ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company. The Parent Corporation’s business currently consists of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”). The Bank’s subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a Delaware investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), ~~Port Jervis Holdings LLC (a New York limited liability company) and~~ NJCB Spec-1, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey online business lending marketplace).

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-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 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 and nine months ended ~~March 31,~~September 30, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019, or for any other interim period. The Company’s 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.

Effective January 1, 2019, the Company implemented ASU No. 2016-02, “Leases (Topic 842)” (modified by ASU 2018-01 – Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842) and ASU 2018-20 – Leases (Topic 842) Narrow – Scope Improvements for Lessors). ASU 2016-02 requires the recognition of a right of use asset and related lease liability by lessees for leases classified as operating leases under current GAAP. Topic 842, which replaces the current guidance under Topic 840, retains a distinction between finance leases and operating leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee also will not significantly change from current GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities. Effective with the adoption, the Company recognized a “right-of-use-asset” and a “lease liability” for its operating leases and has elected to apply practical expedients pertaining to the ASU. The Company applied a modified retrospective transition approach for the applicable leases. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption. The Company elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and non-lease components as a single component and account for it as a lease. The adoption of ASU 2016-02 resulted in the recognition of $15.3 million of “right-of-use assets” and $16.7 million of lease liabilities as of the date of the adoption. This adoption did not materially impact the Company’s Consolidated Statement of Income for the first quarter ended March 31, 2019 and it is not expected to have a material impact on the Consolidated Statement of Income in future periods. See Note 9 – Premises and Equipment for additional disclosures related to leases.

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

SUASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Assets Measured at Amortized Cost.” (modifiedby ASU 2018-19, ~~– Codification Improvements to Topic 326, Financial Instruments –Credit Losses)~~ASU 2019-04 and ASU 2019-05). 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, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. ~~The~~

As previously disclosed, the Company has formed a CECL committee which has assessed our data and system needs. The Company has engaged third-party vendors to 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 ~~historical~~ loss history. We recently completed reconciliation, testing and validation of our historical data, including balances, charge-offs and recoveries for the last 5 years. We have identified distinct loan segments and are in the process of evaluating and reviewing loss drivers, data fits and modeling. We expect to recognize a one-time cumulative effect adjustment to the 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 on our consolidated financial statements.

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 York. Pursuant to the 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 acquisition date. The application of the acquisition method of accounting resulted in the recognition of goodwill of $10.3 million and a core deposit intangible of $5.1 million. The assets acquired and liabilities assumed and consideration paid in the acquisition of GHB were 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. While the fair values are not expected to be materially different from the estimates, accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period, which runs through January 2, 2020, in the measurement period in which the adjustment amounts are determined. The acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the changes to the 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 resulting from the acquisition. As of September 30, 2019 there were no changes to the provisional fair value adjustments recorded on January 2, 2019.

In connection with the acquisition, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the 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

	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 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 the acquisition.

Loans acquired in the GHB acquisition were recorded at fair value, 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.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(unaudited)

Note 2. Business Combination – (continued)

The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the GHB acquisition as of the 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

	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~~interest-bearing deposit accounts was assumed to approximate the 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 ~~Merger~~GHB acquisition were expensed as incurred. These items were recorded as merger-related expenses on the consolidated statement of ~~operations.~~income. During the three months and nine months ended ~~March 31,~~September 30, 2019, merger expenses related to the GHB acquisition were $-0- and $7.6 ~~million.~~million, respectively.

BoeFly, LLC

On May 31, 2019, ConnectOne Bank, through a wholly owned subsidiary, completed the acquisition of certain assets of New York/Boston-based BoeFly, LLC, which operates an online business lending marketplace connecting small- to medium-sized businesses, largely related to the franchise business sector, with lenders and professional loan brokers across the United States. The business will operate as BoeFly, Inc., a 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 a combination of cash, restricted stock and a potential cash earn-out based on predefined business origination targets. The Company recorded $6.3 million as goodwill on its consolidated statement of condition as of the acquisition date. The acquisition of the assets of BoeFly, LLC were not material to the results of operations or financial condition of the Company.

Direct acquisition and integration costs of the 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 nine months ended September 30, 2019.

Pending Acquisition with Bancorp of New Jersey, Inc.

On August 15, 2019, Parent Corporation and Bancorp of New Jersey, Inc., a New Jersey corporation (“BKJ”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which BKJ will merge with and into Parent Corporation (the “Merger”). The Merger Agreement was approved by the Boards of Directors of each of Parent Corporation and BKJ at meetings held on August 15, 2019. Following the Merger, BKJ’s wholly owned bank subsidiary, Bank of New Jersey, will merge with and into the Bank, with the Bank as the surviving bank (the “Bank Merger” and, together with the Merger, the “Transaction”). Under the terms of the Merger Agreement, shareholders of BKJ will have the opportunity to elect to receive either $16.25 or 0.780 of a share of Parent Corporation’s common stock for each share of BKJ common stock, subject to proration and allocation procedures set forth in the Merger Agreement. Closing of the Merger is subject to customary conditions, including, among others, approval of the Merger Agreement by shareholders of BKJ and Parent Corporation, receipt of required regulatory approvals, and approval for listing on NASDAQ with respect to the Parent Corporation common stock to be issued in the Merger. The Merger is expected to close in the first quarter of 2020.

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
      March 31,
(dollars in thousands, except for per share data) 2019       2018
Net income $ 11,635 $ 4,251
Earnings allocated to participating securities (26 ) (12 )
Income attributable to common stock $ 11,609 $ 4,239

Weighted average common shares outstanding, including participating securities 35,283 32,116
Weighted average participating securities (25 ) (94 )
Weighted average common shares outstanding 35,258 32,022
Incremental shares from assumed conversions of options, performance units and restricted shares 61 274
Weighted average common and equivalent shares outstanding 35,319 32,296

Earnings per common share:
Basic $      0.33 $      0.13
Diluted 0.33 0.13

	Three Months Ended September 30,						Nine Months Ended September 30,
	(in thousands, except for per share data)
	2019			2018			2019			2018
Net income	$	21,696		$	19,902		$	52,612		$	41,680
Earnings allocated to participating securities		(117	)		(42	)		(176	)		(98	)
Income attributable to common stock	$	21,579		$	19,860		$	52,436		$	41,582

Weighted average common shares outstanding, including participating securities		35,307			32,167			35,317			32,127
Weighted average participating securities		(141	)		(25	)		(65	)		(34	)
Weighted average common shares outstanding		35,166			32,142			35,252			32,093
Incremental shares from assumed conversions of options, performance units and non-participating restricted shares		97			177			82			220
Weighted average common and equivalent shares outstanding		35,263			32,319			35,334			32,313

Earnings per common share:
Basic	$	0.61		$	0.62		$	1.49		$	1.30
Diluted		0.61			0.61			1.48			1.29

There were no antidilutive share equivalents as of ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(unaudited)

Note 4. Securities Available-for-Sale

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 March 31, 2019 and December 31, 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. – (continued)

The following table summarizes the amortized cost and fair value of securities available-for-sale at ~~March 31,~~September 30, 2019 and December 31, 2018 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss).

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
March 31, 2019 (dollars in thousands)
Securities available-for-sale
Federal agency obligations $ 43,321 $ 191 $ (232 ) $ 43,280
Residential mortgage pass-through securities 255,657 381 (2,837 ) 253,201
Commercial mortgage pass-through securities 6,903 23 (11 ) 6,915
Obligations of U.S. states and political subdivisions 167,819 2,115 (1,764 ) 168,170
Corporate bonds and notes 35,245 193 (367 ) 35,071
Asset-backed securities 8,244 11 (68 ) 8,187
Certificates of deposit 148 2 - 150
Other securities 1,565 - - 1,565
Total securities available-for-sale $ 518,902 $ 2,916 $ (5,279 ) $ 516,539

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2018 (dollars in thousands)
Securities available-for-sale
Federal agency obligations $ 45,509 $ 51 $ (605 ) $ 44,955
Residential mortgage pass-through securities 189,721 85
(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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2019	(dollars in thousands)
Securities available-for-sale
Federal agency obligations	$	23,712	$	824	$	(1	)	$	24,535
Residential mortgage pass-through securities		215,378		1,286		(859	)		215,805
Commercial mortgage pass-through securities		5,017		73		-			5,090
Obligations of U.S. states and political subdivisions		140,870		3,222		(436	)		143,656
Corporate bonds and notes		28,135		308		(193	)		28,250
Asset-backed securities		6,132		3		(41	)		6,094
Certificates of deposit		148		2		-			150
Other securities		2,269		-		-			2,269
Total securities available-for-sale	$	421,661	$	5,718	$	(1,530	)	$	425,849

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair 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 approximately ~~$141.9~~$119.6 million and $151.5 million at ~~March 31,~~September 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 ~~March 31,~~September 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.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(unaudited)

Note 4. Securities Available-for-Sale – (continued)

The following table presents information for investments in securities available-for-sale at ~~March 31,~~September 30, 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.

March 31, 2019
Amortized Fair
Cost Value
(dollars in thousands)
Securities available-for-sale:
Due in one year or less $ 6,909 $ 6,941
Due after one year through five years 46,300 46,324
Due after five years through ten years 32,152 32,634
Due after ten years 169,416 168,959
Residential mortgage pass-through securities 255,657 253,201
Commercial mortgage pass-through securities 6,903 6,915
Other securities 1,565 1,565
Total securities available-for-sale $ 518,902 $ 516,539

	September 30, 2019
	Amortized Cost		Fair Value
	(dollars in thousands)
Securities available-for-sale:
Due in one year or less	$	4,309	$	4,333
Due after one year through five years		28,344		28,503
Due after five years through ten years		24,060		24,757
Due after ten years		142,284		145,092
Residential mortgage pass-through securities		215,378		215,804
Commercial mortgage pass-through securities		5,017		5,091
Other securities		2,269		2,269
Total securities available-for-sale	$	421,661	$	425,849

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

Three Months Ended
March 31,
2019 2018
Proceeds $ 94,075 $ -

Gross gains on sales of securities 8 -
Gross losses on sales of securities - -
Net gains on sales of securities 8 -
Less: tax provision on net gains (2 ) -
Net gains on sales of securities, after tax $ 6 $ -

	Three Months Ended September 30,					Nine Months Ended September 30,
	(dollars in thousands)
	2019			2018		2019			2018
Proceeds	$	33,432		$	-	$	183,728		$	-

Gross gains on sales of securities		1			-		401			-
Gross losses on sales of securities		(280	)		-		(681	)		-
Net losses on sales of securities		(279	)		-		(280	)		-
Tax provision on net losses		62			-		62			-

Net losses on sales of securities, after tax	$	(217	)	$	-	$	(218	)	$	-

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.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(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 ~~131~~49 and 148 securities as of ~~March 31,~~September 30, 2019 and December 31, 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, and 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 isare 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 ~~March~~September 30, 2019 and at December 31, ~~2019.~~2018.

In determining whether or not securities are OTTI, the Company must exercise considerable judgment. Accordingly, there can be no assurance that the actual results will not differ from the Company’s judgments and that such differences may not require the future recognition of OTTI charges that could have a material effect on the Company’s financial position and results of operations. In addition, the value of, and the realization of any loss on, a security is subject to numerous risks as cited above.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(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 ~~March 31,~~September 30, 2019 and December 31, 2018:

March 31, 2019
Total Less than 12 Months 12 Months or Longer
Fair Unrealized Fair Unrealized Fair Unrealized
      Value       Losses       Value       Losses       Value       Losses
(dollars in thousands)
Investment Securities Available-for-Sale:
Federal agency obligation $      23,900 $      (232 ) $      2,005 $        (7 ) $      21,895 $      (225 )
Residential mortgage pass-through securities 194,131 (2,837 ) 60,001 (137 ) 134,130 (2,700 )
Commercial mortgage pass-through securities 3,873 (11 ) - - 3,873 (11 )
Obligations of U.S. states and political subdivisions 53,685 (1,764 ) 531 - 53,154 (1,764 )
Corporate bonds and notes 14,547 (367 ) 7,382 (42 ) 7,165 (325 )
Asset-backed securities 4,536 (68 ) 2,884 (49 ) 1,652 (19 )
Total temporarily impaired securities $ 294,672 $ (5,279 ) $ 72,803 $ (235 ) $ 221,869 $ (5,044 )

December 31, 2018
Total Less than 12 Months 12 Months or Longer
Fair Unrealized Fair Unrealized Fair Unrealized
      Value       Losses       Value       Losses       Value       Losses
(dollars in thousands)
Investment Securities Available-for-Sale:
Federal agency obligation $      35,472 $      (605 ) $      810 $      (1 ) $      34,662 $      (604 )
Residential mortgage pass-through securities 178,365 (4,602 ) 42,040 (393 ) 136,325 (4,209 )
Commercial mortgage pass-through securities 3,874 (45 ) - - 3,874 (45 )
Obligations of U.S. states and political subdivisions 64,367 (3,402 ) 7,765 (21 ) 56,602 (3,381 )
Corporate bonds and notes 15,534 (540 ) 7,767 (133 ) 7,767 (407 )
Asset-backed securities 3,957 (16 ) 2,219 (11 ) 1,738 (5 )
Total Temporarily Impaired Securities $ 301,569 $ (9,210 ) $ 60,601 $ (559 ) $ 240,968 $ (8,651 )

September 30, 2019
Total

Less than 12 Months

12 Months or Longer
Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
(dollars in thousands)
Investment Securities Available-for-Sale:
Federal agency obligation
$
95
$
(1
)
$
-
$
-
$
95
$
(1
)
Residential mortgage pass-through securities
110,586
(859
)
47,169
(210
)
63,417
(649
)
Obligations of U.S. states and political subdivisions
31,550
(436
)
4,054
-
27,496
(436
)
Corporate bonds and notes
5,286
(193
)
2,462
(38
)
2,824
(155
)
Asset-backed securities

5,316

(41
)

2,427

(7
)

2,889

(34
)
Total temporarily impaired securities
$
152,833
$
(1,530
)
$
56,112
$
(255
)

$
96,721

$
(1,275
)
December 31, 2018
Total

Less than 12 Months

12 Months or Longer
Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
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
)

Note 5. Derivatives

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(unaudited)

Note 5. Derivatives – (continued)

Interest rate swaps were entered into on June 4, 2019 and August 6, 2019 each with a notional amount of $50 million and in April 13, 2017, August 24, 2015, and December 30, 2014 each with a respective notional amount of ~~$25.0~~$25 million and were designated as a cash flow ~~hedge~~hedges of ~~a Federal Home Loan Bank~~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 ~~March 31,~~September 30, 2019, December 31, 2018 and ~~March 31,~~September 30, 2018 are presented in the following table.

March 31, December 31, March 31,
2019 2018 2018
(dollars in thousands)
Notional amount $ 75,000 $ 75,000 $ 100,000
Weighted average pay rates 1.80 % 1.70 % 1.79 %
Weighted average receive rates 2.79 % 2.19 % 1.82 %
Weighted average maturity 1.7 years 2.0 years 2.2 years

Fair value $ 768 $ 1,159 $ 1,714

~~Net interest income~~


	September 30, 2019			December 31, 2018			September 30, 2018
	(dollars in thousands)
Notional amount	$	175,000		$	75,000		$	100,000
Weighted average pay rates		1.83	%		1.70	%		1.68	%
Weighted average receive rates		2.53	%		2.19	%		2.12	%
Weighted average maturity		1.5 years			2.0 years			1.7 years
Fair value	$	(380	)	$	1,159		$	1,906

Interest expense recorded on these swap transactions totaled approximately ~~$182 thousand during~~$(204,000) and $(563,000) for the three and nine months ended ~~March 31,~~September 30, 2019, ~~compared to $5 thousand during~~respectively, and $(173,000) and $(326,000) for the three and nine months ended ~~March 31, 2018.~~September 30, 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:

Three Months Ended March 31, 2019
Amount of gain Amount of gain Amount of gain
(loss) recognized (loss) reclassified recognized in other
in OCI (Effective from OCI to Noninterest income
      Portion)       interest income       (Ineffective Portion)
(dollars in thousands)
Interest rate contracts $                       (209 ) $                    (182 ) $      -

Three Months Ended March 31, 2018
Amount of gain Amount of gain Amount of gain
(loss) recognized (loss) reclassified recognized in other
in OCI (Effective from OCI to Noninterest income
      Portion)       interest income       (Ineffective Portion)
(dollars in thousands)
Interest rate contracts $                           921 $                       (5 ) $      -

	Nine Months Ended September 30, 2019
	Amount of gain (loss) recognized in OCI (Effective Portion)		Amount of (gain) loss reclassified from OCI to interest income		Amount of gain recognized in other Noninterest income (Ineffective Portion)
		(dollars in thousands)
Interest rate contracts	$	(976)	$	(563)	$	-

	Nine Months Ended September 30, 2018
	Amount of gain (loss) recognized in OCI (Effective Portion)		Amount of (gain) loss reclassified from OCI to interest income		Amount of gain recognized in other Noninterest income (Ineffective Portion)
	(dollars in thousands)
Interest rate contracts	$	796	$	-	$	-

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

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

March 31, 2019 December 31, 2018
Notional Notional
Amount Fair Value Amount Fair Value
(dollars in thousands)
Interest rate swaps related to FHLB advances included in assets $ 75,000 $ 768 $ 75,000 $ 1,159

	September 30, 2019				December 31, 2018
	Notional Amount		Fair Value		Notional Amount		Fair Value
		(dollars in thousands)
Interest rate swaps related to FHLB advances included in assets	$	175,000	$	(380)	$	75,000	$	1,159

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Loans and the Allowance for Loan Losses

Loans ~~Receivable~~receivable -The following table sets forth the composition of the Company’s loan portfolio, ~~segments,~~ including net deferred loan fees, ~~as of March 31,~~at September 30, 2019 and December 31, 2018:

March 31, December 31,
2019 2018
(dollars in thousands)
Commercial $ 1,051,199 $ 988,758
Commercial real estate 3,054,196 2,778,167
Commercial construction 548,039 465,389
Residential real estate 319,215 309,991
Consumer 4,156 2,594
Gross loans 4,976,805 4,544,899
Net deferred loan fees (4,154 ) (3,807 )
Total loans receivable $ 4,972,651 $ 4,541,092

	September 30, 2019			December 31, 2018
	(dollars in thousands)
Commercial	$	1,113,743		$	988,758
Commercial real estate		3,030,816			2,778,167
Commercial construction		646,172			465,389
Residential real estate		322,307			309,991
Consumer		2,435			2,594
Gross loans		5,115,473			4,544,899
Net deferred loan fees		(5,002	)		(3,807	)
Total loans receivable	$	5,110,471		$	4,541,092

At ~~March 31,~~September 30, 2019 and December 31, 2018, loan balances of approximately $2.5 billion and $2.3 billion, respectively, were pledged to secure borrowings from the FHLB of New York.

Loans held-for-sale - The following table sets forth the composition of the Company's loans held-for-sale portfolio at September 30, 2019 and December 31, 2018:

	September 30, 2019		December 31, 2018
		(dollars in thousands)
Commercial	$	2,294	$	-
Commercial real estate		29,353		-
Residential real estate		1,598		-
Total carrying amount	$	33,245	$	-

Purchased Credit-Impaired Loans -The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investment ofin those loans is as follows at ~~March 31,~~September 30, 2019 and December 31, 2018.

March 31, December 31,
2019 2018
(dollars in thousands)
Commercial $ 6,159 $ 2,509
Commercial real estate 1,181 -
Commercial construction 1,649 -
$ 8,989 $ 2,509

	September 30, 2019		December 31, 2018
		(dollars in thousands)
Commercial	$	5,459	$	2,509
Commercial real estate		1,123		-
	$	6,582	$	2,509

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during either the three and nine months ended ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018. There were no reversals from the allowance for loan losses during the three and nine months ended ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018.

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 the accretable yield, or income expected to be collected, on the purchased credit-impaired loans for three and nine months ended ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018:

Three Months Three Months
Ended Ended
March 31, March 31,
2019 2018
(dollars in thousands)
Balance at beginning of period $ 1,134 $ 1,387
New loans purchased 1,286 -
Accretion of income (146 ) (65 )
Balance at end of period $ 2,274 $ 1,322

	Three Months Ended September 30, 2019			Three Months Ended September 30, 2018
	(dollars in thousands)
Balance at June 30	$	1,637		$	1,259
Accretion of income		(167	)		(63	)
Balance at September 30	$	1,470		$	1,196

	Nine Months Ended September 30, 2019			Nine Months Ended September 30, 2018
	(dollars in thousands)
Balance at January 1	$	1,134		$	1,387
New loans purchased		1,286			-
Accretion of income		(950	)		(191	)
Balance at September 30	$	1,470		$	1,196

~~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 -The following tables present nonaccrual loans included in loans receivable by loan class as of ~~March 31,~~September 30, 2019 and December 31, 2018:

March 31, December 31,
2019 2018
(dollars in thousands)
Commercial $ 28,099 $ 29,340
Commercial real estate 12,159 15,135
Commercial construction 2,934 2,934
Residential real estate 4,488 4,446
Total nonaccrual loans $ 47,680 $ 51,855

	September 30, 2019		December 31, 2018
	(dollars in thousands)
Commercial	$	33,781	$	29,340
Commercial real estate		7,529		15,135
Commercial construction		7,101		2,934
Residential real estate		2,910		4,446
Total nonaccrual loans	$	51,321	$	51,855

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.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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. The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) at ~~March 31,~~September 30, 2019 and December 31, 2018:

	September 30, 2019
	Pass		Special Mention		Substandard		Doubtful		Total
		(dollars in thousands)
Commercial	$	1,040,210	$	23,219	$	50,314	$	-	$	1,113,743
Commercial real estate		3,007,226		6,418		17,172		-		3,030,816
Commercial construction		629,778		1,918		14,475		-		646,172
Residential real estate		318,754		-		3,553		-		322,307
Consumer		2,434		-		1		-		2,435
Gross loans	$	4,998,403	$	31,555	$	85,515	$	-	$	5,115,473

	December 31, 2018
	Pass		Special 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

March 31, 2019
Special
Pass Mention Substandard Doubtful Total
(dollars in thousands)
Commercial $      997,975 $      17,452 $      35,772 $      - $      1,051,199
Commercial real estate 3,024,553 12,970 16,673 - 3,054,196
Commercial construction       533,105       6,920       8,014       -       548,039
Residential real estate 314,599 - 4,616 - 319,215
Consumer 4,143 - 13 - 4,156
Gross loans $ 4,874,375 $ 37,342 $ 65,088 $ - $ 4,976,805

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

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(unaudited)

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

The following table provides an analysis of the impaired loans by ~~class~~segment as of ~~March 31,~~September 30, 2019 and ~~2018.~~December 31, 2018:

	September 30, 2019
	Recorded Investment		Unpaid Principal Balance		Related Allowance
No related allowance recorded	(dollars in thousands)
Commercial	$	41,030	$	87,716
Commercial real estate		12,136		12,301
Commercial construction		6,079		6,085
Residential real estate		1,533		1,897
Total (no related allowance)	$	60,778	$	107,999

With an allowance recorded
Commercial real estate	$	388	$	388	$	23
Commercial construction		6,467		6,467		1,339
Residential real estate		264		264		24
Total (with allowance)	$	7,119	$	7,119	$	1,386

Total
Commercial	$	41,030	$	87,716	$	-
Commercial real estate		12,524		12,689		23
Commercial construction		12,546		12,552		1,339
Residential real estate		1,797		2,161		24
Total	$	67,897	$	115,118	$	1,386

	December 31, 2018
	Recorded Investment		Unpaid Principal Balance		Related 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

March 31, 2019
Unpaid
Recorded Principal Related
Investment Balance Allowance
No related allowance recorded (dollars in thousands)
Commercial $ 28,870 $ 78,844
Commercial real estate 10,124 18,258
Commercial construction 6,326 10,443
Residential real estate 2,185 2,511
Consumer - -
Total (no related allowance) $ 47,505 $ 110,056

With an allowance recorded
Commercial real estate $ 4,984 $ 7,999 $ 1,035
Residential real estate 256 266 25
Total (with allowance) $ 5,240 $ 8,265 $ 1,060

Total
Commercial $ 28,870 $ 78,844 $ -
Commercial real estate 15,108 26,257 1,035
Commercial construction 6,326 10,443 -
Residential real estate 2,441 2,777 25
Consumer - - -
Total $ 52,745 $ 118,321 $ 1,060

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
Consumer - -
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
Consumer - - -
Total $ 59,932 $ 115,046 $ 36

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(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 ~~class~~segment as of and for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018:

Three Months Ended March 31,
2019 2018
Average Interest Average Interest
Recorded Income Recorded Income
Investment Recognized Investment Recognized
Impaired loans with no related allowance recorded
Commercial $ 29,080 $ 16 $ 45,607 $ 31
Commercial real estate 10,146 47 35,010 243
Commercial construction 10,400 57 6,083 77
Residential real estate 2,194 - 2,613 -
Consumer - - - -
Total $ 51,820 $ 120 $ 89,313 $ 351

Impaired loans with an allowance recorded
Commercial real estate $ 7,084 $ - $ 1,129 $ 12
Commercial construction - - 2,649 42
Residential real estate 258 - - -
Total $ 7,342 $ - $ 3,778 $ 54

Total impaired loans
Commercial $ 29,080 $ 16 $ 45,607 $ 31
Commercial real estate 17,230 47 36,139 255
Commercial construction 10,400 57 8,732 119
Residential real estate 2,452 - 2,613 -
Consumer - - - -
Total $ 59,162 $ 120 $ 93,091 $ 405

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

Commercial	$	41,332	$	570	$	31,769	$	36	$	41,731	$	733	$	39,132	$	102
Commercial real estate		12,178		79		21,557		105		12,213		221		21,714		475
Commercial construction		6,044		58		10,297		92		6,047		138		11,718		387
Residential real estate		1,552		-		2,249		-		1,579		19		2,304		-
Total	$	61,106	$	707	$	65,872	$	233	$	61,570	$	1,111	$	74,868	$	964

Impaired loans (allowance):

Commercial real estate	$	392	$	-	$	8,534	$	11	$	393	$	-	$	8,544	$	34
Commercial construction		6,439		220		-		-		6,378		220		-		-
Residential real estate		252		9		264		-		255		9		267		-
Total	$	7,083	$	936	$	8,798	$	11	$	7,026	$	229	$	8,811	$	34

Total impaired loans:

Commercial	$	41,332	$	570	$	31,769	$	36	$	41,731	$	733	$	39,132	$	102
Commercial real estate		12,570		79		30,091		116		12,606		221		30,258		509
Commercial construction		12,483		278		10,297		92		12,425		358		11,718		387
Residential real estate		1,804		9		2,513		-		1,834		28		2,571		-
Total	$	68,189	$	936	$	74,760	$	244	$	68,596	$	1,340	$	83,679	$	998

Included in impaired loans at ~~March 31,~~September 30, 2019 and December 31, 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.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(unaudited)

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

Aging Analysis -The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due at ~~March 31,~~September 30, 2019 and December 31, 2018:

March 31, 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 $ 1,979 $ 2,626 $ 3,799 $ 28,099 $ 36,503 $ 1,014,696 $ 1,051,199
Commercial real estate 10,213 180 - 12,159 22,552 3,031,644 3,054,196
Commercial construction 648 - 1,649 2,934 5,231 542,808 548,039
Residential real estate 1,591 - - 4,488 6,079 313,136 319,215
Consumer 12 - - - 12 4,144 4,156
Total $ 14,443 $ 2,806 $ 5,448 $ 47,680 $ 70,377 $ 4,906,428 $ 4,976,805

	September 30, 2019
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Gross Loans
		(dollars in thousands)
Commercial	$	5,812	$	1,438	$	3,098	$	33,781	$	44,129	$	1,069,614	$	1,113,743
Commercial real estate		-		689		-		7,529		8,218		3,022,598		3,030,816
Commercial construction		-		-		-		7,101		7,101		639,071		646,172
Residential real estate		698		-		-		2,910		3,608		318,699		322,307
Consumer		-		-		-		-		-		2,435		2,435
Total	$	6,510	$	2,127	$	3,098	$	51,321	$	63,056	$	5,052,417	$	5,115,473

Included in the 90 days or greater past due and still accruing category as of ~~March 31,~~September 30, 2019 are purchased credit-impaired loans, net of fair value marks, which accretes income per the valuation at date of acquisition.

December 31, 2018
90 Days or
Greater Past Total Past
30-59 Days 60-89 Days Due and Still Due and
Past Due Past Due Accruing Nonaccrual Nonaccrual Current Gross Loans
Commercial $ 1,673 $ - $ 1,647 $ 29,340 $ 32,660 $ 956,098 $ 988,758
Commercial real estate 6,162 1,840 - 15,135 23,137 2,755,030 2,778,167
Commercial construction 2,496 564 - 2,934 5,994 459,395 465,389
Residential real estate 3,455 119 - 4,446 8,020 301,971 309,991
Consumer - - - - - 2,594 2,594
Total $ 13,786 $ 2,523 $ 1,647 $ 51,855 $ 69,811 $ 4,475,088 $ 4,544,899

~~The amount reported~~

	December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Gross Loans
		(dollars in thousands)
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

Included in the 90 days or greater past due and still accruing category as of December 31, 2018 are ~~comprised of PCI~~purchased credit-impaired loans, net of ~~their~~ fair value marks, which ~~are accreting~~accretes income per ~~their~~the valuation at date of acquisition.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(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 quality, and the related portion of the allowance for loan losses that are allocated to each loan portfolio segment:

March 31, 2019
Commercial Commercial Residential
    Commercial     real estate     construction     real estate     Consumer     Unallocated     Total
(dollars in thousands)
ALLL
Individually evaluated for impairment $ - $ 1,035 $      - $      25 $      - $ - $ 1,060
Collectively evaluated for impairment 8,460 19,526 4,982 1,141 1 488 34,598
Acquired portfolio 200 1,000 - - - - 1,200
Acquired with deteriorated credit quality - - - - - - -
Total $ 8,660 $ 21,561 $ 4,982 $ 1,166 $ 1 $ 488 $ 36,858

Gross loans
Individually evaluated for impairment $ 28,870 $ 15,108 $ 6,326 $ 2,441 $ - $ 52,745
Collectively evaluated for impairment 893,678 2,603,459 498,503 267,903 3,826 4,267,369
Acquired portfolio 122,492 434,448 41,561 48,871 330 647,702
Acquired with deteriorated credit quality 6,159 1,181 1,649 - - 8,989
Total $      1,051,199 $      3,054,196 $ 548,039 $ 319,215 $ 4,156 $      4,976,805

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

	September 30, 2019
	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Unallocated		Total
	(dollars in thousands)
ALLL
Individually evaluated for impairment	$	-	$	23	$	1,339	$	24	$	-	$	-	$	1,386
Collectively evaluated for impairment		8,125		19,987		5,836		1,737		4		496		36,185
Acquired portfolio		200		1,000		-		-		-		-		1,200
Acquired with deteriorated credit quality		-		-		-		-		-		-		-
Total	$	8,325	$	21,010	$	7,175	$	1,761	$	4	$	496	$	38,771

Gross loans
Individually evaluated for impairment	$	41,030	$	12,524	$	12,545	$	1,797		$-			$	67,896
Collectively evaluated for impairment		977,895		2,645,903		597,352		276,457		2,162				4,499,769
Acquired portfolio		89,359		371,266		36,275		44,053		273				541,226
Acquired with deteriorated credit quality		5,459		1,123		-		-		-				6,582
Total	$	1,113,743	$	3,030,816	$	646,172	$	322,307	$	2,435			$	5,115,473

	December 31, 2018
	Commercial		Commercial real estate		Commercial construction		Residential 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

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(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, 2018. A summary of the activity in the ~~allowance for loan losses by loan segment~~ALLL is as follows:

Three Months Ended March 31, 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 - (2,676 ) - - - - (2,676 )

Recoveries 71 - - 2 7 - 80

Provision for loan losses (1,286 ) 5,390 463 (102 ) (8 ) 43 4,500

Balance at March 31, 2019 $ 8,660 $ 21,561 $ 4,982 $ 1,166 $ 1 $ 488 $ 36,858

Three Months Ended March 31, 2018
Commercial Commercial Residential
    Commercial     real estate     construction     real estate     Consumer     Unallocated     Total
(dollars in thousands)
Balance at December 31,
2017 $ 8,233 $ 17,112 $ 4,747 $ 1,050 $ 1 $ 605 $ 31,748

Charge-offs (17,020 ) - - (18 ) - - (17,038 )

Recoveries 19 - - - - - 19

Provision for loan losses 17,318 323 25 77 1 56 17,800

Balance at March 31, 2018 $      8,550 $      17,435 $      4,772 $      1,109 $ 2 $      661 $      32,529

	Three Months Ended September 30, 2019
	Commercial			Commercial real estate			Commercial construction		Residential real estate			Consumer			Unallocated			Total
	(dollars in thousands)
Balance at June 30, 2019	$	8,721		$	21,485		$	5,542	$	1,208		$	2		$	740		$	37,698

Charge-offs		-			(387	)		-		(557	)		(20	)		-			(964	)

Recoveries		28			-			-		-			9			-			37

Provision		(424	)		(88	)		1,633		1,110			13			(244	)		2,000

Balance at September 30, 2019	$	8,325		$	21,010		$	7,175	$	1,761		$	4		$	496		$	38,771

	Three Months Ended September 30, 2018
	Commercial		Commercial real estate		Commercial construction			Residential real estate		Consumer			Unallocated		Total
	(dollars in thousands)
Balance at June 30, 2018	$	8,960	$	18,221	$	4,812		$	1,167	$	3		$	431	$	33,594

Charge-offs		-		-		-			-		(6	)		-		(6	)

Recoveries		56		-		-			-		5			-		61

Provision for loan losses		933		7		(22	)		48		1			133		1,100

Balance at September 30, 2018	$	9,949	$	18,228	$	4,790		$	1,215	$	3		$	564	$	34,749

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(unaudited)

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

	Nine Months Ended September 30, 2019
	Commercial		Commercial real estate			Commercial construction		Residential 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		-		(3,469	)		-		(557	)		(20	)		-		(4,046	)

Recoveries		214		30			-		3			16			-		263

Provision		(1,764)		5,602			2,656		1,049			6			51		7,600

Balance at September 30, 2019	$	8,325	$	21,010		$	7,175	$	1,761		$	4		$	496	$	38,771

	Nine Months Ended September 30, 2018
	Commercial			Commercial real estate		Commercial construction		Residential 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	)		(7	)		-			(17,091	)

Recoveries		87			-		-		-			5			-			92

Provision		18,695			1,116		43		183			4			(41	)		20,000

Balance at September 30, 2018	$	9,949		$	18,228	$	4,790	$	1,215		$	3		$	564		$	34,749

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, longer amortization of principal payments, maturity extension, 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 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 ~~March 31,~~September 30, 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.

As of ~~March 31,~~September 30, 2019, TDRs totaled ~~$30.9~~$51.5 million, of which ~~$22.7~~$31.8 million were on nonaccrual status and ~~$8.2~~$19.7 million were performing under their restructured terms. As of December 31, 2018, TDRs totaled $34.5 million, of which $23.3 million were on nonaccrual status and $11.2 million were performing under their restructured terms. The Company has allocated ~~$-0-~~$1.4 million and ~~$147 thousand~~$0.1 million of specific allowance ~~for the three months ended March 31,~~as of September 30, 2019 and ~~March 31,~~September 30, 2018, respectively.

~~There were no loans modified as TDRs during the three months ended March 31, 2019.~~ There were no charge-offs in connection with a loan modification at the time of modification during the three and nine months ended ~~March 31,~~September 30, 2019. There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ended ~~March 31,~~September 30, 2019.

The following table presents loans by class modified as TDRs that occurred during the ~~three~~nine months ended ~~March 31, 2018 (dollars in thousands):~~September 30, 2019:

Pre-Modification Post-Modification
Outstanding Outstanding
Number of Recorded Recorded
Loans Investment Investment
Troubled debt restructurings:
Commercial 3 $ 2,077 $ 2,077
Commercial real estate 1 60 60
Commercial construction 2 1,839 1,839

Total 6 $ 3,976 $ 3,976

	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:	(dollars in thousands)
Commercial	8	$	13,753	$	13,753
Commercial real estate	2		2,635		2,635
Commercial construction	3		5,630		5,630

Total	13	$	22,018	$	22,018

These ~~six~~13 loan modifications included were maturity extensions.

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

	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
TDRs	(dollars in thousands)
Commercial	31	$	15,737	$	15,737
Commercial real estate	2		209		209
Commercial construction	2		1,839		1,839
Residential real estate	2		454		454

Total	37	$	18,239	$	18,239

Included in the commercial loan segment of the troubled debt restructurings are 27 taxi medallion loans totaling $11.2 million. All 27 taxi medallion loans included above were on nonaccrual status prior to modification, and remain on nonaccrual status post-modification. All loan modifications during the nine months ended September 30, 2018 included interest rate reductions and maturity extensions.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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.

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

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

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

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

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

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Securities Available-for-Sale and Equity Securities:Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.

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

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(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 ~~March 31,~~September 30, 2019 and December 31, 2018 are as follows:

March 31, 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 $ 43,280 $ - $ 43,280 $ -
Residential mortgage pass-through securities 253,201 - 253,201 -
Commercial mortgage pass-through securities 6,915 - 6,915 -
Obligations of U.S. states and political subdivision 168,170 - 158,859 9,311
Corporate bonds and notes 35,071 - 35,071 -
Asset-backed securities 8,187 - 8,187 -
Certificates of deposit 150 - 150 -
Other securities 1,565 1,565 - -
Total available-for-sale $ 516,539 $ 1,565 $ 505,663 $ 9,311

Equity securities 11,564 11,564 - -

Derivatives 768 - 768 -
Total assets $ 528,871 $ 13,129 $ 506,431 $ 9,311

			September 30, 2019
			Fair Value Measurements at Reporting Date Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(dollars in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available-for-sale:
Federal agency obligations	$	24,535	$	-	$	24,535	$	-
Residential mortgage pass-through securities		215,805		-		215,805		-
Commercial mortgage pass-through securities		5,090		-		5,090		-
Obligations of U.S. states and political subdivision		143,656		-		134,475		9,181
Corporate bonds and notes		28,250		-		28,250		-
Asset-backed securities		6,094		-		6,094		-
Certificates of deposit		150		-		150		-
Other securities		2,269		2,269		-		-
Total available-for-sale	$	425,849	$	2,269	$	414,399	$	9,181

Equity securities		11,231		11,231		-		-
Total assets	$	437,080	$	13,500	$	414,399	$	9,181

Liabilities
Derivatives		380		-		380		-
Total liabilities	$	380	$	-	$	380	$	-

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(unaudited)

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

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

			December 31, 2018
			Fair Value Measurements at Reporting Date Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (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~~nine months ended ~~March 31,~~September 30, 2019 and during the year ended December 31, 2018.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis at ~~March 31,~~September 30, 2019 and December 31, 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 parts of these loans directly from the purchasing financial institutions (Level 2).

Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. Fair value of these loans is determined based on the terms of the loan, such as interest rate, maturity date, reset term, as well as sales of similar assets (Level 3).

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(unaudited)

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

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 nonrecurring basis, the fair value measurements at ~~March 31,~~September 30, 2019 and December 31, 2018 are as follows:

Fair Value Measurements at Reporting Date Using
Quoted
Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
March 31, Assets Inputs Inputs
Assets measured at fair value on a nonrecurring basis: 2019 (Level 1) (Level 2) (Level 3)
Impaired loans: (dollars in thousands)
Commercial real estate $ 3,949 $ - $ - $ 3,949
Residential real estate 231 231

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: 2018 (Level 1) (Level 2) (Level 3)
Impaired loans: (dollars in thousands)
Commercial real estate $ 1,481 $ - $ - $ 1,481
Residential real estate 231 - - 231

			Fair Value Measurements at Reporting Date Using
Assets measured at fair value on a nonrecurring basis:	Carrying Value at September 30, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:	(dollars in thousands)
Commercial real estate	$	365	$	-	$	-	$	365
Commercial construction		5,128		-		-		5,128
Residential real estate		240		-		-		240

			Fair Value Measurements at Reporting Date Using
Assets measured at fair value on a nonrecurring basis:	Carrying Value at December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:	(dollars in thousands)
Commercial real estate	$	1,481	$	-	$	-	$	1,481
Residential real estate		231		-		-		231

Impaired loans–Collateral dependent impaired loans at ~~March 31,~~September 30, 2019 that required a valuation allowance were ~~$5.0~~$7.1 million with a related valuation allowance of ~~$1.0~~$1.4 million compared to $1.7 million with a related valuation allowance of $36 thousand at December 31, 2018.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(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 ~~three~~nine months ended ~~March 31,~~September 30, 2019 and for the year ended December 31, 2018:

Municipal
Securities
      (dollars in thousands)
Beginning balance, January 1, 2019 $ 9,377
Principal paydowns (66 )
Ending balance, March 31, 2019 $                      9,311

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

	Municipal Securities
	(dollars in thousands)
Beginning balance, January 1, 2019	$	9,377
Principal paydowns		(196	)
Ending balance, September 30, 2019	$	9,181

	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 ~~March 31,~~September 30, 2019 and December 31, 2018. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.

March 31, 2019
Valuation Unobservable
Fair Value Techniques Input Range
Securities available-for-sale: (dollars in thousands)
Municipal securities $ 9,311 Discounted cash flows Discount rate 2.9 %

December 31, 2018
Valuation Unobservable
Fair Value Techniques Input Range
Securities available-for-sale: (dollars in thousands)
Municipal securities $ 9,377 Discounted cash flows Discount rate 2.9 %

September 30, 2019

Fair Value

Valuation

Techniques

Unobservable

Input

Range

Securities available-for-sale:

(dollars in thousands)

Municipal securities

9,181

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

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(unaudited)

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

Nonrecurring basis:The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a 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.

Valuation Unobservable
March 31, 2019 Fair Value Techniques Input Range
Impaired loans: (dollars in thousands)
Commercial real estate $ 3,949 Sales comparison approach Adjustment for differences between the comparable sales 0% - 20% [10%]
Residential real estate $ 231 Sales comparison approach Adjustment for differences between the comparable sales 0% - 7% [2%]

Valuation Unobservable
December 31, 2018 Fair Value Techniques Input Range
Impaired loans: (dollars in thousands)
Commercial real estate $ 1,481 Sales comparison approach Adjustment for differences between the comparable sales 6% - 9% [8%]
Residential real estate $ 231 Sales comparison approach Adjustment for differences between the comparable sales 0% - 10% [5%]

32 September 30, 2019	Fair Value		Valuation Techniques	Unobservable Input	Range
Impaired loans:	(dollars in thousands)
Commercial real estate	$	365	Sales comparison approach	Adjustment for differences between the comparable sales	0% to 20% [10%]
Commercial construction		5,128	Sales comparison approach	Adjustment for differences between the comparable sales	-10% to 13% [2%]
Residential real estate		240	Sales comparison approach	Adjustment for differences between the comparable sales	0% to 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% to 9% [8%]
Residential real estate		231	Sales comparison approach	Adjustment for differences between the comparable sales	0% to 10% [5%]

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(unaudited)

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

As of ~~March 31,~~September 30, 2019 the fair value measurements presented are consistent with Topic 820,Fair Value Measurement, in which fair value represents exit price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of ~~March 31,~~September 30, 2019 and December 31, 2018:

Fair Value Measurements
Quoted
Prices in
Active Significant
Markets for Other Significant
Identical Observable Unobservable
Carrying Fair Assets Inputs Inputs
Amount Value (Level 1) (Level 2) (Level 3)
(dollars in thousands)
March 31, 2019
Financial assets:
Cash and due from banks $ 172,548 $ 172,548 $ 172,548 $ - $ -
Securities available-for-sale 516,539 516,539 1,565 505,663 9,311
Investment in restricted stocks 31,727 n/a n/a n/a n/a
Equity securities 11,564 11,564 11,564 - -
Net loans 4,935,793 4,875,420 - - 4,875,420
Derivatives 768 768 - 768 -
Accrued interest receivable 21,198 21,198 - 2,759 18,439

Financial liabilities:
Noninterest-bearing deposits 833,090 833,090 833,090 - -
Interest-bearing deposits 3,760,908 3,764,654 2,216,661 1,547,993 -
Borrowings 603,412 603,855 - 603,855 -
Subordinated debentures 128,638 134,962 - 134,962 -
Accrued interest payable 4,869 4,869 - 4,869 -

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 4,506,138 4,402,878 - - 4,402,878
Derivatives 1,159 1,159 - 1,159 -
Accrued interest receivable 18,214 18,214 - 2,064 16,150

Financial liabilities:
Noninterest-bearing deposits 768,584 768,584 768,584 - -
Interest-bearing deposits 3,323,508 3,320,640 1,957,503 1,363,137 -
Borrowings 600,001 598,598 - 598,598 -
Subordinated debentures 128,556 132,426 - 132,426 -
Accrued interest payable 6,764 6,764 - 6,764 -

					Fair Value Measurements
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(dollars in thousands)
September 30, 2019
Financial assets:
Cash and due from banks	$	194,009	$	194,009	$	194,009	$	-	$	-
Securities available-for-sale		425,849		425,849		2,269		414,399		9,181
Investment in restricted stocks		27,946		n/a		n/a		n/a		n/a
Equity securities		11,231		11,231		11,231		-		-
Net loans		5,071,700		5,087,076		-		-		5,087,076
Loans held-for-sale		33,245		33,245		-		1,598		31,647
Accrued interest receivable		21,024		21,024		-		2,262		18,762

Financial liabilities:
Noninterest-bearing deposits		828,190		828,190		828,190		-		-
Interest-bearing deposits		3,923,044		3,935,294		2,349,308		1,585,986		-
Borrowings		512,456		514,331		-		514,331		-
Subordinated debentures		128,802		137,790		-		137,790		-
Derivatives		380		380		-		380		-
Accrued interest payable		4,509		4,509		-		4,509		-

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		4,506,138		4,402,878		-		-		4,402,878
Derivatives		1,159		1,159		-		1,159		-
Accrued interest receivable		18,214		18,214		-		2,064		16,150

Financial liabilities:
Noninterest-bearing deposits		768,584		768,584		768,584		-		-
Interest-bearing deposits		3,323,508		3,320,640		1,957,503		1,363,137		-
Borrowings		600,001		598,598		-		598,598		-
Subordinated debentures		128,556		132,426		-		132,426		-
Accrued interest payable		6,764		6,764		-		6,764		-

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(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.

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. Comprehensive Income

Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from ~~nonowner~~non-owner 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 ~~changes in fair value of derivatives~~ and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, each net of taxes.

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

Details about Accumulated Other Amounts Reclassified from Affected Line Item in the Consolidated
Comprehensive Income Components    Accumulated Other Comprehensive Income    Statements of Income
Three Months Ended
March 31,
2019        2018
Sale of securities available-for-sale $ (8 ) $ - Net gains on sale of securities available-for-sale
Income tax expense
2 -
(6 ) -

Amortization of pension plan net actuarial losses $ 89 $ 91 Salaries and employee benefits
(25 ) (25 ) Income tax benefit
64 66
Total reclassification $                         58 $                       66

Details about Accumulated Other Comprehensive Loss Components	Amounts Reclassified from Accumulated Other Comprehensive Income												Affected Line item in the Statement Where Net Income is Presented
	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
		(dollars in thousands)
Sale of investment securities available for sale	$	(279	)	$	-		$	(280	)	$	-		Net losses on sale of securities available-for-sale
		62			-			62			-		Income tax benefit
		(217	)		-			(218	)		-
Net interest income on swaps		204			-			563			-		Borrowings
		(46	)		-			(125	)		-		Income tax expense
		158			-			438			-
Amortization of pension plan net actuarial losses		(90	)		(91	)		(269	)		(274	)	Other components of net periodic pension expense
		26			26			76			77		Income tax benefit
		(64	)		(65	)		(193	)		(197	)
Total reclassification	$	(123	)	$	(65	)	$	(27	)	$	(197	)

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(unaudited)

Note 8. Comprehensive Income – (continued)

Accumulated other comprehensive loss at ~~March 31,~~September 30, 2019 and December 31, 2018 consisted of the following:

March 31, December 31,
2019 2018
(dollars in thousands)
Investment securities available-for-sale, net of tax $ (1,710 ) $ (5,841 )
Cash flow hedge, net of tax 555 837
Defined benefit pension and post-retirement plans, net of tax (4,125 ) (3,785 )
Total $ (5,280 ) $ (8,789 )

	September 30, 2019			December 31, 2018
		(dollars in thousands)
Investment securities available-for-sale, net of tax	$	3,138		$	(5,841	)
Cash flow hedge, net of tax		(270	)		837
Defined benefit pension and post-retirement plans, net of tax		(3,996	)		(3,785	)
Total	$	(1,128	)	$	(8,789	)

Note 9. Premises and Equipment

The Company leases certain premises and equipment under operating leases. At ~~March 31,~~September 30, 2019, the Company had lease liabilities totaling ~~$16.7~~$17.1 million and right-of-use assets totaling ~~$15.3~~$15.8 million. ~~For the three months ended March 31,~~As of September 30, 2019, the weighted average remaining lease term for operating leases was ~~7.3~~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 nine months ended ~~March 31,~~September 30, 2019 was ~~$0.8 million.~~$0.7 million and $2.3 million, respectively.

Rent expense for the three and nine months ended ~~March 31,~~September 30, 2018 prior to adoption of ASU 2016-02, was ~~$0.5 million.~~$0.6 million and $1.6 million, respectively.

There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

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

	September 30, 2019
	(dollars in thousands)
Lease payments due:
Less than 1 year	$	3,265
1 year through less than 2 years		2,887
2 years through less than 3 years		2,479
3 years through less than 4 years		2,133
4 years through 5 years		1,870
After 5 years		6,709
Total undiscounted cash flows		19,343
Impact of discounting		(2,195	)
Total lease liability	$	17,148

March 31, 2019
(dollars in thousands)
Lease payments due:
Less than 1 year $ 2,693
1 year through less than 2 years 2,568
2 years through less than 3 years 2,418
3 years through less than 4 years 2,129
4 years through 5 years 2,143
After 5 years 7,030
Total undiscounted cash flows 18,981
Discounted cash flows (2,262 )
Total lease liability $ 16,719

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2019 are approximately ~~535,300.~~400,593. The Company intends to issue all shares under the Plan in the form of newly issued shares.

Restricted stock, options and 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 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 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.~~recorded as incurred. Stock-based compensation expense was $0.7 million and $1.9 million for the three and nine months ended ~~March 31,~~September 30, 2019, respectively, and ~~March 31, 2018 was $0.8~~$0.6 million and ~~$(0.4)~~$1.3 million for the three and nine months ended September 30, 2018, respectively.

Activity under the Company’s options ~~as of and~~ for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 was as follows:

Weighted-
Average
Weighted- Remaining
Number of Average Contractual
Stock Exercise Term Aggregate
      Options       Price       (in years)       Intrinsic Value
Outstanding at December 31, 2018      108,463 $ 8.35
Granted - -
Exercised (21,991 ) 7.84
Forfeited/cancelled/expired - -
Outstanding at March 31, 2019 86,472 8.48 2.9 $ 970,370

Exercisable at March 31, 2019 86,472 $ 8.48 2.9 $ 970,370

	Number of Stock Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at December 31, 2018	108,463		$	8.35
Granted	-			-
Exercised	(28,937	)		8.96
Forfeited/cancelled/expired	-			-
Outstanding at September 30, 2019	79,526			8.13	2.3	$	1,119,313
Exercisable at September 30, 2019	79,526		$	8.13	2.3	$	1,119,313

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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2019. This amount changes based on the fair market value of the Company’s stock.

Activity under the Company’s restricted shares for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 was as follows:

	Nonvested Shares		Weighted- Average Grant Date Fair Value
Nonvested at December 31, 2018	68,428		$	23.04
Granted	183,467			21.40
Vested	(52,629	)		21.98
Forfeited/cancelled/expired	-			-
Nonvested September 30, 2019	199,266		$	21.81

Weighted-
Average
Nonvested Grant Date
Shares Fair Value
Nonvested at December 31, 2018 68,428 $ 23.04
Granted 42,483 19.88
Vested (46,352 ) 21.98
Forfeited/cancelled/expired - -
Nonvested March 31, 2019 64,559 $ 21.77

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 10. Stock Based Compensation – (continued)

As of ~~March 31,~~September 30, 2019, there was approximately ~~$1,340,000~~$1,233,743 of total unrecognized compensation cost related to nonvested restricted shares granted. The cost is expected to be recognized over a weighted average period of ~~1.5~~2.3 years. A total of ~~42,483~~11,979 restricted shares were granted during the ~~quarter~~three months ended ~~March 31,~~September 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 11,005 17.02
Vested       (52,508 ) 21.26
Unearned at March 31, 2019 80,142       120,213 $ 23.98

	Units (expected)		Units (maximum)	Weighted Average Grant Date Fair 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 September 30, 2019	92,512		120,212	$	24.27

At ~~March 31,~~September 30, 2019, the specific number of shares related to performance units that were expected to vest was ~~80,142,~~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 ~~March 31,~~September 30, 2019 the maximum amount of performance units that ultimately could vest if performance targets were exceeded is ~~120,213.~~120,212. A total of 25,991 shares were netted from the vested shares to satisfy tax obligations. The net ~~issuance~~shares issued from vesting of performance units ~~issued~~ during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 were 26,517 shares.

At ~~March 31,~~September 30, 2019, compensation cost of approximately ~~$1.4~~$0.8 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of ~~1.8~~1.7 years. A total of 35,636 performance units were awarded during the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

A summary of the status of unearned restricted stock units and the ~~change~~changes 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
Forfeited - -
Vested (9,808 ) 21.28
Unearned at March 31, 2019 73,069 $ 23.62

~~At March 31, 2019, the specific number of shares related to restricted stock units that were expected to vest was approximately 73,069.~~

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

Any forfeitures would result in previously recognized expense being reversed. A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient. During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, a total of 4,904 shares were netted out to satisfy tax obligations, resulting in net issuance of 4,904 shares.

At ~~March 31,~~September 30, 2019, compensation cost of approximately ~~$1.7~~$1.4 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of ~~1.8~~2.4 years. A total of 53,454 restricted stock units were awarded during the ~~quarter~~nine months ended ~~March 31,~~September 30, 2019.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 11. Components of Net Periodic Pension Cost

The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until 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 Affected Line Item in the Consolidated
March 31, Statements of Income
2019 2018
(dollars in thousands)
Service cost $ - $ -
Interest cost 113 107 Other components of net periodic pension expense

Expected return on plan assets (174 ) (191 ) Other components of net periodic pension expense
Net amortization 89 91 Other components of net periodic pension expense
Total periodic pension cost $ 28 $ 7

	Three Months Ended September 30, 2019			Three Months Ended September 30, 2018
		(dollars in thousands)
Service cost	$	-		$	-
Interest cost		113			106
Expected return on plan assets		(174	)		(190	)
Net amortization		90			91
Total periodic pension cost	$	29		$	7

	Nine Months Ended September 30, 2019			Nine Months Ended September 30, 2018
		(dollars in thousands)
Service cost	$	-		$	-
Interest cost		339			320
Expected return on plan assets		(522	)		(573	)
Net amortization		269			274
Total periodic pension cost	$	86		$	21

Contributions

The Company did not make a contribution to the Pension Trust during the ~~three~~nine months ended ~~March 31,~~September 30, 2019. The Company does not plan on contributing amounts to the Pension Trust for the remainder of 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)~~

(unaudited)

Note 12. FHLB Borrowings

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

March 31, 2019 December 31, 2018
Amount Rate Amount Rate
(dollars in thousands)
Total FHLB borrowings $ 603,412 2.60 % $ 600,001 2.59 %

By remaining period to maturity:
Less than 1 year $ 439,159 2.58 % $ 405,000 2.57 %
1 year through less than 2 years 81,000 2.85 % 110,000 2.75 %
2 years through less than 3 years 46,000 2.15 % 60,000 2.27 %
3 years through less than 4 years 9,804 2.48 % - -
4 years through 5 years 25,000 2.92 % 25,000 2.92 %
After 5 years 2,926 2.43 % - -
Total FHLB borrowings 603,889 2.60 % 600,000 2.59 %
Fair value (discount) premium (477 ) 1
FHLB borrowings, net $ 603,412 $ 600,001

	September 30, 2019					December 31, 2018
	Amount			Rate		Amount		Rate
	(dollars in thousands)
Total FHLB borrowings	$	512,456		2.25	%	$	600,001	2.59	%

By remaining period to maturity:
Less than 1 year	$	392,169		2.21	%	$	405,000	2.57	%
1 year through less than 2 years		57,000		2.27	%		110,000	2.75	%
2 years through less than 3 years		28,338		2.15	%		60,000	2.27	%
3 years through less than 4 years		32,421		2.82	%		-	-
4 years through less than 5 years		-		-			-	-
After 5 years		2,898		2.43	%		25,000	2.92	%
Total FHLB borrowings		512,826		2.25	%		600,000	2.59	%
Fair value (discount) premium		(370	)				1
FHLB borrowings, net	$	512,456				$	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.

Advances are payable at stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances are fixed rates. The advances at ~~March 31,~~September 30, 2019 were primarily collateralized by approximately $1.9 billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement. At ~~March 31,~~September 30, 2019 the Company had remaining borrowing capacity of approximately ~~$1.0~~$1.1 billion at FHLB.

In June of 2019, the Corporation extinguished $65 million of FHLBNY advances with a weighted average rate of 3.29 percent and a weighted average maturity of 1.1 years. Of that total $40 million of those extinguished advances were putable at the option of the FHLBNY. A pre-tax prepayment penalty of $1.0 million associated with the extinguishment was recorded to noninterest expense.

Note 13. Revenue Recognition

Effective January 1, 2018, the Company adopted ASU 2014-09Revenue from Contracts with Customersand all subsequent amendments to the ASU (collectively, ~~"ASC~~“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.

The Company, using a modified retrospective transition approach, determined that there will neither be noa cumulative effect adjustment to retained earnings as a result of adopting the new standard, nor will the standard have a material impact on our consolidated financial statements including the timing or amounts of revenue recognized.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(unaudited)~~

(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 nine months ended ~~March 31,~~September 30, 2019 and 2018. Items outside of ASC 606 are noted as such.

Three Months Three Months
Ended Ended
March 31, March 31,
2019 2018
(dollars in thousands)
Noninterest income
Service charges on deposits
Overdraft fees $ 274 $ 202
Other 180 155
Interchange income 156 143
Net gains on sales of loans⁽¹⁾ 19 17
Net gains (losses) on equity securities⁽¹⁾ 103 (120 )
Net gains on sale of securities available-for-sale⁽¹⁾ 8 -
Wire transfer fees⁽¹⁾ 117 72
Loan servicing fees⁽¹⁾ 32 23
Bank owned life insurance⁽¹⁾ 822 774
Other 27 21
Total noninterest income $ 1,738 $ 1,287

	Three Months Ended September 30, 2019			Three Months Ended September 30, 2018
	(dollars in thousands)
Noninterest income
Service charges on deposits
Overdraft fees	$	354		$	222
Other		184			186
Interchange income		199			152
Net gains on sales of loans ⁽¹⁾		278			2
Net gains (losses) on equity securities ⁽¹⁾		79			(157	)
Net losses on sale of securities available-for-sale ⁽¹⁾		(279	)		-
Wire transfer fees ⁽¹⁾		128			73
Loan servicing fees ⁽¹⁾		216			16
Bank owned life insurance ⁽¹⁾		915			751
Other		35			27
Total noninterest income	$	2,109		$	1,272

	Nine Months Ended September 30, 2019			Nine Months Ended September 30, 2018
	(dollars in thousands)
Noninterest income
Service charges on deposits
Overdraft fees	$	947		$	590
Other		556			482
Interchange income		558			465
Net gains on sales of loans ⁽¹⁾		343			31
Net gains (losses) on equity securities ⁽¹⁾		340			(325	)
Net losses on sale of securities available-for-sale ⁽¹⁾		(280	)		-
Wire transfer fees ⁽¹⁾		353			222
Loan servicing fees ⁽¹⁾		313			64
Bank owned life insurance ⁽¹⁾		2,570			2,300
Other		89			70
Total noninterest income	$	5,789		$	3,899

⁽¹⁾

Not within scope of ASC ~~606~~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.

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

Note 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 ~~March 31,~~September 30, 2019 was ~~5.60%~~5.12%. 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 ~~March 31,~~September 30, 2019 and December 31, 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~~

Issuance Date

Securities

Issued

Liquidation Value

Coupon Rate

Maturity

Redeemable by Issuer Beginning

12/19/2003

5,000,000

$1,000 per Capital Security

Floating 3-month LIBOR + 285 Basis Points

01/23/2034

01/23/2009

During June 2015, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”). 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 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 ~~March 31,~~September 30, 2019, unamortized costs related to this debt issuance were approximately ~~$227,000.~~$136,000.

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 ~~March 31,~~September 30, 2019, unamortized costs related to this debt issuance were approximately ~~$1,291,000.~~$1,217,000.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 15. Offsetting Assets and Liabilities

Certain financial instrument-related assets and liabilities may, under GAAP, be ~~eligible for~~ offset on the consolidated statements of condition because they are subject to master netting agreements or similar ~~agreements. However,~~agreements, although the Company ~~does not elect~~has elected to ~~offset~~disclose such arrangements on ~~the~~a gross basis on its 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 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 following table presents information about financial instruments that are eligible for offset as of ~~March 31,~~September 30, 2019 and December 31, 2018:

Gross Amounts Not Offset
Net Amounts
Gross Amounts of Assets
Offset in the Presented in the Cash or
Statement of Statement of Financial Financial
Gross Amounts Financial Financial Instruments Instrument Net
Recognized Condition Condition Recognized Collateral Amount
(dollars in thousands)
March 31, 2019
Assets:
Interest rate swaps $ 768 $ - $ 768 $ - $ - $ 768

December 31, 2018
Assets:
Interest rate swaps $ 1,159 $ - $ 1,159 $ - $ - $ 1,159

							Gross Amounts Not Offset
	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments Recognized		Cash or Financial Instrument Collateral		Net Amount
	(dollars in thousands)
September 30, 2019
Liabilities:
Interest rate swaps	$	380	$	-	$	380	$	-	$	380	$	-

December 31, 2018
Assets:
Interest rate swaps	$	1,159	$	-	$	1,159	$	-	$	-	$	1,159

As of ~~March 31, 2019 and~~ December 31, 2018, there was no financial collateral pledged to our interest rate swaps. As these swap positions were not within the contractually agreed upon collateral requirement there was no collateral pledged to, or from, the respective counterparties.

Item 2. ~~Management’s~~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 ~~March 31,~~September 30, 2019 and December 31, 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; (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.~~anticipated and (11) the ability to complete, the proposed merger transaction with BKJ (the “BKJ Transaction”) on the proposed terms within the expected timeframe; the risk that the businesses of BKJ and ConnectOne Bancorp will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; expected revenue synergies and cost savings from the BKJ Transaction may not be fully realized within the expected timeframe; revenues following the BKJ Transaction may be lower than expected; and customer and employee relationships and business operations may be disrupted by the BKJ Transaction. 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, ~~business combinations,~~ the evaluation of the impairment of goodwill and the evaluation of deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies is provided below.

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

The evaluation of the adequacy of the ALLL includes, among other factors, an analysis of historical loss rates by loan 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 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 6 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~~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 7 of the Notes to Consolidated Financial Statements for further discussion.

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

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

Operating Results Overview

On January 2, 2019, the acquisition of Greater Hudson Bank was completed and first quarter 2019 results reflect the operations of the combined entity. Historical financial information includes only the operations of ConnectOne Bank.

Net income for the three months ended ~~March 31,~~September 30, 2019 ~~was $11.6~~amounted to $21.7 million compared to ~~$4.3~~$19.9 million for the comparable three-month period ended ~~March 31,~~September 30, 2018. The Company’s diluted earnings per share were ~~$0.33~~$0.61 for both the three months ended September 30, 2019 and September 30, 2018. The increase in net income was primarily attributable to an increase in net interest income and an increase in other income, offset by increases in provision for loan losses, noninterest expenses and income tax expense. Included in noninterest expense for the three months ended ~~March 31,~~September 30, 2019 was a FDIC small bank assessment credit of $1.3 million.

Net income for the nine months ended September 30, 2019 amounted to $52.6 million compared to $41.7 million for the comparable nine-month period ended September 30, 2018. The Company’s diluted earnings per share were $1.48 for the nine months ended September 30, 2019 as compared with diluted earnings per share of ~~$0.13~~$1.29 for the comparable ~~three-month~~six-month period ended ~~March 31,~~September 30, 2018. The increase in net income and diluted earnings per share was primarily attributable to an increase in net interest income and a decrease in provision for loan losses, ~~and an increase in net interest income,~~ partially offset by ~~an increase~~increases in noninterest expenses and income tax ~~expenses.~~expense. The increase in net interest income was mainly attributable to loan growth resulting from the GHB acquisition. The increase in noninterest expenses was primarily attributable to merger-related expenses, a loss on extinguishment of debt and an increase in salaries and employee benefits and professional and consulting expenses, partially offset by the aforementioned FDIC credit. The decrease in provision for loan losses was primarily attributable to provisioning related to the taxi medallion portfolio ~~for~~during the three months ended March 31, 2018.

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 three months ended ~~March 31,~~September 30, 2019 ~~increased by $6.9~~was $48.9 million, an increase of $8.5 million, or ~~17.9%~~21.0%, from the ~~comparable three-month period~~three months ended ~~March 31,~~September 30, 2018, resulting from an increase in average total interest-earning assets of ~~15.1%~~27.0%, primarily loans, that resulted from the acquisition of GHB and a widening of the net interest margin of ~~8 basis-points~~14 basis-point to ~~3.34%~~3.44% for the three months ended September 30, 2019 from ~~3.26%.~~3.30% for the three months ended September 30, 2018. Included in net interest income was accretion and amortization of purchase accounting adjustments of ~~$1.2~~$1.6 million during the three months ended ~~March 31,~~September 30, 2019 and $0.2 million during the ~~comparable three-month period~~three months ended ~~March 31,~~September 30, 2018. Excluding these purchase accounting adjustments, the adjusted net interest margin was ~~3.25% in~~3.33% for the ~~first quarter of~~three months ended September 30, 2019, widening by ~~1 basis-point~~4 basis-points from 3.29% for the ~~first quarter of 2018 adjusted net interest margin of 3.24%.~~three months ended September 30, 2018. The increase in the adjusted net interest margin was primarily attributable to ~~an improved asset-mix, a higher yield earned on interest-earning assets and growth in noninterest-bearing deposits, partially offset by higher funding costs,~~increased loan portfolio yields, primarily due to an improved loan mix and higher spreads on new business.

Fully taxable equivalent net interest income for the nine months ended September 30, 2019 was $140.5 million, an increase of $22.1 million, or 18.6%, from the nine months ended September 30, 2018, resulting from an increase in total average interest-earning assets of 16.0% due to the acquisition of GHB. Net interest margin was 3.36% for the nine months ended September 30, 2019, widening by 7 basis-points from 3.29% for the nine months ended September 30, 2018. Included in net interest income was accretion and amortization of purchase accounting adjustments of $4.5 million and $1.1 million during the nine months ended September 30, 2019 and 2018, respectively. Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.25% for both ~~increases in short-term interest rates~~the nine months ended September 30, 2019 and ~~increased deposit competition.~~September 30, 2018.

The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three and nine months ended ~~March 31,~~September 30, 2019 and 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 March 31,
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)} $ 531,083 $ 4,369 3.34 % $ 441,563 $ 2,917 2.68 %
Total loans^{(2) (3) (4)} 4,907,683 60,597 5.01 4,247,997 47,272 4.51
Federal funds sold and interest-bearing with banks 57,690 357 2.51 78,194 264 1.37
Restricted investment in bank stocks 26,478 457 7.00 31,699 485 6.21
Total interest-earning assets 5,522,934 65,780 4.83 4,799,453 50,938 4.30
Noninterest-earning assets:
Allowance for loan losses (35,499 ) (32,113 )
Other noninterest-earning assets 421,626 321,483
Total assets $ 5,909,061 $ 5,088,823

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits $ 1,515,249 8,303 2.22 $ 1,207,368 4,788 1.61
Other interest-bearing deposits 2,236,630 7,048 1.28 1,815,122 2,900 0.65
Total interest-bearing deposits 3,751,879 15,351 1.66 3,022,490 7,688 1.03

Borrowings 486,687 3,024 2.52 630,117 2,926 1.88
Subordinated debentures⁽⁵⁾ 128,585 1,845 5.82 115,182 1,674 5.89
Finance lease 2,479 37 6.05 2,622 40 6.03
Total interest-bearing liabilities 4,369,630 20,257 1.88 3,770,411 12,328 1.33

Demand deposits 824,115 724,471
Other liabilities 35,148 18,912
Total noninterest-bearing liabilities 859,263 743,383
Stockholders’ equity 680,168 575,029
Total liabilities and stockholders’ equity $ 5,909,061 $ 5,088,823
Net interest income (tax-equivalent basis) 45,523 38,610
Net interest spread⁽⁶⁾ 2.95 % 2.97 %
Net interest margin⁽⁷⁾ 3.34 % 3.26 %
Tax-equivalent adjustment (571 ) (463 )
Net interest income $ 44,952 $ 38,147

	Three Months Ended September 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)}	$	445,492		$	3,053		2.72	%	$	423,566		$	3,147		2.95	%
Loans receivable and loans held-for-sale ^{(2) (3) (4)}		5,127,365			67,068		5.19			4,362,905			51,973		4.73
Federal funds sold and interest-bearing with banks		50,289			278		2.19			42,164			183		1.72
Restricted investment in bank stocks		25,912			502		7.69			28,043			530		7.50
Total interest-earning assets		5,649,058			70,901		4.98			4,856,678			55,833		4.56
Noninterest-earning assets:
Allowance for loan losses		(37,704	)							(33,943	)
Other noninterest-earning assets		448,059								363,438
Total assets	$	6,059,413							$	5,186,173

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits	$	1,598,378		$	9,934		2.47			1,296,165		$	6,477		1.98
Other interest-bearing deposits		2,300,886			7,416		1.28			1,854,763			4,204		0.90
Total interest-bearing deposits		3,899,264			17,350		1.77			3,150,928			10,681		1.34

Borrowings		467,230			2,754		2.34			531,251			2,839		2.12
Subordinated debentures ⁽⁵⁾		128,747			1,843		5.68			128,420			1,831		5.66
Capital lease		2,393			36		5.97			2,554			38		5.90
Total interest-bearing liabilities		4,497,634			21,983		1.94			3,813,153			15,389		1.60

Noninterest-bearing demand deposits		810,247								761,782
Other liabilities		37,530								21,110
Total noninterest-bearing liabilities		847,777								782,892
Stockholders’ equity		714,002								590,128
Total liabilities and stockholders’ equity	$	6,059,413							$	5,186,173
Net interest income (tax-equivalent basis)					48,918								40,444
Net interest spread ⁽⁶⁾							3.04	%							2.96	%
Net interest margin ⁽⁷⁾							3.44	%							3.30	%
Tax-equivalent adjustment					(512	)							(482	)
Net interest income				$	48,406							$	39,962


⁽¹⁾		Average balances are based on amortized cost and ~~includes~~include equity securities.
⁽²⁾		Interest income is presented on a tax-equivalent basis using a 21% ~~federal tax rate.~~.
⁽³⁾		Includes loan fee income.
⁽⁴⁾		Total loans include loans held-for-sale and nonaccrual loans.
⁽⁵⁾		Average balances are net of debt issuance costs of ~~$1,570~~$1,407 and ~~$1,639 for the three months ended March 31,~~$1,735 as of September 30, 2019 and ~~March 31,~~September 30, 2018, respectively. Amortization expense related to debt issuance costs included in interest expense was ~~$83 and $86~~$82 for both the three months ended ~~March 31,~~September 30, 2019 and ~~March 31, 2018, respectively.~~September 30, 2018.
⁽⁶⁾		Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax-equivalent basis.
⁽⁷⁾		Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.
⁽⁸⁾		Rates are annualized.

Average Statements of Condition with Interest and Average Rates

	Nine Months Ended September 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)}	$	496,886		$	11,361		3.06	%	$	432,475		$	9,200		2.84	%
Loans receivable and loans held-for-sale ^{(2) (3) (4)}		5,014,324			191,466		5.11			4,294,792			148,994		4.64
Federal funds sold and interest-bearing with banks		54,172			925		2.28			63,506			607		1.28
Restricted investment in bank stocks		28,106			1,369		6.51			30,402			1,517		6.67
Total interest-earning assets		5,593,488			205,121		4.90			4,821,175			160,318		4.45
Noninterest-earning assets:
Allowance for loan losses		(36,873	)							(32,915	)
Other noninterest-earning assets		433,900								337,509
Total assets	$	5,990,515							$	5,125,769

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits	$	1,555,185		$	27,603		2.37		$	1,261,660		$	17,096		1.81
Other interest-bearing deposits		2,420,535			21,695		1.29			1,811,966			10,442		0.77
Total interest-bearing deposits		3,795,720			49,298		1.74			3,073,626			27,538		1.20

Borrowings		518,988			9,647		2.49			591,348			8,856		2.00
Subordinated debentures ⁽⁵⁾		128,667			5,533		5.75			124,029			5,345		5.76
Capital lease		2,436			110		6.02			2,588			117		6.04
Total interest-bearing liabilities		4,445,811			64,588		1.94			3,791,591			41,856		1.48

Noninterest-bearing demand deposits		811,689								735,345
Other liabilities		36,508								18,728
Total noninterest-bearing liabilities		848,197								754,073
Stockholders’ equity		696,507								580,105
Total liabilities and stockholders’ equity	$	5,990,515							$	5,125,769
Net interest income (tax-equivalent basis)					140,533								118,462
Net interest spread ⁽⁶⁾							2.96	%							2.97	%
Net interest margin ⁽⁷⁾							3.36	%							3.29	%
Tax-equivalent adjustment					(1,645	)							(1,408	)
Net interest income				$	138,888							$	117,054


⁽¹⁾	Average balances are based on amortized cost and include equity securities.
⁽²⁾	Interest income is presented on a tax-equivalent basis using 21%.
⁽³⁾	Includes loan fee income.
⁽⁴⁾	Total loans include loans held-for-sale and nonaccrual loans.
⁽⁵⁾	Average balances are net of debt issuance costs of $1,529 and $1,730 as of September 30, 2019 and September 30, 2018, respectively. Amortization expense related to debt issuance costs included in interest expense was $164 and $168 for the nine months September 30, 2019 and September 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 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 ~~$1.7~~$2.1 million for the three months ended ~~March 31,~~September 30, 2019, compared with $1.3 million for the three months ended ~~March 31,~~September 30, 2018. Included in noninterest income for the three months ended September 30, 2019 were losses on sales of securities available-for-sale of $0.3 million. Excluding those losses, noninterest income increased $1.1 million from the three months ended September 30, 2018. Noninterest income consists of income on bank owned life insurance (“BOLI”), net gains on sales of loans held-for-sale, ~~net gains (losses) on equity securities and~~ deposit service fees, loan fees, net gains on equity securities and other income. The increase from the prior year ~~first~~third quarter was attributable to increases in deposit, loan and other income of $0.4 million, net gains on equity securities $0.2 million, BOLI income of $0.2 million and net gains on sale of loans held-for-sale of $0.3 million. The increase in deposit, loan and other income was mainly attributable to increases in overdraft fees, loan servicing fees, wire transfer fees, and fees related to our BoeFly subsidiary.

Noninterest income totaled $5.8 million for the nine months ended September 30, 2019, compared with $3.9 million for the nine months ended September 30, 2018. Included in noninterest income for the nine months ended September 30, 2019 were losses on sale of securities available-for-sale of $0.3 million. Excluding these losses, noninterest income increased $2.2 million from the nine months ended September 30, 2018. The increase from the prior year comparable period was attributable to increases in deposit, loan and other income of $0.9 million, net gains on equity securities of $0.7 million, BOLI income of $0.3 million and increases in net gains sales of loans held-for-sale of $0.3 million. The increase in deposit, loan and other ~~income.~~income was mainly attributable to increases in overdraft fees, loan servicing fees and wire transfer fees.

Noninterest Expenses

Noninterest expenses totaled ~~$28.1~~$20.4 million for the three months ended ~~March 31,~~September 30, 2019, compared to ~~$16.9~~$18.1 million for the three months ended ~~March 31,~~September 30, 2018. Included in noninterest expenses was a FDIC small bank assessment credit for $1.3 million. Excluding this item, noninterest expenses increased $3.6 million from the three months ended September 30, 2018. The increase from the prior year third quarter was primarily attributable to increases in salaries and employee benefits of $2.2 million, professional and consulting expenses of $0.6 million, occupancy and equipment of $0.3 million, and marketing and advertising expenses of $0.3 million. The increases over the prior year third quarter were primarily attributable to the acquisition of GHB.

Noninterest expenses totaled $70.0 million for the nine months ended September 30, 2019, compared to $52.1 million for the nine months ended September 30, 2018. Included in noninterest expenses during the nine months ended September 30, 2019 and September 30, 2018 were $8.1 million and $0.4 million, respectively, in merger-related expenses. Also included in noninterest expenses during the nine months ended September 30, 2019 was $1.0 million related to a loss on extinguishment of debt and a $1.3 million FDIC assessment credit. Excluding these items, noninterest expenses increased ~~by $11.1~~$10.5 million from the prior year ~~first quarter due~~comparable period. The increase from the prior year comparable period was primarily attributable to ~~$7.6 million in merger expenses, an increase of $2.3 million~~increases in salaries and employee benefits ~~$0.5~~of $6.7 million, in professional and consulting ~~$0.4~~expenses of $1.6 million, in occupancy and equipment of $1.0 million, amortization of core deposit intangibles of $0.6 million and marketing and advertising expenses of $0.3 ~~million in other expenses. These~~million. The increases over the prior year comparable period were ~~all~~ primarily attributable to the ~~expansion of our franchise through the~~ acquisition of ~~Greater Hudson Bank.~~GHB.

Income Taxes

Income tax expense was ~~$2.5~~$6.4 million for the three months ended ~~March 31,~~September 30, 2019, compared to ~~$0.4~~$2.1 million for the three months ended ~~March 31,~~September 30, 2018. The increase in income tax expense was primarily ~~the result of an increase in pretax~~attributable to higher income ~~when compared to the prior year first quarter.~~before taxes. The effective tax rate for the three months ended ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018 was ~~17.6%~~22.7% and ~~9.5%~~9.6%, respectively. Included in income tax expense for the third quarter of 2018 were benefits of $1.4 million resulting from Federal and NJ deferred tax asset adjustments.

Income tax expense was $14.4 million for the nine months ended September 30, 2019, compared to $7.1 million for the nine months ended September 30, 2018. The effective tax rate for the nine months ended September 30, 2019 was 21.4% versus 14.6% for the prior-year period. At the present time, the Bank is projecting a 2019 combined federal and state effective tax rate of approximately 22%.

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 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
March 31, 2019 December 31, 2018 Increase/
Amount % Amount % (Decrease)
(dollars in thousands)
Commercial $ 1,051,199 21.1 % $ 988,758 21.8 % $ 62,441
Commercial real estate 3,054,196 61.4 2,778,167 61.1 276,029
Commercial construction 548,039 11.0 465,389 10.2 82,650
Residential real estate 319,215 6.4 309,991 6.8 9,224
Consumer 4,156 0.1 2,594 0.1 1,562
Gross loans $ 4,976,805 100.0 % $ 4,544,899 100.0 % $ 431,906

	September 30, 2019				December 31, 2018				Amount Increase/ (Decrease)
	Amount		%		Amount		%		Amount Increase/ (Decrease)
	(dollars in thousands)
Commercial	$	1,113,743	21.8	%	$	988,758	21.8	%	$	124,985
Commercial real estate		3,030,816	59.2			2,778,167	61.1			252,649
Commercial construction		646,172	12.6			465,389	10.2			180,783
Residential real estate		322,307	6.3			309,991	6.8			12,316
Consumer		2,435	0.1			2,594	0.1			(159	)
Gross loans	$	5,115,473	100.0	%	$	4,544,899	100.0	%	$	570,574

At ~~March 31,~~September 30, 2019, gross loans totaled ~~$5.0~~$5.1 billion, an increase of ~~$432~~$571 million, or ~~9.5%~~12.6%, as compared to December 31, 2018. Net loan growth was primarily attributable to the Greater Hudson Bank acquisition, with increases in commercial real estate ($~~276~~253 million), commercial construction ($83181 million), commercial loans ($62125 million), and residential real estate and consumer ($1112 million).

At ~~March 31,~~September 30, 2019, acquired loans within the loan portfolio totaled ~~$0.7 billion,~~$550 million, compared to ~~$0.3 billion~~$315 million as of December 31, 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 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~~York metropolitan area real estate and the economy in general, as well as operating, regulatory and other conditions beyond the Company’s control.

At ~~March 31,~~September 30, 2019, the ALLL was ~~$36.9~~$38.8 million as compared to $35.0 million at December 31, 2018. The provision for loan losses for the three months and nine months ended ~~March 31,~~September 30, 2019 was ~~$4.5~~$2.0 million and $7.6 million, respectively, compared to ~~$17.8~~$1.1 million and $20.0 million for the three and nine months ended September 30, 2018, respectively. Provision for loan losses for the three months ended ~~March 31, 2018.~~September 30, 2019 increased by $0.9 million when compared to the prior year third quarter. The increase was primarily attributable to an increase in charge-offs, which totaled $0.9 million for the quarter. The decrease in the provision for loan losses during the nine months ended September 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 ~~$2.6 million~~$927 thousand and $(55) thousand in net ~~charge-offs~~charge-offs/(recoveries) for the three months ended ~~March 31,~~September 30, 2019 ~~compared with~~and September 30, 2018, respectively and $3.8 million and $17.0 million ~~in net loan charge-offs~~ for the ~~three~~nine months ended ~~March 31, 2018.~~September 30, 2019 and September 30, 2018, respectively. Net charge-offs for the three months ended ~~March 31,~~September 30, 2019 increased $982 thousand from the prior year period. The increase was primarily related to charge-offs of one home equity line of credit for $0.4 million, and two small commercial mortgage loans of $0.5 million. Net charge-offs for the nine months ended September 30, 2018 ~~were in~~include a $17.0 million partial charge-off related to the taxi medallion loan portfolio, resulting from a decrease in the transfer values of medallions as reported by the New York City Taxi and Limousine Commission, as well as a reduction in the Company’s cash flow valuation model. Included in net charge-offs for the nine months ended September 30, 2019 was a $2.1 million partial charge-off on a single loan secured by a commercial office building. The ALLL as a percentage of loans receivable amounted to ~~0.74%~~0.76% at ~~March 31,~~September 30, 2019 compared to 0.77% at December 31, 2018 and ~~0.77~~0.78 % at ~~March 31,~~September 30, 2018.

The level of the allowance for the respective periods of 2019 and 2018 reflects the credit quality within the loan portfolio, loan 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 ~~March 31,~~September 30, 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.

	Three Months Ended September 30,
	2019			2018
	(dollars in thousands)
Average loans at end of period	$	5,127,365		$	4,362,905

Analysis of the ALLL:
Balance - beginning of quarter	$	37,698		$	33,594
Charge-offs:
Commercial real estate		(387	)		-
Home equity		(557	)		-
Consumer		(20	)		(6	)
Total charge-offs		(964	)		(6	)
Recoveries:
Commercial		28			56
Residential real estate		-			5
Consumer		9			-
Total recoveries		37			61
Net (charge-offs) recoveries		(927)			55
Provision for loan and losses		2,000			1,100
Balance - end of period	$	38,771		$	34,749
Ratio of annualized net charge-offs during the period to average loans during the period		0.07	%		(0.01	)%

Loans receivable	$	5,110,471		$	4,462,487
ALLL as a percentage of loans receivable		0.76	%		0.78	%

Three Months Ended
March 31,
2019 2018
(dollars in thousands)
Average loans receivable at end of period $ 4,907,559 $ 4,223,231

Analysis of the ALLL:
Balance - beginning of quarter $ 34,954 $ 31,748
Charge-offs:
Commercial - (17,020 )
Commercial real estate (2,676 ) -
Residential real estate - (18 )
Total charge-offs (2,676 ) (17,038 )
Recoveries:
Commercial 71 19
Residential real estate 2 -
Consumer 7 -
Total recoveries 80 19
Net recoveries (charge-offs) (2,596 ) (17,019 )
Provision for loan and losses 4,500 17,800
Balance - end of period $ 36,858 $ 32,529
Ratio of annualized net charge-offs during the period to average loans receivable during the period 0.21 % 1.63 %

Loans receivable $ 4,972,651 $ 4,202,679
ALLL as a percentage of loans receivable 0.74 % 0.77 %

Nine Months Ended
September 30,
2019
2018
(dollars in thousands)
Average loans at end of period
$
5,014,324
$
4,294,792

Analysis of the ALLL:
Balance - beginning of quarter
$
34,954
$
31,748
Charge-offs:
Commercial
-
(17,066
)
Commercial real estate
(3,469
)
-
Residential real estate
(557
)
(18
)
Consumer
(20
)
(7
)
Total charge-offs
(4,046
)
(17,091
)
Recoveries:
Commercial
214
87
Commercial real estate
30
-
Residential real estate
3
-
Consumer
16
5
Total recoveries
263
92
Net charge-offs
(3,783
)
(16,999
)
Provision for loan and losses
7,600
20,000
Balance - end of period
$
38,771
$
34,749
Ratio of annualized net charge-offs during the period to average loans during the period
0.10
%
0.53
%

Loans receivable
$
5,110,471
$
4,462,487
ALLL as a percentage of loans receivable
0.76
%
0.78
%

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:

March 31, December 31,
2019 2018
(dollars in thousands)
Nonaccrual loans $ 47,680 $ 51,855
OREO - -
Total nonperforming assets⁽¹⁾ $ 47,680 $ 51,855

Performing TDRs $ 8,191 $ 11,165
Loans 90 days or greater past due and still accruing (non-PCI) $ 50 $ -
Loans 90 days or greater past due and still accruing (PCI) $ 5,398 $ 1,647


	September 30, 2019		December 31, 2018
	(dollars in thousands)
Nonaccrual loans	$	51,321	$	51,855
OREO		907		-
Total nonperforming assets ⁽¹⁾	$	52,228	$	51,855

Performing TDRs	$	19,681	$	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)	$	3,098	$	1,647

⁽¹⁾

Nonperforming assets are defined as nonaccrual loans and OREO.

Nonaccrual loans to total loans receivable 0.96 % 1.14 %
Nonperforming assets to total assets 0.79 % 0.95 %
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable 1.23 % 1.42 %

Nonaccrual loans to total loans receivable

1.00
%

1.14
%
Nonperforming assets to total assets
0.85
%
0.95
%
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable

1.47
%

1.42
%

Securities Available-For-Sale

As of ~~March 31,~~September 30, 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, ~~asset-backed securities~~ and ~~equity~~asset-backed securities. For the quarter ended ~~March 31,~~September 30, 2019, average securities increased ~~$89.5~~by $21.9 million to approximately ~~$531.1~~$445.5 million, or ~~9.6%~~7.9% of average total interest-earning assets, from approximately ~~$441.6~~$423.6 million, or ~~9.2%~~8.7% of average interest-earning assets, for the comparable period in 2018.

At ~~March 31,~~September 30, 2019, net unrealized ~~losses~~gains on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included in stockholders’ equity, net of tax, amounted to ~~$1.7~~$3.1 million as compared with net unrealized losses of $5.8 million at December 31, 2018. The decrease in unrealized losses is predominately attributable to changes in market conditions and 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 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 ~~March 31,~~September 30, 2019 and December 31, 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 ~~March 31,~~September 30, 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 ~~2.62%~~3.89%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~2.00%~~1.79%. As of December 31, 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 0.40%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 1.21%.

Based on our model, which was run as of ~~March 31,~~September 30, 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 ~~3.17%~~4.60%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~2.68%~~2.96%. As of December 31, 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 1.59%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 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 ~~March 31,~~September 30, 2019, would decline by ~~9.51%~~6.70% with an instantaneous rate shock of up 200 basis points, and increase by ~~2.93%~~3.17% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2018, would decline by 12.01% with an instantaneous rate shock of up 200 basis points, and increase by 3.15% with an instantaneous rate shock of down 100 basis points.

The following table illustrates the most recent results for EVE and one year NII sensitivity as of ~~March 31,~~September 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 $ 567,668 $ (99,551 ) (14.92 ) +300 $ 186,930 $ 6,428 3.56
+200 603,775 (63,444 ) (9.51 ) +200 185,233 4,731 2.62
+100 638,871 (28,348 ) (4.25 ) +100 183,377 2,875 1.59
0 667,219 - 0.0 0 180,502 - 0.0
-100 686,789 19,570 2.93 -100 176,892 (3,610 ) (2.00 )

Interest Rates
(basis points)
Estimated
EVE
Estimated Change in
EVE
Interest Rates
(basis points)
Estimated
NII
Estimated Change in NII
Amount
%
Amount
%
+300
$
624,686
$
(74,485
)
(10.65
)
+300
$
197,222
$
10,554
5.65
+200
652,328
(46,843
)
(6.70
)
+200
193,921
7,253
3.89
+100
677,299
(21,872
)
(3.13
)
+100
190,400
3,732
2.00
0
699,171
-
0.0
0
186,668
-
0.0
-100
721,322
22,151
3.17
-100
183,329
(3,339
)
(1.79
)

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~~conditions, 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 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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2019, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were ~~$556.0~~$509.5 million, which represented ~~9.2%~~8.3% of total assets and ~~10.7%~~9.7% of total deposits and borrowings, compared to $441.4 million as of December 31, 2018, which represented 8.1% of total assets and 9.4% of total deposits and borrowings.

The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of ~~March 31,~~September 30, 2019, had the ability to borrow $1.9 billion. In addition, at ~~March 31,~~September 30, 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 ~~$7.7~~$5.4 million. At ~~March 31,~~September 30, 2019, the Bank had aggregate available and unused credit of approximately ~~$1.0~~$1.1 billion, which represents the aforementioned facilities totaling $1.9 billion net of ~~$952.7~~$887.7 million in outstanding borrowings and letters of credit. At ~~March 31,~~September 30, 2019, outstanding commitments for the Bank to extend credit were approximately ~~$954.0 million.~~$1.1 billion.

Cash and cash equivalents totaled ~~$172.5~~$194.0 million at ~~March 31,~~September 30, 2019, increasing by ~~$0.2~~$21.6 million from $172.4 million at December 31, 2018. Operating activities provided ~~$13.0~~$63.4 million in net cash. Investing activities used ~~$35.3~~$118.8 million in net cash, primarily reflecting an increase in loans and net cash flow and sales from the securities portfolio. Financing activities provided ~~$22.5~~$77.1 million in net cash, primarily reflecting a net increase in ~~deposits.~~deposits, offset by repayments in FHLB borrowings.

Deposits

Total deposits increased by ~~$502~~$659 million, or ~~12.3%~~16.1%, to ~~$4.6~~$4.8 billion at ~~March 31,~~September 30, 2019 from December 31, 2018. The increase was primarily attributable the acquisition of Greater Hudson Bank. The following table sets forth the composition of our deposit base by the periods indicated.

Amount
Increase/
March 31, 2019 December 31, 2018 (Decrease)
Amount % Amount % 2019 vs. 2018
(dollars in thousands)
Demand, noninterest-bearing $ 833,090 18.1 % $ 768,584 18.8 % $ 64,506

Demand, interest-bearing 901,836 19.6 845,424 20.7 56,412

Money market 1,141,898 24.9 951,276 23.2 190,622

Savings 172,927 3.8 160,755 3.9 12,172

Time 1,544,247 33.6 1,366,053 33.4 178,194

Total deposits $ 4,593,998 100.0 % $ 4,092,092 100.0 % $ 501,906

September 30, 2019
December 31, 2018
Amount
Increase/
(Decrease)
Amount
%
Amount
%
2019 vs. 2018
(dollars in thousands)
Demand, noninterest-bearing
$
828,190
17.4
%
$
768,584
18.8
%
$
59,606
Demand, interest-bearing
1,045,615
22.0
845,424
20.7
200,191
Money market
1,143,540
24.1
951,276
23.2
192,264
Savings
160,153
3.4
160,755
3.9
(602
)
Time
1,573,736
33.1
1,366,053
33.4
207,683
Total deposits
$
4,751,234
100.0
%
$
4,092,092
100.0
%
$
659,142

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 re-prices quarterly. The rate at ~~March 31,~~September 30, 2019 was ~~5.60%~~5.12%.

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 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 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 ~~$682~~$720 million at ~~March 31,~~September 30, 2019, an increase of ~~$68~~$106 million from December 31, 2018. The increase in stockholders’ equity was primarily attributable to the acquisition of Greater Hudson Bank. As of ~~March 31,~~September 30, 2019, the Company’s tangible common equity ratio and tangible book value per share were ~~8.83%~~9.21% and ~~$14.67,~~$15.60, respectively. As of December 31, 2018, the tangible common equity ratio and tangible book value per share were 8.77% and $14.42, respectively. Total goodwill and other intangible assets were approximately ~~$163~~$169 million as of ~~March 31,~~September 30, 2019 and $148 million at December 31, 2018.

March 31, December 31,
2019 2018
(dollars in thousands, except for share and per
share data)
Stockholders’ equity $ 682,395 $ 613,927

Less: Goodwill and other intangible assets 162,747 147,646
Tangible common stockholders’ equity $ 519,648 $ 466,281

Common stock outstanding at period end 35,443,933 32,328,542

Book value per common share $ 19.25 $ 18.99
Less: Goodwill and other intangible assets 4.59 4.57
Tangible book value per common share $ 14.66 $ 14.42

	September 30, 2019		December 31, 2018
	(dollars in thousands, except for share and per share data)
Stockholders’ equity	$	720,160	$	613,927
Less: Goodwill and other intangible assets		168,374		147,646
Tangible common stockholders’ equity	$	551,786	$	466,281
Common stock outstanding at period end		35,364,845		32,328,542
Book value per common share	$	20.36	$	18.99
Less: Goodwill and other intangible assets		4.76		4.57
Tangible book value per common share	$	15.60	$	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. ~~Pursuant to this plan, in March~~During the nine months ended September 30, 2019, the Company repurchased ~~13,000~~a total of 240,018 shares, ~~at an average price of $19.13 per share. As of March 31, 2019, the Company had authorization to~~leaving 959,982 shares remaining for repurchase ~~an additional 1,187,000 shares~~ under the ~~plan.~~

~~The following table details~~program. There were no stock repurchases during the three months ended ~~March 31, 2019:~~September 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
January 1, 2019 through January 31, 2019 - - - -
February 1, 2019 through February 28, 2019 - - - -
March 1, 2019 through March 31, 2019 13,000 $ 19.13 13,000 1,187,000

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 ~~March 31,~~September 30, 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.

To Be Well-Capitalized Under
For Capital Adequacy Prompt Corrective Action
ConnectOne Bancorp, Inc. Purposes Provisions
At March 31, 2019       Amount       Ratio       Amount       Ratio       Amount       Ratio
(dollars in thousands)
Tier 1 leverage capital $ 524,089 9.12 % $ 229,878      4.00 % N/A N/A
CET I risk-based ratio 518,934 9.68 241,276 4.50 N/A N/A
Tier 1 risk-based capital 524,089 9.77 321,701 6.00 N/A N/A
Total risk-based capital 685,947 12.79 428,935 8.00 N/A N/A

To Be Well-Capitalized Under
For Capital Adequacy Prompt Corrective Action
ConnectOne Bank Purposes Provisions
At March 31, 2019 Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
Tier 1 leverage capital $     599,115      10.43 % $     229,857 4.00 % $        287,322 5.00 %
CET I risk-based ratio 599,115 11.17 241,269 4.50 348,499 6.50
Tier 1 risk-based capital 599,115 11.17 321,691 6.00 428,922 8.00
Total risk-based capital 668,223 12.46 428,922 8.00 536,152         10.00

	ConnectOne Bancorp, Inc.				For Capital Adequacy Purposes				To Be Well-Capitalized Under Prompt Corrective Action Provisions
At September 30, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Tier 1 leverage capital	$	552,075	9.39	%	$	235,277	4.00	%		N/A	N/A
CET I risk-based ratio		546,920	9.78			251,722	4.50			N/A	N/A
Tier 1 risk-based capital		552,075	9.87			335,630	6.00			N/A	N/A
Total risk-based capital		715,846	12.80			447,506	8.00			N/A	N/A

	ConnectOne Bank				For Capital Adequacy Purposes				To Be Well-Capitalized Under Prompt Corrective Action Provisions
At September 30, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Tier 1 leverage capital	$	628,232	10.68	%	$	235,281	4.00	%	$	294,101	5.00	%
CET I risk-based ratio		628,232	11.23			251,715	4.50			363,589	6.50
Tier 1 risk-based capital		628,232	11.23			335,620	6.00			447,494	8.00
Total risk-based capital		699,253	12.50			447,494	8.00			559,367	10.00

N/A - not applicable

As of ~~March 31,~~September 30, 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. Beginning January 1, 2019, the Company and the Bank are required to maintain a 2.5% capital conservation buffer, above and beyond the capital levels otherwise required under applicable regulation. 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 ~~March 31,~~September 30, 2019 both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the Tier 1 Risk Based Ratio which was ~~1.27%~~1.37% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was ~~1.96%~~2.00% 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 ~~Operations-~~Operations - Interest Rate Sensitivity Analysis" herein for a discussion of our management of our interest rate risk.

Item 4. Controls and Procedures

a)Disclosure controls and procedures. As of the end of the Company’s most recently completed fiscal quarter covered by this report, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and are operating in an effective manner and that such information is accumulated and communicated to management, including the Company’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

b)Changes in internal controls over financial reporting. There have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II -– OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1a. Risk Factors

There have been no changes to the risks inherent in our business from those described under Item 1A – Risk Factors of our Annual Report on Form 10-K. Information concerning additional risk factors related to the proposed merger of the Company and BKJ is available in the Company's registration statement on Form S-4 which was filed with the SEC on September 27, 219 and amended on October 16, 2019.

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 55. Other Information

Not applicable

Item 6. Exhibits

Exhibit No.		Description
2.1		Agreement and Plan of Merger, dated as of ~~July 11, 2018,~~August 15, 2019, by and between ConnectOne Bancorp, Inc.~~, ConnectOne Bank~~ and Greater Hudson Bank*Bancorp of New Jersey, Inc.⁽¹⁾

10.1		Form of Voting Agreement executed by all directors ~~and executive officers~~ of Greater Hudson Bank.*Bancorp of New Jersey, Inc.⁽¹⁾

~~10.2~~		Voting and Sell Down Agreement with Kenneth J. Torsoe*

~~10.3~~		Registration Rights Agreement with Kenneth J. Torsoe*

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


(1)	Incorporated by reference to exhibits 2.1 and 10.1 to the Current Report on Form 8-k filed by the Registrant on August 16, 2019.

* Incorporated by reference to exhibits 10.1, 10.2 and 10.3 to the Registrant’s Current Report on Form 8-k filed on July 12, 2018.

SIGNATURES

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

CONNECTONE BANCORP, INC.

(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: ~~May 7,~~November 6, 2019		Date: ~~May 7,~~November 6, 2019

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

Item 2.	~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations	43 46

Item 3.	Qualitative and Quantitative Disclosures about Market Risks	54 60

Item 4.	Controls and Procedures	55 61

PART II – OTHER INFORMATION
Item 1.Legal Proceedings	62
Item 1.1a.Risk Factors	~~Legal Proceedings~~	56 62

~~Item 1a.~~	~~Risk Factors~~	56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57 63

Item 3.	Defaults Upon Senior Securities	57 63

Item 4.	Mine Safety Disclosures	57 63
Item 5.Other Information		63
Item 5.6.Exhibits	~~Other Information~~	57 64
SIGNATURES		65
~~Item 6.~~	~~Exhibits~~	58

~~SIGNATURES~~	59


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


	For the Quarterly Period Ended ~~March 31,~~September 30, 2019 OR

OR

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

	For the transition period from __________ to __________

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

Common Stock, no par value:	35,374,845 shares
(Title of Class)	~~35,455,756 shares~~ (Outstanding as of ~~May 7,~~November 6, 2019)

	Three Months Ended
	March 31,
(dollars in thousands, except for per share data)	2019		2018
Interest income
Interest and fees on loans	$	60,326	$	47,025
Interest and dividends on investment securities:
Taxable		2,942		1,887
Tax-exempt		1,127		814
Dividends		457		485
Interest on federal funds sold and other short-term investments		357		264
Total interest income		65,209		50,475
Interest expense
Deposits		15,351		7,688
Borrowings		4,906		4,640
Total interest expense		20,257		12,328
Net interest income		44,952		38,147
Provision for loan losses		4,500		17,800
Net interest income after provision for loan losses		40,452		20,347
Noninterest income
Income on bank owned life insurance		822		774
Net gains on sale of loans held-for-sale		19		17
Deposit, loan and other income		786		616
Net gains (losses) on equity securities		103		(120	)
Net gains on sales of securities available-for-sale		8		-
Total noninterest income		1,738		1,287
Noninterest expenses
Salaries and employee benefits		11,954		9,672
Occupancy and equipment		2,495		2,143
FDIC insurance		755		850
Professional and consulting		1,209		723
Marketing and advertising		210		207
Data processing		1,155		1,148
Merger expenses		7,562		-
Amortization of core deposit intangibles		364		169
Other components of net periodic pension expense		29		7
Other expenses		2,329		2,020
Total noninterest expenses		28,062		16,939
Income before income tax expense		14,128		4,695
Income tax expense		2,493		444
Net income	$	11,635	$	4,251
Earnings per common share
Basic	$	0.33	$	0.13
Diluted		0.33		0.13

Dividends per common share	$	0.090	$	0.075

	Three Months Ended
	March 31,
(in thousands)	2019			2018
Net income	$	11,635		$	4,251

Other comprehensive income (loss):
Unrealized gains and losses on securities:
Unrealized holding gains (losses) on available-for-sale securities arising during the period		5,558			(5,019	)
Tax effect		(1,422	)		1,292
Net of tax		4,136			(3,727	)

Reclassification adjustment for realized gains included in net income		(8	)		-
Tax effect		2			-
Net of tax		(6	)		-

Unrealized (losses) gains on cash flow hedge		(391	)		916
Tax effect		110			(258	)
Net of tax		(281	)		658
Unrealized pension plan (losses) gains:
Unrealized pension plan (losses) gains before reclassifications		(562	)		236
Tax effect		158			(67	)
Net of tax		(404	)		169

Reclassification adjustment for realized losses included in net income		89			91
Tax effect		(25	)		(25	)
Net of tax		64			66
Total other comprehensive income (loss)		3,509			(2,834	)
Total comprehensive income	$	15,144		$	1,417

	March 31,			December 31,
(in thousands, except for share data)	2019			2018
	(unaudited)
ASSETS
Cash and due from banks	$	54,520		$	39,161
Interest-bearing deposits with banks		118,028			133,205
Cash and cash equivalents		172,548			172,366

Securities available-for-sale		516,539			412,034
Equity securities		11,564			11,460

Loans held-for-sale		368			-

Loans receivable		4,972,651			4,541,092
Less: Allowance for loan losses		36,858			34,954
Net loans receivable		4,935,793			4,506,138

Investment in restricted stock, at cost		31,727			31,136
Bank premises and equipment, net		20,150			19,062
Accrued interest receivable		21,198			18,214
Bank owned life insurance		125,300			113,820
Right of use operating lease assets		15,311			-
Goodwill		156,243			145,909
Core deposit intangibles		6,504			1,737
Other assets		35,731			30,216
Total assets	$	6,048,976		$	5,462,092
LIABILITIES
Deposits:
Noninterest-bearing	$	833,090		$	768,584
Interest-bearing		3,760,908			3,323,508
Total deposits		4,593,998			4,092,092
Borrowings		603,412			600,001
Operating lease liabilities		16,719			-
Subordinated debentures (net of debt issuance costs of $1,517 and $1,599, respectively)		128,638			128,556
Other liabilities		23,814			27,516
Total liabilities		5,366,581			4,848,165

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Preferred Stock:
Authorized 5,000,000 shares		-			-
Common stock, no par value:
Authorized 50,000,000 shares; issued 37,520,855 shares at March 31, 2019 and 34,392,464 shares at December 31, 2018; outstanding 35,443,933 shares at March 31, 2019 and 32,328,542 at December 31, 2018		468,571			412,546
Additional paid-in capital		16,513			15,542
Retained earnings		219,558			211,345
Treasury stock, at cost (2,076,922 common shares at March 31, 2019 and 2,063,922 at December 31, 2018)		(16,967	)		(16,717	)
Accumulated other comprehensive loss		(5,280	)		(8,789	)
Total stockholders’ equity		682,395			613,927
Total liabilities and stockholders’ equity	$	6,048,976		$	5,462,092

(in thousands, except for share data)	September 30, 2019			December 31, 2018
	(unaudited)
ASSETS
Cash and due from banks	$	54,792		$	39,161
Interest-bearing deposits with banks		139,217			133,205
Cash and cash equivalents		194,009			172,366

Securities available-for-sale		425,849			412,034
Equity securities		11,231			11,460

Loans held-for-sale		33,245			-

Loans receivable		5,110,471			4,541,092
Less: Allowance for loan losses		38,771			34,954
Net loans receivable		5,071,700			4,506,138

Investment in restricted stock, at cost		27,946			31,136
Bank premises and equipment, net		19,754			19,062
Accrued interest receivable		21,024			18,214
Bank owned life insurance		137,048			113,820
Right of use operating lease assets		15,789			-
OREO		907			-
Goodwill		162,574			145,909
Core deposit intangibles		5,800			1,737
Other assets		34,393			30,216
Total assets	$	6,161,269		$	5,462,092
LIABILITIES
Deposits:
Noninterest-bearing	$	828,190		$	768,584
Interest-bearing		3,923,044			3,323,508
Total deposits		4,751,234			4,092,092
Borrowings		512,456			600,001
Subordinated debentures (net of unamortized debt issuance costs of $1,353 and $1,599, respectively)		128,802			128,556
Operating lease liabilities		17,148			-
Other liabilities		31,469			27,516
Total liabilities		5,441,109			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 37,668,785 shares at September 30, 2019 and 34,392,464 shares at December 31, 2018; outstanding 35,364,845 shares at September 30, 2019 and 32,328,542 at December 31, 2018		468,571			412,546
Additional paid-in capital		20,450			15,542
Retained earnings		254,159			211,345
Treasury stock, at cost 2,303,940 common shares at September 30, 2019 and 2,063,922 at December 31, 2018		(21,892	)		(16,717	)
Accumulated other comprehensive loss		(1,128	)		(8,789	)
Total stockholders’ equity		720,160			613,927
Total liabilities and stockholders’ equity	$	6,161,269		$	5,462,092

														Accumulated
					Additional									Other			Total
(dollars in thousands, except for per	Preferred		Common		Paid-In			Retained			Treasury			Comprehensive			Stockholders’
share data)	Stock		Stock		Capital			Earnings			Stock			(Loss) Income			Equity
Balance as of December 31, 2017	$	-	$	412,546	$	13,602		$	160,025		$	(16,717	)	$	(4,019	)	$	565,437
Reclassification of stranded tax effects (ASU 2018-02)		-		-		-			709			-			(709	)		-
Cumulative effect of adopting ASU 2016-01		-		-		-			(55	)		-			55			-
Net income		-		-		-			4,251			-			-			4,251
Other comprehensive loss, net of tax		-		-		-			-			-			(2,834	)		(2,834	)
Cash dividends declared on common stock ($0.075 per share)		-		-		-			(2,420	)		-			-			(2,420	)
Exercise of stock options (38,697) shares)		-		-		202			-			-			-			202
Restricted stock grants (22,004 shares)		-		-		-			-			-			-			-
Net performance units issued (42,672 shares)		-		-		(819	)		-			-			-			(819	)
Stock-based compensation		-		-		449			-			-			-			449

Balance as of March 31, 2018	$	-	$	412,546	$	13,434		$	162,510		$	(16,717	)	$	(7,507	)	$	564,266

Balance as of December 31, 2018	$	-	$	412,546	$	15,542		$	211,345		$	(16,717	)	$	(8,789	)	$	613,927
Net income		-		-		-			11,635			-			-			11,635
Other comprehensive income, net of tax		-		-		-			-			-			3,509			3,509
Cash dividends declared on common stock ($0.090 per share)		-		-		-			(3,422	)		-			-			(3,422	)
Exercise of stock options (21,991 shares)		-		-		143			-			-			-			143
Restricted stock grants (43,483 shares)		-		-		-			-			-			-			-
Restricted stock units (4,904 shares)		-		-		-			-			-			-			-
Net performance units issued (26,517 shares)		-		-		196			-			-			-			196
Repurchase of treasury stock (13,000 shares)		-		-		-			-			(250	)		-			(250	)
Stock issued (3,032,496 shares) in acquisition of Greater Hudson Bank		-		56,025		-			-			-			-			56,025
Stock-based compensation		-		-		632			-			-			-			632
Balance as of March 31, 2019	$	-	$	468,571	$	16,513		$	219,558		$	(16,967	)	$	(5,280	)	$	682,395

Supplemental disclosures of cash flow information
Cash payments for:
Interest paid on deposits and borrowings	$	22,340	$	10,927
Income taxes		-		1,223

Supplemental disclosures of noncash activities:
Investing:
Transfer of loans to other real estate owned	$	-	$	538
Transfer of loans from held-for-investment to held-for-sale		-		24,236

Business combination:

Fair value of assets acquired, net of cash and cash equivalents	$	534,166	$	-
Fair value of liabilities assumed		488,475		-

	Nine Months Ended September 30, 2019

(dollars in thousands, except for per share data)	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive (Loss) Income			Total Stockholders’ Equity
Balance as of December 31, 2018	$	-	$	412,546	$	15,542	$	211,345		$	(16,717	)	$	(8,789	)	$	613,927
Net income		-		-		-		52,612			-			-			52,612
Other comprehensive income, net of tax		-		-		-		-			-			7,661			7,661
Cash dividends declared on common stock ($0.27 per share)		-		-		-		(9,798	)		-			-			(9,798	)
Exercise of stock options (28,937 shares)		-		-		265		-			-			-			265
Restricted stock grants (64,459 shares)		-		-		-		-			-			-			-
Net restricted stock units issued (4,904 shares)		-		-		-		-			-			-			-
Repurchase of 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		-		-		1,947		-			-			-			1,947
Balance as of September 30, 2019	$	-	$	468,571	$	20,450	$	254,159		$	(21,892	)	$	(1,128	)	$	720,160

	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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
March 31, 2019	(dollars in thousands)
Securities available-for-sale
Federal agency obligations	$	43,321	$	191	$	(232	)	$	43,280
Residential mortgage pass-through securities		255,657		381		(2,837	)		253,201
Commercial mortgage pass-through securities		6,903		23		(11	)		6,915
Obligations of U.S. states and political subdivisions		167,819		2,115		(1,764	)		168,170
Corporate bonds and notes		35,245		193		(367	)		35,071
Asset-backed securities		8,244		11		(68	)		8,187
Certificates of deposit		148		2		-			150
Other securities		1,565		-		-			1,565
Total securities available-for-sale	$	518,902	$	2,916	$	(5,279	)	$	516,539

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
December 31, 2018	(dollars in thousands)
Securities available-for-sale
Federal agency obligations	$	45,509	$	51	$	(605	)	$	44,955
Residential mortgage pass-through securities		189,721		85		(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

	March 31, 2019
	Total					Less than 12 Months					12 Months or Longer
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(dollars in thousands)
Investment Securities Available-for-Sale:
Federal agency obligation	$	23,900	$	(232	)	$	2,005	$	(7	)	$	21,895	$	(225	)
Residential mortgage pass-through securities		194,131		(2,837	)		60,001		(137	)		134,130		(2,700	)
Commercial mortgage pass-through securities		3,873		(11	)		-		-			3,873		(11	)
Obligations of U.S. states and political subdivisions		53,685		(1,764	)		531		-			53,154		(1,764	)
Corporate bonds and notes		14,547		(367	)		7,382		(42	)		7,165		(325	)
Asset-backed securities		4,536		(68	)		2,884		(49	)		1,652		(19	)
Total temporarily impaired securities	$	294,672	$	(5,279	)	$	72,803	$	(235	)	$	221,869	$	(5,044	)

	December 31, 2018
	Total					Less than 12 Months					12 Months or Longer
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(dollars in thousands)
Investment Securities Available-for-Sale:
Federal agency obligation	$	35,472	$	(605	)	$	810	$	(1	)	$	34,662	$	(604	)
Residential mortgage pass-through securities		178,365		(4,602	)		42,040		(393	)		136,325		(4,209	)
Commercial mortgage pass-through securities		3,874		(45	)		-		-			3,874		(45	)
Obligations of U.S. states and political subdivisions		64,367		(3,402	)		7,765		(21	)		56,602		(3,381	)
Corporate bonds and notes		15,534		(540	)		7,767		(133	)		7,767		(407	)
Asset-backed securities		3,957		(16	)		2,219		(11	)		1,738		(5	)
Total Temporarily Impaired Securities	$	301,569	$	(9,210	)	$	60,601	$	(559	)	$	240,968	$	(8,651	)

	Three Months Ended March 31, 2019
	Amount of gain			Amount of gain			Amount of gain
	(loss) recognized			(loss) reclassified			recognized in other
	in OCI (Effective			from OCI to			Noninterest income
	Portion)			interest income			(Ineffective Portion)
	(dollars in thousands)
Interest rate contracts	$	(209	)	$	(182	)	$	-

	Three Months Ended March 31, 2018
	Amount of gain		Amount of gain			Amount of gain
	(loss) recognized		(loss) reclassified			recognized in other
	in OCI (Effective		from OCI to			Noninterest income
	Portion)		interest income			(Ineffective Portion)
	(dollars in thousands)
Interest rate contracts	$	921	$	(5	)	$	-

	March 31, 2019				December 31, 2018
	Notional				Notional
	Amount		Fair Value		Amount		Fair Value
	(dollars in thousands)
Interest rate swaps related to FHLB advances included in assets	$	75,000	$	768	$	75,000	$	1,159

	Three Months			Three Months
	Ended			Ended
	March 31,			March 31,
	2019			2018
	(dollars in thousands)
Balance at beginning of period	$	1,134		$	1,387
New loans purchased		1,286			-
Accretion of income		(146	)		(65	)
Balance at end of period	$	2,274		$	1,322

	March 31, 2019
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial	$	997,975	$	17,452	$	35,772	$	-	$	1,051,199
Commercial real estate		3,024,553		12,970		16,673		-		3,054,196
Commercial construction		533,105		6,920		8,014		-		548,039
Residential real estate		314,599		-		4,616		-		319,215
Consumer		4,143		-		13		-		4,156
Gross loans	$	4,874,375	$	37,342	$	65,088	$	-	$	4,976,805

	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

	March 31, 2019
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
No related allowance recorded	(dollars in thousands)
Commercial	$	28,870	$	78,844
Commercial real estate		10,124		18,258
Commercial construction		6,326		10,443
Residential real estate		2,185		2,511
Consumer		-		-
Total (no related allowance)	$	47,505	$	110,056

With an allowance recorded
Commercial real estate	$	4,984	$	7,999	$	1,035
Residential real estate		256		266		25
Total (with allowance)	$	5,240	$	8,265	$	1,060

Total
Commercial	$	28,870	$	78,844	$	-
Commercial real estate		15,108		26,257		1,035
Commercial construction		6,326		10,443		-
Residential real estate		2,441		2,777		25
Consumer		-		-		-
Total	$	52,745	$	118,321	$	1,060

	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
Consumer		-		-
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
Consumer		-		-		-
Total	$	59,932	$	115,046	$	36

	Three Months Ended March 31,
	2019				2018
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with no related allowance recorded
Commercial	$	29,080	$	16	$	45,607	$	31
Commercial real estate		10,146		47		35,010		243
Commercial construction		10,400		57		6,083		77
Residential real estate		2,194		-		2,613		-
Consumer		-		-		-		-
Total	$	51,820	$	120	$	89,313	$	351

Impaired loans with an allowance recorded
Commercial real estate	$	7,084	$	-	$	1,129	$	12
Commercial construction		-		-		2,649		42
Residential real estate		258		-		-		-
Total	$	7,342	$	-	$	3,778	$	54

Total impaired loans
Commercial	$	29,080	$	16	$	45,607	$	31
Commercial real estate		17,230		47		36,139		255
Commercial construction		10,400		57		8,732		119
Residential real estate		2,452		-		2,613		-
Consumer		-		-		-		-
Total	$	59,162	$	120	$	93,091	$	405

	March 31, 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	$	1,979	$	2,626	$	3,799	$	28,099	$	36,503	$	1,014,696	$	1,051,199
Commercial real estate		10,213		180		-		12,159		22,552		3,031,644		3,054,196
Commercial construction		648		-		1,649		2,934		5,231		542,808		548,039
Residential real estate		1,591		-		-		4,488		6,079		313,136		319,215
Consumer		12		-		-		-		12		4,144		4,156
Total	$	14,443	$	2,806	$	5,448	$	47,680	$	70,377	$	4,906,428	$	4,976,805

		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Loans	Investment		Investment
Troubled debt restructurings:
Commercial	3	$	2,077	$	2,077
Commercial real estate	1		60		60
Commercial construction	2		1,839		1,839

Total	6	$	3,976	$	3,976

			March 31, 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	$	43,280	$	-	$	43,280	$	-
Residential mortgage pass-through securities		253,201		-		253,201		-
Commercial mortgage pass-through securities		6,915		-		6,915		-
Obligations of U.S. states and political subdivision		168,170		-		158,859		9,311
Corporate bonds and notes		35,071		-		35,071		-
Asset-backed securities		8,187		-		8,187		-
Certificates of deposit		150		-		150		-
Other securities		1,565		1,565		-		-
Total available-for-sale	$	516,539	$	1,565	$	505,663	$	9,311

Equity securities		11,564		11,564		-		-

Derivatives		768		-		768		-
Total assets	$	528,871	$	13,129	$	506,431	$	9,311

	Municipal
	Securities
	(dollars in thousands)
Beginning balance, January 1, 2019	$	9,377
Principal paydowns		(66	)
Ending balance, March 31, 2019	$	9,311

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

					Fair Value Measurements
					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
	Amount		Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
March 31, 2019
Financial assets:
Cash and due from banks	$	172,548	$	172,548	$	172,548	$	-	$	-
Securities available-for-sale		516,539		516,539		1,565		505,663		9,311
Investment in restricted stocks		31,727		n/a		n/a		n/a		n/a
Equity securities		11,564		11,564		11,564		-		-
Net loans		4,935,793		4,875,420		-		-		4,875,420
Derivatives		768		768		-		768		-
Accrued interest receivable		21,198		21,198		-		2,759		18,439

Financial liabilities:
Noninterest-bearing deposits		833,090		833,090		833,090		-		-
Interest-bearing deposits		3,760,908		3,764,654		2,216,661		1,547,993		-
Borrowings		603,412		603,855		-		603,855		-
Subordinated debentures		128,638		134,962		-		134,962		-
Accrued interest payable		4,869		4,869		-		4,869		-

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		4,506,138		4,402,878		-		-		4,402,878
Derivatives		1,159		1,159		-		1,159		-
Accrued interest receivable		18,214		18,214		-		2,064		16,150

Financial liabilities:
Noninterest-bearing deposits		768,584		768,584		768,584		-		-
Interest-bearing deposits		3,323,508		3,320,640		1,957,503		1,363,137		-
Borrowings		600,001		598,598		-		598,598		-
Subordinated debentures		128,556		132,426		-		132,426		-
Accrued interest payable		6,764		6,764		-		6,764		-

Details about Accumulated Other	Amounts Reclassified from						Affected Line Item in the Consolidated
Comprehensive Income Components	Accumulated Other Comprehensive Income						Statements of Income
	Three Months Ended
	March 31,
	2019			2018
Sale of securities available-for-sale	$	(8	)	$	-		Net gains on sale of securities available-for-sale Income tax expense
Sale of securities available-for-sale		2			-
		(6	)		-

Amortization of pension plan net actuarial losses	$	89		$	91		Salaries and employee benefits
		(25	)		(25	)	Income tax benefit
		64			66
Total reclassification	$	58		$	66

					Weighted-
					Average
			Weighted-		Remaining
	Number of		Average		Contractual
	Stock		Exercise		Term	Aggregate
	Options		Price		(in years)	Intrinsic Value
Outstanding at December 31, 2018	108,463		$	8.35
Granted	-			-
Exercised	(21,991	)		7.84
Forfeited/cancelled/expired	-			-
Outstanding at March 31, 2019	86,472			8.48	2.9	$	970,370

Exercisable at March 31, 2019	86,472		$	8.48	2.9	$	970,370

			Weighted-
			Average
	Nonvested		Grant Date
	Shares		Fair Value
Nonvested at December 31, 2018	68,428		$	23.04
Granted	42,483			19.88
Vested	(46,352	)		21.98
Forfeited/cancelled/expired	-			-
Nonvested March 31, 2019	64,559		$	21.77

				Weighted
				Average Grant
	Units		Units	Date Fair
	(expected)		(maximum)	Value
Unearned at December 31, 2018	86,009			$	22.06
Awarded	35,636				20.79
Change in estimate	11,005				17.02
Vested	(52,508	)			21.26
Unearned at March 31, 2019	80,142		120,213	$	23.98

							Gross Amounts Not Offset
					Net Amounts
			Gross Amounts		of Assets
			Offset in the		Presented in the				Cash or
			Statement of		Statement of		Financial		Financial
	Gross Amounts		Financial		Financial		Instruments		Instrument		Net
	Recognized		Condition		Condition		Recognized		Collateral		Amount
	(dollars in thousands)
March 31, 2019
Assets:
Interest rate swaps	$	768	$	-	$	768	$	-	$	-	$	768

December 31, 2018
Assets:
Interest rate swaps	$	1,159	$	-	$	1,159	$	-	$	-	$	1,159

	Three Months Ended March 31,
	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)}	$	531,083		$	4,369		3.34	%	$	441,563		$	2,917		2.68	%
Total loans^{(2) (3) (4)}		4,907,683			60,597		5.01			4,247,997			47,272		4.51
Federal funds sold and interest-bearing with banks		57,690			357		2.51			78,194			264		1.37
Restricted investment in bank stocks		26,478			457		7.00			31,699			485		6.21
Total interest-earning assets		5,522,934			65,780		4.83			4,799,453			50,938		4.30
Noninterest-earning assets:
Allowance for loan losses		(35,499	)							(32,113	)
Other noninterest-earning assets		421,626								321,483
Total assets	$	5,909,061							$	5,088,823

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits	$	1,515,249			8,303		2.22		$	1,207,368			4,788		1.61
Other interest-bearing deposits		2,236,630			7,048		1.28			1,815,122			2,900		0.65
Total interest-bearing deposits		3,751,879			15,351		1.66			3,022,490			7,688		1.03

Borrowings		486,687			3,024		2.52			630,117			2,926		1.88
Subordinated debentures⁽⁵⁾		128,585			1,845		5.82			115,182			1,674		5.89
Finance lease		2,479			37		6.05			2,622			40		6.03
Total interest-bearing liabilities		4,369,630			20,257		1.88			3,770,411			12,328		1.33

Demand deposits		824,115								724,471
Other liabilities		35,148								18,912
Total noninterest-bearing liabilities		859,263								743,383
Stockholders’ equity		680,168								575,029
Total liabilities and stockholders’ equity	$	5,909,061							$	5,088,823
Net interest income (tax-equivalent basis)					45,523								38,610
Net interest spread⁽⁶⁾							2.95	%							2.97	%
Net interest margin⁽⁷⁾							3.34	%							3.26	%
Tax-equivalent adjustment					(571	)							(463	)
Net interest income				$	44,952							$	38,147

Nonaccrual loans to total loans receivable	0.96	%	1.14	%
Nonperforming assets to total assets	0.79	%	0.95	%
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable	1.23	%	1.42	%

Nonaccrual loans to total loans receivable	1.00	%	1.14	%
Nonperforming assets to total assets	0.85	%	0.95	%
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable	1.47	%	1.42	%

			Estimated Change in
Interest Rates	Estimated		EVE					Interest Rates	Estimated		Estimated Change in NII
(basis points)	EVE		Amount			%		(basis points)	NII		Amount			%
+300	$	567,668	$	(99,551	)	(14.92	)	+300	$	186,930	$	6,428		3.56
+200		603,775		(63,444	)	(9.51	)	+200		185,233		4,731		2.62
+100		638,871		(28,348	)	(4.25	)	+100		183,377		2,875		1.59
0		667,219		-		0.0		0		180,502		-		0.0
-100		686,789		19,570		2.93		-100		176,892		(3,610	)	(2.00	)

Interest Rates (basis points)	Estimated EVE		Estimated Change in EVE					Interest Rates (basis points)	Estimated NII		Estimated Change in NII
Interest Rates (basis points)	Estimated EVE		Amount			%		Interest Rates (basis points)	Estimated NII		Amount			%
+300	$	624,686	$	(74,485	)	(10.65	)	+300	$	197,222	$	10,554		5.65
+200		652,328		(46,843	)	(6.70	)	+200		193,921		7,253		3.89
+100		677,299		(21,872	)	(3.13	)	+100		190,400		3,732		2.00
0		699,171		-		0.0		0		186,668		-		0.0
-100		721,322		22,151		3.17		-100		183,329		(3,339	)	(1.79	)