ConnectOne Bancorp, Inc.

After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Siya Vansia, Chief Brand and Innovation Officer. Siya, please go ahead.

Good morning and welcome to today's conference call to review Connect One's results for the second 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 calls 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-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.

Thank you, Siya, and good morning, everyone. I'm pleased to report that our operating performance continued to accelerate this quarter, building on the momentum we established since closing our Long Island acquisition a little over a year ago. Our results demonstrate the execution of our strategy, highlighted by strong revenue and earnings, healthy deposit and loan growth, continued margin expansion and accelerating financial returns. At Connect One Bank, everything starts with a relentless focus on our clients, how we engage them, how we deepen those relationships, and how we make every interaction count. That client-centric approach continues to differentiate us and remains the foundation of our success. Core deposit growth remains a top priority for our team while also driving disciplined, relationship-led growth and others across our loan portfolio. That focus continues to show up in our numbers. We're also seeing a similar trajectory in non-interest income led by SBA and Beaufly with our residential build-out gaining momentum. That's a direct result of the team, infrastructure and the go-to-market plan that we've built over the past year and we expect that momentum to continue. Turning to efficiency, By leveraging agentic tools and optimizing our systems, we're continuously modernizing how we operate. For example, through our recent partnership with Encino, we're deploying digital agents and business intelligence into our loan platform, reducing time spent on some manual processes by over 50%. This capacity is enabling our team to spend more time serving clients, deepening relationships, and driving revenue growth. This is an ongoing effort, and it's core to how we intend to keep Connect One among the most efficient banks in the country while maintaining our high-touch client focus. On capital, we remain disciplined stewards. We continue to generate capital supporting operational flexibility for organic growth, improving our CRE concentration over time as our earnings profile accelerates further, return excess capital to shareholders through both dividends and buybacks. Bill will give us a little more detail on that in a moment. In terms of credit, we made meaningful progress resolving the rent-stabilized relationship we flagged last quarter. We brought a portion of that exposure current, and where a charge-off was warranted, we took it, supported by reserves that we had proactively built well in advance. Bill will walk through this in a little more detail, but I see this as our credit discipline working as intended. We have a long track record of being proactive on situational credits, Looking ahead, we remain attentive to the broader economic environment, including the Fed's path on rates and the pace of economic activity. While external conditions may evolve, our priorities remain unchanged. The strength of our franchise and the dedication of our team position us well for the remainder of 26 and beyond. And with that, Bill will now walk us through some of the quarter's financial performance in a little bit more detail. Bill, take it over.

All right. Thanks, Frank. Good morning, everyone. Thanks for joining our call. As Frank just laid out, we delivered another quarter of accelerating operating performance, which reflected both margin expansion and balance sheet growth. I'll start with our strong operating performance and then provide additional color around our second quarter credit actions. So for the second quarter, We report a net income available to common of $40.2 million or $0.80 per share. That's up more than 10% sequentially from the first quarter's $36.3 million or $0.72 per share. And operating PPNR improved to 1.94% up from 1.81% a quarter ago and 1.52% a year ago. It's all up. Now let me walk through the primary drivers. First, our net interest margin. It widened for the seventh consecutive quarter to 3.42. This was a three basis point sequential increase, building on the 12 basis point widening reported last quarter and 16 basis points of widening two quarters ago. Now the margin increases for this quarter and for future quarters are being driven largely by the repricing of adjustable rate loans. Year to date, For 2026, approximately 700 million of loan balance came up for repricing. That's roughly 100 million per month. About 20% of those loans scheduled to reprice actually paid off, while the remaining 80% were retained in our portfolio at a weighted average rate increase of 255 basis points. That's a strong result on a fairly large sample, and we expect similar dynamics to continue over the next two quarters and into 2027. Now, notwithstanding what I just laid out, I'm going to be conservative here by maintaining our previous quarter's guidance of year-end spot margin of 3.50, as deposit costs not unexpectedly have begun to rise, partially offsetting the improvements from loan repricing. Still, all trends point to wider margins for the rest of 26 and continuing into 27. Now, on the balance sheet, Loans grew sequentially at an annualized rate of approximately 5% period to period, while average loan balances grew faster. They were up 10% annualized, and that contributed to strong growth in net interest income. Client deposits, that's total deposits less brokered, grew 8% annualized on a point-to-point basis, driven by non-interest-bearing demand deposit growth of 20% annualized. Deposit growth has come from a wide range of sources, including commercial and retail accounts, as well as municipalities, particularly in the Southeast Florida market. Now, briefly touching on the rest of the income statement, non-interest income increased to $7.9 million for the quarter, up more than a million sequentially due to higher SBA loan sale gains, and we expect higher levels of non-interest income in the second half. ConnectOne, as you know, is among the industry leaders in expense metrics, and operating expenses continue to be well-controlled, decreasing sequentially to $55.3 million for the quarter, down slightly from $55.7 million last quarter. That decrease, combined with our revenue gains, drove our efficiency ratio even better to 42.7% from 45.4% last quarter and from 49.2% a year ago. Our discipline expense management reflects continued merger synergies as well as operating leverage driven by a cost-conscious philosophy and an optimization of technology. Looking ahead, our internal models forecast about 1.5% sequential growth in each of the next two quarters, and that's due largely to increased staff count. Now let's get to the credit quality. As a reminder, Our first quarter release highlighted a single 63.8 million relationship comprised of nine credits secured by New York City rent stabilized monthly family properties. During the first quarter, they moved into the 30 to 59 day delinquency category. The issue for the borrower centers on administrative issues, including the New York State tax abatement process, which has been delayed in part due to the volume of applicants. We will continue to work with our client this quarter. On that relationship, we received debt service payments on a sizable portion, bringing $20 million of the exposure current, while the remaining $44 million was transferred to non-accrual status, followed by a $13.8 million charge-off based on conservative valuations. In terms of the earnings impact, the $13.8 million charge-off was partially offset by a $9.2 million release of reserves previously allocated to the rent-stabilized subsegment, including this specific relationship. As a result, we added an extra $4.6 million to our provision, bringing the total provision for loan losses for the current quarter higher to $8.3 million versus $5.2 million for the linked quarter. Now, non-performing assets rose to 0.55% of total assets from 0.29 last quarter, and annualized charge loss were 56 basis points for the quarter versus our typical 20 basis point level, with the increases substantially attributable to this one relationship. Now, notwithstanding an increase to non-performing assets, total criticized and classified loans as a percentage of total loans decreased to 1.89 from 2.26 last quarter, and 30 to 89 day delinquencies decreased to just three basis points of total loans, essentially zero. So while this quarter's headline credit metrics may appear mixed, the underlying picture continues to reflect solid overall credit quality. Our allowance for credit losses to loans was 1.18%. pair with 1.3 last quarter. Again, this is just the mechanical effect of utilizing an allocated reserve, not a signal of broader reserve coverage change. Now, I want to give you some additional color on our rent-stabilized position. The rent-stabilized portfolio represents just 5% of our total loans. It's declined by approximately 10% year-over-year, driven by payoffs, paydowns, and aggressive workouts when they're advantageous for us, of course. It's a trajectory we expect to continue. And to further accelerate our de-risking strategy, we are also actively exploring a potential bulk sale, which, depending on market conditions, could prove to be an attractive option. Turning to capital, tangible book values per share increased 3.1% sequentially to $24.66, and it's up over 10%, 12.4% year over year. Very, very strong results. Our tangible common equity ratio advanced to 8.78, already higher by 70 basis points from last June when the first of Long Island merger closed. Year to date, we repurchased 90,000 shares at an average price of $26.21. Although we did not repurchase any shares during the second quarter, we have 550,000 shares remaining under our current authorization, and we will continue to repurchase shares opportunistically. Our board declared a common dividend of 19.5 cents per share. That's the same as last quarter. But with our strong and growing earnings and our current dividend payout ratio sitting in the mid-20% range, we continue to maintain flexibility with regard to dividends and share repurchases. And with that, I'm going to turn it back over to Frank for closing comments.

Thank you, Bill. To wrap things up, I'm proud of what we've accomplished and the momentum we've built across our franchise. We continue to strengthen and diversify our business, We're well positioned with a growing earnings profile, sound credit, fundamentals, and a strong balance sheet. And we're confident in the opportunities ahead to deliver sustainable growth and long-term value for our shareholders. With that, I'll turn the call over for your questions. Operator?

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Fetty Strickland with HubG Group. Your line is open. Please go ahead.

Hey, good morning. You know, just wanted to start on the multifamily loans. I mean, as you mentioned in your opening comments, it seemed like the multifamily buffer really did work as intended here and kind of limited the impact of the income statement. But, you know, it does sound like a portion of the higher provision was still driven by these loans. Did I hear that right, that it was about $4 million or so still related to these loans, kind of in addition to what you tapped from that multifamily reserve?

Yes, that's right. We had an additional $4 million. Okay.

And then the $44 million in non-accruals still remaining from that multifamily group, what does the pathway to work out look like over time?

Well, first, you know, with the charge-off, it's only $30 million. So the total exposure, if you will, going back to the release last quarter when we said there were 63.8 million, 20 million was resolved through a payment. And so those loans are current. And then we reduced the total outstanding by another 13.8 million. So we actually have 30 million outstanding. Look, they're going to continue to work with the city to attain the abatements that they're looking for. And so we're going to continue to work with our client and hopefully we'll be able to resolve that credit over the next year.

Got it. And then just one last one for me real quick. You mentioned potentially a bulk sale of multifamily. How large or small could that be just in terms of either dollars or percentage of the current rent-stabilized multifamily portfolio?

I can't get at the specifics at the current time, but we have some things working for us right now, and that's why we're looking at the option. One is, as you know, a large portion of our rent-regulated portfolio has been marked in the transaction with Percival and marked for both credit and interest rates, so we're in a good position there from what the value is on our books. And the second thing is, is that, you know, based on the demand out there for these assets, we seem to be hitting the bottom, you know, in terms of valuation. So we're going to take a careful look at that, see what we can get accomplished. I think, listen, any kind of reduction here would be a positive in terms of the valuation for the stock.

Got it. Thanks, Phil. I'll step back.

Yep. Your next question comes from the line of Tim DeLacy with Raymond James. Your line is open. Please go ahead.

Hey, good morning, guys. Tim DeLacy. I'm for Danny here. Thanks for taking my questions.

Sure.

Good morning. Good morning. Hey, just hoping you could help us frame up of how much factor payoffs played during the quarter and, you know, maybe help us kind of gauge what you're thinking for the back half of the year in terms of what the loan pipeline looks like.

What was the question about loan growth? About loan payoffs. Loan payoffs. Well, you know, each quarter we have a tremendous amount of originations and payoffs that net to a loan growth rate, you know, in the mid-single digits. So, you know, we're still on track as we've been in the past for that. So it's really hundreds and hundreds of millions of originations and a slightly lower number of payoffs that lead to the increases We expect that to continue over the course of the year. We had a pretty strong loan growth this quarter. Hard to say exactly where it's going to be because there's lots of ins and outs, but still.

There seems to be momentum around the loan pipeline itself, so the things coming into the top of the funnel are giving us a real good sense that the back half of 2026 will continue with the momentum that we saw building through the first half.

Understood. And, you know, kind of taking that all together, does the mid single digit kind of pace for 2026 still stand for you guys today?

Yes. I mean, you know, for your model, I think that's a good guess. Okay.

Okay. I appreciate that, Bill. You know, and maybe just flipping over, you know, Frank, I heard you in your prepared remarks on the CRE concentration ratio and We had discussed before maybe trying to get the concentration ratio below 400% sometime in 2026. So just curious if there's still a desire to get that ratio sub 400% or have thoughts kind of changed here in the current environment?

So a couple of things there. One, I don't believe I said that we would get it down in 2026. I said it would continue to trend down through this year. I think our emphasis is still around diversifying the portfolio over time to see that trend continue to trend lower. And at some terminal point in the future, I don't know if that's in 27 or 28, see that number approach or get below 400%. All that being said, we're still in the CRE business. We have a pretty strong construction portfolio and business model there. We're well respected in the industry. We represent some of the best names in the Northeast relative to that portfolio. And so we're going to continue to put resources and continue to, we'll actually continue to grow the portfolio, but at the same time, it'll shrink relative to the size that it represents for the entire balance sheet. We're seeing growth in other areas of the bank as well. So a combination of increasing capital, building other parts of the portfolio, and being very disciplined about, you know, what new CRE opportunities we bring on board, I think we'll see that trend of having the CRE ratio continue to decline.

Okay. I appreciate that color, Frank. and you know maybe last one just staying here on capital um here you guys on the continued appetite for buybacks here but just curious if there's any early thoughts about you know potentially redeeming or replacing preferred shares they're scheduled to reset here in September yeah well we have not made a final decision on the timing of that yet and um the market will know when the time comes okay well appreciate the color guys I'll step back thank you

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

Hey, good morning. Thank you for taking my question. On the credit side, it seems like there's just been a little bit of a pickup in these larger one-offs across the banks this quarter, not just in multifamily. Are there any other problem loans you guys are watching that could be at risk of a and a larger write-down near term?

Well, I think this was a particularly large one for us. When you look historically, we haven't had too many of these. So from time to time, there are charge-offs. But I would expect our charge-off levels to revert back to what we've been experiencing over the past couple of years.

Okay, good to hear.

And the comparison lately has been to, you know, been to a zero credit charge off environment, which is quite unrealistic.

Yeah, it's a tough comparison. And then changing topics here, is there any interest, can you update us on your thoughts around, you know, M&A and your interest in participation, maybe looking at another bank?

Right now, I have to tell you, with what we're working on currently, our organic growth has really been the focus of what we're doing these days. And it's paying a lot of dividends. We're building a terrific pipeline across all of our markets. There's a lot of opportunities in the marketplaces that we operate in. For right now, that's where our focus is. I think the numbers have proven that the transaction we did last year is proving to be beneficial going forward. It's opened up a fantastic market for us to take advantage of. In the future, obviously, just like we have through our last 21 years of existence, will be opportunistic when those opportunities present themselves. At this time, though, I think the organic, you know, the organic machine that we have is really, really doing well.

Yeah, makes sense. Thank you, Frank.

Your next question comes from the line of Justin Crowley with Piper Sandler. Your line is open. Please go ahead.

Hey, good morning, guys. This is Bader Hitchley on for Justin Crowley. I had a question about the deposit costs, you know, given the current rate environment. And I know this quarter, you know, deposit costs have gone up. You know, how are you guys modeling deposit beta sensitivity in the coming quarters? And is it fair to assume, you know, that deposit costs are, you know, going up in the coming quarters or how should we think about that?

Well, it's hard to predict exactly, but the trends have been up just up slightly. You know, like our, you know, our CD rates are at 4% now. At this point, I was hoping it to be lower. But in order to compete, we need to be at that level. So I think you saw for the quarter, our total deposit costs were up, you know, several basis points. You know, part of it is the mix of deposits. We've had some strong growth in non-transparent demand. So to the extent we have will be able to maintain our deposit levels. But having said that, the main issue is what's going to happen to net interest income and net interest margin. And we still believe that the repricing that's going on in the portfolio for the next year and a half is going to outweigh any increase in deposit costs. Now, if rates are cut, by the Fed in the future. That's going to help our deposit costs. If rates are increased, it could hurt our deposit costs. But the same token, we're going to earn more on our loan balances. And so the net effect is going to be muted on that side. So we just, I got to tell you, overall, we're very bullish on the direction of our margin.

Got it. Thanks. And then one follow-up with regard to credit. Thank you for the commentary on the rent-regulated portion of the loan book. Outside of the rent-regulated, criticized assets have trended downward. With the remainder of the portfolio, are there any pockets of concern you're monitoring closely, or how are you thinking about the rest of the book?

No, there's really no one area that has particular focus. You know, some credits pop up from time to time. They've been included in our chart draft numbers for the past few years, but nothing else in the portfolio that we're particularly concerned about.

Got it. Thanks. That's all my questions. Thank you. Okay.

Great. Thank you. Thank you.

As a reminder, if you would like to ask a question, please press star 1 to raise your hand. Your next question comes from the line of Tyler Cacciatore with Stevens, Inc. Your line is open. Please go ahead.

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

How are you doing, Tyler?

Good, thank you. Just thinking about the NIM longer term, how much longer might we see fixed asset repricing benefits to the NIM and overall NIM expansion? I'm more focused on 2028, given five years prior. In 2023, loan yields kind of spiked. So just thinking as we start to roll some of these into 2028, I'm curious about what the impacts are.

No, absolutely. Let me give you how long it's going to go on. It's about $1.5 billion. about a billion five and 500 million is in 2028 in the first I'd say the first six months of 28.

Okay great and then yeah yeah and then just lastly for me as you work through the kind of trying to sell these regulated multi-family loans How are current appraisals comparing to the marks you established at the time of the FLIC acquisition? And then with the rent freeze currently set through 2027, does that kind of factor into the timing of these sales at all?

Well, let me first answer, yeah. From the marks, we've been pretty right on. You know, I have to tell you, it was a difficult exercise when we did the transaction, trying to come up with valuations on a loan-by-loan basis. But so far, we've been pretty much right on target. So... possibly because we were aggressive in the acquisition but it served us well because we seem to be on track.

As far as the rent freeze goes, as I'm sure you saw yesterday, there was a pretty substantial and very well thought out lawsuit challenging the arbitrary and capricious nature of that rent freeze. I think it's the first time that a realistic Thank you very much. It's obvious that if there is a rent freeze for the next two or three years or four years, that that would probably be a negative relative to the portfolio or to some portion of the portfolio. But I think this is a major component of the story that's going to bear careful monitoring.

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

Thank you.

Your next question comes from the line of Fetty Strickland with Hupti Group. Your line is open. Please go ahead.

Hey, just had one follow-up, really on Florida and geography down there. I know you've been building out the franchise down there the last couple of quarters, LTO in Orlando and the existing presence down in South Florida. Can you talk about maybe just the level of opportunity you see down there in terms of growth and of loans, deposits, and maybe even fee income?

Yeah, I think it's a great market for us. A lot of the dynamic of the economy in Florida appears to be very favorable and continues to be favorable, especially in the markets that we serve. So I do see that, you know, that the emphasis in the Florida market for us for Connect One continuing and we're continuing to hire good seasoned bankers. We're continuing to attract high quality clients within the market itself organically. and I think it'll continue to contribute to the bottom line over time. The pricing in that market is competitive. It's becoming almost as competitive as it is here in the Northeast, but that's not something we're immune to. And so I'm pretty optimistic about, you know, what it will represent as time moves forward.

All right, great. Thanks for the additional color setback.

You're welcome.

We have reached the end of the question and answer session. I will now turn the call back to management for closing remarks.

Well, thank you and thanks again for joining us today. And we look forward to speaking with you during our third quarter earnings conference call in a few months. So enjoy your summer and thank you again for joining today.

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