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 March 31, 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 rest 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 March 31, 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 available to common stockholders for the three months ended March 31, 2026 was $36.3 million, as compared to $18.7 million for the prior-year period. The Company’s diluted earnings per share were $0.72 for the three months ended March 31, 2026, as compared with diluted earnings per share of $0.49 for the prior-year period. The $17.6 million increase in net income available to common stockholders and the $0.23 increase in diluted earnings per share were due to a $43.0 million increase in net interest income and a $2.3 million increase in noninterest income, which was partially offset by an $18.6 million increase in noninterest expenses, a $7.5 million increase in income tax expense and a $1.7 million increase in provision for credit losses. The increases in net interest income and noninterest expenses were primarily driven by a full three-month impact of the FLIC acquisition in 2026, compared to the pre-merger period in 2025.

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 first quarter of 2026 increased $43.4 million, or 65.2%, from prior-year period, due to a 46 basis-point widening of the net interest margin to 3.39% from 2.93%, and a 42.7% increase in average interest earning assets. The increase in average interest-earning assets was primarily due to the full-period impact of assets acquired in the FLIC merger. The margin also benefited from a 20 basis-point increase in the yield on interest-earning assets and a 49 basis-point decrease in the average costs of deposits, including noninterest-bearing deposits.

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The following table presents for the three months ended March 31, 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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Noninterest Income

Noninterest income totaled $6.8 million for the three months ended March 31, 2026, compared with $4.5 million for prior-year-period. The increase was primarily due to a $1.4 million increase in BOLI income and a $1.3 million increase in deposit, loan and other income, which was partially offset by a $0.4 million decrease in net gains (losses) on equity securities. The growth in deposit, loan and other income was primarily attributable to the expanded scale of operations following the merger with FLIC.

Noninterest Expenses

Noninterest expenses totaled $57.9 million for the three months ended March 31, 2026, compared with $39.3 million for prior-year period. The increase was primarily du

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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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Net income available to common stockholders for the year ended December 31, 2024 was $67.8 million, a decrease of $13.2 million, or 16.3%, compared to net income of $81.0 million for 2023. Diluted earnings per share were $1.76 for 2024, a 15.0% decrease from $2.07 for 2023.

The change in net income from 2023 to 2024 was primarily attributable to the following:

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Net Interest Income

Fully taxable equivalent net interest income for 2025 totaled $357.3 million, an increase of $106.6 million, or 42.5%, from 2024. The increase in net interest income was due to a 39 basis-point widening of the net interest margin to 3.11% from 2.72%. The margin benefitted from stable rates on interest-earning assets, despite a declining rate environment, combined with a 58 basis-point decrease in the average cost of deposits, including noninterest-bearing deposits, and a 43 basis-point decrease in the average cost of borrowings. These were partially offset by an increase in both the cost and average balance of outstanding subordinated debt.

Fully taxable equivalent net interest income for 2024 totaled $250.7 million, a decrease of $7.6 million, or 2.9%, from 2023. The decrease in net interest income was due to a 10 basis-point contraction in the net interest margin to 2.72% from 2.82%, partially offset by a $43.0 million, or 0.5%, increase in average interest-earning assets. The net interest margin contraction was due to a 49-basis point increase in the average cost of deposits, including noninterest-bearing demand deposits, to 3.23%, and was partially offset by a 29 basis-point increase in the loan portfolio yield to 5.86%.

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Average Balance Sheets

The following table sets forth certain information relating to our average assets and liabilities for the years ended December 31, 2025, 2024 and 2023 and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.

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Rate/Volume Analysis

The following table presents, by category, the major factors that contributed to the changes in net interest income. Changes due to both volume and rate have been allocated in proportion to the relationship of the dollar amount change in each.

Provision for Credit Losses

In determining the provision for credit losses, management considers national and local economic trends and conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; effects of changes in lending policies, trends in volume and terms of loans; levels and trends in delinquencies, individually analyzed loans and net charge-offs and the results of independent third party loan reviews.

The provision for credit losses was $47.0 million for the year ended December 31, 2025, an increase of $33.2 million from $13.8 million in 2024. This increase was primarily driven by an initial $27.4 million provision for credit losses associated with the FLIC merger.

The provision for credit losses was $13.8 million for the year ended December 31, 2024, an increase of $5.6 million from $8.2 million in 2023. This increase was due to increases in individually evaluated allowance, partially offset by a decrease in the level of collectively evaluated allowance.

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Noninterest Income

Noninterest income for 2025 increased by $18.3 million, or 109.6%, to $35.1 million for the year ended December 31, 2025, compared to $16.7 million in 2024. The growth was primarily driven by a $6.6 million one-time benefit from the Employee Retention Tax Credit, a federal program under the CARES Act and a $3.5 million gain related to the curtailment of the FLIC defined benefit pension plan, which was frozen on September 30, 2025. Further contributing to the increase were a $4.8 million increase in deposit, loan and other income, a $2.4 million increase in income on bank owned life insurance and a $1.7 million increase in net gains on equity securities. These were partially offset by a $0.7 million decrease in net gains on sale of loans held-for-sale.

Noninterest income for 2024 increased by $2.7 million, or 19.5%, to $16.7 million from $14.0 million in 2023. The increase was primarily due to increases in net gains on sale of loans held-for-sale of $1.0 million, bank owned life insurance of $0.8 million, deposit, loan and other income of $0.8 million and net gains on equity securities of $0.1 million.

Noninterest Expense

Noninterest expenses increased $76.8 million in 2025, driven primarily by $32.9 million increase in merger-related expenses and a $21.4 million increase in salaries and employee benefits. Other notable increases included $6.7 million in amortization of core deposit intangibles and $4.9 million in occupancy and equipment expense. Information technology and communications, professional and consulting, and other expenses increased by $2.4 million, $2.4 million, and $1.9 million, respectively. The remaining increase was attributable to a $1.4 million increase in FDIC insurance, $1.0 million in restructuring and exit charges, $0.8 million increase in both branch closing and marketing expenses, and a $0.3 million restructuring charge for bank owned life insurance.

Noninterest expenses for 2024 increased by $7.8 million, primarily due to increases in information technology and communications expenses of $3.2 million, attributable to additional investments in technology, equipment and software. Additionally, there were increases in salaries and employee benefits of $1.8 million, attributable to an increase in incentive compensation accruals and an increase in expenses related to the Bank’s Supplemental Executive Retirement Plan. Finally, there were increases in merger expenses of $1.6 million, due to the planned merger with FLIC, professional and consulting expenses of $0.9 million, occupancy and equipment of $0.7 million, branch closing expenses of $0.5 million, and marketing and advertising of $0.5 million, partially offset by decreases in FDIC insurance of $1.2 million, due to FDIC special assessment charge in 2023, and amortization of core deposit intangible of $0.2 million.

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Income Taxes

Income tax expense was $32.3 million for 2025 compared to $24.7 million for 2024 and $30.0 million for 2023. The increase in income tax expense in 2025 when compared to 2024 and 2023 was primarily the result of higher taxable income and higher statutory tax rates due to the FLIC merger. The effective tax rates were 28.6% in 2025, 25.1% in 2024 and 25.6% for 2023.

For a more detailed description of income taxes see Note 11 of the Notes to Consolidated Financial Statements.

Financial Condition Overview

As of December 31, 2025, the Company’s total assets were $14.0 billion, an increase of $4.1 billion from December 31, 2024. Total loans (including loans held-for-sale) were $11.5 billion, an increase of $3.2 billion from December 31, 2024. Deposits were $11.2 billion, an increase of $3.4 billion from December 31, 2024.

As of December 31, 2024, the Company’s total assets were $9.9 billion, an increase of $24 million from December 31, 2023. Total loans (including loans held-for-sale) were $8.3 billion, a decrease of $70 million from December 31, 2023. Deposits were $7.8 billion, an increase of $284 million from December 31, 2023.

Loan Portfolio

The Bank’s lending activities are generally oriented to small to-medium sized businesses, high net worth individuals, professional practices and consumer and retail clients living and working in the Bank’s metropolitan New York market area, consisting of Bergen, Union, Morris, Essex, Hudson, Mercer and Monmouth Counties, New Jersey, as well as NYC’s five boroughs, Nassau, Rockland, Orange, Suffolk and Westchester Counties, in New York and businesses and individuals living and working in the communities served by the Bank's West Palm Beach, Florida office. The Bank has also recently established a loan production office in Orlando, in central Florida. The Bank has not made loans to borrowers outside of the United States. The Bank believes that its strategy of high-quality client service, competitive rate structures and selective marketing have enabled it to gain market share.

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Commercial loans are loans made for business purposes and are primarily secured by collateral such as business assets including accounts receivable, inventory and equipment. These facilities can also be secured by cash balances with the Bank, marketable securities held by or under the control of the Bank, and commercial and residential real estate. Commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include loans secured by first liens on completed commercial properties, including multifamily properties, to purchase or refinance such properties, as well as land loans. Residential mortgages include loans secured by first liens on residential real estate and are generally made to existing clients of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences. Consumer loans are made to individuals who qualify for auto loans, cash reserve, credit cards and installment loans.

Commercial real estate loans remained the largest component of our gross loan portfolio, totaling $8.1 billion at December 31, 2025. This represents an increase of $2.2 billion, or 37%, from the prior year-end, primarily driven by assets acquired in the FLIC merger. Similarly, residential real estate loans saw a substantial increase of $961.3 million, or 385%, ending the year at $1.2 billion, largely reflecting the integration of FLIC’s residential portfolio. Other segments showed more moderate growth: commercial loans rose $33.2 million 2.2% to $1.6 billion, and commercial construction grew by $7.7 million or 1.2%. Consumer loans increased $0.9 million or 77.6%, primarily due to the FLIC merger.

The following table sets forth the classification of our loans by loan portfolio segment for the periods presented.

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While the previous table reflects the classification of our loans by loan portfolio segment, the following table presents further disaggregation of our commercial real estate portfolio along with loan-to-value ("LTV") percentages.

The table above is further broken down in the following tables by geography: The values below are shown before fair value adjustments.

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In addition, the following tables present further details with respect to our owner-occupied and nonowner-occupied borrower concentrations included in the commercial real estate segment. The values below are before fair value adjustments.

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The following table sets forth the classification of our gross loans by loan portfolio segment and by fixed and adjustable-rate loans as of December 31, 2025 by remaining contractual maturity.

Loan Portfolio Repricing

A significant portion of our loan portfolio, approximately $2.4 billion, primarily originated during the low-interest-rate environment of 2021 and 2022, is scheduled to contractually reprice during 2026 and 2027. As these loans transition to future current market rates over the next 2 years, we anticipate a favorable impact on our net interest income, net interest margin, and earnings per share. While these anticipated increased rates will benefit our results, the increased rates may also, in certain instances, place financial pressure on certain borrowers and potentially lead to elevated levels of stress, such as late payments or defaults.

For additional information regarding loans, see Note 5 of the Notes to the Consolidated Financial Statements.

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Asset Quality

General. One of our key objectives is to maintain a high level of asset quality. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by sending late notices, as well as making personal contact with the borrower. Typically, late notices are sent approximately 10 days after the date the payment is due, followed up by direct contact with the borrower approximately 15 days after payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed, and additional efforts are made to collect the deficiency. Total loans delinquent 30 days or more are reported to the Board of Directors of the Bank on a monthly basis.

On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases (“nonaccrual” loans). Except for loans that are well-secured and in the process of collection, it is our policy to discontinue accruing additional interest and reverse any interest accrued on any loan that is 90 days or greater past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to the borrower’s ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt. Typically, a nonaccrual loan may return to accrual status if the borrower makes the loan current and then makes six consecutive payments as scheduled.

Real estate acquired as a result of foreclosure is classified as other real estate owned (“OREO”) until sold. OREO is recorded at the lower of cost or fair value less estimated selling costs. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of OREO are charged to operations, as incurred.

The Company evaluates individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. The Company evaluates the pooling methodology at least annually. Loans transition from defined segments for individual analysis when credit characteristics, or risk traits, change in a material manner. A loan is considered for individual analysis when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by the Company in determining individual analysis include payment status and the probability of collecting scheduled principal and interest payments when due. Nonaccrual loans with balances of $250,000 or greater and all purchased credit-deteriorated ("PCD") loans are individually analyzed. For loans designated as nonaccrual with balances of less than $250,000, these loans are collectively evaluated, and, accordingly, are not separately identified for analysis or disclosures. Each financial asset is subject to either a collective or an individual loss analysis; no single instrument will be included in both calculations simultaneously. Individual analysis will establish an individually evaluated allowance for instruments in scope.

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Asset Classification. Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special mention.”

When an insured institution classifies one or more assets, or portions thereof, as “substandard” or “doubtful,” it is required that a general valuation allowance for credit losses must be established in an amount deemed prudent by management. General valuation allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as “loss,” it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.

A bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for credit losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement requires that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Our management believes that, based on information currently available, our allowance for credit losses is maintained at a level which is reasonable and supportable to cover our current expected credit losses at each reporting date. However, actual realized losses over time are dependent upon future events and, as such, further additions, or subtractions, to the level of allowances for credit losses may become necessary.

The table below sets forth information on our classified loans and loans designated as special mention (excluding loans held-for-sale) as of the dates presented:

During the year ended December 31, 2025, “substandard” loans and “doubtful” loans, which include lower credit quality loans which possess higher risk characteristics than “special mention” loans, increased to $156.2 million, or 1.4% of loans receivable, as of December 31, 2025 from $72.4 million, or 0.9% of loans receivable, as of December 31, 2024. The increase in substandard loans from the prior year was primarily due to the addition of PCD loans associated with the FLIC merger, in addition to a net increase in loans migrating to nonaccrual during the year ended December 31, 2025.

During the year ended December 31, 2024, “substandard” loans and “doubtful” loans, increased to $72.4 million, or 0.9% of loans receivable, as of December 31, 2024 from $58.5 million, or 0.7% of loans receivable, as of December 31, 2023. The increase in substandard loans from the prior year was primarily due to a net increase in loans migrating to nonaccrual during the year ended December 31, 2024.

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Nonaccrual Loans, OREO and Loans 90 Days or Greater Past Due and Still Accruing

Nonperforming assets include nonaccrual loans and OREO. Nonaccrual loans represent loans on which interest accruals have been suspended. OREO represents property acquired through foreclosure in partial or full satisfaction of loans. Loans 90 days or greater past due and still accruing represent loans that are both well-secured and in the process of collection, as well as any purchased credit-deteriorated loans, net of fair value marks, which accrete income per the valuation at the date of acquisition. The Company considers charging off loans, or a portion thereof, at the time the Company deems it has exhausted all means of collection. For additional information regarding loans, see Note 5 of the Notes to the Consolidated Financial Statements.

The following table sets forth, as of the dates indicated, the amount of the Company’s nonaccrual loans, OREO, and loans past due 90 days or greater and still accruing:

Allowance for Credit Losses and Related Provision

The ACL 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 measurement of expected credit losses is applicable to loans receivable and investment securities measured at amortized cost. It also applies to off-balance-sheet credit exposures such as loan commitments and unused lines of credit. Loan losses are charged against the allowance for credit losses when the Bank believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. The allowance is established through a provision for credit losses that is charged against income. 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 expected credit loss for unfunded loan commitments is reported on the Consolidated Statement of Financial Condition in “Other Liabilities”.

As of December 31, 2025, the allowance for credit losses for loans was $154.3 million, an increase of $71.6 million, or 86.6%, from $82.7 million as of December 31, 2024. The increase in the allowance for credit losses was primarily driven by the FLIC merger with $42.0 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. In addition, there was a $20.5 million provision in credit losses on loans, partially offset by net charge-offs of $18.2 million.

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The allowance for credit losses for loans as a percentage of loans receivable was 1.35% as of December 31, 2025 and 1.00% as of December 31, 2024.

Three-Year Statistical Allowance for Credit Losses for Loans

The following table reflects the relationship of loan volume, the provision and allowance for credit losses for loans and net charge-offs for the periods presented.

For additional information regarding loans, see Note 5 of the Notes to the Consolidated Financial Statements.

Implicit in the lending function is the fact that credit losses will be experienced and that the risk of loss will vary with the type of loan being made, the creditworthiness of the borrower and prevailing economic conditions. The allowance for credit losses has been allocated in the table below according to the estimated amount deemed to be reasonably and supportably necessary to provide for the possibility of either lifetime expected losses or losses being incurred within the following categories of loans as of December 31, for each of the past three years.

The following table shows the amounts of the allowance allocable to such loans and the percentage of such loans to gross loans, along with the amount of the unallocated allowance. “Total Commercial”, as shown below, includes commercial, commercial real estate and commercial construction loans.

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Investments

For the year ended December 31, 2025, the average amortized cost of investment securities, including equity securities, increased by $360.8 million to approximately $1.1 billion, or 9.5% of average interest earning-assets, from $733.3 million, or 8.0% of average interest-earning assets, for the year ended December 31, 2024. As of December 31, 2025, the principal components of the investment portfolio are U.S. Treasury and Government Agency Obligations, Federal Agency Obligations including mortgage-backed securities, Obligations of U.S. States and Political Subdivisions, Corporate Bonds and other debt and equity securities.

During the year ended December 31, 2025, rate related factors increased investment revenue by $5.5 million and volume related factors increased investment revenue by $14.6 million. The tax-equivalent yield on investments increased by 74 basis points to 4.05% from a yield of 3.31% during the year ended December 31, 2024.

Investment securities available-for-sale are a part of the Company’s interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. The Company continues to reposition the investment portfolio as part of an overall corporate-wide strategy to produce reasonable and consistent margins where feasible, while attempting to limit risks inherent in the Company’s Consolidated Statement of Condition.

As of December 31, 2025, net unrealized losses on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included in stockholders’ equity, net of tax, amounted to $40.7 million as compared with net unrealized losses of $69.6 million as of December 31, 2024. The decrease in unrealized losses is predominately attributable to changes in market conditions and interest rates. Unrealized losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. For additional information regarding the Company’s investment portfolio, see Note 4, Note 16 and Note 21 of the Notes to the Consolidated Financial Statements.

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During 2025, 2024 and 2023, there were gains/losses from the sales from the Company’s available-for-sale portfolio. The Company had no impairment charges in 2025, 2024 and 2023. The table below illustrates the maturity distribution and weighted average yield on a tax-equivalent basis for amortized cost of our investment securities, excluding equity securities, as of December 31, 2025, on a contractual maturity basis.

For information regarding the carrying value of the investment portfolio, see Note 4, Note 16 and Note 21 of the Notes to the Consolidated Financial Statements.

The securities listed in the table above are either rated investment grade by Moody’s and/or Standard and Poor’s or have shadow credit ratings from a credit agency supporting an investment grade and conform to the Company’s investment policy guidelines. There were no municipal securities, or corporate securities, of any single issuer exceeding 10% of stockholders’ equity as of December 31, 2025. Other securities do not have a contractual maturity and are included in the “Due in 1 year or less” maturity in the table above.

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The following table sets forth the carrying value of the Company’s investment securities, as of December 31, for each of the last two years.

For other information regarding the Company’s investment securities portfolio, see Note 4, Note 16 and Note 21 of the Notes to the Consolidated Financial Statements.

Interest Rate Sensitivity Analysis

The principal objective of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”). The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.

The Company utilizes a number of strategies to manage interest rate risk including, but not limited to: (i) balancing the types and structures of interest-earning assets and interest-bearing liabilities by diversifying mix, coupons, maturities and/or repricing characteristics, (ii) reducing the overall interest rate sensitivity of liabilities by emphasizing core and/or longer-term deposits; utilizing FHLB advances and wholesale deposits for our interest rate risk profile, (iii) managing the investment portfolio for liquidity and interest rate risk profile, and (iv) entering into interest rate swap and cap agreements.

We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of December 31, 2025, and December 31, 2024, the results of the models are monitored by guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and Bank’s management.

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The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates. The year over year change in the interest rate risk profile primarily reflects updated model assumptions in response to dynamically changing market conditions, including higher beta assumptions, as well as a positioning of the balance sheet to be more liability sensitive.

Based on our model, which was run as of December 31, 2025, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 4.95%, while a 100 basis-point instantaneous decrease in interest rates would increase net interest income by 3.06%. As of December 31, 2024, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 8.02%, while a 100 basis-point instantaneous decrease in interest rates would increase net interest income by 3.56%.

Based on our model, which was run as of December 31, 2025, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 0.32%, while a 100 basis-point instantaneous decrease in interest rates would increase net interest income by 1.04%. As of December 31, 2024, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 2.08%, while a 100 basis-point instantaneous decrease in interest rates would increase net interest income by 0.37%.

An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of December 31, 2025, would decrease by 7.12% with an instantaneous rate shock of up 200 basis points, and increase by 0.28% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2024, would decrease by 7.87% with an instantaneous rate shock of up 200 basis points, and increase by 1.67% with an instantaneous rate shock of down 100 basis points.

The change in interest rate sensitivity was impacted by changes in overall market interest rates, updates to certain model assumptions, changes in short and intermediate-term fixed rate funding and by the deposit mix shift into certificates of deposit, from both noninterest-bearing and interest-bearing non-maturity deposits.

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The following table illustrates the estimates of net interest income for the year ending December 31, 2026 and the calculations of EVE at December 31, 2025 assuming rate changes of plus and minus 100, 200 and 300 bps.

Certain model limitations are inherent in the methodology used in the EVE and net interest income measurements. The models require the making of certain assumptions which may tend to oversimplify the way actual yields and costs respond to changes in market interest rates. The models assume that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured, thus they do not consider the Company’s strategic plans, or any other steps it may take to respond to changes in rates over the forecasted period of time. Additionally, the models assume immediate changes in interest rates, based on yield curves as of a point-in-time, which are reflected in a parallel, instantaneous and uniform manner across all yield curves, when in reality changes may rarely be of this nature. The models also utilize data derived from historical performance and as interest rates change the actual performance of loan prepayments, rate sensitivities, and average life assumptions may deviate from assumptions utilized in the models and can impact the results. Accordingly, although the above measurements provide an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates. Given the unique nature of the post-pandemic interest rate environment, and the speed with which interest rates have been changing, the projections noted above on the Company’s EVE and net interest income can be expected to differ from actual results.

Estimates of Fair Value

The estimation of fair value is significant to certain assets of the Company, including available-for-sale investment securities. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, expected cash flows, credit quality, discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. See Note 21 of the Notes to Consolidated Financial Statements for additional discussion.

These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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Impact of Inflation and Changing Prices

The financial statements and notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the operations; unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Liquidity

Liquidity is a measure of a bank’s ability to fund loans, withdrawals or maturities of deposits, and other cash outflows, in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

As of December 31, 2025, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of December 31, 2025, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $874.4 million, which represented 6.2% of total assets and 7.2% of total deposits and borrowings, compared to $799.7 million as of December 31, 2024, which represented 8.1% of total assets and 9.4% of total deposits and borrowings on such date. As of December 31, 2025, not included in the above liquid assets were securities with a market value of $97.7 million which were pledged to the Federal Home Loan Bank and securities with a market value of $137.6 million which were pledged to the Federal Reserve Bank of New York, which supported aggregate unutilized borrowing capacity of $223.3 million as of December 31, 2025.

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The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of December 31, 2025, had the ability to borrow $3.9 billion. The Bank also has a credit facility established with the Federal Reserve Bank of New York for direct discount window borrowings based on pledged collateral and had the ability to borrow $2.3 billion as of December 31, 2025. In addition, as of December 31, 2025, the Bank had in place borrowing capacity of $280 million through correspondent banks and other unsecured borrowing lines. As of December 31, 2025, the Bank had aggregate available and unused credit of approximately $4.6 billion, which represents the aforementioned facilities totaling $6.4 billion net of $1.9 billion in outstanding borrowings and letters of credit. As of December 31, 2025, outstanding commitments for the Bank to extend credit were approximately $2.0 billion.

Cash and cash equivalents totaled $380.9 million as of December 31, 2025, increasing by $24.4 million from $356.5 million as of December 31, 2024. Operating activities provided $106.4 million in net cash. Investing activities used $186.2 million in net cash, primarily due to purchases of securities and funding of loans. Financing activities provided $104.2 million in net cash, primarily reflecting an increase in deposits and proceeds from the issuance of subordinated debt, partially offset by net repayment of borrowings.

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Deposits

Deposits serve as the Bank’s primary source of funding. Our deposit portfolio is comprised of a diversified range of products designed to meet the needs of both consumer and commercial clients while supporting our liquidity and asset-liability management goals.

Reciprocal and Specialized Deposits Through our participation in the IntraFi Network LLC and, to a lesser extent, the NBID network, we provide reciprocal deposits. These products allow clients with large-dollar balances—who are sensitive to deposit insurance limits—to place funds with the Bank.

The Bank utilizes the IntraFi Network to place these funds into certificates of deposit or demand accounts issued by other participating banks in increments below the FDIC insurance limit ($250,000). This structure ensures that both principal and interest are eligible for full FDIC insurance coverage while maintaining a single relationship with the Bank. For certain regulatory reporting purposes, these funds may be classified as brokered deposits unless specific conditions are met. Additionally, the Bank utilizes internet listing services, such as Rateline or QwickRate, to supplement our funding through targeted deposit acquisition.

The following table presents the average balances of our deposit portfolios along with the associated weighted average interest rates for the periods indicated.

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Average total deposits increased by $2.2 billion, or 29.4%, for the year ended December 31, 2025, compared to the prior year. This growth was primarily attributable to the merger with FLIC, which impacted all deposit categories. On a segment basis, the increase was driven by:

Noninterest-bearing demand deposits represented 20.3% of total average deposits for the year ended December 31, 2025, compared to 16.7% for the year ended December 31, 2024. This shift in the deposit mix along with declines in rates improved our overall cost of funds and reflects our strategic focus on growing core commercial operating accounts following the FLIC merger.

The $214.7 million increase in average time deposits included growth in retail time deposits of $200.9 million, nonreciprocal brokered time deposits of $31.3 million, and internet listing services of $6.3 million. These increases were partially offset by a $23.1 million decrease in CDARS balances.

Average demand deposits (including interest-bearing and noninterest-bearing) for both 2025 and 2024 included $1.1 billion in ICS reciprocal deposits. Average CDARS within the time deposit portfolio were $47.9 million for the year ended December 31, 2025, a decrease from $71.0 million in 2024. This decline was primarily attributed to maturities that were not renewed.

The Bank monitors its deposit beta, which measures the sensitivity of deposit costs to market rate changes. Nonreciprocal brokered deposits generally exhibit a higher beta, as they are more directly correlated to prevailing market interest rates. Conversely, ICS and CDARS reciprocal deposits typically reflect the Bank’s core relationship with clients; these balances are primarily driven by a desire for FDIC insurance coverage rather than market-leading rates, resulting in lower price sensitivity.

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The following table sets forth information related to the uninsured deposit balances of the Bank for the periods presented.

The following table sets forth the mix of our deposit accounts and their respective percentages of total deposits for the periods presented.

Total deposits increased by $3.4 billion, or 43.7%, to $11.2 billion as of December 31, 2025, compared to $7.8 billion at year-end 2024. This significant growth was primarily driven by the merger with FLIC. The increase in the deposit base was reflected across the following categories:

The Bank continues to utilize reciprocal deposit programs to manage large-dollar client relationships. Total interest-bearing demand deposits included $1.2 billion in ICS reciprocal deposits as of December 31, 2025 and $1.1 billion as of December 31, 2024. Within the time deposit portfolio, CDARS balances were $43.3 million at year-end 2025, compared to $60.3 million at year-end 2024.

Additionally, time deposits included $723.4 million in nonreciprocal brokered deposits as of December 31, 2025. This represents a decrease from $907.2 million at the prior year-end, reflecting a strategic shift toward core retail deposits following the merger.

As of December 31, 2025, we held $948.9 million of time deposits balances greater than $250,000. The following table provides information on the maturity distribution of the time deposits with balances greater than $250,000 as of December 31, 2025: