Morningstar DBRS Assigns Initial Long-Term Issuer Ratings of BBB (high) and BBB to ConnectOne Bank and ConnectOne Bancorp, Inc., Respectively; Stable Trends

DBRS, Inc. (Morningstar DBRS) assigned credit ratings to ConnectOne Bancorp, Inc. (CNOB or the Company), including a Long-Term Issuer Rating of BBB. At the same time, Morningstar DBRS assigned credit ratings to the Company's banking subsidiary, ConnectOne Bank (the Bank), including a Long-Term Issuer Rating of BBB (high). The trend for all credit ratings is Stable. The Intrinsic Assessment (IA) for the Bank is BBB (high), while its Support Assessment is SA1. The Company's Support Assessment is SA3, and its Long-Term Issuer Rating is positioned one notch below the Bank's IA.

KEY CREDIT RATING CONSIDERATIONS
CNOB's credit ratings with Stable trends reflect the Company's sound and growing banking franchise, resilient earnings generation, and robust asset quality that is underpinned by strong client relationships and conservative loan underwriting. The Company's current geographic footprint includes the Northeast, specifically New Jersey and New York, as well as a small presence in Florida. The franchise will be enhanced by the pending acquisition of The First of Long Island Corporation (FLIC; expected to close in Q2 2025), which will add approximately $4.1 billion in assets and help to diversify both deposits and loans while significantly increasing CNOB's scale on Long Island. The credit ratings also consider CNOB's limited fee-income contribution to revenues, making it reliant on spread income. Although CNOB's credit profile is solid and reflects sound credit metrics, the Company does have substantial exposures to commercial real estate (CRE), which when combined with its construction loan portfolio, aggregates to approximately 62% of total loans (excluding owner-occupied CRE) on a pro forma basis.

The Bank's Intrinsic Assessment of BBB (high) is at the midpoint of the Intrinsic Assessment Range, as Morningstar DBRS views CNOB's credit fundamentals and performance as commensurate with those of similarly rated peers.

CREDIT RATING DRIVERS
Over the longer term, Morningstar DBRS would upgrade the credit ratings if the Company further builds its franchise and increases revenue and loan portfolio diversification, while maintaining solid credit metrics and capital levels. Conversely, Morningstar DBRS would downgrade the credit ratings if asset quality deteriorates, resulting in weaker earnings, or if the FLIC acquisition is poorly integrated, leading to a loss of franchise value.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Moderate / Weak
CNOB is a community bank with $9.9 billion in assets and a solid commercial lending franchise in the New York metro area. Its pending acquisition of FLIC (expected to close during 2Q 2025) will add significant scale, improve CNOB's deposit profile, and diversify the loan book to provide a somewhat more balanced commercial/consumer split.

Earnings Combined Building Block Assessment: Good / Moderate
Profitability levels have declined versus historical metrics but should rebound as assets continue to reprice higher and deposit costs stabilize. In 2024, CNOB reported a core return on average assets and return on average equity of 78 basis points and 6.2%, respectively. The net interest margin (NIM) has been pressured by high funding costs relative to industry averages. Additionally, the FLIC acquisition, with its lower funding costs, should help boost the NIM. Fee income is largely immaterial, but expense management is a strong point, with noninterest expenses to average assets of about 1.5%, significantly better than the industry average. CNOB has historically operated with strong levels of operating efficiency.

Risk Combined Building Block Assessment: Good / Moderate
Credit quality metrics are solid, but CRE concentrations are significantly above industry levels. Investor real estate loans represent two thirds of the portfolio and more than 400% of total risk-based capital. However, conservative loan underwriting has resulted in very low loss levels over various economic cycles. Overall, current commercial loans are 97% of the portfolio, with only 3% consumer. After the FLIC acquisition, the loan portfolio will be approximately 85% commercial and 15% consumer adding some additional diversification, including geographic diversity.

Funding and Liquidity Combined Building Block Assessment: Good / Moderate
CNOB is primarily deposit funded although it has a relatively higher than peers' proportion of brokered and certificate of deposit funding, resulting in a cost of funds north of 3%, and loan-to-deposit ratio of nearly 110%. FLIC has a cost of funds closer to 2% and a better loan-to-deposit ratio, which should help improve CNOB's overall funding profile. The Company has sufficient liquidity and access to liquidity to cover uninsured deposits over two times.

Capitalization Combined Building Block Assessment: Good / Moderate
Capitalization is sound. The Company's CET1 ratio was 10.97% as of YE2024; however, the FLIC acquisition will absorb some capital and is likely to bring the pro forma CET1 ratio to roughly 10% at close. Additionally, CNOB has strong levels of tangible common equity with a tangible common equity to tangible assets ratio of 9.73% as of March 31, 2025.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 4, 2024), https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings, https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar, Inc. and Company documents. Another source includes Morningstar DBRS. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit rating was not initiated at the request of the rated entity. The credit rating was initiated at the request of a third party.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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