ConnectOne Bancorp, Inc.

Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Connect One Backcourt Inc. fourth quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I would now like to turn the call over to CA Bansio, Chief Brand and Innovation Officer. Please go ahead.

Good morning and welcome to today's conference call to review Connect One's results for the fourth quarter of 2025 and to update you on recent developments. On today's conference call will be Frank Sorrentino, Chairman 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 call that are subject to risks and uncertainties. Factors may cause actual results to differ materially from expectations are detailed in our SEC filings. 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 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.

Thank you, Sia, and good morning, everyone. 2025 was a defining period for Connect One, one that demonstrated the strength of our business model, the value of our client-first culture, and our team's ability to execute on all fronts. Looking back, we delivered on a set of highly aspirational goals for the year, culminating in strong returns backed by solid profitability, efficiency, and asset quality matrix. We seamlessly integrated the largest transaction in our history. We completed a full systems conversion within two weeks of that closing and bolstered our franchise value and competitive position in the New York metro market. This meaningfully propelled the company beyond the $10 billion asset threshold. A transition Connect One was well prepared for, and we ended the year with $14 billion in assets and a market cap in excess of $1.4 billion. These results directly reflect the strength and the dedication of our exceptional team, whose talent and client-focused obsession continue to distinguish Connect One across our market. The natural alignment of our expanded team drove meaningful progress in strengthening client engagement, exemplified by remarkable retention through the merger, all while simultaneously deepening existing client relationships. As Bill will discuss in greater detail, we closed 2025 with meaningful momentum, delivering strong fourth quarter performance, highlighted by robust core earnings, expanding margin, and accelerated return. Turning to some of the recent highlights and our near-term outlook, deposit gathering remains a core competitive advantage. During the second half of 2025, client deposits increased by approximately 5% on an annualized basis, reflecting strong relationship inflows and a sizable reduction in broker deposits. Meanwhile, our loan portfolio also grew by an annualized 5% on the strength of strong originations offset by elevated payoffs, in part due to higher refinancing rates for borrowers. We anticipate these portfolio dynamics continuing into 2026. The bank's net interest margin widened significantly over the past quarter and year, and with our liability-sensitive positioning, we expect that positive trajectory will continue throughout 2026. Performance metrics improved significantly this quarter, and we remain committed to building strong capital, driving efficiency, and generating profitable growth with the goal of delivering even higher returns on assets and equity. As capital generation accelerates, we'll have flexibility to support our growth, increase our common dividend, and stand ready for opportunistic stock repurchases. As we move through the year, we will remain focused further efficiencies, particularly across Long Island, where our team continues to generate opportunities for expansion. In addition, consistent with our branch-light relationship-driven approach, we've identified five branch locations to consolidate, continuing our branch rationalization efforts. Furthermore, we have a deeply talented and expanded team in place. so we anticipate modest staffing growth going forward that will also drive improved revenue and operating synergies. In closing, as we enter 2026, Connect One is uniquely positioned to capitalize on client-driven opportunities in some of the best markets in the country. Even with these strengths, we also recognize that competitive pressures, political developments, and broader market sentiment will continue to shape and challenge our environment. Rest assured, we're prepared to meet these hurdles head on while remaining focused on executing our long-term vision and delivering sustainable value to all our stakeholders. So with that overview, I'll turn it over to Bill to walk through some of our performance in a little more detail. Bill?

All right. Thank you, Frank, and great to be speaking with you this morning as we delivered another excellent quarter. It was highlighted by improving net interest margin and performance ratios, robust loan originations, and core client deposit growth, combined with the reduction in wholesale deposits, clean asset quality, and healthy capital and tangible book value accretion. Just going back to deposits for a moment, since the acquisition, we have significantly improved the quality of our deposit base, reflecting a substantial increase in the percentage of non-interest-bearing demand, which went from 17% to more than 21% today. as well as a reduction in brokers, which declined from a high of 12% of total assets to just 6% today. Now, for the quarter, our operating PPNR percentage grew sequentially by nearly 10%. That was the fifth consecutive increase, while earnings were further augmented by a lower provision for credit losses and a reduced effective tax rate. Putting it all together, operating earnings for the current quarter represented an 18.6% increase sequentially over the third quarter. This drove our quarterly operating return on assets all the way up to 1.24% and a return on tangible common equity to 14.3%. Now, while we expect these performance metrics to moderate in the first quarter, we anticipate a quick return to an upward trend. Future earnings and performance returns will be driven higher by ongoing margin expansion, improved operating efficiencies, modest loan portfolio growth, and increased non-interest income. Now, the margin expansion this quarter stemmed from three key factors. First, we had a decline in our cost of deposits following the Fed rate cuts. Second, the redemption of high-coupon subordinated debt late in last year's third quarter was an action that was delayed by the merger. And lastly, our liability-sensitive position where rate cuts favorably impact our deposit costs without a reduction in loan yields. 2026 guidance for the net interest margin is as follows. I'm going to get specific here, but keep in mind there are many uncontrollable factors that can impact the margin. First, we're likely to be up by five basis points in the first quarter, putting us in the low 330s. Then we should see five basis points of improvement for every 25 basis points of Fed rate cut. Not sure whether it's going to only be one or two coming in 26. In addition, we should see five basis points of improvement per quarter due to higher loan yields, That's not going to kick in really until mid-year. Now, partially offsetting those, we could see five basis points of contraction due to a potential preferred redemption, which would lower margin in the fourth quarter, but it would actually improve EPS. Now, let me turn to operating expenses. We continue to drive efficiencies related to the merger, and following a detailed review of our footprint, we have decided to close five branches. And due to proactive client engagement, which we always do, we do not anticipate measurable deposit runoffs. And while future branch closures are always possible, no decisions have been made for 2026. And we also anticipate realizing further synergies by optimizing our staff count over the coming year, even as we strategically hire new talent in revenue producing and back office operations. Now, for OPEX specific guidance, including the additional efficiencies identified, the objective I have right now calls for a 4% increase in quarter 4-26 from the current quarter, and that increase would occur over the course of 2026. Loan originations have been robust all year, and we anticipate this continuing in 2026. Our philosophy focuses on maintaining appropriate risk-adjusted loan spreads and value-enhancing client relationships. Though this combined with a significant portion of our portfolio maturing or repricing in 2026 and 2027, leads us to expect higher than typical payoffs. Consequently, we now anticipate a more modest loan portfolio increase in the 3% to 5% range. In regard to growth in non-interest income, I am aware that we have fallen a bit short of my prior guidance, but with the pipeline of SBA loan sales building, Now we're pretty confident of more than 4 million in loan sale gains in 2026, and I'll provide updates throughout the year on that. Now turning to the allowance of loan losses, we recorded a relatively low provision this quarter. The reasons for this were multifaceted. First, the CECL model's economic projections improved slightly. Second, we recalibrated loss drivers to align with a new and larger peer group, and finally, We've worked out several PCD loans at values exceeding merger markdowns, and that resulted in favorable reserve releases. There was a slight increase in the non-performing asset ratio to 0.33 from 0.28 a quarter ago due to one multifamily loan relationship. Having said that, and not included in the year-end ratio is a multifamily workup that occurred in January, which brought total non-accruals back down to the lower level. Going forward, I don't see any significant change in the level in paired loans, but as is always the case, These levels can vary from quarter to quarter. One thing I can tell you is we always try to get ahead of any issues with conservative valuation adjustments. In terms of the effective tax rate, which I mentioned before, it was adjusted downward for the quarter to 26%. That was due to the true-up of our deferred tax assets largely having to do with the merger, but we expect a go-forward rate of 28%. Capital continues to strengthen. Our tangible common equity ratio has steadily increased to 8.62 as of year end. This strong capital position gives us the opportunity to increase our dividends. We engage in share repurchases, and we're building firepower for opportunistic M&A. I also want to mention that we've always placed a great deal of importance and focus on tangible book value per share. And at 23.52, which is where we are at year end, We anticipate returning to pre-merger levels within one year of the June merger completion. Before turning back over to Frank, I, too, believe we are well-positioned to deliver best-in-class results while continuing to capitalize on prudent growth opportunities. And that, to me, makes our stock one of the most compelling investment opportunities out there. And back to you, Frank.

Thank you, Bill. With a strong balance sheet, a top-tier team, and expanded footprint, 21-year track record of strategic execution and growing market dynamics, we've never been more competitively positioned. Operationally, we're maintaining rigorous discipline around product pricing and remain diligently focused on managing our balance sheet in a mature and strategic way. That means prioritizing balance sheet optimization while leveraging our size and scale to support sustainable, moderate growth. At the same time, We're consistently recognized as one of the most efficient banks in the industry, and that focus remains unwavering. We'll also continue to innovate while maintaining disciplined execution around true relationship-based banking. Collectively, we believe these efforts are driving better financial results, generating meaningful shareholder value, and as Bill highlighted, making us one of the most compelling investment opportunities. As always, we appreciate your interest in ConnectOneBank Corp. Thanks again for joining us today. And with that, I'd like to turn it over for your questions. Operator?

Ladies and gentlemen, we will now begin the question and answer session. As a reminder, to ask a question, please press the star button followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 1 again. One moment, please, for your first question. Your first question comes from the line of Teddy Strickland of Half Day Group. Please go ahead.

Hey, good morning. I guess, you know, just wanted to touch on something you mentioned in your opening comments. Phil, you talked about maybe the preferred being redeemed later this year. Can you speak a little more broadly about kind of how you view the capital stack today and kind of where you'd like it to optimally be?

Well, you know, we really do focus on tangible common equity at the end of the day. We've been trying to get that ratio back to 9%. We're getting very close. And at that level, it really opens us up to, as I said before, potential for dividend increases, stock buybacks, and a better position for M&A.

And on M&A, I mean, do you view that likelihood is a little greater in 2026 than maybe in the past? How have conversations gone there and just how do you view that versus other forms of capital return?

Well, you know, it really depends. As you know, you know, M&A is heating up a little bit out there. There's lots of transactions to look at. We've always been financially disciplined and we, of course, take a look at the value, the IRR of a transaction versus the IRR of buying back our stock. So all the pieces have to fall in line in order for us to do a transaction. I think we've got a pretty good track record there. Frank, if you wanted to add anything to that comment.

Yeah, I mean, I think it's pretty obvious there's a lot more activity going on in the marketplace for a variety of reasons, but I don't think that really changes very much the way we look at M&A. That may potentially move, you know, a few sellers into our sites, but overall, you know, we're focused pretty much in market, And, again, looking to be very disciplined around what makes sense for us to do.

And just one quick follow-up on the cash balances piece. Do we see that getting deployed again into loans this quarter, maybe earning assets or a little slower in growth?

Yes, exactly. So we'll continue to see more cash transition into loan balances. So higher growth in loans than in assets. All right, great. Thanks for taking my questions.

Your next question comes from the line of Tim Switzer of KBW. Please go ahead.

Hey, good morning. Thank you for taking my questions. Hey, Tim. Hi, Tim. My first one is kind of on the trajectory of the expense outlook. I appreciate the color on 4% year-over-year by Q4, but, you know, what is the timing of this branch rationalization and the new hires? And is that all mostly Q1, Q2, and then do expenses just kind of move sequentially higher each quarter as we move through the year?

Yeah, good question if you're trying to do your model as precisely as possible. That branch closure isn't going to occur until the end of the first quarter, and the staff changes might not take place until,

know after a quarter middle of the year so i would say that the uh expense increase will step up a little bit more in quarter one and then find out gotcha okay that's great um another question i had is on sorry go ahead no go ahead i'm sorry the other question i had was on deposit competition we we've been hearing about rising deposit costs and a little bit more pressure um you guys obviously had pretty good ability to move deposit rates lower. But are you finding that more difficult lately?

I think we've seen a little bit of that, that the competition is heated up. You know, we monitor that very carefully. And to the extent, you know, we're losing, if we think we're losing deposits on rates, you know, we'll make adjustments there. So, you know, my margin projection for the year takes that into account. You know, in the best case, our margin can be much higher than it is today, but more likely than not, you know, we're probably in the 335 to 340 range by year end.

Okay. Got it. That's really helpful. Thank you.

Your next question comes from the line of Mark Fitzgibbon of Piper Sandler. Please go ahead.

Hey, guys. Good morning.

Hey, Mark. Good to have you on this call. Yep.

Thank you. I guess I was curious, could you share with us perhaps the size, complexion, and maybe average rate of your loan pipeline?

Yeah, so which one was the size? We have the $600 million, and about $600 million is in the pipeline, and that rate, that average weighted rate is 6.2%. Okay.

And is it mostly commercial real estate construction or what does the mix look like?

It's a real mix similar to what's on our composition today. Okay.

And then I was curious, are you seeing much of a difference in terms of the loan and deposit growth activity, you know, between the New Jersey franchise and the Long Island franchise?

I don't think so. Frank, did you have any thoughts on that?

Yeah, I mean, I would say there may be some, you know, some skewed interest to the Long Island market only because a lot of the products and services that Connect One provides weren't being provided by the first Long Island folks. And so there may be some additional opportunities there within the existing client base. I think once we capitalize on all of that opportunity that's out there, I think you'll see the balance sheet grow relative to the composition we have today across all our markets.

Great. And Mark, we had early gains in deposits at Long Island. So between the closing of the transaction June 1st and June 30th, we had significant deposit increases at the Long Island part of the franchise. Okay.

And then lastly for me is on the provision. There's obviously a lot of puts and takes, and I heard your comments on the call. We've had some volatility in that line related to the deal, et cetera. I mean, based on the pipeline that you have and, you know, your perception that credit is going to stay strong, Should we be expecting provisions in the sort of $4 to $5 million a quarter range, you know, assuming no surprises?

I'm pretty good with what the street estimates are. I think it might be a little bit higher than that. You said $4 to $5? $4 to $6, you know? Maybe more like $5 to $6 million would be my projection. It's hard to tell. A lot of moving parts. Okay? Okay. There was definitely, you know, part of the reduction was non-recurring, okay?

Got it.

For the quarter. Thank you. Yep.

Your next question comes from the line of Daniel Tamayo of Raymond James. Please go ahead.

Thanks. Good morning, Frank. Good morning, Bill.

Hey, Danny.

How are you? Doing well, thanks. I guess, so... Is there a chance that deposit growth exceeds loan growth this year given the slower loan growth guide from the payoffs?

Yeah, I think that is a possibility, but more likely than not, if I just had to project, it would be about equal.

Okay. Okay. And then I got on late, so I apologize if this was mentioned already, but the deposit declined in the fourth quarter. But I guess you just said that you had some pretty good gains in the Long Island franchise post-close. So my question was going to be, is that related to the acquisition? If not, what was the deposit decline?

No, that little anomaly, if you will, has to do with that we took the client deposits and used it to pay off broker deposits. Got it. We're focused on quality of our deposit base. And I think that's a big determinant in evaluation of a bank is the quality of the deposit base. So we are focused on that. Obviously, earnings are important, right? And growth is important. But we are focusing on, you know, smart, profitable growth, quality of the balance sheet, and return metrics.

Understood. And then I guess a clarification on your margin guidance, which is great, very specific. So I think I get everything except the five basis points from loan yields that you mentioned. Yeah. We should think about that. And I think you said starting kind of mid-year or second quarter. Right. That's kind of a gradual build to that overall five basis points. Is that the way to think about that?

Well, it's – It's about five basis points a quarter for each of the third and fourth quarters we're objecting right now, okay? The amount of loans repricing are skewed towards the latter half of the year, and that's why we are pushing that aspect of the margin increase out, okay? The second thing is, you know, there's going to be pressure on those repricings. Contractually, the repricings are significant. but contractually might not match market, right? Contractually might not match borrowers who say don't need to take the loan, but see that the rate's higher and they're just going to pay the loan off. And we've started to see that happen. So the actual contractual that might be in our outcome model doesn't necessarily match or probably overstates what the margin widening will be. And so I've tempered, you know, our margin guidance because of that. I understood.

Okay.

But directionally, you know, everything is pointing in the right direction.

Got it. Okay. All right. Well, thanks for the color. Appreciate it, guys.

Yep. Yep. Again, if you would like to ask a question, please press star 1 on your telephone keypad. Your last question comes from the line of Matt Breeze of Stephens, Inc. Please go ahead.

Hey, good morning. Hi, Matt. Good morning, Matt. Good morning. I was hoping we could just touch on the updated loan growth guide. You had also mentioned some payoff or prepayment activity. You know, what's driving that? Are you seeing spread compression, better offers for your clients from, you know, the agencies and insurance companies? We've heard quite a bit of that this quarter. And then, Bill, you had mentioned the pipeline, both in amount and rate. How does that look relative to last quarter or a year ago? I guess I'm trying to get a better idea of why with everything and all the chess pieces where they are, why there's not a little bit better loan growth outlook for the year.

Yeah. I think it's self-explanatory. You know, the loan rates are a little bit lower than what was before. A lot of it has to do with competition out there. And, you know, we continue to allow loans that are non-relationship based to drift off the balance sheet. So I think some of your projections, Matt, probably are, you know, maybe overly optimistic in terms of us achieving, you know, contractual repricing at the maximum amount. And I think it smarter to temper that a little bit and be a little bit more conservative. On the upside, what you have, I think, is accurate. Okay, that would be the upside. But more conservatively speaking, more like it is a little bit lower in terms of growth and margin expansion.

Okay.

Okay?

Yep. And then, Frank, you had mentioned additional efficiencies. I'd love to kind of get your more holistic view on on the expense base, there's a little bit of growth, but how are you using, you know, the newer technologies available to you? Have you test run any AI? How productive, how impactful is that, and how do you think about operating leverage over the next couple of years?

I think it's going to be terrific, Matt. We've incorporated, you know, a number of leading technologies in the company going back years. And many of those are taking advantage of AI. Look, I'm not a big fan of talking about, you know, how great we're going to be at utilizing AI. But the reality is every vendor, every partner we have is incorporating artificial intelligence into their systems, which is just naturally making a lot of the processes better if you're utilizing those types of systems. It also forces us to think in that way and provide for a foundation here at Connect One, which is, you know, we've always been utilizing technology to replace labor. And so not only are we becoming more efficient internally, but the vendors that we partnered with are also becoming more efficient. So I think we can grow the the balance sheet without significant additions other than, you know, revenue producing people, people who are creating those relationships that we highly value. But all of the back office functionality and the ability to serve our clients is just getting more efficient in every single thing we do. Now, we've made a lot of investments over the years relative to picking those systems that are probably going to be the winners to allow us to take full advantage of those types of efficiencies. It's what we're focused on. It's why we're in the top 1% of all banks in the country relative to efficiency ratio, even after doing this acquisition with First of Long Island, which dramatically expanded our retail branch presence. As I mentioned on the call, we're looking to rationalize that over time and be able to provide our clients a first-class experience but be able to do it with, you know, the technological advantages that keep us in the lane of gaining operational leverage and operational efficiencies over time.

And then one thing we've heard a lot about with these newer technologies is being able to use them to your point on back office compliance, but even BSA, AML, you know, your customer type applications. Are you seeing the regulators adopt this as well, or are they okay with you all, you know, trying to apply there? Are they on board with that kind of transition?

Yeah, I think they are, Matt. I think they recognize the changes that are taking place. Of course, there's always some skepticism. relative to, you know, totally eliminating or, you know, creating what they perceive to be potentially a black box scenario where they can't really understand how something's happening. So there's a fine line there. And, you know, I do think that there is some limitations there as to how far we can go at this point in time. But overall, I don't believe we've been stopped or even been curtailed in any effort that we've tried to put forward. So but I will tell you this, you know, I used to say this just about, you know, technology in general. You know, you just can't you can't buy AI in a box and just open the box and turn it on and plug it in. It doesn't work that way. There needs to be, you know, to gain efficiencies and to be able to get that leverage that we're talking about. you got to have a holistic approach across the entire company to have good data, to have systems that speak to each other, to have all kinds of operational efficiencies that are already built into your system to take advantage or full advantage of some of these newer technologies. And so I think we're doing a good job of managing that process going forward and being able to extract those types of efficiencies At the same time, we're able to grow our ability to get in front of more clients. And so, you know, the more we can spend time in the field meeting with and going back to old world technology, you know, I tell everybody go out and have 50 cups of coffee. You know, that's what brings in new business. I think the better off we're going to be.

Appreciate that. Just last one is, you know, you discussed M&A a little bit. You know, given your size now at $14 billion, you know, is there a lower bound of deal that just doesn't make sense anymore? And then secondly, maybe you could just speak to what markets or contiguous markets would be interesting to you, or oppositely, is there something in market that might be more of a financial deal that you'd be interested in?

Yeah, Matt, I think it's hard to set a lower bound. I mean, like, I could envision a really small transaction that could be somehow transformative in a particular line of business we want, or there's a group of folks that we want to get. So I don't think we can evaluate opportunities solely based on size. Now, of course, all things being equal and if all we're doing is adding to the balance sheet, yes, there are, you know, some scale issues relative to, you know, just wanting to do a deal that's too small and yet takes the same amount of time that something else might take. But again, I think we look at these things on a one-off basis. We try to determine, you know, does this make sense? Will it be additive? Are there synergies going forward? Are there things that you know, we can create real value moving forward. And that's the basis of being financially disciplined and looking how we're going to build a better, you know, valuation for the franchise in general. As far as markets, you know, I've been pretty consistent speaking about, I'll say staying within market. Within market, though, I consider us the New York metro market, which is a huge market. And to me, that makes the most sense. I really don't want to rule anything else out. There could be something that's compelling that I haven't seen yet or, you know, that we haven't evaluated yet. But mostly, we believe and we have our roots based in this New York metro market, which is, as I said, is an incredibly large market. It extends beyond Philadelphia, you know, out to the western part of New Jersey, all the way you know, along the Long Island Sound on both sides. So it's an enormous market. To me, the most, what would what makes the most sense is within that 100 150 mile radius of New York City, you know, about a two hour drive, that's me driving, you know, real fast. That's, that's the market that I see. And of course, as I joked before, I consider Southeast Florida to be the sixth borough of New York. So I include that within the marketplace.

Thank you for taking all my questions. I'll leave it there.

Great, Matt.

Your next question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Thanks, guys. Just a quick follow-up here.

Okay.

And it And it's for you, Bill, the first one at least. Just wanted to clarify, again, on the margin, the 335 to 340 base case, I think you called it, for the end of the year or by the end of the year, does that include any rate cuts in that number?

Yeah, it probably includes one rate cut.

And then for Frank, just a clarification on the buyback talk. I can hear you on the 9% TCE. Is there a way to think about that? Do you want to get there before you're going to do buybacks, or are you comfortable kind of some buybacks with the stock price still low and more gradual uptake to 9%?

Hard to say. Look, I think we're on the trajectory to meet and exceed that 9% number. I feel comfortable here. I do think we want to see how the year progresses. We want to look at what else is out in the marketplace, what opportunities there really are, either for organic growth or any potential M&A activity down the road. So, I think we're going to be very judicious with our capital. I think we've been good stewards of capital over time, and I think you've known us to do the right thing relative to our shareholders. Understood. Okay. That's all I have.

Thanks, guys. Yeah. Yep. Go ahead.

Matt, Danny, I was just going to say, you know, with the, you know, continually increased return on equity, a relatively low dividend payout ratio and, you know, subdued growth on the balance sheet, that ratio is headed up, you know, at a good pace, capital ratio.

There are no further questions at this time. With that, I'm going to turn the call over to management for closing remarks. Please go ahead.

Well, I want to thank everyone again for joining us today, and certainly we look forward to speaking with you during our first quarter conference call. And with that, please have a great day.

Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect.