UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~(Mark One)~~

(Mark One)

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

~~For the Quarterly Period Ended September 30, 2017~~

☐
For the Quarterly Period Ended June 30, 2019 OR

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

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

Commission File Number: 000-11486

CNOB

CONNECTONE BANCORP, INC.

(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.)

301 Sylvan Avenue

Englewood Cliffs, New Jersey 07632

(Address of Principal Executive Offices) (Zip Code)

201-816-8900

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes☒No☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ~~reporting company)~~	Emerging growth company☐
	reporting company)

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:

Title of each class	Trading symbol	Name of each exchange on which registered
Common stock	CNOB	NASDAQ

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

Common Stock, no par value:	~~32,015,317~~35,352,866 shares
(Title of Class)	(Outstanding as of ~~November 3, 2017)~~August 6, 2019)

Table of Contents

				Page
PART I – FINANCIAL INFORMATION
~~Item 1.~~			~~Financial Statements~~
Item 1.		Financial Statements
		Consolidated Statements of Condition at ~~September~~June 30, ~~2017~~2019 (unaudited) and December 31, ~~2016~~2018		3
		Consolidated Statements of Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (unaudited)		4
		Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (unaudited)		5
		Consolidated Statements of Changes in Stockholders’ Equity for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (unaudited)		6
		Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (unaudited)	7	8
		Notes to Consolidated Financial Statements (unaudited)	8	9

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	44	43

Item 3.		Qualitative and Quantitative Disclosures about Market Risks	58	56

Item 4.		Controls and Procedures	59	57

PART II – OTHER INFORMATION
~~Item 1.~~			~~Legal Proceedings~~	60
Item ~~1a.~~1.	~~Risk Factors~~	60Legal Proceedings		58

Item 1a.		Risk Factors		58

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	61	59

Item 3.		Defaults Upon Senior Securities	61	59

Item 4.		Mine Safety Disclosures	61	59
~~Item 5.~~	~~Other Information~~	61
Item 6.5.	~~Exhibits~~	62Other Information		59
~~SIGNATURES~~

2Item 6.	Exhibits	60

SIGNATURES

Item 1. Financial Statements

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

	June 30,			December 31,
(in thousands, except for share data)	2019			2018
	(unaudited)
ASSETS
Cash and due from banks	$	51,950		$	39,161
Interest-bearing deposits with banks		133,700			133,205
Cash and cash equivalents		185,650			172,366

Securities available-for-sale		441,911			412,034
Equity securities		11,152			11,460

Loans receivable		5,090,492			4,541,092
Less: Allowance for loan losses		37,698			34,954
Net loans receivable		5,052,794			4,506,138

Investment in restricted stock, at cost		31,767			31,136
Bank premises and equipment, net		19,781			19,062
Accrued interest receivable		21,272			18,214
Bank owned life insurance		126,132			113,820
Right of use operating lease assets		16,397			-
Goodwill		162,574			145,909
Core deposit intangibles		6,140			1,737
Other assets		33,496			30,216
Total assets	$	6,109,066		$	5,462,092
LIABILITIES
Deposits:
Noninterest-bearing	$	813,635		$	768,584
Interest-bearing		3,827,508			3,323,508
Total deposits		4,641,143			4,092,092
Borrowings		597,317			600,001
Operating lease liabilities		17,787			-
Subordinated debentures (net of debt issuance costs of $1,435 and $1,599, respectively)		128,720			128,556
Other liabilities		24,875			27,516
Total liabilities		5,409,842			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 37,656,806 shares at June 30, 2019 and 34,392,464 shares at December 31, 2018; outstanding 35,352,866 shares at June 30, 2019 and 32,328,542 at December 31, 2018		468,571			412,546
Additional paid-in capital		19,777			15,542
Retained earnings		235,649			211,345
Treasury stock, at cost 2,303,940 common shares at June 30, 2019 and 2,063,922 at December 31, 2018)		(21,892	)		(16,717	)
Accumulated other comprehensive loss		(2,881	)		(8,789	)
Total stockholders’ equity		699,224			613,927
Total liabilities and stockholders’ equity	$	6,109,066		$	5,462,092

3See accompanying notes to unaudited consolidated financial statements.

~~CONNECTONE BANCORP, INC.~~CONNECTONE BANCORP, INC. AND ~~SUBSIDIARIES~~
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						Six Months Ended
	June 30,						June 30,
(in thousands, except for per share data)	2019			2018			2019			2018
Interest income
Interest and fees on loans	$	63,524		$	49,494		$	123,850		$	96,519
Interest and dividends on investment securities:
Taxable		2,573			2,150			5,515			4,037
Tax-exempt		1,081			778			2,208			1,592
Dividends		410			502			867			987
Interest on federal funds sold and other short-term investments		290			160			647			424
Total interest income		67,878			53,084			133,087			103,559
Interest expense
Deposits		16,596			9,169			31,947			16,857
Borrowings		5,752			4,970			10,658			9,610
Total interest expense		22,348			14,139			42,605			26,467
Net interest income		45,530			38,945			90,482			77,092
Provision for loan losses		1,100			1,100			5,600			18,900
Net interest income after provision for loan losses		44,430			37,845			84,882			58,192
Noninterest income
Income on bank owned life insurance		833			775			1,655			1,549
Net gains on sale of loans held-for-sale		46			12			65			29
Deposit, loan and other income		914			601			1,700			1,217
Net gains (losses) on equity securities		158			(47	)		261			(168	)
Net losses on sales of securities available-for-sale		(9	)		-			(1	)		-
Total noninterest income		1,942			1,341			3,680			2,627
Noninterest expenses
Salaries and employee benefits		11,793			9,729			23,748			19,401
Occupancy and equipment		2,357			2,031			4,852			4,174
FDIC insurance		825			765			1,580			1,615
Professional and consulting		1,370			825			2,579			1,548
Marketing and advertising		397			337			607			544
Data processing		1,139			1,091			2,294			2,239
Merger expenses		331			-			7,893			-
Loss on extinguishment of debt		1,047			-			1,047			-
Amortization of core deposit intangibles		364			169			728			338
Other components of net periodic pension expense		29			7			57			14
Other expenses		1,938			2,107			4,267			4,126
Total noninterest expenses		21,590			17,061			49,652			33,999
Income before income tax expense		24,782			22,125			38,910			26,820
Income tax expense		5,501			4,598			7,994			5,042
Net income	$	19,281		$	17,527		$	30,916		$	21,778

Earnings per common share:
Basic	$	0.54		$	0.54		$	0.87		$	0.68
Diluted		0.54			0.54			0.87			0.67

4See accompanying notes to unaudited consolidated financial statements.

~~CONNECTONE BANCORP, INC.~~CONNECTONE BANCORP, INC. AND ~~SUBSIDIARIES~~
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

      Three Months Ended       Nine Months Ended
September 30, September 30,
(in thousands) 2017       2016 2017       2016
Net income $        13,077 $        11,856 $        32,640 $        33,106
Other comprehensive income:
Unrealized gains and losses:
Unrealized holding gains (losses) on available-for-sale securities arising during the period 415 (523 ) 1,332 1,551
Tax effect (165 ) 187 (525 ) (634 )
Net of tax 250 (336 ) 807 917
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 )
Tax effect - 1,640 579 1,682
Net of tax - (2,491 ) (1,017 ) (2,552 )
Amortization of unrealized net losses on held-to-maturity securities transferred from available-for-sale securities - 1,890 - 1,986
Tax effect - (774 ) - (813 )
Net of tax 1,116 - 1,173

Unrealized gains (losses) on cash flow hedges 119 644 76 (1,081 )
Tax effect (48 ) (263 ) (31 ) 441
Net of tax 71 381 45 (640 )
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 comprehensive income $ 13,459 $ 16,901 $ 32,657 $ 38,439

~~See accompanying notes to unaudited consolidated financial statements.~~

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2019			2018			2019			2018
Net income	$	19,281		$	17,527		$	30,916		$	21,778
Other comprehensive income (loss):
Unrealized gains and losses:
Unrealized holding gains (losses) on available-for-sale securities arising during the period		4,027			(1,780	)		9,585			(6,799	)
Tax effect		(1,055	)		445			(2,477	)		1,737
Net of tax		2,972			(1,335	)		7,108			(5,062	)
Reclassification adjustment for realized losses included in net income		9			-			1			-
Tax effect		(2	)		-			-			-
Net of tax		7			-			1			-
Unrealized (losses) gains on cash flow hedges		(897	)		178			(1,287	)		1,094
Tax effect		252			(49	)		361			(307	)
Net of tax		(645	)		129			(926	)		787
Unrealized pension plan gains and losses:
Unrealized pension plan (losses) gains before reclassifications		-			-			(562	)		236
Tax effect		-			-			158			(67	)
Net of tax		-			-			(404	)		169
Reclassification adjustment for amortization included in net income		90			92			179			183
Tax effect		(25	)		(26	)		(50	)		(51	)
Net of tax		65			66			129			132
Total other comprehensive (loss) income		2,399			(1,140	)		5,908			(3,974	)
Total comprehensive income	$	21,680		$	16,387		$	36,824		$	17,804

5See accompanying notes to unaudited consolidated financial statements.

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

~~See accompanying notes to unaudited consolidated financial statements.~~

	Six Months Ended June 30, 2019

													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, 2018	$	-	$	412,546	$	15,542	$	211,345		$	(16,717	)	$	(8,789	)	$	613,927
Net income		-		-		-		30,916			-			-			30,916
Other comprehensive income, net of tax		-		-		-		-			-			5,908			5,908
Cash dividends declared on common stock ($0.18 per share)		-		-		-		(6,612	)		-			-			(6,612	)
Exercise of stock options (28,937 shares)		-		-		265		-			-			-			265
Restricted stock grants (52,480 shares)		-		-		-		-			-			-			-
Net restricted stock units issued (4,904 shares)		-		-		-		-			-			-			-
Repurchase of treasury stock (240,018 shares)		-		-		-		-			(5,175	)		-			(5,175	)
Net performance units issued (26,517 shares)		-		-		196		-			-			-			196
Stock issued (3,032,496 shares) in acquisition of Greater Hudson Bank		-		56,025		-		-			-			-			56,025
Restricted stock issued (119,008 shares) in acquisition of BoeFly LLC		-		-		2,500		-			-			-			2,500
Stock-based compensation expense		-		-		1,274		-			-			-			1,274
Balance as of June 30, 2019	$	-	$	468,571	$	19,777	$	235,649		$	(21,892	)	$	(2,881	)	$	699,224

	Three Months Ended June 30, 2019

													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 March 31, 2019	$	-	$	468,571	$	16,513	$	219,558		$	(16,967	)	$	(5,280	)	$	682,395
Net income		-		-		-		19,281			-			-			19,281
Other comprehensive income, net of tax		-		-		-		-			-			2,399			2,399
Cash dividends declared on common stock ($0.09 per share)		-		-		-		(3,190	)		-			-			(3,190	)
Exercise of stock options (6,946) shares)		-		-		122		-			-			-			122
Restricted stock grants (8,997 shares)		-		-		-		-			-			-			-
Repurchase of treasury stock (227,018 shares)		-		-		-		-			(4,925	)		-			(4,925	)
Restricted stock issued (119,008 shares) in acquisition of BoeFly LLC		-		-		2,500		-			-			-			2,500
Stock-based compensation expense		-		-		642		-			-			-			642
Balance as of June 30, 2019	$	-	$	468,571	$	19,777	$	235,649		$	(21,892	)	$	(2,881	)	$	699,224

6(continued)

	Six Months Ended June 30, 2018

														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) (see Note 8)		-		-		-			709			-			(709	)		-
Cumulative effect of adopting ASU 2016-01 (see Note 8)		-		-		-			(55	)		-			55			-
Net income		-		-		-			21,778			-			-			21,778
Other comprehensive loss, net of tax		-		-		-			-			-			(3,974	)		(3,974	)
Cash dividends declared on common stock ($0.15 per share)		-		-		-			(4,838	)		-			-			(4,838	)
Exercise of stock options (46,497) shares)		-		-		252			-			-			-			252
Restricted stock grants (23,018 shares)		-		-		-			-			-			-			-
Net performance units issued (42,672 shares)		-		-		(819	)		-			-			-			(819	)
Stock-based compensation expense		-		-		721			-			-			-			721
Balance as of June 30, 2018	$	-	$	412,546	$	13,756		$	177,619		$	(16,717	)	$	(8,647	)	$	578,557

	Three Months Ended June 30, 2018

														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 March 31, 2018	$	-	$	412,546	$	13,434		$	162,510		$	(16,717	)	$	(7,507	)	$	564,266
Net income		-		-		-			17,108			-			-			17,108
Other comprehensive income, net of tax		-		-		-			-			-			(1,140	)		(1,140	)
Cash dividends declared on common stock ($0.075 per share)		-		-		-			(1,999	)		-			-			(1,999	)
Exercise of stock options (7,800 shares)		-		-		50			-			-			-			50
Restricted stock grants (1,014 shares)		-		-		-			-			-			-			-
Stock-based compensation expense		-		-		272			-			-			-			272
Balance as of June 30, 2018	$	-	$	412,546	$	13,756		$	177,619		$	(16,717	)	$	(8,647	)	$	578,557

See accompanying notes to unaudited consolidated financial statements.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

      Nine Months Ended
September 30,
(dollars in thousands) 2017       2016
Cash flows from operating activities
Net income $        32,640 $        33,106
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 2,364 2,084
Provision for loan losses 4,000 13,500
Increase in valuation allowance 15,325 -
Amortization of intangibles 555 627
Net accretion of loans (1,106 ) (3,381 )
Accretion on bank premises (58 ) (94 )
Accretion on deposits (19 ) (167 )
Accretion on borrowings (156 ) (250 )
Stock-based compensation 1,315 1,650
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 ) -
Loans originated for resale (6,790 ) (6,399 )
Proceeds from sale of loans held-for sale 12,015 4,948
Net loss (gain) on sale of other real estate owned 82 (182 )
Increase in cash surrender value of bank owned life insurance (2,402 ) (1,843 )
Amortization of premiums and accretion of discounts on investments securities, net 1,808 1,148
(Increase) decrease in accrued interest receivable (1,876 ) 48
Decrease (increase) in other assets 8,894 (2,813 )
Increase (decrease) in other liabilities 3,444 (981 )
Net cash provided by operating activities 68,311 36,620
Cash flows from investing activities
Investment securities available-for-sale:
Purchases (138,945 ) (114,844 )
Sales 29,543 85,253
Maturities, calls and principal repayments 61,700 109,452
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
Payments on loans held-for-sale 2,841 -
Net increase in loans (447,457 ) (359,945 )
Proceeds from sales of fixed assets 8 -
Purchases of premises and equipment (2,148 ) (1,769 )
Purchases of bank owned life insurance (10,000 ) (17,000 )
Proceeds from sale of other real estate owned 1,124 2,992
Net cash used in investing activities (508,696 ) (274,026 )
Cash flows from financing activities
Net increase in deposits 279,517 478,150
Advances of Federal Home Loan Bank (“FHLB”) borrowings 780,000 375,000
Repayments of FHLB borrowings (656,000 ) (565,000 )
Repayment of repurchase agreement (15,000 ) -
Cash dividends paid on common stock (7,207 ) (6,805 )
Cash dividends paid on preferred stock - (22 )
Common stock issuance costs (180 ) -
Redemption of preferred stock - (11,250 )
Proceeds from exercise of stock options 118 232
Net cash provided by financing activities 381,248 270,305
Net change in cash and cash equivalents (59,137 ) 32,899
Cash and cash equivalents at beginning of period 200,399 200,895
Cash and cash equivalents at end of period $ 141,262 $ 233,794
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

~~See accompanying notes to unaudited consolidated financial statements.~~

	Six Months Ended
	June 30,
(dollars in thousands)	2019			2018
Cash flows from operating activities
Net income	$	30,916		$	21,778
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		1,597			1,536
Provision for loan losses		5,600			18,900
Amortization of intangibles		728			338
Net accretion of loans		(2,450	)		(806	)
Accretion on bank premises		(43	)		(33	)
Accretion on deposits		(639	)		(31	)
Amortization (accretion) on borrowings		114			(82	)
Stock-based compensation expense		1,470			(98	)
Losses on sales of investment securities, net		1			-
(Gains) losses on equity securities, net		(261	)		168
Gains on sales of loans held-for-sale, net		(65	)		(29	)
Loans originated for resale		(4,044	)		(1,498	)
Proceeds from sale of loans held-for sale		4,109			1,897
Loss on extinguishment of debt		1,047			-
Increase in cash surrender value of bank owned life insurance		(1,655	)		(964	)
Amortization of premiums and accretion of discounts on investments securities, net		1,759			1,832
Amortization of subordinated debt issuance costs		164			168
Increase in accrued interest receivable		(624	)		(1,284	)
Net change in operating leases		1,390			-
Decrease (increase) in other assets		4,231			(126	)
(Decrease) increase in other liabilities		(8,078	)		12,633
Net cash provided by operating activities		35,267			54,299
Cash flows from investing activities
Investment securities available-for-sale:
Purchases		(141,739	)		(60,595	)
Sales		150,332			-
Maturities, calls and principal repayments		91,028			75,506
Sales of equity securities		569			-
Net (purchases) redemptions of restricted investment in bank stocks		(631	)		1,056
Payments on loans held-for-sale		-			159
Net increase in loans		(186,892	)		(181,868	)
Purchases of premises and equipment		(649	)		(233	)
Cash and cash equivalents acquired in acquisition		13,741			-
Cash consideration paid in acquisition		(2,530	)		-
Net cash used in investing activities		(76,771	)		(165,975	)
Cash flows from financing activities
Net increase in deposits		133,580			110,313
Increase in subordinated debentures		-			73,525
Advances of Federal Home Loan Bank (“FHLB”) borrowings		892,000			863,000
Repayments of FHLB borrowings		(960,031	)		(904,000	)
Repurchase of treasury stock		(5,175	)		-
Cash dividends paid on common stock		(5,851	)		(4,827	)
Proceeds from exercise of stock options		265			252
Net cash provided by financing activities		54,788			138,263
Net change in cash and cash equivalents		13,284			26,587
Cash and cash equivalents at beginning of period		172,366			149,582
Cash and cash equivalents at end of period	$	185,650		$	176,169
Supplemental disclosures of cash flow information
Cash payments for:
Interest paid on deposits and borrowings	$	44,169		$	25,055
Income taxes		7,816			1,497
Supplemental disclosures of noncash investing activities
Transfer of loans to other real estate owned	$	-		$	538
Transfer of loans held-for-investment to loans held-for-sale		-			21,236
Transfer of loans held-for-sale to held-for-investment		-			45,552
Business combinations:
Fair value of net assets acquired, net of cash and cash equivalents	$	534,146		$	-
Fair value of liabilities assumed		488,475			-

7See accompanying notes to unaudited consolidated financial statements.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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), ~~and~~ NJCB Spec-1, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey online business lending place).

The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its ~~twenty~~twenty-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.

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 (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three ~~months~~ and ~~nine~~six months ended ~~September~~June 30, ~~2017~~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 ~~2016~~2018 Annual Report on Form 10-K should be read in conjunction with these consolidated financial statements.

In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates.

The consolidated financial statements have been prepared in conformity with 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 ~~2. New~~1a. Authoritative Accounting Guidance

Newly Issued, But Not Yet Effective Accounting Standards

ASU No. ~~2017-12~~ 2016-13, “~~“Derivatives~~Financial Instruments – Credit Losses (Topic 326): Assets Measured at Amortized Cost.” (modified by ASU 2018-19, ASU 2019-04 and ~~Hedging (Topic 815): Targeted Improvements~~ASU 2019-05). ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to ~~Accounting for Hedging Activities.”~~ ~~ASU No. 2017-12 refines~~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 both~~requires 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 on~~assets not excluded from the ~~face of~~scope that have the ~~financial statements and in the footnotes. It also makes certain targeted improvements~~contractual right to ~~simplify the application of hedge accounting guidance. ASU 2017-12 will be effective for~~receive cash. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, ~~2018, and~~2019, including interim periods within those fiscal years. ~~Although management continues~~The Company has formed a CECL committee which has assessed our data and system needs. The Company has engaged third-party vendors to ~~evaluate~~assist 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 loss history. We expect to recognize a one-time cumulative effect adjustment to the ~~potential~~allowance 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.

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

Note 1a. Authoritative Accounting Guidance – (continued)

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 ~~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.

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 toon our consolidated financial statements.

810

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 2. Business Combination

Greater Hudson Bank

On July 11, 2018, the Company entered into an Agreement and Plan of Merger 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 this merger, the Company acquired seven branch offices located in Rockland, Orange and Westchester Counties, New ~~Authoritative Accounting Guidance – (continued)~~

~~ASU No. 2016-15, “~~~~Statement of Cash Flows (Topic 230)~~:~~Classification of Certain Cash Receipts 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 relationYork. Pursuant to the ~~effective interest rate~~merger agreement, holders of GHB common stock received 0.245 shares of common stock of ConnectOne with cash paid in lieu of fractional shares.

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 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 ~~amendments~~assets 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 as~~acquisition of GHB were recorded at their estimated fair values based on management’s best estimates using information available at the date of the ~~beginning~~acquisition 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 of~~acquisition. 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 ~~scope~~estimates, accounting guidance provides that ~~have~~an 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 determine~~adjustment amounts are determined. The acquirer must record in the ~~magnitude~~financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, ~~such one-time adjustment or the overall impact~~as 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's~~provisional 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 in~~resulting from the ~~process of evaluating all of our leases for compliance~~acquisition.

In connection with the ~~new ASU.~~

~~ASU No. 2016-01,~~~~Financial Instruments – Overall (Subtopic 825-10): Recognition~~acquisition, 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 portion~~identifiable assets acquired and liabilities assumed as of the ~~total change~~date 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

The amount of goodwill recorded represents the excess purchase price over the estimated fair value of ~~a liability resulting~~the 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 change~~the acquisition.

Loans acquired in the ~~instrument-specific credit risk when the entity has elected to measure the liability~~GHB acquisition were recorded at fair value, ~~in accordance with~~and there was no carryover related allowance for loan losses. The fair values of loans acquired from GHB were estimated based on the value of the expected 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 relative risk of the cash flows, considering the loan type, liquidity risk, the maturity of the loans, servicing costs and a required return on capital. As of June 30, 2019 there were no changes to the provisional fair value option for financial instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-01 will be effective for usadjustments recorded on January ~~1, 2018 and we are currently evaluating the potential impact of ASU No. 2016-01 on our consolidated financial statements.~~2, 2019.

911

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 2. ~~New Authoritative Accounting Guidance~~Business Combination – (continued)

~~ASU No. 2014-09,~~~~“Revenue from Contracts~~The following is a summary of the loans accounted for in accordance with ~~Customers (Topic 606).”~~~~ASU 2014-09 implements a common revenue standard~~ASC 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~~GHB acquisition as of the ~~transaction price; (iv) allocate~~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

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

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

Direct acquisition and integration costs of the GHB acquisition were expensed as incurred. These items were recorded as merger-related expenses on the consolidated statement of income. During the three months and six months ended June 30, 2019, merger expenses related to the ~~performance obligations in~~GHB acquisition were $-0- and $7.6 million, respectively.

BoeFly, LLC

On May 31, 2019, ConnectOne Bank completed the ~~contract;~~acquisition of New York/Boston-based BoeFly, LLC, which operates an online business lending marketplace connecting small- to medium-sized businesses with lenders and ~~(v) recognize revenue when (or as)~~professional loan brokers across the ~~entity satisfies~~United States. The business will operate as BoeFly, Inc., a ~~performance obligation. ASU 2014-09~~wholly owned subsidiary of ConnectOne Bank, and is expected to generate fee income and small business lending opportunities for the Bank. The consideration exchanged was ~~originally going to be effective for us~~a combination of cash, restricted stock and a potential cash earn-out based on ~~January 1, 2017; however, the FASB recently issued ASU 2015-14,~~~~“Revenue from Contracts with Customers (Topic 606) - Deferral~~predefined business origination targets. The Company recorded $6.3 million as goodwill on its consolidated statement of condition as of the ~~Effective Date”~~ ~~which deferred~~acquisition date. The acquisition of BoeFly, LLC was not material to the ~~effective date~~results 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~~operations or financial ~~statements, at this time, we believe the adoption of this standard will not have a significant impact to our consolidated financial statements.~~

~~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, which is not yet effective. The effective date will be the same as the effective date of ASU No. 2014-09.

~~In April 2016, the FASB issued ASU No. 2016-10,~~~~Revenue from Contracts with Customers (Topic 606)~~: Identifying Performance Obligations 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 understandabilitycondition of the licensing implementation guidance. The amendments in this update affect the guidance in ASU No. 2014-09 above, which is not yet effective. The effective date will be the same as the effective date of ASU No. 2014-09.Company.

~~In May 2016, the FASB issued ASU No. 2016-12,~~~~Revenue from Contracts with Customers (Topic 606)~~~~: Narrow-Scope Improvements~~Direct acquisition 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~~integration costs of the ~~proposals~~BoeFly, LLC acquisition were expensed as incurred. These items were recorded as merger-related expenses on the consolidated statement of income. Merger expenses related to the BoeFly, LLC acquisition were $0.3 million for both the three and ~~to expedite improvements to ASU No. 2014-09. The amendment affects narrow aspects of the guidance issued in ASU No. 2014-09.~~six months ended June 30, 2019.

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

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:

	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	(in thousands, except for per share data)												(in thousands, except for per share data)
	2017			2016			2017			2016			2019			2018			2019			2018
Net income available to common stockholders	$	13,035		$	11,812		$	32,534		$	33,084
Net income													$	19,281		$	17,527		$	30,916		$	21,778
Earnings allocated to participating securities		42			44			106			22			(58	)		(37	)		(140	)		(54	)
Net income	$	13,077		$	11,856		$	32,640		$	33,106
Income attributable to common stock													$	19,223		$	17,490		$	30,776		$	21,724

Weighted average common shares outstanding, including participating securities		32,015			30,143			31,999			30,094			35,365			32,134			35,322			32,106
Weighted average participating securities		(103	)		(113	)		(104	)		(98	)		(49	)		(20	)		(26	)		(38	)
Weighted average common shares outstanding		31,912			30,030			31,895			29,996			35,316			32,114			35,296			32,068
Incremental shares from assumed conversions of options, performance units and restricted shares		270			329			272			351
Incremental shares from assumed conversions of options, performance units and non-participating restricted shares														79			207			74			208
Weighted average common and equivalent shares outstanding		32,182			30,359			32,167			30,347			35,395			32,321			35,370			32,276

Earnings per common share:
Basic	$	0.41		$	0.39		$	1.02		$	1.10		$	0.54		$	0.54		$	0.87		$	0.68
Diluted		0.41			0.39			1.01			1.09			0.54			0.54			0.87			0.67

There were no antidilutive share equivalents as of ~~September~~June 30, ~~2017~~2019 and ~~September~~June 30, ~~2016.~~2018.

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

Note 4. Securities ~~Available-For-Sale~~Available-for-Sale

~~The 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~~June 30, ~~2017~~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.

~~During~~The 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 June 30, 2019 and December 31, 2018 and the ~~date~~corresponding amounts of ~~transfer. For transfers from the available-for-sale category to the held-to maturity category the~~gross unrealized ~~holding gain or loss at the date of transfer remains in accumulated other comprehensive income~~gains 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
June 30, 2019	(dollars in thousands)
Securities available-for-sale
Federal agency obligations	$	24,877	$	599	$	(15	)	$	25,461
Residential mortgage pass-through securities		230,064		881		(1,403	)		229,542
Commercial mortgage pass-through securities		5,748		78		-			5,826
Obligations of U.S. states and political subdivisions		142,521		2,417		(819	)		144,119
Corporate bonds and notes		28,128		267		(278	)		28,117
Asset-backed securities		7,802		2		(58	)		7,746
Certificates of deposit		148		2		-			150
Other securities		950		-		-			950
Total securities available-for-sale	$	440,238	$	4,246	$	(2,573	)	$	441,911

			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		(4,602	)		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

Investment securities having a carrying value of ~~applicable taxes.~~approximately $125.4 million and $151.5 million at June 30, 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 June 30, 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

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4. Securities ~~Available-For-Sale~~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

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

~~Note 4. Securities Available-For-Sale – (continued)~~

The following table presents information for investments in securities available-for-sale at ~~September~~June 30, ~~2017,~~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.

	June 30, 2019
	Amortized		Fair
	Cost		Value
	(dollars in thousands)
Securities available-for-sale:
Due in one year or less	$	4,166	$	4,192
Due after one year through five years		29,411		29,449
Due after five years through ten years		22,538		23,126
Due after ten years		147,361		148,826
Residential mortgage pass-through securities		230,064		229,542
Commercial mortgage pass-through securities		5,748		5,826
Other securities		950		950
Total securities available-for-sale	$	440,238	$	441,911

September 30, 2017
Amortized Fair
Cost Value
(dollars in thousands)
Securities available-for-sale:
Due in one year or less $ 6,775 $ 6,801
Due after one year through five years 30,824 31,197
Due after five years through ten years 39,489 40,174
Due after ten years 170,373 170,717
Residential mortgage pass-through securities 133,517 133,164
Commercial mortgage pass-through securities 4,088 4,130
Equity securities 376 630
Other securities 13,976 13,703
Total $ 399,418 $ 400,516

Gross gains and losses from the sales ~~calls and maturities~~ of securities for periods presented were as ~~follows (dollars in thousands):~~follows:

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Net gains on sales of securities, after tax $ - $ 78,680 $ 29,543 $ 85,253

Gross gains on sales of securities - 4,131 1,596 4,234
Gross losses on sales of securities - - - -
Net gains on sales of securities - 4,131 1,596 4,234
Less: tax provision on net gains - 1,640 579 1,682

Net gains on sales of securities, after tax $ - $ 2,491 $ 1,017 $ 2,552

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	(dollars in thousands)
	2019			2018		2019			2018
Proceeds	$	47,664		$	-	$	141,739		$	-

Gross gains on sales of securities		263			-		400			-
Gross losses on sales of securities		(272	)		-		(401	)		-
Net losses on sales of securities		(9	)		-		(1	)		-
Less: tax provision on net losses		(2	)		-		-			-

Net losses on sales of securities, after tax	$	(7	)	$	-	$	(1	)	$	-

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~~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.

1314

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 7569 and 84148 securities as of ~~September~~June 30, ~~2017~~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~~asset-backed securities are not considered to be other-than-temporary because these unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.

Factors 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 otherNo corporate issuers have defaulted on interest payments. The ~~unrealized loss in equity securities consists of losses on other bank equities. The decline~~declines 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 ~~September~~June 30, ~~2017.~~2019.

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.

1415

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 ~~September~~June 30, ~~2017~~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															June 30, 2019
	Total					Less than 12 Months					12 Months or Longer					Total					Less than 12 Months					12 Months or Longer
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
	(dollars in thousands)															(dollars in thousands)
Investment Securities Available-for-Sale:
Federal agency obligation	$	22,672	$	(271	)	$	21,416	$	(262	)	$	1,256	$	(9	)	$	4,260	$	(15	)	$	-	$	-		$	4,260	$	(15	)
Residential mortgage pass-through securities		50,136		(944	)		49,817		(937	)		319		(7	)		147,392		(1,403	)		42,750		(73	)		104,642		(1,330	)
Obligations of U.S. states and political subdivisions		52,307		(931	)		52,307		(931	)		-		-			41,825		(819	)		-		-			41,825		(819	)
Trust preferred securities		1,427		(151	)		-		-			1,427		(151	)
Corporate bonds and notes		15,930		(375	)		7,671		(265	)		8,259		(110	)		8,696		(278	)		2,000		-			6,696		(278	)
Asset-backed securities		13,404		(286	)		3,743		(88	)		9,661		(198	)		6,397		(58	)		4,406		(47	)		1,991		(11	)
Other securities		11,467		(325	)		-		-			11,467		(325	)
Total temporarily impaired securities	$	167,343	$	(3,283	)	$	134,954	$	(2,483	)	$	32,389	$	(800	)	$	208,570	$	(2,573	)	$	49,156	$	(120	)	$	159,414	$	(2,453	)

																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	)

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.

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.

1516

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 5. Derivatives – (continued)

Interest rate swaps were entered into on June 4, 2019 with a notional amount of $50 million and in April 13, 2017, August 24, 2015, December 30, 2014 and October 15, 2014, each with a respective notional amount of $25 million and were designated as cash flow hedges of an FHLB 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.

Summary information about the interest rate swaps designated as cash flow hedges as of ~~September~~June 30, ~~2017,~~2019, December 31, ~~2016~~2018 and ~~September~~June 30, ~~2016~~2018 are presented in the following table.

	September 30,			December 31,			September 30,			June 30,			December 31,			June 30,
	2017			2016			2016			2019			2018			2018
	(dollars in thousands)									(dollars in thousands)
Notional amount	$	100,000		$	75,000		$	75,000		$	125,000		$	75,000		$	100,000
Weighted average pay rates		1.52	%		1.59	%		1.58	%		1.81	%		1.70	%		1.68	%
Weighted average receive rates		1.07	%		0.69	%		0.70	%		2.69	%		2.19	%		1.99	%
Weighted average maturity		2.7 years			2.8 years			3.1 years			1.7 years			2.0 years			1.9 years
Fair value	$	164		$	88		$	(1,212	)	$	(128	)	$	1,159		$	1,893

Interest expense recorded on these swap transactions totaled approximately ~~$95,000~~$(176,000) and ~~$326,000~~$(358,000) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, and ~~$167,000~~$(148,000) and ~~$534,000~~$(152,000) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, respectively.

Cash Flow Hedge

The following table presents the net gains/losses recorded in other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the following periods:

	~~Nine Months Ended September 30, 2017~~
	~~Amount of gain~~		~~Amount of gain~~		~~Amount of gain (loss)~~
	~~(loss) recognized~~		~~(loss) reclassified~~		~~recognized in other~~
	~~in OCI (Effective~~		~~from OCI to~~		~~Noninterest income~~
	~~Portion)~~		~~interest income~~		~~(Ineffective Portion)~~
	~~(dollars in thousands)~~
~~Interest rate contracts~~	$	45	$	-	$	-

	~~Nine Months Ended September 30, 2016~~
	~~Amount of gain~~			~~Amount of gain~~		~~Amount of gain (loss)~~
	~~(loss) recognized~~			~~(loss) reclassified~~		~~recognized in other~~
	~~in OCI (Effective~~			~~from OCI to~~		~~Noninterest income~~
	~~Portion)~~			~~interest income~~		~~(Ineffective Portion)~~
	~~(dollars in thousands)~~
~~Interest rate contracts~~	$	~~(640~~	)	$	-	$	-

	Six Months Ended June 30, 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	$	(929	)	$	(358	)	$	-

	Six Months Ended June 30, 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	$	1,246		$	(152	)	$	-

The following table reflects the cash flow hedges included in the consolidated statements of condition as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

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

	June 30, 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	$	125,000	$	(128	)	$	75,000	$	1,159

1617

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Loans and the Allowance for Loan Losses

~~Loans~~

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, 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.

~~Loans Held-for-Sale~~

Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan.

Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. 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 losses~~

The 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.

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~
~~NOTES 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 Loans~~

The 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.

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

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

~~Loans held-for-sale~~

~~The 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 $ -

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~
~~NOTES 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, including net deferred loan fees, at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

	June 30,			December 31,
	2019			2018
	(dollars in thousands)
Commercial	$	1,052,559		$	988,758
Commercial real estate		3,111,274			2,778,167
Commercial construction		602,213			465,389
Residential real estate		326,661			309,991
Consumer		2,041			2,594
Gross loans		5,094,748			4,544,899
Net deferred loan fees		(4,256	)		(3,807	)
Total loans receivable	$	5,090,492		$	4,541,092

September 30, December 31,
2017 2016
(dollars in thousands)
Commercial $ 641,613 $ 553,576
Commercial real estate 2,585,205 2,204,710
Commercial construction 399,453 486,228
Residential real estate 264,244 232,547
Consumer 1,912 2,380
Gross loans 3,892,427 3,479,441
Net deferred loan fees (3,138 ) (3,609 )
Total loans receivable $ 3,889,289 $ 3,475,832

At ~~September~~June 30, ~~2017~~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.

Purchased Credit-Impaired ~~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 ofin those loans is as follows at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018.

	June 30,		December 31,
	2019		2018
	(dollars in thousands)
Commercial	$	5,399	$	2,509
Commercial real estate		1,305		-
	$	6,704	$	2,509

September 30, December 31,
2017 2016
(dollars in thousands)
Commercial $ 5,243 $ 7,098
Commercial real estate 232 982
Total carrying amount $ 5,475 $ 8,080

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during ~~both~~either the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~September~~June 30, ~~2016.~~2018. There were no reversals from the allowance for loan losses during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~June 30, 2018.

The following ~~tables~~table presents the accretable yield, or income expected to be collected, on the purchased credit-impaired loans for ~~the following periods:~~three and six months ended June 30, 2019 and June 30, 2018:

	Three Months			Three Months
	Ended			Ended
	June 30, 2019			June 30, 2018
	(dollars in thousands)
Balance at April 1	$	2,213		$	1,322
Accretion of income		(575	)		(63	)
Balance at June 30	$	1,638		$	1,259

	Six Months			Six Months
	Ended			Ended
	June 30, 2019			June 30, 2018
	(dollars in thousands)
Balance at January 1	$	1,134		$	1,387
New loans purchased		1,286
Accretion of income		(782	)		(128	)
Balance at June 30	$	1,638		$	1,259

Three Months Three Months
Ended Ended
September 30, September 30,
2017 2016
(dollars in thousands)
Balance at beginning of period $ 2,496 $ 3,233
Accretion of income (180 ) (185 )
Balance at end of period $ 2,316 $ 3,048

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

2018

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Loans Receivable on Nonaccrual ~~Status:~~Status- The following tables ~~presents~~present nonaccrual loans included in loans receivable by loan ~~segment~~class as of ~~the periods presented:~~June 30, 2019 and December 31, 2018:

	June 30,		December 31,
	2019		2018
	(dollars in thousands)
Commercial	$	28,433	$	29,340
Commercial real estate		12,686		15,135
Commercial construction		3,579		2,934
Residential real estate		5,219		4,446
Total nonaccrual loans	$	49,917	$	51,855

September 30, December 31,
2017 2016
(dollars in thousands)
Commercial $ 951 $ 1,460
Commercial real estate 8,369 1,081
Residential real estate 4,435 3,193
Total loans receivable on nonaccrual status $ 13,755 $ 5,734

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.

~~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~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

	June 30, 2019
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial	$	997,503	$	19,269	$	35,787	$	-	$	1,052,559
Commercial real estate		3,084,014		7,622		19,638		-		3,111,274
Commercial construction		589,165		4,106		8,942		-		602,213
Residential real estate		321,316		-		5,345		-		326,661
Consumer		2,034		-		7		-		2,041
Gross loans	$	4,994,032	$	30,997	$	69,719	$	-	$	5,094,748

September 30, 2017
Special
Pass Mention Substandard Doubtful Total
(dollars in thousands)
Commercial $ 630,818 $ 3,882 $ 6,913 $ - $ 641,613
Commercial real estate 2,535,005 30,875 19,325 - 2,585,205
Commercial construction 393,625 3,239 2,589 - 399,453
Residential real estate 264,244 - - - 264,244
Consumer 1,912 - - - 1,912
Gross loans $ 3,825,604 $ 37,996 $ 28,827 $ - $ 3,892,427

December 31, 2016
Special
Pass Mention Substandard Doubtful Total
(dollars in thousands)
Commercial $ 539,961 $ 3,255 $ 10,360 $ - $ 553,576
Commercial real estate 2,154,343 31,173 19,194 - 2,204,710
Commercial construction 480,319 3,388 2,521 - 486,228
Residential real estate 228,990 - 3,557 - 232,547
Consumer 2,318 - 62 - 2,380
Gross loans $ 3,405,931 $ 37,816 $ 35,694 $ - $ 3,479,441

	December 31, 2018
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial	$	951,610	$	3,371	$	33,777	$	-	$	988,758
Commercial real estate		2,742,989		12,574		22,604		-		2,778,167
Commercial construction		453,598		5,515		6,276		-		465,389
Residential real estate		305,414		-		4,577		-		309,991
Consumer		2,576		-		18		-		2,594
Gross loans	$	4,456,187	$	21,460	$	67,252	$	-	$	4,544,899

2119

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The following table provides an analysis of the impaired loans by segment as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

	June 30, 2019
	Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
No related allowance recorded	(dollars in thousands)
Commercial	$	32,559	$	79,328
Commercial real estate		17,162		17,317
Commercial construction		6,047		6,047
Residential real estate		3,175		3,519
Total (no related allowance)	$	58,943	$	106,211

With an allowance recorded
Commercial real estate	$	393	$	393	$	29
Commercial construction		2,894		2,895		162
Residential real estate		253		265		22
Total (with allowance)	$	3,540	$	3,553	$	213

Total
Commercial	$	32,559	$	79,328	$	-
Commercial real estate		17,555		17,710		29
Commercial construction		8,941		8,942		162
Residential real estate		3,428		3,784		22
Total	$	62,483	$	109,764	$	213

	December 31, 2018
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
No related allowance recorded	(dollars in thousands)
Commercial	$	29,896	$	83,596
Commercial real estate		16,839		17,935
Commercial construction		9,240		9,240
Residential real estate		2,209		2,521
Total (no related allowance)	$	58,184	$	113,292

With an allowance recorded
Commercial real estate	$	1,488	$	1,488	$	7
Residential real estate		260		266		29
	$	1,748	$	1,754	$	36

Total
Commercial	$	29,896	$	83,596	$	-
Commercial real estate		18,327		19,423		7
Commercial construction		9,240		9,240		-
Residential real estate		2,469		2,787		29
Total	$	59,932	$	115,046	$	36

      September 30, 2017
      Unpaid
Recorded Principal Related
Investment Balance Allowance
No related allowance recorded (dollars in thousands)
Commercial $ 3,068 $ 3,073
Commercial real estate 19,221 19,283
Commercial construction 4,340 4,340
Residential real estate 2,520 2,749
Consumer 46 46
Total $ 29,195 $ 29,491

With an allowance recorded
Commercial real estate $ 1,640 $ 2,052 $        110

Total
Commercial $ 3,068 $ 3,073 $ -
Commercial real estate 20,861 21,335 110
Commercial construction 4,340 4,340 -
Residential real estate 2,520 2,749 -
Consumer 46 46 -
Total (including allowance) $ 30,835 $ 31,543 $ 110

December 31, 2016
Unpaid
Recorded Principal Related
Investment Balance Allowance
No related allowance recorded (dollars in thousands)
Commercial $        3,637 $        4,063
Commercial real estate 18,288 18,288
Commercial construction 5,909 5,909
Residential real estate 1,851 2,055
Consumer 62 62
Total $ 29,747 $ 30,377

With an allowance recorded
Commercial real estate $ 1,244 $ 1,244 $ 145

Total
Commercial $ 3,637 $ 4,063 $ -
Commercial real estate 19,532 19,532 145
Commercial construction 5,909 5,909 -
Residential real estate 1,851 2,055 -
Consumer 62 62 -
Total (including allowance) $ 30,991 $ 31,621 $ 145

2220

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 segment as of and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016:~~2018:

	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended June 30,								Six Months Ended June 30,
	2017				2016				2017				2016				2019				2018				2019				2018
	Average		Interest		Average		Interest		Average		Interest		Average		Interest		Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
	(dollars in thousands)																(dollars in thousands)
Impaired loans (no allowance)

Commercial	$	3,100	$	34	$	6,704	$	66	$	3,149	$	115	$	4,317	$	86	$	33,663	$	82	$	38,770	$	35	$	33,066	$	164	$	42,056	$	66
Commercial real estate		19,302		221		9,129		65		18,813		424		8,167		118		17,205		68		23,422		127		17,170		143		23,504		370
Commercial construction		4,285		63		1,224		21		4,273		215		979		54		6,048		25		9,225		176		6,049		80		9,845		295
Residential real estate		2,529		2		3,271		5		2,551		6		3,247		15		3,198		-		2,569		-		3,195		-		2,599		-
Consumer		48		1		70		1		54		2		74		3
Total	$	29,264	$	321	$	20,398	$	158	$	28,840	$	762	$	16,784	$	276	$	60,114	$	175	$	73,986	$	338	$	59,480	$	387	$	78,004	$	731

Impaired loans (allowance):

Commercial	$	-	$	-	$	91,393	$	925	$	-	$	-	$	85,620	$	2,447
Commercial real estate		1,645		2		153		-		1,654		39		153		-	$	393	$	-	$	8,544	$	11	$	393	$	-	$	8,548	$	23
Commercial construction																		2,850		42		-		-		2,818		85		-		-
Residential real estate																		255		-		-		-		256		-		-		-
Total	$	1,645	$	2	$	91,546	$	925	$	1,654	$	39	$	85,773	$	2,447	$	3,498	$	42	$	8,544	$	11	$	3,467	$	85	$	8,548	$	23

Total impaired loans:

Commercial	$	3,100	$	34	$	98,097	$	991	$	3,149	$	115	$	89,937	$	2,533	$	33,663	$	82	$	38,770	$	35	$	33,066	$	164	$	42,056	$	66
Commercial real estate		20,947		223		9,282		65		20,467		463		8,320		118		17,598		68		31,966		138		17,563		143		32,052		393
Commercial construction		4,285		63		1,224		21		4,273		215		979		54		8,898		67		9,225		176		8,867		165		9,845		295
Residential mortgage		2,259		2		3,271		5		2,551		6		3,247		15		3,453		-		2,569		-		3,451		-		2,599		-
Consumer		48		1		70		1		54		2		74		3

Total	$	30,909	$	323	$	111,944	$	1,083	$	30,494	$	801	$	102,557	$	2,723	$	63,612	$	217	$	82,530	$	349	$	62,947	$	472	$	86,552	$	754

Included in impaired loans at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 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.

2321

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Aging Analysis - The following table provides an analysis of the aging of ~~gross~~the loans ~~(excluding loans held-for-sale)~~by class, excluding net deferred fees, that are past due at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016 by segment:~~2018:

	June 30, 2019
					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	$	1,130	$	3,035	$	3,006	$	28,433	$	35,604	$	1,016,955	$	1,052,559
Commercial real estate		-		1,148		-		12,686		13,834		3,097,440		3,111,274
Commercial construction		-		3,530		-		3,579		7,109		595,104		602,213
Residential real estate		681		-		-		5,219		5,900		320,761		326,661
Consumer		3		20		-		-		23		2,018		2,041
Total	$	1,814	$	7,733	$	3,006	$	49,917	$	62,470	$	5,032,278	$	5,094,748

~~Aging Analysis~~

September 30, 2017
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 $ 199 $ 288 $ 4,209 $ 951 $ 5,647 $ 635,966 $ 641,613
Commercial real estate 586 8,057 - 8,369 17,012 2,568,193 2,585,205
Commercial construction - - - - - 399,453 399,453
Residential real estate 918 541 - 4,435 5,894 258,350 264,244
Consumer - 2 - - 2 1,910 1,912
Total $ 1,703 $ 8,888 $ 4,209 $ 13,755 $ 28,555 $ 3,863,872 $ 3,892,427

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

~~Included in the~~The amount reported 90 days or greater past due and still ~~accruing/accreting category~~accruing as of ~~both September~~June 30, ~~2017 and December 31, 2016~~2019 are ~~three purchased credit-impaired~~comprised of PCI loans, net of their fair value marks, which are accreting income per their 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

The amount reported 90 days or greater past due and still accruing as of December 31, 2018 are comprised of PCI loans, net of their fair value marks, which are accreting income per their valuation at date of acquisition.

2422

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 ~~credit~~ quality, and the related portion of the allowance for loan losses ~~(“ALLL”)~~ that are allocated to each loan portfolio segment:

      September 30, 2017
      Commercial       Commercial       Residential
Commercial real estate construction real estate Consumer Unallocated Total
(dollars in thousands)
ALLL
Individually evaluated for impairment $        - $        110 $        - $        - $        - $        - $        110
Collectively evaluated for impairment 7,716 15,224 3,940 1,052 2 326 28,260
Acquired portfolio - 1,500 - - - - 1,500
Acquired with deteriorated credit quality - - - - - - -
Total ALLL $ 7,716 $ 16,834 $ 3,940 $ 1,052 $ 2 $ 326 $ 29,870

Gross loans
Individually evaluated for impairment $ 3,068 $ 20,861 $ 4,340 $ 2,520 $ 46 $ 30,835
Collectively evaluated for impairment 618,012 2,142,385 395,113 199,902 1,410 3,356,822
Acquired portfolio 15,290 421,727 - 61,822 456 499,295
Acquired with deteriorated credit quality 5,243 232 - - - 5,475
Total gross loans $ 641,613 $ 2,585,205 $ 399,453 $ 264,244 $ 1,912 $ 3,892,427

December 31, 2016
Commercial Commercial Residential
Commercial real estate construction real estate Consumer Unallocated Total
(dollars in thousands)
ALLL
Individually evaluated for impairment $ - $ 145 $ - $ - $ - $ - $ 145
Collectively evaluated for impairment 6,632 12,438 4,789 958 3 779 25,599
Acquired portfolio - - - - - - -
Acquired with deteriorated credit quality - - - - - - -
Total ALLL $ 6,632 $ 12,583 $ 4,789 $ 958 $ 3 $ 779 $ 25,744

Gross loans
Individually evaluated for impairment $ 3,637 $ 19,532 $ 5,909 $ 1,851 $ 62 $ 30,991
Collectively evaluated for impairment 517,869 1,621,745 478,865 163,686 1,757 2,783,922
Acquired portfolio 24,972 562,451 1,454 67,010 561 656,448
Acquired with deteriorated credit quality 7,098 982 - - - 8,080
Total gross loans $ 553,576 $ 2,204,710 $ 486,228 $ 232,547 $ 2,380 $ 3,479,441

	June 30, 2019
			Commercial		Commercial		Residential
	Commercial		real estate		construction		real estate		Consumer		Unallocated		Total
	(dollars in thousands)
ALLL
Individually evaluated for impairment	$	-	$	29	$	162	$	22	$	-	$	-	$	213
Collectively evaluated for impairment		8,521		20,456		5,380		1,186		2		740		36,285
Acquired portfolio		200		1,000		-		-		-		-		1,200
Acquired with deteriorated credit quality		-		-		-		-		-		-		-
Total	$	8,721	$	21,485	$	5,542	$	1,208	$	2	$	740	$	37,698

Gross loans
Individually evaluated for impairment	$	32,559	$	17,555	$	8,941	$	3,428	$	-			$	62,483
Collectively evaluated for impairment		901,858		2,694,372		552,712		277,490		1,716				4,428,148
Acquired portfolio		112,743		398,042		40,560		45,743		325				597,413
Acquired with deteriorated credit quality		5,399		1,305		-		-		-				6,704
Total	$	1,052,559	$	3,111,274	$	602,213	$	326,661	$	2,041			$	5,094,748

	December 31, 2018
			Commercial		Commercial		Residential
	Commercial		real estate		construction		real estate		Consumer		Unallocated		Total
	(dollars in thousands)
Allowance for loan losses
Individually evaluated for impairment	$	-	$	7	$	-	$	29	$	-	$	-	$	36
Collectively evaluated for impairment		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	$	9,875	$	18,847	$	4,519	$	1,266	$	2	$	445	$	34,954

Gross loans
Individually evaluated for impairment	$	29,896	$	18,327	$	9,240	$	2,469	$	-			$	59,932
Collectively evaluated for impairment		949,129		2,500,132		456,149		263,449		2,484				4,171,343
Acquired portfolio		7,224		259,708		-		44,073		110				311,115
Acquired with deteriorated credit quality		2,509		-		-		-		-				2,509
Total	$	988,758	$	2,778,167	$	465,389	$	309,991	$	2,594			$	4,544,899

2523

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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. 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.~~

2018. A summary of the activity in the ALLL is as follows:

      Three Months Ended September 30, 2017
      Commercial       Commercial       Residential
Commercial real estate construction real estate Consumer Unallocated Total
(dollars in thousands)
Balance at June 30, 2017 $        7,238 $        15,389 $        4,241 $        985 $        2 $        546 $        28,401

Charge-offs - - - - (1 ) - (1 )

Recoveries 17 2 - - 1 - 20

Provision for loan losses 461 1,443 (301 ) 67 - (220 ) 1,450

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

	Three Months Ended June 30, 2019
				Commercial			Commercial		Residential
	Commercial			real estate			construction		real estate		Consumer		Unallocated		Total
	(dollars in thousands)
Balance at March 31, 2019	$	8,660		$	21,561		$	4,982	$	1,166	$	1	$	488	$	36,858

Charge-offs		-			(406	)		-		-		-		-		(406	)

Recoveries		115			30			-		1		-		-		146

Provision		(54	)		300			560		41		1		252		1,100

Balance at June 30, 2019	$	8,721		$	21,485		$	5,542	$	1,208	$	2	$	740	$	37,698

	Three Months Ended June 30, 2018
				Commercial		Commercial		Residential
	Commercial			real estate		construction		real estate		Consumer			Unallocated			Total
	(dollars in thousands)
Balance at March 31, 2018	$	8,550		$	17,435	$	4,772	$	1,109	$	2		$	661		$	32,529

Charge-offs		(46	)		-		-		-		(1	)		-			(47	)

Recoveries		12			-		-		-		-			-			12

Provision for loan losses		444			786		40		58		2			(230	)		1,100

Balance at June 30, 2018	$	8,960		$	18,221	$	4,812	$	1,167	$	3		$	431		$	33,594

2624

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

      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

	Six Months Ended June 30, 2019
				Commercial			Commercial		Residential
	Commercial			real estate			construction		real estate			Consumer			Unallocated		Total
							(dollars in thousands)
Balance at December 31, 2018	$	9,875		$	18,847		$	4,519	$	1,266		$	2		$	445	$	34,954

Charge-offs		-			(3,082	)		-		-			-			-		(3,082	)

Recoveries		186			30			-		3			7			-		226

Provision		(1,340	)		5,690			1,023		(61	)		(7	)		295		5,600

Balance at June 30, 2019	$	8,721		$	21,485		$	5,542	$	1,208		$	2		$	740	$	37,698

	Six Months Ended June 30, 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		(17,066	)		-		-		(18	)		(1	)		-			(17,085	)

Recoveries		31			-		-		-			-			-			31

Provision		17,762			1,109		65		135			3			(174	)		18,900

Balance at June 30, 2018	$	8,960		$	18,221	$	4,812	$	1,167		$	3		$	431		$	33,594

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

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 ~~nine~~six 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.

At ~~September~~June 30, ~~2017,~~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.

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

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

~~The following table presents a rollforward~~As 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 $ -

June 30, 2019, TDRs totaled ~~$17.6~~$39.1 million, ~~at September 30, 2017,~~ of which ~~$4.8~~$22.8 million were on nonaccrual status and ~~$12.8~~$16.3 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. ~~TDRs as~~The Company has allocated $162 thousand and $147 thousand of ~~September 30, 2017 did not increase~~specific allowance for the ~~ALLL during the three and nine~~six months ended ~~September~~June 30, ~~2017.~~2019 and June 30, 2018, respectively. There were no charge-offs in connection with a loan modification at the time of modification during the three ~~or nine~~and six months ended ~~September~~June 30, ~~2017.~~2019. There were no TDRs for which there was a payment default within twelve months following the modification during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019.

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.

The following table presents loans by class modified as ~~troubled debt restructurings~~TDRs that occurred during the ~~nine~~six months ended ~~September~~June 30, ~~2016 (dollars in thousands):~~2019:

		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:						(dollars in thousands)
Commercial	16	$	19,311	$	19,311	4	$	4,186	$	4,186
Commercial real estate	2		581		581	2		2,635		2,635
Commercial construction	-		-		-	2		2,101		2,101
Residential real estate	-		-		-
Consumer	-		-		-

Total	18	$	19,892	$	19,892	8	$	8,922	$	8,922

These eight loan modifications included interest rate reductions and maturity extensions.

The following table presents loans by class modified as TDRs that occurred during the six months ended June 30, 2018:

		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Loans	Investment		Investment
Troubled debt restructurings:	(dollars in thousands)
Commercial	30	$	15,613	$	15,613
Commercial real estate	1		60		60
Commercial construction	2		1,839		1,839
Residential	2		454		454

Total	35	$	17,966	$	17,966

Included in the ~~above TDRs were 14~~commercial loan segment of the troubled debt restructurings are 27 taxi medallion loans ~~secured by 25 New York City taxi medallions~~ totaling ~~$17.3~~$11.2 million. These loan modifications included interest rate reductions and maturity extensions. All 1427 taxi medallion loans included above were ~~accruing~~on nonaccrual status prior to modification, ~~while 13 remained in accrual~~and remain on nonaccrual status post-modification.

2826

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES 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.

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

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

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

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

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

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

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

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

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to 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

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.

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

~~Note 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)~~

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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

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 ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 are as follows:

September 30, 2017
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
(dollars in thousands)
Recurring fair value measurements:
Assets
Securities:
Federal agency obligations $ 55,938 $ - $ 55,938 $ -
Residential mortgage pass-through securities 133,164 - 133,164 -
Commercial mortgage pass-through securities 4,130 - 4,130 -
Obligations of U.S. states and political subdivisions 144,976 - 127,111 17,865
Trust preferred securities 4,627 - 4,627 -
Corporate bonds and notes 30,088 - 30,088 -
Asset-backed securities 12,633 - 12,633 -
Certificates of deposit 627 - 627 -
Equity securities 630 630 - -
Other securities 13,703 13,703 - -
Total available-for-sale 400,516 14,333 368,318 17,865
Derivatives 164 - 164 -
Total Assets $ 400,680 $ 14,333 $ 368,482 $ 17,865

			June 30, 2019
			Fair Value Measurements at Reporting Date Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total Fair Value		(Level 1)		(Level 2)		(Level 3)
(dollars in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available-for-sale:
Federal agency obligations	$	25,461	$	-	$	25,461	$	-
Residential mortgage pass-through securities		229,542		-		229,542		-
Commercial mortgage pass-through securities		5,826		-		5,826		-
Obligations of U.S. states and political subdivision		144,119		-		134,873		9,246
Corporate bonds and notes		28,117		-		28,117		-
Asset-backed securities		7,746		-		7,746		-
Certificates of deposit		150		-		150		-
Other securities		950		950		-		-
Total available-for-sale	$	441,911	$	950	$	431,715	$	9,246

Equity securities		11,152		11,152		-		-
Total assets	$	453,063	$	12,102	$	431,715	$	9,246

Liabilities
Derivatives		128		-		128		-
Total liabilities	$	128	$	-	$	128	$	-

3028

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

December 31, 2016
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
(dollars in thousands)
Recurring fair value measurements:
Assets
Securities:
Federal agency obligations $ 52,837 $ - $ 52,837 $ -
Residential mortgage pass-through securities 72,497 - 72,497 -
Commercial mortgage pass-through securities 4,209 - 4,209 -
Obligations of U.S. states and political subdivisions 150,605 - 132,387 18,218
Trust preferred securities 5,666 - 5,666 -
Corporate bonds and notes 36,928 - 36,928 -
Asset-backed securities 14,583 - 14,583 -
Certificates of deposit 983 - 983 -
Equity securities 568 568 - -
Other securities 14,414 14,414 - -
Total available-for-sale 353,290 14,982 320,090 18,218
Derivatives 88 - 88 -
Total assets $ 353,378 $ 14,982 $ 320,178 $ 18,218

			December 31, 2018
			Fair Value Measurements at Reporting Date Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total Fair Value		(Level 1)		(Level 2)		(Level 3)
(dollars in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available-for-sale:
Federal agency obligations	$	44,955	$	-	$	44,955	$	-
Residential mortgage pass-through securities		185,204		-		185,204		-
Commercial mortgage pass-through securities		3,874		-		3,874		-
Obligations of U.S. states and political subdivision		139,185		-		129,808		9,377
Corporate bonds and notes		25,813		-		25,813		-
Asset-backed securities		9,691		-		9,691		-
Certificates of deposit		322		-		322		-
Other securities		2,990		2,990		-		-
Total available-for-sale	$	412,034	$	2,990	$	399,667	$	9,377

Equity securities		11,460		11,460		-		-
Derivatives		1,159		-		1,159		-
Total assets	$	424,653	$	14,450	$	400,826	$	9,377

There were no transfers between Level 1 and Level 2 during the ~~quarter~~six months ended ~~September~~June 30, ~~2017~~2019 and during the year ended December 31, ~~2016.~~2018.

Assets Measured at Fair Value on a ~~Non-Recurring~~Nonrecurring Basis

The Company may be required periodically to measure certain assets at fair value on a ~~non-recurring~~nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a ~~non-recurring~~nonrecurring basis at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

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 ~~part~~parts of these loans directly from the purchasing financial institutions (Level 2).

3129

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 7. - 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).

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 ~~non-recurring~~nonrecurring basis, the fair value measurements at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 are as follows:

Fair Value Measurements at Reporting Date Using
Quoted
Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
September Assets Inputs Inputs
Assets measured at fair value on a nonrecurring basis: 30, 2017 (Level 1) (Level 2) (Level 3)
(dollars in thousands)
Impaired loans:
Commercial real estate $ 1,198 $ - $ - $ 1,198

Loans held-for-sale:
Commercial 47,430 - - 47,430

Fair Value Measurements at Reporting Date Using
Quoted
Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
December 31, Assets Inputs Inputs
Assets measured at fair value on a nonrecurring basis: 2016 (Level 1) (Level 2) (Level 3)
(dollars in thousands)
Impaired loans:
Commercial real estate $ 1,099 $ - $ - $ 1,099

Loans held-for-sale:
Commercial 70,105 - 4,509 65,596
Commercial real estate 7,712 - 7,712 -

			Fair Value Measurements at Reporting Date Using
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Assets measured at fair value on a nonrecurring basis:	June 30, 2019		(Level 1)		(Level 2)		(Level 3)
Impaired loans:			(dollars in thousands)
Commercial real estate	$	364	$	-	$	-	$	364
Commercial construction		2,732		-		-		2,732
Residential real estate		231		-		-		231

Fair Value Measurements at Reporting Date Using

Quoted

Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets measured at fair value on a nonrecurring basis:

December 31,
2018

Assets
(Level 1)

Inputs
(Level 2)

Inputs
(Level 3)

Impaired loans:

(dollars in thousands)

Commercial real estate

1,481

Residential real estate

231

Impaired loans–Collateral dependent impaired loans at ~~September~~June 30, ~~2017~~2019 that required a valuation allowance were ~~$1.3~~$3.5 million with a related valuation allowance of ~~$0.1~~$0.2 million compared to ~~$1.2~~$1.7 million with a related valuation allowance of ~~$0.1 million~~$-0- 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

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Assets Measured With Significant Unobservable Level 3 Inputs

Recurring basis

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~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

⁽¹⁾	~~Includes transfers from held-to-maturity to available-for-sale designation~~

	Municipal
	Securities
	(dollars in thousands)
Beginning balance, January 1, 2019	$	9,377
Principal paydowns		(131	)
Ending balance, June 30, 2019	$	9,246

	Municipal
	Securities
	(dollars in thousands)
Beginning balance, January 1, 2018	$	9,632
Principal paydowns		(255	)
Ending balance, December 31, 2018	$	9,377

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at ~~September~~June 30, ~~2017~~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
Fair Value Techniques Input Range
(dollars in thousands)
Securities available-for-sale:
Municipal securities $ 17,865 Discounted cash flows Discount rate 2.8%

December 31, 2016
Valuation Unobservable
Fair Value Techniques Input Range
(dollars in thousands)
Securities available-for-sale:
Municipal securities $ 18,218 Discounted cash flows Discount rate 2.8%

June 30, 2019
			Valuation	Unobservable
	Fair Value		Techniques	Input	Range
Securities available-for-sale:			(dollars in thousands)
Municipal securities	$	9,246	Discounted cash flows	Discount rate	2.9%

December 31, 2018

	Fair Value		Valuation Techniques	Unobservable Input	Range
Securities available-for-sale:			(dollars in thousands)
Municipal securities	$	9,377	Discounted cash flows	Discount rate	2.9%

3331

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Nonrecurring basis~~Non-recurring basis~~:

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a ~~non-recurring~~nonrecurring 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 value Comparable 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
balance 37 - 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 value Comparable 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
balance 40 - 100 (59)

Discounted cash
flows (30%) Discount Rate 14%

			Valuation	Unobservable
June 30, 2019	Fair Value		Techniques	Input	Range
Impaired loans:			(dollars in thousands)
Commercial real estate	$	364	Sales comparison approach	Adjustment for differences between the comparable sales	0% - 20% [10%]
Commercial construction	$	2,732	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%]

December 31, 2018	Fair Value		Valuation Techniques	Unobservable 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

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

~~Fair Value~~As of ~~Financial Instruments~~

FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-sale and 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 determine~~June 30, 2019 the fair value ~~of FHLB stock due to restrictions placed on its transferability.~~

~~Loans.~~ ~~The~~measurements presented are consistent with Topic 820, Fair Value Measurement, 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.~~

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

~~Note 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)~~

price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of ~~September~~June 30, ~~2017~~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
June 30, 2019
Financial assets:
Cash and due from banks	$	141,262	$	141,262	$	141,262	$	-	$	-	$	185,650	$	185,650	$	185,650	$	-	$	-
Securities available-for-sale		400,516		400,516		14,333		368,318		17,865		441,911		441,911		950		431,715		9,246
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												31,767		n/a		n/a		n/a		n/a
Equity securities												11,152		11,152		11,152		-		-
Net loans												5,052,794		5,041,283		-		-		5,041,283
Accrued interest receivable												21,272		21,272		-		2,447		18,825

Financial liabilities:
Noninterest-bearing deposits												813,635		813,635		813,635		-		-
Interest-bearing deposits												3,827,508		3,839,549		2,203,560		1,635,989		-
Borrowings												597,317		598,821		-		598,821		-
Subordinated debentures												128,720		137,269		-		137,269		-
Derivatives												128		128		-		128		-
Accrued interest payable												5,561		5,561		-		5,561		-

December 31, 2018
Financial assets:
Cash and due from banks											$	172,366	$	172,366	$	172,366	$	-	$	-
Securities available-for-sale												412,034		412,034		2,990		399,667		9,377
Investment in restricted stocks												31,136		n/a		n/a		n/a		n/a
Equity securities												11,460		11,460		11,460		-		-
Net loans		3,859,419		3,862,104		-		-		3,862,104		4,506,138		4,402,878		-		-		4,402,878
Derivatives		164		164		-		164		-		1,159		1,159		-		1,159		-
Accrued interest receivable		14,841		14,841		-		2,011		12,830		18,214		18,214		-		2,064		16,150

Financial liabilities:
Noninterest-bearing deposits		719,582		719,582		719,582		-		-		768,584		768,584		768,584		-		-
Interest-bearing deposits		2,904,187		2,904,285		1,825,846		1,078,439		-		3,323,508		3,320,640		1,957,503		1,363,137		-
Borrowings		585,124		586,474		-		586,474		-		600,001		598,598		-		598,598		-
Subordinated debentures		54,657		56,519		-		56,519		-		128,556		132,426		-		132,426		-
Accrued interest payable		4,304		4,304		-		4,304		-		6,764		6,764		-		6,764		-

December 31, 2016
Financial assets:
Cash and due from banks	$	200,399	$	200,399	$	200,399	$	-	$	-
Securities available-for-sale		353,290		353,290		14,982		320,090		18,218
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
Net loans		3,450,088		3,462,138		-		-		3,462,138
Derivatives		88		88		-		88		-
Accrued interest receivable		12,965		12,965		-		2,026		10,939

Financial liabilities:
Noninterest-bearing deposits		694,977		694,977		694,977		-		-
Interest-bearing deposits		2,649,294		2,649,717		1,681,044		968,673		-
Borrowings		476,280		478,286		-		478,286		-
Subordinated debentures		54,534		55,901		-		55,901		-
Accrued interest payable		4,142		4,142		-		4,142		-

3633

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 7. - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company’s core deposit base is required by FASB ASC 825-10.

Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as 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. ~~Other~~ Comprehensive Income ~~(Loss)~~

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, unrealized gains (losses) on cash flow hedges, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, net of taxes.

The following table represents the ~~reclassifications~~reclassification out of accumulated other comprehensive (loss) income for the periods presented:

													Affected Line item in the
Details about Accumulated Other	Amounts Reclassified from Accumulated						Amounts Reclassified from Accumulated						Statement Where Net Income is	Amounts Reclassified from Accumulated												Affected Line item in the
Comprehensive Income Components	Other Comprehensive Income/(Loss)						Other Comprehensive Income/(Loss)						Presented
Comprehensive Loss Components														Other Comprehensive Income												Statement Where Net Income is Presented
	(dollars in thousands)													Three Months Ended						Six Months Ended
	Three Months Ended September 30,						Nine Months Ended September 30,							June 30,						June 30,
	2017			2016			2017			2016				2019			2018			2019			2018
Sale of securities available-for-sale	$	-		$	4,131		$	1,596		$	4,234		Net gains on sales of securities available for sale
														(dollars in thousands)
Sale of investment securities available for sale														$	(9	)	$	-		$	(1	)	$	-		Net losses on sale of securities available-for-sale
		-			(1,640	)		(579	)		(1,682	)	Income tax expense		2			-			-			-		Income tax benefit
		-			2,491			1,017			2,552				(7	)		-			(1	)		-

Amortization of pension plan net actuarial losses		(103	)		(204	)		(309	)		(306	)	Salaries and employee benefits		(90	)		(92	)		(179	)		(183	)	Other components of net periodic pension expense.
		42			83			126			124		Income tax benefit		25			26			50			51		Income tax benefit
		(61	)		(121	)		(183	)		(182	)			(65	)		(66	)		(129	)		(132	)

Total reclassification	$	(61	)	$	2,370		$	834		$	2,370			$	(72	)	$	(66	)	$	(130	)	$	(132	)

3734

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 8. ~~Other~~ Comprehensive ~~(Loss)~~ Income – (continued)

Accumulated other comprehensive ~~(loss) income (net of tax)~~loss at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 consisted of the following:

	June 30,			December 31,
	2019			2018
	(dollars in thousands)
Investment securities available-for-sale, net of tax	$	1,268		$	(5,841	)
Cash flow hedge, net of tax		(89	)		837
Defined benefit pension and post-retirement plans, net of tax		(4,060	)		(3,785	)
Total	$	(2,881	)	$	(8,789	)

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 )

Note 9. Premises and Equipment

The Company leases certain premises and equipment under operating leases. At June 30, 2019, the Company had lease liabilities totaling $17.8 million and right-of-use assets totaling $16.4 million. As of June 30, 2019, the weighted average remaining lease term for operating leases was 7.4 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.0%. Total lease costs for the three and six months ended June 30, 2019 was $0.8 million and $1.6 million, respectively.

Rent expense for the three and six months ended June 30, 2018 prior to adoption of ASU 2016-02, was $0.5 million and $1.0 million, respectively.

There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the six months ended June 30, 2019.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:

	June 30, 2019
	(dollars in thousands)
Lease payments due:
Less than 1 year	$	2,704
1 year through less than 2 years		2,497
2 years through less than 3 years		2,418
3 years through less than 4 years		2,372
4 years through 5 years		2,093
After 5 years		7,965
Total undiscounted cash flows		20,049
Discounted cash flows		(2,262	)
Total lease liability	$	17,787

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

Note ~~9. Stock-Based~~10. Stock Based Compensation

The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of ~~September~~June 30, ~~2017.~~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~~June 30, ~~2017~~2019 are ~~750,000.~~approximately 412,572. The Company intends to issue all shares under the Plan in the form of newly issued shares.

Restricted stock, options and ~~option awards~~restricted 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 ~~performance~~restricted stock units do not.

All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are handled on a case-by-case basis.

~~No options or performance units were granted during~~ Stock-based compensation expense was $0.7 million and $1.5 million for the three and six months ended ~~September~~June 30, ~~2017 or 2016.~~

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~2019, respectively, and $0.3 million and $0.7 million for the three and six months ended June 30, 2018, respectively.

~~Note 9. Stock-Based Compensation – (continued)~~

Activity under the Company’s ~~option plans~~options as of and for the ~~nine~~six months ended ~~September~~June 30, ~~2017 were~~2019 was as follows:

				Weighted-			Number of Stock Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
				Average
		Weighted-		Remaining
		Average		Contractual
		Exercise		Term	Aggregate
	Shares	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				(28,937	)		8.96
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 June 30, 2019							79,526			8.13	2.6	$	1,155,895
Exercisable at June 30, 2019							79,526		$	8.13	2.6	$	1,155,895

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 ~~September~~June 30, ~~2017~~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~~June 30, ~~2017.~~2019. This amount changes based on the fair market value of the ~~Parent Corporation’s~~Company’s stock.

~~The below table represents information regarding~~Activity under the Company’s restricted shares ~~currently outstanding at September~~for the six months ended June 30, ~~2017:~~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	171,488			20.70
Vested	(65,359	)		16.49	(52,629	)		21.98
Forfeited/cancelled/expired	-			-	-			-
Nonvested at September 30, 2017	103,078		$	20.41
Nonvested June 30, 2019					187,287		$	21.20

As of ~~September~~June 30, ~~2017,~~2019, there was approximately ~~$1,366,000~~$997,285 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.~~2.3 years. A total of 129,005 restricted shares were granted during the three months ended June 30, 2019.

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

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:

				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	23,375				30.95
Vested	(52,508	)			21.26
Unearned at June 30, 2019	92,512		120,212	$	24.27

At ~~September~~June 30, ~~2017,~~2019, the specific number of shares related to performance ~~unit awards~~units that were expected to vest was ~~151,194,~~92,512, 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~~June 30, ~~2017~~2019 the maximum amount of performance units that ultimately could vest if performance targets were exceeded is ~~226,791.~~

120,212. A ~~summary~~total of 25,991 shares were netted from the ~~status~~vested shares to satisfy tax obligations. The net shares issued from vesting of ~~unearned~~ performance ~~unit awards and the change~~units during the ~~period is presented in the table below:~~six months ended June 30, 2019 were 26,517 shares.

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

At ~~September~~June 30, ~~2017,~~2019, compensation cost of approximately ~~$1,006,000~~$1.0 million related to non-vested performance ~~unit awards~~units not yet recognized is expected to be recognized over a weighted-average period of ~~1.3~~1.8 years. A total of 35,636 performance units were awarded during the six months ended June 30, 2019.

A summary of the status of unearned restricted stock units and the change in restricted stock units during the period is presented in the table below:

			Weighted
			Average Grant
	Units		Date Fair
	(expected)		Value
Unearned at December 31, 2018	29,423		$	31.35
Awarded	53,454			20.79
Vested	(9,808	)		21.28
Unearned at June 30, 2019	73,069		$	24.98

At June 30, 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 six months ended June 30, 2019, a total of 4,904 shares were netted out to satisfy tax obligations, resulting in net issuance of 4,904 shares.

At June 30, 2019, compensation cost of approximately $1.5 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 2.4 years. A total of 53,454 restricted stock units were awarded during the six months ended June 30, 2019.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

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.

Note ~~10.~~11. Components of Net Periodic Pension Cost

The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until ~~March 31,~~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			Three Months
	Ended			Ended
	June 30, 2019			June 30, 2018
	(dollars in thousands)
Service cost	$	-		$	-
Interest cost		113			107
Expected return on plan assets		(174	)		(192	)
Net amortization		90			92
Total periodic pension cost	$	29		$	7

	Six Months			Six Months
	Ended			Ended
	June 30, 2019			June 30, 2018
	(dollars in thousands)
Service cost	$	-		$	-
Interest cost		226			214
Expected return on plan assets		(348	)		(383	)
Net amortization		179			183
Total periodic pension cost	$	57		$	14

Contributions

The Company did not make ~~any contributions~~a contribution to the Pension Trust during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~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.

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

Note ~~11 –~~12. FHLB Borrowings

The Company’s FHLB borrowings and weighted average interest rates are summarized below:

	September 30, 2017				December 31, 2016				June 30, 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	%	$	597,317		2.51%	$	600,001	2.59%

By remaining period to maturity:
Less than 1 year	$	415,124	1.41	%	$	231,280	1.02	%	$	474,105		2.54%	$	405,000	2.57%
1 year through less than 2 years		105,000	1.69	%		130,000	1.84	%		61,000		2.25%		110,000	2.75%
2 years through less than 3 years		25,000	1.85	%		35,000	1.60	%		27,353		2.15%		60,000	2.27%
3 years through less than 4 years		40,000	3.43	%		65,000	2.82	%		32,428		2.82%		-	-
4 years through 5 years		-	-			-	-			2,852		2.43%		25,000	2.92%
Total FHLB borrowings	$	585,124	1.61	%	$	461,280	1.55	%		597,738		2.51%		600,000	2.59%
Fair value (discount) premium										(421	)			1
FHLB borrowings, net									$	597,317			$	600,001

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.

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

~~Note 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~~June 30, ~~2017~~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~~June 30, ~~2017~~2019 the Company had remaining borrowing capacity of approximately ~~$796 million~~$1.0 billion at FHLB.

Note ~~12 – Securities Sold Under Agreements~~13. Revenue Recognition

Effective January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to ~~Repurchase~~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 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.

~~Repurchase agreements are secured borrowings.~~ The Company, ~~pledges securities~~using a modified retrospective transition approach, determined that there will be no cumulative effect adjustment to ~~secure those borrowings. Information concerning repurchase agreements is summarized~~retained earnings as ~~follows for~~a result of adopting the ~~periods presented:~~new standard, nor will the standard have a material impact on our consolidated financial statements including the timing or amounts of revenue recognized.

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 %

~~As 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.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

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 and six months ended June 30, 2019 and 2018. Items outside of ASC 606 are noted as such.

	Three Months			Three Months
	Ended			Ended
	June 30, 2019			June 30, 2018
	(dollars in thousands)
Noninterest income
Service charges on deposits
Overdraft fees	$	319		$	166
Other		192			141
Interchange income		203			170
Net gains on sales of loans ⁽¹⁾		46			12
Net gains (losses) on equity securities ⁽¹⁾		158			(47	)
Net losses on sale of securities available-for-sale ⁽¹⁾		(9	)		-
Wire transfer fees ⁽¹⁾		108			77
Loan servicing fees ⁽¹⁾		65			25
Bank owned life insurance ⁽¹⁾		833			775
Other		27			22
Total noninterest income	$	1,942		$	1,341

	Six Months			Six Months
	Ended			Ended
	June 30, 2019			June 30, 2018
	(dollars in thousands)
Noninterest income
Service charges on deposits
Overdraft fees	$	593		$	368
Other		372			296
Interchange income		359			313
Net gains on sales of loans ⁽¹⁾		65			29
Net gains (losses) on equity securities ⁽¹⁾		261			(168	)
Net losses on sale of securities available-for-sale ⁽¹⁾		(1	)		-
Wire transfer fees ⁽¹⁾		225			149
Loan servicing fees ⁽¹⁾		97			48
Bank owned life insurance ⁽¹⁾		1,655			1,549
Other		54			43
Total noninterest income	$	3,680		$	2,627

⁽¹⁾	Not within scope of ASC 606.

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

Note 13. Revenue Recognition – (continued)

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.

Note ~~13 -~~14. Subordinated Debentures

During 2003, the Company formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier I capital. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or in part prior to maturity. The floating interest rate on the subordinate debentures is three month LIBOR plus 2.85% and reprices quarterly. The rate at ~~September~~June 30, ~~2017~~2019 was ~~4.16%~~5.43%. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with FASB ASC 810-10. Distributions on the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income.

The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II at ~~September~~June 30, ~~2017~~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~~

	Securities					Redeemable by
Issuance Date	Issued		Liquidation Value	Coupon Rate	Maturity	Issuer Beginning
12/19/2003	$	5,000,000	$1,000 per Capital Security	Floating 3-month LIBOR + 285 Basis Points	01/23/2034	01/23/2009
12/19/2003	$	5,000,000			01/23/2034	01/23/2009

During June 2015, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”). The Notes are non-callable for five years, have a stated maturity of July 1, 2025, and bear interest at a fixed rate of 5.75% per year, from and including ~~September~~June 30, 2015 to, but excluding July 1, 2020. From and including July 1, 2020 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three month LIBOR rate plus 393 basis points. As of ~~September~~June 30, ~~2017,~~2019, unamortized costs related to ~~the~~this debt issuance ~~was~~were approximately ~~$498,000.~~$185,000.

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 June 30, 2019, unamortized costs related to this debt issuance were approximately $1,254,000.

4241

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note ~~14 –~~15. Offsetting Assets and Liabilities

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 5.5 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~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

							Gross Amounts Not Offset												Gross Amounts Not Offset
			Gross Amounts		Net Amounts of				Cash or								Net Amounts
			Offset in the		Assets Presented in		Financial		Financial						Gross Amounts		of Assets
	Gross Amounts		Statement of		the Statement of		Instruments		Instrument		Net				Offset in the		Presented in the				Cash or
	Recognized		Financial Position		Financial Position		Recognized		Collateral		Amount				Statement of		Statement of		Financial		Financial
	(dollars in thousands)												Gross Amounts		Financial		Financial		Instruments		Instrument		Net
September 30, 2017
													Recognized		Condition		Condition		Recognized		Collateral		Amount
													(dollars in thousands)
June 30, 2019
Liabilities:
Interest rate swaps													$	128	$	-	$	128	$	-	$	128	$	-

December 31, 2018
Assets:
Interest rate swaps	$	164	$	-	$	164	$	-	$	-	$	164	$	1,159	$	-	$	1,159	$	-	$	-	$	1,159
Liabilities:
Repurchase agreements	$	-	$	-	$	-	$	-	$	-	$	-
December 31, 2016
Assets:
Interest rate swaps	$	88	$	-	$	88	$	-	$	-	$	88
Liabilities:
Repurchase agreements	$	15,000	$	-	$	15,000	$	-	$	15,000	$	-

~~Note 15 – Subsequent Event~~

~~On November 2, 2017, all~~As of ~~the Bank’s loans secured by New York City medallions, which had been classified as held-for-sale since~~ December 31, ~~2016,~~2018, there was no financial collateral pledged to our interest rate swaps. As these swap positions were ~~returned~~not 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.

4342

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

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of ~~September~~June 30, ~~2017~~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.

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 ~~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.

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.~~income. 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, 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 ~~category~~segment 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.

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 ~~category~~segment 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.

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 87 of the Notes to Consolidated Financial Statements for further discussion.

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, ~~2016~~2018 includes additional discussion on the accounting for income taxes.

4544

Operating Results Overview

Net income ~~available to common stockholders~~ for the three months ended ~~September~~June 30, ~~2017~~2019 amounted to ~~$13.1~~$19.3 million compared to ~~$11.9~~$17.5 million for the comparable three-month period ended ~~September~~June 30, ~~2016.~~2018. The Company’s diluted earnings per share were ~~$0.41~~$0.54 for both the three months ended ~~September~~June 30, ~~2017~~2019 and June 30, 2018. The increase in net income was primarily attributable to an increase in net interest income and an increase in other income, partially offset by increases in noninterest expenses and income tax expense.

Net income for the six months ended June 30, 2019 amounted to $30.9 million compared to $21.8 million for the comparable six-month period ended June 30, 2018. The Company’s diluted earnings per share were $0.87 for the six months ended June 30, 2019 as compared with diluted earnings per share of ~~$0.39~~$0.67 for the comparable ~~three-month~~six-month period ended ~~September~~June 30, ~~2016.~~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~~and 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 atax expenses. The decrease in provision for loan losses was primarily attributable to provisioning related to the taxi medallion portfolio during the three months ended March 31, 2018. The increase in noninterest expenses was primarily attributable to merger-related expenses, a loss on extinguishment of debt and ~~a decrease~~an increase in ~~income tax expense.~~salaries and employee benefits and professional and consulting expenses.

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 ~~third quarter~~three months ended June 30, 2019 was $46.1 million, an increase of ~~2017 increased by $4.2~~$6.7 million, or ~~12.3%~~17.0%, from the ~~third quarter of 2016,~~three months ended June 30, 2018, resulting from an increase in average total interest-earning assets of ~~8.4% and~~17.5%, primarily loans, that resulted from the ~~widening~~acquisition of GHB, offset by a contraction of the net interest margin ~~by 12 basis-points~~of 1 basis-point to ~~3.44%~~3.30% for the three months ended June 30, 2019 from ~~3.32%.~~3.31% for the three months ended June 30, 2018. Included in net interest income was accretion and amortization of purchase accounting adjustments of ~~$0.3 million and $1.0~~$1.8 million during the ~~third quarter of 2017~~three months ended June 30, 2019 and ~~2016, respectively.~~$0.7 million during the three months ended June 30, 2018. Excluding these purchase accounting adjustments, the adjusted net interest margin was ~~3.41% in~~3.17% for the ~~third quarter of 2017, widening~~three months ended June 30, 2019, contracting by 199 basis-points from 3.26% for the ~~third quarter of 2016 adjusted net interest margin of 3.22%.~~three months ended June 30, 2018. The ~~increase~~decrease 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, partially offset by~~ increased cost in deposit ~~funding and lower yields on securities.~~funding.

Fully taxable equivalent net interest income for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~$108.0~~$91.6 million, an increase of ~~$9.1~~$13.6 million, or ~~9.2%~~17.4%, from the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, resulting from an increase in total average interest-earning assets of ~~7.8% and~~16.3% due to the ~~widening~~acquisition of ~~the net~~GHB. Net interest margin was 3.32% for the six months ended June 30, 2019, widening by 53 basis-points ~~to 3.44%~~ from ~~3.39%.~~3.29% for the six months ended June 30, 2018. Included in net interest income was accretion and amortization of purchase accounting adjustments of ~~$1.3~~$3.0 million and ~~$3.6~~$0.9 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. Excluding these purchase accounting adjustments, the adjusted net interest margin was ~~3.40%~~3.21% for the ~~nine~~six months ended ~~September~~June 30, ~~2017, widening~~2019, contracting by 144 basis-points from ~~the nine months ended September 30, 2016~~ adjusted net interest margin of ~~3.26%.~~3.25% for the six months ended June 30, 2018. The ~~increase~~decrease 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.

4645

The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~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.

Average Statements of Condition with Interest and Average Rates

Three 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)} $ 397,077 $ 3,033 3.03 % $ 406,802 $ 3,293 3.22 %
Total loans^{(2) (3) (4)} 3,898,404 43,683 4.45 3,407,278 38,010 4.44
Federal funds sold and interest-bearing with banks 53,820 170 1.25 202,106 261 0.51
Restricted investment in bank stocks 29,236 362 4.91 24,834 352 5.64
Total interest-earning assets 4,378,537 47,248 4.28 4,041,020 41,916 4.13
Noninterest-earning assets:
Allowance for loan losses (28,999 ) (34,052 )
Other noninterest-earning assets 364,474 337,828
Total assets $ 4,714,012 $ 4,344,796

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits $ 1,005,997 3,593 1.42 $ 1,007,530 3,323 1.31
Other interest-bearing deposits 1,816,162 2,520 0.55 1,637,500 1,836 0.45
Total interest-bearing deposits 2,822,159 6,113 0.86 2,645,030 5,159 0.78

Borrowings 570,711 2,353 1.64 488,015 2,139 1.74
Subordinated debentures⁽⁵⁾ 55,155 813 5.85 55,155 814 5.87
Capital lease 2,688 40 5.90 2,814 42 5.94
Total interest-bearing liabilities 3,450,713 9,319 1.07 3,191,014 8,154 1.02

Demand deposits 688,707 640,323
Other liabilities 17,972 18,318
Total noninterest-bearing liabilities 706,679 658,641
Stockholders’ equity 556,620 495,141
Total liabilities and stockholders’ equity $ 4,714,012 $ 4,344,796
Net interest income (tax-equivalent basis) 37,929 33,762
Net interest spread⁽⁶⁾ 3.21 % 3.11 %
Net interest margin⁽⁷⁾ 3.44 % 3.32 %
Tax-equivalent adjustment (910 ) (738 )
Net interest income $ 37,019 $ 33,024

	Three Months Ended June 30,
	2019									2018
				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)}	$	515,022		$	3,941			3.07	%	$	432,493		$	3,136		2.91	%
Loans receivable and loans held-for-sale ^{(2) (3) (4)}		5,005,509			63,799			5.11			4,272,212			49,750		4.67
Federal funds sold and interest-bearing with banks		54,619			290			2.13			35,315			160		1.82
Restricted investment in bank stocks		31,936			410			5.15			31,503			502		6.39
Total interest-earning assets		5,607,086			68,440			4.90			4,771,523			53,548		4.50
Noninterest-earning assets:
Allowance for loan losses		(37,390	)								(32,668	)
Other noninterest-earning assets		431,973									365,806
Total assets	$	6,001,669								$	5,104,661

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits	$	1,551,014		$	9,366			2.42		$	1,280,471		$	5,830		1.83
Other interest-bearing deposits		2,183,384			7,230			1.33			1,765,577			3,339		0.76
Total interest-bearing deposits		3,734,398			16,596			1.78			3,046,048			9,169		1.21

Borrowings		603,260			3,870			2.57			613,763			3,091		2.02
Subordinated debentures ⁽⁵⁾		128,666			1,845			5.75			128,339			1,840		5.75
Capital lease		2,436			37			6.09			2,589			39		6.04
Total interest-bearing liabilities		4,468,760			22,348			2.01			3,790,739			14,139		1.50

Noninterest-bearing demand deposits		800,856									719,372
Other liabilities		37,075									19,558
Total noninterest-bearing liabilities		837,931									738,930
Stockholders’ equity		694,978									574,992
Total liabilities and stockholders’ equity	$	6,001,669								$	5,104,661
Net interest income (tax-equivalent basis)					46,092									39,409
Net interest spread ⁽⁶⁾								2.89	%							3.00	%
Net interest margin ⁽⁷⁾								3.30	%							3.31	%
Tax-equivalent adjustment					(562	)								(464	)
Net interest income				$	45,530								$	38,945

⁽¹⁾	Average balances are based on amortized ~~cost.~~cost and include equity securities.
⁽²⁾	Interest income is presented on a tax-equivalent basis using ~~35% federal tax rate.~~21%.
⁽³⁾	Includes loan fee income.
⁽⁴⁾	~~Loans~~Total loans include loans held-for-sale and nonaccrual loans.
⁽⁵⁾	~~Does not reflect netting~~Average balances are net of debt issuance costs of ~~$525~~$1,489 and ~~$697~~$1,816 as of ~~September~~June 30, ~~2017~~2019 and ~~2016,~~June 30, 2018, respectively. Amortization expense related to debt issuance costs included in interest expense was $82 and $82 as of June 30, 2019 and June 30, 2018, 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~~tax-equivalent basis.
⁽⁷⁾	Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.
⁽⁸⁾	Rates are annualized.

4746

Average Statements of Condition with Interest and Average Rates

Nine 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

	Six Months Ended June 30,
	2019								2018
	Average Balance			Interest Income/ Expense			Average Rate ⁽⁸⁾		Average Balance			Interest Income/ Expense			Average Rate ⁽⁸⁾
	(dollars in thousands)
Interest-earning assets:
Securities ^{(1) (2)}	$	523,008		$	8,310		3.20	%	$	437,003		$	6,052		2.79	%
Loans receivable and loans held-for-sale ^{(2) (3) (4)}		4,956,866			124,397		5.06			4,260,171			97,022		4.59
Federal funds sold and interest-bearing with banks		56,146			647		2.32			56,755			424		1.50
Restricted investment in bank stocks		29,222			867		5.98			31,601			987		6.30
Total interest-earning assets		5,565,242			134,221		4.86			4,785,530			104,485		4.40
Noninterest-earning assets:
Allowance for loan losses		(36,450	)							(32,392	)
Other noninterest-earning assets		426,828								343,648
Total assets	$	5,955,620							$	5,096,786

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits	$	1,533,230		$	17,669		2.32		$	1,244,123		$	10,619		1.72
Other interest-bearing deposits		2,209,860			14,278		1.30			1,790,212			6,238		0.70
Total interest-bearing deposits		3,743,090			31,947		1.72			3,034,335			16,857		1.12

Borrowings		545,295			6,894		2.55			621,895			6,017		1.95
Subordinated debentures ⁽⁵⁾		128,626			3,690		5.78			121,797			3,514		5.82
Capital lease		2,458			74		6.07			2,605			79		6.04
Total interest-bearing liabilities		4,419,469			42,605		1.94			3,780,632			26,467		1.41

Noninterest-bearing demand deposits		812,421								721,907
Other liabilities		36,117								19,237
Total noninterest-bearing liabilities		848,538								741,144
Stockholders’ equity		687,613								575,010
Total liabilities and stockholders’ equity	$	5,955,620							$	5,096,786
Net interest income (tax-equivalent basis)					91,616								78,018
Net interest spread ⁽⁶⁾							2.92	%							2.99	%
Net interest margin ⁽⁷⁾							3.32	%							3.29	%
Tax-equivalent adjustment					(1,134	)							(926	)
Net interest income				$	90,482							$	77,092

⁽¹⁾	Average balances are based on amortized ~~cost.~~cost and include equity securities.
⁽²⁾	Interest income is presented on a tax-equivalent basis using ~~35% federal tax rate.~~21%.
⁽³⁾	Includes loan fee income.
⁽⁴⁾	~~Loans~~Total loans include loans held-for-sale and nonaccrual loans.
⁽⁵⁾	~~Does not reflect netting~~Average balances are net of debt issuance costs of ~~$565~~$1,529 and ~~$697~~$1,728 as of ~~September~~June 30, ~~2017~~2019 and ~~2016,~~June 30, 2018, respectively. Amortization expense related to debt issuance costs included in interest expense was $164 and $168 as of June 30, 2019 and June 30, 2018, 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~~tax-equivalent basis.
⁽⁷⁾	Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.
⁽⁸⁾	Rates are annualized.

Noninterest Income

Noninterest income totaled ~~$1.8~~$1.9 million for the three months ended ~~September~~June 30, ~~2017,~~2019, compared with ~~$5.6~~$1.3 million for the three months ended ~~September~~June 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, noninterest2018. Noninterest income ~~increased by $0.3 million when compared to the prior year third quarter. The increase was due primarily to a~~consists of income on bank owned life insurance ~~death benefit recorded during~~(“BOLI”), net gains on sales of loans held-for-sale, deposit service fees, loan fees, net gains (losses) on equity securities and other income. The increase from the ~~third~~prior year second quarter ~~of 2017. Noninterest income also includes bank owned life insurance and~~was mainly attributable to increases in deposit loan and other income ~~for the three month periods.~~($0.3 million), net gains on equity securities ($0.2 million), and increases in BOLI income ($0.1 million).

Noninterest income totaled ~~$6.2~~$3.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, compared with ~~$8.3~~$2.6 million for the ~~nine~~six months ended ~~September~~June 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, 2016.2018. The increase from the prior year comparable period was ~~due primarily~~mainly attributable 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~~increases in deposit, loan and other income ~~for the nine month periods.~~($0.5 million) and increases in net gains on equity securities ($0.4 million).

Noninterest Expenses

Noninterest expenses totaled ~~$18.6~~$21.6 million for the three months ended ~~September~~June 30, ~~2017,~~2019, compared to ~~$14.6~~$17.1 million for the three months ended ~~September~~June 30, ~~2016. The increase~~2018. Noninterest expenses increased by $4.5 million from the prior year ~~period was mainly attributable~~second quarter due primarily to ~~an increase in the taxi medallions loans held-for-sale valuation allowance of $3.0 million. In addition,~~ increases in salaries and employee benefits ($~~1.1~~2.1 million), ~~FDIC insurance premiums~~increases in professional and consulting expenses ($~~0.1~~0.5 million) ~~and data processing ($0.2 million) were partially offset by decreases in~~, increases on occupancy and equipment expenses ($~~0.1 million) and other expense ($0.2~~0.3 million), ~~contributing~~and a $1.0 million loss on extinguishment of debt. The increases over the prior year second quarter were primarily attributable to the ~~overall increase~~acquisition of GHB.

Noninterest expenses totaled $49.7 million for the six months ended June 30, 2019, compared to $34.0 million for the six months ended June 30, 2018. Included in noninterest expenses during the six months ended June 30, 2019 were $7.9 million in merger-related expenses and $1.0 million related to a loss on extinguishment of debt. Excluding these items, noninterest expenses increased $6.7 million from 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.~~comparable period. The increase ~~from the prior year period~~ was ~~mainly~~primarily attributable to ~~an increase in the taxi medallions loans held-for-sale valuation allowance of $15.3 million. In addition,~~ increases in salaries and employee benefits ($~~2.6~~4.4 million), ~~FDIC insurance premiums~~professional and consulting expenses ($~~0.6 million), data processing ($0.4~~1.0 million) and ~~other expense ($0.3 million) were partially offset by decreases~~increases in occupancy and equipment expenses ($~~0.2~~0.7 million) ~~contributing to the overall increase in noninterest expenses from~~. The increases over 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,~~period were ~~returned~~primarily attributable to the ~~loans held-for-investment portfolio. As~~acquisition 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.GHB.

Income Taxes

Income tax expense was ~~$5.6~~$5.5 million for the three months ended ~~September~~June 30, ~~2017,~~2019, compared to ~~$5.4~~$4.6 million for the three months ended ~~September~~June 30, ~~2016.~~2018. The increase in income tax expense was the result of higher income before taxes. The effective tax rate for the ~~current quarter~~three months ended June 30, 2019 and June 30, 2018 was ~~30.0% versus 31.5% for the prior-year quarter.~~22.2% and 20.8%, respectively.

Income tax expense was ~~$12.6~~$8.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, compared to ~~$15.2~~$5.0 million for the ~~nine~~six months ended ~~September~~June 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.2018. The effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~27.9%~~20.5% versus ~~31.5%~~18.8% for the prior-year period. ~~Excluding any changes to~~At the ~~taxi medallion valuation allowance,~~present time, the Bank is projecting a 2019 combined federal and state effective tax rate of approximately 22%, although this rate is subject to change pending actions potentially taken as a result of New Jersey’s newly enacted tax legislation discussed below.

We expect our effective tax rate to increase in 2019 largely as a result of New Jersey’s adoption of tax legislation changing its status as a so-called “separate return state” to one that requires combined filing of affiliated companies. Since the regulations implementing these legislative changes have not yet been issued, we are unable to calculate the precise impact for ~~2017~~2019 and beyond. The Company is ~~expected~~currently evaluating tax strategies to ~~be maintained in~~partially reduce the ~~low 30% range.~~impact of the legislation.

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~~a 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.

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.

																				Amount
	September 30, 2017				December 31, 2016				Amount Increase/			June 30, 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		$	1,052,559	20.6	%	$	988,758	21.8	%	$	63,801

Commercial real estate		2,585,205	66.4			2,204,710	63.3			380,495			3,111,274	61.1			2,778,167	61.1			333,107

Commercial construction		399,453	10.2			486,228	14.0			(86,775	)		602,213	11.8			465,389	10.2			136,824

Residential real estate		264,244	6.8			232,547	6.7			31,697			326,661	6.4			309,991	6.8			16,670

Consumer		1,912	0.1			2,380	0.1			(468	)		2,041	0.1			2,594	0.1			(553	)

Gross loans	$	3,892,427	100.0	%	$	3,479,441	100.0	%	$	412,986		$	5,094,748	100.0	%	$	4,544,899	100.0	%	$	549,849

At ~~September~~June 30, ~~2017,~~2019, gross loans totaled ~~$3.9~~$5.1 billion, an increase of ~~$0.4 billion,~~$550 million, or ~~11.9%~~12.1%, as compared to December 31, ~~2016.~~2018. Net loan growth was primarily attributable to the Greater Hudson Bank acquisition, with increases in commercial real estate ($~~380~~333 million), commercial construction ($88137 million), commercial loans ($64 million), and residential real estate and consumer ($~~32 million), partially offset by a decrease in construction ($87~~16 million).

At ~~September~~June 30, ~~2017,~~2019, acquired loans ~~remaining in~~within the loan portfolio totaled ~~$0.5~~$0.6 billion, compared to ~~$0.7~~$0.3 billion as of December 31, ~~2016.~~2018. The increase was attributable to the Greater Hudson Bank acquisition.

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 ~~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.

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.~~York metropolitan area. Future adjustments to the ALLL may be necessary due to economic factors impacting New Jersey real estate and the economy in general, as well as operating, regulatory and other conditions beyond the Company’s control.

At ~~September~~June 30, ~~2017,~~2019, the ALLL was ~~$29.9~~$37.7 million as compared to ~~$25.7~~$35.0 million at December 31, ~~2016. Provisions~~2018. The provision for loan losses for the three months and six months ended June 30, 2019 was $1.1 million and $5.6 million, respectively, compared to ~~the ALLL~~$1.1 million and $18.9 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 totaled $1.5~~2018, respectively. Provision for loan losses for the three months ended June 30, 2019 remained flat when compared to the prior year second quarter. The decrease in the provision for loan losses during the six months ended June 30, 2019 when compared to the comparable prior year period was primarily attributable to $17.0 million of provision related to the taxi medallion 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.

There were $260 thousand and $35 thousand in net charge-offs for the three months ended June 30, 2019 and June 30, 2018, respectively and $2.9 million and ~~$4.0 million, respectively, compared to $6.8 million and $13.5~~$17.1 million for the ~~same periods in 2016. The decrease~~six months ended June 30, 2019 and June 30, 2018, respectively. Net charge-offs for the three months ended June 30, 2019 increased $225 from the prior year ~~quarter and prior year nine month period~~period. The increase was ~~largely attributable to decreases in specific reserves,~~ primarily related to ~~the portfolio of~~charges on two commercial real estate loans, offset by taxi medallion ~~loans.~~

~~There were $(19) thousand~~recoveries. Net charge-offs for the six months ended June 30, 2018 include a $17.0 million partial charge-off related to the taxi medallion loan portfolio, resulting from a decrease in ~~net recoveries~~the transfer values of medallions as reported by the New York City Taxi and ~~$1.9 million~~Limousine Commission, as well as a reduction in the Company’s cash flow valuation model. Included in net charge-offs ~~during~~for the ~~three~~six months ended ~~September~~June 30, ~~2017 and 2016, respectively. There were $(126) thousand in net recoveries and $2.5~~2019 was a $2.1 million ~~in net charge-offs during the nine months ended September 30, 2017 and September 30, 2016, respectively.~~partial charge-off on a single loan secured by a commercial office building. The ALLL as a percentage of ~~total~~ loans receivable amounted to 0.74% at June 30, 2019 compared to 0.77% at ~~September 30, 2017 compared to 0.74% at~~ December 31, ~~2016~~2018 and ~~1.09~~0.77 % at ~~September~~June 30, ~~2016.~~2018.

The level of the allowance for the respective periods of ~~2017~~2019 and ~~2016~~2018 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~~June 30, ~~2017~~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.

Changes in the ALLL are presented in the following table for the periods indicated.

Nine Months Ended
September 30,
2017 2016
(dollars in thousands)
Average loans receivable at end of period $ 3,847,396 $ 3,406,800

Analysis of the ALLL:
Balance - beginning of quarter $ 25,744 $ 26,572
Charge-offs:
Commercial - (2,396 )
Commercial real estate (71 ) -
Residential real estate - (94 )
Consumer (12 ) (10 )
Total charge-offs (83 ) (2,500 )
Recoveries:
Commercial 158 2
Commercial real estate 50 35
Residential real estate - 3
Consumer 1 3
Total recoveries 209 43
Net recoveries (charge-offs) 126 (2,457 )
Provision for loan and losses 4,000 13,500
Balance - end of period $ 29,870 $ 37,615
Ratio of annualized net charge-offs during the period to average loans receivable during the period - % 0.06 %

Loans receivable $ 3,889,289 $ 3,445,476
ALLL as a percentage of loans receivable 0.77 % 1.09 %

	Three Months Ended
	June 30,
	2019			2018
	(dollars in thousands)
Average loans at end of period	$	5,005,509		$	4,272,212

Analysis of the ALLL:
Balance – beginning of quarter	$	36,858		$	32,529
Charge-offs:
Commercial		-			(46	)
Commercial real estate		(406	)		-
Consumer		-			(1	)
Total charge-offs		(406	)		(47	)
Recoveries:
Commercial		115			12
Commercial real estate		30			-
Residential real estate		1
Total recoveries		146			12
Net (charge-offs) recoveries		(260	)		(35	)
Provision for loan and losses		1,100			1,100
Balance – end of period	$	37,698		$	33,594
Ratio of annualized net charge-offs during the period to average loans during the period		0.02	%		0.00	%

Loans receivable	$	5,090,492		$	4,360,854
ALLL as a percentage of loans receivable		0.74	%		0.77	%

	Six Months Ended
	June 30,
	2019			2018
		(dollars in thousands)
Average loans at end of period	$	4,956,866		$	4,260,171

Analysis of the ALLL:
Balance - beginning of quarter	$	34,954		$	31,748
Charge-offs:
Commercial		-			(17,066	)
Commercial real estate		(3,082	)		-
Residential real estate		-			(18	)
Consumer		-			(1	)
Total charge-offs		(3,082	)		(17,085	)
Recoveries:
Commercial		186			31
Commercial real estate		30			-
Residential real estate		3			-
Consumer		7			-
Total recoveries		226			31
Net (charge-offs) recoveries		(2,856	)		(17,054	)
Provision for loan and losses		5,600			18,900
Balance - end of period	$	37,698		$	33,594
Ratio of annualized net charge-offs during the period to average loans during the period		0.12	%		0.81	%

Loans receivable	$	5,090,492		$	4,360,854
ALLL as a percentage of loans receivable		0.74	%		0.77	%

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 ~~accruing/accreting:~~accruing:

September 30, December 31,
2017 2016
(dollars in thousands)
Nonaccrual loans (held-for-investment) $ 13,755 $ 5,734
Nonaccrual loans (held-for-sale) 47,430 63,044
OREO - 626
Total nonperforming assets⁽¹⁾ $ 61,185 $ 69,404

Performing TDRs $ 12,749 $ 13,338
Loans 90 days or greater past due and still accruing (non-PCI) - -
Loans 90 days or greater past due and still accruing/accreting (PCI) $ 4,209 $ 5,293

	June 30,		December 31,
	2019		2018
	(dollars in thousands)
Nonaccrual loans	$	49,917	$	51,855
OREO		-		-
Total nonperforming assets ⁽¹⁾	$	49,917	$	51,855

Performing TDRs	$	16,332	$	11,165
Loans 90 days or greater past due and still accruing (non-PCI)	$	-	$	-
Loans 90 days or greater past due and still accruing (PCI)	$	3,006	$	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	0.98%	1.14%
Nonperforming assets to total assets	0.82%	0.95%
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable	1.36%	1.42%

Securities ~~Portfolio~~Available-For-Sale

~~At September~~As of June 30, ~~2017,~~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,~~and asset-backed ~~securities and equity~~ securities.

~~During~~ For the quarter ended ~~September~~June 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,~~2019, average securities ~~decreased $9.7~~increased $82.5 million to ~~$397.1~~approximately $515.0 million, or ~~9.1%~~9.2% of average total interest-earning assets, from ~~$406.8~~approximately $432.5 million, or ~~10.1%~~9.1% of average interest-earning assets, for the comparable period in ~~2016. For the nine months ended September~~2018.

At June 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.

~~At September 30, 2017,~~2019, net unrealized gains on securities available-for-sale, which are carried as a component of accumulated other comprehensive ~~income~~loss and included in stockholders’ equity, net of tax, amounted to ~~$0.7~~$1.3 million as compared ~~to $0.9~~with net unrealized losses of $5.8 million at December 31, ~~2016.~~2018. The decrease in ~~net~~ unrealized ~~gains~~losses is ~~predominantly~~predominately attributable to ~~the sales of available-for-sale securities during 2017~~changes 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.

Interest Rate Sensitivity Analysis

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

We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018, 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.

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

Based on our model, which was run as of ~~September~~June 30, ~~2017,~~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%~~1.91%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~1.84%~~1.46%. 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%.

Based on our model, which was run as of ~~September~~June 30, ~~2017,~~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%~~2.67%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~2.75%~~2.38%. 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%

An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of ~~September~~June 30, ~~2017,~~2019, would decline by ~~12.49%~~8.40% with an instantaneous rate shock of up 200 basis points, and increase by ~~4.51%~~3.26% 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)

The following table illustrates the most recent results for EVE and one year NII sensitivity as of June 30, 2019.

			Estimated Change in
Interest Rates	Estimated		EVE					Interest Rates	Estimated		Estimated Change in NII
(basis points)	EVE		Amount			%		(basis points)	NII		Amount			%
+300	$	589,021	$	(89,932	)	(13.25	)	+300	$	185,095	$	4,690		2.60
+200		621,889		(57,064	)	(8.40	)	+200		183,846		3,441		1.91
+100		652,907		(26,046	)	(3.84	)	+100		182,438		2,033		1.13
0		678,953		-		0.0		0		180,405		-		0.0
-100		701,101		22,148		3.26		-100		177,773		(2,632	)	(1.46	)

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 ~~require~~requires 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.

Liquidity

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

At ~~September~~June 30, ~~2017,~~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~~June 30, ~~2017,~~2019, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were ~~$399.2~~$512.7 million, which represented ~~8.2%~~8.4% of total assets and ~~9.5%~~9.8% 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.

The Bank is a member of the ~~FHLB~~Federal Home Loan Bank of New York and, based on available qualified collateral as of ~~September~~June 30, ~~2017,~~2019, had the ability to borrow ~~$1.4~~$1.9 billion. In addition, at ~~September~~June 30, ~~2017,~~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~~$5.4 million. At ~~September~~June 30, ~~2017,~~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~~$942.2 million in outstanding borrowings and letters of credit. At ~~September~~June 30, ~~2017,~~2019, outstanding commitments for the Bank to extend credit were approximately ~~$635 million.~~$1.0 billion.

Cash and cash equivalents totaled ~~$141.3~~$185.7 million ~~on September~~at June 30, ~~2017, decreasing~~2019, increasing by ~~$59.1~~$13.3 million from ~~$200.4~~$172.4 million at December 31, ~~2016.~~2018. Operating activities provided ~~$68.3~~$35.3 million in net cash. Investing activities used ~~$508.7~~$76.8 million in net cash, primarily reflecting an increase in loans and ~~securities.~~net cash flow from the securities portfolio. Financing activities provided ~~$381.2~~$54.8 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~~borrowings.

Deposits

Total deposits increased by ~~$279.5~~$549 million, or ~~8.4%~~13.4%, to ~~$3.6~~$4.6 billion at ~~September~~June 30, ~~2017~~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
Increase/
September 30, 2017 December 31, 2016 (Decrease)
Amount % Amount % 2017 vs. 2016
(dollars in thousands)
Demand, noninterest-bearing $ 719,582 19.8 % $ 694,977 20.8 % $ 24,605

Demand, interest-bearing 623,027 17.2 563,740 16.9 59,287

Money market 1,024,975 28.3 911,867 27.3 113,108

Savings 177,826 4.9 205,551 6.1 (27,725 )

Time 1,078,359 29.8 968,136 28.9 110,223

Total deposits $ 3,623,769 100.0 % $ 3,344,271 100.0 % $ 279,498

									Amount
									Increase/
	June 30, 2019				December 31, 2018				(Decrease)
	Amount		%		Amount		%		2019 vs. 2018
					(dollars in thousands)
Demand, noninterest-bearing	$	813,635	17.5	%	$	768,584	18.8	%	$	45,051
Demand, interest-bearing		977,611	21.1			845,424	20.7			132,187
Money market		1,062,051	22.9			951,276	23.2			110,775
Savings		163,898	3.5			160,755	3.9			3,143
Time		1,623,948	35.0			1,366,053	33.4			257,895
Total deposits	$	4,641,143	100.0	%	$	4,092,092	100.0	%	$	549,051

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 ~~reprices~~re-prices quarterly. The rate at ~~September~~June 30, ~~2017~~2019 was ~~4.16%~~5.43%.

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 ~~on September 30, 2015,~~ and to repay on March 11, 2016 $11.25 million of SBLF preferred stock issued to the U.S. ~~Treasury on March 11, 2016.~~Treasury. 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 ~~September~~June 30, 2015 to, but excluding July 1, 2020. From and including July 1, 2020 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three month LIBOR rate plus 393 basis points.

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 ~~$558~~$699 million at ~~September~~June 30, ~~2017,~~2019, an increase of ~~$26.7~~$85 million from December 31, ~~2016.~~2018. The increase in stockholders’ equity was primarily attributable to ~~an increase~~the 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~~June 30, ~~2017,~~2019, the Company’s tangible common equity ratio and tangible book value per share were ~~8.71%~~8.93% and ~~$12.78,~~$15.01, 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~~$169 million as of ~~September~~June 30, ~~2017~~2019 and $148 million at December 31, ~~2016, respectively.~~2018.

	September 30,		December 31,
	2017		2016		June 30,		December 31,
	(dollars in thousands, except for share and				2019		2018
	per share data)				(dollars in thousands, except for share and per share data)
Stockholders’ equity	$	557,691	$	531,032	$	699,224	$	613,927

Less: Goodwill and other intangible assets		148,442		148,997		168,714		147,646
Tangible common stockholders’ equity	$	409,249	$	382,035	$	530,510	$	466,281

Common stock outstanding at period end		32,015,317		31,948,307		35,352,866		32,328,542

Book value per common share	$	17.42	$	16.62	$	19.78	$	18.99
Less: Goodwill and other intangible assets		4.64		4.66		4.77		4.57
Tangible book value per common share	$	12.78	$	11.96	$	15.01	$	14.42

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. During the six months ended June 30, 2019, the Company repurchased a total of 240,018 shares, leaving 959,982 shares remaining for repurchase under the program.

The following table details stock repurchases during the three months ended June 30, 2019:

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
April 1, 2019 through April 30, 2019 - - - 1,187,000
May 1, 2019 through May 31, 2019 115,000 $ 21.88 128,000 1,072,000
June 1, 2019 through June 30, 2019 112,018 $ 21.43 240,018 959,982

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 ~~September~~June 30, ~~2017~~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
                For Capital Adequacy       Prompt Corrective Action
ConnectOne Bancorp, Inc. Purposes Provisions
At September 30, 2017 Amount Ratio Amount      Ratio Amount      Ratio
(dollars in thousands)
Tier 1 leverage capital $           416,736 9.13 % $           182,603 4.00 % N/A N/A
CET I risk-based ratio 411,582 9.40 197,042 4.50 N/A N/A
Tier 1 risk-based capital 416,736 9.52 262,723 6.00 N/A N/A
Total risk-based capital 496,606 11.34 350,397 8.00 N/A N/A

To Be Well-Capitalized Under
For Capital Adequacy Prompt Corrective Action
ConnectOne Bank Purposes Provisions
At September 30, 2017 Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
Tier 1 leverage capital $ 461,300         10.11 % $ 182,539         4.00 % $           228,173        5.00 %
CET I risk-based ratio 461,300 10.54 197,019 4.50 284,583 6.50
Tier 1 risk-based capital 461,300 10.54 262,692 6.00 350,255 8.00
Total risk-based capital 491,170 11.22 350,255 8.00 437,819 10.00

									To Be Well-Capitalized Under
					For Capital Adequacy				Prompt Corrective Action
	ConnectOne Bancorp, Inc.				Purposes				Provisions
At June 30, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio
					(dollars in thousands)
Tier 1 leverage capital	$	532,552	9.14	%	$	233,127	4.00	%		N/A	N/A
CET I risk-based ratio		527,397	9.65			245,930	4.50			N/A	N/A
Tier 1 risk-based capital		532,552	9.74			327,907	6.00			N/A	N/A
Total risk-based capital		695,250	12.72			437,209	8.00			N/A	N/A

									To Be Well-Capitalized Under
					For Capital Adequacy				Prompt Corrective Action
	ConnectOne Bank				Purposes				Provisions
At June 30, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio
					(dollars in thousands)
Tier 1 leverage capital	$	607,500	10.42	%	$	233,108	4.00	%	$	291,386	5.00	%
CET I risk-based ratio		607,500	11.12			245,923	4.50			355,222	6.50
Tier 1 risk-based capital		607,500	11.12			327,897	6.00			437,196	8.00
Total risk-based capital		677,448	12.40			437,196	8.00			546,496	10.00

N/A - not applicable

~~N/A - not applicable~~

As of ~~September~~June 30, ~~2017,~~2019, management believes that each of the Bank and the Company meet all capital adequacy requirements to which they are subject.

Basel III rules require a “capital conservation buffer” for both the Company and the Bank. ~~When fully phased in on~~Beginning January 1, 2019, ~~each of~~ the Company and the Bank ~~will be~~are 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.

As of ~~September~~June 30, ~~2017~~2019 both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the ~~Total~~Tier 1 Risk Based ~~Capital~~ Ratio which was ~~2.09%~~1.24% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was ~~1.97%~~1.90% above the minimum buffer ratio.

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 ~~Operation-~~Operations - Interest Rate Sensitivity Analysis" herein for a discussion of our management of our interest rate risk.

5856

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.

5957

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~~Other than as set forth below, 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.

Reforms to and uncertainty regarding LIBOR may adversely affect the business.

In 2017, a committee of private-market derivative participants and their regulators convened by the Federal Reserve, the Alternative Reference Rates Committee, or “ARRC”, was created to identify an alternative reference interest rate to replace LIBOR. The ARRC announced Secured Overnight Financing Rate, or “SOFR”, a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, as its preferred alternative to LIBOR. The Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced its intention to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. Subsequently, the Federal Reserve Bank announced final plans for the production of SOFR, which resulted in the commencement of its published rates by the Federal Reserve Bank of New York on April 2, 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR at this time is uncertain. The uncertainty as to the nature and effect of such reforms and actions and the political discontinuance of LIBOR may adversely affect the value of and return on the Company’s financial assets and liabilities that are based on or are linked to LIBOR, the Company’s results of operations or financial condition. In addition, these reforms may also require extensive changes to the contracts that govern these LIBOR based products, as well as the Company’s systems and processes.

6058

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

~~Not applicable~~See “Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Shareholders' Equity”

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5.5 Other Information

Not applicable

6159

Item 6. Exhibits

Exhibit No.		Description
31.1		Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Definition Taxonomy Extension Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

6260

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.

(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, 2017~~August 6, 2019		Date: ~~November 3, 2017~~August 6, 2019

6361

	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

	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

	Three Months Ended September 30, 2017
				Commercial			Commercial			Residential
	Commercial			real estate			construction			real estate			Consumer			Unallocated			Total
	(dollars in thousands)
Balance at June 30, 2017	$	7,238		$	15,389		$	4,241		$	985		$	2		$	546		$	28,401

Charge-offs		-			-			-			-			(1	)		-			(1	)

Recoveries		17			2			-			-			1			-			20

Provision for loan losses		461			1,443			(301	)		67			-			(220	)		1,450

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

	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

	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		$	-

	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

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%

				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
April 1, 2019 through April 30, 2019	-		-	-	1,187,000
May 1, 2019 through May 31, 2019	115,000	$	21.88	128,000	1,072,000
June 1, 2019 through June 30, 2019	112,018	$	21.43	240,018	959,982