ConnectOne Bancorp, Inc. announced results for the second quarter ended June 30, 2016

OREANDA-NEWS. ConnectOne Bancorp, Inc. (Nasdaq:CNOB) (the “Company” or “ConnectOne”), parent company of ConnectOne Bank (the “Bank”), today announced results for the second quarter ended June 30, 2016.  The Company reported net income available to common stockholders of $10.9 million, or $0.36 per diluted share, compared with net income available to common stockholders of $10.4 million, or $0.34 per diluted share, for the first quarter of 2016 and $10.5 million, or $0.35 per diluted share, for the second quarter of 2015.

Frank Sorrentino, ConnectOne’s Chairman and CEO stated, “We are extremely pleased with ConnectOne’s second quarter performance, highlighted by record quarterly earnings which were achieved despite an additional $1.75 million of pre-tax reserves set aside for our NYC-taxi medallion portfolio. Specific reserves against this portfolio now total 7.6%.  Our deposits increased by $308 million, or 11%, to $3.2 billion at June 30, 2016 from March 31, 2016, while average deposits for the second quarter increased by 8% over the sequential quarter.  While some of these deposits are transitory, our focus on core deposit growth remains solid.  Net growth in our loan portfolio was $112 million for the current quarter, slightly below recent levels, but our pipeline remains strong and we continue to expect mid- to high-teens loan growth for 2016.  For the current quarter, return on assets was in excess of 1%, return on tangible equity was in excess of 13%, and the efficiency ratio was 42%, placing us among the best performing banking institutions.  Looking ahead, we remain well-positioned to execute on our business strategies and realize strong growth while continuing to create long-term shareholder value.”

Operating Results

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 financial measures including net income available to common stockholders excluding non-core items. 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, and facilitates comparisons with the performance of peers. Reconciliations of non-GAAP disclosures used in this earnings release to the comparable GAAP measures are provided in the accompanying tables.

Second quarter 2016 results reflect the following non-core items: $1.3 million of income resulting from accretion of purchase accounting fair value marks; $0.2 million in additional loan loss provision related to the maturity and extension of acquired portfolio loans; $1.8 million in additional provision associated with the Bank’s New York City taxi medallion loan portfolio; $0.1 million of net securities gains; $0.1 million of pension settlement expenses, which had no impact on total stockholders’ equity or book value per share, and $0.2 million in amortization of intangible assets. Excluding non-core items, along with related income tax impact, net income available to common stockholders was $11.4 million, or $0.38 per diluted share, for the second quarter of 2016, $10.9 million, or $0.36 per diluted share, for the first quarter of 2016, and $10.1 million, or $0.33 per diluted share, for the second quarter of 2015.

Fully taxable equivalent net interest income for the second quarter of 2016 was $33.1 million, an increase of $1.1 million, or 3.5%, from the first quarter of 2016. This was the result of a 4.9% increase in average interest-earning assets, offset by a 5 basis-point contraction of the net interest rate margin. Included in net interest income was accretion and amortization of purchase accounting adjustments of $1.2 million during the second quarter of 2016 and $1.3 million in the first quarter of 2016.  Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.28% in the second quarter of 2016, contracting by 3 basis points from the first quarter of 2016 adjusted net interest margin of 3.31%. The decrease in the adjusted net interest margin was primarily attributable to an increase in average cash balances.

Fully taxable equivalent net interest income for the second quarter of 2016 was $33.1 million, an increase of $3.8 million, or 13.0%, from the same quarter of 2015. This was a result of a 19.8% increase in average interest-earning assets due to significant organic loan growth, partially offset by a 20 basis-point contraction of the net interest margin. Included in net interest income was accretion and amortization of purchase accounting adjustments of $1.2 million during the second quarter of 2016 and $1.5 million in the same quarter of 2015.  Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.28% in the second quarter of 2016, 14 basis points lower than the 2015 second quarter adjusted net interest margin of 3.42%.  The reduction in the adjusted net interest margin was due to a higher level of cash balances, the June 30, 2015 issuance of $50 million in subordinated debentures and the impact of a protracted low-interest rate environment.

Noninterest income represents a relatively small portion of the Bank’s total revenue. Noninterest income totaled $1.6 million in the second quarter of 2016, $1.2 million in the first quarter of 2016 and $3.4 million in the second quarter of 2015. Securities gains were $0.1 million for the second quarter of 2016, zero for the first quarter of 2016 and $0.2 million for the second quarter of 2015. The second quarter of 2016 included a gain of $0.2 million on the sale of one OREO property, and the second quarter of 2015 included an insurance recovery of $2.2 million. Noninterest income also includes bank-owned life insurance income, deposit and loan fees, annuities and life insurance commissions, and gains on sales of residential mortgages in the secondary market.

Noninterest expenses totaled $14.4 million for both the second and first quarters of 2016.  Salaries and employee benefits increased by $0.2 million and were offset by $0.2 million of decreases in occupancy and equipment and other miscellaneous expenses.  Noninterest expenses for the second quarter of 2015 totaled $15.0 million and included a loss on debt extinguishment of $2.4 million.  Excluding the debt extinguishment charge, noninterest expenses increased by $1.8 million in the second quarter of 2016 from the prior year quarter. This increase was largely attributable to a $0.8 million increase in salaries and employee benefits, $0.4 million in occupancy and equipment expense, $0.2 million in data processing, and $0.4 million in other expenses, all resulting from increased levels of business and staff resulting from organic growth.

Income tax expense was $5.0 million for the second quarter of 2016, compared to $4.8 million for the first quarter of 2016 and $5.1 million for the second quarter of 2015, resulting in effective tax rates of 31.5% in 2016 and 32.5% in 2015. The effective tax rate for the full year 2016 is expected to remain at approximately 31.5%.

Asset Quality

The provision for loan and lease losses increased to $3.8 million in the second quarter of 2016 from $3.0 million in the first quarter of 2016, and from $1.6 million in the second quarter of 2015.  The increases were largely attributable to additional reserves specifically allocated to the Bank’s taxi medallion portfolio.

As of June 30, 2016, loans secured by New York City taxi medallions totaled $103.1 million. Troubled debt restructurings associated with this portfolio totaled $88.0 million and total nonaccrual loans were $3.9 million, up from $86.4 million and $1.9 million as of March 31, 2016.  Specific reserves for taxi medallion loans totaled $7.8 million, or 7.6%, of total taxi medallion portfolio.  The Bank’s valuation of corporate medallions, which represent approximately 95% of total exposure, was approximately $750 thousand as of June 30, 2016, down from approximately $775 thousand as of March 31, 2016.

Nonperforming assets, which includes nonaccrual loans and other real estate owned, were $23.9 million at June 30, 2016, $23.3 million at December 31, 2015, and $13.7 million at June 30, 2015. Nonperforming assets as a percent of total assets were 0.56% at June 30, 2016, 0.58% at December 31, 2015, and 0.37% at June 30, 2015. Annualized net charge-offs were 0.01% for the second quarter of 2016, 0.06% for the first quarter of 2016, and 0.00% for the second quarter of 2015. The allowance for loan and lease losses was $32.8 million, representing 0.97% of loans receivable and 149.5% of nonaccrual loans at June 30, 2016. At December 31, 2015, the allowance was $26.6 million representing 0.86% of loans receivable and 128.1% of nonaccrual loans, and at June 30, 2015, the allowance was $17.5 million representing 0.63% of loans receivable and 143.9% of nonaccrual loans. In purchase accounting, any allowance for loan and lease losses on an acquired loan portfolio is reversed and a credit risk discount is applied directly to the acquired loan balances. In Management’s opinion, a useful non-GAAP metric is the ratio of allowance for loan and lease losses plus the credit risk discount to total loans receivable. This non-GAAP ratio was 1.30% at June 30, 2016, 1.28% at December 31, 2015, and 1.17% at June 30, 2015. (See Supplemental GAAP and non-GAAP Financial Measures).

Selected Balance Sheet Items

At June 30, 2016, the Company’s total assets were $4.3 billion, an increase of $247 million from December 31, 2015. Loans receivable at June 30, 2016 were $3.4 billion, reflecting net loan growth (loan originations less pay-downs and pay-offs) of $277 million from December 31, 2015, primarily attributable to multifamily ($87 million, including a $28 million loan reclassified during the first quarter as multifamily from other commercial real estate), commercial and industrial (“C&I”) ($60 million), other commercial real estate ($18 million, including the aforementioned reclassification) and construction ($114 million), which reflected higher utilization of existing construction facilities.  The growth in loans was funded with increases in deposits.

The Company’s stockholders’ equity was $484 million at June 30, 2016, an increase of $7 million from December 31, 2015. The increase in stockholders’ equity was primarily attributable to an increase of $17 million in retained earnings and approximately $1 million of equity issuance related to stock-based compensation, including the exercise of stock options, offset by an $11 million payoff of SBLF preferred stock. As of June 30, 2016, the Company’s tangible common equity ratio and tangible book value per share were 8.14% and $11.09, respectively. As of December 31, 2015, the tangible common equity ratio and tangible book value per share were 8.18% and $10.51, respectively. Total goodwill and other intangible assets were approximately $150 million as of June 30, 2016 and December 31, 2015.

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.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
	June 30,				December 31,				June 30,
		2016				2015				2015
	(unaudited)				(audited)				(unaudited)
ASSETS
Cash and due from banks	$	35,850			$	31,291			$	41,454
Interest-bearing deposits with banks		139,263				169,604				84,029
Cash and cash equivalents		175,113				200,895				125,483
Investment securities:
Available-for-sale		208,266				195,770				264,098
Held-to-maturity (fair value of $227,427, $230,558, $237,208)		214,718				224,056				232,557
Loans held-for-sale		360				-				124
Loans receivable		3,375,620				3,099,007				2,765,288
Less: Allowance for loan and lease losses		32,763				26,572				17,480
Net loans receivable		3,342,857				3,072,435				2,747,808
Investment in restricted stock, at cost		25,210				32,612				27,078
Bank premises and equipment, net		22,477				22,333				21,252
Accrued interest receivable		12,726				12,545				12,055
Bank-owned life insurance		80,028				78,801				53,293
Other real estate owned		2,029				2,549				1,564
Goodwill		145,909				145,909				145,909
Core deposit intangibles		3,474				3,908				4,343
Other assets		29,747				24,096				24,493
Total assets	$	4,262,914			$	4,015,909			$	3,660,057
LIABILITIES
Deposits:
Noninterest-bearing	$	648,664			$	650,775			$	553,008
Interest-bearing		2,552,329				2,140,191				2,016,223
Total deposits		3,200,993				2,790,966				2,569,231
Borrowings		496,414				671,587				548,758
Subordinated debentures (net of $714, $812, $0 in debt issuance costs)		54,441				54,343				55,155
Other liabilities		26,652				21,669				22,931
Total liabilities		3,778,500				3,538,565				3,196,075
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock		-				11,250				11,250
Common stock		374,287				374,287				374,287
Additional paid-in capital		9,864				8,527				8,120
Retained earnings		121,301				104,606				88,772
Treasury stock		(16,717	)			(16,717	)			(16,717	)
Accumulated other comprehensive loss		(4,321	)			(4,609	)			(1,730	)
Total stockholders' equity		484,414				477,344				463,982
Total liabilities and stockholders' equity	$	4,262,914			$	4,015,909			$	3,660,057

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for per share data)
		Three Months Ended June 30,								Six Months Ended June 30,
			2016				2015				2016				2015
Interest income							(unaudited)
Interest and fees on loans		$	36,561			$	30,217			$	71,578			$	59,531
Interest and dividends on investment securities:
Taxable			1,965				2,760				4,105				5,671
Tax-exempt			996				883				1,879				1,765
Dividends			370				280				722				500
Interest on federal funds sold and other short-term investments			146				41				280				84
Total interest income			40,038				34,181				78,564				67,551
Interest expense
Deposits			4,434				3,301				8,373				6,325
Borrowings			3,210				2,202				6,477				4,256
Total interest expense			7,644				5,503				14,850				10,581
Net interest income			32,394				28,678				63,714				56,970
Provision for loan and lease losses			3,750				1,550				6,750				3,375
Net interest income after provision for loan and lease losses			28,644				27,128				56,964				53,595
Noninterest income
Annuities and insurance commissions			32				46				72				133
Bank-owned life insurance			616				388				1,228				774
Net gains on sale of loans held-for-sale			56				99				92				213
Deposit, loan and other income			763				458				1,277				921
Insurance recovery			-				2,224				-				2,224
Net gains on sale of investment securities			103				221				103				726
Total noninterest income			1,570				3,436				2,772				4,991
Noninterest expenses
Salaries and employee benefits			7,753				6,948				15,353				13,575
Occupancy and equipment			2,154				1,788				4,401				3,869
FDIC insurance			615				440				1,210				1,000
Professional and consulting			700				715				1,412				1,209
Marketing and advertising			250				193				523				387
Data processing			1,010				829				2,033				1,729
Loss on extinguishment of debt			-				2,397				-				2,397
Amortization of core deposit intangible			217				241				434				483
Other expenses			1,653				1,423				3,339				2,955
Total noninterest expenses			14,352				14,974				28,705				27,604
Income before income tax expense			15,862				15,590				31,031				30,982
Income tax expense			5,003				5,069				9,781				10,081
Net income			10,859				10,521				21,250				20,901
Less: Preferred stock dividends			-				28				22				56
Net income available to common stockholders		$	10,859			$	10,493			$	21,228			$	20,845
Earnings per common share:
Basic		$	0.36			$	0.35			$	0.71			$	0.70
Diluted		$	0.36			$	0.35			$	0.70			$	0.69
Weighted average common shares outstanding:
Basic			30,089,829				29,868,247				30,081,278				29,812,521
Diluted			30,340,376				30,231,480				30,331,172				30,203,682
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.
CONNECTONE BANCORP, INC.
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,
		2016				2016				2015				2015				2015
Selected Financial Data
Total assets	$	4,262,914			$	4,091,000			$	4,015,909			$	3,837,426			$	3,660,057
Loans receivable:
Commercial		630,425				601,708				570,116				569,605				568,969
Commercial real estate-other		1,104,214				1,087,388				1,085,615				1,052,982				987,303
Commercial real estate-multifamily		967,555				940,913				881,081				820,732				764,088
Commercial construction		443,277				402,594				328,838				283,623				220,267
Residential		230,497				231,319				233,690				225,158				224,134
Consumer		1,976				1,851				2,454				3,569				2,454
Gross loans		3,377,944				3,265,773				3,101,794				2,955,669				2,767,215
Unearned net origination fees		(2,324	)			(1,960	)			(2,787	)			(2,288	)			(1,927	)
Loans receivable		3,375,620				3,263,813				3,099,007				2,953,381				2,765,288
Securities available-for-sale		208,266				191,331				195,770				224,214				264,098
Securities held-to-maturity		214,718				219,373				224,056				227,221				232,557
Goodwill and other intangible assets		149,383				149,600				149,817				150,034				150,252
Deposits:
Noninterest-bearing		648,664				614,507				650,776				586,643				558,388
Interest-bearing		523,742				517,810				490,379				465,552				439,949
Savings		210,040				219,865				216,399				220,199				214,244
Money market		866,643				678,222				658,695				611,753				578,047
Time deposits		951,904				862,667				774,717				782,487				778,603
Total deposits		3,200,993				2,893,071				2,790,966				2,666,634				2,569,231
Borrowings		496,414				646,501				671,587				621,674				548,759
Subordinated debentures (net of issuance costs)		54,441				54,392				54,343				54,328				55,155
Total stockholders' equity	$	484,414			$	474,727			$	477,344			$	471,146			$	463,982
Quarterly Average Balances
Total assets	$	4,212,307			$	4,034,375			$	3,891,885			$	3,729,503			$	3,551,597
Loans receivable:
Commercial		626,902				585,773				579,512				567,737				555,119
Commercial real estate (including multifamily)		2,056,263				2,005,872				1,919,263				1,811,745				1,700,399
Commercial construction		418,769				361,108				313,223				255,627				200,820
Residential		231,553				236,404				232,022				227,051				230,415
Consumer		2,865				2,670				3,269				3,013				4,137
Gross loans		3,336,352				3,191,827				3,047,289				2,865,173				2,690,890
Unearned net origination fees		(2,295	)			(2,397	)			(2,706	)			(2,102	)			(2,131	)
Loans receivable		3,334,057				3,189,430				3,044,583				2,863,071				2,688,759
Securities available-for-sale		200,050				222,776				219,927				260,211				271,168
Securities held-to-maturity		218,220				194,474				225,875				229,483				233,145
Goodwill and other intangible assets		149,525				149,741				149,959				150,178				150,407
Deposits:
Noninterest-bearing		581,743				609,312				608,227				560,129				510,369
Interest-bearing		528,954				503,896				476,237				480,685				416,221
Savings		215,267				215,491				216,149				220,481				218,845
Money market		791,845				656,557				636,180				582,238				591,328
Time deposits		889,561				807,801				783,068				787,262				748,780
Total deposits		3,007,370				2,793,057				2,719,861				2,630,795				2,485,543
Borrowings		639,054				684,469				621,615				544,774				565,093
Subordinated debentures		55,155				55,155				55,155				55,155				5,704
Total stockholders' equity	$	483,519			$	482,503			$	478,919			$	471,682			$	464,004
	Three Months Ended
	June 30,				Mar. 31,				Dec. 31,				Sept. 30,				June 30,
GAAP Earnings Data		2016				2016				2015				2015				2015
Net interest income	$	32,394			$	31,320			$	30,456			$	29,727			$	28,678
Provision for loan and lease losses		3,750				3,000				5,055				4,175				1,550
Net interest income after provision for loan and lease losses		28,644				28,320				25,401				25,552				27,128
Noninterest income
Annuity and insurance commissions		32				40				32				77				46
Bank-owned life insurance		616				612				620				388				388
Net gains on sale of loans held-for-sale		56				35				51				63				99
Deposit, loan and other income		763				515				522				1,224				458
Insurance recovery		-				-				-				-				2,224
Net gains on sale of investment securities		103				-				1,138				2,067				221
Total noninterest income		1,570				1,202				2,363				3,819				3,436
Noninterest expenses
Salaries and employee benefits		7,753				7,599				7,205				6,905				6,948
Occupancy and equipment		2,154				2,247				1,802				1,916				1,788
FDIC insurance		615				595				575				535				440
Professional and consulting		700				711				906				836				715
Marketing and advertising		250				184				213				247				193
Data processing		1,010				1,024				1,017				957				829
Loss on extinguishment of debt		-				-				-				-				2,397
Amortization of core deposit intangible		217				217				217				217				241
Other expenses		1,653				1,776				1,644				1,688				1,423
Total noninterest expenses		14,352				14,353				13,579				13,301				14,974
Income before income tax expense		15,862				15,169				14,185				16,070				15,590
Income tax expense		5,003				4,778				4,617				5,228				5,069
Net income (GAAP)	$	10,859			$	10,391			$	9,568			$	10,842			$	10,521
Less: preferred dividends		-				22				28				28				28
Net income available to common stockholders (GAAP)	$	10,859			$	10,369			$	9,540			$	10,814			$	10,493
Reconciliation of GAAP Earnings to Operating Earnings
Net gains on sales of securities	$	(103	)		$	-			$	(1,138	)		$	(2,067	)		$	(221	)
Partial settlements of pension obligation		87				103				106				168				243
Insurance recovery		-				-				-				-				(2,223	)
Loss on debt extinguishment		-				-				-				-				2,397
Amortization of intangible assets		217				217				217				217				241
Provision related to maturity and extension of acquired portfolio loans		229				397				512				590				502
Provision related to taxi cab medallion loans		1,750				1,487				2,500				2,000				-
Provision for pending disposition of  Union Center operations bldg.		-				-				1,304				-				-
Accretion of purchase accounting fair value marks		(1,277	)			(1,367	)			(1,416	)			(1,340	)			(1,513	)
Non-core items		903				837				2,085				(432	)			(574	)
Income tax (expense) benefit		326				301				751				(156	)			(207	)
Non-core items, after taxes (36%)		577				536				1,334				(276	)			(367	)
Core earnings available to common stockholders (non-GAAP)	$	11,436			$	10,905			$	10,874			$	10,538			$	10,126
Weighted average diluted shares outstanding		30,340,376				30,257,676				30,310,905				30,335,571				30,231,480
Diluted EPS (GAAP)	$	0.36			$	0.34			$	0.31			$	0.36			$	0.35
Core Diluted EPS (Non-GAAP) (1)		0.38				0.36				0.36				0.35				0.33
Return on Assets Measures
Core earnings available to common stockholders (non-GAAP)	$	11,436			$	10,905			$	10,874			$	10,538			$	10,126
Add: preferred dividends		-				22				28				28				28
Core net income (non-GAAP)	$	11,436			$	10,927			$	10,902			$	10,566			$	10,154
Average assets	$	4,212,307			$	4,034,375			$	3,891,885			$	3,729,503			$	3,551,597
Less: average intangible assets		(149,525	)			(149,741	)			(149,959	)			(150,178	)			(150,407	)
Average tangible assets	$	4,062,782			$	3,884,634			$	3,741,926			$	3,579,325			$	3,401,190
Return on avg. assets (GAAP)		1.04	%			1.04	%			0.98	%			1.15	%			1.19	%
Core return on avg. assets (Non-GAAP) (2)		1.09	%			1.09	%			1.11	%			1.12	%			1.15	%
Return on avg. tangible assets (Non-GAAP) (3)		1.09	%			1.09	%			1.03	%			1.22	%			1.26	%
Core return on avg. tangible assets (Non-GAAP) (4)		1.13	%			1.13	%			1.16	%			1.17	%			1.20	%
(1) Represents core earnings available to common stockholders divided by weighted average diluted shares outstanding.
(2) Core net income divided by average assets.
(3) Net income excluding amortization of intangible assets divided by average tangible assets.
(4) Core net income divided by average tangible assets.
	Three Months Ended
	June 30,				Mar. 31,				Dec. 31,				Sept. 30,				June 30,
		2016				2016				2015				2015				2015
Return on Equity Measures
Core earnings available to common stockholders	$	11,436			$	10,905			$	10,874			$	10,538			$	10,126
Average common equity	$	483,519			$	473,849			$	467,669			$	460,432			$	452,754
Less: average intangible assets		(149,525	)			(149,741	)			(149,959	)			(150,178	)			(150,407	)
Average tangible common equity	$	333,994			$	324,108			$	317,710			$	310,254			$	302,347
Return on avg. common equity (GAAP)		9.03	%			8.80	%			8.09	%			9.32	%			9.30	%
Core return on avg. common equity (non-GAAP) (5)		9.51	%			9.26	%			9.23	%			9.08	%			8.97	%
Return on avg. tangible common equity (non-GAAP) (6)		13.23	%			13.03	%			12.07	%			13.99	%			14.11	%
Core return on avg. tangible common equity (non-GAAP) (7)		13.77	%			13.53	%			13.58	%			13.47	%			13.43	%
Efficiency Measures
Total noninterest expenses	$	14,352			$	14,353			$	13,579			$	13,301			$	14,974
Partial settlements of pension obligation		(87	)			(103	)			(106	)			(168	)			(243	)
Loss on debt extinguishment		-				-				-				-				(2,397	)
Foreclosed property expense		10				(167	)			(387	)			(121	)			(56	)
Amortization of intangible assets and fair value marks		(217	)			(217	)			(217	)			(217	)			(241	)
Operating noninterest expense	$	14,058			$	13,866			$	12,869			$	12,795			$	12,037
Net interest income (FTE)	$	33,112			$	31,985			$	31,102			$	30,382			$	29,316
Impact of purchase accounting fair value marks		(1,245	)			(1,335	)			(1,384	)			(1,314	)			(1,487	)
Noninterest income		1,570				1,202				2,363				3,819				3,436
Less: insurance recovery		-				-				-				-				(2,224	)
Less: net gains on sales of securities		(103	)			-				(1,138	)			(2,067	)			(221	)
Operating revenue	$	33,334			$	31,852			$	30,943			$	30,820			$	28,820
Operating efficiency ratio (non-GAAP) (8)		42.2	%			43.5	%			41.6	%			41.5	%			41.8	%
Net Interest Margin
Average interest-earning assets	$	3,912,802			$	3,728,958			$	3,582,408			$	3,441,151			$	3,266,382
Net interest income (FTE)	$	33,112			$	31,985			$	31,102			$	30,382			$	29,316
Impact of purchase accounting fair value marks		(1,245	)			(1,335	)			(1,384	)			(1,314	)			(1,487	)
Adjusted net interest income	$	31,867			$	30,650			$	29,718			$	29,068			$	27,829
Net interest margin (GAAP)		3.40	%			3.45	%			3.44	%			3.50	%			3.60	%
Adjusted net interest margin (non-GAAP) (9)		3.28	%			3.31	%			3.29	%			3.35	%			3.42	%
_____
(5) Core earnings available to common stockholders divided by average common equity.
(6) Earnings available to common stockholders excluding amortization of intangibles divided by average tangible common equity.
(7) Core earnings available to common stockholders divided by average tangible common equity.
(8) Operating noninterest expense divided by operating revenue.
(9) Adjusted net interest income divided by average interest-earning assets.
	As of
(dollars in thousands, except share data)	June 30,				Mar. 31,				Dec. 31,				Sept. 30,				June 30,
		2016				2016				2015				2015				2015
Capital Ratios and Book Value per Share
Common equity	$	484,414			$	474,727			$	466,094			$	459,896			$	452,732
Less: intangible assets		(149,383	)			(149,600	)			(149,817	)			(150,034	)			(150,252	)
Tangible common equity	$	335,031			$	325,127			$	316,277			$	309,862			$	302,480
Total assets	$	4,262,914			$	4,091,000			$	4,015,909			$	3,837,426			$	3,660,057
Less: intangible assets		(149,383	)			(149,600	)			(149,817	)			(150,034	)			(150,252	)
Tangible assets	$	4,113,531			$	3,941,400			$	3,866,092			$	3,687,392			$	3,509,805
Common shares outstanding		30,197,318				30,163,078				30,085,663				30,197,789				30,196,731
Common equity ratio (GAAP)		11.36	%			11.60	%			11.61	%			11.98	%			12.37	%
Tangible common equity ratio (non-GAAP) (10)		8.14	%			8.25	%			8.18	%			8.40	%			8.62	%
Regulatory capital ratios (Bancorp):
Leverage ratio		8.52	%			8.66	%			9.07	%			9.26	%			9.49	%
Common equity Tier 1 risk-based ratio		9.10	%			9.05	%			9.14	%			9.33	%			9.63	%
Risk-based Tier 1 capital ratio		9.23	%			9.19	%			9.61	%			9.82	%			10.14	%
Risk-based total capital ratio		11.44	%			11.35	%			11.77	%			11.94	%			12.26	%
Regulatory capital ratios (Bank):
Leverage ratio		9.62	%			9.83	%			9.96	%			10.22	%			10.48	%
Common equity Tier 1 risk-based ratio		10.43	%			10.44	%			10.55	%			10.83	%			11.19	%
Risk-based Tier 1 capital ratio		10.43	%			10.44	%			10.55	%			10.83	%			11.19	%
Risk-based total capital ratio		11.30	%			11.23	%			11.31	%			11.47	%			11.74	%
Book value per share (GAAP)	$	16.04			$	15.74			$	15.49			$	15.23			$	14.99
Tangible book value per share (non-GAAP) (11)	$	11.09			$	10.78			$	10.51			$	10.26			$	10.02
	Three Months Ended
	June 30,				Mar. 31,				Dec. 31,				Sept. 30,				June 30,
		2016				2016				2015				2015				2015
NCO Detail
Net loan charge-offs:
Charge-offs	$	77			$	512			$	18			$	519			$	334
Recoveries		(16	)			(15	)			(2	)			(342	)			(331	)
Net loan charge-offs	$	61			$	497			$	16			$	177			$	3
as a % of average total loans (annualized)		0.01	%			0.06	%			0.00	%			0.02	%			0.00	%
Asset Quality
Nonaccrual loans	$	21,911			$	21,450			$	20,737			$	12,888			$	12,145
Other real estate owned		2,029				1,696				2,549				3,244				1,564
Total nonperforming assets	$	23,940			$	23,146			$	23,286			$	16,132			$	13,709
Performing troubled debt restructurings	$	97,831			$	95,122			$	85,925			$	77,882			$	77,927
Loans past due 90 days and still accruing	$	-			$	-			$	-			$	268			$	-
Nonaccrual loans as a % of loans receivable		0.65	%			0.66	%			0.67	%			0.44	%			0.44	%
Nonperforming assets as a % of total assets		0.56	%			0.57	%			0.58	%			0.42	%			0.37	%
Allowance for loan losses as a % of nonaccrual loans		149.5	%			135.5	%			128.1	%			167.1	%			143.9	%
Loans receivable	$	3,375,620			$	3,263,813			$	3,099,007			$	2,953,381			$	2,765,288
Less: acquired loans		(799,851	)			(825,047	)			(866,878	)			(923,210	)			(1,060,632	)
Loans receivable, excluding acquired loans	$	2,575,769			$	2,438,766			$	2,232,129			$	2,030,171			$	1,704,656
Allowance for loan losses	$	32,763			$	29,074			$	26,572			$	21,533			$	17,480
Accretable credit risk discount on acquired loans		11,198				12,101				12,955				13,893				14,781
Total allowance for loan losses and accretable credit risk discount on acquired loans	$	43,961			$	41,175			$	39,527			$	35,426			$	32,261
Allowance for loan losses as a % of loans receivable		0.97	%			0.89	%			0.86	%			0.73	%			0.63	%
Allowance for loan losses as a % of loans receivable, excluding acquired loans		1.27	%			1.19	%			1.19	%			1.06	%			1.03	%
Allowance for loan losses and accretable credit risk discount on loans as a % of loans receivable		1.30	%			1.26	%			1.28	%			1.20	%			1.17	%
(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, 2016														March 31, 2016													June 30, 2015
				Average									(7	)				Average								(7	)				Average							(7	)
Interest-earning assets:				Balance				Interest				Rate						Balance			Interest				Rate						Balance			Interest			Rate
Investment securities (1) (2)				$	418,270			$	3,497				3.36		%			$	415,481			$	3,499			3.39		%			$	495,805		$	4,118			3.33		%
Loans receivable (2) (3) (4)					3,334,057				36,743				4.43						3,189,572				35,206			4.44						2,689,525			30,380			4.53
Federal funds sold and interest-
bearing deposits with banks					128,994				146				0.45						90,712				134			0.59						54,087			41			0.30
Restricted investment in bank stock					31,481				370				4.72						33,193				352			4.27						26,965			280			4.16
Total interest-earning assets					3,912,802				40,756				4.19						3,728,958				39,191			4.23						3,266,382			34,819			4.28
Allowance for loan losses					(29,924	)													(27,221	)												(16,463	)
Noninterest earning assets					329,429														332,638													301,678
Total assets				$	4,212,307													$	4,034,375												$	3,551,597
Interest-bearing liabilities:
Money market deposits					791,845				992				0.50						656,557				812			0.50						591,328			689			0.47
Savings deposits					215,267				156				0.29						215,491				157			0.29						218,845			157			0.29
Time deposits					889,561				2,857				1.29						807,801				2,535			1.26						748,780			2,131			1.14
Other interest-bearing deposits					528,954				429				0.33						503,896				435			0.35						416,221			324			0.31
Total interest-bearing deposits					2,425,627				4,434				0.74						2,183,745				3,939			0.73						1,975,174			3,301			0.67
Borrowings					639,054				2,355				1.48						684,469				2,413			1.42						565,094			2,110			1.50
Subordinated debentures (8)					55,155				812				5.92						55,155				811			5.91						5,704			48			3.38
Capital lease obligation					2,844				43				6.04						2,874				43			6.02						2,961			44			5.96
Total interest-bearing liabilities					3,122,680				7,644				0.98						2,926,243				7,206			0.99						2,548,933			5,503			0.87
Demand deposits					581,743														609,312													510,369
Other liabilities					24,365														16,317													28,291
Total noninterest-bearing liabilities					606,108														625,629													538,660
Stockholders' equity					483,519														482,503													464,004
Total liabilities and stockholders' equity				$	4,212,307													$	4,034,375												$	3,551,597
Net interest income (tax equivalent basis)									33,112														31,985												29,316
Net interest spread (5)													3.21		%											3.24		%										3.41		%
Net interest margin (6)													3.40		%											3.45		%										3.60		%
Tax equivalent adjustment									(718	)													(665	)											(638	)
Net interest income								$	32,394													$	31,320											$	28,678
(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) 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.
(6) Represents net interest income on a tax equivalent basis divided by average total interest-earning assets.
(7) Rates are annualized.
(8) Amount does not reflect netting of debt issuance costs of $714, $812 and $0 for the three months ended June 30, 2016, March 31, 2016 and June 30, 2015, respectively.