ConnectOne Bancorp, Inc. (CNOB)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of June 30, 2026 and December 31, 2025. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Cautionary Statement Concerning Forward-Looking Statements

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp Inc. and its subsidiaries, including statements preceded by, followed by, or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and credit loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected or may be adversely effected by policy uncertainties, including regarding the impact of tariffs; (5) political developments, sovereign debt problems, wars or other hostilities such as the ongoing conflict between Ukraine and Russia and the United States and Iran, and instability in the Middle East, may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp is engaged or the business of our clients, such as changes affecting the owners of rent stabilized multi-family buildings in New York City; (7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; (10) the outcome of regulatory and legal investigations and proceedings may not be anticipated, and (11) the impact of health emergencies or natural disasters on our employees and operations, and those of our customers. Further information on other factors that could affect the financial results of ConnectOne Bancorp is included in Item 1a. of ConnectOne Bancorp’s Annual Report on Form 10-K as amended and updated in ConnectOne Bancorp’s other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission’s website at http://www.sec.gov and/or from ConnectOne Bancorp, Inc.

Critical Accounting Policies and Estimates

Our accounting policies are integral to understanding the results reported. We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. As of June 30, 2026, there have been no material changes to our critical accounting policies as compared to the critical accounting policies disclosed in our most recent Annual Report on Form 10-K. Reference is made to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025.

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Operating Results Overview

Net income (loss) available to common stockholders for the three months ended June 30, 2026 was $40.2 million, as compared to ($21.8) million for the prior-year period. The Company’s diluted earnings (loss) per share was $0.80 for the three months ended June 30, 2026 compared with ($0.52) for the prior-year period. The $62.0 million increase in net income available to common stockholders and the $1.32 increase in diluted earnings per share were due to a $34.8 million increase in net interest income, a $27.4 million decrease in provision for credit losses, a $2.7 million increase in noninterest income and a $18.2 million decrease in noninterest expenses, which was partially offset by a $21.2 million increase in income tax expense. The reduction in provision for credit losses primarily reflects the initial $27.4 million provision recognized in the prior-year period upon closing the acquisition of The First of Long Island Corporation ("FLIC"). Similarly, the $18.2 million decrease in noninterest expenses was driven by $30.7 million in merger and restructuring charges recognized in the prior-year period, partially offset by the inclusion of ongoing FLIC operating expenses in the current period. Overall, year-over-year variances across all income statement line items were heavily impacted by the merger with FLIC.

Net income (loss) available to common stockholders for the six months ended June 30, 2026 was $76.5 million, as compared to ($3.1) million for the prior-year period. The Company’s diluted earnings (loss) per share were $1.51 for the six months ended June 30, 2026 compared with ($0.08) for the prior-year period. The $79.5 million increase in net income available to common stockholders and the $1.59 increase in diluted earnings per share were due to a $77.8 million increase in net interest income, a $25.7 million decrease in provision for credit losses and a $5.1 million increase in noninterest income, which was partially offset by a $28.7 million increase in income tax expense and a $0.3 million increase in noninterest expenses. The reduction in provision for credit losses primarily reflects the initial $27.4 million provision recognized in the prior-year period upon closing the acquisition of FLIC. Noninterest expenses were essentially flat year-over-year, as the prior-year period included $32.1 million in merger and restructuring charges associated with the transaction; excluding these prior-year charges, core noninterest expenses increased due to operating the larger combined franchise for the full six-month period in 2026. Overall, performance variances across both periods reflect the significant expansion of the franchise following the FLIC merger.

Net Interest Income and Margin

Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid on deposits and borrowings, which support these assets. Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (including interest earned on tax-free loans and on obligations of state and local political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable assets. Net interest margin is defined as net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.

Fully taxable equivalent net interest income for the second quarter of 2026 increased $35.0 million, or 43.9%, from the prior-year period, due to a 36 basis-point widening of the net interest margin to 3.42% from 3.06%, and a 28.5% increase in average interest earning assets. The margin also benefited from a 16 basis-point increase in the yield on interest-earning assets and a 32 basis-point decrease in the average costs of deposits, including noninterest-bearing deposits. The year-over-year expansion in both net interest margin and average earning assets was primarily driven by the inclusion of a full quarter of FLIC's operating results in the second quarter of 2026, compared to only one month of activity in the prior-year period following the mid-quarter closing of the merger.

Fully taxable equivalent net interest income for the six months ended June 30, 2026 increased $78.4 million, or 53.6%, from prior-year period, due to a 41 basis-point widening of the net interest margin to 3.41% from 3.00%, and a 35.1% increase in average interest-earning assets. The margin also benefited from a 17 basis-point increase in the yield on interest-earning assets and a 40 basis-point decrease in the average costs of deposits, including noninterest-bearing deposits. Similarly, performance for the six-month period reflects six full months of the combined balance sheet in 2026 compared to just one month of FLIC activity in the prior-year period, significantly benefiting both average earning asset volumes and net interest margin.

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The following tables present for the three and six months ended June 30, 2026 and 2025, the Company’s average assets, liabilities and stockholders’ equity. The Company’s net interest income, net interest spread and net interest margin are also reflected.

Average Statements of Condition with Interest and Average Rates

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Item 7. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document.

Cautionary Statement Concerning Forward-Looking Statements

See Item 1 of this Annual Report on Form 10-K for information regarding forward-looking statements.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company considers the allowance for credit losses and related provision to be critical to our financial results. For information on our significant accounting policies, see Note 1a in the Notes to Consolidated Financial Statements:

Allowance for Credit Losses and Related Provision

The allowance for credit losses is an estimate of current expected credit losses considering available information relevant to assessing collectability of cash flows over the contractual term of the financial assets necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The loan portfolio also represents the largest asset type on the Company’s Consolidated Statements of Financial Condition.

Management believes the following information may enable investors to better understand the changes in our allowance for credit losses for loans. The Company’s allowance for credit losses ("ACL") for loans totaled $154.3 million and $82.7 million as of December 31, 2025 and 2024, respectively. The $71.6 million increase in the ACL for loans was primarily due to the FLIC merger with $43.3 million of allowance being recorded through goodwill related to the purchased credit-deteriorated loans and $27.3 million reflecting the initial provision for credit losses.

The quantitative component of our ACL for collectively evaluated loans increased by $13.4 million as of December 31, 2025 when compared to December 31, 2024. This increase was primarily attributable to an increase in collectively evaluated loans of $3.0 billion due to the FLIC merger. The qualitative component of our ACL for loans, which is largely based on management’s judgment of qualitative loss factors, increased by $17.2 million on an absolute basis, over the same period-of-time. In addition, qualitative risk factor trends generally increased over 2025.

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The Company’s allowance for credit losses for collectively evaluated loans totaled $111.8 million as of December 31, 2025, which included $94.4 million of allowance related to commercial and commercial real estate loans. Of the $94.4 million allowance related to commercial and commercial real estate loans, $47.9 million was attributable to qualitative loss factors. Changes in management's judgment of qualitative loss factors could result in a significant change to the ACL for loans. As described in Note 1a to our financial statements filed as part of this Annual Report on Form 10-K, qualitative loss factors are applied to each portfolio segment with the amounts judgmentally determined by the relative risk to the most severe loss periods identified in the historical loan charge-offs of a peer group of similar-sized regional banks. As of December 31, 2025, on a weighted average basis the most severe historical loss rate for our commercial and commercial real estate loans were 2.38% and 1.94%, respectively.

The Company’s quantitative component of allowance for credit losses for collectively evaluated loans is calculated with an economic forecast sourced from Moody’s. Management performed a hypothetical sensitivity analysis to understand the impact of changes in the economic forecast as a key input on our allowance for credit losses for collectively evaluated loans. Within the various economic scenarios considered for this hypothetical sensitivity analysis, as of December 31, 2025, the quantitative estimate of the allowance for credit loss for collectively evaluated loans would increase by approximately $54.9 million under sole consideration of an adverse Moody’s economic forecast. The hypothetical sensitivity calculation reflects the sensitivity of the modeled allowance estimate to macroeconomic forecast data but lacks other qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process. As such, this does not necessarily reflect the nature and extent of future changes in the allowance for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.

Our allowance for credit losses for individually analyzed loans is determined on an individual basis using the present value of expected cash flows discounted using the loan’s effective interest rate or, for collateral-dependent loans, the fair value of the collateral, less estimated selling costs, as applicable. As of December 31, 2025, the Company’s allowance for credit losses on individually analyzed loans decreased by approximately $0.8 million when compared to December 31, 2024.

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Fair Value of Loans Acquired in a Business Combination

On June 1, 2025, the Company completed the acquisition of FLIC, which was accounted for as a business combination using the acquisition method of accounting. As a result of the merger, the Company recorded the acquired loans at their estimated fair value. The fair value of acquired loans is based on a discounted cash flow methodology that considers factors such as the specific type of loan and related collateral. This process requires management’s judgment regarding several key estimates, including:

Uncertainties Regarding Estimates:

Management relies on economic forecasts, internal valuations, and other relevant factors available at the time of the merger to determine the assumptions used to calculate the fair value of the acquired loans. These estimates—specifically those regarding discount rates and future cash flows—are inherently subjective. Actual results may differ from these estimates if economic conditions in the Long Island and New York City regions deviate from management's original projections.

Impact on Financial Condition and Results of Operations:

The estimate of fair value for acquired loans is one of the primary components in determining the $11.9 million in goodwill recorded from the FLIC merger. In future income statement periods, the Company’s results of operations will be impacted by the following:

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Overview and Strategy

We serve as a holding company for the Bank, which is our primary asset and only operating subsidiary. We follow a business plan that emphasizes the delivery of customized banking services in our market area to clients who desire a high level of personalized service and responsiveness. The Bank conducts a traditional banking business, making commercial loans, consumer loans and residential and commercial real estate loans. In addition, the Bank offers various non-deposit products through non-proprietary relationships with third party vendors. The Bank relies upon deposits as the primary funding source for its assets. The Bank offers traditional deposit products.

Many of our client relationships start with referrals from existing clients. We then seek to cross sell our products to clients to grow the client relationship. For example, we will frequently offer an interest rate concession on credit products for clients that maintain a noninterest-bearing deposit account at the Bank. This strategy has helped maintain our funding costs and the growth of our interest expense even as we have substantially increased our total deposits. It has also helped fuel our significant loan growth. We believe that the Bank’s continued growth and profitability demonstrate the need for and success of our brand of banking.

Our results of operations depend primarily on our net interest income, which is the difference between the interest earned on our interest-earning assets and the interest paid on funds borrowed to support those assets, primarily deposits. Net interest margin is the difference between the weighted average rate received on interest-earning assets and the weighted average rate paid to fund those interest-earning assets, which is also affected by the average level of interest-earning assets as compared with that of interest-bearing liabilities. Net income is also affected by the amount of noninterest income and noninterest expenses.

General

The following discussion and analysis present the more significant factors affecting the Company’s financial condition as of December 31, 2025 and 2024 and results of operations for each of the years in the three-year period ended December 31, 2025. The MD&A should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and other information contained in this report.

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Operating Results Overview

Net income available to common stockholders for the year ended December 31, 2025 was $74.4 million, an increase of $6.7 million, or 9.8%, compared to net income of $67.8 million for 2024. Diluted earnings per share were $1.63 for 2025, a 7.4% decrease from $1.76 for 2024.

The change in net income from 2024 to 2025 was attributable to the following:

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