross unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive incomegains and in the carrying value of the held-to-maturity security. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted out of other comprehensive income with an offsetting entry to interest income as a yield adjustment through earnings over the remaining terms of the securities. For transfers from the held-to-maturity category to the available-for-sale category unrealized holding gain or loss at the date of the transfer shall be recognized in accumulated other comprehensive income net(loss).Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value March 31, 2019 (dollars in thousands) Securities available-for-sale Federal agency obligations $ 43,321 $ 191 $ (232 ) $ 43,280 Residential mortgage pass-through securities 255,657 381 (2,837 ) 253,201 Commercial mortgage pass-through securities 6,903 23 (11 ) 6,915 Obligations of U.S. states and political subdivisions 167,819 2,115 (1,764 ) 168,170 Corporate bonds and notes 35,245 193 (367 ) 35,071 Asset-backed securities 8,244 11 (68 ) 8,187 Certificates of deposit 148 2 - 150 Other securities 1,565 - - 1,565 Total securities available-for-sale $ 518,902 $ 2,916 $ (5,279 ) $ 516,539 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value December 31, 2018 (dollars in thousands) Securities available-for-sale Federal agency obligations $ 45,509 $ 51 $ (605 ) $ 44,955 Residential mortgage pass-through securities 189,721 85 ) 185,204 Commercial mortgage pass-through securities 3,919 - (45 ) 3,874 Obligations of U.S. states and political subdivisions 141,496 1,091 (3,402 ) 139,185 Corporate bonds and notes 26,308 45 (540 ) 25,813 Asset-backed securities 9,685 22 (16 ) 9,691 Certificates of deposit 319 3 - 322 Other securities 2,990 - - 2,990 Total securities available-for-sale $ 419,947 $ 1,297 $ (9,210 ) $ 412,034 applicable taxes.approximately $141.9 million and $151.5 million at March 31, 2019 and December 31, 2018, respectively, were pledged to secure public deposits, borrowings, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law. As of March 31, 2019 and December 31, 2018, 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.1113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)Available-For-Sale – (continued)The following tables present information related to the Company’s securities at September 30, 2017 and December 31, 2016:Gross Gross Amortized Unrealized Unrealized Fair September 30, 2017 Cost Gains Losses Value (dollars in thousands) Federal agency obligations $ 55,819 $ 290 $ (171 ) $ 55,938 Residential mortgage pass-through securities 133,517 668 (1,021 ) 133,164 Commercial mortgage pass-through securities 4,088 42 - 4,130 Obligations of U.S. states and political subdivisions 143,787 2,233 (1,044 ) 144,976 Trust preferred securities 4,576 122 (71 ) 4,627 Corporate bonds and notes 30,052 255 (219 ) 30,088 Asset-backed securities 12,605 66 (38 ) 12,633 Certificates of deposit 622 5 - 627 Equity securities 376 254 - 630 Other securities 13,976 - (273 ) 13,703 Total securities available-for-sale $ 399,418 $ 3,935 $ (2,837 ) $ 400,516 Gross Gross Amortized Unrealized Unrealized Fair December 31, 2016 Cost Gains Losses Value (dollars in thousands) Federal agency obligations $ 52,826 $ 282 $ (271 ) $ 52,837 Residential mortgage pass-through securities 72,922 519 (944 ) 72,497 Commercial mortgage pass-through securities 4,186 23 - 4,209 Obligations of U.S. states and political subdivisions 148,747 2,789 (931 ) 150,605 Trust preferred securities 5,575 242 (151 ) 5,666 Corporate bonds and notes 36,717 586 (375 ) 36,928 Asset-backed securities 14,867 2 (286 ) 14,583 Certificates of deposit 973 10 - 983 Equity securities 376 192 - 568 Other securities 14,739 - (325 ) 14,414 Total securities available-for-sale $ 351,928 $ 4,645 $ (3,283 ) $ 353,290 12CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)Note 4. Securities Available-For-SaleAvailable-for-Sale – (continued)September 30, 2017,March 31, 2019, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer. Securities not due at a single maturity date are shown separately.September 30, 2017 March 31, 2019 Amortized Fair Amortized Fair Cost Value Cost Value (dollars in thousands) (dollars in thousands) Securities available-for-sale: Due in one year or less $ 6,775 $ 6,801 $ 6,909 $ 6,941 Due after one year through five years 30,824 31,197 46,300 46,324 Due after five years through ten years 39,489 40,174 32,152 32,634 Due after ten years 170,373 170,717 169,416 168,959 Residential mortgage pass-through securities 133,517 133,164 255,657 253,201 Commercial mortgage pass-through securities 4,088 4,130 6,903 6,915 Equity securities 376 630 Other securities 13,976 13,703 1,565 1,565 Total $ 399,418 $ 400,516 Total securities available-for-sale $ 518,902 $ 516,539 calls and maturities of securities for periods presented were as follows (dollars in thousands):Three Months Ended Nine Months Ended Three Months Ended September 30, September 30, March 31, 2017 2016 2017 2016 2019 2018 Net gains on sales of securities, after tax $ - $ 78,680 $ 29,543 $ 85,253 Proceeds $ 94,075 $ - Gross gains on sales of securities - 4,131 1,596 4,234 8 - Gross losses on sales of securities - - - - - - Net gains on sales of securities - 4,131 1,596 4,234 8 - Less: tax provision on net gains - 1,640 579 1,682 (2 ) - Net gains on sales of securities, after tax $ - $ 2,491 $ 1,017 $ 2,552 $ 6 $ - 1314
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)75131 and 84148 securities as of September 30, 2017March 31, 2019 and December 31, 2016,2018, respectively, represent an other-than-temporary impairment (“OTTI”). The gross unrealized losses associated with U.S. Treasury and agency securities, federal agency obligations, mortgage-backed securities, corporate bonds, tax-exempt securities, asset-backed securities, trust preferred securities, mutual funds and equity securities are not considered to be other-than-temporary because these unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.September 30, 2017.March 31, 2019.1415
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)September 30, 2017March 31, 2019 and December 31, 2016:2018:September 30, 2017 Total Less than 12 Months 12 Months or Longer Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses (dollars in thousands) Federal agency obligation $ 21,451 $ (171 ) $ 17,679 $ (116 ) $ 3,772 $ (55 ) Residential mortgage pass-through securities 77,391 (1,021 ) 49,079 (457 ) 28,312 (564 ) Obligations of U.S. states and political subdivisions 54,073 (1,044 ) 47,016 (829 ) 7,057 (215 ) Trust preferred securities 1,507 (71 ) - - 1,507 (71 ) Corporate bonds and notes 13,123 (219 ) 3,946 (38 ) 9,177 (181 ) Asset-backed securities 7,929 (38 ) - - 7,929 (38 ) Other securities 11,193 (273 ) 5,911 (56 ) 5,282 (217 ) Total temporarily impaired securities $ 186,667 $ (2,837 ) $ 123,631 $ (1,496 ) $ 63,036 $ (1,341 ) December 31, 2016 Total Less than 12 Months 12 Months or Longer Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses (dollars in thousands) Federal agency obligation $ 22,672 $ (271 ) $ 21,416 $ (262 ) $ 1,256 $ (9 ) Residential mortgage pass-through securities 50,136 (944 ) 49,817 (937 ) 319 (7 ) Obligations of U.S. states and political subdivisions 52,307 (931 ) 52,307 (931 ) - - Trust preferred securities 1,427 (151 ) - - 1,427 (151 ) Corporate bonds and notes 15,930 (375 ) 7,671 (265 ) 8,259 (110 ) Asset-backed securities 13,404 (286 ) 3,743 (88 ) 9,661 (198 ) Other securities 11,467 (325 ) - - 11,467 (325 ) Total temporarily impaired securities $ 167,343 $ (3,283 ) $ 134,954 $ (2,483 ) $ 32,389 $ (800 ) Securities having a carrying value of approximately $139.5 million and $121.9 million at September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits, Federal Reserve Bank discount window borrowings, Federal Home Loan Bank (“FHLB”) advances and for other purposes required or permitted by law.As of September 30, 2017 and December 31, 2016, 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.March 31, 2019 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 $ 23,900 $ (232 ) $ 2,005 $ (7 ) $ 21,895 $ (225 ) Residential mortgage pass-through securities 194,131 (2,837 ) 60,001 (137 ) 134,130 (2,700 ) Commercial mortgage pass-through securities 3,873 (11 ) - - 3,873 (11 ) Obligations of U.S. states and political subdivisions 53,685 (1,764 ) 531 - 53,154 (1,764 ) Corporate bonds and notes 14,547 (367 ) 7,382 (42 ) 7,165 (325 ) Asset-backed securities 4,536 (68 ) 2,884 (49 ) 1,652 (19 ) Total temporarily impaired securities $ 294,672 $ (5,279 ) $ 72,803 $ (235 ) $ 221,869 $ (5,044 ) December 31, 2018 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 $ 35,472 $ (605 ) $ 810 $ (1 ) $ 34,662 $ (604 ) Residential mortgage pass-through securities 178,365 (4,602 ) 42,040 (393 ) 136,325 (4,209 ) Commercial mortgage pass-through securities 3,874 (45 ) - - 3,874 (45 ) Obligations of U.S. states and political subdivisions 64,367 (3,402 ) 7,765 (21 ) 56,602 (3,381 ) Corporate bonds and notes 15,534 (540 ) 7,767 (133 ) 7,767 (407 ) Asset-backed securities 3,957 (16 ) 2,219 (11 ) 1,738 (5 ) Total Temporarily Impaired Securities $ 301,569 $ (9,210 ) $ 60,601 $ (559 ) $ 240,968 $ (8,651 ) 1516
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) 2014 and October 15, 2014, each with a respective notional amount of $25$25.0 million and were designated as a cash flow hedgeshedge of an FHLBa 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.September 30, 2017,March 31, 2019, December 31, 20162018 and September 30, 2016March 31, 2018 are presented in the following table.September 30, December 31, September 30, March 31, December 31, March 31, 2017 2016 2016 2019 2018 2018 (dollars in thousands) (dollars in thousands) Notional amount $ 100,000 $ 75,000 $ 75,000 $ 75,000 $ 75,000 $ 100,000 Weighted average pay rates 1.52 % 1.59 % 1.58 % 1.80 % 1.70 % 1.79 % Weighted average receive rates 1.07 % 0.69 % 0.70 % 2.79 % 2.19 % 1.82 % Weighted average maturity 2.7 years 2.8 years 3.1 years 1.7 years 2.0 years 2.2 years Fair value $ 164 $ 88 $ (1,212 ) $ 768 $ 1,159 $ 1,714 Interest expenseNet interest income recorded on these swap transactions totaled approximately $95,000 and $326,000 for$182 thousand during the three and nine months ended September 30, 2017, respectively, and $167,000 and $534,000 forMarch 31, 2019 compared to $5 thousand during the three and nine months ended September 30, 2016, respectively.March 31, 2018.Nine Months Ended September 30, 2017Amount of gainAmount of gainAmount of gain (loss)(loss) recognized(loss) reclassifiedrecognized in otherin OCI (Effectivefrom OCI toNoninterest incomePortion)interest income(Ineffective Portion)(dollars in thousands)Interest rate contracts$ 45$ -$ -Three Months Ended March 31, 2019 Amount of gain Amount of gain Amount of gain (loss) recognized (loss) reclassified recognized in other in OCI (Effective from OCI to Noninterest income Portion) interest income (Ineffective Portion) (dollars in thousands) Interest rate contracts $ (209 ) $ (182 ) $ - Three Months Ended March 31, 2018 Amount of gain Amount of gain Amount of gain (loss) recognized (loss) reclassified recognized in other in OCI (Effective from OCI to Noninterest income Portion) interest income (Ineffective Portion) (dollars in thousands) Interest rate contracts $ 921 $ (5 ) $ - Nine Months Ended September 30, 2016Amount of gainAmount of gainAmount of gain (loss)(loss) recognized(loss) reclassifiedrecognized in otherin OCI (Effectivefrom OCI toNoninterest incomePortion)interest income(Ineffective Portion)(dollars in thousands)Interest rate contracts$ (640)$ -$ -The following table reflects the cash flow hedges included in the consolidated statements of condition as of September 30, 2017 and December 31, 2016:September 30, 2017 December 31,2016 Notional Notional Amount Fair Value Amount Fair Value (dollars in thousands) Interest rate swaps related to FHLB advances included in assets $ 100,000 $ 164 $ 75,000 $ 88 1617
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)March 31, 2019 December 31, 2018 Notional Notional Amount Fair Value Amount Fair Value (dollars in thousands) Interest rate swaps related to FHLB advances included in assets $ 75,000 $ 768 $ 75,000 $ 1,159 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)LoansLoans 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, premiums and discounts related to purchase accounting, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.Loan segments are defined as a group of loans, which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Company has five segments of loans: commercial, commercial real estate, commercial construction, residential real estate (including home equity) and consumer.The recognition of interest income on commercial, commercial real estate, commercial construction and residential loans is 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 our 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 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.Held-for-SaleReceivableResidential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan.Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. A portion of these loans, taxi medallion loans, have no material observable trading in any market. Fair value is established with consideration of a range of market participant indications, for all or parts of these loans, and discounted cash flow analyses, which have significant unobservable inputs. See Note 7 for further discussion.Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.Allowance for Loan lossesThe allowance for loan 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 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.17CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)Note 6. Loans and the Allowance for Loan Losses – (continued)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.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.TDRs 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 TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan 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 and with the exogenous factor adjustments based on the risks present for each loan category. These exogenous factors 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 LoansThe Company acquires 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 their estimated fair value, such that there is no carryover of the seller’s allowance for loan losses (“ALLL”). After acquisition, probable incurred credit losses are recognized by an increase in the ALLL.Such purchased credit-impaired loans (“PCI”) are identified on an individual basis. 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).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 by foreclosure. A gain or loss on resolution would be recognized based on the difference between the proceeds received and the carrying amount of the loan.PCI loans that met the criteria for nonaccrual may be considered performing, regardless of 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 on these loans, including the impact of any accretable discount.18CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)Note 6. Loans and the Allowance for Loan Losses – (continued)Loans held-for-saleThe following table presents loans held-for-sale by loan segment:September 30, December 31, 2017 2016 (dollars in thousands) Commercial $ 47,430 $ 70,105 Commercial real estate 41,811 7,712 Residential real estate 145 188 Total carrying amount $ 89,386 $ 78,005 As of September 30, 2017 and December 31, 2016, the commercial loans held-for-sale segment included the Company’s entire taxi medallion portfolio, with a carrying value of $47.4 million and $65.6 million, net of $15.3 million and $-0- million valuation allowance, respectively. The commercial real estate segment reflects multifamily loans, with a carrying value of $41.8 million as of September 30, 2017. These loans were designated as loans held-for-sale during the quarter ended September 30, 2017. No portion of the valuation allowance has been designated toward the loans held-for-sale within the commercial real estate segment.Activity in the valuation allowance was as follows for periods presented: Three Months Three Months Ended Ended September 30, September 30, 2017 2016 (dollars in thousands) Balance at beginning of period $ 12,325 $ - Reduction from loans paid off (38 ) - Increase in valuation allowance 3,000 - Balance at end of period $ 15,287 $ - Nine Months Nine Months Ended Ended September 30, September 30, 2017 2016 (dollars in thousands) Balance at beginning of period $ - $ - Reduction from loans paid off (38 ) - Increase in valuation allowance 15,325 - Balance at end of period $ 15,287 $ - 19CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)Note 6. Loans and the Allowance for Loan Losses – (continued)Loans receivable -: The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred loan fees, at September 30, 2017as of March 31, 2019 and December 31, 2016:2018: September 30, December 31, March 31, December 31, 2017 2016 2019 2018 (dollars in thousands) (dollars in thousands) Commercial $ 641,613 $ 553,576 $ 1,051,199 $ 988,758 Commercial real estate 2,585,205 2,204,710 3,054,196 2,778,167 Commercial construction 399,453 486,228 548,039 465,389 Residential real estate 264,244 232,547 319,215 309,991 Consumer 1,912 2,380 4,156 2,594 Gross loans 3,892,427 3,479,441 4,976,805 4,544,899 Net deferred loan fees (3,138 ) (3,609 ) (4,154 ) (3,807 ) Total loans receivable $ 3,889,289 $ 3,475,832 $ 4,972,651 $ 4,541,092 September 30, 2017March 31, 2019 and December 31, 2016,2018, loan balances of approximately $1.9$2.5 billion and $1.8$2.3 billion, respectively, were pledged to secure borrowings from the FHLB of New York.Loans: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 recorded investment of those loans is as follows at September 30, 2017March 31, 2019 and December 31, 2016.2018. September 30, December 31, March 31, December 31, 2017 2016 2019 2018 (dollars in thousands) (dollars in thousands) Commercial $ 5,243 $ 7,098 $ 6,159 $ 2,509 Commercial real estate 232 982 1,181 - Total carrying amount $ 5,475 $ 8,080 Commercial construction 1,649 - $ 8,989 $ 2,509 botheither the three and nine months ended September 30, 2017March 31, 2019 and September 30, 2016.March 31, 2018. There were no reversals from the allowance for loan losses during the three and nine months ended September 30, 2017March 31, 2019 and 2016.March 31, 2018.tablestable presents the accretable yield, or income expected to be collected, on the purchased credit-impaired loans for the following periods:three months ended March 31, 2019 and March 31, 2018: Three Months Three Months Three Months Three Months Ended Ended Ended Ended September 30, September 30, March 31, March 31, 2017 2016 2019 2018 (dollars in thousands) (dollars in thousands) Balance at beginning of period $ 2,496 $ 3,233 $ 1,134 $ 1,387 New loans purchased 1,286 - Accretion of income (180 ) (185 ) (146 ) (65 ) Balance at end of period $ 2,316 $ 3,048 $ 2,274 $ 1,322 Nine Months Nine Months Ended Ended September 30, September 30, 2017 2016 (dollars in thousands) Balance at beginning of period $ 2,860 $ 3,599 Accretion of income (544 ) (551 ) Balance at end of period $ 2,316 $ 3,048 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)Status:Status -The following tables presentspresent nonaccrual loans included in loans receivable by loan segmentclass as of the periods presented:March 31, 2019 and December 31, 2018: September 30, December 31, March 31, December 31, 2017 2016 2019 2018 (dollars in thousands) (dollars in thousands) Commercial $ 951 $ 1,460 $ 28,099 $ 29,340 Commercial real estate 8,369 1,081 12,159 15,135 Commercial construction 2,934 2,934 Residential real estate 4,435 3,193 4,488 4,446 Total loans receivable on nonaccrual status $ 13,755 $ 5,734 Total nonaccrual loans $ 47,680 $ 51,855 Credit Quality Indicators:The following table presents information excluding loans held-for-sale and net deferred loan fees, about the Company’s loan credit quality by loan class of gross loans (which exclude net deferred fees) at September 30, 2017March 31, 2019 and December 31, 2016:2018:September 30, 2017 March 31, 2019 Special Special Pass Mention Substandard Doubtful Total Pass Mention Substandard Doubtful Total (dollars in thousands) (dollars in thousands) Commercial $ 630,818 $ 3,882 $ 6,913 $ - $ 641,613 $ 997,975 $ 17,452 $ 35,772 $ - $ 1,051,199 Commercial real estate 2,535,005 30,875 19,325 - 2,585,205 3,024,553 12,970 16,673 - 3,054,196 Commercial construction 393,625 3,239 2,589 - 399,453 533,105 6,920 8,014 - 548,039 Residential real estate 264,244 - - - 264,244 314,599 - 4,616 - 319,215 Consumer 1,912 - - - 1,912 4,143 - 13 - 4,156 Gross loans $ 3,825,604 $ 37,996 $ 28,827 $ - $ 3,892,427 $ 4,874,375 $ 37,342 $ 65,088 $ - $ 4,976,805 December 31, 2016 December 31, 2018 Special Special Pass Mention Substandard Doubtful Total Pass Mention Substandard Doubtful Total (dollars in thousands) (dollars in thousands) Commercial $ 539,961 $ 3,255 $ 10,360 $ - $ 553,576 $ 951,610 $ 3,371 $ 33,777 $ - $ 988,758 Commercial real estate 2,154,343 31,173 19,194 - 2,204,710 2,742,989 12,574 22,604 - 2,778,167 Commercial construction 480,319 3,388 2,521 - 486,228 453,598 5,515 6,276 - 465,389 Residential real estate 228,990 - 3,557 - 232,547 305,414 - 4,577 - 309,991 Consumer 2,318 - 62 - 2,380 2,576 - 18 - 2,594 Gross loans $ 3,405,931 $ 37,816 $ 35,694 $ - $ 3,479,441 $ 4,456,187 $ 21,460 $ 67,252 $ - $ 4,544,899 2120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)segmentclass as of September 30, 2017March 31, 2019 and December 31, 2016:2018. September 30, 2017 March 31, 2019 Unpaid Unpaid Recorded Principal Related Recorded Principal Related Investment Balance Allowance Investment Balance Allowance No related allowance recorded (dollars in thousands) (dollars in thousands) Commercial $ 3,068 $ 3,073 $ 28,870 $ 78,844 Commercial real estate 19,221 19,283 10,124 18,258 Commercial construction 4,340 4,340 6,326 10,443 Residential real estate 2,520 2,749 2,185 2,511 Consumer 46 46 - - Total $ 29,195 $ 29,491 Total (no related allowance) $ 47,505 $ 110,056 With an allowance recorded Commercial real estate $ 1,640 $ 2,052 $ 110 $ 4,984 $ 7,999 $ 1,035 Residential real estate 256 266 25 Total (with allowance) $ 5,240 $ 8,265 $ 1,060 Total Commercial $ 3,068 $ 3,073 $ - $ 28,870 $ 78,844 $ - Commercial real estate 20,861 21,335 110 15,108 26,257 1,035 Commercial construction 4,340 4,340 - 6,326 10,443 - Residential real estate 2,520 2,749 - 2,441 2,777 25 Consumer 46 46 - - - - Total (including allowance) $ 30,835 $ 31,543 $ 110 Total $ 52,745 $ 118,321 $ 1,060 December 31, 2016 December 31, 2018 Unpaid Unpaid Recorded Principal Related Recorded Principal Related Investment Balance Allowance Investment Balance Allowance No related allowance recorded (dollars in thousands) (dollars in thousands) Commercial $ 3,637 $ 4,063 $ 29,896 $ 83,596 Commercial real estate 18,288 18,288 16,839 17,935 Commercial construction 5,909 5,909 9,240 9,240 Residential real estate 1,851 2,055 2,209 2,521 Consumer 62 62 - - Total $ 29,747 $ 30,377 Total (no related allowance) $ 58,184 $ 113,292 With an allowance recorded Commercial real estate $ 1,244 $ 1,244 $ 145 $ 1,488 $ 1,488 $ 7 Residential real estate 260 266 29 $ 1,748 $ 1,754 $ 36 Total Commercial $ 3,637 $ 4,063 $ - $ 29,896 $ 83,596 $ - Commercial real estate 19,532 19,532 145 18,327 19,423 7 Commercial construction 5,909 5,909 - 9,240 9,240 - Residential real estate 1,851 2,055 - 2,469 2,787 29 Consumer 62 62 - - - - Total (including allowance) $ 30,991 $ 31,621 $ 145 Total $ 59,932 $ 115,046 $ 36 2221
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)segmentclass as of and for the three and nine months ended September 30, 2017March 31, 2019 and 2016:2018: Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31, 2017 2016 2017 2016 2019 2018 Average Interest Average Interest Average Interest Average Interest Average Interest Average Interest Recorded Income Recorded Income Recorded Income Recorded Income Recorded Income Recorded Income Investment Recognized Investment Recognized Investment Recognized Investment Recognized Investment Recognized Investment Recognized (dollars in thousands) Impaired loans (no allowance) Impaired loans with no related allowance recorded Commercial $ 3,100 $ 34 $ 6,704 $ 66 $ 3,149 $ 115 $ 4,317 $ 86 $ 29,080 $ 16 $ 45,607 $ 31 Commercial real estate 19,302 221 9,129 65 18,813 424 8,167 118 10,146 47 35,010 243 Commercial construction 4,285 63 1,224 21 4,273 215 979 54 10,400 57 6,083 77 Residential real estate 2,529 2 3,271 5 2,551 6 3,247 15 2,194 - 2,613 - Consumer 48 1 70 1 54 2 74 3 - - - - Total $ 29,264 $ 321 $ 20,398 $ 158 $ 28,840 $ 762 $ 16,784 $ 276 $ 51,820 $ 120 $ 89,313 $ 351 Impaired loans (allowance): Commercial $ - $ - $ 91,393 $ 925 $ - $ - $ 85,620 $ 2,447 Impaired loans with an allowance recorded Commercial real estate 1,645 2 153 - 1,654 39 153 - $ 7,084 $ - $ 1,129 $ 12 Commercial construction - - 2,649 42 Residential real estate 258 - - - Total $ 1,645 $ 2 $ 91,546 $ 925 $ 1,654 $ 39 $ 85,773 $ 2,447 $ 7,342 $ - $ 3,778 $ 54 Total impaired loans: Total impaired loans Commercial $ 3,100 $ 34 $ 98,097 $ 991 $ 3,149 $ 115 $ 89,937 $ 2,533 $ 29,080 $ 16 $ 45,607 $ 31 Commercial real estate 20,947 223 9,282 65 20,467 463 8,320 118 17,230 47 36,139 255 Commercial construction 4,285 63 1,224 21 4,273 215 979 54 10,400 57 8,732 119 Residential mortgage 2,259 2 3,271 5 2,551 6 3,247 15 Residential real estate 2,452 - 2,613 - Consumer 48 1 70 1 54 2 74 3 - - - - Total $ 30,909 $ 323 $ 111,944 $ 1,083 $ 30,494 $ 801 $ 102,557 $ 2,723 $ 59,162 $ 120 $ 93,091 $ 405 September 30, 2017March 31, 2019 and December 31, 20162018 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.2322
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)grossthe loans (excluding loans held-for-sale)by class, excluding net deferred fees, that are past due at September 30, 2017March 31, 2019 and December 31, 2016 by segment:2018:Aging AnalysisSeptember 30, 2017 March 31, 2019 90 Days or 90 Days or Greater Past Total Past Greater Past Total Past 30-59 Days 60-89 Days Due and Still Due and 30-59 Days 60-89 Days Due and Still Due and Past Due Past Due Accruing Nonaccrual Nonaccrual Current Gross Loans Past Due Past Due Accruing Nonaccrual Nonaccrual Current Gross Loans (dollars in thousands) (dollars in thousands) Commercial $ 199 $ 288 $ 4,209 $ 951 $ 5,647 $ 635,966 $ 641,613 $ 1,979 $ 2,626 $ 3,799 $ 28,099 $ 36,503 $ 1,014,696 $ 1,051,199 Commercial real estate 586 8,057 - 8,369 17,012 2,568,193 2,585,205 10,213 180 - 12,159 22,552 3,031,644 3,054,196 Commercial construction - - - - - 399,453 399,453 648 - 1,649 2,934 5,231 542,808 548,039 Residential real estate 918 541 - 4,435 5,894 258,350 264,244 1,591 - - 4,488 6,079 313,136 319,215 Consumer - 2 - - 2 1,910 1,912 12 - - - 12 4,144 4,156 Total $ 1,703 $ 8,888 $ 4,209 $ 13,755 $ 28,555 $ 3,863,872 $ 3,892,427 $ 14,443 $ 2,806 $ 5,448 $ 47,680 $ 70,377 $ 4,906,428 $ 4,976,805 December 31, 2016 90 Days or Greater Past Total Past 30-59 Days 60-89 Days Due and Still Due and Past Due Past Due Accruing Nonaccrual Nonaccrual Current Gross Loans (dollars in thousands) Commercial $ 475 $ 18 $ 4,630 $ 1,460 $ 6,583 $ 546,993 $ 553,576 Commercial real estate 4,928 1,584 663 1,081 8,256 2,196,454 2,204,710 Commercial construction - - - - - 486,228 486,228 Residential real estate 2,131 388 - 3,193 5,712 223,835 232,547 Consumer - - - - - 2,380 2.380 Total $ 7,534 $ 1,990 $ 5,293 $ 5,734 $ 20,551 $ 3,458,890 $ 3,479,441 accruing/accretingaccruing category as of both September 30, 2017March 31, 2019 are purchased credit-impaired loans, net of fair value marks, which accretes income per the valuation at date of acquisition.December 31, 2018 90 Days or Greater Past Total Past 30-59 Days 60-89 Days Due and Still Due and Past Due Past Due Accruing Nonaccrual Nonaccrual Current Gross Loans Commercial $ 1,673 $ - $ 1,647 $ 29,340 $ 32,660 $ 956,098 $ 988,758 Commercial real estate 6,162 1,840 - 15,135 23,137 2,755,030 2,778,167 Commercial construction 2,496 564 - 2,934 5,994 459,395 465,389 Residential real estate 3,455 119 - 4,446 8,020 301,971 309,991 Consumer - - - - - 2,594 2,594 Total $ 13,786 $ 2,523 $ 1,647 $ 51,855 $ 69,811 $ 4,475,088 $ 4,544,899 20162018 are three purchased credit-impairedcomprised of PCI loans, net of their fair value marks, which are accreting income per their valuation at date of acquisition.2423
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)credit quality, and the related portion of the allowance for loan losses (“ALLL”) that are allocated to each loan portfolio segment: September 30, 2017 March 31, 2019 Commercial Commercial Residential Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) (dollars in thousands) ALLL Individually evaluated for impairment $ - $ 110 $ - $ - $ - $ - $ 110 $ - $ 1,035 $ - $ 25 $ - $ - $ 1,060 Collectively evaluated for impairment 7,716 15,224 3,940 1,052 2 326 28,260 8,460 19,526 4,982 1,141 1 488 34,598 Acquired portfolio - 1,500 - - - - 1,500 200 1,000 - - - - 1,200 Acquired with deteriorated credit quality - - - - - - - - - - - - - - Total ALLL $ 7,716 $ 16,834 $ 3,940 $ 1,052 $ 2 $ 326 $ 29,870 Total $ 8,660 $ 21,561 $ 4,982 $ 1,166 $ 1 $ 488 $ 36,858 Gross loans Individually evaluated for impairment $ 3,068 $ 20,861 $ 4,340 $ 2,520 $ 46 $ 30,835 $ 28,870 $ 15,108 $ 6,326 $ 2,441 $ - $ 52,745 Collectively evaluated for impairment 618,012 2,142,385 395,113 199,902 1,410 3,356,822 893,678 2,603,459 498,503 267,903 3,826 4,267,369 Acquired portfolio 15,290 421,727 - 61,822 456 499,295 122,492 434,448 41,561 48,871 330 647,702 Acquired with deteriorated credit quality 5,243 232 - - - 5,475 6,159 1,181 1,649 - - 8,989 Total gross loans $ 641,613 $ 2,585,205 $ 399,453 $ 264,244 $ 1,912 $ 3,892,427 Total $ 1,051,199 $ 3,054,196 $ 548,039 $ 319,215 $ 4,156 $ 4,976,805 December 31, 2016 December 31, 2018 Commercial Commercial Residential Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) (dollars in thousands) ALLL Allowance for loan losses Individually evaluated for impairment $ - $ 145 $ - $ - $ - $ - $ 145 $ - $ 7 $ - $ 29 $ - $ - $ 36 Collectively evaluated for impairment 6,632 12,438 4,789 958 3 779 25,599 9,675 17,840 4,519 1,237 2 445 33,718 Acquired portfolio - - - - - - - 200 1,000 - - - - 1,200 Acquired with deteriorated credit quality - - - - - - - - - - - - - - Total ALLL $ 6,632 $ 12,583 $ 4,789 $ 958 $ 3 $ 779 $ 25,744 Total $ 9,875 $ 18,847 $ 4,519 $ 1,266 $ 2 $ 445 $ 34,954 Gross loans Individually evaluated for impairment $ 3,637 $ 19,532 $ 5,909 $ 1,851 $ 62 $ 30,991 $ 29,896 $ 18,327 $ 9,240 $ 2,469 $ - $ 59,932 Collectively evaluated for impairment 517,869 1,621,745 478,865 163,686 1,757 2,783,922 949,129 2,500,132 456,149 263,449 2,484 4,171,343 Acquired portfolio 24,972 562,451 1,454 67,010 561 656,448 7,224 259,708 - 44,073 110 311,115 Acquired with deteriorated credit quality 7,098 982 - - - 8,080 2,509 - - - - 2,509 Total gross loans $ 553,576 $ 2,204,710 $ 486,228 $ 232,547 $ 2,380 $ 3,479,441 Total $ 988,758 $ 2,778,167 $ 465,389 $ 309,991 $ 2,594 $ 4,544,899 2524
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) There have been no material changes to the allowance for loan losses (“ALLL”) methodology as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.ALLLallowance for loan losses by loan segment is as follows: Three Months Ended September 30, 2017 Three Months Ended March 31, 2019 Commercial Commercial Residential Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) (dollars in thousands) Balance at June 30, 2017 $ 7,238 $ 15,389 $ 4,241 $ 985 $ 2 $ 546 $ 28,401 Balance at December 31, 2018 $ 9,875 $ 18,847 $ 4,519 $ 1,266 $ 2 $ 445 $ 34,954 Charge-offs - - - - (1 ) - (1 ) - (2,676 ) - - - - (2,676 ) Recoveries 17 2 - - 1 - 20 71 - - 2 7 - 80 Provision for loan losses 461 1,443 (301 ) 67 - (220 ) 1,450 (1,286 ) 5,390 463 (102 ) (8 ) 43 4,500 Balance at September 30,2017 $ 7,716 $ 16,834 $ 3,940 $ 1,052 $ 2 $ 326 $ 29,870 Three Months Ended September 30, 2016 Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) Balance at June 30, 2016 $ 15,548 $ 11,371 $ 4,040 $ 1,091 $ 4 $ 709 $ 32,763 Charge-offs (1,878 ) - - (27 ) (5 ) - (1,910 ) Recoveries 1 10 - - 1 - 12 Provision for loan losses 6,725 (6 ) 32 110 4 (115 ) 6,750 Balance at September 30, 2016 $ 20,396 $ 11,375 $ 4,072 $ 1,174 $ 4 $ 594 $ 37,615 Balance at March 31, 2019 $ 8,660 $ 21,561 $ 4,982 $ 1,166 $ 1 $ 488 $ 36,858 Three Months Ended March 31, 2018 Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) Balance at December 31, 2017 $ 8,233 $ 17,112 $ 4,747 $ 1,050 $ 1 $ 605 $ 31,748 Charge-offs (17,020 ) - - (18 ) - - (17,038 ) Recoveries 19 - - - - - 19 Provision for loan losses 17,318 323 25 77 1 56 17,800 Balance at March 31, 2018 $ 8,550 $ 17,435 $ 4,772 $ 1,109 $ 2 $ 661 $ 32,529 2625
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) Nine Months Ended September 30, 2017 Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) Balance at December 31, 2016 $ 6,632 $ 12,583 $ 4,789 $ 958 $ 3 $ 779 $ 25,744 Charge-offs - (71 ) - - (12 ) - (83 ) Recoveries 158 50 - - 1 - 209 Provision for loan losses 926 4,272 (849 ) 94 10 (453 ) 4,000 Balance at September 30, 2017 $ 7,716 $ 16,834 $ 3,940 $ 1,052 $ 2 $ 326 $ 29,870 Nine Months Ended September 30, 2016 Commercial Commercial Residential Commercial real estate construction real estate Consumer Unallocated Total (dollars in thousands) Balance at December 31, 2015 $ 10,949 $ 10,926 $ 3,253 $ 976 $ 4 $ 464 $ 26,572 Charge-offs (2,396 ) - - (94 ) (10 ) - (2,500 ) Recoveries 2 35 - 3 3 - 43 Provision for loan losses 11,841 414 819 289 7 130 13,500 Balance at September 30, 2016 $ 20,396 $ 11,375 $ 4,072 $ 1,174 $ 4 $ 594 $ 37,615 ninesix months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status.September 30, 2017,March 31, 2019, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in troubled debt restructurings.27CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)Note 6. Loans and the Allowance for Loan Losses – (continued)The following table presents a rollforwardAs of TDRs and the related changes to the allowance for loan losses (“ALLL”) that occurred for the periods presented:Nine Months Ended Year Ended September 30, 2017 December 31, 2016 (dollars in thousands) Recorded Recorded Investment ALLL Investment ALLL Troubled Debt Restructurings Beginning balance $ 13,818 $ - $ 86,629 $ 4,500 Additions 5,668 - 26,325 8,250 Payoffs/paydowns (1,309 ) - (2,616 ) - Transfers (580 ) - (96,520 ) - Other - - - (12,750 ) Ending balance $ 17,597 $ - $ 13,818 $ - $17.6$30.9 million, at September 30, 2017, of which $4.8$22.7 million were on nonaccrual status and $12.8$8.2 million were performing under their restructured terms. AtAs of December 31, 2016,2018, TDRs totaled $13.8$34.5 million, of which $0.5$23.3 million were on nonaccrual status and $13.3$11.2 million were performing under their restructured terms. TDRsThe Company has allocated $-0- and $147 thousand of specific allowance for the three months ended March 31, 2019 and March 31, 2018, respectively.of September 30, 2017 did not increase the ALLLTDRs during the three and nine months ended September 30, 2017.March 31, 2019. There were no charge-offs in connection with a loan modification at the time of modification during the three or nine months ended September 30, 2017.March 31, 2019. There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2017.TDRs totaled $106.7 million at September 30, 2016, of which $1.4 million were on nonaccrual status and $105.3 million were performing under restructured terms. The Company had allocated $12.5 in specific allocations with respect to loans whose loan terms had been modified in troubled debt restructurings as of September 30, 2016. TDRs as of September 30, 2016 increased the ALLL by $5.0 and $8.3 million during the three and nine months ended September 30, 2016, respectively.The $12.5 million in specific allocations referenced above were associated with New York City taxi medallion lending 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 estimated fair value of the collateral excluding any consideration for personal guarantees of borrowers, which provide an additional source of repayment but cannot be relied upon.March 31, 2019.troubled debt restructuringsTDRs that occurred during the ninethree months ended September 30, 2016March 31, 2018 (dollars in thousands):Pre-Modification Post-Modification Pre-Modification Post-Modification Outstanding Outstanding Outstanding Outstanding Number of Recorded Recorded Number of Recorded Recorded Loans Investment Investment Loans Investment Investment Troubled debt restructurings: Commercial 16 $ 19,311 $ 19,311 3 $ 2,077 $ 2,077 Commercial real estate 2 581 581 1 60 60 Commercial construction - - - 2 1,839 1,839 Residential real estate - - - Consumer - - - Total 18 $ 19,892 $ 19,892 6 $ 3,976 $ 3,976 Included in the above TDRs were 14 loans secured by 25 New York City taxi medallions totaling $17.3 million. These six loan modifications included interest rate reductions and maturity extensions. All 14 loans were accruing prior to modification, while 13 remained in accrual status post-modification.28CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)Note 6. Loans and the Allowance for Loan Losses – (continued)The TDRs described above increased the allowance for loan losses by $8.3 million during the nine months ended September 30, 2016. There were no charge-offs in connection with a loan modification at the time of modification during the three and nine months ended September 30, 2016. There were no TDRs for which there was a payment default within twelve months following the modification during the three or nine months ended September 30, 2016. - Fair Value Measurements and Fair Value of Financial InstrumentsFASB ASC 820-10-05 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurements and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly.FASB ASC 820-10-05 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820-10-05 are as follows:26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)September 30, 2017March 31, 2019 and December 31, 2016:2018:29CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)September 30, 2017March 31, 2019 and December 31, 20162018 are as follows:September 30, 2017 March 31, 2019 Fair Value Measurements at Reporting Date Using Fair Value Measurements at Reporting Date Using Quoted Prices Quoted Prices in Active Significant in Active Significant Markets for Other Significant Markets for Other Significant Identical Observable Unobservable Identical Observable Unobservable Assets Inputs Inputs Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Total Fair Value (Level 1) (Level 2) (Level 3) (dollars in thousands) (dollars in thousands) Recurring fair value measurements: Assets Securities: Investment securities: Available-for-sale: Federal agency obligations $ 55,938 $ - $ 55,938 $ - $ 43,280 $ - $ 43,280 $ - Residential mortgage pass-through securities 133,164 - 133,164 - 253,201 - 253,201 - Commercial mortgage pass-through securities 4,130 - 4,130 - 6,915 - 6,915 - Obligations of U.S. states and political subdivisions 144,976 - 127,111 17,865 Trust preferred securities 4,627 - 4,627 - Obligations of U.S. states and political subdivision 168,170 - 158,859 9,311 Corporate bonds and notes 30,088 - 30,088 - 35,071 - 35,071 - Asset-backed securities 12,633 - 12,633 - 8,187 - 8,187 - Certificates of deposit 627 - 627 - 150 - 150 - Equity securities 630 630 - - Other securities 13,703 13,703 - - 1,565 1,565 - - Total available-for-sale 400,516 14,333 368,318 17,865 $ 516,539 $ 1,565 $ 505,663 $ 9,311 Equity securities 11,564 11,564 - - Derivatives 164 - 164 - 768 - 768 - Total Assets $ 400,680 $ 14,333 $ 368,482 $ 17,865 Total assets $ 528,871 $ 13,129 $ 506,431 $ 9,311 3028
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Fair Value Measurements and Fair Value of Financial Instruments – (continued)December 31, 2016 December 31, 2018 Fair Value Measurements at Reporting Date Using Fair Value Measurements at Reporting Date Using Quoted Prices Quoted Prices in Active Significant in Active Significant Markets for Other Significant Markets for Other Significant Identical Observable Unobservable Identical Observable Unobservable Assets Inputs Inputs Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Total Fair Value (Level 1) (Level 2) (Level 3) (dollars in thousands) (dollars in thousands) Recurring fair value measurements: Assets Securities: Investment securities: Available-for-sale: Federal agency obligations $ 52,837 $ - $ 52,837 $ - $ 44,955 $ - $ 44,955 $ - Residential mortgage pass-through securities 72,497 - 72,497 - 185,204 - 185,204 - Commercial mortgage pass-through securities 4,209 - 4,209 - 3,874 - 3,874 - Obligations of U.S. states and political subdivisions 150,605 - 132,387 18,218 Trust preferred securities 5,666 - 5,666 - Obligations of U.S. states and political subdivision 139,185 - 129,808 9,377 Corporate bonds and notes 36,928 - 36,928 - 25,813 - 25,813 - Asset-backed securities 14,583 - 14,583 - 9,691 - 9,691 - Certificates of deposit 983 - 983 - 322 - 322 - Equity securities 568 568 - - Other securities 14,414 14,414 - - 2,990 2,990 - - Total available-for-sale 353,290 14,982 320,090 18,218 $ 412,034 $ 2,990 $ 399,667 $ 9,377 Equity securities 11,460 11,460 - - Derivatives 88 - 88 - 1,159 - 1,159 - Total assets $ 353,378 $ 14,982 $ 320,178 $ 18,218 $ 424,653 $ 14,450 $ 400,826 $ 9,377 September 30, 2017March 31, 2019 and during the year ended December 31, 2016.2018.Non-RecurringNonrecurring Basisnon-recurringnonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurringnonrecurring basis at September 30, 2017March 31, 2019 and December 31, 2016:2018:partparts of these loans directly from the purchasing financial institutions (Level 2).3129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Fair Value Measurements and Fair Value of Financial Instruments – (continued)Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. A portion of these loans, taxi medallion loans, have no material observable trading in any market. The approach to determining fair value involved several steps, including a detailed collateral analysis of the underlying medallions, performance projections for individual loans, discounted cash flow modeling and consideration of indicative bids, which at September 30, 2017 did not necessarily contemplate whole loan sales (Level 3).non-recurringnonrecurring basis, the fair value measurements at September 30, 2017March 31, 2019 and December 31, 20162018 are as follows:Fair Value Measurements at Reporting Date Using Fair Value Measurements at Reporting Date Using Quoted Quoted Prices Prices in Active Significant in Active Significant Markets for Other Significant Markets for Other Significant Identical Observable Unobservable Identical Observable Unobservable September Assets Inputs Inputs March 31, Assets Inputs Inputs Assets measured at fair value on a nonrecurring basis: 30, 2017 (Level 1) (Level 2) (Level 3) 2019 (Level 1) (Level 2) (Level 3) (dollars in thousands) Impaired loans: (dollars in thousands) Commercial real estate $ 1,198 $ - $ - $ 1,198 $ 3,949 $ - $ - $ 3,949 Loans held-for-sale: Commercial 47,430 - - 47,430 Residential real estate 231 231 Fair Value Measurements at Reporting Date Using Fair Value Measurements at Reporting Date Using Quoted Quoted Prices Prices in Active Significant in Active Significant Markets for Other Significant Markets for Other Significant Identical Observable Unobservable Identical Observable Unobservable December 31, Assets Inputs Inputs December 31, Assets Inputs Inputs Assets measured at fair value on a nonrecurring basis: 2016 (Level 1) (Level 2) (Level 3) 2018 (Level 1) (Level 2) (Level 3) (dollars in thousands) Impaired loans: (dollars in thousands) Commercial real estate $ 1,099 $ - $ - $ 1,099 $ 1,481 $ - $ - $ 1,481 Loans held-for-sale: Commercial 70,105 - 4,509 65,596 Commercial real estate 7,712 - 7,712 - Residential real estate 231 - - 231 September 30, 2017March 31, 2019 that required a valuation allowance were $1.3$5.0 million with a related valuation allowance of $0.1$1.0 million compared to $1.2$1.7 million with a related valuation allowance of $0.1 million$36 thousand at December 31, 2016.Loans held-for-sale –Loans held-for-sale at September 30, 2017 that required a valuation allowance were $62.7 million with a related valuation allowance of $15.3 million compared to $65.6 million with no valuation allowance at December 31, 2016.2018.3230
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Fair Value Measurements and Fair Value of Financial Instruments – (continued)ninethree months ended September 30, 2017March 31, 2019 and for the year ended December 31, 2016:2018:Municipal Securities (dollars in thousands) Beginning balance, January 1, 2017 $ 18,218 Principal paydowns (353 ) Ending balance, September 30, 2017 $ 17,865 Municipal Securities (dollars in thousands) Beginning balance, January 1, 2016 $ - Other(1) 18,335 Principal paydowns (117 ) Ending balance, December 31, 2016 $ 18,218 Municipal Securities (dollars in thousands) Beginning balance, January 1, 2019 $ 9,377 Principal paydowns (66 ) Ending balance, March 31, 2019 $ 9,311 Municipal Securities (dollars in thousands) Beginning balance, January 1, 2018 $ 9,632 Principal paydowns (255 ) Ending balance, December 31, 2018 $ 9,377 (1)Includes transfers from held-to-maturity to available-for-sale designationSeptember 30, 2017March 31, 2019 and December 31, 2016.2018. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.September 30, 2017 Valuation Unobservable March 31, 2019 Fair Value Techniques Input Range Valuation Unobservable (dollars in thousands) Fair Value Techniques Input Range Securities available-for-sale: (dollars in thousands) Municipal securities $ 17,865 Discounted cash flows Discount rate 2.8% $ 9,311 Discounted cash flows Discount rate 2.9 % December 31, 2016 Valuation Unobservable December 31, 2018 Fair Value Techniques Input Range Valuation Unobservable (dollars in thousands) Fair Value Techniques Input Range Securities available-for-sale: (dollars in thousands) Municipal securities $ 18,218 Discounted cash flows Discount rate 2.8% $ 9,377 Discounted cash flows Discount rate 2.9 % 3331
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Fair Value Measurements and Fair Value of Financial Instruments – (continued)Non-recurring basis:non-recurringnonrecurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.September 30, 2017 Valuation Techniques Unobservable Type Fair Value (weightings) Input Range (weighted average) (dollars in thousands) Impaired loans: Commercial real estate $ 1,918 Appraisals of
collateral valueComparable sales 0% - 15% (6%) Loans held-for-sale: Commercial taxi medallion loans $ 47,430 Market approach
(70%)Indications expressed as a
price to unpaid principal
balance37 - 100 (46) Discounted cash
flows (30%)Discount rate 14% December 31, 2016 Valuation Techniques Unobservable Type Fair Value (weightings) Input Range (weighted average) (dollars in thousands) Impaired loans: Commercial real estate $ 1,099 Appraisals of
collateral valueComparable sales 0% - 15% (6%) Loans held-for-sale: Commercial taxi medallion loans $ 65,596 Market approach
(70%)Indications under securitized
transactions expressed as a
price to unpaid principal
balance40 - 100 (59) Discounted cash
flows (30%)Discount Rate 14% Valuation Unobservable March 31, 2019 Fair Value Techniques Input Range Impaired loans: (dollars in thousands) Commercial real estate $ 3,949 Sales comparison approach Adjustment for differences between the comparable sales 0% - 20% [10%] Residential real estate $ 231 Sales comparison approach Adjustment for differences between the comparable sales 0% - 7% [2%] Valuation Unobservable December 31, 2018 Fair Value Techniques Input Range Impaired loans: (dollars in thousands) Commercial real estate $ 1,481 Sales comparison approach Adjustment for differences between the comparable sales 6% - 9% [8%] Residential real estate $ 231 Sales comparison approach Adjustment for differences between the comparable sales 0% - 10% [5%] 3432
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Fair Value Measurements and Fair Value of Financial Instruments – (continued)Fair ValueAs of Financial InstrumentsFASB 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 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. The carrying amounts of cash and short-term instruments approximate fair values.FHLB Stock. It is not practical to determineMarch 31, 2019 the fair value of FHLB stock due to restrictions placed on its transferability.measurements presented are consistent with Topic 820,Loans.Fair Value Measurement The, in which 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. The methods utilized to estimate the fair value of loans do not necessarily represent anrepresents exit price and therefore, while permissible for presentation purposes under ASC 825-10, do not conform to ASC 820-10.Deposits.The carrying amounts of deposits with no stated maturities (i.e., noninterest-bearing, savings, NOW, and money market deposits) are assigned fair values equal to the carrying amounts payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for alternative funding sources of similar remaining maturity.Term Borrowings and Subordinated Debentures. The fair value of the Company’s long-term borrowings and subordinated debentures was calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities.Accrued Interest Receivable/Payable. The carrying amounts of accrued interest approximate fair value resulting in a level 2 or level 3 classification based on the level of the asset or liability with which the accrual is associated.35CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)September 30, 2017March 31, 2019 and December 31, 2016:2018:Fair Value Measurements Fair Value Measurements Quoted Quoted Prices in Prices in Active Significant Active Significant Markets for Other Significant Markets for Other Significant Identical Observable Unobservable Identical Observable Unobservable Carrying Fair Assets Inputs Inputs Carrying Fair Assets Inputs Inputs Amount Value (Level 1) (Level 2) (Level 3) Amount Value (Level 1) (Level 2) (Level 3) (dollars in thousands) (dollars in thousands) September 30, 2017 March 31, 2019 Financial assets: Cash and due from banks $ 141,262 $ 141,262 $ 141,262 $ - $ - $ 172,548 $ 172,548 $ 172,548 $ - $ - Securities available-for-sale 400,516 400,516 14,333 368,318 17,865 516,539 516,539 1,565 505,663 9,311 Restricted investment in bank stocks 29,672 n/a n/a n/a n/a Loans held-for-sale 89,386 89,386 - 41,956 47,430 Investment in restricted stocks 31,727 n/a n/a n/a n/a Equity securities 11,564 11,564 11,564 - - Net loans 3,859,419 3,862,104 - - 3,862,104 4,935,793 4,875,420 - - 4,875,420 Derivatives 164 164 - 164 - 768 768 - 768 - Accrued interest receivable 14,841 14,841 - 2,011 12,830 21,198 21,198 - 2,759 18,439 Financial liabilities: Noninterest-bearing deposits 719,582 719,582 719,582 - - 833,090 833,090 833,090 - - Interest-bearing deposits 2,904,187 2,904,285 1,825,846 1,078,439 - 3,760,908 3,764,654 2,216,661 1,547,993 - Borrowings 585,124 586,474 - 586,474 - 603,412 603,855 - 603,855 - Subordinated debentures 54,657 56,519 - 56,519 - 128,638 134,962 - 134,962 - Accrued interest payable 4,304 4,304 - 4,304 - 4,869 4,869 - 4,869 - December 31, 2016 December 31, 2018 Financial assets: Cash and due from banks $ 200,399 $ 200,399 $ 200,399 $ - $ - $ 172,366 $ 172,366 $ 172,366 $ - $ - Securities available-for-sale 353,290 353,290 14,982 320,090 18,218 412,034 412,034 2,990 399,667 9,377 Restricted investment in bank stocks 24,310 n/a n/a n/a n/a Loans held-for-sale 78,005 78,005 - 12,409 65,596 Investment in restricted stocks 31,136 n/a n/a n/a n/a Equity securities 11,460 11,460 11,460 - - Net loans 3,450,088 3,462,138 - - 3,462,138 4,506,138 4,402,878 - - 4,402,878 Derivatives 88 88 - 88 - 1,159 1,159 - 1,159 - Accrued interest receivable 12,965 12,965 - 2,026 10,939 18,214 18,214 - 2,064 16,150 Financial liabilities: Noninterest-bearing deposits 694,977 694,977 694,977 - - 768,584 768,584 768,584 - - Interest-bearing deposits 2,649,294 2,649,717 1,681,044 968,673 - 3,323,508 3,320,640 1,957,503 1,363,137 - Borrowings 476,280 478,286 - 478,286 - 600,001 598,598 - 598,598 - Subordinated debentures 54,534 55,901 - 55,901 - 128,556 132,426 - 132,426 - Accrued interest payable 4,142 4,142 - 4,142 - 6,764 6,764 - 6,764 - 3633
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) - Fair Value Measurements and Fair Value of Financial Instruments – (continued)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.Other Comprehensive Income (Loss)reclassificationsreclassification out of accumulated other comprehensive (loss) income for the periods presented:Affected Line item in the Details about Accumulated Other Amounts Reclassified from Accumulated Amounts Reclassified from Accumulated Statement Where Net Income is Amounts Reclassified from Affected Line Item in the Consolidated Comprehensive Income Components Other Comprehensive Income/(Loss) Other Comprehensive Income/(Loss) Presented Accumulated Other Comprehensive Income Statements of Income (dollars in thousands) Three Months Ended Three Months Ended September 30, Nine Months Ended September 30, March 31, 2017 2016 2017 2016 2019 2018 Sale of securities available-for-sale $ - $ 4,131 $ 1,596 $ 4,234 Net gains on sales of securities available for sale $ (8 ) $ - Net gains on sale of securities available-for-sale
Income tax expense- (1,640 ) (579 ) (1,682 ) Income tax expense Sale of securities available-for-sale 2 - - 2,491 1,017 2,552 (6 ) - Net gains on sale of securities available-for-sale
Income tax expense Amortization of pension plan net actuarial losses (103 ) (204 ) (309 ) (306 ) Salaries and employee benefits $ 89 $ 91 42 83 126 124 Income tax benefit (25 ) (25 ) Income tax benefit (61 ) (121 ) (183 ) (182 ) 64 66 Total reclassification $ (61 ) $ 2,370 $ 834 $ 2,370 $ 58 $ 66 3734
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)Other Comprehensive (Loss) Income – (continued)(loss) income (net of tax)loss at September 30, 2017March 31, 2019 and December 31, 20162018 consisted of the following:September 30, December 31, 2017 2016 (dollars in thousands) Securities available-for-sale $ 723 $ 933 Cash flow hedge 97 52 Defined benefit pension and post-retirement plans (3,649 ) (3,831 ) Total accumulated other comprehensive loss $ (2,829 ) $ (2,846 ) March 31, December 31, 2019 2018 (dollars in thousands) Investment securities available-for-sale, net of tax $ (1,710 ) $ (5,841 ) Cash flow hedge, net of tax 555 837 Defined benefit pension and post-retirement plans, net of tax (4,125 ) (3,785 ) Total $ (5,280 ) $ (8,789 ) March 31, 2019 (dollars in thousands) Lease payments due: Less than 1 year $ 2,693 1 year through less than 2 years 2,568 2 years through less than 3 years 2,418 3 years through less than 4 years 2,129 4 years through 5 years 2,143 After 5 years 7,030 Total undiscounted cash flows 18,981 Discounted cash flows (2,262 ) Total lease liability $ 16,719 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)9. Stock-Based10. Stock Based CompensationSeptember 30, 2017.March 31, 2019. The maximum number of shares of common stock or equivalents which may be issued under the Plan, is 750,000. Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, restricted share units or performance units. Shares available for grant and issuance under the Plan as of September 30, 2017March 31, 2019 are 750,000.approximately 535,300. The Company intends to issue all shares under the Plan in the form of newly issued shares.option awardsrestricted stock units typically have a three-year vesting period starting one year after the date of grant with one-third vesting each year. The options generally expire ten years from the date of grant. Restricted stock awards granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control. All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the awards vesting. Restricted shares have the same dividend and voting rights as common stock, while options, performance units and performancerestricted stock units do not.No options or performance units were granted during Stock-based compensation expense for the three months ended September 30, 2017 or 2016.38CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 9. Stock-Based Compensation – (continued)March 31, 2019 and March 31, 2018 was $0.8 million and $(0.4) million, respectively.option plansoptions as of and for the ninethree months ended September 30, 2017 wereMarch 31, 2019 was as follows:Weighted- Weighted- Average Average Weighted- Remaining Weighted- Remaining Average Contractual Number of Average Contractual Exercise Term Aggregate Stock Exercise Term Aggregate Shares Price (In Years) Intrinsic Value Options Price (in years) Intrinsic Value Outstanding at December 31, 2016 358,367 $ 6.26 Outstanding at December 31, 2018 108,463 $ 8.35 Granted - - - - Exercised 10,846 10.89 (21,991 ) 7.84 Forfeited/cancelled/expired - - - - Outstanding at September 30, 2017 347,521 $ 6.11 1.90 $ 6,425,663 Exercisable at September 30, 2017 343,991 $ 6.03 1.86 $ 6,387,912 Outstanding at March 31, 2019 86,472 8.48 2.9 $ 970,370 Exercisable at March 31, 2019 86,472 $ 8.48 2.9 $ 970,370 September 30, 2017March 31, 2019 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, 2017.March 31, 2019. This amount changes based on the fair market value of the Parent Corporation’sCompany’s stock.The below table represents information regardingActivity under the Company’s restricted shares currently outstanding at September 30, 2017:for the three months ended March 31, 2019 was as follows:Weighted- Weighted- Average Average Nonvested Grant Date Nonvested Grant Date Shares Fair Value Shares Fair Value Nonvested at December 31, 2016 111,273 $ 16.81 Nonvested at December 31, 2018 68,428 $ 23.04 Granted 57,164 23.82 42,483 19.88 Vested (65,359 ) 16.49 (46,352 ) 21.98 Forfeited/cancelled/expired - - - - Nonvested at September 30, 2017 103,078 $ 20.41 Nonvested March 31, 2019 64,559 $ 21.77 September 30, 2017,March 31, 2019, there was approximately $1,366,000$1,340,000 of total unrecognized compensation cost related to nonvested restricted shares granted under the plans.granted. The cost is expected to be recognized over a weighted average period of one year.1.5 years. A total of 42,483 restricted shares were granted during the quarter ended March 31, 2019.36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)Weighted Average Grant Units Units Date Fair (expected) (maximum) Value Unearned at December 31, 2018 86,009 $ 22.06 Awarded 35,636 20.79 Change in estimate 11,005 17.02 Vested (52,508 ) 21.26 Unearned at March 31, 2019 80,142 120,213 $ 23.98 September 30, 2017,March 31, 2019, the specific number of shares related to performance unit awardsunits that were expected to vest was 151,194,80,142, 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. At September 30, 2017March 31, 2019 the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 226,791.120,213. A total of 25,991 shares were netted from the vested shares to satisfy tax obligations. The net issuance of performance units issued during the three months ended March 31, 2019 were 26,517 shares.performance unit awardsrestricted stock units and the change during the period is presented in the table below:Weighted Average Grant Units Units Date Fair (expected) (maximum) Value Unearned at December 31, 2016 151,572 189,455 $ 18.47 Awarded 24,891 37,336 22.75 Forfeited - - - Adjustments (25,269 ) - 18.47 Unearned at September 30, 2017 151,194 226,791 $ 19.19 Weighted Average Grant Units Date Fair (expected) Value Unearned at December 31, 2018 29,423 $ 31.35 Awarded 53,454 20.79 Forfeited - - Vested (9,808 ) 21.28 Unearned at March 31, 2019 73,069 $ 23.62 September 30, 2017,March 31, 2019, the specific number of shares related to restricted stock units that were expected to vest was approximately 73,069. Any forfeitures would result in previously recognized expense being reversed. A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient. During the three months ended March 31, 2019 a total of 4,904 shares were netted out to satisfy tax obligations, resulting in net issuance of 4,904 shares.$1,006,000$1.7 million related to non-vested performance unit awardsrestricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.31.8 years. A total of 53,454 restricted stock units were awarded during the quarter ended March 31, 2019.3937
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)Note 9. Stock-Based Compensation – (continued)Effective January 1, 2017, the Company implemented ASU 2016-09,Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment.Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Included in income tax expense for the three and nine months ended September 30, 2017 is a benefit of $-0- and $180 thousand, respectively, which resulted from the effect of implementing ASU 2016-09.10.11. Components of Net Periodic Pension CostMarch 31,June 30, 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 Nine Months Ended September 30, September 30, 2017 2016 2017 2016 (dollars in thousands) Interest cost $ 119 $ 129 $ 358 $ 386 Expected return on plan assets (160 ) (166 ) (480 ) (457 ) Net amortization 103 101 309 305 Recognized settlement loss - - 2 - Net periodic pension cost $ 62 $ 64 $ 189 $ 234 Amortization of actuarial loss $ (103 ) $ (204 ) $ (309 ) $ (306 ) Total recognized in other comprehensive income $ (103 ) $ (204 ) $ (309 ) $ (306 ) Total recognized in net expense and OCI (before tax) $ (41 ) $ (140 ) $ (120 ) $ (72 ) Three Months Ended Affected Line Item in the Consolidated March 31, Statements of Income 2019 2018 (dollars in thousands) Service cost $ - $ - Interest cost 113 107 Other components of net periodic pension expense Expected return on plan assets (174 ) (191 ) Other components of net periodic pension expense Net amortization 89 91 Other components of net periodic pension expense Total periodic pension cost $ 28 $ 7 any contributionsa contribution to the Pension Trust during the ninethree months ended September 30, 2017.March 31, 2019. The Company does not plan on contributing amounts to the Pension Trust for the remainder of 2017.2019. 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.38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)11 –12. FHLB BorrowingsSeptember 30, 2017 December 31, 2016 March 31, 2019 December 31, 2018 Amount Rate Amount Rate Amount Rate Amount Rate (dollars in thousands) (dollars in thousands) Total FHLB borrowings $ 585,124 1.61 % $ 461,280 1.55 % $ 603,412 2.60 % $ 600,001 2.59 % By remaining period to maturity: Less than 1 year $ 415,124 1.41 % $ 231,280 1.02 % $ 439,159 2.58 % $ 405,000 2.57 % 1 year through less than 2 years 105,000 1.69 % 130,000 1.84 % 81,000 2.85 % 110,000 2.75 % 2 years through less than 3 years 25,000 1.85 % 35,000 1.60 % 46,000 2.15 % 60,000 2.27 % 3 years through less than 4 years 40,000 3.43 % 65,000 2.82 % 9,804 2.48 % - - 4 years through 5 years - - - - 25,000 2.92 % 25,000 2.92 % After 5 years 2,926 2.43 % - - Total FHLB borrowings $ 585,124 1.61 % $ 461,280 1.55 % 603,889 2.60 % 600,000 2.59 % Fair value (discount) premium (477 ) 1 FHLB borrowings, net $ 603,412 $ 600,001 40CONNECTONE BANCORP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 11 – FHLB Borrowings – (continued)Three of the FHLB notes ($2.5 million and $7.5 million each due April 2, 2018, and $5.0 million 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 advancesAdvances are payable at stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances are fixed rate.rates. The advances at September 30, 2017March 31, 2019 were primarily collateralized by approximately $1.4$1.9 billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement. At September 30, 2017March 31, 2019 the Company had remaining borrowing capacity of approximately $796 million$1.0 billion at FHLB.12 – Securities Sold Under Agreements to Repurchase13. Revenue RecognitionRepurchase agreementsEffective January 1, 2018, the Company adopted ASU 2014-09Revenue from Contracts with Customersand all subsequent amendments to the ASU (collectively, "ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company’s revenues come from interest income and other sources, including loans, leases, securities, and derivatives that are secured borrowings. outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include deposit service charges on deposits, interchange income, and the sale of OREO.pledges securitiesusing a modified retrospective transition approach, determined that there will be no cumulative effect adjustment to secure those borrowings. Information concerning repurchase agreements is summarizedretained earnings as follows fora result of adopting the periods presented:September 30, December 31, September 30, 2017 2016 2016 (dollars in thousands) Average daily balance during the year-to-date $ 9,065 $ 15,000 $ 15,000 Average interest rate during the year-to-date 5.95 % 5.95 % 5.95 % Maximum month end balance during the year-to-date $ 15,000 $ 15,000 $ 15,000 Weighted average interest rate during the year-to-date 5.95 % 5.95 % 5.95 % Asnew standard, nor will the standard have a material impact on our consolidated financial statements including the timing or amounts of September 30, 2017, there were no repurchase agreements outstanding. The previous outstanding repurchase agreement of $15.0 million was repaid on June 15, 2017.December 31, 2016 Remaining Contractual Maturity of the Agreements Overnight and Up to 30 Greater Than Continuous Days 31-90 Days 90 Days Total (dollars in thousands) Repurchase agreements & repurchase-to-maturity transaction U.S. Treasury and agency securities $ - $ - $ - $ - $ - Residential mortgage pass-through securities - - - 16,826 16,826 Total borrowings $ - $ - $ - $ 16,826 $ 16,826 Amounts related to agreements not included in offsetting disclosure in Note 14: $ 1,826 The fair value of securities pledged to secure repurchase agreements may decline. By contractual agreement, the fair value of securities pledged to secure repurchase agreements must meet or exceed the gross outstanding balance by 8%, or be subject to margin calls. Securities sold under agreements to repurchase are secured by securities with a carrying amount of $-0- and $16.8 million at September 30, 2017 and December 31, 2016, respectively.revenue recognized.4139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)Three Months Three Months Ended Ended March 31, March 31, 2019 2018 (dollars in thousands) Noninterest income Service charges on deposits Overdraft fees $ 274 $ 202 Other 180 155 Interchange income 156 143 Net gains on sales of loans(1) 19 17 Net gains (losses) on equity securities(1) 103 (120 ) Net gains on sale of securities available-for-sale(1) 8 - Wire transfer fees(1) 117 72 Loan servicing fees(1) 32 23 Bank owned life insurance(1) 822 774 Other 27 21 Total noninterest income $ 1,738 $ 1,287 (1) 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)13 -14. Subordinated DebenturesSeptember 30, 2017March 31, 2019 was 4.16%5.60%. 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.September 30, 2017March 31, 2019 and December 31, 2016.2018.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 SeptemberJune 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, 2017,March 31, 2019, unamortized costs related to thethis debt issuance waswere approximately $498,000.$227,000.4241
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)14 –15. Offsetting Assets and Liabilities5.5 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.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 securities account, therefore there is no offsetting or netting of the securities assets with the repurchase agreement liability. The following table presents information about financial instruments that are eligible for offset as of September 30, 2017March 31, 2019 and December 31, 2016:2018:Gross Amounts Not Offset Gross Amounts Net Amounts of Cash or Offset in the Assets Presented in Financial Financial Gross Amounts Statement of the Statement of Instruments Instrument Net Recognized Financial Position Financial Position Recognized Collateral Amount (dollars in thousands) September 30, 2017 Assets: Interest rate swaps $ 164 $ - $ 164 $ - $ - $ 164 Liabilities: Repurchase agreements $ - $ - $ - $ - $ - $ - December 31, 2016 Assets: Interest rate swaps $ 88 $ - $ 88 $ - $ - $ 88 Liabilities: Repurchase agreements $ 15,000 $ - $ 15,000 $ - $ 15,000 $ - Gross Amounts Not Offset Net Amounts Gross Amounts of Assets Offset in the Presented in the Cash or Statement of Statement of Financial Financial Gross Amounts Financial Financial Instruments Instrument Net Recognized Condition Condition Recognized Collateral Amount (dollars in thousands) March 31, 2019 Assets: Interest rate swaps $ 768 $ - $ 768 $ - $ - $ 768 December 31, 2018 Assets: Interest rate swaps $ 1,159 $ - $ 1,159 $ - $ - $ 1,159 Note 15 – Subsequent EventOn November 2, 2017, allAs of the Bank’s loans secured by New York City medallions, which had been classified as held-for-sale sinceMarch 31, 2019 and December 31, 2016,2018, there was no financial collateral pledged to our interest rate swaps. As these swap positions were returnednot within the contractually agreed upon collateral requirement there was no collateral pledged to, or from, the loans held-for-investment portfolio. As of September 30, 2017, the portfolio totaled $47.4 million, net of a $15.3 million valuation allowance. This transfer of the loans to held-for-investment will be recorded at the fair value of the loans held-for-sale with any difference between the fair value determined as of the transfer date and the carrying value as of September 30, 2017 to be recognized in noninterest expense during the fourth quarter 2017. The Company currently estimates a pretax charge of approximately $0.5 million to reflect this transfer. Management’s decision is based on its current view that a strategy to work out the credits through cash flow generated by borrowers’ operations is now superior, from a financial perspective, to a disposition via a sale to a third-party. This decision reflects (i) a reduced level of interest on the part of institutional investors to purchase taxi medallion loans, especially for relatively smaller portfolios such as the Bank’s and (ii) the Company’s increasing success at restructuring loans in the portfolio to monthly payment terms that can be supported through borrowers’ operations, although the collectability of principal balloon payments at maturity remains uncertain.respective counterparties.4342September 30, 2017March 31, 2019 and December 31, 2016.2018. 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.engaged, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and regulations issued thereunder;engaged; (7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; and (10) the outcome of regulatory and legal investigations and proceedings may not be anticipated. Further information on other factors that could affect the financial results of ConnectOne Bancorp is included in Item 1a. of ConnectOne Bancorp’s Annual Report on Form 10-K as amended and updated 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.categorysegment applied to current loan totals. However, actual loan 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.4443categorysegment and the resulting loan 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 ALLL may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 16 of the Notes to Consolidated Financial Statements.87 of the Notes to Consolidated Financial Statements for further discussion.20162018 includes additional discussion on the accounting for income taxes.4544 available to common stockholders for the three months ended September 30, 2017 amounted to $13.1March 31, 2019 was $11.6 million compared to $11.9$4.3 million for the comparable three-month period ended September 30, 2016.March 31, 2018. The Company’s diluted earnings per share were $0.41$0.33 for the three months ended September 30, 2017March 31, 2019 as compared with diluted earnings per share of $0.39$0.13 for the comparable three-month period ended September 30, 2016.March 31, 2018. The increase in net income available to common stockholders and diluted earnings per share was primarily attributable to an increase in net interest income and a decrease in provision for loan losses, partially offset by a decrease in net gains on sale of investment securities and an increase in other expenses. The increase in other expenses was primarily the result of an increase in a valuation allowance related to loans held-for-sale.Net income available to common stockholders for the nine months ended September 30, 2017 amounted to $32.6 million compared to $33.1 million for the comparable nine-month period ended September 30, 2016. The Company’s diluted earnings per share were $1.01 for the nine months ended September 30, 2017 as compared with diluted earnings per share of $1.09 for the comparable nine-month period ended September 30, 2016. The decrease in net income available to common stockholders and diluted earnings per share was primarily attributable to an increase in noninterest expenses, which was primarily the result of an increase in a valuation allowance related to loans held-for-sale and a decrease in net gains on sale of investment securities, partially offset by an increase in net interest income, a decrease in provision for loan losses and aan increase in net interest income, partially offset by an increase in noninterest expenses and income tax expenses. The decrease in income tax expense.provision for loan losses was primarily attributable to provisioning related to the taxi medallion portfolio for the three months ended March 31, 2018.third quarter of 2017three months ended March 31, 2019 increased by $4.2$6.9 million, or 12.3%17.9%, from the third quarter of 2016,comparable three-month period ended March 31, 2018, resulting from an increase in average interest-earning assets of 8.4%15.1%, primarily loans, and thea widening of the net interest margin by 12of 8 basis-points to 3.44%3.34% from 3.32%3.26%. Included in net interest income was accretion and amortization of purchase accounting adjustments of $0.3 million and $1.0$1.2 million during the third quarter of 2017three months ended March 31, 2019 and 2016, respectively.$0.2 million during the comparable three-month period ended March 31, 2018. Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.41%3.25% in the thirdfirst quarter of 2017,2019, widening by 19 basis-points1 basis-point from the thirdfirst quarter of 20162018 adjusted net interest margin of 3.22%3.24%. The increase in the adjusted net interest margin was primarily attributable to a higher volume of loans which reduced excess cash balances resulting in an improved asset-mix, a higher yield earned on interest-earning assets and growth in noninterest-bearing deposits, partially offset by higher funding costs, primarily due to both increases in short-term interest rates and increased cost in deposit funding and lower yields on securities.Fully taxable equivalent net interest income for the nine months ended September 30, 2017 was $108.0 million, an increase of $9.1 million, or 9.2%, from the nine months ended September 30, 2016, resulting from an increase in average interest-earning assets of 7.8% and the widening of the net interest margin by 5 basis-points to 3.44% from 3.39%. Included in net interest income was accretion and amortization of purchase accounting adjustments of $1.3 million and $3.6 million during the nine months ended September 30, 2017 and 2016, respectively. Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.40% for the nine months ended September 30, 2017, widening by 14 basis-points from the nine months ended September 30, 2016 adjusted net interest margin of 3.26%. The increase in the adjusted net interest margin was primarily attributable to higher yields on loans and an improved asset-mix, partially offset by lower yields on securities and an increased cost in deposit funding.competition.4645and nine months ended September 30, 2017March 31, 2019 and 2016,2018, 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.Three Months Ended September 30, Three Months Ended March 31, 2017 2016 2019 2018 Interest Interest Interest Interest Average Income/ Average Average Income/ Average Average Income/ Average Average Income/ Average Balance Expense Rate(8) Balance Expense Rate(8) Balance Expense Rate(8) Balance Expense Rate(8) (dollars in thousands) (dollars in thousands) Interest-earning assets: Securities(1) (2) $ 397,077 $ 3,033 3.03 % $ 406,802 $ 3,293 3.22 % $ 531,083 $ 4,369 3.34 % $ 441,563 $ 2,917 2.68 % Total loans(2) (3) (4) 3,898,404 43,683 4.45 3,407,278 38,010 4.44 4,907,683 60,597 5.01 4,247,997 47,272 4.51 Federal funds sold and interest-bearing with banks 53,820 170 1.25 202,106 261 0.51 57,690 357 2.51 78,194 264 1.37 Restricted investment in bank stocks 29,236 362 4.91 24,834 352 5.64 26,478 457 7.00 31,699 485 6.21 Total interest-earning assets 4,378,537 47,248 4.28 4,041,020 41,916 4.13 5,522,934 65,780 4.83 4,799,453 50,938 4.30 Noninterest-earning assets: Allowance for loan losses (28,999 ) (34,052 ) (35,499 ) (32,113 ) Other noninterest-earning assets 364,474 337,828 421,626 321,483 Total assets $ 4,714,012 $ 4,344,796 $ 5,909,061 $ 5,088,823 Interest-bearing liabilities: Interest-bearing deposits: Time deposits $ 1,005,997 3,593 1.42 $ 1,007,530 3,323 1.31 $ 1,515,249 8,303 2.22 $ 1,207,368 4,788 1.61 Other interest-bearing deposits 1,816,162 2,520 0.55 1,637,500 1,836 0.45 2,236,630 7,048 1.28 1,815,122 2,900 0.65 Total interest-bearing deposits 2,822,159 6,113 0.86 2,645,030 5,159 0.78 3,751,879 15,351 1.66 3,022,490 7,688 1.03 Borrowings 570,711 2,353 1.64 488,015 2,139 1.74 486,687 3,024 2.52 630,117 2,926 1.88 Subordinated debentures(5) 55,155 813 5.85 55,155 814 5.87 128,585 1,845 5.82 115,182 1,674 5.89 Capital lease 2,688 40 5.90 2,814 42 5.94 Finance lease 2,479 37 6.05 2,622 40 6.03 Total interest-bearing liabilities 3,450,713 9,319 1.07 3,191,014 8,154 1.02 4,369,630 20,257 1.88 3,770,411 12,328 1.33 Demand deposits 688,707 640,323 824,115 724,471 Other liabilities 17,972 18,318 35,148 18,912 Total noninterest-bearing liabilities 706,679 658,641 859,263 743,383 Stockholders’ equity 556,620 495,141 680,168 575,029 Total liabilities and stockholders’ equity $ 4,714,012 $ 4,344,796 $ 5,909,061 $ 5,088,823 Net interest income (tax-equivalent basis) 37,929 33,762 45,523 38,610 Net interest spread(6) 3.21 % 3.11 % 2.95 % 2.97 % Net interest margin(7) 3.44 % 3.32 % 3.34 % 3.26 % Tax-equivalent adjustment (910 ) (738 ) (571 ) (463 ) Net interest income $ 37,019 $ 33,024 $ 44,952 $ 38,147 (1) cost.cost and includes equity securities.(2) 35%a 21% federal tax rate.(3) (4) Loans(5) Does not reflect netting$525$1,570 and $697 as of September 30, 2017$1,639 for the three months ended March 31, 2019 and 2016,March 31, 2018, respectively. Amortization expense related to debt issuance costs included in interest expense was $83 and $86 for the three months ended March 31, 2019 and March 31, 2018, respectively.(6) tax- equivalenttax-equivalent basis.(7) (8) 47Average Statements of Condition with Interest and Average RatesNine Months Ended September 30, 2017 2016 Interest Interest Average Income/ Average Average Income/ Average Balance Expense Rate(8) Balance Expense Rate(8) (dollars in thousands) Interest-earning assets: Securities(1) (2) $ 384,782 $ 9,272 3.22 % $ 413,493 $ 10,290 3.32 % Total loans(2) (3) (4) 3,716,876 123,009 4.42 3,310,788 109,959 4.44 Federal funds sold and interest-bearing with banks 73,424 555 1.01 143,517 541 0.50 Restricted investment in bank stocks 26,177 982 5.02 29,818 1,074 4.81 Total interest-earning assets 4,201,259 133,818 4.26 3,897,616 121,864 4.18 Noninterest-earning assets: Allowance for loan losses (27,533 ) (30,412 ) Other noninterest-earning assets 358,726 331,544 Total assets $ 4,532,452 $ 4,198,748 Interest-bearing liabilities: Interest-bearing deposits: Time deposits $ 982,149 9,996 1.36 $ 902,017 8,714 1.29 Other interest-bearing deposits 1,745,742 6,722 0.51 1,515,785 4,818 0.42 Total interest-bearing deposits 2,727,891 16,718 0.82 2,417,802 13,532 0.75 Borrowings 509,625 6,581 1.73 603,423 6,908 1.53 Subordinated debentures(5) 55,155 2,431 5.89 55,155 2,436 5.90 Capital lease 2,720 123 6.05 2,844 128 6.01 Total interest-bearing liabilities 3,295,391 25,853 1.05 3,079,224 23,004 1.00 Demand deposits 670,709 610,568 Other liabilities 17,652 21,872 Total noninterest-bearing liabilities 688,361 632,440 Stockholders’ equity 548,700 487,084 Total liabilities and stockholders’ equity $ 4,532,452 $ 4,198,748 Net interest income (tax-equivalent basis) 107,965 98,860 Net interest spread(6) 3.21 % 3.18 % Net interest margin(7) 3.44 % 3.39 % Tax-equivalent adjustment (2,704 ) (2,122 ) Net interest income $ 105,261 $ 96,738 (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)Does not reflect netting of debt issuance costs of $565 and $697 as of September 30, 2017 and 2016, respectively.(6)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.(7)Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.(8)Rates are annualized.48$1.8$1.7 million for the three months ended September 30, 2017,March 31, 2019, compared with $5.6$1.3 million for the three months ended September 30, 2016. There were no net securities gains/(losses) for the three months ended September 30, 2017 and $4.1 million in net securities gains for the three months ended September 30, 2016. Excluding the securities gains, noninterestMarch 31, 2018. Noninterest income increased by $0.3 million when compared to the prior year third quarter. The increase was due primarily to aconsists of income on bank owned life insurance, death benefit recorded duringnet gains on sales of loans held-for-sale, net gains (losses) on equity securities and deposit service fees, loan fees, and other income. The increase from the thirdprior year first quarter of 2017. Noninterest income also includes bank owned life insurancewas mainly attributable to increases in gains on equity securities and deposit, loan and other income for the three month periods.Noninterest income totaled $6.2 million for the nine months ended September 30, 2017, compared with $8.3 million for the nine months ended September 30, 2016. For the nine months ended September 30, 2017 and 2016, there were $1.6 million and $4.2 million of net securities gains, respectively. Excluding the securities gains, noninterest income increased by $0.5 million when compared to the nine months ended September 30, 2016. The increase was due primarily to a bank owned life insurance death benefit recorded during the third quarter of 2017. Noninterest income also includes annuities and insurance commissions, bank owned life insurance and deposit, loan and other income for the nine month periods.income.$18.6$28.1 million for the three months ended September 30, 2017,March 31, 2019, compared to $14.6$16.9 million for the three months ended September 30, 2016. The increaseMarch 31, 2018. Noninterest expenses increased by $11.1 million from the prior year period was mainly attributablefirst quarter due primarily to $7.6 million in merger expenses, an increase in the taxi medallions loans held-for-sale valuation allowance of $3.0 million. In addition, increases$2.3 million in salaries and employee benefits, ($1.1 million), FDIC insurance premiums ($0.1 million)$0.5 million in professional and data processing ($0.2 million) were partially offset by decreasesconsulting, $0.4 million in occupancy and equipment expenses ($0.1 million) and $0.3 million in other expense ($0.2 million), contributingexpenses. These increases were all primarily attributable to the overall increase in noninterest expenses fromexpansion of our franchise through the prior year third quarter.Noninterest expenses totaled $62.2 million for the nine months ended September 30, 2017, compared to $43.3 million for the nine months ended September 30, 2016. The increase from the prior year period was mainly attributable to an increase in the taxi medallions loans held-for-sale valuation allowanceacquisition of $15.3 million. In addition, increases in salaries and employee benefits ($2.6 million), FDIC insurance premiums ($0.6 million), data processing ($0.4 million) and other expense ($0.3 million) were partially offset by decreases in occupancy and equipment expenses ($0.2 million) contributing to the overall increase in noninterest expenses from the prior year nine month period.On November 2, 2017, all of the Bank’s loans secured by New York City medallions, which had been classified as held-for-sale since December 31, 2016, were returned to the loans held-for-investment portfolio. As of September 30, 2017, the portfolio totaled $47.4 million, net of a $15.3 million valuation allowance. This transfer of the loans to held-for-investment will be recorded at the fair value of the loans held-for-sale with any difference between the fair value determined as of the transfer date and the carrying value as of September 30, 2017 to be recognized in noninterest expense during the fourth quarter 2017. The Company currently estimates a pretax charge of approximately $0.5 million to reflect this transfer. Management’s decision is based on its current view that a strategy to work out the credits through cash flow generated by borrowers’ operations is now superior, from a financial perspective, to a disposition via a sale to a third-party. This decision reflects (i) a reduced level of interest on the part of institutional investors to purchase taxi medallion loans, especially for relatively smaller portfolios such as the Bank’s and (ii) the Company’s increasing success at restructuring loans in the portfolio to monthly payment terms that can be supported through borrowers’ operations, although the collectability of principal balloon payments at maturity remains uncertain.Greater Hudson Bank.$5.6$2.5 million for the three months ended September 30, 2017,March 31, 2019, compared to $5.4$0.4 million for the three months ended September 30, 2016.March 31, 2018. The increase in income tax expense was primarily the result of an increase in pretax income when compared to the prior year first quarter. The effective tax rate for the current quarter was 30.0% versus 31.5% for the prior-year quarter.Income tax expense was $12.6 million for the ninethree months ended September 30, 2017, compared to $15.2 million for the nine months ended September 30, 2016. Included in income tax expense for the nine months ended September 30, 2017 is a benefit of $180 thousand which resulted from the effect of implementing ASU 2016-09, which relates to the recognition of excess tax benefits in the income statement (formerly through equity) that result from employee share-based payment awards. The effective tax rate for the nine months ended September 30, 2017March 31, 2019 and March 31, 2018 was 27.9% versus 31.5% for the prior-year period. Excluding any changes to the taxi medallion valuation allowance, the effective tax rate for 2017 is expected to be maintained in the low 30% range.17.6% and 9.5%, respectively.thea diverse client base in the Company’s 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.49Amount September 30, 2017 December 31, 2016 Amount
Increase/March 31, 2019 December 31, 2018 Increase/ Amount % Amount % (Decrease) Amount % Amount % (Decrease) (dollars in thousands) (dollars in thousands) Commercial $ 641,613 16.5 % $ 553,576 15.9 % $ 88,037 $ 1,051,199 21.1 % $ 988,758 21.8 % $ 62,441 Commercial real estate 2,585,205 66.4 2,204,710 63.3 380,495 3,054,196 61.4 2,778,167 61.1 276,029 Commercial construction 399,453 10.2 486,228 14.0 (86,775 ) 548,039 11.0 465,389 10.2 82,650 Residential real estate 264,244 6.8 232,547 6.7 31,697 319,215 6.4 309,991 6.8 9,224 Consumer 1,912 0.1 2,380 0.1 (468 ) 4,156 0.1 2,594 0.1 1,562 Gross loans $ 3,892,427 100.0 % $ 3,479,441 100.0 % $ 412,986 $ 4,976,805 100.0 % $ 4,544,899 100.0 % $ 431,906 September 30, 2017,March 31, 2019, gross loans totaled $3.9$5.0 billion, an increase of $0.4 billion,$432 million, or 11.9%9.5%, as compared to December 31, 2016.2018. Net loan growth was primarily attributable to the Greater Hudson Bank acquisition, with increases in commercial real estate ($380276 million), commercial construction ($8883 million), commercial loans ($62 million), and residential real estate and consumer ($32 million), partially offset by a decrease in construction ($8711 million).September 30, 2017,March 31, 2019, acquired loans remaining inwithin the loan portfolio totaled $0.5$0.7 billion, compared to $0.7$0.3 billion as of December 31, 2016.2018. The increase was attributable to the Greater Hudson Bank acquisition.47 categories,segments, 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.September 30, 2017,March 31, 2019, the ALLL was $29.9$36.9 million as compared to $25.7$35.0 million at December 31, 2016. Provisions to the ALLL2018. The provision for loan losses for the three and nine months ended September 30, 2017 totaled $1.5March 31, 2019 was $4.5 million, and $4.0 million, respectively, compared to $6.8 million and $13.5$17.8 million for the same periods in 2016.three months ended March 31, 2018. The decrease fromin the prior year quarter and prior year nine month periodprovision for loan losses was largelyprimarily attributable to decreases in specific reserves, primarily$17.0 million of provision related to the portfolio of taxi medallion loans.loan portfolio for the three months ended March 31, 2018, offset by a $3.0 million provision related to a single loan secured by a commercial office building for the three months ended March 31, 2019.$(19) thousand in net recoveries and $1.9$2.6 million in net charge-offs duringfor the three months ended September 30, 2017 and 2016, respectively. There were $(126) thousand in net recoveries and $2.5March 31, 2019, compared with $17.0 million in net loan charge-offs duringfor the ninethree months ended September 30, 2017March 31, 2018. Net charge-offs for the three months ended March 31, 2018 were in the taxi medallion loan portfolio, resulting from a decrease in the transfer values of medallions as reported by the New York City Taxi and September 30, 2016, respectively.Limousine Commission, as well as a reduction in the Company’s cash flow valuation model. The ALLL as a percentage of total loans receivable amounted to 0.74% at March 31, 2019 compared to 0.77% at September 30, 2017 compared to 0.74% at December 31, 20162018 and 1.090.77 % at September 30, 2016.March 31, 2018.20172019 and 20162018 reflects the credit quality within the loan portfolio, the loan volume recorded during the periods,growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the ALLL at September 30, 2017March 31, 2019 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.50 Nine Months Ended Three Months Ended September 30, March 31, 2017 2016 2019 2018 (dollars in thousands) (dollars in thousands) Average loans receivable at end of period $ 3,847,396 $ 3,406,800 $ 4,907,559 $ 4,223,231 Analysis of the ALLL: Balance - beginning of quarter $ 25,744 $ 26,572 $ 34,954 $ 31,748 Charge-offs: Commercial - (2,396 ) - (17,020 ) Commercial real estate (71 ) - (2,676 ) - Residential real estate - (94 ) - (18 ) Consumer (12 ) (10 ) Total charge-offs (83 ) (2,500 ) (2,676 ) (17,038 ) Recoveries: Commercial 158 2 71 19 Commercial real estate 50 35 Residential real estate - 3 2 - Consumer 1 3 7 - Total recoveries 209 43 80 19 Net recoveries (charge-offs) 126 (2,457 ) (2,596 ) (17,019 ) Provision for loan and losses 4,000 13,500 4,500 17,800 Balance - end of period $ 29,870 $ 37,615 $ 36,858 $ 32,529 Ratio of annualized net charge-offs during the period to average loans receivable during the period - % 0.06 % 0.21 % 1.63 % Loans receivable $ 3,889,289 $ 3,445,476 $ 4,972,651 $ 4,202,679 ALLL as a percentage of loans receivable 0.77 % 1.09 % 0.74 % 0.77 % 48 51 accruing/accreting:accruing:September 30, December 31, March 31, December 31, 2017 2016 2019 2018 (dollars in thousands) (dollars in thousands) Nonaccrual loans (held-for-investment) $ 13,755 $ 5,734 Nonaccrual loans (held-for-sale) 47,430 63,044 Nonaccrual loans $ 47,680 $ 51,855 OREO - 626 - - Total nonperforming assets(1) $ 61,185 $ 69,404 $ 47,680 $ 51,855 Performing TDRs $ 12,749 $ 13,338 $ 8,191 $ 11,165 Loans 90 days or greater past due and still accruing (non-PCI) - - $ 50 $ - Loans 90 days or greater past due and still accruing/accreting (PCI) $ 4,209 $ 5,293 Loans 90 days or greater past due and still accruing (PCI) $ 5,398 $ 1,647 (1) Nonperforming assets are defined as nonaccrual loans (held-for-investment), nonaccrual loans (held-for-sale), and other real estate owned.OREO.Nonaccrual loans (held-for-investment) to total loans receivable 0.35% 0.16% Nonperforming assets to total assets 1.26% 1.57% Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to total loans 1.96% 2.48% Nonaccrual loans to total loans receivable 0.96 % 1.14 % Nonperforming assets to total assets 0.79 % 0.95 % Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable 1.23 % 1.42 % PortfolioAvailable-For-SaleAt September 30, 2017,As of March 31, 2019, the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations of U.S. states and political subdivisions, corporate bonds and notes, trust preferred securities, asset-backed securities and equity securities.During For the quarter ended September 30, 2016, the Company transferred all securities previously categorized as held-to-maturity to available-for-sale classification. The transfer resulted in an increase of approximately $210 million in amortized cost basis of available-for-sale securities and resulted in a net increase to accumulated other comprehensive income of $7.4 million, net of tax. This transfer enhanced liquidity and increased flexibility with regard to asset-liability management and balance sheet composition. As a result of the transfer, the Company believes it has tainted its held-to-maturity classification and judgment will be required in the future in determining when circumstances have changed such that management can assert that it has the intent and ability to hold debt securities to maturity. Based on this guidance, the Company does not expect to classify any securities as held-to-maturity within the near future.For the three months ended September 30, 2017,March 31, 2019, average securities decreased $9.7increased $89.5 million to $397.1approximately $531.1 million, or 9.1%9.6% of average total interest-earning assets, from $406.8approximately $441.6 million, or 10.1%9.2% of average interest-earning assets, for the comparable period in 2016. For the nine months ended September 30, 2017, average securities decreased $28.7 million to $384.8 million, or 9.2% of average interest-earning assets, from $413.5 million, or 10.6% of average interest-earning assets, for the comparable period in 2016.2018.September 30, 2017,March 31, 2019, net unrealized gainslosses on securities available-for-sale, which are carried as a component of accumulated other comprehensive incomeloss and included in stockholders’ equity, net of tax, amounted to $0.7$1.7 million as compared to $0.9with net unrealized losses of $5.8 million at December 31, 2016.2018. The decrease in net unrealized gainslosses is predominantlypredominately attributable to the sales of available-for-sale securities during 2017changes in market conditions and fluctuations in prevailing market interest rates. 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 issue.issuer.52September 30, 2017March 31, 2019 and December 31, 20162018, the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and the Bank’s management.September 30, 2017,March 31, 2019, 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 1.65%2.62%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 1.84%2.00%. As of December 31, 2016,2018, 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 5.79%0.40%, while a 100 basis-point instantaneous decrease in the general level of interest rates would decrease our net interest income by 2.93%1.21%.September 30, 2017,March 31, 2019, 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 2.43%3.17%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.75%2.68%. As of December 31, 2016,2018, 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 6.65%1.59%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 4.43%.2.17%September 30, 2017,March 31, 2019, would decline by 12.49%9.51% with an instantaneous rate shock of up 200 basis points, and increase by 4.51%2.93% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2016,2018, would decline by 7.97%12.01% with an instantaneous rate shock of up 200 basis points, and increase by 2.96%3.15% 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 % (dollars in thousands) +300 $443,173 $(108,035) (19.6) +300 $154,260 $3,080 2.0 +200 482,343 (68,865) (12.5) +200 153,672 2,491 1.7 +100 520,848 (30,360) (5.5) +100 152,821 1,640 1.1 0 551,208 - 0.0 0 151,180 - 0.0 -100 576,090 24,882 4.5 -100 148,406 (2,775) (1.8) 53Estimated Change in Interest Rates Estimated EVE Interest Rates Estimated Estimated Change in NII (basis points) EVE Amount % (basis points) NII Amount % +300 $ 567,668 $ (99,551 ) (14.92 ) +300 $ 186,930 $ 6,428 3.56 +200 603,775 (63,444 ) (9.51 ) +200 185,233 4,731 2.62 +100 638,871 (28,348 ) (4.25 ) +100 183,377 2,875 1.59 0 667,219 - 0.0 0 180,502 - 0.0 -100 686,789 19,570 2.93 -100 176,892 (3,610 ) (2.00 ) 50 requirerequires 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.September 30, 2017,March 31, 2019, 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, 2017,March 31, 2019, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $399.2$556.0 million, which represented 8.2%9.2% of total assets and 9.5%10.7% of total deposits and borrowings, compared to $428.2$441.4 million atas of December 31, 2016,2018, which represented 9.7%8.1% of total assets and 11.2%9.4% of total deposits and borrowings on such date.borrowings.FHLBFederal Home Loan Bank of New York and, based on available qualified collateral as of September 30, 2017,March 31, 2019, had the ability to borrow $1.4$1.9 billion. In addition, at September 30, 2017,March 31, 2019, the Bank had in place borrowing capacity of $25 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 $10.9$7.7 million. At September 30, 2017,March 31, 2019, the Bank had aggregate available and unused credit of approximately $796 million,$1.0 billion, which represents the aforementioned facilities totaling $1.4$1.9 billion net of $610$952.7 million in outstanding borrowings and letters of credit. At September 30, 2017,March 31, 2019, outstanding commitments for the Bank to extend credit were approximately $635$954.0 million.$141.3$172.5 million on September 30, 2017, decreasingat March 31, 2019, increasing by $59.1$0.2 million from $200.4$172.4 million at December 31, 2016.2018. Operating activities provided $68.3$13.0 million in net cash. Investing activities used $508.7$35.3 million in net cash, primarily reflecting an increase in loans and securities.net cash flow from the securities portfolio. Financing activities provided $381.2$22.5 million in net cash, primarily reflecting a net increase of $279.5 million in deposits and a net increase of $109 million in borrowings (consisting of $780.0 million in new FHLB borrowings offset by notional repayments of $656.0 million of FHLB borrowings and $15.0 million of repayments of repurchase agreements).deposits.54$279.5$502 million, or 8.4%12.3%, to $3.6$4.6 billion at September 30, 2017March 31, 2019 from December 31, 2016.2018. The increase was primarily attributable to increases in time deposits, money market, interest-bearing demand and noninterest-bearing demand deposits and partially offset by a slight decrease in savings deposits.the acquisition of Greater Hudson Bank. The following table sets forth the composition of our deposit base by the periods indicated.Amount Amount Increase/ Increase/ September 30, 2017 December 31, 2016 (Decrease) March 31, 2019 December 31, 2018 (Decrease) Amount % Amount % 2017 vs. 2016 Amount % Amount % 2019 vs. 2018 (dollars in thousands) (dollars in thousands) Demand, noninterest-bearing $ 719,582 19.8 % $ 694,977 20.8 % $ 24,605 $ 833,090 18.1 % $ 768,584 18.8 % $ 64,506 Demand, interest-bearing 623,027 17.2 563,740 16.9 59,287 901,836 19.6 845,424 20.7 56,412 Money market 1,024,975 28.3 911,867 27.3 113,108 1,141,898 24.9 951,276 23.2 190,622 Savings 177,826 4.9 205,551 6.1 (27,725 ) 172,927 3.8 160,755 3.9 12,172 Time 1,078,359 29.8 968,136 28.9 110,223 1,544,247 33.6 1,366,053 33.4 178,194 Total deposits $ 3,623,769 100.0 % $ 3,344,271 100.0 % $ 279,498 $ 4,593,998 100.0 % $ 4,092,092 100.0 % $ 501,906 51 repricesre-prices quarterly. The rate at September 30, 2017March 31, 2019 was 4.16%5.60%.on September 30, 2015, and to repay $11.25 million of SBLF preferred stock issued to the U.S. Treasury on March 11, 2016. Remaining funds were used for general corporate 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 SeptemberJune 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.55$558$682 million at September 30, 2017,March 31, 2019, an increase of $26.7$68 million from December 31, 2016.2018. The increase in stockholders’ equity was primarily attributable to an increasethe acquisition of $25.4 million in retained earnings and approximately $1.4 million of equity issuance related to stock-based compensation.Greater Hudson Bank. As of September 30, 2017,March 31, 2019, the Company’s tangible common equity ratio and tangible book value per share were 8.71%8.83% and $12.78,$14.67, respectively. As of December 31, 2016,2018, the tangible common equity ratio and tangible book value per share were 8.93%8.77% and $11.96,$14.42, respectively. Total goodwill and other intangible assets were approximately $148 million and $149$163 million as of September 30, 2017March 31, 2019 and $148 million at December 31, 2016, respectively.2018.September 30, December 31, March 31, December 31, 2017 2016 2019 2018 (dollars in thousands, except for share and (dollars in thousands, except for share and per per share data) share data) Stockholders’ equity $ 557,691 $ 531,032 $ 682,395 $ 613,927 Less: Goodwill and other intangible assets 148,442 148,997 162,747 147,646 Tangible common stockholders’ equity $ 409,249 $ 382,035 $ 519,648 $ 466,281 Common stock outstanding at period end 32,015,317 31,948,307 35,443,933 32,328,542 Book value per common share $ 17.42 $ 16.62 $ 19.25 $ 18.99 Less: Goodwill and other intangible assets 4.64 4.66 4.59 4.57 Tangible book value per common share $ 12.78 $ 11.96 $ 14.66 $ 14.42 Total Number of Maximum Number Total Shares Purchased of Shares that May Number as Part of Publicly Yet Be Purchased of Shares Average Price Announced Plans Under the Plans or Period Purchased Paid per Share or Programs Programs January 1, 2019 through January 31, 2019 - - - - February 1, 2019 through February 28, 2019 - - - - March 1, 2019 through March 31, 2019 13,000 $ 19.13 13,000 1,187,000 56September 30, 2017March 31, 2019 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution (dollars in thousands).institution.To Be Well-Capitalized Under To Be Well-Capitalized Under For Capital Adequacy Prompt Corrective Action For Capital Adequacy Prompt Corrective Action ConnectOne Bancorp, Inc. Purposes Provisions ConnectOne Bancorp, Inc. Purposes Provisions At September 30, 2017 Amount Ratio Amount Ratio Amount Ratio At March 31, 2019 Amount Ratio Amount Ratio Amount Ratio (dollars in thousands) (dollars in thousands) Tier 1 leverage capital $ 416,736 9.13 % $ 182,603 4.00 % N/A N/A $ 524,089 9.12 % $ 229,878 4.00 % N/A N/A CET I risk-based ratio 411,582 9.40 197,042 4.50 N/A N/A 518,934 9.68 241,276 4.50 N/A N/A Tier 1 risk-based capital 416,736 9.52 262,723 6.00 N/A N/A 524,089 9.77 321,701 6.00 N/A N/A Total risk-based capital 496,606 11.34 350,397 8.00 N/A N/A 685,947 12.79 428,935 8.00 N/A N/A To Be Well-Capitalized Under To Be Well-Capitalized Under For Capital Adequacy Prompt Corrective Action For Capital Adequacy Prompt Corrective Action ConnectOne Bank Purposes Provisions ConnectOne Bank Purposes Provisions At September 30, 2017 Amount Ratio Amount Ratio Amount Ratio At March 31, 2019 Amount Ratio Amount Ratio Amount Ratio (dollars in thousands) (dollars in thousands) Tier 1 leverage capital $ 461,300 10.11 % $ 182,539 4.00 % $ 228,173 5.00 % $ 599,115 10.43 % $ 229,857 4.00 % $ 287,322 5.00 % CET I risk-based ratio 461,300 10.54 197,019 4.50 284,583 6.50 599,115 11.17 241,269 4.50 348,499 6.50 Tier 1 risk-based capital 461,300 10.54 262,692 6.00 350,255 8.00 599,115 11.17 321,691 6.00 428,922 8.00 Total risk-based capital 491,170 11.22 350,255 8.00 437,819 10.00 668,223 12.46 428,922 8.00 536,152 10.00 September 30, 2017,March 31, 2019, management believes that each of the Bank and the Company meet all capital adequacy requirements to which they are subject.When fully phased in onBeginning January 1, 2019, each of the Company and the Bank will beare required to 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 shortfall.September 30, 2017March 31, 2019 both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the TotalTier 1 Risk Based Capital Ratio which was 2.09%1.27% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 1.97%1.96% above the minimum buffer ratio.57Operation-Operations- Interest Rate Sensitivity Analysis" herein for a discussion of our management of our interest rate risk.5854595560565.5 Other Information61576258
(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 3, 2017May 7, 2019Date: November 3, 2017May 7, 20196359