ConnectOne Bancorp, Inc. (CNOB) Earnings Call Transcript & Summary

Thank you. Hello everyone. Thank you for joining us and welcome to the Connect One Bancor Inc. Second Quarter 2026 Earnings Call. 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. withdraw your question, press star one again. I will now hand the conference over to Sia Vansia, Chief Brand and Innovation Officer. Sia, 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, and may be a 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, Sia, 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 and while also driving disciplined relationship led growth 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 Bowfly with our residential build out 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. 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, and 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 dedication of our team position as 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 away. 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 reported net income available to comment of 40.2 million or 80 cents per share. That's up more than 10% sequentially from the first quarter, 36.3 million or 72 cents per share. And operating PPNR improved to 1.94% up from 1.8% 8.1% 1.81% A QUARTER AGO AND 1.52% A YEAR AGO. IT'S ALL UP. LET ME WALK THROUGH THE PRIMARY DRIVERS. FIRST, OUR NET INTEREST MARGIN. IT WIDENED FOR THE 7TH CONSECUTIVE QUARTER TO 3.42. THIS IS A THREE BASIS POINT SEQUENTIAL INCREASE BUILDING ON we reported last quarter and 16 basis points of widening two quarters ago. Now the margin increases for this quarter and for future quarters of 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, 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. 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 seven point nine million for the quarter, up more than a million sequentially due to higher SBA loan sale gains. We expect higher levels of non-interest income in the second half. Connect One, 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 velocity and an optimization of technology. our internal models forecast about one and a half percent sequential growth in each of the next two quarters, and that's due largely to increase 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 stable THE FIRST QUARTER THEY MOVED INTO THE 30 TO 59 DAY DELINGUANCE CATEGORY. THE ISSUE FOR THE BORROWER CENTERS ON ADMINISTRATIVE ISSUES INCLUDING NEW YORK STATE TAX ABATEMENT PROCESS WHICH HAS BEEN DELAYED IN PART TO THE VOLUME OF APPLICANTS. WE WILL CONTINUE TO WORK WITH OUR CLIENTS. 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 link quarter. Now, non-performing assets rose to 0.55% of total assets from 0.29 last quarter, and annualized charge drops 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 criticize and classify loans as a percentage of total loans that decreased to one point eight nine from two point two six last quarter and thirty to eighty nine days the length of these 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% paired 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. 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, PAY DOWNS AND AGGRESSIVE WORKOUTS WHEN THEY'RE ADVANTAGEOUS FOR US OF COURSE. IT'S A TRAJECTORY WE CONTINUE WE EXPECT TO CONTINUE. 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 INCREASE 3.1% SEQUENTIALLY TO $24.66. AND IT'S UP OVER 10%, 12.4% YEAR OVER YEAR. VERY, VERY STRONG RESULT. OUR TANGIBLE COMMON EQUITY RATIO ADVANCED TO 8.78, ALREADY HIGHER BY 70 BASIS POINTS FROM LAST JUNE WHEN THE FIRST OF LONG ISLAND MERGED. are 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. declare the 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 ratios 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 and close the comments. Thank you, Bill. To wrap things up,.

I'm proud of what we've accomplished in the momentum we 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 one to raise your hand. 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. that right that it was about four million or so still related to these loans uh kind of in addition to what she tapped uh 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 is 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 PAYMENTS AND SO THOSE LONGS ARE CURRENT AND THEN WE REDUCED THE TOTAL OUTSETTING BY ANOTHER 13.8 MILLION million so we actually have 30 million outstanding um look they're going to continue to work with the city to uh 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 you know over the next year.

Got it. And then just one last one for me real quick. Just 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 into specifics at the moment.

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, of our rent regulated portfolio has been marked in the, in the transaction with first of all, and marked for both credit and interest rates. So we're in a good position there from a, 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. 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 kind of gauge what you're thinking for the back half of the year in terms of what the long pipeline looks like today.

What was the question about loan growth? About loan payoffs. Loan payoffs. Well, each quarter we have a tremendous amount of originations and payoffs that net to a loan growth rate in the mid single digits. So 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. And 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 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, for your model, I think that's a good guess.

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, you know, we had discussed before, you know, maybe trying to get the concentration ratio below 400% sometime in 2026. But so just curious if that'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 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 and continue to, will 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, you know,.

the CRE ratio continue to decline. Okay. I appreciate that color, Frank. And, you know, maybe last one just staying here on capital 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 the preferred shares that are scheduled to reset here in September.

WE HAVE NOT MADE A FINAL DECISION ON THE TIMING OF THAT DECISION ON THE TIMING OF THAT YET. YET. AND, WELL, THAT'S THE FIRST THING AND, WELL, THAT'S THE FIRST THING THAT WE'RE GOING TO DO.

so as Marco 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.