ConnectOne Bancorp, Inc.

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Connect One Bancorp, Inc. first quarter 2026 earnings call. All lines has 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, again, press the star one. I would now like to turn the conference over to Sia Bansia, Chief Brand and Innovation Officer. You may begin.

Good morning and welcome to today's conference call to review Connect One's results for the first quarter of 2026 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 like to caution you that we may make forward-looking statements during today's conference call that are subject to risks and uncertainties. Factors that 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-cap financial measures Reconciliations of which are provided in the company's earnings release and the company tables or schedules which have been filed today on Form 8K with the SEC 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. We kick off 2026 with strong momentum firing on all cylinders as demonstrated by our results. 12 months ago, we detailed our strategic objectives heading into the largest merger in our company's history. I'm pleased to report that we're not only delivering on those goals, we're exceeding initial expectations. Today, our franchise is stronger and better balanced. We diversified our client base and revenue streams, materially improved deposit mix, including core and non-interest-bearing deposits, and diversified our loan portfolio. We scaled the balance sheet from under $10 billion to nearly $15 billion in assets, increased our market capitalization to over $1.4 billion, and built a valuable franchise, accelerating our presence across Long Island. Our geographic footprint now spans the entire New York City metro region and naturally extends to the growing South Florida market. We're positioned for a very strong start to 2026, and we're confident in that momentum continuing for the year ahead. Turning quickly to our first quarter performance, we delivered loan growth, margin expansion, accelerating return metrics, and further increased tangible book value per share. Reflecting our success and confidence in future performance, we opportunistically repurchased shares in the first quarter and increased our common dividend. Bill will provide some more details regarding our financial performance this quarter and our continued confidence in further margin expansion for 2020-26. On the expense side, we remain highly disciplined as we continue to realize merger synergies and steadily return to best in class efficiency levels. To ensure we continue to operate as a top tier efficient bank, this discipline is being further enhanced by our focus on optimizing all systems, products, and services, along with the thoughtful integration of AI across the organization. Working together, these initiatives will drive continued improvement in our expense metrics going forward, while also enhancing scalability as we continue to grow. Our first quarter credit quality remained solid. Net charge-offs declined to a recent low. Our non-approval loan ratio also decreased, while criticized and classified assets remained at historically low levels. However, as disclosed in the earnings release, delinquencies increased due to an isolated client relationship collateralized by 19 multifamily New York City rent-stabilized properties. The client, who we're working closely with, has had a strong track record of payment performance spanning more than five years, and significant portions of the credit remain fundamentally sound. While it may be too early to determine any financial impact, Bill in a minute will review with you the significant reserves we've recorded against the entire rent-stabilized portfolio. Look, we've always been supporters of affordable housing in all the markets we serve. New York City is a somewhat unique market with its rent-stabilized portion of affordable housing. Our interest continues to be to support the owners that work hard every day to provide solutions for all in the greatest city in the United States. Just a reminder, Connect One has a strong track record of successfully resolving situations either through negotiated adjustments to interest rates and payment terms with clients or alternatively through self loans. Next, turning to non-interest income growth, momentum continues to build. Subsequent to the quarter end, we saw accelerating activity in SBA loan sales supplemented by BowFly, and Bill will share some more details on that shortly. Notwithstanding headline economic uncertainties and volatility, we're confident Connect One will deliver sustained long-term value for shareholders in 2026 and beyond. And with that, I'll turn the call over to Bill to walk us through some of our performance in a little bit more detail.

All right. Thank you, Frank. And good morning to everyone on the call. So as Frank just laid out, we delivered another excellent quarter characterized by accelerating operating performance, robust loan growth, and a significant widening of our net interest margin. For the first quarter, we reported operating earnings per share of 79 cents, and operating PPNR is a percentage of average assets of 1.81 percent. That's up 3.5 percent from last quarter and up 35 percent from a year ago. Now, let me walk you through some of the primary drivers of these results. Clear highlight of the quarter was our net interest margin, which expanded by 12 basis points sequentially to 3.39, and that builds upon a 16 basis point widening in the prior quarter. This current quarter exceeded our initial projections and was primarily driven by contractual loan repricings and improved deposit costs. Looking ahead, advancing loan portfolio yields are expected to support continued margin expansion, even without the benefit of further rate cuts. On the asset side, loan originations were strong, with the portfolio growing by an annualized rate of approximately 10 percent. This was $300 million in growth for the quarter, and that's double the pace we saw in each of the two prior quarters. The pipeline remains strong, and portfolio growth net of payoffs is anticipated to be in the mid-single digits. Now, maintaining deposit growth that keeps pace with our loan growth is a primary focus for our team. And while we achieved client deposit growth this quarter, our accelerated loan growth was also funded through a reduction in cash and investment securities and supplemented with some wholesale deposits. In terms of margin outlook, we are maintaining our previous guidance. It's a year-end spot margin of 350, so by the end of the year, we'll be at 350. This factors in lower probability of rate cuts, maybe there's one to come, loans repricing higher, and a competitive deposit pricing environment, which we are seeing unfolding. Now, turning to asset quality, the broader portfolio metrics continue to show strength. Our total non-performing assets declined to just 0.29 percent of total assets, and our criticized and classified loans dropped to an historically low level of 2.26% of total loans. Further, net charge-offs on our non-PCD portfolio were exceptionally clean at just eight basis points annualized, and that's a recent low. As Frank mentioned, we did experience an increase in 30 to 59-day delinquencies, which rose to 0.81% due to one relationship, which we are in the process of working out. And we recognize the market's focus on the New York City rent-stabilized space, That's why we provided additional information in this morning's release. In the release, you can see our total rent-stabilized portfolio has been reduced over the past year to 675 million. That was accomplished through paydowns, payoffs, and loan sales. It was 750 million in the total portfolio at merger close. Now, 413 million, or 61% of that 675 is attributable to the first of Long Island acquisition. And that portion was fully reviewed in our merger due diligence and was marked down aggressively with reserves and yield adjustments aggregating the 66 million, bringing today's carrying value on that part of our portfolio to less than 85 cents of the dollar. The remaining 263 million, which was originated by Connect One, represents just 2.2% of total loans. And that too has an elevated reserve. It's 15 million for that portion. So between the general reserves, In the purchase accounting marks, we have a 12% offset to our aggregate rent-stabilized exposure, providing more than 80 million in total value-absorbing cushion. Now, the provision for loan losses for the first quarter was 5.2 million. That reflected a number of items. First, the strong loan growth. Also, we increased qualitative factors tied to the multifamily portfolio. And the provision was partially offset in a good way by improved economic forecasts in our CECL model. And today, our total allowance of credit losses to loans remains healthy at 1.3%. Now, let me touch on a little bit on the income statement. Operating expenses remain well controlled across the bank, excluding merger and restructuring charges. Non-interest expenses were $55.7 million for the quarter, and I am targeting a 1.5% per quarter sequential growth rate going forward. On the revenue side, non-trust income was $6.8 million for the quarter. SBA gains were approximately $400,000 for the quarter, but that plus $1.1 million in additional SBA gains recorded in April puts us ahead of our 2026 target, with a third generated by both slides. Finally, our capital position continues to strengthen through solid retained earnings. Tangible book value per share increased by 1.7 percent to 2393. That brings us very close to our pre-merger tangible book value of 2416. The tangible common equity ratio at the Bancorp advanced to 864, and the bank's leverage ratio to 10.81. And reflecting confidence in our capital generation and forward margin outlook, the Board declared an 8.3 percent increase in our common dividend. We repurchased 90,000 shares in the quarter at $26.21 per share, and we will continue to opportunistically repurchase shares, taking into account market pricing and asset growth. We have more than 500,000 shares remaining in our repurchase authorization. Before we get to Q&A, I'll turn it back over to Frank for some closing comments. Frank?

Thanks, Bill. To wrap things up, our earnings profile is solid and growing. Credit quality remains sound, and we have a well-positioned balance sheet. We're incredibly proud of what we've accomplished so far, having established a powerful and strong framework for our next phase of growth. Our tech-forward, highly efficient culture is driving continuous optimization across the organization, allowing us to maintain our relationship-focused banking model as we continue to scale. Our teams are energized and are executing on the momentum we've created. In short, our franchise has never been stronger. At our current valuation, we believe Connect One Bank presents an interesting opportunity to own a high-quality franchise in one of the most desirable markets in the country. I want to thank you for joining us here today, and as always, we appreciate your interest in Connect One Bank. And with that, I'd like to turn it over to your 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 one again. If you are called upon to ask your question and are listening by a speakerphone on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Our first question comes from Tyler Casitore from Stevenson. Please go ahead.

Good morning. This is Tyler on for Matt Brees.

Yes. Hi, Tyler. Hi, Tyler.

Just starting with loan growth for the quarter, can you kind of walk us through some of the dynamics there and if there were any accelerated pull-throughs or kind of lower than anticipated payoff activity? And then just with the stronger growth here, is there any opportunity to be on the higher end of that mid-single-digit guide?

I would say the answer is yes. I do think that payoffs have come down a little bit, which helped to bolster the loan growth. But the pipeline is strong. We are seeing the types of business that we, you know, are looking for in all of the markets we serve. So I do think we are executing on what our objectives are relative to that. As far as what the loan growth is going to be for the rest of the year, You know, mid to, you know, the mid single digits is probably where we feel the most comfortable. It could be a little higher. It could be a little lower.

Okay, great. And then just on new originations, what are you putting on new loans at? And are you seeing any compression?

The pipeline right now is about 635, and the loans that we've put on most recently were about 620. So that's the general amount of loans we're putting on. I think the spreads are being maintained nicely.

Okay, great. And then if I could just squeeze one more in on the rent-regulated side. I know the release had an uptick in past due loans. Was that from the Legacy portfolio or from Flick? And then if you could just talk about the portfolio as a whole and then potential impacts from Mandami's new insurance program for rent-regulated properties.

Wow, you packed a lot in there.

Yeah, yeah.

Sorry about that.

Maybe I'll give a quick overview. First of all, it's from the Legacy portfolio.

Legacy Connect One, it's a relationship that goes back a number of years. You know, we've been working together with them very closely. I do, you know, I think everyone is aware there are challenges in the rent stabilized portfolio, you know, across everyone's portfolios. Those that, you know, have the value add components in their portfolios probably see, you know, the most amount of challenges. That was an area that we generally stayed away from. You know, this is definitely a combination of higher interest rates and many other factors that are coming to play within New York City itself, predominantly the 2019 change in the rent stabilization laws. All that being said, we've had great track record of being able to work with most of these borrowers to provide solutions and answers for them to work out, you know, their challenges as they go forward. I'm fairly optimistic that based on the way we have the portfolio positioned, and as Bill went into a lot of detail, and maybe he can give you a little bit more around the way that we provision that entire portfolio, that we are well prepared going forward into the future.

Yeah, and I think the, you know, the strong reserves we provided, really give us some comfort going forward on the total portfolio. And, you know, most of the portfolio, 60% of the portfolio was done through the acquisition, which gave us the opportunity to take significant reserves. So, those significant reserves that have turned out to be probably overly conservative plus adding to reserves over the past couple of years puts us in a very good position.

Understood. That's all I have. Thank you. Thank you.

Our next question comes from Tim DeLisi from Raymond James. Please go ahead.

Hey, good morning, guys. This is Tim DeLisi. Hey, good morning. I'm for Danny this morning. Thanks for taking my questions. You know, I was wondering if we could just get an update here on your Florida markets and how activity is trending there and

know maybe in conduct junction with that you recently opened an lpno in orlando and i was wondering if you could share some details on any recent or planned hires you intend to make there or kind of maybe your longer term view of that market look we uh we're very bullish on the florida market uh we've been growing there in a i think a very measured way uh i think we started there with uh four or five individuals we're now up uh you know past uh 18 or 19 individuals that are working in that market. And I would tell you that the mix of business that's coming from there, you know, continues to stay pretty steady. It's a great mix of both C&I, owner-occupied and non-owner-occupied real estate type transactions, very, very similar to the types of transactions that we do in our primary markets here in New York. And a decent portion of the business there is related to our New York business. I've joked on, you know, on these calls before that, you know, Southeast Florida is sort of like the sixth borough of New York. And it becomes more true every single day. So, you know, we're very optimistic about a lot of different parts of Florida. But again, we're growing in a measured way. So, you know, that would be my, you know, my response to that question.

great thanks for the color there frank um you know and just maybe switching over to the margin maybe uh for you bill yeah you know you kind of mentioned it in your comments you know that the the competitive landscape for deposit costs remains uh competitive out there um you know do you have any kind of thoughts on you know where deposit costs might trend here absent for the rate cuts you know through the rest of the year well i mean i think uh we're we're planning it to be flat for the year

So most of our margin widening is coming from the repricing of the loan portfolio.

Understood. Appreciate that. And then just a quick modeling question for me. Do you happen to have the accretion that impacted the margin during the quarter?

The accretion in the net interest margin?

Yeah, correct.

Do we have it in the, what was that? So hold on one second. We'll get back to, yeah. We'll get back to you on that, okay, on the amount that's included in the net interest income.

Okay, great. Well, I appreciate that. That's all I have. I'll step back.

All right. Thank you. Our next question comes from Freddie Strickland from Healthy Group. Please go ahead.

Hey, good morning. Just in X multifamily, it seems like you had some solid progress on, you know, already pretty good credit metrics here. Is there anything else kind of in the existing either criticized and classified or MPAs that maybe we could see, you know, work out on later in the year to maybe make those balances fall even a little further?

Nothing more than typical. There's always a few assets that we're working on all the time, but nothing out of the ordinary in terms of dollar amounts.

Got it. And just wanted to clarify, Bill, in your spot margin comment of 350 a year in, should I take that to mean you expect the margin could be 350 for the fourth quarter, or is that more as you kind of exit the year in December?

I would say as we exit the year. So I think that's similar to what we've said before, which was 345 or so for the quarter, for the fourth quarter. You know, it's hard to exactly predict. We could get a little bit more on the loan repricing side, but we also could see deposit costs go up. And that's why we're coming out with, I would say, a conservative estimate of 345 of the quarter and 350 spot at the end of the year.

And just one more for me. Did you happen to have the quantity of fixed-rate loans coming up for repricing? I apologize if I missed that.

About $100 million. Yeah. Put it simply, it's about $100 million a month. Okay, it fluctuates a little bit. That's a good way to model it.

Perfect. That's it for me. Thanks for taking my questions.

Thank you so much.

And again, if you'd like to ask a question, please press star, then the number one on your telephone keypad. Our next question comes from Emily Lee from KBW. Please go ahead.

Hi, everyone. This is Emily Lee stepping in for Tim Switzer. Thanks for taking my question, and congrats on the quarter.

Hi, Emily. Thank you. Thanks.

Yeah, so really great to see the dividend increase. Just wondering where would you like the payout or share to go over time? And you also mentioned in your opening remarks that you plan to continue repurchasing shares. So just wondering how we should think about capital allocation and deployment for the rest of the year.

All right. Well, on the repurchases, we did 90,000 in the quarter. Our plan is to do about 100,000 a quarter for the next, for the rest of the year, although it could depend on what the stock price is, as well as what our growth rates are. And in tandem with that is our payout ratio. We've always liked to have a lower payout ratio. So although I see us continuing to increase dividends each year, you know, with the expected increase in earnings going forward into 27, I would say that our payout ratio would be similar.

Understood. Yeah, thank you. And then, you know, you kind of provided a bit more color on the past due credits coming from legacy CNOB. I'm just wondering, do you have any metrics such as like LTVs or anything you could provide to kind of give some more comfort on those?

Nothing at this time. You know, the rent regulated market is a little bit in a state of flux. And it's difficult to determine exactly what the current LTVs on those loans are. But the majority of our portfolio is current and not impaired. And so, you know, we feel pretty good about the whole portfolio.

Okay, great. That's all for me. Thank you, guys.

Okay, sure.

Thank you so much. Our next question comes from Daniel Tamayo from Raymond James. Please go ahead.

Hey, guys.

Hi.

Morning. Yeah, I know you took some questions from Tim earlier. I appreciate that. Just jumped on a little bit later. And I think everything has mostly been asked. So I'll ask you, Frank, about the state of the M&A market. I know you've answered these questions over the last several quarters, but we've had some changes in the macro environment. Curious how that's impacted just conversations, where you guys stand in that in those conversations? Anything noteworthy from your standpoint within just general conversations in the market? Thanks.

Dan, my answer is kind of sort of standard. We're highly focused, and I think this quarter really demonstrated it. We're highly focused on our organic growth, our ability to expand within our markets, take advantage of the market opportunities that exist. I think we did a really fantastic job with the merger with First of Long Island that has been integrated really well and is providing us tremendous opportunities. And while I see the headlines that there's lots of other M&A occurring in and around the marketplace, again, we've been opportunistic. We've only done a couple of deals in our existence and Certainly, we'll talk to anyone. We like to know what's going on within the marketplace. We like to understand what the environment looks like. But it's very difficult to get to a place where something makes a lot of sense. specifically with where we are today, both in size, scale, capability, and what we see as opportunities going forward. We're doing a great job of building capital, providing return to our shareholders. And to us, that's incredibly important. If the right opportunity presented itself, of course, we would take a look at that. I do think those are becoming fewer and farther in between. As you know, the ramp up in some of the other M&A that's occurred within the market has taken place. I'm happy to participate either way. If we get the opportunity, great. If we don't, we'll take advantage of someone else taking advantage of an opportunity. And, you know, we've generally been very successful partners. in providing a safer or better home for some of the clients that feel negatively impacted or disaffected by those M&A transactions taking place. So I think that's a real long way of saying, yeah, I know there's a lot in the headlines, but I don't see anything right at the moment that's compelling.

Great. Well, thanks for taking that question. I think we've hit on everything else. I appreciate it. I'll step back.

And I just wanted to follow up and give an answer to the question about the purchase accounting interest. So it was 9.3 million in the most recent quarter, averaging 9 million a quarter for this year. And for 27, it would be 8 million a quarter.

Our next question comes from Emily Lee from KBW. Please go ahead.

Hi, I just wanted to hop on with a quick follow-up. But, you know, in your opening remarks, you mentioned the implementation of AI within your organization. So, I was wondering if you could provide some color on maybe potential use cases or opportunities for further efficiencies related to AI. Thank you.

So, Emily, AI is pervasive for everyone, I believe. And if You know, you're not thinking about it or utilizing it in your day-to-day operations. I think you have to question, you know, what are you doing? We see it in two different ways. We see lots of opportunities within the organization for folks to utilize AI tools to make their everyday processes better, more streamlined, more effective, you know, cut down on repetitive tasks. And we're seeing tremendous opportunities in all aspects of the bank in that we use tools like Encino and Slack and Google here for our email platform, which has Gemini built into it. And so all of these things provide AI components that just make our jobs a lot easier. And I am so proud of the team here that have been able to turn over opportunities for use cases, as small as they may be, sometimes they can be really effective in how we go about doing more accurate work in a much more efficient way. The other part of it is that many of the vendors that we work with, specifically whether it's Encino or it's Google or it's Verifin or whomever, are incorporating AI in their platforms. And so we are really seeing a groundswell of opportunities with some of the more modern platforms that are incorporating systems to be able to do things in an incredibly efficient way that may in the future, you know, allow us to scale faster and better with less human resources and at the same time provide additional accuracy, better opportunities and the ability to actually look at how we run the business in a completely different way, as opposed to just trying to design a faster horse. So I really am excited about the opportunities that are coming forward because of some of these changes within the marketplace. And we're using it from the smallest opportunities to some of the largest. And I think it's a, I think it's a great tool going forward.

Yeah, that's great. Well, thank you so much for taking my question. I appreciate it.

You're welcome. That concludes the question and answer session. I would now like to turn the call back over to the management for closing remarks.

Well, I want to thank everyone again today for joining us and for some of those great questions, and we look forward to speaking with you during our second quarter conference call in a few months. Have a great day.

This concludes today's conference call. Thank you for joining. You may now disconnect.