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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, 2019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the transition period from __________ to __________

Commission File Number: 000-11486

CONNECTONE BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

New Jersey | 52-1273725
(State or Other Jurisdiction of 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 every Interactive Data File required to be submitted 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 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 ☐ (Do not check if smaller reporting company) | Smaller reporting company ☐ Emerging growth 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) | (Outstanding as of November 6, 2019)

Table of Contents

| Page
PART I – FINANCIAL INFORMATION |
Item 1.Financial Statements |
Consolidated Statements of Condition at September 30, 2019 (unaudited) and December 31, 2018 | 3
Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018 (unaudited) | 4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018 (unaudited) | 5
Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018 (unaudited) | 6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited) | 8
Notes to Consolidated Financial Statements (unaudited) | 9
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations | 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 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 6.Exhibits | 64
SIGNATURES | 65

2

Item 1. Financial Statements

ConnectOne Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CONDITION

(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.

3

ConnectOne Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

|  | 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.

4

ConnectOne Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

|  | 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.

5

ConnectOne Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

|  | 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)

6

|  | 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.

7

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

|  | 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.

8

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

The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its twenty-eight other banking offices. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrower’s business, real estate rental and consumer wages.

The preceding unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019, or for any other interim period. The Company’s 2018 Annual Report on Form 10-K should be read in conjunction with these consolidated financial statements.

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

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

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.

9

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1a. Authoritative Accounting Guidance – (continued)

ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” ASU No. 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 will be effective for 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 amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018-15 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. We believe the adoption of this standard will not have a significant impact on our consolidated financial statements.

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

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

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

10

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 2. Business Combination

Greater Hudson Bank

On July 11, 2018, the Company entered into an Agreement and Plan of Merger with Greater Hudson Bank (“GHB”), under which GHB would merge with and into ConnectOne Bank, with ConnectOne Bank as the surviving bank. This transaction was completed effective January 2, 2019 (“Merger date”). As part of this merger, the Company acquired seven branch offices located in Rockland, Orange and Westchester Counties, New York. Pursuant to the merger agreement, holders of GHB common stock received 0.245 shares of common stock of ConnectOne with cash paid in lieu of fractional shares.

The acquisition of GHB was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date. The application of the acquisition method of accounting resulted in the recognition of goodwill of $10.3 million and a core deposit intangible of $5.1 million. The assets acquired and liabilities assumed and consideration paid in the acquisition of GHB were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates, accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period, which runs through January 2, 2020, in the measurement period in which the adjustment amounts are determined. The acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition. As of September 30, 2019 there were no changes to the provisional fair value adjustments recorded on January 2, 2019.

In connection with the acquisition, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table:

|  | Estimated Fair Value at January 2, 2019
|  | (in thousands)
Consideration paid: |  |  |
Common stock issued in acquisition |  | $ | 56,025
Assets acquired: |  |  |
Cash and cash equivalents |  |  | 13,741
Securities available-for-sale |  |  | 121,672
Loans, net |  |  | 362,914
Premises and equipment, net |  |  | 1,624
Accrued interest receivable |  |  | 2,434
Core deposit intangibles |  |  | 5,131
Other assets |  |  | 26,650
Total assets acquired |  |  | 534,166
Liabilities assumed: |  |  |
Deposits |  |  | 416,110
Borrowings |  |  | 64,186
Other liabilities |  |  | 8,179
Total liabilities assumed |  |  | 488,475
Net assets acquired |  |  | 45,691
Goodwill recorded in acquisition |  | $ | 10,334

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.

11

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 2. Business Combination – (continued)

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

| Estimated Fair Value at January 2, 2019
| (in thousands)
Contractually required principal and interest acquisition | $ | 19,874 |
Contractual cash flows not expected to be collected (non-accretable discount) |  | (12,167 | )
Expected cash flows at acquisition |  | 7,707 |
Interest component of expected cash flows (accretable discount) |  | (1,286 | )
Fair value of acquired loans | $ | 6,421 |

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 share of Parent Corporation’s common stock for each share of BKJ common stock, subject to proration and allocation procedures set forth in the Merger Agreement. Closing of the Merger is subject to customary conditions, including, among others, approval of the Merger Agreement by shareholders of BKJ and Parent Corporation, receipt of required regulatory approvals, and approval for listing on NASDAQ with respect to the Parent Corporation common stock to be issued in the Merger. The Merger is expected to close in the first quarter of 2020.

12

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 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, 2019 and September 30, 2018.

13

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

| 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 $119.6 million and $151.5 million at September 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits, borrowings, Federal Reserve Discount Window borrowings and Federal Home Loan Bank advances and for other purposes required or permitted by law. As of September 30, 2019 and December 31, 2018, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

14

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The following table presents information for investments in securities available-for-sale at September 30, 2019, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer. Securities not due at a single maturity date are shown separately.

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

Gross gains and losses from the sales of securities for periods presented were as follows:

| 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 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.

15

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Temporarily Impaired Securities

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

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

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

The Company evaluates all securities with unrealized losses quarterly to determine whether the loss is other-than-temporary. Unrealized losses in the corporate debt securities category consist primarily of senior unsecured corporate debt securities issued by large financial institutions, insurance companies and other corporate issuers. No corporate issuers have defaulted on interest payments. The declines in fair value are 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.

16

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at September 30, 2019 and December 31, 2018:

| 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.

17

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 5. Derivatives – (continued)

Interest rate swaps were entered into on June 4, 2019 and August 6, 2019 each with a notional amount of $50 million and in April 13, 2017, August 24, 2015, and December 30, 2014 each with a respective notional amount of $25 million and were designated as cash flow hedges of an FHLB advance. The swaps were determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income while the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.

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

| 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 $(204,000) and $(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.

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, 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 |  | $ | - |  | $ | -

18

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

|  | 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

19

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Loans and the Allowance for Loan Losses

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

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

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

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

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

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

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

20

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

| 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 tables present nonaccrual loans included in loans receivable by loan class as of September 30, 2019 and December 31, 2018:

| 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 include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.

21

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. All loans past due 90 days or greater and all impaired loans are included in the appropriate category below. The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) at September 30, 2019 and December 31, 2018:

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

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

22

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

| September 30, 2019
| Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance
No related allowance recorded | (dollars in thousands)
Commercial | $ | 41,030 |  | $ | 87,716 |  |  |
Commercial real estate |  | 12,136 |  |  | 12,301 |  |  |
Commercial construction |  | 6,079 |  |  | 6,085 |  |  |
Residential real estate |  | 1,533 |  |  | 1,897 |  |  |
Total (no related allowance) | $ | 60,778 |  | $ | 107,999 |  |  |
With an allowance recorded |  |  |  |  |  |  |  |
Commercial real estate | $ | 388 |  | $ | 388 |  | $ | 23
Commercial construction |  | 6,467 |  |  | 6,467 |  |  | 1,339
Residential real estate |  | 264 |  |  | 264 |  |  | 24
Total (with allowance) | $ | 7,119 |  | $ | 7,119 |  | $ | 1,386
Total |  |  |  |  |  |  |  |
Commercial | $ | 41,030 |  | $ | 87,716 |  | $ | -
Commercial real estate |  | 12,524 |  |  | 12,689 |  |  | 23
Commercial construction |  | 12,546 |  |  | 12,552 |  |  | 1,339
Residential real estate |  | 1,797 |  |  | 2,161 |  |  | 24
Total | $ | 67,897 |  | $ | 115,118 |  | $ | 1,386

| December 31, 2018
| Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance
No related allowance recorded | (dollars in thousands)
Commercial | $ | 29,896 |  | $ | 83,596 |  |  |
Commercial real estate |  | 16,839 |  |  | 17,935 |  |  |
Commercial construction |  | 9,240 |  |  | 9,240 |  |  |
Residential real estate |  | 2,209 |  |  | 2,521 |  |  |
Total (no related allowance) | $ | 58,184 |  | $ | 113,292 |  |  |
With an allowance recorded |  |  |  |  |  |  |  |
Commercial real estate | $ | 1,488 |  | $ | 1,488 |  | $ | 7
Residential real estate |  | 260 |  |  | 266 |  |  | 29
| $ | 1,748 |  | $ | 1,754 |  | $ | 36
Total |  |  |  |  |  |  |  |
Commercial | $ | 29,896 |  | $ | 83,596 |  | $ | -
Commercial real estate |  | 18,327 |  |  | 19,423 |  |  | 7
Commercial construction |  | 9,240 |  |  | 9,240 |  |  | -
Residential real estate |  | 2,469 |  |  | 2,787 |  |  | 29
Total | $ | 59,932 |  | $ | 115,046 |  | $ | 36

23

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by segment as of and for the three and nine months ended September 30, 2019 and 2018:

| 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, 2019 and December 31, 2018 are loans that are deemed troubled debt restructurings. The recorded investment in loans include accrued interest receivable and other capitalized costs such as real estate taxes paid on behalf of the borrower and loan origination fees, net, when applicable. Cash basis interest and interest income recognized on accrual basis approximate each other.

24

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

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

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

25

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for loan losses that are allocated to each loan portfolio segment:

| 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

26

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The Company’s allowance for loan losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit. There have been no material changes to the allowance for loan losses (“ALLL”) methodology as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. A summary of the activity in the ALLL is as follows:

| 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 |

27

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

| Nine Months Ended September 30, 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 |

28

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Troubled Debt Restructurings

Loans are considered to have been modified in a troubled debt restructuring (“TDRs”) when due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, longer amortization of principal payments, maturity extension, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan.

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

As of September 30, 2019, TDRs totaled $51.5 million, of which $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. The Company has allocated $1.4 million and $0.1 million of specific allowance as of September 30, 2019 and September 30, 2018, respectively. 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, 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, 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:

| 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.

29

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

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

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018:

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.

30

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2019 and December 31, 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 |  | $ | -

31

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

|  |  |  |  | December 31, 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 nine months ended September 30, 2019 and during the year ended December 31, 2018.

Assets Measured at Fair Value on a Nonrecurring Basis

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

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

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

32

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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, 2019 and December 31, 2018 are as follows:

|  |  |  |  | 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, 2019 that required a valuation allowance were $7.1 million with a related valuation allowance of $1.4 million compared to $1.7 million with a related valuation allowance of $36 thousand at December 31, 2018.

33

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Assets Measured With Significant Unobservable Level 3 Inputs

Recurring basis

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2019 and for the year ended December 31, 2018:

| Municipal Securities
| (dollars in thousands)
Beginning balance, January 1, 2019 | $ | 9,377 |
Principal paydowns |  | (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, 2019 and December 31, 2018. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.

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 | %

34

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Nonrecurring basis: 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, 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%]

35

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

|  |  |  |  |  |  | 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 |  |  | -

36

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

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

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 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:

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 | ) |  |

37

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 8. Comprehensive Income – (continued)

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

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

Note 9. Premises and Equipment

The Company leases certain premises and equipment under operating leases. At September 30, 2019, the Company had lease liabilities totaling $17.1 million and 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 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 |

38

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 10. Stock Based Compensation

The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of 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 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, respectively.

Activity under the Company’s options for the nine months ended September 30, 2019 was as follows:

| 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, 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, 2019. This amount changes based on the fair market value of the Company’s stock.

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

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

39

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 10. Stock Based Compensation – (continued)

As of September 30, 2019, there was approximately $1,233,743 of total unrecognized compensation cost related to nonvested restricted shares granted. The cost is expected to be recognized over a weighted average period of 2.3 years. A total of 11,979 restricted shares were granted during the three months ended September 30, 2019.

A summary of the status of unearned performance unit awards and the change during the period is presented in the table below:

| 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, 2019, the specific number of shares related to performance units that were expected to vest was 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, 2019 the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 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, 2019, compensation cost of approximately $0.8 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.7 years. A total of 35,636 performance units were awarded during the nine months ended September 30, 2019.

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

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

Any forfeitures would result in previously recognized expense being reversed. A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient. During the 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, 2019, compensation cost of approximately $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 53,454 restricted stock units were awarded during the nine months ended September 30, 2019.

40

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 11. Components of Net Periodic Pension Cost

The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until June 30, 2007, at which time the Company froze the plan. The following table sets forth the net periodic pension cost of the Company’s pension plan for the periods indicated.

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

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

Contributions

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

41

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 12. FHLB Borrowings

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

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

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

Note 13. Revenue Recognition

Effective January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company’s revenues come from interest income and other sources, including loans, leases, securities, and derivatives that are 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 a 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.

42

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, 2019 and 2018. Items outside of ASC 606 are noted as such.

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

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

(1) | Not within scope of ASC 606.

43

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 13. Revenue Recognition – (continued)

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

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

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

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

Note 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, 2019 was 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, 2019 and December 31, 2018.

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, 2019, unamortized costs related to this debt issuance were approximately $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, 2019, unamortized costs related to this debt issuance were approximately $1,217,000.

44

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 15. Offsetting Assets and Liabilities

Certain financial instrument-related assets and liabilities may, under GAAP, be offset on the consolidated statements of condition because they are subject to master netting agreements or similar agreements, although the Company has elected to disclose such arrangements on 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, 2019 and December 31, 2018:

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

45

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

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of September 30, 2019 and December 31, 2018. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Cautionary Statement Concerning Forward-Looking Statements

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp is engaged; (7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; (10) the outcome of regulatory and legal investigations and proceedings may not be 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 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.

46

Other-Than-Temporary Impairment of Securities Available-for-Sale: Securities available-for-sale are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FASB ASC 320-10-65 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management assesses whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery.

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Fair Value of Securities: FASB ASC 820-10-35 clarifies the application of the provisions of FASB ASC 820-10-05 in an inactive market and how an entity would determine fair value in an inactive market. The Company applies the guidance in FASB ASC 820-10-35 when determining fair value for the Company’s private label collateralized mortgage obligations, pooled trust preferred securities and single name corporate trust preferred securities. See Note 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, 2018 includes additional discussion on the accounting for income taxes.

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Operating Results Overview

Net income for the three months ended September 30, 2019 amounted to $21.7 million compared to $19.9 million for the comparable three-month period ended September 30, 2018. The Company’s diluted earnings per share were $0.61 for both the three months ended September 30, 2019 and September 30, 2018. The increase in net income was primarily attributable to an increase in net interest income and an increase in other income, offset by increases in provision for loan losses, noninterest expenses and income tax expense. Included in noninterest expense for the three months ended 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 $1.29 for the comparable 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 and a decrease in provision for loan losses, partially offset by increases in noninterest expenses and income tax expense. The increase in net interest income was mainly attributable to loan growth resulting from the GHB acquisition. The increase in noninterest expenses was primarily attributable to merger-related expenses, a loss on extinguishment of debt and an increase in salaries and employee benefits and professional and consulting expenses, partially offset by the aforementioned FDIC credit. The decrease in provision for loan losses was primarily attributable to provisioning related to the taxi medallion portfolio 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, 2019 was $48.9 million, an increase of $8.5 million, or 21.0%, from the three months ended September 30, 2018, resulting from an increase in average total interest-earning assets of 27.0%, primarily loans, that resulted from the acquisition of GHB and a widening of the net interest margin of 14 basis-point to 3.44% for the three months ended September 30, 2019 from 3.30% for the three months ended September 30, 2018. Included in net interest income was accretion and amortization of purchase accounting adjustments of $1.6 million during the three months ended September 30, 2019 and $0.2 million during the three months ended September 30, 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. The increase in the adjusted net interest margin was primarily attributable to increased loan portfolio yields, primarily due to an improved loan mix and higher spreads on new business.

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

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

Average Statements of Condition with Interest and Average Rates

| Three Months Ended 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%.
(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 $1,407 and $1,735 as of September 30, 2019 and September 30, 2018, respectively. Amortization expense related to debt issuance costs included in interest expense was $82 for both the three months ended September 30, 2019 and September 30, 2018.
(6) | Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax-equivalent basis.
(7) | Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.
(8) | Rates are annualized.

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Average Statements of Condition with Interest and Average Rates

| Nine Months Ended September 30,
| 2019 |  | 2018
| Average Balance |  | Interest Income/ Expense |  | Average Rate (8) |  | Average Balance |  | Interest Income/ Expense |  | Average Rate (8)
| (dollars in thousands) |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities (1) (2) | $ | 496,886 |  |  | $ | 11,361 |  |  | 3.06 | % |  | $ | 432,475 |  |  | $ | 9,200 |  |  | 2.84 | %
Loans receivable and loans held-for-sale (2) (3) (4) |  | 5,014,324 |  |  |  | 191,466 |  |  | 5.11 |  |  |  | 4,294,792 |  |  |  | 148,994 |  |  | 4.64 |
Federal funds sold and interest-bearing with banks |  | 54,172 |  |  |  | 925 |  |  | 2.28 |  |  |  | 63,506 |  |  |  | 607 |  |  | 1.28 |
Restricted investment in bank stocks |  | 28,106 |  |  |  | 1,369 |  |  | 6.51 |  |  |  | 30,402 |  |  |  | 1,517 |  |  | 6.67 |
Total interest-earning assets |  | 5,593,488 |  |  |  | 205,121 |  |  | 4.90 |  |  |  | 4,821,175 |  |  |  | 160,318 |  |  | 4.45 |
Noninterest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses |  | (36,873 | ) |  |  |  |  |  |  |  |  |  | (32,915 | ) |  |  |  |  |  |  |
Other noninterest-earning assets |  | 433,900 |  |  |  |  |  |  |  |  |  |  | 337,509 |  |  |  |  |  |  |  |
Total assets | $ | 5,990,515 |  |  |  |  |  |  |  |  |  | $ | 5,125,769 |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Time deposits | $ | 1,555,185 |  |  | $ | 27,603 |  |  | 2.37 |  |  | $ | 1,261,660 |  |  | $ | 17,096 |  |  | 1.81 |
Other interest-bearing deposits |  | 2,420,535 |  |  |  | 21,695 |  |  | 1.29 |  |  |  | 1,811,966 |  |  |  | 10,442 |  |  | 0.77 |
Total interest-bearing deposits |  | 3,795,720 |  |  |  | 49,298 |  |  | 1.74 |  |  |  | 3,073,626 |  |  |  | 27,538 |  |  | 1.20 |
Borrowings |  | 518,988 |  |  |  | 9,647 |  |  | 2.49 |  |  |  | 591,348 |  |  |  | 8,856 |  |  | 2.00 |
Subordinated debentures (5) |  | 128,667 |  |  |  | 5,533 |  |  | 5.75 |  |  |  | 124,029 |  |  |  | 5,345 |  |  | 5.76 |
Capital lease |  | 2,436 |  |  |  | 110 |  |  | 6.02 |  |  |  | 2,588 |  |  |  | 117 |  |  | 6.04 |
Total interest-bearing liabilities |  | 4,445,811 |  |  |  | 64,588 |  |  | 1.94 |  |  |  | 3,791,591 |  |  |  | 41,856 |  |  | 1.48 |
Noninterest-bearing demand deposits |  | 811,689 |  |  |  |  |  |  |  |  |  |  | 735,345 |  |  |  |  |  |  |  |
Other liabilities |  | 36,508 |  |  |  |  |  |  |  |  |  |  | 18,728 |  |  |  |  |  |  |  |
Total noninterest-bearing liabilities |  | 848,197 |  |  |  |  |  |  |  |  |  |  | 754,073 |  |  |  |  |  |  |  |
Stockholders’ equity |  | 696,507 |  |  |  |  |  |  |  |  |  |  | 580,105 |  |  |  |  |  |  |  |
Total liabilities and stockholders’ equity | $ | 5,990,515 |  |  |  |  |  |  |  |  |  | $ | 5,125,769 |  |  |  |  |  |  |  |
Net interest income (tax-equivalent basis) |  |  |  |  |  | 140,533 |  |  |  |  |  |  |  |  |  |  | 118,462 |  |  |  |
Net interest spread (6) |  |  |  |  |  |  |  |  | 2.96 | % |  |  |  |  |  |  |  |  |  | 2.97 | %
Net interest margin (7) |  |  |  |  |  |  |  |  | 3.36 | % |  |  |  |  |  |  |  |  |  | 3.29 | %
Tax-equivalent adjustment |  |  |  |  |  | (1,645 | ) |  |  |  |  |  |  |  |  |  | (1,408 | ) |  |  |
Net interest income |  |  |  |  | $ | 138,888 |  |  |  |  |  |  |  |  |  | $ | 117,054 |  |  |  |

(1) | Average balances are based on amortized cost and include equity securities.
(2) | Interest income is presented on a tax-equivalent basis using 21%.
(3) | Includes loan fee income.
(4) | Total loans include loans held-for-sale and nonaccrual loans.
(5) | Average balances are net of debt issuance costs of $1,529 and $1,730 as of September 30, 2019 and September 30, 2018, respectively. Amortization expense related to debt issuance costs included in interest expense was $164 and $168 for the nine months September 30, 2019 and September 30, 2018, respectively.
(6) | Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax-equivalent basis.
(7) | Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.
(8) | Rates are annualized.

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Noninterest Income

Noninterest income totaled $2.1 million for the three months ended September 30, 2019, compared with $1.3 million for the three months ended September 30, 2018. Included in noninterest income for the three months ended September 30, 2019 were losses on sales of securities available-for-sale of $0.3 million. Excluding those losses, noninterest income increased $1.1 million from the three months ended September 30, 2018. Noninterest income consists of income on bank owned life insurance (“BOLI”), net gains on sales of loans held-for-sale, deposit service fees, loan fees, net gains on equity securities and other income. The 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 increases in overdraft fees, loan servicing fees, wire transfer fees, and fees related to our BoeFly subsidiary.

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

Noninterest Expenses

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

Noninterest expenses totaled $70.0 million for the nine months ended September 30, 2019, compared to $52.1 million for the nine months ended September 30, 2018. Included in noninterest expenses during the nine months ended September 30, 2019 and September 30, 2018 were $8.1 million and $0.4 million, respectively, in merger-related expenses. Also included in noninterest expenses during the nine months ended September 30, 2019 was $1.0 million related to a loss on extinguishment of debt and a $1.3 million FDIC assessment credit. Excluding these items, noninterest expenses increased $10.5 million from the prior year comparable period. The increase from the prior year comparable period was primarily attributable to increases in salaries and employee benefits of $6.7 million, professional and consulting expenses of $1.6 million, occupancy and equipment of $1.0 million, amortization of core deposit intangibles of $0.6 million and marketing and advertising expenses of $0.3 million. The increases over the prior year comparable period were primarily attributable to the acquisition of 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. The increase in income tax expense was primarily attributable to higher income before taxes. The effective tax rate for the three months ended September 30, 2019 and September 30, 2018 was 22.7% and 9.6%, respectively. Included in income tax expense for the third quarter of 2018 were benefits of $1.4 million resulting from Federal and NJ deferred tax asset adjustments.

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

Financial Condition

Loan Portfolio

Commercial lending is the Company’s primary business activity. The Company’s loan portfolio consists of commercial, residential and consumer loans, serving a diverse client base in the Company’s market area. The composition of the Company’s portfolio remains relatively constant but can change due to factors such as the economic climate, the level and fluctuations in interest rates, real estate values and employment metrics. Organic growth (i.e., growth other than through mergers and acquisitions) is generated through business development, repeat client requests for new financings, penetration into existing markets and entry into new markets.

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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.

| September 30, 2019 |  | December 31, 2018 |  | Amount Increase/ (Decrease)
| Amount |  | % |  | Amount |  | % |
| (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, 2019, gross loans totaled $5.1 billion, an increase of $571 million, or 12.6%, as compared to December 31, 2018. Net loan growth was primarily attributable to the Greater Hudson Bank acquisition, with increases in commercial real estate ($253 million), commercial construction ($181 million), commercial loans ($125 million), and residential real estate and consumer ($12 million). At September 30, 2019, acquired loans within the loan portfolio totaled $550 million, compared to $315 million as of December 31, 2018. The increase was attributable to the Greater Hudson Bank acquisition.

Allowance for Loan Losses and Related Provision

The purpose of the allowance for loan losses (“ALLL”) is to establish a valuation allowance for probable incurred credit losses in the loan portfolio. Additions to the ALLL are made through provisions charged against current operations and through recoveries made on loans previously charged off. The ALLL is maintained at an amount considered adequate by management to provide for probable incurred credit losses inherent in the loan portfolio based upon historical losses and a periodic evaluation of external and portfolio risk factors. In establishing an appropriate ALLL, an assessment of the individual borrowers, a determination of the value of the underlying collateral, a review of historical loss experience and an analysis of the levels and trends of loan segments, delinquencies and problem loans are considered. Such factors as the level and trend of interest rates and current economic conditions and peer group statistics are also reviewed. The Company’s analysis of its ALLL also takes into consideration the potential impact that current trends may have on the Company’s borrower base.

Although management uses the best information available, the level of the ALLL remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ALLL. Such agencies may require the Company to increase the ALLL based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in the New York metropolitan area. Future adjustments to the ALLL may be necessary due to economic factors impacting New 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, 2019, the ALLL was $38.8 million as compared to $35.0 million at December 31, 2018. The provision for loan losses for the three months and nine months ended 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, 2019 increased by $0.9 million when compared to the prior year third quarter. The increase was primarily attributable to an increase in charge-offs, which totaled $0.9 million for the quarter. The decrease in the provision for loan losses during the nine months ended September 30, 2019 when compared to the comparable prior year period was primarily attributable to $17.0 million of provision related to the taxi medallion loan portfolio for the three months ended March 31, 2018, offset by a $3.0 million provision related to a single loan secured by a commercial office building for the three months ended March 31, 2019.

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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 increase was primarily related to charge-offs of one home equity line of credit for $0.4 million, and two small commercial mortgage loans of $0.5 million. Net charge-offs for the nine months ended September 30, 2018 include a $17.0 million partial charge-off related to the taxi medallion loan portfolio, resulting from a decrease in the transfer values of medallions as reported by the New York City Taxi and Limousine Commission, as well as a reduction in the Company’s cash flow valuation model. Included in net charge-offs for the nine months ended September 30, 2019 was a $2.1 million partial charge-off on a single loan secured by a commercial office building. The ALLL as a percentage of loans receivable amounted to 0.76% at September 30, 2019 compared to 0.77% at December 31, 2018 and 0.78 % at September 30, 2018.

The level of the allowance for the respective periods of 2019 and 2018 reflects the credit quality within the loan portfolio, loan growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the ALLL at September 30, 2019 is adequate to cover losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.

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

| Three Months Ended September 30,
| 2019 |  | 2018
| (dollars in thousands)
Average loans at end of period | $ | 5,127,365 |  |  | $ | 4,362,905 |
Analysis of the ALLL: |  |  |  |  |  |  |
Balance - beginning of quarter | $ | 37,698 |  |  | $ | 33,594 |
Charge-offs: |  |  |  |  |  |  |
Commercial real estate |  | (387 | ) |  |  | - |
Home equity |  | (557 | ) |  |  | - |
Consumer |  | (20 | ) |  |  | (6 | )
Total charge-offs |  | (964 | ) |  |  | (6 | )
Recoveries: |  |  |  |  |  |  |
Commercial |  | 28 |  |  |  | 56 |
Residential real estate |  | - |  |  |  | 5 |
Consumer |  | 9 |  |  |  | - |
Total recoveries |  | 37 |  |  |  | 61 |
Net (charge-offs) recoveries |  | (927) |  |  |  | 55 |
Provision for loan and losses |  | 2,000 |  |  |  | 1,100 |
Balance - end of period | $ | 38,771 |  |  | $ | 34,749 |
Ratio of annualized net charge-offs during the period to average loans during the period |  | 0.07 | % |  |  | (0.01 | )%
Loans receivable | $ | 5,110,471 |  |  | $ | 4,462,487 |
ALLL as a percentage of loans receivable |  | 0.76 | % |  |  | 0.78 | %

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| 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.

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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, 2019 |  | December 31, 2018 |
|  | (dollars in thousands) |
Nonaccrual loans |  | $ | 51,321 |  | $ | 51,855 |
OREO |  |  | 907 |  |  | - |
Total nonperforming assets (1) |  | $ | 52,228 |  | $ | 51,855 |
Performing TDRs |  | $ | 19,681 |  | $ | 11,165 |
Loans 90 days or greater past due and  still accruing (non-PCI) |  | $ | - |  | $ | - |
Loans 90 days or greater past due and  still accruing (PCI) |  | $ | 3,098 |  | $ | 1,647 |

| (1) | Nonperforming assets are defined as nonaccrual loans and OREO.

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

Securities Available-For-Sale

As of September 30, 2019, the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations of U.S. states and political subdivisions, corporate bonds and notes, and asset-backed securities. For the quarter ended September 30, 2019, average securities increased by $21.9 million to approximately $445.5 million, or 7.9% of average total interest-earning assets, from approximately $423.6 million, or 8.7% of average interest-earning assets, for the comparable period in 2018.

At September 30, 2019, net unrealized gains on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included in stockholders’ equity, net of tax, amounted to $3.1 million as compared with net unrealized losses of $5.8 million at December 31, 2018. The decrease in unrealized losses is predominately attributable to changes in market conditions and interest rates. The gross unrealized losses associated with agency securities and federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other-than-temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.

Interest Rate Sensitivity Analysis

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

We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of September 30, 2019 and December 31, 2018, the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and the Bank’s management.

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

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

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Based on our model, which was run as of September 30, 2019, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 4.60%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.96%. As of December 31, 2018, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 1.59%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.17%

An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of September 30, 2019, would decline by 6.70% with an instantaneous rate shock of up 200 basis points, and increase by 3.17% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2018, would decline by 12.01% with an instantaneous rate shock of up 200 basis points, and increase by 3.15% with an instantaneous rate shock of down 100 basis points.

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

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 conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Impact of Inflation and Changing Prices

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

Liquidity

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

At September 30, 2019, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of September 30, 2019, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $509.5 million, which represented 8.3% of total assets and 9.7% of total deposits and borrowings, compared to $441.4 million as of December 31, 2018, which represented 8.1% of total assets and 9.4% of total deposits and borrowings.

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The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of September 30, 2019, had the ability to borrow $1.9 billion. In addition, at September 30, 2019, the Bank had in place borrowing capacity of $25 million through correspondent banks. The Bank also has a credit facility established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral of $5.4 million. At September 30, 2019, the Bank had aggregate available and unused credit of approximately $1.1 billion, which represents the aforementioned facilities totaling $1.9 billion net of $887.7 million in outstanding borrowings and letters of credit. At September 30, 2019, outstanding commitments for the Bank to extend credit were approximately $1.1 billion.

Cash and cash equivalents totaled $194.0 million at September 30, 2019, increasing by $21.6 million from $172.4 million at December 31, 2018. Operating activities provided $63.4 million in net cash. Investing activities used $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 $77.1 million in net cash, primarily reflecting a net increase in deposits, offset by repayments in FHLB borrowings.

Deposits

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

| 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, 2019 was 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. 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.

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Stockholders’ Equity

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

| 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.

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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, 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.

| 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, 2019, management believes that each of the Bank and the Company meet all capital adequacy requirements to which they are subject. Basel III rules require a “capital conservation buffer” for both the Company and the Bank. Beginning January 1, 2019, the Company and the Bank are required to maintain a 2.5% capital conservation buffer, above and beyond the capital levels otherwise required under applicable regulation. Under this guidance banking institutions with a CET1, Tier 1 Capital Ratio and Total Risk Based Capital Ratio above the minimum regulatory adequate capital ratios but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall.

As of September 30, 2019 both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the Tier 1 Risk Based Ratio which was 1.37% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 2.00% above the minimum buffer ratio.

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Item 3. Qualitative and Quantitative Disclosures about Market Risks

Market Risk

Interest rate risk management is our primary market risk. See "Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity Analysis" herein for a discussion of our management of our interest rate risk.

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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.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1a. Risk Factors

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

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

See “Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Shareholders' Equity”

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

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Item 6. Exhibits

Exhibit No. |  | Description
2.1 |  | Agreement and Plan of Merger, dated as of August 15, 2019, by and between ConnectOne Bancorp, Inc. and Bancorp of New Jersey, Inc.(1)
10.1 |  | Form of Voting Agreement executed by all directors of Bancorp of New Jersey, Inc.(1)
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.

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SIGNATURES

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

CONNECTONE BANCORP, INC.

(Registrant)

By: | /s/ Frank Sorrentino III |  | By: | /s/ William S. Burns
| Frank Sorrentino III |  |  | William S. Burns
| Chairman and Chief Executive Officer |  |  | Executive Vice President and Chief Financial Officer
| Date: November 6, 2019 |  |  | Date: November 6, 2019

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