ConnectOne Bancorp, Inc. Reports Second Quarter 2017 Results

ENGLEWOOD CLIFFS, N.J., July 27, 2017 (GLOBE NEWSWIRE) -- ConnectOne Bancorp, Inc. (Nasdaq:CNOB) (the "Company" or "ConnectOne"), parent company of ConnectOne Bank (the "Bank"), today reported net income of $7.7 million for the second quarter of 2017 compared with $11.9 million for the first quarter of 2017 and $10.9 million earned during the second quarter of 2016.  Diluted earnings per share were $0.24 for the current quarter versus $0.37 earned in the first quarter of 2017 and $0.36 earned in the second quarter of 2016.

During the quarter we recorded a $9.7 million pretax expense due to further weakness in the valuation of NYC taxi medallions, thereby reducing the carrying value of our taxi medallion loan portfolio, which is predominantly corporate medallions, to $50.9 million. Excluding expense related to taxi medallion loan valuation and net securities gains, earnings per share increased to $0.42 for the second quarter of 2017, as compared with $0.38 for the first quarter of 2017 and $0.39 for the second quarter of 2016.

Frank Sorrentino, ConnectOne's Chairman and CEO stated, "We are exceedingly pleased with our second quarter operating performance. Loans receivable increased by $190 million from the prior quarter-end and, consistent with our emphasis on diversifying our loan mix, commercial and industrial loans grew by $69 million, representing an annualized growth rate of 50.8% for this non-CRE segment.  Overall loan growth since year-end 2016 has amounted to $286 million, or 16.4% annualized.  Meanwhile, core deposit growth has also exhibited strong progress.  For the current quarter, our total demand deposits (including both interest and noninterest-bearing) increased by $49 million, or 16.0% on an annualized basis.  Additional deposit growth is expected through enhanced cash management service capabilities, expansion of our municipal and private-school relationships, and better utilization of our modern branch model which allows our staff to focus on sales. The Company remains focused on accelerating deposit growth so that it is commensurate with strong loan growth.  On a GAAP basis, return on average assets was 0.69% and return on average tangible equity was 7.80%; however, when excluding the aforementioned taxi charge, the adjusted return on average assets and return on average tangible equity was 1.20% and 13.5%, respectively, reflecting strengthening underlying core performance.  Meanwhile, our net interest margin widened by 5 basis points to 3.45% and the operating efficiency ratio improved to 41.6%, from 44.0% in the first quarter of 2017 due to seasonal factors and continued operational leverage.  We expect our efficiency ratio to improve further in future quarters.  Augmenting our efficiency and deposit gathering capabilities, we are proud to announce our new partnerships with Zelle, the consortium of the top 30 banks in the country to provide real-time payments, and with nCino, one of the most efficient and streamlined deposit and loan operating systems in the industry, which will continue to support our best-in-class efficiency metrics."

Mr. Sorrentino commented further, "While we are disappointed that weakness in the taxi medallion sector has negatively impacted this quarter's results, our taxi medallion exposure is now down to 1.3% of our loan portfolio; a level where, regardless of final resolution, no negative impact is expected on our strategic plans."

Operating Results

Fully taxable equivalent net interest income for the second quarter of 2017 was $35.8 million, an increase of $1.9 million, or 5.5%, from the first quarter of 2017, resulting from an increase in average interest-earning assets of 2.8% and the widening of the net interest margin to 3.45% from 3.40%.  Included in net interest income was accretion and amortization of purchase accounting adjustments of $0.3 million and $0.6 million during the second and first quarter of 2017, respectively.  Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.42% in the second quarter of 2017, widening by 9 basis-points from the first quarter 2017 adjusted net interest margin of 3.33%.  The increase in the adjusted net interest margin was primarily attributable to higher yields on loans and an improved asset-mix, partially offset by lower yields on securities and an increased cost in deposit funding. 

Fully taxable equivalent net interest income for the second quarter of 2017 reflected an increase of $2.7 million, or 8.2%, from the second quarter of 2016, resulting from an increase in average interest-earning assets of 6.5% and the widening of the net interest margin by 5 basis-points to 3.45% from 3.40%. Included in net interest income was accretion and amortization of purchase accounting adjustments of $0.3 million and $1.2 million during the second quarter of 2017 and second quarter of 2016, respectively.  Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.42% in the second quarter of 2017, widening by 14 basis-points from the second quarter of 2016 adjusted net interest margin of 3.28%.  The increase in the adjusted net interest margin was primarily attributable to higher yields on loans and an improved asset-mix, partially offset by lower yields on securities and an increased cost in deposit funding.   

Noninterest income totaled $1.4 million in the second quarter of 2017, $3.0 million in the first quarter of 2017 and $1.6 million in the second quarter of 2016.  There were no net securities gains/(losses) during the second quarter of 2017. The first quarter of 2017 and the second quarter of 2016 included net securities gains of $1.6 million and $0.1 million, respectively.  Excluding the securities gains, noninterest income remained flat when compared to the sequential quarter and the prior year second quarter.  Noninterest income also includes bank owned life insurance and deposit, loan and other income.

Noninterest expenses totaled $25.3 million for the second quarter of 2017, up $7.1 million from $18.2 million for the first quarter of 2017 and up $10.9 million from $14.4 million for the second quarter of 2016.  The increase from the sequential quarter was mainly attributable to an increase in the taxi medallion loans held-for-sale valuation allowance, which was $9.7 million in the current quarter and $2.6 million in the first quarter of 2017.  In addition, decreases in occupancy and equipment expenses ($0.3 million) and other expenses ($0.2 million), partially offset by increases in salaries and employee benefits ($0.4 million), contributed to the overall increase in noninterest expenses from the first quarter of 2017.  The increase from the prior year second quarter was mainly attributable to the valuation allowance of which there was none in the prior year's period.  In addition, increases in salaries and employee benefits ($0.9 million), FDIC insurance premiums ($0.2 million), data processing ($0.1 million), and other expense ($0.1 million), partially offset by a decrease in occupancy and equipment expenses ($0.2 million), contributed to the overall increase in noninterest expense from the second quarter of 2016.  The increases over the prior year second quarter were the result of increased levels of business and staff resulting from organic growth.

Income tax expense was $2.1 million for the second quarter of 2017, compared to $4.9 million for the first quarter of 2017 and $5.0 million for the second quarter of 2016.  Included in income tax expense for the second and first quarter of 2017 is a benefit of $47 thousand and $133 thousand, respectively, which resulted from the effect of implementing ASU 2016-09, which relates to the recognition of excess tax benefits in the income statement (formerly through equity) that result from employee share-based payment awards.  The effective tax rate for the current quarter was 21.4% versus 31.5% for the prior-year quarter.  Excluding any changes to the taxi medallion valuation allowance, the effective tax rate for 2017 is expected to be maintained in the low 30% range.

Asset Quality

The provision for loan losses increased to $1.5 million in the second quarter of 2017 from $1.1 million in the first quarter of 2017, and decreased from $3.8 million in the second quarter of 2016.  The increase from the sequential quarter was largely attributable to higher loan growth.  The decrease from the prior year quarter was largely attributable to decreases in specific reserves.

As of June 30, 2017, loans held-for-sale included loans secured by NYC taxi medallions, predominantly corporate medallions, totaling $50.9 million (net of a $12.3 million valuation allowance), compared to $65.6 million (with no valuation allowance) as of December 31, 2016.  The decrease was primarily attributable to the aforementioned taxi medallion valuation allowance and a payoff of two corporate medallions for $1.1 million.  The increase of the valuation allowance to $12.3 million compared to year-end 2016 was the result of reduced medallion lease revenues, lower transfer valuations as reported by the New York City Taxi and Limousine Commission, and uncertainty surrounding institutional investor interest in the NYC taxi business.  The valuation allowance is based on a per medallion value of approximately $374,000 as of June 30, 2017, down from $450,000 as of March 31, 2017.  The carrying value of taxi medallion loans at June 30, 2017 ($50.9 million) represents just 1.33% of total loans and 1.09% of total assets. Taxi medallion loans are on non-accrual status but are currently cash flowing in excess of $3 million on an annualized basis.

Nonperforming assets, which includes nonaccrual loans and other real estate owned, were $63.5 million at June 30, 2017, $69.4 million at December 31, 2016 and $23.9 million at June 30, 2016.  Included in nonperforming assets were taxi medallion loans, totaling $48.9 million at June 30, 2017, $63.0 million at December 31, 2016 and $3.9 million at June 30, 2016.  Nonperforming assets as a percentage of total assets were 1.36% at June 30, 2017, 1.57% at December 31, 2016, and 0.56% at June 30, 2016.  Excluding the taxi medallion loans, nonaccrual loans increased to $14.1 million at June 30, 2017, from $5.7 million at December 31, 2016 and decreased from $18.0 million at June 30, 2016.  Nonaccrual loans as a percentage of loans receivable, excluding taxi medallion loans, were 0.37% at June 30, 2017, 0.16% at December 31, 2016 and 0.55% at June 30, 2016.

Annualized net charge-offs were (0.01)% (a net recovery) for the first and second quarters of 2017 and 0.01% for the second quarter of 2016.  The allowance for loan losses represented 0.76%, 0.74%, and 0.97% of loans receivable as of June 30, 2017, December 31, 2016 and June 30, 2016, respectively.  The allowance for loan losses as a percentage of nonaccruals, excluding taxi medallion loans, was 202.1% as of June 30, 2017, 449.0% as of December 31, 2016 and 138.8% as of June 30, 2016.

Selected Balance Sheet Items

At June 30, 2017, the Company's total assets were $4.7 billion, an increase of $255 million from December 31, 2016.  Total loans (including loans held-for-sale) at June 30, 2017 were $3.8 billion, reflecting net loan growth (loan originations less pay-downs and pay-offs) of $259 million from December 31, 2016, primarily attributable to increases in multifamily ($202 million), other commercial real estate ($65 million), commercial and industrial ($56 million) and residential real estate ($19 million), offset by decreases in construction ($55 million) and loans held-for-sale ($27 million).

The Company's stockholders' equity was $546 million at June 30, 2017, an increase of $15.1 million from December 31, 2016.  The increase in stockholders' equity was primarily attributable to an increase of $14.7 million in retained earnings and approximately $1.0 million of equity issuance related to stock-based compensation, partially offset by an increase to accumulated other comprehensive loss of $0.4 million.  As of June 30, 2017, the Company's tangible common equity ratio and tangible book value per share were 8.77% and $12.42, respectively.  As of December 31, 2016, the tangible common equity ratio and tangible book value per share were 8.93% and $11.96, respectively. Total goodwill and other intangible assets were approximately $149 million as of both June 30, 2017 and December 31, 2016.

Use of Non-GAAP Financial Measures

In addition to the results presented in accordance with Generally Accepted Accounting Principles ("GAAP"), ConnectOne routinely supplements its evaluation with an analysis of certain non-GAAP/adjusted financial measures including an adjusted net income available to common shareholders. ConnectOne believes these non-GAAP financial measures, in addition to the related GAAP measures, provide meaningful information to investors in understanding our operating performance and trends.  These non-GAAP measures have inherent limitations and are not required to be uniformly applied and are not audited.  They should not be considered in isolation or as a substitute for an analysis of results reported under GAAP.  These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.

Reconciliations of non-GAAP/adjusted financial measures disclosed in this earnings release to the comparable GAAP measures are provided in the accompanying tables.

Second Quarter 2017 Conference Call

Management will host a conference call and audio webcast at 10:00 a.m. ET on July 27, 2017 to review the Company's financial performance and operating results.  The conference call dial-in number is 719-325-2353, access code 2896145. Please dial in at least five minutes before the start of the call to register. An audio webcast of the conference call will be available to the public, on a listen-only basis, via the Company's website  ir.ConnectOneBank.com. 

A replay of the conference call will be available beginning at approximately 1:00 p.m. ET on Thursday, July 27, 2017 and ending on Wednesday, August 2, 2017 by dialing 719-457-0820, access code 2896145.  An online archive of the webcast will be available following the completion of the conference call at  ir.ConnectOneBank.com.

About ConnectOne Bancorp, Inc.

ConnectOne is a New Jersey corporation and a registered bank holding company pursuant to the Bank Holding Company Act of 1956, as amended, and serves as the holding company for ConnectOne Bank ("the Bank"). 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 20 other banking offices.

For more information visit https://www.ConnectOneBank.com/.

Forward-Looking Statements

This news release contains certain forward-looking statements which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, those factors set forth in Item 1A - Risk Factors of the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, and changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 
C ONNECT O NE B ANCORP, I NC. AND S UBSIDIARIES          
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION          
(dollars in thousands)          
  June 30,     December 31,   June 30,
    2017     2016      2016 
  (unaudited)       (unaudited)
ASSETS          
Cash and due from banks $   54,305     $   37,150     $   35,850  
Interest-bearing deposits with banks     92,203         163,249         139,263  
   Cash and cash equivalents     146,508         200,399         175,113  
           
Investment securities:          
   Available-for-sale     402,130         353,290         208,266  
   Held-to-maturity (fair value of $-0-, $-0-, $227,427)     -         -         214,718  
           
Loans held-for-sale (net of $12,325, $-0-, $-0- valuation allowance)     51,124         78,005         360  
           
Loans receivable     3,761,572         3,475,832         3,375,620  
Less: Allowance for loan losses     28,401         25,744         32,763  
   Net loans receivable     3,733,171         3,450,088         3,342,857  
           
Investment in restricted stock, at cost     32,152         24,310         25,210  
Bank premises and equipment, net     21,630         22,075         22,477  
Accrued interest receivable     13,194         12,965         12,726  
Bank owned life insurance     99,777         98,359         80,028  
Other real estate owned     580         626         2,029  
Goodwill     145,909         145,909         145,909  
Core deposit intangibles     2,702         3,088         3,474  
Other assets     32,403         37,234         29,747  
    Total assets $   4,681,280     $   4,426,348     $   4,262,914  
           
LIABILITIES          
Deposits:          
   Noninterest-bearing $   695,522     $   694,977     $   648,664  
   Interest-bearing     2,734,851         2,649,294         2,552,329  
     Total deposits     3,430,373         3,344,271         3,200,993  
Borrowings     626,173         476,280         496,414  
Subordinated debentures (net of $539, $621, $714 in debt issuance costs)     54,616         54,534         54,441  
Other liabilities     23,945         20,231         26,652  
    Total liabilities     4,135,107         3,895,316         3,778,500  
           
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS' EQUITY          
Common stock     412,546         412,726         374,287  
Additional paid-in capital     12,377         11,407         9,864  
Retained earnings     141,178         126,462         121,301  
Treasury stock     (16,717 )       (16,717 )       (16,717 )
Accumulated other comprehensive loss     (3,211 )       (2,846 )       (4,321 )
    Total stockholders' equity     546,173         531,032         484,414  
    Total liabilities and stockholders' equity $   4,681,280     $   4,426,348     $   4,262,914  

 
CONNECTONE BANCORP, INC. AND SUBSIDIARIES                      
CONSOLIDATED STATEMENTS OF INCOME                      
(dollars in thousands, except for per share data)                      
                       
      Three Months Ended       Six Months Ended        
    06/30/17   06/30/16   06/30/17   06/30/16      
Interest income                      
    Interest and fees on loans   $   40,632   $   36,561   $   78,638   $   71,578      
    Interest and dividends on investment securities:                      
       Taxable       1,799       1,965       3,347       4,105      
       Tax-exempt       831       996       1,785       1,879      
    Dividends       290       370       620       722      
    Interest on federal funds sold and other short-term investments                     139       146       385       280      
       Total interest income       43,691       40,038       84,775       78,564      
Interest expense                      
    Deposits       5,495       4,434       10,604       8,373      
    Borrowings       3,095       3,210       5,929       6,477      
       Total interest expense       8,590       7,644       16,533       14,850      
                       
Net interest income       35,101       32,394       68,242       63,714      
   Provision for loan losses       1,450       3,750       2,550       6,750      
Net interest income after provision for loan losses       33,651       28,644       65,692       56,964      
                       
Noninterest income                      
    Annuities and insurance commissions       -       32       39       72      
    Income on bank owned life insurance       714       616       1,417       1,228      
    Net gains on sale of loans held-for-sale       49       56       70       92      
    Deposit, loan and other income       659       763       1,302       1,277      
    Net gains on sale of investment securities       -       103       1,596       103      
        Total noninterest income       1,422       1,570       4,424       2,772      
                       
Noninterest expenses                      
    Salaries and employee benefits       8,632       7,753       16,838       15,353      
    Occupancy and equipment       1,991       2,154       4,246       4,401      
    FDIC insurance       815       615       1,710       1,210      
    Professional and consulting       734       700       1,452       1,412      
    Marketing and advertising       289       250       545       523      
    Data processing       1,149       1,010       2,298       2,033      
    Amortization of core deposit intangible       193       217       386       434      
    Increase in valuation allowance, loans held-for-sale       9,725       -       12,325       -      
    Other expenses       1,775       1,653       3,752       3,339      
       Total noninterest expenses       25,303       14,352       43,552       28,705      
                       
Income before income tax expense       9,770       15,862       26,564       31,031      
    Income tax expense       2,087       5,003       7,001       9,781      
Net income       7,683       10,859       19,563       21,250      
    Less: Preferred stock dividends       -       -       -       22      
Net income available to common stockholders   $   7,683   $   10,859   $   19,563   $   21,228      
                       
Earnings per common share:                      
    Basic   $   0.24   $   0.36   $   0.61   $   0.71      
    Diluted       0.24       0.36       0.60       0.70      
                       
Dividends per common share   $   0.075   $   0.075   $   0.150   $   0.150      
                       

ConnectOne's management believes that the supplemental financial information, including non-GAAP measures, provided below is useful to investors. The non-GAAP measures should not be viewed as a substitute for financial results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP financial measures presented by other companies.

                     
C ONNECT O NE B ANCORP, I NC.                    
SUPPLEMENTAL GAAP AND NON-GAAP FINANCIAL MEASURES                    
(dollars in thousands, except share data)                    
  As of  
  June 30,   Mar. 31,   Dec. 31,   Sept. 30,   June 30,  
  2017    2017    2016    2016    2016   
Selected Financial Data                    
Total assets $   4,681,280     $   4,460,816     $   4,426,348     $   4,327,804     $   4,262,914    
Loans receivable:                    
  Commercial     610,442         541,690         554,065         644,430         630,425    
  Commercial real estate-other     1,218,995         1,192,074         1,154,154         1,139,641         1,104,214    
  Commercial real estate-multifamily     1,251,962         1,134,760         1,050,067         961,163         967,555    
  Commercial construction     431,049         460,611         486,228         471,109         443,277    
  Residential     251,108         242,883         232,547         229,401         230,497    
  Consumer     2,005         2,811         2,380         2,879         1,976    
  Gross loans     3,765,561         3,574,829         3,479,441         3,448,623         3,377,944    
Unearned net origination fees     (3,989 )       (3,166 )       (3,609 )       (3,147 )       (2,324 )  
  Loans receivable     3,761,572         3,571,663         3,475,832         3,445,476         3,375,620    
  Loans held-for-sale (net of valuation allowance)     51,124         62,255         78,005         15,112         360    
Total loans     3,812,696         3,633,918         3,553,837         3,460,588         3,375,980    
                     
Securities available-for-sale     402,130         352,476         353,290         338,459         208,266    
Securities held-to-maturity     -        -          -         -         214,718    
Goodwill and other intangible assets     148,611         148,804         148,997         149,190         149,383    
Deposits:                    
 Noninterest-bearing demand     695,522         671,183         694,977         655,683         648,664    
 Interest-bearing demand     572,438         547,934         563,740         531,500         523,742    
 Savings     189,862         188,790         205,551         207,717         210,040    
 Money market     990,223         977,357         911,867         866,710         866,643    
 Time deposits     982,328         970,213         968,136         1,007,339         951,904    
Total deposits     3,430,373         3,355,477         3,344,271         3,268,949         3,200,993    
                     
Borrowings     626,173         491,226         476,280         481,337         496,414    
Subordinated debentures (net of issuance costs)     54,616         54,575         54,534         54,490         54,441    
Total stockholders' equity     546,173         540,277         531,032         499,588         484,414    
                     
Quarterly Average Balances                    
Total assets $   4,495,573     $   4,382,314     $   4,349,961     $   4,344,796     $   4,212,307    
Loans receivable:                    
  Commercial     603,733         557,347         644,263         632,892         626,902    
  Commercial real estate (including multifamily)     2,337,499         2,222,795         2,130,955         2,081,741         2,056,263    
  Commercial construction     451,038         466,455         479,342         462,399         418,769    
  Residential     246,864         237,418         229,738         229,953         231,553    
  Consumer     2,929         2,460         2,777         2,771         2,865    
  Gross loans     3,642,063         3,486,475         3,487,075         3,409,756         3,336,352    
Unearned net origination fees     (3,967 )       (3,304 )       (3,151 )       (2,956 )       (2,295 )  
  Loans receivable     3,638,096         3,483,171         3,483,924         3,406,800         3,334,057    
  Loans held-for-sale     61,259         65,860         4,549         478         395    
Total loans     3,699,355         3,549,031         3,488,473         3,407,278         3,334,452    
                     
Securities available-for-sale     391,965         367,940         351,809         269,895         202,103    
Securities held-to-maturity     -         -         -         143,146         218,220    
Goodwill and other intangible assets     148,737         148,930         149,123         149,317         149,525    
Deposits:                    
 Noninterest-bearing demand     667,461         655,597         666,913         640,323         581,743    
 Interest-bearing demand     582,196         549,335         534,127         553,401         528,954    
 Savings     186,033         199,000         205,477         211,162         215,267    
 Money market     944,646         958,656         891,764         872,937         791,845    
 Time deposits     976,012         963,976         985,944         1,007,530         889,561    
Total deposits     3,356,348         3,326,564         3,284,225         3,285,353         3,007,370    
                     
Borrowings     514,161         442,595         476,925         488,015         639,054    
Subordinated debentures     55,155         55,155         55,155         55,155         55,155    
Total stockholders' equity     549,748         539,544         511,663         495,141         483,519    
                                         
  Three Months Ended  
  June 30,   Mar. 31,   Dec. 31,   Sept. 30,   June 30,  
  2017    2017    2016    2016    2016   
Net interest income $   35,101     $   33,141     $   33,407     $   33,024     $   32,394    
 Provision for loan losses     1,450         1,100         25,200         6,750         3,750    
Net interest income after provision for loan losses     33,651         32,041         8,207         26,274         28,644    
Noninterest income                    
 Annuity and insurance commissions     -         39         51         68         32    
 Income on bank owned life insurance     714         703         715         615         616    
 Net gains on sale of loans held-for-sale     49         21         86         56         56    
 Deposit, loan and other income     659         643         721         706         763    
 Net gains on sale of investment securities     -         1,596         -         4,131         103    
    Total noninterest income     1,422         3,002         1,573         5,576         1,570    
Noninterest expenses                    
 Salaries and employee benefits     8,632         8,206         7,888         7,791         7,753    
 Occupancy and equipment     1,991         2,255         2,122         2,049         2,154    
 FDIC insurance     815         895         985         745         615    
 Professional and consulting     734         718         901         667         700    
 Marketing and advertising     289         256         222         293         250    
 Data processing     1,149         1,149         1,106         1,002         1,010    
 Amortization of core deposit intangible     193         193         193         193         217    
 Increase in valuation allowance, loans held-for-sale     9,725         2,600         -         -         -    
 Other expenses     1,775         1,977         1,835         1,811         1,653    
    Total noninterest expenses     25,303         18,249         15,252         14,551         14,352    
                     
Income (loss) before income tax expense     9,770         16,794         (5,472 )       17,299         15,862    
 Income tax expense (benefit)     2,087         4,914         (3,448 )       5,443         5,003    
Net income (loss) available to common stockholders $   7,683     $   11,880     $   (2,024 )   $   11,856     $   10,859    
                     
Reconciliation of GAAP Earnings to Earnings excluding Net Securities Gains and Expenses Related to the Taxi Medallion Portfolio                    
Net income (loss) available to common stockholders $   7,683     $   11,880     $   (2,024 )   $   11,856     $   10,859    
Net gains on sales of securities (after taxes)     -         (1,093 )       -          (2,643 )       (66 )  
Provision related to taxi medallion loans (after taxes)     -         -         14,196         2,958         1,035    
Increase in valuation allowance, loans held-for-sale (after taxes)     5,719         1,538         -          -          -     
Net income available to common stockholders-adjusted $   13,402     $   12,325     $   12,172     $   12,171     $   11,828    
Weighted average diluted shares outstanding     32,255,770         32,192,643         30,729,359         30,401,684         30,340,376    
Diluted EPS (GAAP) $   0.24     $   0.37     $   (0.07 )   $   0.39     $   0.36    
Diluted EPS-adjusted (Non-GAAP) (1)     0.42         0.38         0.40         0.40         0.39    
                     
Return on Assets Measures                    
Net income available to common stockholders-adjusted $   13,402     $   12,325     $   12,172     $   12,171     $   11,828    
                     
Average assets $   4,495,573     $   4,382,314     $   4,349,961     $   4,344,796     $   4,212,307    
Less: average intangible assets     (148,737 )       (148,930 )       (149,123 )       (149,317 )       (149,525 )  
Average tangible assets $   4,346,836     $   4,233,384     $   4,200,838     $   4,195,479     $   4,062,782    
Return on avg. assets (GAAP)   0.69 %     1.10 %     -0.19 %     1.09 %     1.04 %  
Return on avg. assets-adjusted (non-GAAP) (2)   1.20 %     1.14 %     1.11 %     1.11 %     1.13 %  
Return on avg. tangible assets (non-GAAP) (3)   0.72 %     1.15 %     -0.18 %     1.14 %     1.09 %  
Return on avg. tangible assets-adjusted (non-GAAP) (4)   1.25 %     1.19 %     1.16 %     1.16 %     1.18 %  
_____                    
(1) Represents adjusted earnings available to common stockholders divided by weighted average diluted shares outstanding.          
(2) Adjusted net income divided by average assets.                    
(3) Net income excluding amortization of intangible assets divided by average tangible assets.              
(4) Adjusted net income excluding amortization of intangible assets divided by average tangible assets.              
  Three Months Ended  
  June 30,   Mar. 31,   Dec. 31,   Sept. 30,   June 30,  
  2017    2017    2016    2016    2016   
Return on Equity Measures                    
Net income available to common stockholders-adjusted $   13,402     $   12,325     $   12,172     $   12,171     $   11,828    
                     
Average common equity $   549,748     $   539,544     $   511,663     $   495,141     $   483,519    
Less: average intangible assets     (148,737 )       (148,930 )       (149,123 )       (149,317 )       (149,525 )  
Average tangible common equity $   401,011     $   390,614     $   362,540     $   345,824     $   333,994    
                     
Return on avg. common equity (GAAP)   5.61 %     8.93 %     -1.57 %     9.53 %     9.03 %  
Return on avg. common equity-adjusted (non-GAAP) (5)   9.78 %     9.26 %     9.46 %     9.78 %     9.84 %  
Return on avg. tangible common equity (non-GAAP) (6)   7.80 %     12.45 %     -2.10 %     13.77 %     13.23 %  
Return on avg. tangible common equity-adjusted (non-GAAP) (7)   13.52 %     12.91 %     13.48 %     14.13 %     14.24 %  
                     
Efficiency Measures                    
Total noninterest expenses $   25,303     $   18,249     $   15,252     $   14,551     $   14,352    
Increase in valuation allowance, loans held-for-sale     (9,725 )       (2,600 )       -         -         -    
Foreclosed property expense     (71 )       (100 )       (81 )       (37 )       10    
Operating noninterest expense  $   15,507     $   15,549     $   15,171     $   14,514     $   14,362    
                     
Net interest income (tax equivalent basis) $   35,839     $   33,956     $   34,120     $   33,762     $   33,112    
Noninterest income     1,422         3,002         1,573         5,576         1,570    
Net gains on sales of investment securities     -         (1,596 )       -         (4,131 )       (103 )  
Operating revenue  $   37,261     $   35,362     $   35,693     $   35,207     $   34,579    
                     
Operating efficiency ratio (non-GAAP) (8)   41.6 %     44.0 %     42.5 %     41.2 %     41.5 %  
                     
Net Interest Margin                    
Average interest-earning assets $   4,168,344     $   4,053,324     $   4,038,030     $   4,041,020     $   3,912,802    
                     
Net interest income (tax equivalent basis) $   35,839     $   33,956     $   34,120     $   33,762     $   33,112    
Impact of purchase accounting fair value marks     (316 )       (649 )       (960 )       (1,045 )       (1,245 )  
Adjusted net interest income $   35,523     $   33,307     $   33,160     $   32,717     $   31,867    
                     
Net interest margin (GAAP)   3.45 %     3.40 %     3.36 %     3.32 %     3.40 %  
Adjusted net interest margin (non-GAAP) (9)   3.42 %     3.33 %     3.27 %     3.22 %     3.28 %  
_____                    
(5) Adjusted earnings available to common stockholders divided by average common equity.              
(6) Earnings available to common stockholders excluding amortization of intangibles assets divided by average tangible common equity.      
(7) Adjusted earnings available to common stockholders divided by average tangible common equity.              
(8) Operating noninterest expense divided by operating revenue.                    
(9) Adjusted net interest income excluding amortization of intangibles assets divided by average interest-earning assets.          
  As of  
  June 30,   Mar. 31,   Dec. 31,   Sept. 30,   June 30,  
(dollars in thousands, except share data) 2017    2017    2016    2016    2016   
Capital Ratios and Book Value per Share                    
Common equity $   546,173     $   540,277     $   531,032     $   499,588     $   484,414    
Less: intangible assets     (148,611 )       (148,804 )       (148,997 )       (149,190 )       (149,383 )  
Tangible common equity $   397,562     $   391,473     $   382,035     $   350,398     $   335,031    
                     
Total assets $   4,681,280     $   4,460,816     $   4,426,348     $   4,327,804     $   4,262,914    
Less: intangible assets     (148,611 )       (148,804 )       (148,997 )       (149,190 )       (149,383 )  
Tangible assets $   4,532,669     $   4,312,012     $   4,277,351     $   4,178,614     $   4,113,531    
                     
Common shares outstanding     32,015,317         32,004,471         31,944,403         30,197,318         30,197,318    
                     
Common equity ratio (GAAP)   11.67 %     12.11 %     12.00 %     11.54 %     11.36 %  
Tangible common equity ratio (non-GAAP) (10)   8.77 %     9.08 %     8.93 %     8.39 %     8.14 %  
                     
Regulatory capital ratios (Bancorp):                    
  Leverage ratio   9.33 %     9.44 %     9.29 %     8.49 %     8.52 %  
  Common equity Tier 1 risk-based ratio   9.48 %     9.79 %     9.74 %     9.25 %     9.10 %  
  Risk-based Tier 1 capital ratio   9.60 %     9.92 %     9.87 %     9.38 %     9.23 %  
  Risk-based total capital ratio   11.46 %     11.83 %     11.78 %     11.69 %     11.44 %  
                     
Regulatory capital ratios (Bank):                    
  Leverage ratio   10.34 %     10.50 %     10.34 %     9.57 %     9.62 %  
  Common equity Tier 1 risk-based ratio   10.64 %     11.03 %     10.98 %     10.58 %     10.43 %  
  Risk-based Tier 1 capital ratio   10.64 %     11.03 %     10.98 %     10.58 %     10.43 %  
  Risk-based total capital ratio   11.32 %     11.70 %     11.63 %     11.57 %     11.30 %  
                     
Book value per share (GAAP) $   17.06     $   16.88     $   16.62     $   16.54     $   16.04    
Tangible book value per share (non-GAAP) (11)     12.42         12.23         11.96         11.60         11.09    
                     
  Three Months Ended  
  June 30,   Mar. 31,   Dec. 31,   Sept. 30,   June 30,  
  2017    2017    2016    2016    2016   
Net Charge-Off Detail                    
Net loan charge-offs:                    
 Charge-offs $   10     $   72     $   37,074     $   1,910     $   77    
 Recoveries     (60 )       (129 )       (2 )       (12 )       (16 )  
   Net loan charge-offs $   (50 )   $   (57 )   $   37,072     $   1,898     $   61    
   as a % of average total loans (annualized)   -0.01 %     -0.01 %     4.23 %     0.22 %     0.01 %  
                     
Asset Quality                    
Nonaccrual taxi medallion loans $   48,884     $   59,054     $   63,044     $   3,637     $   3,882    
Nonaccrual loans, excluding taxi medallion loans     14,055         12,790         5,734         7,856         18,029    
Other real estate owned     580         580         626         626         2,029    
Total nonperforming assets $   63,519     $   72,424     $   69,404     $   12,119     $   23,940    
                     
Performing troubled debt restructurings $   10,221     $   10,005     $   13,338     $   105,338     $   97,831    
                     
Allowance for loan losses ("ALLL") $   28,401     $   26,901     $   25,744     $   37,615     $   32,763    
ALLL, net of taxi specific reserves     28,401         26,901         25,744         25,081         25,026    
                     
Nonaccrual loans as a % of loans receivable, excluding taxi medallion loans   0.37 %     0.36 %     0.16 %     0.24 %     0.55 %  
Nonperforming assets as a % of total assets   1.36 %     1.62 %     1.57 %     0.28 %     0.56 %  
ALLL as a % of loans receivable   0.76 %     0.75 %     0.74 %     1.09 %     0.97 %  
ALLL as a % of nonaccrual loans   45.1 %     37.4 %     37.4 %     327.3 %     149.5 %  
ALLL (excluding taxi medallion specific reserves) as a % of nonaccrual loans (excluding taxi medallion loans)   202.1 %     210.3 %     449.0 %     319.3 %     138.8 %  
ALLL (excluding taxi medallion specific reserves) as a % of loans receivable (excluding taxi medallion loans)   0.76 %     0.75 %     0.74 %     0.75 %     0.76 %  
_____                    
(10) Tangible common equity divided by tangible assets.                    
(11) Tangible common equity divided by common shares outstanding at period-end.                  

 
CONNECTONE BANCORP, INC.                                
NET INTEREST MARGIN ANALYSIS                                
(dollars in thousands)                                  
        For the Three Months Ended      
        June 30, 2017 March 31, 2017 June 30, 2016    
        Average           Average           Average            
Interest-earning assets:   Balance Interest Rate (8)     Balance Interest Rate (8)     Balance Interest Rate (8)      
Investment securities (1) (2)   $   390,462   $   3,079     3.16 %   $   366,473   $   3,015     3.34 %   $   418,270   $   3,497     3.36 %    
Loans receivable and loans held-for-sale (2) (3) (4)     3,699,355       40,921     4.44         3,549,031       38,308     4.38         3,334,057       36,743     4.43      
Federal funds sold and interest-                                
  bearing deposits with banks       52,099       139     1.07         115,025       246     0.87         128,994       146     0.46      
Restricted investment in bank stock     26,428       290     4.40         22,795       330     5.87         31,481       370     4.73      
    Total interest-earning assets     4,168,344       44,429     4.28         4,053,324       41,899     4.19         3,912,802       40,756     4.19      
Allowance for loan losses       (27,355 )             (26,215 )             (29,924 )          
Noninterest-earning assets       354,584               355,205               329,429            
    Total assets     $   4,495,573           $   4,382,314           $   4,212,307            
                                       
Interest-bearing liabilities:                                  
 Money market deposits       944,646       1,609     0.68         958,656       1,515     0.64         791,845       992     0.50      
 Savings deposits         186,033       75     0.16         199,000       79     0.16         215,267       156     0.29      
 Time deposits         976,012       3,311     1.36         963,976       3,091     1.30         889,561       2,857     1.29      
 Other interest-bearing deposits     582,196       500     0.34         549,335       424     0.31         528,954       429     0.33      
    Total interest-bearing deposits     2,688,887       5,495     0.82         2,670,967       5,109     0.78         2,425,627       4,434     0.74      
                                       
Borrowings         514,161       2,244     1.75         442,595       1,985     1.82         639,054       2,355     1.48      
Subordinated debentures (5)       55,155       810     5.89         55,155       808     5.94         55,155       812     5.92      
Capital lease obligation       2,720       41     6.05         2,752       41     6.04         2,844       43     6.08      
    Total interest-bearing liabilities     3,260,923       8,590     1.06         3,171,469       7,943     1.02         3,122,680       7,644     0.98      
                                       
Demand deposits         667,461               655,597               581,743            
Other liabilities         17,441               15,705               24,365            
    Total noninterest-bearing liabilities     684,902               671,302               606,108            
Stockholders' equity       549,748               539,543               483,519            
    Total liabilities and stockholders' equity $   4,495,573           $   4,382,314           $   4,212,307            
                                       
Net interest income (tax equivalent basis)       35,839               33,956               33,112          
Net interest spread (6)         3.22 %         3.17 %         3.21 %    
                                       
Net interest margin (7)         3.45 %         3.40 %         3.40 %    
                                       
Tax equivalent adjustment         (738 )             (815 )             (718 )        
Net interest income       $   35,101           $   33,141           $   32,394          
                                       
(1) Average balances are calculated on amortized cost.                                      
(2) Interest income is presented on a tax equivalent basis using 35% federal tax rate.                          
(3) Includes loan fee income.                                  
(4) Loans include nonaccrual loans.                                
(5) Does not reflect netting of debt issuance costs of $565, $580 and $714 for the three months ended June 30, 2017 March 31, 2017 and June 30, 2016, respectively. 
(6) Represents difference between the average yield on interest-earning assets and the average cost of interest-bearing  liabilities and is presented on a tax equivalent basis. 
(7) Represents net interest income on a tax equivalent basis divided by average total interest-earning assets.                    
(8) Rates are annualized.                                  
Investor Contact:William S. BurnsExecutive VP & CFO201.816.4474; bburns@cnob.comMedia Contact:Jake Ciorciari, MWWPR646.376.7042; jciorciari@mww.com

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