ConnectOne Bancorp, Inc.

and Chief Executive Officer, and Bill Burns, Senior Executive Vice President and Chief Financial Officer. I'd also like to caution you that we may make forward-looking statements during today's conference calls that are subject to risk and uncertainty. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filing. The forward-looking statements included in this conference call are only made as of the date of this call, and the company is not obligated to publicly update or revise them. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed today on Form 8K with the SEC and may also be accessed through the company's website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

Thanks, Saya, and thank you all for joining us this morning to discuss Connect One's second quarter. which reflects continued momentum in executing our strategy alongside successful integration of the largest merger in our company's history. On June 1st, Connect One Bank officially launched as a unified entity, completing the legal close of our merger, first of Long Island Bank. This milestone marks the beginning of an exciting new chapter for us, one that significantly enhances our scale and positions us to accelerate growth across all our markets. especially on Long Island. In line with Connect One's unique approach to M&A, we deployed a deliberate and focused effort to maximize synergy, both in preparation for and immediately following the close of the combination. The results are already clear, compelling, and a direct reflection on our ability to execute. Yet overwhelmingly strong client retention, demonstrating the success of our integration efforts and the continued loyalty of our combined client base. Steady momentum in new client onboarding as well as meaningful traction on new business opportunities. We had strong core deposit growth, including gains in DDA balances of existing newly acquired relationships. We're also seeing strong loan demand as we combine Connect One's deep expertise with significant growth opportunities across our new market. We entered the back half of 2025 with a solid This includes C&I, construction, SBA, and residential lending. Prior to Bill providing additional details about the merger and its positive impact on our financials and performance metrics, I'd like to emphasize a few things. Our assets now stand at nearly $14 billion, $11.2 billion in loans and $11.3 billion in deposits, while our market capitalization today exceeds $1.2 billion. This quarter, we organically grew client deposits by a record amount, improving our loan-to-deposit ratio to 99% at the end of the second quarter, down from 106% as of March 31st. Noninterest-bearing demand composition now exceeds 21% of total deposits, up from 18% as of year-end, reflecting both the merger and our client-focused, relationship-based approach. Additionally, while this transaction propelled us to above $10 billion asset threshold, Connect One was already well-prepared to cross this hurdle. We've proactively managed the associated regulatory requirements and, as a result, anticipate only modest expense growth while remaining well-positioned to continue our growth trajectory. Next, I'm also extremely pleased to welcome our newest members to our talented team. Deep expertise in community banking aligns with our client-first culture and strategy. I'm equally proud of the commitment and dedication shown by our team immediately coming together as one organization. The energy in our combined team is palpable, and our bench strength and momentum position us to execute on the opportunities in our market. We had a flawless day one brand transition, followed by the successful completion of a full systems conversion just two weeks later. Leading up to and throughout the transition, we placed a strong emphasis on delivering a seamless client experience. We proactively tripled our call center capacity to ensure responsiveness and continuity to address client needs in real time. Our clients were provided with broad access to the team, and I personally met with many, reinforcing our commitment to relationship banking that defines Connect One. As a result, we not only managed the conversion in under 30 days, we did so with excellent client and deposit retention. while also growing balances and setting the stage for enhancing those relationships. Today, we're operating as one unified company, single culture, consistent brand presence, and a shared vision. We're one team, fully aligned, and better positioned than ever to drive organic growth, create long-term shareholder value. And with that, I'll turn it over to Bill.

All right. Thank you, Frank. Good morning to everyone on the call. I want to start. by reiterating that we are truly thrilled with the first Long Island merger. It's strategic in that it expands our geographic footprint and client base. It's also financially disciplined and compelling, strengthens our balance sheet, enhances our key financial metrics, and ultimately boosts our franchise net. Now, with any merger, particularly in the early stages of a transaction that closed mid-quarter, it can be challenging to digest what's going on behind the numbers. Therefore, I want to delve into some key areas to provide greater clarity. But first and foremost, I want to highlight the exceptionally strong deposit and funding trends that ConnectOne is generating right out of the gate. On a combined company basis, non-interest-bearing demand deposits increased by more than 100 million since March 31st, approximately 15 percent annualized. And over the same timeframe, Total deposits are up an annualized 8 percent, which reflects solid performance, but it's even more encouraging that when you factor in a $200 million decline in broker deposits, our true core balances have increased by more than 500 million, or 17 percent annually. And with that robust deposit growth, we've been able to reduce wholesale federal home loan bank borrowings by about 200 million. Another point we want to highlight is the loan-to-deposit ratio. Pre-merger, our first quarter loan-to-deposit ratio was 106, climbing to 101 on a pro forma combined basis on March 31st. Fast forward to today, going to deposit growth, the ratio has improved even further to a couple percentage points below 100. Going forward, we expect to operate at about that 100% threshold. The deposit growth is a testament to the success across the entire organization. particularly healthy contribution of the loan on the market. Many bank mergers often face challenges with positive attrition. However, our unwavering focus on client retention has led to accelerated growth. Let me now turn to our purchase accounting entries. I'm going to aim for full transparency regarding the merger's purchase accounting adjustments, both now and in the future, to ensure our core underlying trends remain clear. The merger has a total loan market of $250 million. That's comprised of a $207 million fair value accretable mark and a $43 million non-accretable mark. Fair value mark of $205 million reflects a 6.6% discount to First of Long Island's $3 billion loan portfolio. A good portion of that is attributable to the $1.1 billion of residential loans we're taking on. They have a relatively longer duration. 43 million non-accredible mark on 270 million of PCD loans largely reflects portion of First of Long Island's New York City regulated portfolio. When you combine that non-accredible mark with the accretable mark on the PCD loans, those loans are now being carried on our balance sheet at about 70 cents of the dollar. I want to remind you that First of Long Island had a long standing track record of seeing credit quality Nearly all of the rent-regulated loans are performing. Nevertheless, under GAAP, conservatively and appropriately allocated a healthy reserve due to the higher cap rates currently being applied to the subsegment. Now, earnings accretion will be considerable. We are projecting them to be approximately 9.8 million per quarter for 2025, climbing to 9.2 million per quarter in 26, and 7.9 million per quarter in 27. I'LL ADDRESS THE IMPACT OF THE INCREASION ON OUR MARGINS HERE. NOW THE PROVISION AND ALLOWANCE, I'M GOING TO TALK ABOUT THAT A LITTLE BIT. THE TOTAL PROVISION FOR CREDIT LOSSES FOR THE SECOND QUARTER WAS $35.7 MILLION, INCLUDING A DAY ONE PROVISION, FIRST OF LONG ISLAND, $27.4 MILLION, AND AN OPERATING PROVISION OF $8.3 MILLION. NOW THAT $8.3 MILLION IS HIGHER THAN USUAL FOR CONNECT ONE, BUT IT'S LARGELY DUE TO UPWARD ADJUSTMENTS IN OUR QUANTITATIVE LOSS FACTORS resulting from the merger, particularly attributable to the longer-duration loan portfolio required. So in my view, the impact to CECL modeling is more or less a one-time adjustment. As such, all things equal, we expect lower levels of quarterly . As many of you are aware, there is a pending rule change that would eliminate the day-one provisioning. We will be able to reverse that charge in the future should it become effective. That would flow through earnings and add about 15 basis points to the CECL. Let me review the merger charges and cost saves so far. So far we've recognized $40 million in aggregate merger charges, and my expectation is we'll record up to an additional $10 million over the next quarter or two. Target was approximately $52 million, so expect to remain below that after the full recognition. In terms of cost saves, we are on track. First thing I want to explain is that the second quarter was a mixed bag. just one month of a combined expense base and specific emergency charges. Calibrating for those items, our expense base is what I've expected. Going forward, as a 100% combined company, 2025 quarterly expenses projected in the $55 million range, while in 26, the quarterly run rate is likely to be slightly higher, 56 to 57 million. And these projections are consistent. The achievement are 35% previously . Just the other income line for a moment. Pre merger connect one standalone was running at four to five million on a merge basis. That's going to go up to six point seven million per quarter for the next few quarters. What thing can you build of our SBA business market? Well, we also expect both lie to be an increasing source of gains on sale. Let me talk a little about the net interest margin. You know, as always, there are many moving parts, but overall we expect continued expansion. THOSE MOVING PARTS INCLUDE THE MERGER AND PURCHASE ACCOUNTING, ORGANIC WIDENING AS OUR DEPOSIT MIX AND LOW PRICING CONTINUE, SUBDEBT ISSUANCE WE JUST DID AND REDEMPTIONS COMING UP AND SET RATE CUTS. SO A LOT OF MOVING PARTS THERE. OUR COMPETITIONS CALL FOR AN APPROXIMATE INCREASE TO OUR MARGIN OF 10 BASIS POINTS FOR EACH OF THE THIRD AND FOURTH QUARTERS VERSUS THE 3.06 REPORTED TO. THAT RESULTS IN AN INTEREST MARGIN OF ABOUT 325 FOR THE further expansion expected from 26. That estimate assumes just one rate cut in 25. In terms of projected turn on assets and return on tangible common equity, we're still comfortable with the previously announced 1.2% ROA, 15% return on tangible common equity as we enter 26, but we will refresh that analysis once we have a full quarter behind us. I'm hopeful for an even better outlook. The metrics saw significant improvement due to the merger and the work out in sale of certain impaired loans. Our non-performing asset ratio improved dramatically, just 0.28 percent from 0.51 percent a year ago. The ACL at the percentage of loans jumped to 1.4 percent from just 1 percent, although the significant increase reflects the non-accreditable mark. Charge-offs remained in a reasonable range at 22 basis order. There's no significant increase expected. CRE concentration ratio, as expected, it ticked up slightly to 438%. With the merger, reduced CRE composition in the loan portfolio and higher earnings projections, we anticipate a sub-400 level by the end of 2020. I know you'll have questions about loan growth. Frank spoke to it a little bit. Organically speaking, the loan portfolio has recently remained relatively flat, largely due to elevated payoffs. Having said that, we continue to see solid demand. The pipeline continues to grow. And along those lines, our capital remains strong to support growth. The Bancorp Tangible Common Equity Ratio stands above 8% at 8.1, will trend upwards with strong levels of sustained earnings, while the Bank CT Ratio today remains above 12%, down just a little from before the acquisition, and that reflects, first of all, lower risk-rated assets . With that, I'll turn it back over to Frank, and we'll take some of your questions.

Thank you, Bill. As you just heard, proud that we've been able to successfully close and immediately integrate this merger while also delivering on our strategic objectives as planned. We acquired culture complementary turnkey organization in an adjacent market enviable client base, and proven track record. Our markets are ripe with opportunities for a truly client-focused bank. Our expanded footprint and team, coupled with the momentum we've built, lay the foundation for a strong second half. As we move through the second half of the year, we look forward to driving growth and creating long-term value for our clients, team members, and our shareholders. Let me close by saying that our company was undervalued before. Today, I truly believe our valuation is even more compelling. ConnectOne is one of the best investments. As always, we appreciate your interest in ConnectOne Bancorp. Thanks again for joining us today. And with that, I'd like to turn it over for some questions. Operator?

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. We'll go first to Freddie Strickland at HubD.

Hey, good morning, Frank and Bill. Hi, Freddie. It's great to see the criticized and classifieds as well as the NPAs down a quarter. Are there any other opportunities in the back half of the year to maybe reduce those even a little further? They're already pretty low, but just wondering if there's any big bogeys there.

Freddie's asking about our projection with classified and criticized. I DON'T SEE ANY MAJOR CHANGE FROM WHERE WE ARE TODAY. YOU KNOW, THERE'S SOME STRESSES OUT THERE IN THE MARKETPLACE. THAT WOULDN'T BE UNEXPECTED. YOU KNOW, WITH THE WRITEDOWNS AND LOANS, THERE'S OPPORTUNITIES FOR US TO POTENTIALLY UNLOAD SOME LOANS THERE. SO WE'LL WATCH THAT NUMBER, BUT I WOULDN'T EXPECT ANY CHANGE.

Got it. And then just switching gears to capital, with the deal behind you now and the likelihood of some pretty good capital generation in the next couple quarters, how do you think through the dynamic between capital deployment and managing CRE concentration?

Well, the numbers pan out very nicely to see CRE concentration. That's based on the use of origination of both the risk types. That's part of it. And then because of the accretion of the deal, we're really in a relatively low dividend rate, really adding capital quickly. So I think I answered your question. We're going to see that go down on its own. Are you asking about stock repurchases and growth?

Yeah, I'm just curious if there's, like, a target level of common equity tier one or any other metric where you'd be a little more likely to engage in share repurchases.

You know, there's always a possibility. I mean, we came out of the gate when we talked about the deal that we'd hold off on share repurchases in the beginning. In my view, the capital ratios are looking a little bit stronger than I originally anticipated. So, I'll just leave that open for now, and we continually look at that in terms of share repurchases. It obviously depends on growth in the loan portfolios.

All right, great. Thanks for taking my questions. Thanks, Eddie.

We'll move next to Daniel Tamayo at Raymond James.

Hey, good morning, guys. This is Tim DeLacian filling in for Danny. Thanks for taking my questions. Absolutely. Hi. Good morning. Hey, you know, just shifting to the margin here, you know, saw a really nice pickup in the securities portfolio this quarter. Curious, you know, what were the drivers there? And, you know, were there any actions taken on the Lexi flick portfolio that you did?

Well, the securities portfolio increased because of the acquisition. So you see, you know, as of the balances on an average basis, it's less because it's only one month. But we did do some restructurings. We think we improved.

our interest sensitivity and earnings from those restructurings so you'll see the benefits of those going forward understood and kind of you know following up on that you know uh you know five basis point you know positive impacts you know for the 25 basis rate uh cut previously should we kind of be thinking about that somewhat differently now kind of post merger here

No, I'm still we're still sticking with that, that it's approximately five basis points for each cut. And the estimates I gave you, we estimated one cut. So, you know, it could be up or down depending on how many cuts we see through 26. You know, as we build a bigger non-sparing deposit base, that would reduce the benefit of rate cuts. but it would improve the overall interest rate profile of the company.

Okay, understood. Thank you. Great color there. And then finally, you know, just looking at reserve levels here going forward, you know, standing at, you know, 140 here, you know, obviously a little bit elevated relative to historical levels. So how should we be thinking about those, you know, levels kind of trending from here?

Well, I did try to mention that we were up slightly excluding the non-accredible reserve. So that was the reason for the jump. You know, to the extent, I don't want to comment on how much of that reserve we'll use, but I think we set up a pretty conservative one. So to the extent we were conservative and we perform well, we'll have the ability to raise our reserves more going forward, our core reserves.

Great. Awesome. Thanks, guys. Appreciate you taking my question. You're welcome. Yep.

And as a reminder, if you would like to ask a question, please press star one. We'll go next to Tyler Cacciatore at Stevens Inc.

Hey, good morning. This is Tyler on for Matt Brees.

Yes. Okay.

Sorry if I missed it. I think you said the reserve was a bit higher due to increased cap rates on regulated housing. Do you know the cap rates that were used for that?

Well, this is in our I'm in our purchase accounting. Okay. And when you, when you look at, when you look at purchase accounting, you have to look as a buyer of, as we do, that's what purchase accounting means for buying those loans. So you use cap rates that a buyer would use. So they probably ranged anywhere from six and a half to eight and a half percent, you know, for the, for the purchase accounting adjustment. You know, if you get the loan appraised, you might see lower rates, cap rates. but we use higher cap rates as a potential buyer of loans.

Okay, great. That helps. And then moving on to deposits, it's nice to see DDAs above 20% with the deal. How do you feel about that number going forward? And is growing that realistic given the current environment? And then if you could just talk a little bit about overall composition and growth heading forward.

Yeah, I think there's a lot of opportunity to continue the trend of growing DDA higher relative to the entire portfolio. And part of that is, you know, the mix of the loan portfolio as we continue to execute on CNI and other opportunities in the marketplace that come naturally with deposits. And having what is a pretty substantial now presence on Long Island. that had a higher DDA balance to begin with, we think there's some real great opportunities there to enhance a lot of the relationships that were formed there over the years. So I would say really look forward to continuing to build the book in a way that helps to keep the loan deposit ratio low and the DDA balance is growing and a very well diversified loan

and others yeah we're certainly off to a really great start so i'm pretty optimistic okay great uh thank you and if i could just squeeze one more in i know you talked a little bit about the loan pipeline heading forward uh what are the yields you're seeing on that right now and then if you could give us some sense for near-term uh growth projections i think on last quarter's call you spoke about five percent for the year uh what do you what do you see heading forward well first the loan

Sorry, the loan rate on our pipeline is 677. Okay, that's the weighted average rate. In terms of the growth rate, I want to tell you that we are originating a lot of loans. And so there's still a lot of demand out there. The reason for the lower than anticipated growth has been payoffs. So it's hard to say going forward, but I'd say we'd be in the, you know, single digit, going forward, you know, for the next six months. It could be in the low single digits. It could be mid-single digits. Frank, do you agree with me?

Yeah. Again, I like to characterize it as strong loan demand. How much that translates into actual balance sheet growth is still a little bit subject to some of the payoffs. A number of the payoffs we're seeing, we're happy to see. So overall, I think it gives us a better balance sheet going forward. I have to tell you, we seem to be very happy with both what's in the pipeline, what's coming off, and what the balance sheet should look like at year end, both from a composition standpoint, a earnings yield, depository relationships, all the things that we've been working. Whether we grow at 2%, 5%, 6%, I don't want to say it doesn't matter, but to the extent that we can get the balance sheet that we want and we can continue to focus on treating our clients in the way that they want to be treating and being the bank that they choose as their number one institution, that's where we see success coming from. And that will translate into a profitable model.

Great. Thank you. That'll be it for me.

And that concludes our Q&A session. I will now turn the conference back over to management for closing remarks.

Well, I want to thank everyone again for your time today. We look forward to speaking with you again during the third quarter earnings call. With that, everyone, enjoy your summer.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.