UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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


	For the Quarterly Period Ended September 30, ~~2018~~ OR2019

OR

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

	For the transition period from __________ to __________

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

Commission File Number: 000-11486

CONNECTONE BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

New Jersey

52-1273725

(State or Other Jurisdiction of

~~(IRS Employer~~

Incorporation or Organization)

(IRS Employer

Identification No.)

301 Sylvan Avenue

Englewood Cliffs, New Jersey 07632

(Address of Principal Executive Offices) (Zip Code)

201-816-8900

(Registrant’s Telephone Number, Including Area Code)

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

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

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

Large accelerated filer ☐☒

Accelerated filer ☒☐

Non-accelerated filer ☐

~~Smaller reporting company ☐~~

(Do not check if smaller

reporting company)

Smaller reporting company ☐

Emerging growth company ☐

~~reporting company)~~

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

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

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

Common Stock, no par value:	35,374,845 shares
(Title of Class)	~~32,239,928 shares~~ (Outstanding as of November ~~1, 2018)~~6, 2019)

Table of Contents

		Page

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

Item 2.	~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations	47 46

Item 3.	Qualitative and Quantitative Disclosures about Market Risks	60

Item 4.	Controls and Procedures	61

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

~~Item 1a.~~	~~Risk Factors~~	62

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

Item 3.	Defaults Upon Senior Securities	63

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

~~SIGNATURES~~

Item 1. Financial Statements

ConnectOne Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CONDITION

September 30, December 31,
2018 2017
(in thousands, except for share data) (unaudited)
ASSETS
Cash and due from banks $ 37,058 $ 52,565
Interest-bearing deposits with banks 118,790 97,017
Cash and cash equivalents 155,848 149,582

Securities available-for-sale 410,039 435,284
Equity securities 11,403 -

Loans held-for-sale 270 24,845

Loans receivable 4,462,487 4,171,456
Less: Allowance for loan losses 34,749 31,748
Net loans receivable 4,427,738 4,139,708

Investment in restricted stock, at cost 32,486 33,497
Bank premises and equipment, net 20,998 21,659
Accrued interest receivable 17,690 15,470
Bank owned life insurance 113,026 111,311
Other real estate owned - 538
Goodwill 145,909 145,909
Core deposit intangibles 1,881 2,364
Other assets 31,353 28,275
Total assets $ 5,368,641 $ 5,108,442
LIABILITIES
Deposits:
Noninterest-bearing $ 758,213 $ 776,843
Interest-bearing 3,230,552 3,018,285
Total deposits 3,988,765 3,795,128
Borrowings 629,979 670,077
Subordinated debentures (net of debt issuance costs of $1,681 and $456, respectively) 128,474 54,699
Other liabilities 26,552 23,101
Total liabilities 4,773,770 4,543,005

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY

Preferred stock, authorized 5,000,000 shares; issued -0- shares of Series B preferred stock at September 30, 2018 and December 31, 2017; outstanding -0- shares at September 30, 2018 and December 31, 2017; liquidation value of $-0- at September 30, 2018 and December 31, 2017 - -
Common stock, no par value, authorized 50,000,000 shares; issued 34,303,850 shares at September 30, 2018 and 34,135,782 at December 31, 2017; outstanding 32,239,928 shares at September 30, 2018 and 32,071,860 at December 31, 2017 412,546 412,546
Additional paid-in capital 14,625 13,602
Retained earnings 195,101 160,025
Treasury stock, at cost (2,063,922 common shares at September 30, 2018 and December 31, 2017) (16,717 ) (16,717 )
Accumulated other comprehensive loss (10,684 ) (4,019 )
Total stockholders’ equity 594,871 565,437
Total liabilities and stockholders’ equity $ 5,368,641 $ 5,108,442

(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

See accompanying notes to unaudited consolidated financial statements.

ConnectOne Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except for per share data) 2018 2017 2018 2017
Interest income
Interest and fees on loans $ 51,699 $ 43,241 $ 148,218 $ 121,879
Interest and dividends on investment securities:
Taxable 2,154 1,695 6,191 5,042
Tax-exempt 785 870 2,377 2,655
Dividends 530 362 1,517 982
Interest on federal funds sold and other short-term investments 183 170 607 555
Total interest income 55,351 46,338 158,910 131,113
Interest expense
Deposits 10,681 6,113 27,538 16,717
Borrowings 4,708 3,206 14,318 9,135
Total interest expense 15,389 9,319 41,856 25,852
Net interest income 39,962 37,019 117,054 105,261
Provision for loan losses 1,100 1,450 20,000 4,000
Net interest income after provision for loan losses 38,862 35,569 97,054 101,261
Noninterest income
Annuities and insurance commissions - - - 39
Income on bank owned life insurance 751 985 2,300 2,402
Net gains on sale of loans held-for-sale 2 50 31 120
Deposit, loan and other income 676 721 1,893 2,023
Net gains on sales of securities available-for-sale - - - 1,596
Total noninterest income 1,429 1,756 4,224 6,180
Noninterest expenses
Salaries and employee benefits 10,174 8,810 29,575 25,521
Occupancy and equipment 2,137 1,969 6,311 6,215
FDIC insurance 735 840 2,350 2,550
Professional and consulting 891 740 2,439 2,192
Marketing and advertising 192 225 736 770
Data processing 1,102 1,176 3,341 3,474
Merger expenses 375 - 399 -
Amortization of core deposit intangible 145 169 483 555
Other components of net periodic pension expense 7 62 21 189
Increase in valuation allowance, loans held-for-sale - 3,000 - 15,325
Change in fair value of equity securities 157 - 325 -
Other expenses 2,372 1,650 6,474 5,402
Total noninterest expenses 18,287 18,641 52,454 62,193
Income before income tax expense 22,004 18,684 48,824 45,248
Income tax expense 2,102 5,607 7,144 12,608
Net income $ 19,902 $ 13,077 $ 41,680 $ 32,640

Earnings per common share:
Basic $ 0.62 $ 0.41 $ 1.30 $ 1.02
Diluted 0.61 0.41 1.29 1.01

Dividends per common share $ 0.075 $ 0.075 $ 0.225 $ 0.225

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except for per share data)	2019			2018			2019			2018
Interest income
Interest and fees on loans	$	66,796		$	51,699		$	190,646		$	148,218
Interest and dividends on investment securities:
Taxable		1,916			2,154			7,431			6,191
Tax-exempt		897			785			3,105			2,377
Dividends		502			530			1,369			1,517
Interest on federal funds sold and other short-term investments		278			183			925			607
Total interest income		70,389			55,351			203,476			158,910
Interest expense
Deposits		17,351			10,681			49,298			27,538
Borrowings and subordinated debentures		4,632			4,708			15,290			14,318
Total interest expense		21,983			15,389			64,588			41,856
Net interest income		48,406			39,962			138,888			117,054
Provision for loan losses		2,000			1,100			7,600			20,000
Net interest income after provision for loan losses		46,406			38,862			131,288			97,054
Noninterest income
Income on bank owned life insurance		915			751			2,570			2,300
Net gains on sale of loans held-for-sale		278			2			343			31
Deposit, loan and other income		1,116			676			2,816			1,893
Net gains (losses) on equity securities		79			(157	)		340			(325	)
Net losses on sales of securities available-for-sale		(279	)		-			(280	)		-
Total noninterest income		2,109			1,272			5,789			3,899
Noninterest expenses
Salaries and employee benefits		12,420			10,174			36,168			29,575
Occupancy and equipment		2,480			2,137			7,332			6,311
FDIC insurance		(364	)		735			1,216			2,350
Professional and consulting		1,499			891			4,078			2,439
Marketing and advertising		473			192			1,080			736
Data processing		1,058			1,102			3,352			3,341
Merger expenses		191			375			8,084			399
Loss on extinguishment of debt		-			-			1,047			-
Amortization of core deposit intangibles		340			145			1,068			483
Other components of net periodic pension expense		29			7			86			21
Other expenses		2,253			2,372			6,520			6,474
Total noninterest expenses		20,379			18,130			70,031			52,129
Income before income tax expense		28,136			22,004			67,046			48,824
Income tax expense		6,440			2,102			14,434			7,144
Net income	$	21,696		$	19,902		$	52,612		$	41,680

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

See accompanying notes to unaudited consolidated financial statements.

ConnectOne Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2018 2017 2018 2017
Net income $ 19,902 $ 13,077 $ 41,680 $ 32,640
Other comprehensive income:
Unrealized gains and losses:
Unrealized holding (losses) gains on available-for-sale securities arising during the period (2,840 ) 415 (9,639 ) 1,332
Tax effect 729 (165 ) 2,466 (525 )
Net of tax (2,111 ) 250 (7,173 ) 807
Reclassification adjustment for realized gains included in net income - - - (1,596 )
Tax effect - - - 579
Net of tax - - - (1,017 )
Unrealized gains on cash flow hedges 14 119 1,108 76
Tax effect (5 ) (48 ) (312 ) (31 )
Net of tax 9 71 796 45
Unrealized pension plan gains (losses):
Unrealized pension plan gains (losses) before reclassifications - - 236 (2 )
Tax effect - - (67 ) 1
Net of tax - - 169 (1 )
Reclassification adjustment for amortization included in net income 91 103 274 309
Tax effect (26 ) (42 ) (77 ) (126 )
Net of tax 65 61 197 183
Total other comprehensive (loss) income (2,037 ) 382 (6,011 ) 17
Total comprehensive income $ 17,865 $ 13,459 $ 35,669 $ 32,657

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Net income	$	21,696		$	19,902		$	52,612		$	41,680
Other comprehensive income (loss):
Unrealized gains and losses:
Unrealized holding gains (losses) on available-for-sale securities arising during the period		2,236			(2,840	)		11,821			(9,639	)
Tax effect		(584	)		729			(3,061	)		2,466
Net of tax		1,652			(2,111	)		8,760			(7,173	)
Reclassification adjustment for realized losses included in net income		279			-			280			-
Tax effect		(62	)		-			(62	)		-
Net of tax		217			-			218			-
Unrealized (losses) gains on cash flow hedges		(49	)		14			(977	)		1,108
Tax effect		27			(5	)		309			(312	)
Net of tax		(22	)		9			(668	)		796
Reclassification adjustment for gains included in net income		(204	)		-			(563	)		-
Tax effect		46			-			125			-
Net of tax		(158	)		-			(438	)		-
Unrealized pension plan gains and losses:
Unrealized pension plan (losses) gains before reclassifications		-			-			(562	)		236
Tax effect		-			-			158			(67	)
Net of tax		-			-			(404	)		169
Reclassification adjustment for amortization included in net income		90			91			269			274
Tax effect		(26	)		(26	)		(76	)		(77	)
Net of tax		64			65			193			197
Total other comprehensive income (loss)		1,753			(2,037	)		7,661			(6,011	)
Total comprehensive income	$	23,449		$	17,865		$	60,273		$	35,669

See accompanying notes to unaudited consolidated financial statements.

ConnectOne Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

Accumulated
Additional Other Total
     Preferred     Common     Paid-In      Retained     Treasury     Comprehensive     Stockholders’
(dollars in thousands, except for per share data) Stock Stock Capital Earnings Stock (Loss) Income Equity
Balance as of December 31, 2016 $     - $     412,726 $      11,407 $      126,462 $      (16,717 ) $     (2,846 ) $      531,032
Net income - - - 32,640 - - 32,640
Other comprehensive income, net of tax - - - - - 17 17
Cash dividends declared on common stock ($0.225 per share) - - - (7,251 ) - - (7,251 )
Stock issuance costs - (180 ) - - - - (180 )
Exercise of stock options (10,846 shares) - - 118 - - - 118
Restricted stock grants (57,164 shares) - - - - - - -
Stock-based compensation expense - - 1,315 - - - 1,315

Balance as of September 30, 2017 $ - $ 412,546 $ 12,840 $ 151,851 $ (16,717 ) $ (2,829 ) $ 557,691

Balance as of December 31, 2017 $ - $ 412,546 $ 13,602 $ 160,025 $ (16,717 ) $ (4,019 ) $ 565,437

Reclassification of stranded tax effects (ASU 2018-02) (see Note 8) - - - 709 - (709 ) -
Cumulative effect of adopting ASU 2016-01 (see Note 8) - - - (55 ) - 55 -
Net income - - - 41,680 - - 41,680
Other comprehensive loss, net of tax - - - - - (6,011 ) (6,011 )
Cash dividends declared on common stock ($0.225 per share) - - - (7,258 ) - - (7,258 )
Exercise of stock options (102,378) shares) - - 524 - - - 524
Restricted stock grants (23,018 shares) - - - - - - -
Net performance units issued (42,672 shares) - - (819 ) - - - (819 )
Stock-based compensation expense - - 1,318 - - - 1,318

Balance as of September 30, 2018 $ - $ 412,546 $ 14,625 $ 195,101 $ (16,717 ) $ (10,684 ) $ 594,871

	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

	Three 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 June 30, 2019	$	-	$	468,571	$	19,777	$	235,649		$	(21,892	)	$	(2,881	)	$	699,224
Net income		-		-		-		21,696			-			-			21,696
Other comprehensive income, net of tax		-		-		-		-			-			1,753			1,753
Cash dividends declared on common stock ($0.09 per share)		-		-		-		(3,186	)		-			-			(3,186	)
Restricted stock grants (11,979 shares)		-		-		-		-			-			-			-
Stock-based compensation expense		-		-		673		-			-			-			673
Balance as of September 30, 2019	$	-	$	468,571	$	20,450	$	254,159		$	(21,892	)	$	(1,128	)	$	720,160

(continued)

	Nine Months Ended September 30, 2018

(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, 2017	$	-	$	412,546	$	13,602		$	160,025		$	(16,717	)	$	(4,019	)	$	565,437
Reclassification of stranded tax effects (ASU 2018-02) (see Note 8)		-		-		-			709			-			(709	)		-
Cumulative effect of adopting ASU 2016-01 (see Note 8)		-		-		-			(55	)		-			55			-
Net income		-		-		-			41,680			-			-			41,680
Other comprehensive loss, net of tax		-		-		-			-			-			(6,011	)		(6,011	)
Cash dividends declared on common stock ($0.225 per share)		-		-		-			(7,258	)		-			-			(7,258	)
Exercise of stock options (102,378) shares)		-		-		524			-			-			-			524
Restricted stock grants (23,018 shares)		-		-		-			-			-			-			-
Net performance units issued (42,672 shares)		-		-		(819	)		-			-			-			(819	)
Stock-based compensation expense		-		-		1,318			-			-			-			1,318
Balance as of September 30, 2018	$	-	$	412,546	$	14,625		$	195,101		$	(16,717	)	$	(10,684	)	$	594,871

	Three Months Ended September 30, 2018

(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 June 30, 2018	$	-	$	412,546	$	13,756	$	177,619		$	(16,717	)	$	(8,647	)	$	578,557
Net income		-		-		-		19,902			-			-			19,902
Other comprehensive income, net of tax		-		-		-		-			-			(2,037	)		(2,037	)
Cash dividends declared on common stock ($0.075 per share)		-		-		-		(2,420	)		-			-			(2,420	)
Exercise of stock options (55,881 shares)		-		-		272		-			-			-			272
Stock-based compensation expense		-		-		597		-			-			-			597
Balance as of September 30, 2018	$	-	$	412,546	$	14,625	$	195,101		$	(16,717	)	$	(10,684	)	$	594,871

See accompanying notes to unaudited consolidated financial statements.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Nine Months Ended
September 30,
(in thousands) 2018 2017
Cash flows from operating activities
Net income $ 41,680 $ 32,640
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 2,336 2,364
Provision for loan losses 20,000 4,000
Increase in valuation allowance - 15,325
Amortization of intangibles 483 555
Net accretion of loans (969 ) (1,106 )
Accretion on bank premises (46 ) (58 )
Accretion on deposits (46 ) (19 )
Accretion on borrowings (98 ) (156 )
Stock-based compensation expense 499 1,315
Gains on sales of investment securities, net - (1,596 )
Change in fair value of equity securities, net 325 -
Gains on sales of loans held-for-sale, net (31 ) (120 )
Gains on sales of fixed assets, net - (8 )
Loans originated for resale (2,206 ) (6,790 )
Proceeds from sale of loans held-for-sale 2,337 12,015
Net loss on sale of other real estate owned 192 82
Net increase in cash surrender value of bank owned life insurance (1,715 ) (2,402 )
Amortization of premiums and accretion of discounts on investments securities, net 2,577 1,808
Amortization of subordinated debt issuance costs 250 124
Increase in accrued interest receivable (2,220 ) (1,876 )
Decrease in other assets 42 8,770
Increase in other liabilities 3,945 3,444
Net cash provided by operating activities 67,335 68,311
Cash flows from investing activities
Investment securities available-for-sale:
Purchases (114,457 ) (138,945 )
Sales - 29,543
Maturities, calls and principal repayments 115,757 61,700
Net redemptions (purchases) of restricted investment in bank stocks 1,011 (5,362 )
Payments on loans held-for-sale 159 2,841
Net increase in loans (283,283 ) (447,457 )
Proceeds from sales of fixed assets - 8
Purchases of premises and equipment (1,629 ) (2,148 )
Purchases of bank owned life insurance - (10,000 )
Proceeds from sale of other real estate owned 884 1,124
Net cash used in investing activities (281,558 ) (508,696 )
Cash flows from financing activities
Net increase in deposits 193,683 279,517
Increase in subordinated debentures 73,525 -
Advances of Federal Home Loan Bank (“FHLB”) borrowings 1,256,000 780,000
Repayments of FHLB borrowings (1,296,000 ) (656,000 )
Repayment of repurchase agreement - (15,000 )
Cash dividends paid on common stock (7,243 ) (7,207 )
Common stock issuance costs - (180 )
Proceeds from exercise of stock options 524 118
Net cash provided by financing activities 220,489 381,248
Net change in cash and cash equivalents 6,266 (59,137 )
Cash and cash equivalents at beginning of period 149,582 200,399
Cash and cash equivalents at end of period $ 155,848 $ 141,262
Supplemental disclosures of cash flow information
Cash payments for:
Interest paid on deposits and borrowings $ 40,200 $ 25,807
Income taxes 2,507 4,670
Supplemental disclosures of noncash investing activities
Transfer of loans to other real estate owned $ 538 $ 580
Transfer of loans held-for-investment to loans held-for-sale 21,236 34,652
Transfer of loans held-for-sale to held-for-investment 45,552 -

	Nine Months Ended September 30,
(dollars in thousands)	2019			2018
Cash flows from operating activities
Net income	$	52,612		$	41,680
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		2,333			2,336
Provision for loan losses		7,600			20,000
Amortization of intangibles		1,068			483
Net accretion of loans		(3,790	)		(969	)
Accretion on bank premises		(65	)		(46	)
Accretion on deposits		(917	)		(46	)
Amortization (accretion) on borrowings		166			(98	)
Stock-based compensation expense		2,143			499
Losses on sales of investment securities, net		280			-
(Gains) losses on equity securities, net		(340	)		325
Gains on sales of loans held-for-sale, net		(343	)		(31	)
Loans originated for resale		(11,807	)		(2,206	)
Proceeds from sale of loans held-for sale		10,552			2,337
Net loss on sale of other real estate owned		-			192
Loss on extinguishment of debt		1,047			-
Increase in cash surrender value of bank owned life insurance		(2,570	)		(1,715	)
Amortization of premiums and accretion of discounts on investments securities, net		3,069			2,577
Amortization of subordinated debt issuance costs		246			250
Increase in accrued interest receivable		(376	)		(2,220	)
Net change in operating leases		1,359			-
Decrease in other assets		2,483			42
(Decrease) increase in other liabilities		(1,396	)		3,945
Net cash provided by operating activities		63,354			67,335
Cash flows from investing activities
Investment securities available-for-sale:
Purchases		(203,494	)		(114,457	)
Sales		183,728			-
Maturities, calls and principal repayments		136,375			115,757
Sales of equity securities		569			-
Net redemptions of restricted investment in bank stocks		3,190			1,011
Payments on loans held-for-sale		-			159
Net increase in loans		(239,012	)		(283,283	)
Purchases of premises and equipment		(1,336	)		(1,629	)
Purchases of bank owned life insurance		(10,000	)		-
Proceeds from sale of other real estate owned		-			884
Cash and cash equivalents acquired in acquisition		13,741			-
Cash consideration paid in acquisition		(2,530	)		-
Net cash used in investing activities		(118,769	)		(281,558	)
Cash flows from financing activities
Net increase in deposits		243,949			193,683
Increase in subordinated debentures		-			73,525
Advances of Federal Home Loan Bank (“FHLB”) borrowings		1,576,000			1,256,000
Repayments of FHLB borrowings		(1,728,944	)		(1,296,000	)
Repurchase of stock		(5,175	)		-
Cash dividends paid on common stock		(9,037	)		(7,243	)
Proceeds from exercise of stock options		265			524
Net cash provided by financing activities		77,058			220,489
Net change in cash and cash equivalents		21,643			6,266
Cash and cash equivalents at beginning of period		172,366			149,582
Cash and cash equivalents at end of period	$	194,009		$	155,848
Supplemental disclosures of cash flow information
Cash payments for:
Interest paid on deposits and borrowings	$	67,443		$	40,200
Income taxes		13,199			2,507
Supplemental disclosures of noncash investing activities
Transfer of loans to other real estate owned	$	907		$	538
Transfer of loans held-for-investment to loans held-for-sale		31,647			21,236
Transfer of loans held-for-sale to held-for-investment		-			45,552
Business combinations:
Fair value of net assets acquired, net of cash and cash equivalents	$	534,146		$	-
Fair value of liabilities assumed		488,475			-

See accompanying notes to unaudited consolidated financial statements.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Nature of Operations and Principles of Consolidation

ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company. The Parent Corporation’s business currently consists of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”). The Bank’s subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a Delaware investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), ~~and~~ NJCB Spec-1, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey online business lending 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-one~~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 September 30, ~~2018~~2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, ~~2018,~~2019, or for any other interim period. The Company’s ~~2017~~2018 Annual Report on Form 10-K should be read in conjunction with these consolidated financial statements.

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

The consolidated financial statements have been prepared in conformity with GAAP. Some items in the prior year consolidated financial statements were reclassified to conform to current presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.

Note 1a. Authoritative Accounting Guidance

Newly Issued, But Not Yet Effective Accounting Standards

ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Assets Measured at Amortized Cost.” (modified by ASU 2018-19, 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.

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 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)~~

(unaudited)

Note ~~2. New~~1a. Authoritative Accounting Guidance – (continued)

ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” ASU No. 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 will be effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. We are currently evaluating this ASU to determine the impact on our consolidated financial statements.

ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ~~'These~~These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018-15 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value ~~Measurement.~~Measurement.” The amendments in this update modify disclosure requirements on fair value measurements by removing, modifying and adding certain disclosure requirements. The amendments primarily pertain to Level 3 fair value measurements and depending on the amendment are applied either prospectively or retrospectively. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

~~ASU 2018-10, “~~~~Codification Improvements to Topic 842, Leases~~.” These amendments affect narrow aspects of the guidance issued in the amendments in ASU 2016-02 including those regarding residual value guarantees, rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic 840, transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic 840, transition guidance for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on rate implicit in the lease, and failed sale and leaseback transactions. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

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

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

~~ASU 2018-01, “~~~~Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842~~.” ASU 2018-01 provides an optional transition practical expedient for the adoption of ASU 2016-02 that, if elected, would not require an organization to reconsider their accounting for existing land easements that are not currently accounted for under the old leases standard; and clarify that new or modified land easements should be evaluated under ASU 2016-02, once an entity has adopted the new standard. ASU 2018-01 is effective for fiscal years beginning after December 15, 2018. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

~~ASU No. 2017-12, “~~~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~.” ASU No. 2017-12 refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. ASU 2017-12 will be effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Although management continues to evaluate the potential impact of ASU 2017-12 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

~~ASU No. 2017-08, “'~~~~Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities~~.” ASU No. 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 will be effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. We are currently evaluating this ASU to determine the impact on our consolidated financial statements.

ASU No. 2017-04,“Intangibles – Goodwill and Other (Topic 350).”ASU 2017-04 aims to simplify the subsequent measurement of goodwill. Under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets and still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019. Although management continues to evaluate the potential impact of ASU 2017-04 on our consolidated financial statements, at this time, we believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

~~ASU No. 2016-13, “~~~~Financial Instruments – Credit Losses (Topic 326): Assets Measured~~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 ~~Amortized Cost.” ASU 2016-13 requires~~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 ~~financial asset (or a group~~core deposit intangible of ~~financial assets) measured~~$5.1 million. The assets acquired and liabilities assumed and consideration paid in the acquisition of GHB were recorded at ~~amortized cost basis to be presented~~their estimated fair values based on management’s best estimates using information available at the ~~net amount~~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 collected. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates and affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excludedmaterially different from the ~~scope~~estimates, accounting guidance provides that ~~have~~an acquirer must recognize adjustments to provisional amounts that are identified during the ~~contractual right to receive cash. For public business entities,~~measurement period, which runs through January 2, 2020, in the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has formed a CECL committee that is assessing our data and system needs. The Company has engaged a third-party vendor to assist is analyzing our data and developing a CECL model. The Company has recently met with the third-party vendor and discussed our data, in terms of what is available and potential gaps. The Company also discussed modeling standards, loan segmentation, as well as potential external inputs to supplement our historical loss history. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reportingmeasurement period in which the ~~ASU is effective, but cannot yet determine~~adjustment amounts are determined. The acquirer must record in the ~~magnitude~~financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, ~~such one-time adjustment or the overall impact~~as a result of the ~~ASU~~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 ~~our consolidated financial statements.~~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

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

~~ASU No. 2016-02, “~~~~Leases (Topic 842)~~~~” requires~~The following is a summary of the ~~recognition~~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

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

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

Direct acquisition and integration costs of the GHB acquisition were expensed as incurred. These items were recorded as merger-related expenses on the consolidated statement of income. During the three months and nine months ended September 30, 2019, merger expenses related to the GHB acquisition were $-0- and $7.6 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 ~~right~~share of ~~use asset~~Parent Corporation’s common stock for each share of BKJ common stock, subject to proration and ~~related lease liability by lessees for leases classified as operating leases under current GAAP. Topic 842, which replaces~~allocation procedures set forth in the current guidance under Topic 840, retains a distinction between finance leases and operating leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee also will not significantly change from current GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities. Topic 842 will be effective for the Company for reporting periods beginning January 1, 2019, with early adoption permitted. The Company must apply a modified retrospective transition approach for the applicable leases existing at, or entered into after, the beginningMerger Agreement. Closing of the ~~earliest comparative period presented~~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 ~~consolidated financial statements.~~Merger. The ~~modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The Company~~Merger is ~~currently leasing properties as branch locations and is leasing certain office equipment. Currently, the Company is~~expected to close in the ~~process~~first quarter of evaluating all of our leases for compliance for the new ASU. As part of that process, management is developing a systematic approach that can be used to calculate the financial statement impact starting in 2019. The adoption of ASU 2016-02 will result in increases to the Company's assets and liabilities.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 Nine Months Ended
September 30, September 30,
(in thousands, except for per share data)
      2018       2017       2018       2017
Income attributable to common stock $       19,860 $       13,035 $       41,582 $        32,534
Earnings allocated to participating securities 42 42 98 106
Net income $ 19,902 $ 13,077 $ 41,680 $ 32,640
Weighted average common shares outstanding, including participating securities 32,167 32,015 32,127 31,999
Weighted average participating securities (25 ) (103 ) (34 ) (104 )
Weighted average common shares outstanding 32,142 31,912 32,093 31,895
Incremental shares from assumed conversions of options, performance units and restricted shares 177 270 220 272
Weighted average common and equivalent shares outstanding 32,319 32,182 32,313 32,167

Earnings per common share:
Basic $ 0.62 $ 0.41 $ 1.30 $ 1.02
Diluted 0.61 0.41 1.29 1.01

	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 September 30, ~~2018~~2019 and September 30, ~~2017.~~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 September 30, 2018 and December 31, 2017. 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 September 30, ~~2018~~2019 and December 31, ~~2017~~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
September 30, 2018 (dollars in thousands)
Securities available-for-sale
Federal agency obligations $ 48,963 $ 14 $ (1,443 ) $ 47,534
Residential mortgage pass-through securities 196,650 75 (6,174 ) 190,551
Commercial mortgage pass-through securities 3,953 - (110 ) 3,843
Obligations of U.S. states and political subdivisions 133,564 727 (3,903 ) 130,388
Corporate bonds and notes 26,305 96 (439 ) 25,962
Asset-backed securities 10,317 59 (13 ) 10,363
Certificates of deposit 420 3 - 423
Other securities 975 - - 975
Total securities available-for-sale $ 421,147 $ 974 $ (12,082 ) $ 410,039

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2017 (dollars in thousands)
Securities available-for-sale
Federal agency obligations $ 56,297 $ 141 $ (416 ) $ 56,022
Residential mortgage pass-through securities 183,509 330 (1,948 ) 181,891
Commercial mortgage pass-through securities 4,054 3 (3 ) 4,054
Obligations of U.S. states and political subdivisions 130,723 1,739 (1,334 ) 131,128
Trust preferred securities 4,577 205 (111 ) 4,671
Corporate bonds and notes 29,801 163 (271 ) 29,693
Asset-backed securities 12,021 66 (37 ) 12,050
Certificates of deposit 621 4 - 625
Equity securities 11,843 235 (350 ) 11,728
Other securities 3,422 - - 3,422
Total securities available-for-sale $ 436,868 $ 2,886 $ (4,470 ) $ 435,284

~~Effective January 1, 2018, the Company implemented ASU 2016-01, “~~~~Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.~~” Under ASU 2016-01, equity securities, with certain exceptions, are to be measured at fair value with changes in fair value recognized in net income. As of March 31, 2018, the Company began separately presenting equity securities with readily determinable fair values on the Statements of Condition within the “Equity securities” caption. Net unrealized losses recognized on equity securities with readily determinable fair values for the three and nine months ended as of September 30, 2018 were $157 thousand and $325 thousand, respectively.

	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 ~~$157.0~~$119.6 million and ~~$157.8~~$151.5 million at September 30, ~~2018~~2019 and December 31, ~~2017,~~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 September 30, ~~2018~~2019 and December 31, ~~2017,~~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 September 30, ~~2018,~~2019, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer. Securities not due at a single maturity date are shown separately.

September 30, 2018
Amortized Fair
Cost Value
(dollars in thousands)
Securities available-for-sale:
Due in one year or less $ 4,429 $ 4,425
Due after one year through five years 36,607 36,375
Due after five years through ten years 28,135 28,290
Due after ten years 150,398 145,580
Residential mortgage pass-through securities 196,650 190,551
Commercial mortgage pass-through securities 3,953 3,843
Other securities 975 975
Total securities available-for-sale $ 421,147 $ 410,039

	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 ~~calls and maturities~~ of securities for periods presented were as follows:

Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands)
2018 2017 2018 2017
Proceeds $ - $ - $ - $ 29,543

Gross gains on sales of securities - - - 1,596
Gross losses on sales of securities - - - -
Net gains on sales of securities - - - 1,596
Less: tax provision on net gains - - - (579 )

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

	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 ~~170~~49 and ~~112~~148 securities as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, represent an other-than-temporary impairment (“OTTI”). The gross unrealized losses associated with U.S. Treasury and agency securities, federal agency obligations, mortgage-backed securities, corporate bonds, tax-exempt securities, ~~asset-backed securities, trust preferred securities, mutual funds~~ and ~~equity~~asset-backed securities are not considered to be other-than-temporary because these unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.

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

The unrealized losses included in the tables below are primarily related to changes in interest rates and credit spreads. All of the Company’s securities are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. These are largely intermediate duration holdings and, in certain cases, monthly principal payments can further reduce loss exposure resulting from an increase in rates.

The Company evaluates all securities with unrealized losses quarterly to determine whether the loss is other-than-temporary. Unrealized losses in the corporate debt securities category consist primarily of senior unsecured corporate debt securities issued by large financial institutions, insurance companies and other corporate issuers. Single issuer corporate trust preferred securities are also included, and in the case of one holding the market valuation loss is largely based upon the floating rate coupon and corresponding market valuation. Neither that trust preferred issuer, nor any otherNo corporate issuers have defaulted on interest payments. The ~~unrealized loss in equity securities consists of losses on other bank equities. The decline~~declines in fair value 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 September 30, 2019 and at December 31, 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 September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

September 30, 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 $     45,057 $     (1,443 ) $     21,455 $     (513 ) $     23,602 $     (930 )
Residential mortgage pass-through securities 185,442 (6,174 ) 106,190 (2,491 ) 79,252 (3,683 )
Commercial mortgage pass-through securities 3,843 (110 ) 3,843 (110 ) - -
Obligations of U.S. states and political subdivisions 78,481 (3,903 ) 33,733 (877 ) 44,748 (3,026 )
Corporate bonds and notes 15,655 (439 ) 11,008 (124 ) 4,647 (315 )
Asset-backed securities 4,113 (13 ) 2,303 (8 ) 1,810 (5 )
Total temporarily impaired securities $ 332,591 $ (12,082 ) $ 178,532 $ (4,123 ) $ 154,059 $ (7,959 )

December 31, 2017
Total Less than 12 Months 12 Months or Longer
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
(dollars in thousands)
Investment Securities
Available-for-Sale:
Federal agency obligation $     39,813 $     (416 ) $     28,407 $     (213 ) $     11,406 $     (203 )
Residential mortgage pass-through securities 148,574 (1,948 ) 117,556 (1,146 ) 31,018 (802 )
Commercial mortgage pass-through securities 1,198 (3 ) 1,198 (3 ) - -
Obligations of U.S. states and political subdivisions 57,685 (1,334 ) 17,909 (246 ) 39,776 (1,088 )
Trust preferred securities 1,469 (111 ) - - 1,469 (111 )
Corporate bonds and notes 11,074 (271 ) 1,965 (21 ) 9,109 (250 )
Asset-backed securities 7,428 (37 ) 993 (2 ) 6,435 (35 )
Equity securities 11,116 (350 ) - - 11,116 (350 )
Total temporarily impaired securities $ 278,357 $ (4,470 ) $ 168,028 $ (1,631 ) $ 110,329 $ (2,839 )

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 and October 15,~~ 2014 each with a respective notional amount of $25 million and were designated as cash flow hedges of ~~a Federal Home Loan Bank (“FHLB”)~~an FHLB advance. The swaps were determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income while the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.

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

September 30, December 31, September 30,
2018 2017 2017
(dollars in thousands)
Notional amount $ 100,000 $ 100,000 $ 100,000
Weighted average pay rates 1.68 % 1.66 % 1.52 %
Weighted average receive rates 2.12 % 1.23 % 1.07 %
Weighted average maturity 1.7 years 2.4 years 2.7 years

Fair value $ 1,906 $ 798 $ 164

~~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 ~~$173 thousand~~$(204,000) and ~~$326 thousand~~$(563,000) for the three and nine months ended September 30, 2019, respectively, and $(173,000) and $(326,000) for the three and nine months ended September 30, 2018, respectively, and net interest expense recorded on these swap transactions totaled $95 thousand and $326 thousand for the three and nine months ended September 30, 2017, respectively, and is reported as a component of interest expense on FHLB advances.respectively.

Cash Flow Hedge

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

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

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

	Nine Months Ended September 30, 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 September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

September 30, 2018 December 31, 2017
Notional Notional
Amount Fair Value Amount Fair Value
(dollars in thousands)
Interest rate swaps related to FHLB advances included in assets $ 100,000 $ 1,906 $ 100,000 $ 798

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

Loan segments are defined as a group of loans, which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Company has five segments of loans: commercial, commercial real estate, commercial construction, residential real estate (including home equity) and consumer.

The recognition of interest income on commercial, commercial real estate, commercial construction and residential loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to nonaccrual status in accordance with the Company’s policy, typically after 90 days of non-payment.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The policy of the Company is to generally grant commercial, residential and consumer loans to residents and businesses within our market area. The borrowers’ abilities to repay their obligations are dependent upon various factors including the borrowers’ income and net worth, cash flows generated by the borrowers’ underlying collateral, value of the underlying collateral, and priority of the lender’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the control of the Company. The Company is therefore subject to risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for a large majority of the Company’s loans.

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

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

~~Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.~~

~~Allowance for Loan Losses~~: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

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

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

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired. As part of the evaluation of impaired loans, the Company individually reviews for impairment all non-homogeneous loans internally classified as substandard or below. Generally, smaller impaired non-homogeneous loans and impaired homogeneous loans are collectively evaluated for impairment.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, impairment of the loan is measured using the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

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

~~Purchased Credit-Impaired Loans~~: The Company acquires groups of loans in conjunction with mergers, some of which have shown evidence of credit deterioration since origination. These purchased credit-impaired loans are recorded at their estimated fair value, such that there is no carryover of the seller’s allowance for loan losses (“ALLL”). After acquisition, probable incurred credit losses are recognized by an increase in the ALLL.

Such purchased credit-impaired loans (“PCI”) are identified on an individual basis. The Company estimates the amount and timing of expected cash flows for each loan and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

A PCI loan may be resolved either through a sale of the loan, by working with the customer and obtaining partial or full repayment, by short sale of the collateral, or by foreclosure. A gain or loss on resolution would be recognized based on the difference between the proceeds received and the carrying amount of the loan.

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

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

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

Loans receivable- The following table sets forth the composition of the Company’s loan portfolio, including net deferred loan fees, at September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

September 30, December 31,
2018 2017
(dollars in thousands)
Commercial $ 933,169 $ 824,082
Commercial real estate 2,739,943 2,592,909
Commercial construction 494,206 483,216
Residential real estate 295,948 271,795
Consumer 2,508 2,808
Gross loans 4,465,774 4,174,810
Net deferred loan fees (3,287 ) (3,354 )
Total loans receivable $ 4,462,487 $ 4,171,456

	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 September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, loan balances of approximately ~~$2.2~~$2.5 billion and ~~$1.9~~$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~~Company's loans held-for-sale portfolio at September 30, ~~2018~~2019 and December 31, ~~2017:~~

September 30, December 31,
2018 2017
(dollars in thousands)
Commercial real estate $ - $ 24,475
Residential real estate 270 370
Total carrying amount $ 270 $ 24,845

~~Valuation allowance~~- The following table sets forth the composition of the Company’s valuation allowance within the loans held-for-sale portfolio during the three and nine months ended September 30, 2018 and September 30, 2017:

Three Months Three Months
Ended Ended
September 30, September 30,
      2018       2017
(dollars in thousands)
Balance at July 1, $ - $             12,325
Reduction from loans paid off - (38 )
Increase in valuation allowance - 3,000
Balance at September 30, $ - $ 15,287

Nine Months Nine Months
Ended Ended
September 30, September 30,
      2018       2017
(dollars in thousands)
Balance at January 1, $ - $             -
Reduction from loans paid off - (38 )
Increase in valuation allowance - 15,325
Balance at September 30, $ - $ 15,287

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

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

Purchased Credit-Impaired Loans: - The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investment ofin those loans is as follows at September 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

September 30, December 31,
2018 2017
(dollars in thousands)
Commercial $ 2,524 $ 2,683

	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 orand nine months ended September 30, ~~2018~~2019 and September 30, ~~2017.~~2018. There were no reversals from the allowance for loan losses during the three and nine months ended September 30, ~~2018~~2019 and September 30, ~~2017.~~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 ~~interest~~the accretable yield, or income expected to be ~~recognized~~collected, on the purchased credit-impaired loans ~~and the related activity~~ for ~~the~~ three and nine months ended September 30, ~~2018~~2019 and September 30, ~~2017:~~2018:

Three Months Three Months
Ended Ended
September 30, September 30,
      2018       2017
(dollars in thousands)
Balance at July 1, $               1,259 $               2,496
Accretion of income (63 ) (180 )
Balance at September 30, $ 1,196 $ 2,316

Nine Months Nine Months
Ended Ended
September 30, September 30,
      2018       2017
(dollars in thousands)
Balance at January 1, $              1,387 $              2,860
Accretion of income (191 ) (544 )
Balance at September 30, $ 1,196 $ 2,316

	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

Loans Receivable on Nonaccrual Status-The following ~~table sets forth the composition of the Company’s~~tables present nonaccrual loans included in loans receivable by loan class as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

September 30, December 31,
2018 2017
(dollars in thousands)
Commercial $ 29,562 $ 47,363
Commercial real estate 15,927 12,757
Commercial construction 2,934 -
Residential real estate 4,592 5,493
Total nonaccrual loans $ 53,015 $ 65,613

	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.

The decrease in nonaccruals from the year-end 2017 was mainly attributable to a $17.0 million charge-off, related to the taxi medallion loan portfolio (which is included in the Commercial loan category) that took place during the first quarter of 2018. The taxi medallion loan portfolio was classified as substandard and impaired as of September 30, 2018 and December 31, 2017.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

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

(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.

~~Credit Quality Indicators~~ -The following table presents information ~~excluding loans held-for-sale and net deferred loan fees,~~ about the ~~Company’s~~ loan credit quality by loan class of gross loans (which exclude net deferred fees) at September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

September 30, 2018
Special
Pass Mention Substandard Doubtful Total
(dollars in thousands)
Commercial ⁽¹⁾ $ 887,024 $ 12,639 $ 33,506 $ - $ 933,169
Commercial real estate 2,699,338 10,651 29,954 - 2,739,943
Commercial construction 481,226 5,458 7,522 - 494,206
Residential real estate 291,223 - 4,725 - 295,948
Consumer 2,484 - 24 - 2,508
Gross loans $ 4,361,295 $ 28,748 $ 75,731 $ - $ 4,465,774

December 31, 2017
Special
Pass Mention Substandard Doubtful Total
(dollars in thousands)
Commercial $ 767,020 $ 3,764 $ 53,298 $ - $ 824,082
Commercial real estate 2,534,973 34,335 23,601 - 2,592,909
Commercial construction 475,066 5,521 2,629 - 483,216
Residential real estate 266,163 - 5,632 - 271,795
Consumer 2,767 - 41 - 2,808
Gross loans $ 4,045,989 $ 43,620 $ 85,201 $ - $ 4,174,810

⁽¹⁾

~~Reflects a $17.0 million charge-off related to the taxi medallion loans classified as “substandard”.~~

	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

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 ~~category~~segment as of September 30, ~~2018~~2019 and December 31, ~~2017:~~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

September 30, 2018
            Unpaid
Recorded Principal Related
Investment Balance Allowance
No related allowance recorded (dollars in thousands)
Commercial $ 31,471 $ 92,452
Commercial real estate 21,483 21,636
Commercial construction 10,428 10,429
Residential real estate 2,237 2,533
Consumer - -
Total (no related allowance) $ 65,619 $ 127,050

With an allowance recorded
Commercial real estate $     8,529 $     8,529 $     709
Residential real estate 263 266 32
Total (with allowance) $ 8,792 $ 8,795 $ 741

Total
Commercial $ 31,471 $ 92,452 $ -
Commercial real estate 30,012 30,165 709
Commercial construction 10,428 10,429 -
Residential real estate 2,500 2,799 32
Consumer - - -
Total $ 74,411 $ 135,845 $ 741

December 31, 2017
          Unpaid
Recorded Principal Related
Investment Balance Allowance
No related allowance recorded (dollars in thousands)
Commercial $ 49,761 $ 101,066
Commercial real estate 23,905 23,976
Commercial construction 6,662 6,662
Residential real estate 3,203 3,442
Consumer - -
Total (no related allowance) $ 83,531 $ 135,146

With an allowance recorded
Commercial real estate $ 1,133 $ 1,133 $ 39

Total
Commercial $ 49,761 $ 101,066 $ -
Commercial real estate 25,038 25,109 39
Commercial construction 6,662 6,662 -
Residential real estate 3,203 3,442 -
Consumer - - -
Total $ 84,664 $ 136,279 $ 39

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

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Average Interest Average Interest Average Interest Average Interest
Recorded Income Recorded Income Recorded Income Recorded Income
Investment Recognized Investment Recognized Investment Recognized Investment Recognized
(dollars in thousands)
Impaired loans (no allowance):
Commercial ⁽¹⁾ $ 31,769 $ 36 $ 3,100 $ 34 $ 39,132 $ 102 $ 3,149 $ 115
Commercial real estate 21,557 105 19,302 221 21,714 475 18,813 424
Commercial construction 10,297 92 4,285 63 11,718 387 4,273 215
Residential real estate 2,249 - 2,529 2 2,304 - 2,551 6
Consumer - - 48 1 - - 54 2
Total $ 65,872 $ 233 $ 29,264 $ 321 $ 74,868 $ 964 $ 28,840 $ 762
Impaired loans (allowance):
Commercial real estate $ 8,534 $ 11 $ 1,645 $ 2 $ 8,544 $ 34 $ 1,654 $ 39
Residential real estate 264 - - - 267 - - -
Total $ 8,798 $ 11 $ 1,645 $ 2 $ 8,811 $ 34 $ 1,654 $ 39
Total impaired loans:
Commercial ⁽¹⁾ $ 31,769 $ 36 $ 3,100 $ 34 $ 39,132 $ 102 $ 3,149 $ 115
Commercial real estate 30,091 116 20,947 223 30,258 509 20,467 463
Commercial construction 10,297 92 4,285 63 11,718 387 4,273 215
Residential real estate 2,513 - 2,259 2 2,571 - 2,551 6
Consumer - - 48 1 - - 54 2
Total $ 74,670 $ 244 $ 30,909 $ 323 $ 83,679 $ 998 $ 30,494 $ 801

⁽¹⁾

~~Reflects the entire taxi medallion portfolio moving back to the loans held-for-investment category from the loans held-for-sale category in November 2017.~~

	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 September 30, ~~2018~~2019 and December 31, ~~2017~~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 ~~gross~~the loans ~~(excluding loans held-for-sale)~~by class, excluding net deferred fees, that are past due at September 30, ~~2018~~2019 and December 31, ~~2017 by segment:~~2018:

~~Aging Analysis~~

	September 30, 2018
					90 Days or
					Greater Past				Total Past
	30-59 Days		60-89 Days		Due and Still				Due and						September 30, 2019
	Past Due		Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Gross Loans		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)															(dollars in thousands)
Commercial	$	233	$	246	$	1,648	$	29,562	$	31,689	$	901,480	$	933,169	$	5,812	$	1,438	$	3,098	$	33,781	$	44,129	$	1,069,614	$	1,113,743
Commercial real estate		-		3,190		-		15,927		19,117		2,720,826		2,739,943		-		689		-		7,529		8,218		3,022,598		3,030,816
Commercial construction		-		-		-		2,934		2,934		491,272		494,206		-		-		-		7,101		7,101		639,071		646,172
Residential real estate		6		-		-		4,592		4,598		291,350		295,948		698		-		-		2,910		3,608		318,699		322,307
Consumer		288		-		-		-		288		2,220		2,508		-		-		-		-		-		2,435		2,435
Total	$	527	$	3,436	$	1,648	$	53,015	$	58,626	$	4,407,148	$	4,465,774	$	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 September 30, 2018 are purchased credit-impaired loan, net of its fair value marks, which accretes income per its valuation at date of acquisition.

	December 31, 2017
					90 Days or
					Greater Past				Total Past
	30-59 Days		60-89 Days		Due and Still				Due and
	Past Due		Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Gross Loans
	(dollars in thousands)
Commercial	$	1,708	$	183	$	1,664	$	47,363	$	50,918	$	773,164	$	824,082
Commercial real estate		545		1,475		-		12,757		14,777		2,578,132		2,592,909
Commercial construction		-		-		-		-		-		483,216		483,216
Residential real estate		1,578		-		-		5,493		7,071		264,724		271,795
Consumer		18		-		-		-		18		2,790		2,808
Total	$	3,849	$	1,658	$	1,664	$	65,613	$	72,784	$	4,102,026	$	4,174,810

Included in the 90 days or greater past due and still accruing category as of 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
	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, ~~2017~~2018 are purchased credit-impaired ~~loan,~~loans, net of ~~its~~ fair value marks, which accretes income per ~~its~~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 ~~credit~~ quality, and the related portion of the allowance for loan losses ~~(“ALLL”)~~ that are allocated to each loan portfolio segment:

September 30, 2018
Commercial Commercial Residential
      Commercial       real estate       construction       real estate       Consumer       Unallocated       Total
(dollars in thousands)
ALLL
Individually evaluated for impairment $      - $      709 $      - $      32 $      - $      - $      741
Collectively evaluated for impairment 9,749 16,569 4,790 1,183 3 564 32,858
Acquired portfolio 200 950 - - - - 1,150
Acquired with deteriorated credit quality - - - - - - -
Total $ 9,949 $ 18,228 $ 4,790 $ 1,215 $ 3 $ 564 $ 34,749

Gross loans
Individually evaluated for impairment $ 31,471 $ 30,012 $ 10,428 $ 2,500 $ - $ 74,411
Collectively evaluated for impairment 891,514 2,438,638 483,778 247,211 2,123 4,063,264
Acquired portfolio 7,660 271,293 - 46,237 385 325,575
Acquired with deteriorated credit quality 2,524 - - - - 2,524
Total $ 933,169 $ 2,739,943 $ 494,206 $ 295,948 $ 2,508 $ 4,465,774

December 31, 2017
Commercial Commercial Residential
Commercial real estate construction real estate Consumer Unallocated Total
(dollars in thousands)
ALLL
Individually evaluated for impairment $ - $ 39 $ - $ - $ - $ - $ 39
Collectively evaluated for impairment 8,032 15,472 4,747 1,051 2 605 29,909
Acquired portfolio 200 1,600 - - - - 1,800
Acquired with deteriorated credit quality - - - - - - -
Total $ 8,232 $ 17,111 $ 4,747 $ 1,051 $ 2 $ 605 $ 31,748

Gross loans
Individually evaluated for impairment $ 49,761 $ 25,038 $ 6,662 $ 3,203 $ - $ 84,664
Collectively evaluated for impairment 757,923 2,190,686 476,554 212,350 2,338 3,639,851
Acquired portfolio 13,715 377,185 - 56,242 470 447,612
Acquired with deteriorated credit quality 2,683 - - - - 2,683
Total $ 824,082 $ 2,592,909 $ 483,216 $ 271,795 $ 2,808 $ 4,174,810

	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, ~~2017.~~

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

Three Months Ended September 30, 2018
        Commercial    Commercial     Residential
Commercial real estate construction 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

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

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

Recoveries 17 2 - - 1 - 20

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

Balance at September 30, 2017 $ 7,716 $ 16,834 $ 3,940 $ 1,052 $ 2 $ 326 $ 29,870

	Three Months Ended September 30, 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, 2018
Commercial Commercial Residential
    Commercial     real estate     construction     real estate     Consumer     Unallocated     Total
(dollars in thousands)
Balance at December 31, 2017 $      8,233 $         17,112 $      4,747 $        1,050 $            1 $             605 $      31,748

Charge-offs (17,066 ) - - (18 ) (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

Nine Months Ended September 30, 2017
Commercial Commercial Residential
    Commercial     real estate     construction     real estate     Consumer     Unallocated     Total
(dollars in thousands)
Balance at December 31, 2016 $      6,632 $      12,583 $            4,789 $      958 $            3 $             779 $      25,744

Charge-offs - (71 ) - - (12 ) - (83 )

Recoveries 158 50 - - 1 - 209

Provision for loan losses 926 4,272 (849 ) 94 10 (453 ) 4,000

Balance at September 30, 2017 $ 7,716 $ 16,834 $ 3,940 $ 1,052 $ 2 $ 326 $ 29,870

	Nine Months Ended September 30, 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)~~

(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 ~~TDR~~troubled debt restructuring remains on nonaccrual status for a period of ~~nine~~six months to demonstrate that the borrower is able to meet the terms of the modified loan. ~~However, performance prior~~

At September 30, 2019, there were no commitments 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~~lend additional funds 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~~borrowers whose loans were on nonaccrual ~~status.~~status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in troubled debt restructurings.

~~The following table presents a rollforward~~As of ~~TDRs and the related changes to the allowance for loan losses (“ALLL”) that occurred for the periods presented:~~

Nine Months Ended Year Ended
September 30, 2018 December 31, 2017
(dollars in thousands)
Recorded Recorded
Investment ALLL Investment ALLL
TDRs
Beginning balance $ 20,518 $ - $ 13,818 $ -
Net additions 18,913 11 10,378 -
Payoffs/paydowns (7,094 ) - (3,098 ) -
Transfers - - (580 ) -
Ending balance $ 32,337 $ 11 $ 20,518 $ -

September 30, 2019, TDRs totaled ~~$32.3~~$51.5 million, ~~at September 30, 2018,~~ of which ~~$21.1~~$31.8 million were on nonaccrual status and $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. ~~At December 31, 2017, TDRs totaled $20.5~~The Company has allocated $1.4 million and $0.1 million of ~~which $5.6 million were on nonaccrual status and $14.9 million were performing under restructured terms. TDRs~~specific allowance as of September 30, ~~2018 increased the ALLL during the three~~2019 and ~~nine months ended~~ September 30, 2018, ~~by $-0- and $147 thousand,~~ respectively. During the nine months ended September 30, 2018, one commercial construction loan and one commercial real estate loan showed collateral improvement, resulting in approximately $136 thousand reduction in specific reserve allocations. There were no charge-offs in connection with a loan modification at the time of modification during the three and nine months ended September 30, ~~2018.~~2019. There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, ~~2018.~~2019.

The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2019:

	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 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:

Pre-Modification Post-Modification
Outstanding Outstanding
Number of Recorded Recorded
Loans Investment 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

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

TDRs totaled $17.6 million at September 30, 2017, of which $4.8 million were on nonaccrual status and $12.8 million were performing under restructured terms. At December 31, 2016, TDRs totaled $13.8 million, of which $0.5 million were on nonaccrual status and $13.3 million were performing under restructured terms. TDRs as of September 30, 2017 did not increase the ALLL during the three and nine months ended September 30, 2017. There were no charge-offs in connection with a loan modification at the time of modification during the three or nine months ended September 30, 2017. There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2017.

~~The following table presents loans by segment modified as troubled debt restructurings that occurred during the nine months ended September 30, 2017:~~

Pre-Modification Post-Modification
Outstanding Outstanding
Number of Recorded Recorded
Loans Investment Investment
TDRs (dollars in thousands)
Commercial real estate 2 $ 3,042 $ 3,042
Commercial construction 1 2,589 2,589
Residential real estate 1 17 17
Total 4 $ 5,648 $ 5,648

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

			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	$	-

September 30, 2018
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
(dollars in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available-for-sale:
Federal agency obligations $ 47,534 $ - $ 47,534 $ -
Residential mortgage pass-through securities 190,551 - 190,551 -
Commercial mortgage pass-through securities 3,843 - 3,843 -
Obligations of U.S. states and political subdivision 130,388 - 120,947 9,441
Corporate bonds and notes 25,962 - 25,962 -
Asset-backed securities 10,363 - 10,363 -
Certificates of deposit 423 - 423 -
Other securities 975 975 - -
Total available-for-sale $ 410,039 $ 975 $ 399,623 $ 9,441

Equity securities 11,403 11,403 - -

Derivatives 1,906 - 1,906 -
Total assets $ 423,348 $ 12,378 $ 401,529 $ 9,441

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, 2017
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
(dollars in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available-for-sale:
Federal agency obligations $ 56,022 $ - $ 56,022 $ -
Residential mortgage pass-through securities 181,891 - 181,891 -
Commercial mortgage pass-through securities 4,054 - 4,054 -
Obligations of U.S. states and political subdivision 131,128 - 121,496 9,632
Trust preferred securities 4,671 - 4,671 -
Corporate bonds and notes 29,693 - 29,693 -
Asset-backed securities 12,050 - 12,050 -
Certificates of deposit 625 - 625 -
Equity securities 11,728 11,728 - -
Other securities 3,422 3,422 - -
Total available-for-sale $ 435,284 $ 15,150 $ 410,502 $ 9,632
Derivatives 798 - 798 -
Total assets $ 436,082 $ 15,150 $ 411,300 $ 9,632

			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 September 30, ~~2018~~2019 and during the year ended December 31, ~~2017.~~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 September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

Loans Held-for-Sale:Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. Management obtains quotes or bids on all or ~~part~~parts of these loans directly from the purchasing financial institutions (Level 2).

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

            Fair Value Measurements at Reporting Date Using
Quoted
Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
September 30, 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 $ 7,820 $ - $ - $ 7,820
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: 2017 (Level 1) (Level 2) (Level 3)
Impaired loans:
(dollars in thousands)
Commercial real estate $     1,094 $     - $     - $     1,094

			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 September 30, ~~2018~~2019 that required a valuation allowance were ~~$8.8~~$7.1 million with a related valuation allowance of ~~$0.7~~$1.4 million compared to ~~$1.1~~$1.7 million with a related valuation allowance of ~~$39~~$36 thousand at December 31, ~~2017.~~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 nine months ended September 30, ~~2018~~2019 and for the year ended December 31, ~~2017:~~2018:

      Municipal
Securities
(dollars in thousands)
Beginning balance, January 1, 2018 $                       9,632
Principal paydowns (191 )
Ending balance, September 30, 2018 $ 9,441

Municipal
Securities
(dollars in thousands)
Beginning balance, January 1, 2017 $ 18,218
Principal paydowns (8,586 )
Ending balance, December 31, 2017 $     9,632

	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 September 30, ~~2018~~2019 and December 31, ~~2017.~~2018. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.

September 30, 2018
Valuation Unobservable
Fair Value Techniques Input Range
Securities available-for-sale:

(dollars in thousands)

Municipal securities $ 9,441 Discounted cash flows Discount rate 2.9 %

December 31, 2017
Valuation Unobservable
Fair Value Techniques Input Range
Securities available-for-sale: (dollars in thousands)
Municipal securities $ 9,632 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.

September 30, 2018
Valuation Unobservable
Fair Value Techniques Input Range
Impaired loans:
(dollars in thousands)
Commercial real estate $ 7,820 Sales comparison approach Adjustment for differences between the comparable sales 0% - 20% [10%]
Residential real estate $ 231 Sales comparison approach Adjustment for differences between the comparable sales 0% - 7% [2%]

December 31, 2017
Valuation Unobservable
Fair Value Techniques Input Range
Impaired loans: (dollars in thousands)
Commercial real estate $ 1,094 Sales comparison approach Adjustment for differences between the comparable sales 0% - 10% [5%]

36 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 September 30, ~~2018~~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 September 30, ~~2018~~2019 and December 31, ~~2017:~~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)
September 30, 2018
Financial assets:
Cash and cash equivalents $ 155,848 $ 155,848 $ 155,848 $ - $ -
Securities available-for-sale 410,039 410,039 975 399,623 9,441
Equity Securities 11,403 11,403 11,403 - -
Loans held-for-sale 270 270 - - 270
Net loans 4,427,738 4,304,357 - - 4,304,357
Derivatives 1,906 1,906 - 1,906 -

Financial liabilities:
Noninterest-bearing deposits 758,213 758,213 758,213 - -
Interest-bearing deposits 3,230,552 3,222,141 1,907,805 1,314,336 -
Borrowings 629,979 626,841 - 626,841 -
Subordinated debentures 128,474 129,165 - 129,165 -

December 31, 2017
Financial assets:
Cash and cash equivalents $     149,582 $     149,582 $     149,582 $     - $     -
Securities available-for-sale 435,284 435,284 15,150 410,502 9,632
Loans held-for-sale 24,845 24,845 - 370 24,475
Net loans 4,139,708 4,118,542 - - 4,118,542
Derivatives 798 798 - 798 -

Financial liabilities:
Noninterest-bearing deposits 776,843 776,843 776,843 - -
Interest-bearing deposits 3,018,285 3,018,285 1,842,151 1,176,134 -
Borrowings 670,077 669,680 - 669,680 -
Subordinated debentures 54,699 57,340 - 57,340 -

					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 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:

Affected Line item in the
Details about Accumulated Other Amounts Reclassified from Accumulated Statement Where Net Income is
Comprehensive Income Components Other Comprehensive Income Presented

Three Months Ended Nine Months Ended
September 30 September 30
2018 2017 2018 2017
Sale of investment securities available-for-sale $ - $ - $ - $ 1,596 Net gains on sales of securities available-for-sale Income tax expense
- - - (579 )
$ - $ - $ - $ 1,017

Amortization of pension plan net actuarial losses $ 91 $ (103 ) $ 274 $ (309 ) Other components of net periodic pension expense Income tax expense
(26 ) 42 (77 ) 126
$ 65 $ (61 ) $ 197 $ (183 )

Total reclassification $ 65 $ (61 ) $ 197 $ 834

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 September 30, ~~2018~~2019 and December 31, ~~2017~~2018 consisted of the following:

September 30, December 31,
2018 2017
(dollars in thousands)
Investment securities available-for-sale, net of tax $ (8,208 ) $ (902 )
Cash flow hedge, net of tax 1,370 472
Defined benefit pension and post-retirement plans, net of tax (3,846 ) (3,589 )
Total $ (10,684 ) $ (4,019 )

	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	)

~~Effective January 1, 2018,~~Note 9. Premises and Equipment

The Company leases certain premises and equipment under operating leases. At September 30, 2019, the Company ~~implemented ASU 2018-02, “~~~~Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”~~~~Under ASU 2018-02, the FASB amended existing guidance to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts~~had lease liabilities totaling $17.1 million and Jobs Act (“Tax Act”). In order to comply with this new ASU, the Company recorded an adjustment to the balance sheet on January 1, 2018 of approximately $709 thousand that increased retained earnings and increased accumulated other comprehensive loss.

~~Effective January 1, 2018, the Company implemented ASU 2016-01, “~~~~Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.~~” Under ASU 2016-01, equity securities, with certain exceptions, are to be measured at fair value with changes in fair value recognized in net income. In order to comply with this new ASU, the Company recorded a cumulative-effect adjustment to the balance sheet of approximately $55 thousand.right-of-use assets totaling $15.8 million. As of September 30, 2019, the weighted average remaining lease term for operating leases was 7.4 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.0%. Total lease costs for the three and nine months ended September 30, 2019 was $0.7 million and $2.3 million, respectively.

Rent expense for the three and nine months ended September 30, 2018 prior to adoption of ASU 2016-02, was $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 ~~Company’s equity securities had readily determinable fair values.~~nine months ended September 30, 2019.

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

	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

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 9.10. Stock Based Compensation

The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of September 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 September 30, 2019 are approximately 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. Compensation~~recorded as incurred. Stock-based compensation expense was $0.7 million and $1.9 million for the three and nine months ended September 30, 2019, respectively, and $0.6 million and $1.3 million for the three and nine months ended September 30, 2018, ~~were $0.6 million and $1.3 million, respectively, while the compensation expense for the three and nine months ended September 30, 2017 were $0.5 million and $1.3 million,~~ respectively.

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

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

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

Activity under the Company’s options ~~as of and~~ for the nine months ended September 30, ~~2018~~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, 2017 299,778 $ 6.18
Granted -
Exercised (102,378 ) 5.12
Forfeited/cancelled/expired (1,323 ) 14.24
Outstanding at September 30, 2018 196,077 6.68 1.8 $ 3,346,546

Exercisable at September 30, 2018 196,077 $ 6.68 1.8 $ 3,346,546

	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 September 30, ~~2018~~2019 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, ~~2018.~~2019. This amount changes based on the fair market value of the Company’s stock.

Activity under the Company’s restricted shares ~~as of and~~ for the nine months ended September 30, ~~2018~~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, 2017 103,078 $ 20.41
Granted 23,018 28.08
Vested (58,002 ) 20.33
Forfeited/cancelled/expired (666 ) 24.25
Nonvested at September 30, 2018 67,428 23.07

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 10. Stock Based Compensation – (continued)

As of September 30, ~~2018,~~2019, there was approximately ~~$920,000~~$1,233,743 of total unrecognized compensation cost related to nonvested restricted shares ~~granted under the plans.~~granted. The cost is expected to be recognized over a weighted average period of ~~1.1~~2.3 years. A total of ~~-0- and 23,018~~11,979 restricted shares were granted during the three ~~and nine~~ months ended September 30, ~~2018, respectively, and 1,000 and 56,164 for the three and nine months ended September 30, 2017, respectively.~~

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

~~Note 9. Stock-Based Compensation – (continued)~~2019.

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, 2017 151,194 $ 19.19
Awarded 19,614 31.35
Change in Estimate (15,172 )
Vested (69,627 ) 19.46
Unearned at September 30, 2018 86,009 151,772 $ 22.06

	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 September 30, ~~2018,~~2019, the specific number of shares related to performance units that were expected to vest was ~~86,009,~~92,512, determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed. At September 30, ~~2018~~2019 the maximum amount of performance units that ultimately could vest if performance targets were exceeded is ~~151,772.~~120,212. A total of 25,991 shares were netted from the vested shares to satisfy tax obligations. The net shares issued from vesting of performance units during the nine months ended September 30, 2019 were 26,517 shares.

At September 30, ~~2018,~~2019, compensation cost of approximately ~~$822,000~~$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 ~~-0- and 19,614~~35,636 performance units were awarded during the ~~three and~~ nine months ended September 30, ~~2018, respectively.~~

During the nine months ended September 30, 2018, 69,627 shares were issued in satisfaction of earned performance units. The shares issued were calculated based on a net down of 26,955 shares to satisfy tax obligations created by vesting.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, 2017 - $ -
Awarded 29,423 31.35
Forfeited - -
Vested - -
Unearned at September 30, 2018 29,423 $ 31.35

~~At September 30, 2018, the specific number of shares related to restricted stock units that were expected to vest was approximately 29,423.~~

	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 ~~repurchased~~netted out to satisfy the tax obligations of the recipient. During the nine months ended 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 September 30, ~~2018,~~2019, compensation cost of approximately ~~$756,000~~$1.4 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 2.4 years. A total of ~~29,423 and -0-~~53,454 restricted stock units were awarded during the nine months ended September 30, ~~2018 and 2017, respectively.~~2019.

~~Effective January 1, 2017, the Company implemented ASU 2016-09, “~~~~Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment.”~~Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Included in income tax expense for the nine months ended September 30, 2018 and September 30, 2017 is a benefit of approximately $887 thousand and $181 thousand, respectively, which resulted from the effect of implementing ASU 2016-09.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until 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
September 30, Statements of Income
      2018       2017
(dollars in thousands)
Service cost $        - $        -
Interest cost 106 119 Other components of net periodic pension expense
Expected return on plan assets (190 ) (160 ) Other components of net periodic pension expense
Net amortization 91 103 Other components of net periodic pension expense
Total periodic pension cost $ 7 $ 62

Nine Months Ended Affected Line Item in the Consolidated
September 30, Statements of Income
      2018       2017
(dollars in thousands)
Service cost $        - $        -
Interest cost 320 358 Other components of net periodic pension expense
Expected return on plan assets (573 ) (480 ) Other components of net periodic pension expense
Net amortization 274 309 Other components of net periodic pension expense
Recognized settlement loss - 2 Other components of net periodic pension expense
Total periodic pension cost $ 21 $ 189

~~Effective January 1, 2018, the Company implemented ASU 2017-07, “~~~~Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~.” Under ASU 2017-07, the FASB requires employers to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The table above details the affected line items within the Consolidated Statements of Income related to the net periodic pension costs for the following periods.

	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

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

~~Note 10. Components of Net Periodic Pension Cost – (continued)~~

This ASU is also required to be applied retrospectively to all periods presented. The following table summarizes the impact of retrospective application to the consolidated statement of condition for the three and nine months ended September 30, 2017:

Three Months Nine Months
Ended Ended
September 30, September 30,
2017 2017
(dollars in thousands)
Other components of net periodic pension expense
As previously reported $ - $ -
As reported under the new guidance 62 189

Salaries and employee benefits
As previously reported $ 8,872 $ 25,710
As reported under the new guidance 8,810 25,521

	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 ~~made~~did not make a ~~$2.0 million~~ contribution to the Pension Trust during the ~~three~~nine months ended ~~March 31, 2018.~~September 30, 2019. The Company does not plan on contributing amounts to the Pension Trust for the remainder of ~~2018.~~2019. The trust is established to provide retirement and other benefits for eligible employees and their beneficiaries. No part of the trust assets may be applied to any purpose other than providing benefits under the plan and for defraying expenses of administering the plan and the trust.

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

Note ~~11.~~12. FHLB Borrowings

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

September 30, 2018 December 31, 2017
Amount Rate Amount Rate
(dollars in thousands)
Total FHLB borrowings $ 629,979 2.32 % $ 670,077 1.76 %

By remaining period to maturity:
Less than 1 year $ 459,979 2.24 % $ 505,077 1.59 %
1 year through less than 2 years 25,000 1.85 % 35,000 1.60 %
2 years through less than 3 years 95,000 2.76 % 85,000 2.65 %
3 years through less than 4 years 25,000 2.13 % 45,000 2.15 %
4 years through 5 years 25,000 2.92 % - -
Total FHLB borrowings $ 629,979 2.32 % $ 670,077 1.76 %

	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 September 30, ~~2018~~2019 were primarily collateralized by approximately ~~$1.7~~$1.9 billion of commercial mortgage loans, net of required over collateralization amounts, under a blanket lien arrangement. At September 30, ~~2018~~2019 the Company had remaining borrowing capacity of approximately ~~$1.0~~$1.1 billion at FHLB.

~~CONNECTONE BANCORP, INC. AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~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 ~~12.~~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)

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 September 30, ~~2018~~2019 and ~~2017.~~2018. Items outside of ASC 606 are noted as such.

Three Months Three Months
Ended Ended
September 30, September 30,
2018 2017^(b)
(dollars in thousands)
Noninterest income
Service charges on deposits
Overdraft fees $ 222 $ 228
Other 186 193
Interchange income 152 153
Net gains on sales of loans^(a) 2 50
Wire transfer fees^(a) 73 63
Loan servicing fees^(a) 16 47
Bank owned life insurance^(a) 751 985
Other 27 37
Total noninterest income $ 1,429 $ 1,756

Nine Months Nine Months
Ended Ended
September 30, September 30,
2018 2017^(b)
(dollars in thousands)
Noninterest income
Service charges on deposits
Overdraft fees $ 590 $ 587
Other 482 552
Interchange income 465 499
Net gains on sales of loans^(a) 31 120
Wire transfer fees^(a) 222 184
Loan servicing fees^(a) 64 97
Bank owned life insurance^(a) 2,300 2,402
Net gains on sales of securities^(a) - 1,596
Annuities and insurance commissions^(a) - 39
Other 70 104
Total noninterest income $ 4,224 $ 6,180

	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

^(a)(1)	Not within scope of ASC ~~606~~606.
^(b)	~~The Company elected the modified respective approach of adoption; therefore, prior period balances are presented under legacy GAAP and may not be comparable to current year presentation.~~

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

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

(unaudited)

Note ~~12.~~13. Revenue Recognition – (continued)

A description of the Company’s revenue streams accounted for under ASC 606 is as follows:

Service Charges on Deposit Accounts: The Company earns fees from deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in the time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Interchange Income: The Company earns interchange fees from debit and credit card holder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided by the cardholder.

Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether the collectability of the transaction prices is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

Note ~~13.~~14. Subordinated Debentures

During 2003, the Company formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier I capital. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or in part prior to maturity. The floating interest rate on the subordinate debentures is three month LIBOR plus 2.85% and reprices quarterly. The rate at September 30, ~~2018~~2019 was ~~5.19%~~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 September 30, ~~2018~~2019 and December 31, ~~2017.~~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 September 30, ~~2018,~~2019, unamortized costs related to this debt issuance were approximately ~~$317,000.~~$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 September 30, ~~2018,~~2019, unamortized costs related to this debt issuance were approximately ~~$1,364,000.~~$1,217,000.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Certain financial instrument-related assets and liabilities may, 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 September 30, ~~2018~~2019 and December 31, ~~2017:~~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)
September 30, 2018
Assets:
Interest rate swaps
$      1,906 $      - $      1,906 $      - $      - $      1,906
December 31, 2017
Assets:
Interest rate swaps
$ 798 $ - $ 798 $ - $ - $ 798

							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 ~~September 30, 2018 and~~ December 31, ~~2017,~~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 September 30, ~~2018~~2019 and December 31, ~~2017.~~2018. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Cautionary Statement Concerning Forward-Looking Statements

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp is ~~engaged, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and regulations issued thereunder;~~engaged; (7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; ~~and~~ (10) the outcome of regulatory and legal investigations and proceedings may not be ~~anticipated.~~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, 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 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, ~~2017~~2018 includes additional discussion on the accounting for income taxes.

Operating Results Overview

Net income for the three months ended September 30, ~~2018~~2019 amounted to ~~$19.9~~$21.7 million compared to ~~$13.1~~$19.9 million for the comparable ~~2017~~ three-month ~~period.~~period ended September 30, 2018. The Company’s diluted earnings per share were $0.61 for both the three months ended September 30, ~~2018~~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 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 ~~$0.41~~$1.29 for the comparable ~~2017 three-month period.~~six-month period ended September 30, 2018. The increase in net income and diluted earnings per share was primarily attributable to an increase in net interest income ~~($2.9 million),~~and a decrease in provision for loan losses, ~~($0.4 million)~~partially offset by increases in noninterest expenses and ~~a decrease in~~ income tax ~~expense ($3.5 million).~~

~~Net income for the nine months ended September 30, 2018 amounted to $41.7 million compared to $32.6 million for the comparable nine-month period ended September 30, 2017.~~expense. The Company’s diluted earnings per share were $1.29 for the nine months ended September 30, 2018 as compared with diluted earnings per share of $1.01 for the comparable nine-month period ended September 30, 2017. The increase in net income and diluted earnings per share was primarily attributable to an increase in net interest income ~~($11.8 million),~~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 ~~excluding taxi ($1.0 million) and a decrease in income tax expense ($5.5 million), partially offset by a net increase in charges~~was primarily attributable to provisioning related to the taxi medallion ~~loans ($1.7 million), a decrease in noninterest income ($2.0 million), and an increase in noninterest expenses ($5.6 million) (excluding taxi charges of $15.3 million).~~portfolio 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 September 30, ~~2018~~2019 was ~~$40.4~~$48.9 million, an increase of ~~$2.5~~$8.5 million, or ~~6.6%~~21.0%, from the three months ended September 30, ~~2017,~~2018, resulting from an increase in average total interest-earning assets of ~~10.9%~~27.0%, primarily ~~reflecting significant organic loan growth, offset by~~loans, that resulted from the acquisition of GHB and a ~~contraction~~widening of the net interest margin of 14 ~~basis-points~~basis-point to 3.44% for the three months ended September 30, 2019 from 3.30% for the three months ended September 30, ~~2018 from 3.44% for the three months ended September 30, 2017.~~2018. Included in net interest income was accretion and amortization of purchase accounting adjustments of $1.6 million during the three months ended September 30, 2019 and $0.2 million during the three months ended September 30, ~~2018 and $0.3 million during the three months ended September 30, 2017.~~2018. Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.33% for the three months ended September 30, 2019, widening by 4 basis-points from 3.29% for the three months ended September 30, ~~2018, contracting by 12 basis-points from 3.41% for the three months ended September 30, 2017.~~2018. The ~~decrease~~increase in the adjusted net interest margin was primarily attributable to ~~a long-term subordinated debt issuance during the first quarter of 2018, the change in the taxable equivalent adjustment~~increased loan portfolio yields, primarily due to ~~the Tax Act, increased cost of deposits~~an improved loan mix and ~~lower yields~~higher spreads on ~~securities.~~new business.

Fully taxable equivalent net interest income for the nine months ended September 30, ~~2018~~2019 was ~~$118.5~~$140.5 million, an increase of ~~$10.5~~$22.1 million, or ~~9.7%~~18.6%, from the nine months ended September 30, ~~2017,~~2018, resulting from an increase in total average interest-earning assets of ~~14.8%~~16.0% due to ~~significant organic loan growth.~~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, contracting 15 basis-points from 3.44% for the nine months ended September 30, 2017.~~2018. Included in net interest income was accretion and amortization of purchase accounting adjustments of ~~$1.1~~$4.5 million and ~~$1.3~~$1.1 million during the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.25% for both the nine months ended September 30, ~~2018, contracting by 15 basis-points from adjusted net interest margin of 3.40% for the nine months ended~~2019 and September 30, 2017. The decrease in the adjusted net interest margin was primarily attributable to a long-term subordinated debt issuance during the first quarter of 2018, the change in the taxable equivalent adjustment due to the Tax Act, increased cost in deposits funding and lower yields on securities.2018.

The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Company’s average assets, liabilities and stockholders’ equity. The Company’s net interest income, net interest spread and net interest margin are also reflected.

Average Statements of Condition with Interest and Average Rates

   Three Months Ended September 30,
2018    2017
   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)} $     423,566 $     3,147 2.95 % $     397,077 $     3,033     3.03 %
Loans receivable and loans held-for-sale^{(2) (3) (4)} 4,362,905 51,973 4.73 3,898,404 43,683 4.45
Federal funds sold and interest-bearing with banks 42,164 183 1.72 53,820 170 1.25
Restricted investment in bank stocks 28,043 530 7.50 29,236 362 4.91
Total interest-earning assets 4,856,678 55,833 4.56 4,378,537 47,248 4.28
Noninterest-earning assets:
Allowance for loan losses (33,943 ) (28,999 )
Other noninterest-earning assets 363,438 363,949
Total assets $ 5,186,173 $ 4,713,487

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits $ 1,296,165 $ 6,477 1.98 $ 1,005,997 $ 3,593 1.42
Other interest-bearing deposits 1,854,763 4,204 0.90 1,816,162 2,520 0.55
Total interest-bearing deposits 3,150,928 10,681 1.34 2,822,159 6,113 0.86
Borrowings 531,251 2,839 2.12 570,711 2,353 1.64
Subordinated debentures⁽⁵⁾ 128,420 1,831 5.66 54,630 813 5.90
Capital lease 2,554 38 5.90 2,688 40 5.90
Total interest-bearing liabilities 3,813,153 15,389 1.60 3,450,188 9,319 1.07
Noninterest-bearing demand deposits 761,782 688,707
Other liabilities 21,110 17,972
Total noninterest-bearing liabilities 782,892 706,679
Stockholders’ equity 590,128 556,620
Total liabilities and stockholders’ equity $ 5,186,173 $ 4,713,487
Net interest income (tax-equivalent basis) 40,444 37,929
Net interest spread⁽⁶⁾ 2.96 % 3.21 %
Net interest margin⁽⁷⁾ 3.30 % 3.44 %
Tax-equivalent adjustment (482 ) (910 )
Net interest income $ 39,962 $ 37,019

	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 include equity securities.
⁽²⁾		Interest income is presented on a tax-equivalent basis using 21% ~~and 35% federal tax rates as of September 30, 2018 and September 30, 2017, respectively.~~.
⁽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 ~~$1,735~~$1,407 and ~~$525~~$1,735 as of September 30, ~~2018~~2019 and September 30, ~~2017,~~2018, respectively. Amortization expense related to debt issuance costs included in interest expense was $82 ~~and $41 as of~~for both the three months ended September 30, ~~2018~~2019 and September 30, ~~2017, respectively.~~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,
2018 2017
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)} $     432,475 $     9,200 2.84 % $     384,782 $     9,272 3.22 %
Loans receivable and loans held-for-sale^{(2) (3) (4)} 4,294,792 148,994 4.64 3,716,876 123,009 4.42
Federal funds sold and interest-bearing with banks 63,506 607 1.28 73,424 555 1.01
Restricted investment in bank stocks 30,402 1,517 6.67 26,177 982 5.02
Total interest-earning assets 4,821,175 160,318 4.45 4,201,259 133,818 4.26
Noninterest-earning assets:
Allowance for loan losses (32,915 ) (27,533 )
Other noninterest-earning assets 337,509 358,161
Total assets $ 5,125,769 $ 4,531,887

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits $ 1,261,660 $ 17,096 1.81 $ 982,149 $ 9,996 1.36
Other interest-bearing deposits 1,811,966 10,442 0.77 1,745,742 6,722 0.51
Total interest-bearing deposits 3,073,626 27,538 1.20 2,727,891 16,718 0.82
Borrowings 591,348 8,856 2.00 509,625 6,581 1.73
Subordinated debentures⁽⁵⁾ 124,029 5,345 5.76 54,590 2,431 5.95
Capital lease 2,588 117 6.04 2,720 123 6.05
Total interest-bearing liabilities 3,791,591 41,856 1.48 3,294,826 25,853 1.05
Noninterest-bearing demand deposits 735,345 670,709
Other liabilities 18,728 17,652
Total noninterest-bearing liabilities 754,073 688,361
Stockholders’ equity 580,105 548,700
Total liabilities and stockholders’ equity $ 5,125,769 $ 4,531,887
Net interest income (tax-equivalent basis) 118,462 107,965
Net interest spread⁽⁶⁾ 2.97 % 3.21 %
Net interest margin⁽⁷⁾ 3.29 % 3.44 %
Tax-equivalent adjustment (1,408 ) (2,704 )
Net interest income $ 117,054 $ 105,261

	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% ~~and 35% federal tax rates as of September 30, 2018 and September 30, 2017, respectively.~~.
⁽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 ~~$1,730~~$1,529 and ~~$565~~$1,730 as of September 30, ~~2018~~2019 and September 30, ~~2017,~~2018, respectively. Amortization expense related to debt issuance costs included in interest expense was ~~$250~~$164 and ~~$124 as of~~$168 for the nine months September 30, 2019 and September 30, 2018, ~~and September 30, 2017,~~ 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 ~~$1.4~~$2.1 million for the three months ended September 30, ~~2018,~~2019, compared with ~~$1.8~~$1.3 million for the three months ended September 30, ~~2017.~~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, deposit service fees, loan fees, net gains on equity securities and other income. The ~~decrease~~increase from the prior year 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 ~~a BOLI death benefit~~increases in ~~the prior period.~~overdraft fees, loan servicing fees, wire transfer fees, and fees related to our BoeFly subsidiary.

Noninterest income totaled ~~$4.2~~$5.8 million for the nine months ended September 30, ~~2018,~~2019, compared with ~~$6.2~~$3.9 million for the nine months ended September 30, ~~2017. For~~2018. Included in noninterest income for the nine months ended September 30, ~~2018 and 2017, there~~2019 were ~~$-0- and $1.6 million~~losses on sale of ~~net~~ securities ~~gains, respectively.~~available-for-sale of $0.3 million. Excluding ~~the securities gains,~~these losses, noninterest income ~~decreased $0.4~~increased $2.2 million from the nine months ended September 30, 2018. The increase from the prior year ~~third quarter due primarily~~comparable period was attributable to aincreases in deposit, loan and other income of $0.9 million, net gains on equity securities of $0.7 million, BOLI ~~death benefit~~income of $0.3 million and increases in ~~the prior period.~~net gains sales 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 and wire transfer fees.

Noninterest Expenses

Noninterest expenses totaled ~~$18.3~~$20.4 million for the three months ended September 30, ~~2018,~~2019, compared to ~~$18.6~~$18.1 million for the three months ended September 30, ~~2017. Noninterest~~2018. Included in noninterest expenses ~~decreased by $0.3~~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 ~~due~~was primarily attributable to ~~a $3.0 million valuation allowance adjustment on taxi medallion loans held-for-sale that occurred during the prior year third quarter, partially offset by~~ increases in salaries and employee benefits ~~($1.4 million),~~of $2.2 million, professional and ~~other~~consulting expenses ~~($0.7 million), both mainly due~~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 ~~increased levels~~the acquisition of ~~business and staff resulting from organic growth, changes in fair value of equity securities ($0.2 million) and merger-related expenses ($0.4 million).~~GHB.

Noninterest expenses totaled ~~$52.5~~$70.0 million for the nine months ended September 30, ~~2018,~~2019, compared to ~~$62.2~~$52.1 million for the nine months ended September 30, ~~2017. Noninterest~~2018. Included in noninterest expenses ~~decreased by $9.7~~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 $10.5 million from the prior year ~~nine-month period due primarily to a $15.3 million valuation allowance adjustment on taxi medallion loans held-for-sale that occurred during~~comparable period. The increase from the prior year ~~nine-month~~comparable period ~~partially offset by~~was primarily attributable to increases in salaries and employee benefits ~~($4.1 million), other~~of $6.7 million, professional and consulting expenses ~~($1.1 million), changes in fair value~~ of ~~equity securities ($0.3 million)~~$1.6 million, occupancy and ~~merger-related~~equipment of $1.0 million, amortization of core deposit intangibles of $0.6 million and marketing and advertising expenses ~~($0.4 million).~~of $0.3 million. The increases over the prior year ~~nine-month~~comparable period ~~(excluding~~were primarily attributable to the ~~valuation allowance on the taxi medallions) were mainly the result~~acquisition of ~~increased levels of business and staff resulting from organic growth.~~GHB.

Income Taxes

Income tax expense was $6.4 million for the three months ended September 30, 2019, compared to $2.1 million for the three months ended September 30, ~~2018, compared to $5.6 million for the three months ended September 30, 2017.~~2018. The ~~decrease~~increase in income tax expense was primarily ~~the result of a reduced Federal tax rate due~~attributable to ~~the Tax Act, benefits related to Federal and NJ deferred tax asset adjustments and benefits resulting from ASU 2016-09.~~higher income before taxes. The effective tax rate for the three months ended September 30, ~~2018~~2019 and September 30, ~~2017~~2018 was ~~9.6%~~22.7% and ~~30.0%~~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, compared to $12.6 million for the nine months ended September 30, 2017. The decrease in income tax expense was primarily the result of a reduced Federal tax rate due to the Tax Act, benefits related to Federal and NJ deferred tax asset adjustments and benefits resulting from ASU 2016-09.2018. The effective tax rate for the nine months ended September 30, ~~2018~~2019 was ~~14.6%~~21.4% versus ~~27.9%~~14.6% for the prior-year period. ~~The~~At the present time, the Bank is projecting a 2019 combined federal and state effective tax rate ~~exclusive~~ of ~~income tax expense adjustments, is anticipated to increase to~~ approximately ~~26% for 2019, due to the recent NJ corporate tax legislation.~~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
September 30, 2018 December 31, 2017 Increase/
Amount % Amount % (Decrease)
(dollars in thousands)
Commercial $ 933,169 20.9 % $ 824,082 19.7 % $ 109,087
Commercial real estate 2,739,943 61.3 2,592,909 62.1 147,034
Commercial construction 494,206 11.1 483,216 11.6 10,990
Residential real estate 295,948 6.6 271,795 6.5 24,153
Consumer 2,508 0.1 2,808 0.1 (300 )
Gross loans $ 4,465,774 100.0 % $ 4,174,810 100.0 % $ 290,964

	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 September 30, ~~2018,~~2019, gross loans totaled ~~$4.5~~$5.1 billion, an increase of ~~$291~~$571 million, or ~~7.0%~~12.6%, as compared to December 31, ~~2017.~~2018. Net loan growth was primarily attributable to the Greater Hudson Bank acquisition, with increases in commercial real estate ($~~147~~253 million), commercial construction ($181 million), commercial loans ($~~109~~125 million), and residential real estate and consumer ($~~24 million) and commercial construction ($11~~12 million). ~~Included in the commercial real estate increase was approximately $25 million of loans previously classified as held-for-sale but now classified as loans held-for-investment.~~

At September 30, ~~2018,~~2019, acquired loans ~~remaining in~~within the loan portfolio totaled ~~$0.3 billion,~~$550 million, compared to ~~$0.5 billion~~$315 million as of December 31, ~~2017.~~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 September 30, ~~2018,~~2019, the ALLL was ~~$34.7~~$38.8 million as compared to ~~$31.7~~$35.0 million at December 31, ~~2017.~~2018. The provision for loan losses for the three months and nine months ended September 30, 2019 was $2.0 million and $7.6 million, respectively, compared to $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 September 30, ~~2018 was $1.1~~2019 increased by $0.9 million when compared to ~~$1.5~~the prior year third quarter. The increase was primarily attributable to an increase in charge-offs, which totaled $0.9 million for the ~~three months ended September 30, 2017.~~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 ~~a decrease in~~$17.0 million of provision ~~allocated~~related to the ~~acquired~~taxi medallion loan ~~portfolio.~~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 $927 thousand and $(55) thousand in net charge-offs/(recoveries) for the three months ended September 30, 2019 and September 30, 2018, respectively and $3.8 million and $17.0 million for the nine months ended September 30, 2019 and September 30, 2018, respectively. Net charge-offs for the three months ended September 30, 2019 increased $982 thousand from the prior year period. The ~~provision~~increase was primarily related to charge-offs of one home equity line of credit for ~~loan losses~~$0.4 million, and two small commercial mortgage loans of $0.5 million. Net charge-offs for the nine months ended September 30, 2018 ~~was $20.0 million, compared to $4.0 million for the nine months ended September 30, 2017. The increase in provision for loan losses was primarily attributable to~~include a $17.0 million ~~allocation related to the taxi medallion loan portfolio.~~

There were $55 thousand in net recoveries during the three months ended September 30, 2018, compared with $19 thousand in net recoveries during the three months ended September 30, 2017. There were $17.0 million in net charge-offs during the nine months ended September 30, 2018, compared to $126 thousand in net recoveries during the nine months ended September 30, 2017. The increase in charge-offs during the nine months ended September 30, 2018 is attributable to a $17.0 millionpartial charge-off related to the taxi medallion loan ~~portfolio. The $17.0 million charge-off was~~portfolio, resulting from a ~~result of decreases~~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 ~~0.78%~~0.76% at September 30, ~~2018~~2019 compared to ~~0.76%~~0.77% at December 31, ~~2017~~2018 and ~~0.77~~0.78 % at September 30, ~~2017.~~2018.

The level of the allowance for the respective periods of ~~2018~~2019 and ~~2017~~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 September 30, ~~2018~~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,
2018 2017
(dollars in thousands)
Average total loans at end of period $ 4,362,905 $ 3,898,404

Analysis of the ALLL:
Balance - beginning of quarter $ 33,594 $ 28,401
Charge-offs:
Consumer (6 ) (1 )
Total charge-offs (6 ) (1 )
Recoveries:
Commercial 56 17
Commercial real estate - 2
Consumer 5 1
Total recoveries 61 20
Net (charge-offs) recoveries 55 19
Provision for loan and losses 1,100 1,450
Balance - end of period $ 34,749 $ 29,870
Ratio of annualized net charge-offs during the period to average loans during the period (0.01 )% (0.00 )%

Loans receivable $ 4,462,487 $ 3,889,289
ALLL as a percentage of loans receivable 0.78 % 0.77 %

Nine Months Ended
September 30,
2018 2017
(dollars in thousands)
Average total loans at end of period $ 4,294,792 $ 3,716,876

Analysis of the ALLL:
Balance - beginning of quarter $ 31,748 $ 25,744
Charge-offs:
Commercial-taxi medallion loans (17,046 ) -
Commercial-other (20 ) -
Commercial real estate - (71 )
Residential real estate (18 ) -
Consumer (7 ) (12 )
Total charge-offs (17,091 ) (83 )
Recoveries:
Commercial-other 87 158
Commercial real estate - 50
Consumer 5 1
Total recoveries 92 209
Net (charge-offs) recoveries (16,999 ) 126
Provision for loan and losses 20,000 4,000
Balance - end of period $ 34,749 $ 29,870
Ratio of annualized net charge-offs during the period to average loans during the period 0.53 % (0.00 )%

Loans receivable $ 4,462,487 $ 3,889,289
ALLL as a percentage of loans receivable 0.78 % 0.77 %

	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	%

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:

September 30, December 31,
2018 2017
(dollars in thousands)
Nonaccrual loans $ 53,015 $ 65,613
OREO - 538
Total nonperforming assets⁽¹⁾ $ 53,015 $ 66,151

Performing TDRs $ 11,243 $ 14,920
Loans 90 days or greater past due and still accruing (non-PCI) $ - $ -
Loans 90 days or greater past due and still accruing (PCI) $ 1,648 $ 1,664


	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 ~~other real estate owned.~~OREO.

Nonaccrual loans to total loans receivable 1.19 % 1.57 %
Nonperforming assets to total assets 0.99 % 1.29 %
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable 1.48 % 1.98 %

The decrease in nonaccruals from the year-end 2018 was mainly attributable to a $17.0 million charge-off, related to the taxi medallion loan portfolio (which is included in the Commercial loan segment).

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	%

~~Investment~~ Securities Available-For-Sale

As of September 30, ~~2018,~~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 September 30, ~~2018,~~2019, average securities increased ~~$26.5~~by $21.9 million to approximately ~~$423.6~~$445.5 million, or ~~8.7%~~7.9% of average total interest-earning assets, from approximately ~~$397.1~~$423.6 million, or ~~9.1%~~8.7% of average interest-earning assets, for the comparable period in ~~2017.~~2018.

At September 30, ~~2018,~~2019, net unrealized ~~losses~~gains on securities available-for-sale, which are carried as a component of accumulated other comprehensive ~~income~~loss and included in stockholders’ equity, net of tax, amounted to ~~$8.2~~$3.1 million as compared with net unrealized losses of ~~$0.9~~$5.8 million at December 31, ~~2017.~~2018. The ~~increase~~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-temporary55because~~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 September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and the Bank’s management.

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

Based on our model, which was run as of September 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 3.89%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 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 ~~1.28%~~0.40%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~1.44%~~1.21%. As

Based on our model, which was run as of ~~December 31, 2017,~~September 30, 2019, we estimated that over the next ~~one-year period,~~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 ~~1.31%~~4.60%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by ~~1.40%~~2.96%.

~~Based on our model, which was run as~~ As of ~~September 30,~~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 ~~1.85%~~1.59%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.17%. As of December 31, 2017, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 2.16%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.41%

An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of September 30, ~~2018,~~2019, would decline by ~~13.09%~~6.70% with an instantaneous rate shock of up 200 basis points, and increase by ~~3.49%~~3.17% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, ~~2017,~~2018, would decline by ~~12.83%~~12.01% with an instantaneous rate shock of up 200 basis points, and increase by ~~4.02%~~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 September 30, ~~2018.~~2019.

           Estimated Change in
Interest Rates Estimated EVE Interest Rates Estimated Estimated Change in NII
(basis points)      EVE      Amount      %     (basis points)      NII      Amount      %
+300 $      474,448 $      (117,523 )      (19.85 ) +300 $      169,179 $          2,826 1.70
+200 514,454 (77,517 ) (13.09 ) +200 168,482 2,129 1.28
+100 555,834 (36,137 ) (6.10 ) +100 167,731 1,378 0.83
0 591,971 - 0.0 0 166,353 - 0.0
-100 612,632 20,661 3.49 -100 163,951 (2,402 )      (1.44 )

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 ~~require~~requires the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations; unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Liquidity

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

At September 30, ~~2018,~~2019, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of September 30, ~~2018,~~2019, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were ~~$419.4~~$509.5 million, which represented ~~7.8%~~8.3% of total assets and ~~9.1%~~9.7% of total deposits and borrowings, compared to ~~$423.4~~$441.4 million as of December 31, ~~2017,~~2018, which represented ~~8.3%~~8.1% of total assets and ~~9.5%~~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 September 30, ~~2018,~~2019, had the ability to borrow ~~$1.7~~$1.9 billion. In addition, at September 30, ~~2018,~~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 ~~$8.0~~$5.4 million. At September 30, ~~2018,~~2019, the Bank had aggregate available and unused credit of approximately ~~$1.0~~$1.1 billion, which represents the aforementioned facilities totaling ~~$1.7~~$1.9 billion net of ~~$740~~$887.7 million in outstanding borrowings and letters of credit. At September 30, ~~2018,~~2019, outstanding commitments for the Bank to extend credit were approximately ~~$823 million.~~$1.1 billion.

Cash and cash equivalents totaled ~~$155.8~~$194.0 million at September 30, ~~2018,~~2019, increasing by ~~$6.3~~$21.6 million from ~~$149.6~~$172.4 million at December 31, ~~2017.~~2018. Operating activities provided ~~$67.3~~$63.4 million in net cash. Investing activities used ~~$281.6~~$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 ~~$220.5~~$77.1 million in net cash, primarily reflecting a net increase ~~of $193.7 million~~ in deposits, ~~increase of subordinated notes of $73.5 million and net decrease~~offset by repayments in FHLB ~~advances of $40.0 million.~~borrowings.

Deposits

Total deposits increased by ~~$194~~$659 million, or ~~5.1%~~16.1%, to ~~$4.0~~$4.8 billion at September 30, ~~2018~~2019 from December 31, ~~2017.~~2018. The increase was primarily attributable ~~to increases in interest-bearing demand and time deposits, offset by decreases in noninterest-bearing demand, money market deposits, and savings.~~the acquisition of Greater Hudson Bank. The following table sets forth the composition of our deposit base by the periods indicated.

Amount
Increase/
September 30, 2018 December 31, 2017 (Decrease)
Amount % Amount % 2018 vs. 2017
(dollars in thousands)
Demand, noninterest-bearing $ 758,213 19.0 % $ 776,843 20.5 % $ (18,630 )
Demand, interest-bearing 795,962 20.0 636,339 16.8 159,623
Money market 949,103 23.8 1,033,525 27.2 (84,422 )
Savings 162,740 4.1 168,452 4.4 (5,712 )
Time 1,322,747 33.1 1,179,969 31.1 142,778
Total deposits $ 3,988,765 100.0 % $ 3,795,128 100.0 % $ 193,637

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 September 30, ~~2018~~2019 was ~~5.19%~~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 ~~$595~~$720 million at September 30, ~~2018,~~2019, an increase of ~~$29~~$106 million from December 31, ~~2017.~~2018. The increase in stockholders’ equity was primarily attributable to ~~increases in retained earnings~~the acquisition of ~~$35 million, partially offset by increases in accumulated other comprehensive losses of $7 million.~~Greater Hudson Bank. As of September 30, ~~2018,~~2019, the Company’s tangible common equity ratio and tangible book value per share were ~~8.56%~~9.21% and ~~$13.87,~~$15.60, respectively. ~~Tangible book value per share increased $0.49, or 3.7%, from the sequential quarter.~~ As of December 31, ~~2017,~~2018, the tangible common equity ratio and tangible book value per share were ~~8.41%~~8.77% and ~~$13.01,~~$14.42, respectively. Total goodwill and other intangible assets were approximately ~~$148~~$169 million as of September 30, ~~2018~~2019 and $148 million at December 31, ~~2017.~~2018.

September 30, December 31,
2018 2017
(dollars in thousands, except for share and per share data)
Stockholders’ equity $ 594,871 $ 565,437

Less: Goodwill and other intangible assets 147,791 148,273
Tangible common stockholders’ equity $ 447,080 $ 417,164

Common stock outstanding at period end 32,239,928 32,071,860

Book value per common share $ 18.45 $ 17.63
Less: Goodwill and other intangible assets 4.58 4.62
Tangible book value per common share $ 13.87 $ 13.01

	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. During the nine months ended September 30, 2019, the Company repurchased a total of 240,018 shares, leaving 959,982 shares remaining for repurchase under the program. There were no stock repurchases during the three months ended September 30, 2019.

Regulatory Capital and Capital Adequacy

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

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

The following is a summary of regulatory capital amounts and ratios as of September 30, ~~2018~~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 September 30, 2018 Amount Ratio Amount Ratio Amount       Ratio
(dollars in thousands)
Tier 1 leverage capital $ 461,570        9.15 % $ 201,813 4.00 % N/A N/A
CET I risk-based ratio 456,415 9.50 216,108 4.50 N/A N/A
Tier 1 risk-based capital 461,570 9.61 288,144 6.00 N/A N/A
Total risk-based capital 621,319 12.94 384,192 8.00 N/A N/A

To Be Well-Capitalized Under
For Capital Adequacy Prompt Corrective Action
ConnectOne Bank Purposes Provisions
At September 30, 2018 Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
Tier 1 leverage capital $     536,863 10.64 % $     201,789 4.00 % $     252,236              5.00 %
CET I risk-based ratio 536,863 11.18 216,113 4.50 312,163 6.50
Tier 1 risk-based capital 536,863 11.18 288,150 6.00 384,200 8.00
Total risk-based capital 603,862 12.57 384,200 8.00 480,251 10.00

N/A - not applicable

	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 September 30, ~~2018,~~2019, management believes that each of the Bank and the Company meet all capital adequacy requirements to which they are subject. Basel III rules require a “capital conservation buffer” for both the Company and the Bank. ~~When fully phased in on~~Beginning January 1, 2019, ~~each of~~ the Company and the Bank ~~will be~~are required to maintain a 2.5% capital conservation buffer, above and beyond the capital levels otherwise required under applicable regulation. ~~The implementation of this capital conservation buffer began on January 1, 2016 at a level of 0.625%, and will increase by 0.625% on each subsequent January 1 until it reaches 2.5% on January 1, 2019.~~ Under this guidance banking institutions with a CET1, Tier 1 Capital Ratio and Total Risk Based Capital Ratio above the minimum regulatory adequate capital ratios but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall.

As of September 30, ~~2018~~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 ~~1.74%~~1.37% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was ~~2.70%~~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 ~~Operation-~~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

~~Other than as set forth below, the~~The Company is not subject to any legal proceedings, which could have a materially adverse impact on its results of operations and financial condition.

Two complaints have been filed in the Supreme Court of the State of New York in connection with our previously announced merger with Greater Hudson Bank. Each seeks class action status and asserts that Greater Hudson Bank and the members of its Board violated their duties to Greater Hudson Bank shareholders in connection with the proposed merger. One of these complaints also alleges that ConnectOne Bancorp, Inc. has aided and abetted the individual defendants in their alleged breaches of fiduciary duties.

The asserted factual bases for the allegations of breach of duty include, generally that Greater Hudson Bank and its Board failed in its duty to disclose all material facts in this proxy statement in order to allow Greater Hudson's shareholders to make an informed decision as to whether to vote in favor of the merger agreement, including failure to adequately disclose: (i) alleged conflicts of interest of the special committee of Greater Hudson's Board with respect to the transaction; (ii) the purported sale process Board engaged; and (iii) the details of the analyses underlying the opinion prepared by the Greater Hudson's financial advisor that the consideration is fair to Greater Hudson shareholders.

~~Both we and Greater Hudson Bank are evaluating the complaints, and we intend to vigorously defend the allegations contained in the complaints.~~

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 as supplemented by our form 10-Q for~~10-K. Information concerning additional risk factors related to the ~~quarter ended June 30, 2018.~~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)

	September 30,			December 31,
	2018			2017
(in thousands, except for share data)	(unaudited)
ASSETS
Cash and due from banks	$	37,058		$	52,565
Interest-bearing deposits with banks		118,790			97,017
Cash and cash equivalents		155,848			149,582

Securities available-for-sale		410,039			435,284
Equity securities		11,403			-

Loans held-for-sale		270			24,845

Loans receivable		4,462,487			4,171,456
Less: Allowance for loan losses		34,749			31,748
Net loans receivable		4,427,738			4,139,708

Investment in restricted stock, at cost		32,486			33,497
Bank premises and equipment, net		20,998			21,659
Accrued interest receivable		17,690			15,470
Bank owned life insurance		113,026			111,311
Other real estate owned		-			538
Goodwill		145,909			145,909
Core deposit intangibles		1,881			2,364
Other assets		31,353			28,275
Total assets	$	5,368,641		$	5,108,442
LIABILITIES
Deposits:
Noninterest-bearing	$	758,213		$	776,843
Interest-bearing		3,230,552			3,018,285
Total deposits		3,988,765			3,795,128
Borrowings		629,979			670,077
Subordinated debentures (net of debt issuance costs of $1,681 and $456, respectively)		128,474			54,699
Other liabilities		26,552			23,101
Total liabilities		4,773,770			4,543,005

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY

Preferred stock, authorized 5,000,000 shares; issued -0- shares of Series B preferred stock at September 30, 2018 and December 31, 2017; outstanding -0- shares at September 30, 2018 and December 31, 2017; liquidation value of $-0- at September 30, 2018 and December 31, 2017		-			-
Common stock, no par value, authorized 50,000,000 shares; issued 34,303,850 shares at September 30, 2018 and 34,135,782 at December 31, 2017; outstanding 32,239,928 shares at September 30, 2018 and 32,071,860 at December 31, 2017		412,546			412,546
Additional paid-in capital		14,625			13,602
Retained earnings		195,101			160,025
Treasury stock, at cost (2,063,922 common shares at September 30, 2018 and December 31, 2017)		(16,717	)		(16,717	)
Accumulated other comprehensive loss		(10,684	)		(4,019	)
Total stockholders’ equity		594,871			565,437
Total liabilities and stockholders’ equity	$	5,368,641		$	5,108,442

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except for per share data)	2018		2017		2018		2017
Interest income
Interest and fees on loans	$	51,699	$	43,241	$	148,218	$	121,879
Interest and dividends on investment securities:
Taxable		2,154		1,695		6,191		5,042
Tax-exempt		785		870		2,377		2,655
Dividends		530		362		1,517		982
Interest on federal funds sold and other short-term investments		183		170		607		555
Total interest income		55,351		46,338		158,910		131,113
Interest expense
Deposits		10,681		6,113		27,538		16,717
Borrowings		4,708		3,206		14,318		9,135
Total interest expense		15,389		9,319		41,856		25,852
Net interest income		39,962		37,019		117,054		105,261
Provision for loan losses		1,100		1,450		20,000		4,000
Net interest income after provision for loan losses		38,862		35,569		97,054		101,261
Noninterest income
Annuities and insurance commissions		-		-		-		39
Income on bank owned life insurance		751		985		2,300		2,402
Net gains on sale of loans held-for-sale		2		50		31		120
Deposit, loan and other income		676		721		1,893		2,023
Net gains on sales of securities available-for-sale		-		-		-		1,596
Total noninterest income		1,429		1,756		4,224		6,180
Noninterest expenses
Salaries and employee benefits		10,174		8,810		29,575		25,521
Occupancy and equipment		2,137		1,969		6,311		6,215
FDIC insurance		735		840		2,350		2,550
Professional and consulting		891		740		2,439		2,192
Marketing and advertising		192		225		736		770
Data processing		1,102		1,176		3,341		3,474
Merger expenses		375		-		399		-
Amortization of core deposit intangible		145		169		483		555
Other components of net periodic pension expense		7		62		21		189
Increase in valuation allowance, loans held-for-sale		-		3,000		-		15,325
Change in fair value of equity securities		157		-		325		-
Other expenses		2,372		1,650		6,474		5,402
Total noninterest expenses		18,287		18,641		52,454		62,193
Income before income tax expense		22,004		18,684		48,824		45,248
Income tax expense		2,102		5,607		7,144		12,608
Net income	$	19,902	$	13,077	$	41,680	$	32,640

Earnings per common share:
Basic	$	0.62	$	0.41	$	1.30	$	1.02
Diluted		0.61		0.41		1.29		1.01

Dividends per common share	$	0.075	$	0.075	$	0.225	$	0.225

															Accumulated
						Additional									Other			Total
	Preferred		Common			Paid-In			Retained			Treasury			Comprehensive			Stockholders’
(dollars in thousands, except for per share data)	Stock		Stock			Capital			Earnings			Stock			(Loss) Income			Equity
Balance as of December 31, 2016	$	-	$	412,726		$	11,407		$	126,462		$	(16,717	)	$	(2,846	)	$	531,032
Net income		-		-			-			32,640			-			-			32,640
Other comprehensive income, net of tax		-		-			-			-			-			17			17
Cash dividends declared on common stock ($0.225 per share)		-		-			-			(7,251	)		-			-			(7,251	)
Stock issuance costs		-		(180	)		-			-			-			-			(180	)
Exercise of stock options (10,846 shares)		-		-			118			-			-			-			118
Restricted stock grants (57,164 shares)		-		-			-			-			-			-			-
Stock-based compensation expense		-		-			1,315			-			-			-			1,315

Balance as of September 30, 2017	$	-	$	412,546		$	12,840		$	151,851		$	(16,717	)	$	(2,829	)	$	557,691

Balance as of December 31, 2017	$	-	$	412,546		$	13,602		$	160,025		$	(16,717	)	$	(4,019	)	$	565,437

Reclassification of stranded tax effects (ASU 2018-02) (see Note 8)		-		-			-			709			-			(709	)		-
Cumulative effect of adopting ASU 2016-01 (see Note 8)		-		-			-			(55	)		-			55			-
Net income		-		-			-			41,680			-			-			41,680
Other comprehensive loss, net of tax		-		-			-			-			-			(6,011	)		(6,011	)
Cash dividends declared on common stock ($0.225 per share)		-		-			-			(7,258	)		-			-			(7,258	)
Exercise of stock options (102,378) shares)		-		-			524			-			-			-			524
Restricted stock grants (23,018 shares)		-		-			-			-			-			-			-
Net performance units issued (42,672 shares)		-		-			(819	)		-			-			-			(819	)
Stock-based compensation expense		-		-			1,318			-			-			-			1,318

Balance as of September 30, 2018	$	-	$	412,546		$	14,625		$	195,101		$	(16,717	)	$	(10,684	)	$	594,871

	Nine Months Ended
	September 30,
(in thousands)	2018			2017
Cash flows from operating activities
Net income	$	41,680		$	32,640
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		2,336			2,364
Provision for loan losses		20,000			4,000
Increase in valuation allowance		-			15,325
Amortization of intangibles		483			555
Net accretion of loans		(969	)		(1,106	)
Accretion on bank premises		(46	)		(58	)
Accretion on deposits		(46	)		(19	)
Accretion on borrowings		(98	)		(156	)
Stock-based compensation expense		499			1,315
Gains on sales of investment securities, net		-			(1,596	)
Change in fair value of equity securities, net		325			-
Gains on sales of loans held-for-sale, net		(31	)		(120	)
Gains on sales of fixed assets, net		-			(8	)
Loans originated for resale		(2,206	)		(6,790	)
Proceeds from sale of loans held-for-sale		2,337			12,015
Net loss on sale of other real estate owned		192			82
Net increase in cash surrender value of bank owned life insurance		(1,715	)		(2,402	)
Amortization of premiums and accretion of discounts on investments securities, net		2,577			1,808
Amortization of subordinated debt issuance costs		250			124
Increase in accrued interest receivable		(2,220	)		(1,876	)
Decrease in other assets		42			8,770
Increase in other liabilities		3,945			3,444
Net cash provided by operating activities		67,335			68,311
Cash flows from investing activities
Investment securities available-for-sale:
Purchases		(114,457	)		(138,945	)
Sales		-			29,543
Maturities, calls and principal repayments		115,757			61,700
Net redemptions (purchases) of restricted investment in bank stocks		1,011			(5,362	)
Payments on loans held-for-sale		159			2,841
Net increase in loans		(283,283	)		(447,457	)
Proceeds from sales of fixed assets		-			8
Purchases of premises and equipment		(1,629	)		(2,148	)
Purchases of bank owned life insurance		-			(10,000	)
Proceeds from sale of other real estate owned		884			1,124
Net cash used in investing activities		(281,558	)		(508,696	)
Cash flows from financing activities
Net increase in deposits		193,683			279,517
Increase in subordinated debentures		73,525			-
Advances of Federal Home Loan Bank (“FHLB”) borrowings		1,256,000			780,000
Repayments of FHLB borrowings		(1,296,000	)		(656,000	)
Repayment of repurchase agreement		-			(15,000	)
Cash dividends paid on common stock		(7,243	)		(7,207	)
Common stock issuance costs		-			(180	)
Proceeds from exercise of stock options		524			118
Net cash provided by financing activities		220,489			381,248
Net change in cash and cash equivalents		6,266			(59,137	)
Cash and cash equivalents at beginning of period		149,582			200,399
Cash and cash equivalents at end of period	$	155,848		$	141,262
Supplemental disclosures of cash flow information
Cash payments for:
Interest paid on deposits and borrowings	$	40,200		$	25,807
Income taxes		2,507			4,670
Supplemental disclosures of noncash investing activities
Transfer of loans to other real estate owned	$	538		$	580
Transfer of loans held-for-investment to loans held-for-sale		21,236			34,652
Transfer of loans held-for-sale to held-for-investment		45,552			-

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
September 30, 2018	(dollars in thousands)
Securities available-for-sale
Federal agency obligations	$	48,963	$	14	$	(1,443	)	$	47,534
Residential mortgage pass-through securities		196,650		75		(6,174	)		190,551
Commercial mortgage pass-through securities		3,953		-		(110	)		3,843
Obligations of U.S. states and political subdivisions		133,564		727		(3,903	)		130,388
Corporate bonds and notes		26,305		96		(439	)		25,962
Asset-backed securities		10,317		59		(13	)		10,363
Certificates of deposit		420		3		-			423
Other securities		975		-		-			975
Total securities available-for-sale	$	421,147	$	974	$	(12,082	)	$	410,039

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
December 31, 2017	(dollars in thousands)
Securities available-for-sale
Federal agency obligations	$	56,297	$	141	$	(416	)	$	56,022
Residential mortgage pass-through securities		183,509		330		(1,948	)		181,891
Commercial mortgage pass-through securities		4,054		3		(3	)		4,054
Obligations of U.S. states and political subdivisions		130,723		1,739		(1,334	)		131,128
Trust preferred securities		4,577		205		(111	)		4,671
Corporate bonds and notes		29,801		163		(271	)		29,693
Asset-backed securities		12,021		66		(37	)		12,050
Certificates of deposit		621		4		-			625
Equity securities		11,843		235		(350	)		11,728
Other securities		3,422		-		-			3,422
Total securities available-for-sale	$	436,868	$	2,886	$	(4,470	)	$	435,284

	September 30, 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	$	45,057	$	(1,443	)	$	21,455	$	(513	)	$	23,602	$	(930	)
Residential mortgage pass-through securities		185,442		(6,174	)		106,190		(2,491	)		79,252		(3,683	)
Commercial mortgage pass-through securities		3,843		(110	)		3,843		(110	)		-		-
Obligations of U.S. states and political subdivisions		78,481		(3,903	)		33,733		(877	)		44,748		(3,026	)
Corporate bonds and notes		15,655		(439	)		11,008		(124	)		4,647		(315	)
Asset-backed securities		4,113		(13	)		2,303		(8	)		1,810		(5	)
Total temporarily impaired securities	$	332,591	$	(12,082	)	$	178,532	$	(4,123	)	$	154,059	$	(7,959	)

	December 31, 2017
	Total					Less than 12 Months					12 Months or Longer
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(dollars in thousands)
Investment Securities
Available-for-Sale:
Federal agency obligation	$	39,813	$	(416	)	$	28,407	$	(213	)	$	11,406	$	(203	)
Residential mortgage pass-through securities		148,574		(1,948	)		117,556		(1,146	)		31,018		(802	)
Commercial mortgage pass-through securities		1,198		(3	)		1,198		(3	)		-		-
Obligations of U.S. states and political subdivisions		57,685		(1,334	)		17,909		(246	)		39,776		(1,088	)
Trust preferred securities		1,469		(111	)		-		-			1,469		(111	)
Corporate bonds and notes		11,074		(271	)		1,965		(21	)		9,109		(250	)
Asset-backed securities		7,428		(37	)		993		(2	)		6,435		(35	)
Equity securities		11,116		(350	)		-		-			11,116		(350	)
Total temporarily impaired securities	$	278,357	$	(4,470	)	$	168,028	$	(1,631	)	$	110,329	$	(2,839	)

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

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

	September 30, 2018				December 31, 2017
	Notional				Notional
	Amount		Fair Value		Amount		Fair Value
	(dollars in thousands)
Interest rate swaps related to FHLB advances included in assets	$	100,000	$	1,906	$	100,000	$	798

	Three Months		Three Months
	Ended		Ended
	September 30,		September 30,
	2018		2017
	(dollars in thousands)
Balance at July 1,	$	-	$	12,325
Reduction from loans paid off		-		(38	)
Increase in valuation allowance		-		3,000
Balance at September 30,	$	-	$	15,287

	Nine Months		Nine Months
	Ended		Ended
	September 30,		September 30,
	2018		2017
	(dollars in thousands)
Balance at January 1,	$	-	$	-
Reduction from loans paid off		-		(38	)
Increase in valuation allowance		-		15,325
Balance at September 30,	$	-	$	15,287

	September 30, 2018
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial ⁽¹⁾	$	887,024	$	12,639	$	33,506	$	-	$	933,169
Commercial real estate		2,699,338		10,651		29,954		-		2,739,943
Commercial construction		481,226		5,458		7,522		-		494,206
Residential real estate		291,223		-		4,725		-		295,948
Consumer		2,484		-		24		-		2,508
Gross loans	$	4,361,295	$	28,748	$	75,731	$	-	$	4,465,774

	December 31, 2017
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial	$	767,020	$	3,764	$	53,298	$	-	$	824,082
Commercial real estate		2,534,973		34,335		23,601		-		2,592,909
Commercial construction		475,066		5,521		2,629		-		483,216
Residential real estate		266,163		-		5,632		-		271,795
Consumer		2,767		-		41		-		2,808
Gross loans	$	4,045,989	$	43,620	$	85,201	$	-	$	4,174,810

	September 30, 2018
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
No related allowance recorded	(dollars in thousands)
Commercial	$	31,471	$	92,452
Commercial real estate		21,483		21,636
Commercial construction		10,428		10,429
Residential real estate		2,237		2,533
Consumer		-		-
Total (no related allowance)	$	65,619	$	127,050

With an allowance recorded
Commercial real estate	$	8,529	$	8,529	$	709
Residential real estate		263		266		32
Total (with allowance)	$	8,792	$	8,795	$	741

Total
Commercial	$	31,471	$	92,452	$	-
Commercial real estate		30,012		30,165		709
Commercial construction		10,428		10,429		-
Residential real estate		2,500		2,799		32
Consumer		-		-		-
Total	$	74,411	$	135,845	$	741

	December 31, 2017
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
No related allowance recorded	(dollars in thousands)
Commercial	$	49,761	$	101,066
Commercial real estate		23,905		23,976
Commercial construction		6,662		6,662
Residential real estate		3,203		3,442
Consumer		-		-
Total (no related allowance)	$	83,531	$	135,146

With an allowance recorded
Commercial real estate	$	1,133	$	1,133	$	39

Total
Commercial	$	49,761	$	101,066	$	-
Commercial real estate		25,038		25,109		39
Commercial construction		6,662		6,662		-
Residential real estate		3,203		3,442		-
Consumer		-		-		-
Total	$	84,664	$	136,279	$	39

	Nine Months Ended					Year Ended
	September 30, 2018					December 31, 2017
	(dollars in thousands)
	Recorded					Recorded
	Investment			ALLL		Investment			ALLL
TDRs
Beginning balance	$	20,518		$	-	$	13,818		$	-
Net additions		18,913			11		10,378			-
Payoffs/paydowns		(7,094	)		-		(3,098	)		-
Transfers		-			-		(580	)		-
Ending balance	$	32,337		$	11	$	20,518		$	-

		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Loans	Investment		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

			September 30, 2018
			Fair Value Measurements at Reporting Date Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
			(Level 1)		(Level 2)		(Level 3)
			(dollars in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Available-for-sale:
Federal agency obligations	$	47,534	$	-	$	47,534	$	-
Residential mortgage pass-through securities		190,551		-		190,551		-
Commercial mortgage pass-through securities		3,843		-		3,843		-
Obligations of U.S. states and political subdivision		130,388		-		120,947		9,441
Corporate bonds and notes		25,962		-		25,962		-
Asset-backed securities		10,363		-		10,363		-
Certificates of deposit		423		-		423		-
Other securities		975		975		-		-
Total available-for-sale	$	410,039	$	975	$	399,623	$	9,441

Equity securities		11,403		11,403		-		-

Derivatives		1,906		-		1,906		-
Total assets	$	423,348	$	12,378	$	401,529	$	9,441

	Municipal
	Securities
	(dollars in thousands)
Beginning balance, January 1, 2018	$	9,632
Principal paydowns		(191	)
Ending balance, September 30, 2018	$	9,441

	Municipal
	Securities
	(dollars in thousands)
Beginning balance, January 1, 2017	$	18,218
Principal paydowns		(8,586	)
Ending balance, December 31, 2017	$	9,632

					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)
September 30, 2018
Financial assets:
Cash and cash equivalents	$	155,848	$	155,848	$	155,848	$	-	$	-
Securities available-for-sale		410,039		410,039		975		399,623		9,441
Equity Securities		11,403		11,403		11,403		-		-
Loans held-for-sale		270		270		-		-		270
Net loans		4,427,738		4,304,357		-		-		4,304,357
Derivatives		1,906		1,906		-		1,906		-

Financial liabilities:
Noninterest-bearing deposits		758,213		758,213		758,213		-		-
Interest-bearing deposits		3,230,552		3,222,141		1,907,805		1,314,336		-
Borrowings		629,979		626,841		-		626,841		-
Subordinated debentures		128,474		129,165		-		129,165		-

December 31, 2017
Financial assets:
Cash and cash equivalents	$	149,582	$	149,582	$	149,582	$	-	$	-
Securities available-for-sale		435,284		435,284		15,150		410,502		9,632
Loans held-for-sale		24,845		24,845		-		370		24,475
Net loans		4,139,708		4,118,542		-		-		4,118,542
Derivatives		798		798		-		798		-

Financial liabilities:
Noninterest-bearing deposits		776,843		776,843		776,843		-		-
Interest-bearing deposits		3,018,285		3,018,285		1,842,151		1,176,134		-
Borrowings		670,077		669,680		-		669,680		-
Subordinated debentures		54,699		57,340		-		57,340		-

													Affected Line item in the
Details about Accumulated Other	Amounts Reclassified from Accumulated												Statement Where Net Income is
Comprehensive Income Components	Other Comprehensive Income												Presented

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2018			2017			2018			2017
Sale of investment securities available-for-sale	$	-		$	-		$	-		$	1,596		Net gains on sales of securities available-for-sale Income tax expense
		-			-			-			(579	)
	$	-		$	-		$	-		$	1,017

Amortization of pension plan net actuarial losses	$	91		$	(103	)	$	274		$	(309	)	Other components of net periodic pension expense Income tax expense
		(26	)		42			(77	)		126
	$	65		$	(61	)	$	197		$	(183	)

Total reclassification	$	65		$	(61	)	$	197		$	834

					Weighted-
					Average
			Weighted-		Remaining
	Number of		Average		Contractual
	Stock		Exercise		Term	Aggregate
	Options		Price		(in years)	Intrinsic Value
Outstanding at December 31, 2017	299,778		$	6.18
Granted	-
Exercised	(102,378	)		5.12
Forfeited/cancelled/expired	(1,323	)		14.24
Outstanding at September 30, 2018	196,077			6.68	1.8	$	3,346,546

Exercisable at September 30, 2018	196,077		$	6.68	1.8	$	3,346,546

			Weighted-
			Average
	Nonvested		Grant Date
	Shares		Fair Value
Nonvested at December 31, 2017	103,078		$	20.41
Granted	23,018			28.08
Vested	(58,002	)		20.33
Forfeited/cancelled/expired	(666	)		24.25
Nonvested at September 30, 2018	67,428			23.07

				Weighted
				Average Grant
	Units		Units	Date Fair
	(expected)		(maximum)	Value
Unearned at December 31, 2017	151,194			$	19.19
Awarded	19,614				31.35
Change in Estimate	(15,172	)
Vested	(69,627	)			19.46
Unearned at September 30, 2018	86,009		151,772	$	22.06

	Three Months Ended						Affected Line Item in the Consolidated
	September 30,						Statements of Income
	2018			2017
	(dollars in thousands)
Service cost	$	-		$	-
Interest cost		106			119		Other components of net periodic pension expense
Expected return on plan assets		(190	)		(160	)	Other components of net periodic pension expense
Net amortization		91			103		Other components of net periodic pension expense
Total periodic pension cost	$	7		$	62

	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

							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)
September 30, 2018
Assets:
Interest rate swaps
	$	1,906	$	-	$	1,906	$	-	$	-	$	1,906
December 31, 2017
Assets:
Interest rate swaps
	$	798	$	-	$	798	$	-	$	-	$	798

	Three Months Ended September 30,
	2018								2017
				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)}	$	423,566		$	3,147		2.95	%	$	397,077		$	3,033		3.03	%
Loans receivable and loans held-for-sale^{(2) (3) (4)}		4,362,905			51,973		4.73			3,898,404			43,683		4.45
Federal funds sold and interest-bearing with banks		42,164			183		1.72			53,820			170		1.25
Restricted investment in bank stocks		28,043			530		7.50			29,236			362		4.91
Total interest-earning assets		4,856,678			55,833		4.56			4,378,537			47,248		4.28
Noninterest-earning assets:
Allowance for loan losses		(33,943	)							(28,999	)
Other noninterest-earning assets		363,438								363,949
Total assets	$	5,186,173							$	4,713,487

Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits	$	1,296,165		$	6,477		1.98		$	1,005,997		$	3,593		1.42
Other interest-bearing deposits		1,854,763			4,204		0.90			1,816,162			2,520		0.55
Total interest-bearing deposits		3,150,928			10,681		1.34			2,822,159			6,113		0.86
Borrowings		531,251			2,839		2.12			570,711			2,353		1.64
Subordinated debentures⁽⁵⁾		128,420			1,831		5.66			54,630			813		5.90
Capital lease		2,554			38		5.90			2,688			40		5.90
Total interest-bearing liabilities		3,813,153			15,389		1.60			3,450,188			9,319		1.07
Noninterest-bearing demand deposits		761,782								688,707
Other liabilities		21,110								17,972
Total noninterest-bearing liabilities		782,892								706,679
Stockholders’ equity		590,128								556,620
Total liabilities and stockholders’ equity	$	5,186,173							$	4,713,487
Net interest income (tax-equivalent basis)					40,444								37,929
Net interest spread⁽⁶⁾							2.96	%							3.21	%
Net interest margin⁽⁷⁾							3.30	%							3.44	%
Tax-equivalent adjustment					(482	)							(910	)
Net interest income				$	39,962							$	37,019

Nonaccrual loans to total loans receivable	1.19	%	1.57	%
Nonperforming assets to total assets	0.99	%	1.29	%
Nonperforming assets, performing TDRs, and loans 90 days or greater past due and still accruing to loans receivable	1.48	%	1.98	%

			Estimated Change in
Interest Rates	Estimated		EVE					Interest Rates	Estimated		Estimated Change in NII
(basis points)	EVE		Amount			%		(basis points)	NII		Amount			%
+300	$	474,448	$	(117,523	)	(19.85	)	+300	$	169,179	$	2,826		1.70
+200		514,454		(77,517	)	(13.09	)	+200		168,482		2,129		1.28
+100		555,834		(36,137	)	(6.10	)	+100		167,731		1,378		0.83
0		591,971		-		0.0		0		166,353		-		0.0
-100		612,632		20,661		3.49		-100		163,951		(2,402	)	(1.44	)

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	)


									Amount
									Increase/
	September 30, 2018				December 31, 2017				(Decrease)
	Amount		%		Amount		%		2018 vs. 2017
	(dollars in thousands)
Demand, noninterest-bearing	$	758,213	19.0	%	$	776,843	20.5	%	$	(18,630	)
Demand, interest-bearing		795,962	20.0			636,339	16.8			159,623
Money market		949,103	23.8			1,033,525	27.2			(84,422	)
Savings		162,740	4.1			168,452	4.4			(5,712	)
Time		1,322,747	33.1			1,179,969	31.1			142,778
Total deposits	$	3,988,765	100.0	%	$	3,795,128	100.0	%	$	193,637

/s/ Frank Sorrentino III

/s/ William S. Burns

Frank Sorrentino III

William S. Burns

Chairman and Chief Executive Officer

Executive Vice President and Chief Financial Officer

Date: November ~~2, 2018~~6, 2019

Date: November ~~2, 2018~~6, 2019