ConnectOne Bancorp, Inc. Q2 FY2026 earnings call

Overall Strategic Direction & Client Focus

• The bank continues to accelerate operating performance, building on momentum from the Long Island acquisition closed just over one year prior.
• Core deposit growth is a top strategic priority, alongside disciplined, relationship-led growth across the loan portfolio.
• Management maintains a long-term focus on delivering sustainable growth and long-term shareholder value, with a strong, diversified franchise position.

Operational & Technology Modernization

• The bank is continuously modernizing operations via agentic AI tools and system optimization to remain one of the most efficient U.S. banks while retaining high-touch client service.
• A new partnership with Encino is deploying digital agents and business intelligence tools to the bank's loan platform, cutting time spent on manual processes by over 50%, freeing staff to focus on client service and revenue generation.

Capital Management

• Management acts as disciplined capital stewards: generated capital supports organic growth, reduces commercial real estate (CRE) concentration over time, and enables returning excess capital to shareholders via dividends and opportunistic share repurchases.
• The board maintained the common dividend at 19.5 cents per share, with a current mid-20% payout ratio that preserves flexibility for future capital actions.
• As of Q2 2026, 90,000 shares have been repurchased year-to-date at an average price of $26.21, with no repurchases in Q2; 550,000 shares remain under the current authorization.

Credit Quality Management

• Meaningful progress was made resolving a flagged $63.8 million delinquent relationship secured by New York City rent-stabilized multifamily properties: $20 million of the exposure was brought current, $13.8 million was charged off, and $30 million remains in non-accrual status.
• The $13.8 million charge-off was partially offset by a $9.2 million release of previously allocated reserves for the rent-stabilized subsegment, resulting in a net $4.6 million addition to the quarter's loan loss provision.
• Overall underlying credit quality remains solid: total criticized and classified loans as a percentage of total loans decreased to 1.89% from 2.26% last quarter, and 30-89 day delinquencies fell to 3 basis points of total loans (near zero).
• The rent-stabilized multifamily portfolio currently represents 5% of total loans, and has declined 10% year-over-year via payoffs, paydowns, and proactive workouts; the bank is actively exploring a potential bulk sale of the portfolio to accelerate de-risking.

This transcript does not break out performance across multiple distinct product segments. All financial results are reported on an aggregate firm-wide basis for the second quarter of 2026: net income available to common shareholders was $40.2 million ($0.80 per share), up 10.7% sequentially from $36.3 million ($0.72 per share) in Q1 2026. Net interest income grew with net interest margin expanding 3 basis points sequentially to 3.42%, marking the seventh consecutive quarter of margin expansion. Non-interest income was $7.9 million, up over $1 million sequentially, driven by higher SBA loan sale gains. Operating expenses decreased sequentially to $55.3 million from $55.7 million in Q1 2026, bringing the efficiency ratio down to 42.7% from 45.4% last quarter and 49.2% year-over-year. Loans grew 5% annualized sequentially (average loan balances grew 10% annualized), client deposits grew 8% annualized, with non-interest-bearing demand deposits growing 20% annualized. Net income per share: 2.4% year-over-year increase, tangible book value per share increased 3.1% sequentially to $24.66 (up 12.4% year-over-year).

• Management maintained its prior guidance for a year-end 2026 net interest margin of 3.50%, despite seven consecutive quarters of margin expansion, to account for recently rising deposit costs that partially offset loan repricing gains; management still expects margin expansion to continue through the rest of 2026 and into 2027.
• ~$700 million of adjustable rate loans have repriced year-to-date 2026 (an average of ~$100 million per month): 20% of repricing loans paid off, while 80% were retained at a weighted average rate increase of 255 basis points; similar dynamics are expected for the remainder of 2026 and into 2027, with $1.5 billion in total additional repricing scheduled through the first half of 2028.
• Operating expenses are forecast to grow 1.5% sequentially in each of the next two quarters, driven primarily by increased staff count.
• Loan growth is expected to continue at a mid-single digit annualized pace for full-year 2026, consistent with prior outlooks, with strong pipeline momentum supporting continued growth in the second half of 2026.
• Non-interest income is expected to rise in the second half of 2026.
• CRE concentration as a percentage of total assets is expected to continue trending lower over time, but is not projected to fall below 400% until 2027 or 2028.

• A single large delinquent rent-stabilized multifamily relationship increased headline credit metrics in Q2 2026: non-performing assets rose to 0.55% of total assets from 0.29% last quarter, and annualized charge-offs rose to 56 basis points from the bank's typical 20 basis point level, with all increases attributable to this single exposure.
• Rising deposit costs are partially offsetting gains from loan repricing, creating downward pressure on net interest margin expansion.
• A New York state rent freeze on rent-stabilized units is currently in place through 2027, which could negatively impact valuations for the remaining rent-stabilized multifamily portfolio; a major lawsuit challenging the rent freeze is ongoing and being closely monitored.
• Broader macroeconomic uncertainty, including the Federal Reserve's future interest rate path and overall economic activity, creates uncertainty for future performance.
• CRE concentration remains elevated relative to management's long-term target, requiring continued deliberate de-risking over multiple years.

Q: The rent-stabilized multifamily charge-off was partially offset by existing reserves, leaving a $4.6 million net hit to Q2 earnings. What is the workout path for the remaining $30 million of this exposure, and how large could a potential bulk sale of the broader rent-stabilized portfolio be?

A: The borrower will continue working with New York City to secure delayed tax abatements, and the bank will continue collaborating with the borrower to resolve the remaining exposure over the next 12 months. Management cannot share specific details of a potential bulk sale at this time, but notes portfolio values are already marked to market from the Percival acquisition, and current market valuations appear to be near a bottom, making a sale an attractive de-risking option that would benefit shareholder value.

Q: The bank has targeted reducing CRE concentration over time. Is the goal to hit below 400% in 2026, and what is the strategic outlook for the CRE business?

A: Management never targeted hitting below 400% in 2026, only that the ratio would continue trending lower through 2026. The long-term goal is to approach or fall below 400% in 2027 or 2028. The bank will remain active in the CRE business and grow the portfolio, but the ratio will decline as total assets grow via expansion of other business lines, increased capital, and disciplined underwriting for new CRE additions.

Q: Are there any other large problem credits being monitored that could lead to significant near-term write-downs, and what is the bank's current outlook for M&A?

A: This Q2 charge-off was an unusually large one-off for the bank, and charge-off levels are expected to revert to the low, historical average seen over the past several years. There are no other large at-risk credits being monitored. Current management focus is entirely on organic growth, which is performing very well and capitalizing on the new market access from last year's acquisition. The bank will remain opportunistic toward future M&A as attractive opportunities arise, but it is not a current priority.

Q: How should investors model deposit beta and deposit costs for coming quarters, and what is the outlook for net interest margin?

A: Deposit costs have trended slightly upward recently, as the bank has had to raise CD rates to 4% to remain competitive. However, management expects loan repricing gains over the next 18 months will outweigh any deposit cost increases. Regardless of whether the Fed cuts or raises rates, the net impact on margin will be muted, and management remains bullish on continued direction expansion for net interest margin.